The Regulation of International Trade, Volume 2: The WTO Agreements on Trade in Goods 0262029995, 9780262029995
A detailed examination of WTO agreements regulating trade in goods, discussing legal context, policy background, economi
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Table of contents :
Contents
Preface
Introduction
1 Annex 1A Agreements Dealing with Customs Procedures
1.1 Clearing Goods through Customs
1.2 ILA
1.3 CVA
1.4 The Agreement on Preshipment Inspection (PSI)
1.5 Trade Facilitation
1.6 Concluding Remarks
2 Antidumping
2.1 The Legal Discipline and Its Rationale
2.2 The Relationship with GATT
2.3 Calculating the Dumping Margin
2.4 Injury Analysis
2.5 The Causality Requirement
2.6 Imposing Antidumping Duties
2.7 Administrative Review of AD Duties
2.8 Sunset Reviews
2.9 Duties Can Be Imposed Only Following Investigation
2.10 Special and Differential Treatment
2.11 The Standard of Review by WTO Adjudicating Bodies
2.12 Remedies against Illegally Imposed AD Duties
2.13 Institutional Issues
2.14 Is Dumping Unfair?
2.15 Concluding Remarks
3 Subsidies
3.1 The Legal Discipline and Its Rationale
3.2 The Relationship with GATT
3.3 Defining a Subsidy
3.4 Three Categories of Subsidies
3.5 Actionable Subsidies
3.6 Nonactionable Subsidies
3.7 Prohibited Subsidies
3.8 CVDs: Substantive Requirements
3.9 CVDs: Procedural Requirements
3.10 Administrative Reviews
3.11 Sunset Reviews
3.12 Special and Differential Treatment for Developing Countries
3.13 The Standard of Review Applied by WTO Adjudicating Bodies
3.14 Fisheries Subsidies
3.15 Institutional Issues
3.16 Concluding Remarks
4 Safeguards
4.1 The Legal Discipline and Its Rationale
4.2 The Legal Relationship with GATT
4.3 The Road to the SG Agreement
4.4 The Right to Safeguard Action
4.5 Applying Safeguards
4.6 Procedural Requirements
4.7 Special Safeguard Regime with Respect to China
4.8 Special and Differential Treatment for Developing Countries
4.9 Standard of Review
4.10 Institutions
4.11 Concluding Remarks
5 Technical Barriers to Trade
5.1 The Legal Discipline and Its Rationale
5.2 The Relationship with GATT
5.3 Coverage
5.4 International Standards
5.5 Technical Regulations
5.6 Standards
5.7 Conformity Assessment
5.8 Special and Differential Treatment for Developing Countries
5.9 Institutional Issues
5.10 Concluding Remarks
6 Sanitary and Phytosanitary Measures
6.1 The Legal Discipline and Its Rationale
6.2 The Relationship with GATT and the Other Annex 1A Agreements
6.3 Coverage
6.4 International Standards
6.5 Unilateral Measures Must Be Based on Science
6.6 Measures Based on Precaution
6.7 Measures Must Be Applied in a Nondiscriminatory Way
6.8 Measures Must Be Necessary
6.9 Consistency
6.10 Special and Differential Treatment
6.11 Transparency
6.12 Standard of Review 94
6.13 Institutional Issues
6.14 Concluding Remarks
7 Trade-Related Investment Measures (TRIMs)
7.1 The Legal Discipline and Its Rationale
7.2 The Relationship with GATT and the Other Annex 1A Agreements
7.3 Trade and Investment
7.4 The TRIMs Agreement
7.5 Institutions
7.6 Review of the Agreement
7.7 Concluding Remarks
8 Agreement on Agriculture
8.1 The Legal Discipline and Its Rationale
8.2 The Relationship with GATT and the Other Annex 1A Agreements
8.3 The Road to the AG Agreement
8.4 Product Coverage and Schedules of Concessions
8.5 Border Measures
8.6 Domestic Support
8.7 Export Subsidies
8.8 Minimum Access Requirements
8.9 Due Restraint (Peace Clause)
8.10 Public Stockholding for Food-Security Purposes
8.11 Special and Differential Treatment
8.12 Transparency
8.13 Institutional Issues
8.14 Concluding Remarks
9 Agreement on Textiles and Clothing
9.1 The Legal Discipline and Its Rationale
9.2 The Relationship with GATT
9.3 The Road to the ATC
9.4 ATC
9.5 Concluding Remarks
10 Government Procurement
10.1 The Legal Discipline and Its Rationale
10.2 The Relationship with GATT
10.3 Government Procurement: A Multifaceted Instrument
10.4 The Scope of the GPA
10.5 The Obligations Assumed
10.6 Procurement Methods
10.7 Transparency
10.8 Special and Differential Treatment
10.9 Enforcing the GPA
10.10 The Work Programmes
10.11 Institutional Issues
10.12 Concluding Remarks
11 The Civil Aviation Agreement
11.1 The Legal Discipline and Its Rationale
11.2 The Relationship with the GATT and Annex 1A Agreements
11.3 Membership
11.4 Product Coverage
11.5 Elimination of Customs Duties
11.6 Disciplines on Subsidies
11.7 Other Obligations
11.8 Institutions
11.9 Concluding Remarks
12 Transparency
12.1 The Legal Discipline and Its Rationale
12.2 Article X of GATT
12.3 The Trade Policy Review Mechanism (TPRM)
12.4 Into the Great Wide Open: Transparency Unlimited
Notes
References
Index
Citation preview
The Regulation of International Trade
The Regulation of International Trade Volume 2: The WTO Agreements on Trade in Goods Petros C. Mavroidis
The MIT Press Cambridge, Massachusetts London, England
© 2016 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. This book was set in Times New Roman by Toppan Best-set Premedia Limited. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data is available. ISBN: 978-0-262-02999-5 10
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For Meritas always, as always
Contents
Preface xxxv Introduction 1 1
Annex 1A Agreements Dealing with Customs Procedures
1.1
Clearing Goods through Customs
1.2
ILA
1.2.1
The Legal Discipline and Its Rationale
1.2.2
Automatic Licensing
1.2.3
5
5 5
8
1.2.2.1
Definition
8
1.2.2.2
The Rationale for Automaticity
1.2.2.3
Conditions for Lawful Imposition
1.2.2.4
Approval Granted in All Cases
1.2.2.5
General Provisions
1.2.2.6
Presumption of Existence of Restrictive Effects
Nonautomatic Licensing 1.2.3.1
Definition
8 9 9
12
14
14
1.2.3.2
The Rationale for Nonautomatic Licensing
1.2.3.3
Conditions for Lawful Imposition
1.2.3.4
Disciplines Specific to Nonautomatic Licensing
1.2.4
Administration of Tariff Quotas
1.2.5
Transparency
19
Notification Requirements
1.2.5.2
The Record
20
1.2.6
Export Licensing
20
1.2.7
Special and Differential Treatment
1.2.8
Reservations
15
16
18
1.2.5.1
23
13
19
23
17
5
viii
Contents
1.2.9
Exceptions
23
1.2.10
Institutions
23
1.2.11
Relationship with Article XI of GATT
1.3
CVA
1.3.1
The Legal Discipline and Its Rationale
1.3.2
1.3.3
23
24
Transaction Value (Actual Price)
24
27
1.3.2.1
The Primacy of Transaction Value
1.3.2.2
Arm’s Length
27
1.3.2.3
Verifying the Truth and Accuracy of Information Received
28
Deviating from the Transaction Value
30
1.3.3.1
Hierarchy among the Statutory Methods
1.3.3.2
Fallback Method: Limited Discretion
1.3.3.3
Right of Appeal
30 32
34
1.3.4
Treatment of Confidential Information
1.3.5
Cooperation across WTO Members
1.3.6
Special and Differential Treatment
1.3.7
Exceptions
1.3.8
Reservations
1.3.9
Institutions
1.4
The Agreement on Preshipment Inspection (PSI)
1.4.1
The Legal Discipline and Its Rationale
1.4.2
1.4.3
1.4.4
34
34 35
35 35 35
Déjà Vu All Over Again?
36
36
1.4.2.1
Is PSI an NTB?
37
1.4.2.2
It Is Basically Companies We Are After
The Ambit of the Agreement 1.4.3.1
What Is a PSI Entity?
1.4.3.2
What Do PSI Entities Do?
38
39
39 39
Obligations Imposed on User Members 1.4.4.1
The Site of Inspection
1.4.4.2
Nondiscrimination
1.4.4.3
Contractual and International Standards
1.4.4.4
Transparency
1.4.4.5
BCI
1.4.4.6
Conflict of Interest
1.4.4.7
Timely Inspection
42
1.4.4.8
Price Verification
42
40
40 41
41
41 41
41
36
29
Contents
ix
1.4.5
Obligations Imposed on Exporter Members
1.4.6
Resolution of Disputes
42
1.4.6.1
Appeals Procedures
1.4.6.2
The Independent Entity
42 42
1.4.7
Special and Differential Treatment
1.4.8
Exceptions
44
1.4.9
Institutions
45
1.4.10
PSI Inspection and Trade Facilitation
1.5
Trade Facilitation
1.5.1
The Legal Discipline and Its Rationale
1.5.2
The Negotiating Process
1.5.3
The Evolution of Definition
1.5.4
For the Benefit of …
1.5.5
Cutting Red Tape in Customs
1.5.6
42
44
45
46 46
48 49
51 51
1.5.5.1
Transparency
1.5.5.2
Substantive Improvements in Customs Administration
52 52
1.5.5.3
Procedural Improvements in Customs Administration
55
Special and Differential Treatment 1.5.6.1
Categories of Commitments
58
58
1.5.6.2
Implementation: Sine Die (Until the Greek
1.5.6.3
Early Warning
Kalends)?
59 61
1.5.7
Institutions
61
1.5.8
Entry into Force
1.5.9
Where Does the Red Tape End?
1.6
Concluding Remarks
2
Antidumping
2.1
The Legal Discipline and Its Rationale
2.1.1
The Legal Discipline
2.1.2
The Rationale for the Legal Discipline
2.1.3
Discussion
62 62
64
67 67
67
72
2.1.3.1
Negotiating History
2.1.3.2
Economic Theory
2.1.3.3
Contingent Protection
72 73 73
67
x
Contents
2.1.3.4
Injury to Competitors
2.1.3.5
Combating Dumping Only through Antidumping
73
2.1.3.6
No Double Count
2.2
The Relationship with GATT
2.3
Calculating the Dumping Margin
2.3.1
NV Must Exceed EP
2.3.2
NV Can Be a Market Price
2.3.3
2.3.4
2.3.5
2.3.6
2.3.7
2.3.8
73
74
75 75
75 75
NV When Market Price Is Discounted 2.3.3.1
Ordinary Course of Trade
2.3.3.2
Low Volume of Sales
2.3.3.3
Particular Market Situation
76
76
77 77
Calculating NV when Market Price Is Discounted 2.3.4.1
Third-Country Sales
2.3.4.2
Constructed Price
Export Price (EP)
77
78 78
81
2.3.5.1
EP Can Be a Market Price
2.3.5.2
EP when Market Price Is Discounted
81 81
The Duty to Perform Fair Comparison between NV and EP 2.3.6.1
Prices Must Be at the Same Level of Trade
2.3.6.2
Due Allowances Can Be Made
2.3.6.3
Statutory Methodologies to Decide on the Dumping Margin
2.3.6.4
Zeroing: Dead and Loving It
84 85
87
Calculating the Amount of Dumping Margin
88
2.3.7.1
Dumping Margin Must Not Exceed the Statutory De Minimis Level
2.3.7.2
Calculating Duties for Individual Exporters
2.3.7.3
Sampling Exporters
2.3.7.4
New Shipments
90
2.3.7.5
Unknown Exporters
Single Entity/Collapsing
91 91
Calculating Dumping Margins for NMEs 2.3.8.1
Defining NMEs
89
91
2.3.7.6
92
93
2.3.8.2
The Rationale for Including Separate Calculation for NMEs
2.3.8.3
Third-Country Sales, Constructed Prices
2.3.8.4
The Case of China
93
2.4
Injury Analysis
94
2.4.1
Injury Must Be “Material” 2.4.1.1
Quantity Effects
2.4.1.2
Price Effects
95 96
94
82
83
93
93
88
Contents
2.4.2
xi
Injury to Competitors 2.4.2.1
Like Product
2.4.2.2
Major Proportion
99
99 101
2.4.3
Statutory Indicators of Injury
102
2.4.4
Cumulating Injury from Various Sources
2.4.5
Sampling in Injury Analysis
2.4.6
Threat of Injury
104
105
105
2.4.6.1
Factors of Threat of Injury
2.4.6.2
Reasoned and Adequate Explanation
105
2.4.6.3
The Special Care Obligation
2.4.6.4
The Standard of Review: Clear and Present Danger
107
107
2.5
The Causality Requirement
2.5.1
Causal Relationship between Dumping and Injury
2.5.2
Implications for Data Gathering
2.5.3
Genuine and Substantial Relationship
2.6
Imposing Antidumping Duties
2.6.1
The Decision to Impose Duties
2.6.2
Public Interest Clause
2.6.3
The Various Forms of Impositions 2.6.3.1
2.6.4
2.6.5
108 109
110 110
111 111
111
Provisional Duties
113
113
2.6.3.2
Definitive Duties
2.6.3.3
Variable Antidumping Duties
2.6.3.4
Price Undertakings
113 113
114
The Level of Permissible Imposition
115
2.6.4.1
Duties Cannot Exceed the Dumping Margin
2.6.4.2
Lesser Duty Rule
115
115
Duties Imposed Prospectively, Retrospectively 2.6.5.1
Prospective Assessment
2.6.5.2
Retrospective Assessment
115 115
2.6.6
Retroactive Application of Duties
2.6.7
Who Are Duties Imposed Against? 2.6.7.1
107
Known Exporters
118
2.6.7.2
Sampled Exporters
2.6.7.3
Nonsampled Exporters
118
2.6.7.4
New Shipments
2.6.7.5
Unknown Exporters
118
119 120
116 117
115
xii
Contents
2.6.8
Refunding AD Duties
122
2.7
Administrative Review of AD Duties
2.7.1
The Function and Rationale for Administrative Reviews
2.7.2
The Ambit of Review
2.7.3
Ex Officio and Upon Request Reviews
2.7.4
Reasonable Period of Time
2.7.5
Standard of Review
2.8
Sunset Reviews
2.8.1
Duties Will Lapse in Five Years, Absent Review
2.8.2
The Ambit of Sunset Review
2.8.3
The Standard of Sunset Review
123
124 125
125
127
128 128
129 129
2.8.3.1
Likelihood of Continuation or Recurrence of Injury
2.8.3.2
Positive Evidence
129
2.8.3.3
Irrelevance of Standards Applied in the Original Investigation
2.8.3.4
Zeroing in Sunset: Illegal as Well
130
Ex Officio and Upon Request Reviews
2.8.5
Due Process
2.8.6
Sunset Practice
2.8.7
Administrative and Sunset Reviews: The Overlap
2.9
Duties Can Be Imposed Only Following Investigation
2.9.1
Conducting Investigation Is a Legal Requirement
2.9.2
Who Can Request Investigation?
135
136 137
2.9.2.1
Ex Officio
2.9.2.2
Upon Request
137 138
138
138
138 138
Standing Requirements
138
2.9.3.1
The Rationale for Standing Requirements
2.9.3.2
Statutory Thresholds
138
139
2.9.4
The Content of Requests
2.9.5
The Decision to Initiate Investigation
2.9.6
132
134
2.8.4
2.9.3
123
141 142
2.9.5.1
The Duty to Examine Supplied Information
2.9.5.2
IAs Retain Discretion to Initiate
143
143
Rights and Duties of Investigating Authorities during Investigation 146 2.9.6.1
The Right to Request Information through Questionnaires
146
Contents
2.9.7
2.9.8
xiii
2.9.6.2
The Right to Conduct On-the-Spot Verification
2.9.6.3
The Right to Draw Inferences
2.9.6.4
The Duty to Observe Due Process
2.9.6.5
The Duty to Protect Confidential Information
2.9.6.6
The Duty to Respect Transparency
2.9.7.1
The Right to Access the File
2.9.7.2
The Right to Be Heard
153
2.9.7.3
The Duty to Cooperate
154
149
151
152
153
Balancing Rights and Duties: Recourse to BIA The Rationale for This Provision
154
154
2.9.8.2
When Is Recourse to BIA Appropriate?
2.9.8.3
Refusing Access to Necessary Information
2.9.8.4
Failure to Provide Necessary Information within a Reasonable Period of Time
155 157
159
2.9.8.5
Significant Impediment of Investigation
2.9.8.6
Special Circumspection
The Function of POI
159
160
The Length of the Period of Investigation 2.9.9.1
2.10
148
The Rights and Duties of Interested Parties
2.9.8.1
2.9.9
147
148
161
161
2.9.9.2
Recommendation on Length of POI
2.9.9.3
POI Ends before Initiation of Investigation
161
2.9.9.4
Recent Data Should Be Used
2.9.9.5
Shorter Periods Can Be Lawful
163
163 164
2.9.9.6
Cherry Picking Is Not Permissible
2.9.9.7
Overlap between Dumping and Injury POI
Special and Differential Treatment
164 166
166
2.10.1
What Are Constructive Remedies?
166
2.10.2
Constructive Remedies Must Be Explored
166
2.11
The Standard of Review by WTO Adjudicating Bodies
2.11.1
One or Two Standards of Review?
2.11.2
De Novo Review Is Not Total Deference
167
167 169
2.11.2.1
Panels Cannot Use New Evidence
2.11.2.2
Absence of a Reasoned and Adequate Explanation
169 171
2.11.3
Permissible Interpretations
2.11.4
Investigating Authorities: Honest Brokers or Active Investigators?
2.12
Remedies against Illegally Imposed AD Duties
2.13
Institutional Issues
175
172 174
173
xiv
Contents
2.14
Is Dumping Unfair?
2.14.1
The Origins of Modern Antidumping
2.14.2
Price Discrimination in Domestic Antitrust Statutes
2.14.3
2.14.4
In Defense of AD
175 176
180
2.14.3.1
Price Discrimination
2.14.3.2
Predatory Dumping
180 181
2.14.3.3
Strategic Dumping
2.14.3.4
Leveling the Playing Field
181
2.14.3.5
AD as Safeguard
182
182
AD and ... More Problems
183
2.14.4.1
A Procartel Instrument
183
2.14.4.2
AD Wars
184
2.15
Concluding Remarks
3
Subsidies
3.1
The Legal Discipline and Its Rationale
3.1.1
The Legal Discipline
3.1.2
The Rationale for the Legal Discipline
3.1.3
Discussion
184
185 185
185 185
186
3.1.3.1
Negotiating Subsidies in GATT/WTO
3.1.3.2
Subsidies in the Realm of Economic Theory
3.1.3.3
From Economic Theory to WTO Practice
3.1.3.4
Action against Subsidies
186 191 193
195
3.2
The Relationship with GATT
3.3
Defining a Subsidy
3.3.1
Financial Contribution by Government
3.3.2
178
196
200 202
3.3.1.1
Contribution by Government (or Public Body)
3.3.1.2
Government Acts Through a Private Agent
203 207
3.3.1.3
Direct Transfer of Funds by Government
3.3.1.4
Revenue Otherwise Due to Government Is Foregone
3.3.1.5
The Special Case of Double Taxation
3.3.1.6
Provision of Goods or Services by Government
3.3.1.7
Any Fo1.rm of Income or Price Support
Benefit to the Recipient
210 210
213 213
215
216
3.3.2.1
The Identity of the Recipient
3.3.2.2
“Private Investor” Test: Benefit That Market Does Not Yield
217
3.3.2.3
Cost of Production: An Appropriate Benchmark to Discern Benefit?
218 223
Contents
3.3.3
3.3.4
xv
Pass Through of Benefits to New Owners 3.3.3.1
The Issue
3.3.3.2
A Typology of Pass Through
3.3.3.3
The Test (in Full Mutation)
3.3.3.4
Extinction of Subsidies Bestowed
229
3.3.3.5
Extraction of Subsidies Bestowed
231
3.3.3.6
Change of Corporate Identity
3.3.3.7
Critique
3.3.5
225 227
232
232
Calculating the Amount of Benefit 3.3.4.1
224
224
233
Why Calculate Subsidies in Terms of Benefit Granted?
3.3.4.2
The Guidance Provided in Article 14 of SCM
3.3.4.3
Does Article 14 of SCM Reflect an Exhaustive List?
3.3.4.4
Allocation of Benefits over Time
3.3.4.5
Allocation of Benefit over Productive Assets
Specificity
233
233 234
238 239
240
3.3.5.1
De Jure Specificity
3.3.5.2
De Facto Specificity
242
3.3.5.3
Regional Subsidies
3.3.5.4
Positive Evidence
243 248 248
3.4
Three Categories of Subsidies
248
3.4.1
Classifying Subsidies: Actionable, Nonactionable, Prohibited
3.4.2
Legal Consequences of Classification
3.5
Actionable Subsidies
3.5.1
Three Forms of Adverse Effect: Injury, Nullification or Impairment, and Serious Prejudice 249
3.5.2
Injury
3.5.3
Nullification and Impairment
3.5.4
Serious Prejudice
248
248
249
250 250
251
3.5.4.1
Quantity Effects
3.5.4.2
Price Effects
252
3.5.4.3
The Causality Requirement
254 259
3.5.5
Remedies
261
3.6
Nonactionable Subsidies
3.6.1
The Statutory Criteria
3.6.2
The Limits of Nonactionability
3.6.3
The Origins of Nonactionable Subsidies
262
262 262 263
xvi
Contents
3.6.4
Back to the Future
3.6.5
They Did Not Overstay Their Welcome
3.6.6
Lo and Behold: Stimulus Packages
3.6.7
Are Nonactionable Subsidies Legally Irrelevant?
3.7
Prohibited Subsidies
3.7.1
Export Subsidies
3.7.2
3.7.3
264 265
266
267
268
3.7.1.1
The Changing Attitude toward Export Subsidies
3.7.1.2
De Jure Export Subsidies
3.7.1.3
De Facto Export Subsidies
3.7.1.4
The Evidentiary Standard
3.7.1.5
Permanent Group of Experts (PGE)
Local Content
267
268
270 270 271 272
272
3.7.2.1
Local Content and Production Subsidies
3.7.2.2
Local Content in the GATT, and the SCM Agreement
Remedies against Prohibited Subsidies 3.7.3.1
The Process
273 273
274
274
3.7.3.2
“Appropriate” Countermeasures
3.7.3.3
Benefit, Injury, and the Missing Incentives
274 277
3.8
CVDs: Substantive Requirements
3.8.1
CVDs, if Subsidies Cause Injury
3.8.2
Calculating the Amount of Benefit That Subsidies Have Conferred 279
3.8.3
278 278
3.8.2.1
The Rule: CVDs Cannot Exceed the Amount of Subsidy Granted
3.8.2.2
Calculating the Amount of Subsidy in Terms of the Benefit Granted
3.8.2.3
Investigated Exporters
3.8.2.4
Noninvestigated Exporters
Injury Analysis
279 280
280
3.8.3.1
Statutory Indicators of Injury
3.8.3.2
Injury to Competitors (Like Product Analysis)
280
3.8.3.3
Quantity Effects
3.8.3.4
Price Effects
3.8.3.5
Cumulating Various Sources of Injury
3.8.3.6
Injury Based on Positive Evidence
3.8.3.7
Threat of Injury
3.8.3.8
Public Interest Clauses
284 285
286 288
285 286
281
279 279
Contents
3.8.4
3.8.5
3.8.6
xvii
The Causality Requirement
288
3.8.4.1
Nonattribution
3.8.4.2
Temporal Correlation between Imports and Injury
3.8.4.3
Controlling for Factors Not Mentioned in the Agreement
The Types of CVDs
290 290
291
3.8.5.1
Provisional CVDs
3.8.5.2
Definitive CVDs
3.8.5.3
Price Undertakings
292 292 292
Imposition and Collection of Definitive CVDs 3.8.6.1
CVDs up to the Amount of Benefit Conferred
3.8.6.2
Lesser Duty Rule
3.8.6.3
Retroactive Application of Duties
293 293
293 293
3.8.7
Duties Imposed Prospectively, Retrospectively
3.8.8
No Double Counting: CVDs or Countermeasures
3.9
CVDs: Procedural Requirements
3.9.1
Duties Can Be Imposed Only Following an Investigation 295
3.9.2
Initiating an Investigation
3.9.3
294 295
295
296
3.9.2.1
Ex Officio
3.9.2.2
Investigation upon Request
296 296
Standing Requirements (Locus Standi) 3.9.3.1
The Rationale for Standing Requirements
3.9.3.2
The Statutory Thresholds
296 296
296
3.9.4
The Content of the Request
3.9.5
The Decision to Initiate an Investigation
3.9.6
291
296 296
3.9.5.1
IAs Must Examine the Accuracy of Supplied Information
3.9.5.2
Consultation with the Exporting WTO Member
3.9.5.3
IAs Retain Discretion
296
297
297
The Rights and Duties of IAs
298
3.9.6.1
The Right to Seek Information through Questionnaires
3.9.6.2
The Right to Conduct On-the-Spot Verifications
3.9.6.3
The Right to Draw Inferences
298
298
298
3.9.6.4
The Obligation to Observe Due Process
3.9.6.5
The Obligation to Protect Confidential Information
298
3.9.6.6
The Obligation to Ensure Transparency
301
300
xviii
3.9.7
3.9.8
3.9.9
Contents
Rights and Obligations of Interested Parties 3.9.7.1
The Right to Access the File
3.9.7.2
The Duty to Cooperate
301
301
301
Balancing Rights and Duties: Recourse to BIA
301
3.9.8.1
The Rationale for Recourse to BIA
302
3.9.8.2
Duty to Include Requested Information in the Questionnaire
3.9.8.3
Refusal to Supply Necessary Information
3.9.8.4
Significant Impediment of Investigation
The POI
303 303
304
3.9.9.1
The Length of the Investigation Process
3.9.9.2
The Function of POI
304
304
3.10
Administrative Reviews
3.10.1
The Function and Rationale for Administrative Reviews
3.10.2
The Ambit of Review
3.10.3
Initiating Reviews
3.10.4
305 305
305
306
3.10.3.1
Ex Officio
306
3.10.3.2
Review upon Request
Standard of Review
306
307
3.10.4.1
Standard of Initiation
3.10.4.2
Irrelevance of de Minimis Standards Applicable to Original Investigations
307
3.11
Sunset Reviews
3.11.1
Duties Will Lapse in Five Years Absent Review
3.11.2
The Ambit of Review
3.11.3
Initiating Reviews
3.11.4
303
307
307 307
307
308
3.11.3.1
Ex Officio
308
3.11.3.2
Review upon Request
308
The Standard of Review
308
3.11.4.1
Continuation or Recurrence of Injury
3.11.4.2
Positive Evidence
308
3.11.4.3
Irrelevance of Standards Applied to the Original Investigation
308 309
3.12
Special and Differential Treatment for Developing Countries
3.13
The Standard of Review Applied by WTO Adjudicating Bodies
3.14
Fisheries Subsidies
3.14.1
The Issue
3.14.2
The Negotiation
3.15
Institutional Issues
310
310 311 311
309 310
Contents
xix
3.16
Concluding Remarks
4
Safeguards
4.1
The Legal Discipline and Its Rationale
4.1.1
The Legal Discipline
4.1.2
The Rationale for the Legal Discipline
4.1.3
Discussion
311
313 313
315
Why Safeguards?
315
4.1.3.2
Costs Associated with the Imposition of Safeguards
4.1.3.3
Safeguards, Antidumping, and Countervailing
The Legal Relationship with GATT
4.3
The Road to the SG Agreement
4.3.1
The Original Safeguard Clause
4.3.2
Practice Evolves Contra Legem: VERs 4.3.2.1
Why VERs?
4.3.2.2
VERs and GATT
318
322 323
323 324
US Safeguard Practice
4.3.4
Onto the Agreement on Safeguards
4.4
The Right to Safeguard Action
4.4.1
Unforeseen Developments
4.4.4
317
318
322
4.3.3
4.4.3
313
4.1.3.1
4.2
4.4.2
313
325 325 327
329
4.4.1.1
The Rationale
4.4.1.2
The (Lack of) Definition
329
4.4.1.3
Unforeseen When?
4.4.1.4
Procedural Requirements
331
333 333
Increased Quantities of Imports
335
4.4.2.1
Recent, Sudden, Sharp, Significant Increase: Trends Matter
4.4.2.2
Recent, Sudden, Sharp, Significant Increase: No Injury Analysis
Injury to Competitors (Like Product Analysis) 4.4.3.1
Injury Must Be “Serious”
4.4.3.2
Statutory Factors Indicating Injury
4.4.3.3
Other Factors
4.4.3.4
Domestic Industry Producing the “Like” Product
Threat of Injury
340
340 340
341 342
345
4.4.4.1
Forward-Looking Evaluation
4.4.4.2
Standard of Review
345
4.4.4.3
Injury and Threat of Injury Based on the Same Facts
345 346
335 339
xx
4.4.5
Contents
The Causality Requirement 4.4.5.1
346
Genuine and Substantial Relationship
347
4.4.5.2
The Obligation to Review All Relevant Facts
4.4.5.3
Nonattribution (Separation)
4.4.5.4
Postseparation
4.4.5.5
Evaluation in Light of Alternative Explanations
4.4.5.6
Failure to Meet the Causal Requirement
4.5
Applying Safeguards
4.5.1
Types of Safeguards
349
350
354 354
356
356 356
4.5.1.1
Provisional Safeguards
4.5.1.2
Definitive Safeguards
356 356
4.5.2
Safeguards to the Extent Necessary
4.5.3
The Duration of Safeguards: Dynamic Use Constraint
4.5.4
The Obligation to Compensate
4.5.5
4.5.6
356
358
4.5.4.1
Affected Parties, Substantial Interest
4.5.4.2
Substantially Equivalent Level of Concessions
4.5.4.3
No Duty to Compensate during the First Three Years
Safeguarding against Whom?
358 359
360
4.5.5.1
Safeguards Must Be Nondiscriminatory
4.5.5.2
Quota Modulation
4.5.5.3
VERs
360
360
361
Who Imposes Safeguards?
361
4.5.6.1
Individual WTO Members
4.5.6.2
Individual WTO Members, Members of a PTA
361
4.5.6.3
PTAs in the Name of a Constituent
4.5.6.4
PTAs Imposing Safeguards as a Single Unit
362
363 363
4.5.7
The Form of Safeguards
363
4.6
Procedural Requirements
4.6.1
Safeguards Can Be Imposed Only Following an Investigation 363
4.6.2
Initiating an Investigation
4.6.3
The Request to Initiate
4.6.4
Standing Requirements (Locus Standi)
4.6.5
The Rights and Duties of IAs
363
364 364 364
364
4.6.5.1
The Right to Seek Information
4.6.5.2
The Duty to Observe Due Process
364 365
359
357
Contents
4.6.6
xxi
4.6.5.3
The Duty to Protect Confidential Information
4.6.5.4
The Duty to Observe Transparency
365
365
The Rights and Duties of Interested Parties 4.6.6.1
The Right to Access the File
4.6.6.2
The Duty to Cooperate
367
367
368
4.6.7
Consultations
4.6.8
The Length and Period of Investigation
4.7
Special Safeguard Regime with Respect to China
4.7.1
Four Types of Safeguards
4.7.2
Transitional Safeguard
4.7.3
Safeguarding against Safeguards
4.7.4
Textiles Safeguard
4.8
Special and Differential Treatment for Developing Countries
4.9
Standard of Review
4.10
Institutions
4.11
Concluding Remarks
5
Technical Barriers to Trade
5.1
The Legal Discipline and Its Rationale
5.1.1
The Legal Discipline
5.1.2
The Rationale for the Legal Discipline
5.1.3
5.2 5.3 5.3.1 5.3.2
Discussion
368 368
368
369 372
372 373
374 374 377 377
377 377
380
5.1.3.1
Why Standardize?
5.1.3.2
Standard Setting in the EU and US
5.1.3.3
The Cost of Divergent Standards
5.1.3.4
International Cooperation to Reduce Costs
380
The Relationship with GATT Coverage
380 382 385
387
388
Instruments Covered Private Standards 5.3.2.1
368
388
389
Private Standards Proliferate
391
5.3.3
The Origins of Private Standards
393
5.3.4
Certification
5.3.5
One International Standard, One Test, One Certificate
393 394
373
xxii
5.3.6
Contents
The Relevance of the TBT Agreement on Private Standards 5.3.6.1
GATT and Private Practices
5.3.6.2
The TBT Agreement and Private Practices
5.3.6.3
TBT Committee Practice
5.3.6.4
A Very Preliminary Conclusion
397
398 398
5.4
International Standards
5.4.1
The Primacy of International Standards
5.4.2
Defining International Standards
399
5.4.2.1
Statutory (Lack of) Definition
399
5.4.2.2
The International Standardizing Community
5.4.2.3
Practice
5.4.3
399 399
400
401
Litigating International Standards
406
5.4.3.1
Observing International Standards
5.4.3.2
Deviating from International Standards
5.5
Technical Regulations
5.5.1
Defining Technical Regulations
406 406
410 410
5.5.1.1
Document
411
5.5.1.2
Identifiable Group of Products
5.5.1.3
Product Characteristics and PPMs
5.5.1.4
Mandatory Compliance
411 412
413
5.5.1.5
Coverage of “Technical Regulation” Revisited
416
5.5.1.6
Return to the Good Old Days (Recommended)
416
5.5.2
Legitimate Objective
5.5.3
Necessity
5.5.4
396
396
417
419
5.5.3.1
Intervene When Necessary and Adopt Necessary Measures Only
5.5.3.2
Measures Based on International Standards Are Presumed Necessary
5.5.3.3
Appropriate Level of Protection (ALOP)
5.5.3.4
Necessity and Appropriateness
5.5.3.5
Necessity and the Relative Importance of the Objective Sought
5.5.3.6
Necessity and Consistency
5.5.3.7
Burden of Proof
Nondiscrimination
419
421
421 421
422
423
423
5.5.4.1
Like Products
5.5.4.2
Less Favorable Treatment (LFT)
424
5.5.5
Performance Requirements
5.5.6
Transparency
427
428
428
5.5.6.1
Reasonable Interval between Adoption and Entry into Force
5.5.6.2
Enquiry Points
430
429
420
Contents
xxiii
5.5.7
Recognition
5.6
Standards
5.6.1
Defining Standards
5.6.2
Standard-Setting Bodies
5.6.3
Code of Good Practice
5.7
Conformity Assessment
5.7.1
Defining Conformity Assessment
5.7.2
430 431 431 432 433 433 433
The Ambit of Conformity Assessment 5.7.2.1
Assessing Products
5.7.2.2
Assessing Procedures
434
434 436
5.7.3
International Standards
437
5.7.4
Unilateral Conformity Assessment
438
5.7.4.1
Nondiscrimination
438
5.7.4.2
Necessity
5.7.4.3
Confidentiality
5.7.4.4
Transparency
5.7.4.5
Local and Nongovernmental Bodies
438 439 439 439
5.8
Special and Differential Treatment for Developing Countries
5.9
Institutional Issues
5.9.1
The TBT Committee
441 441
5.9.1.1
Reviewing the Operation of the TBT Agreement
5.9.1.2
Promoting Transparency
5.9.1.3
Specific Trade Concerns (STCs)
441
443 443
5.9.2
Technical Expert Groups
5.10
Concluding Remarks
5.10.1
The Challenges Posed by the TBT Agreement
5.10.2
A Test for Addressing Complaints under the TBT Agreement 5.10.2.1
Errors Galore
439
444 444 445 447
447
5.10.2.2
GATT and TBT Are Not Like Products
5.10.2.3
TBT Is More Like Article XX and Less Like Article III of GATT
5.10.2.4
Why Sequence Matters
449
452
6
Sanitary and Phytosanitary Measures
6.1
The Legal Discipline and Its Rationale
6.1.1
The Legal Discipline
6.1.2
The Rationale for the Legal Discipline
455 455
455 455
451
xxiv
6.1.3
Contents
Discussion 6.1.3.1
457
Link to Agriculture
457
6.1.3.2
Science, Uncertainty, Ambiguity, Ignorance
6.1.3.3
Proxies to Detect Unlawful Behavior
458
459
6.2
The Relationship with GATT and the Other Annex 1A Agreements
6.2.1
The Relationship with GATT
6.2.2
The Relationship with the TBT Agreement
6.2.3
The Relationship with the AG Agreement
6.3
Coverage
6.3.1
SPS Measures
6.3.2
Private Standards
460 460 460
461 461 463
6.3.2.1
The Relevance of the SPS Agreement to Private Standards
6.3.2.2
SPS Committee Practice
6.4
International Standards
6.4.1
Defining International Standards
6.4.2
Measures That Conform to International Standards
6.4.3
Measures Based on International Standards
6.4.4
Measures Deviating from International Standards
6.5
Unilateral Measures Must Be Based on Science
6.5.1
6.5.2
463
463
466 466 468
Risk Assessment Based on Scientific Principles 6.5.1.1
Risk Must Be Identifiable
6.5.1.2
Two Types of Risk Assessment
6.5.1.3
The Content of Risk Assessment
6.5.1.4
The Methodology for Risk Assessment
6.5.1.5
Minority Scientific Opinions Suffice
6.5.1.6
Science, Not Junk Science
468 469 471
471
472 473 474 475 476
476
6.5.1.7
Is There a Procedural Requirement to Demonstrate Risk Assessment?
6.5.1.8
The Standard of Review
ALOP 6.5.2.1
478
478 Definition
478
6.5.2.2
Wide Discretion to Define ALOP
6.5.2.3
Expressing the ALOP
6.5.3
Recognition
6.5.4
Conformity Assessment
479
482 483
478
477
460
Contents
xxv
6.6
Measures Based on Precaution
483
6.6.1
Defining Precaution
6.6.2
The Legal Test for Consistency with Article 5.7 of SPS
6.6.3
Precaution and Science
6.6.4
Precaution, Nondiscrimination, Necessity, and Consistency
6.6.5
Is Precaution a “Carte Blanche”?
6.7
Measures Must Be Applied in a Nondiscriminatory Way
6.7.1
The Relationship between Articles 2.3 and 5.5 of SPS
6.7.2
Where Identical or Similar Conditions Prevail
6.7.3
Arbitrary or Unjustifiable Discrimination
6.7.4
Disguised Restriction of Trade
6.7.5
Geographic Scope of SPS Measures
6.7.6
Burden of Proof
6.8
Measures Must Be Necessary
6.8.1
Burden of Proof
483 484
484 486
487 488
488
489
489
490 490
492 492
493
6.8.1.1
GATT, TBT/SPS: Same Principle, Different Application
6.8.1.2
Practice
493
494
6.8.2
Judicial Review: Limited to Means; No Discussion of Ends
6.8.3
The Relationship between Articles 5.6 and 2.2 of SPS
6.9
Consistency
6.9.1
The Test for Compliance with the Consistency Requirement
6.9.2
The Guidelines on Consistency
6.10
Special and Differential Treatment
6.10.1
Parallel with the TBT Agreement
6.10.2
Standards and Trade Development Facility (STDF)
6.11
Transparency
6.12
Standard of Review
6.13
Institutional Issues
502
6.13.1
The SPS Committee
502
6.13.2
Specific Trade Concerns (STCs)
494
495
495 497 500
500
501 502
503
500
496
xxvi
6.13.3
Contents
The Treatment of Expertise by Panels 6.13.3.1
504
Panels Have Discretion to Invite Experts
504
6.13.3.2
The Ambit of Supplied Expertise
6.13.3.3
Selecting Court-Appointed Experts
6.13.3.4
Self-Disclosure Obligations
6.13.3.5
Due Process
6.13.3.6
Legal Value of Opinions Expressed by Court-Appointed Experts
504 505
505
506
6.14
Concluding Remarks
7
Trade-Related Investment Measures (TRIMs)
7.1
The Legal Discipline and Its Rationale
7.1.1
The Legal Discipline
7.1.2
The Rationale for the Legal Discipline
7.1.3
Discussion
507
510 513
513
513 513
514
7.1.3.1
Local Content, Export Performance
7.1.3.2
Negotiating TRIMs
514
515
7.2
The Relationship with GATT and the Other Annex 1A Agreements
7.2.1
The Relationship with GATT
7.2.2
The Relationship with the Other Annex 1A Agreements
7.3
Trade and Investment
7.3.1
From ITO to GATT
520
7.3.2
The GATT Regime
520
7.3.3
518
520
521
The WTO Working Group on Trade and Investment 7.3.3.1
7.3.4
517
Chronicle of a Death Foretold
521
7.3.3.2
Developing Countries Are Skeptical
7.3.3.3
Developed Countries Do Not Speak with One Voice
521
7.3.3.4
End Game: Drop It
522
523
Attempts outside the WTO: The MAI
523
7.3.4.1
An Ambitious Project
7.3.4.2
Content
523
7.3.4.3
Failure Explained: No Taxation without Representation
7.3.4.4
A Glimmer of Hope
524 524
526
7.3.5
Investment Protection in BITs and PTAs
526
7.4
The TRIMs Agreement
7.4.1
Measures Coming under the Purview of TRIMs
527 527
7.4.1.1
Measures Coming under the Purview of Article III of GATT
528
7.4.1.2
Measures Coming under the Purview of Article XI of GATT
528
517
Contents
7.4.2
xxvii
The Obligations Assumed
529
7.4.2.1
Thou Shalt Not …
529
7.4.2.2
Thou Shalt Not … in the Foreseeable Future
7.4.2.3
Transparency
7.4.3
De Facto TRIMs?
7.4.4
Special and Differential Treatment
7.5
Institutions
7.6
Review of the Agreement
7.7
Concluding Remarks
8
Agreement on Agriculture
8.1
The Legal Discipline and Its Rationale
8.1.1
The Legal Discipline
8.1.2
The Rationale for the Legal Discipline
8.1.3
Discussion
529
530
531 531
532 532
532 535 535
535 535
536
8.1.3.1
Farm Markets Are Volatile
536
8.1.3.2
The Political Economy of Farm Protection in the North
8.1.3.3
Farm Trade and Developing Countries
537
537
8.2
The Relationship with GATT and the Other Annex 1A Agreements
8.2.1
The Relationship with GATT
8.2.2
The Relationship between the AG and the SCM Agreements
8.2.3
The Relationship between the AG and the SG Agreements
8.3
The Road to the AG Agreement
8.3.1
The GATT Approach
8.3.2
The US Waiver (1955)
8.3.3
The CAP
538
544
544 546
546
8.3.3.1
Self-Sufficiency for Europe
8.3.3.2
Challenging the Consistency of CAP with the GATT Rules
547
8.3.3.3
Reforming the CAP
550
8.3.4
The Uruguay-Round Negotiation
8.3.5
The Doha-Round Negotiation
8.3.6
The AG Agreement in a Nutshell
555
8.3.6.1
Border Measures (Market Access)
8.3.6.2
Domestic Support
8.3.6.3
Export Subsidies
556 558
552 555 556
547
540 544
538
xxviii
Contents
8.4
Product Coverage and Schedules of Concessions
8.5
Border Measures
8.5.1
Goods Protected by Tariffs
8.5.2
560 561
Goods Protected by Other Measures: Tariffication 8.5.2.1
The Indicative List of Items to Tariffy
8.5.2.2
Similar Border Measures
Tariff Bindings Must Be Respected
8.5.4
Exceptions
567
568
8.5.4.1
Special Safeguard Mechanism
8.5.4.2
Special Treatment
8.5.4.3
Predominant Staple
568
569 570
8.6
Domestic Support
8.6.1
Aggregate Measurement of Support (AMS)
8.6.2
Payments Excluded from the Calculation of AMS
570 572 573
8.6.2.1
Development Subsidies
8.6.2.2
De minimis Payments
573
8.6.2.3
Direct Payments for Production-Limiting Programs (Blue Box)
8.6.2.4
Green Box
573
574
8.6.3
Calculating the AMS
8.6.4
Equivalent Measurement of Support (EMS)
8.7
Export Subsidies
8.7.1
Defining Export Subsidies
8.7.3
562
564
566
8.5.3
8.7.2
558
579
583 583
Commitments on Export Subsidies 8.7.2.1
Commitments on Budgetary Outlays
8.7.2.2
Commitments on Quantities
8.7.2.3
Scheduled Goods
8.7.2.4
Unscheduled Goods
Anticircumvention
587
587 587
587
8.7.3.1
Export Credits
588
8.7.3.2
Excess Exports
588
8.7.3.3
Food Aid
8.7.3.4
Standard of Review
589 591
8.7.4
Export Competition
591
8.7.5
Export Subsidies Revisited
591
586 586
582
574
Contents
xxix
8.8
Minimum Access Requirements
8.8.1
Minimum Access Opportunities
8.8.2
Current Access Opportunities
8.9
Due Restraint (Peace Clause)
8.10
Public Stockholding for Food-Security Purposes
8.10.1
India in Bali
8.10.2
India Was Serious
8.10.3
What Prompted This Action?
8.10.4
Food Crises at Large
8.11
Special and Differential Treatment
8.11.1
Implementation Period for Developing Countries
8.11.2
Export Restrictions and Prohibitions
8.11.3
Net Food-Importing Developing Countries
8.11.4
Remaining Provisions
8.11.5
592 592
593 593
594 595
The Cotton Initiative
596
597 598
599
600 600
8.11.5.1
What Is the Initiative All About?
8.11.5.2
The Measures Envisaged
8.11.5.3
The Situation Now (Far from Xanadu)
600
601
Transparency
8.13
Institutional Issues
8.14
Concluding Remarks
9
Agreement on Textiles and Clothing
9.1
The Legal Discipline and Its Rationale
9.1.1
The Legal Discipline
9.1.2
The Rationale for the Legal Discipline Discussion
598
598
8.12
9.1.3
594
602
602 603 603 607 607
607 607
608
9.1.3.1
Estimating the Welfare Implications of MFA
9.1.3.2
From Manchester to Delhi: Changing Production Patterns
9.2
The Relationship with GATT
9.3
The Road to the ATC
9.3.1
Before the MFA
9.3.2
Why the MFA?
609 609
609
609
608 608
xxx
Contents
9.3.3
The MFA Regime
9.3.4
MFA and GATT
9.4
ATC
9.4.1
The Objective Sought
9.4.2
Product Coverage
9.4.3
Notification of Restrictions
9.4.4
Progressive Integration
9.4.5
610 611
612 612
613 613
613
Special Transitional Safeguard Mechanism
614
9.4.5.1
Conditions for Lawful Imposition
614
9.4.5.2
The Rationale
9.4.5.3
Injury, Threat of Injury
9.4.5.4
Domestic Industry Producing the Like Product
9.4.5.5
Attribution to a Source of Supply
9.4.5.6
The Requirement to Hold Consultations
9.4.5.7
Retroactive Application
614 615 616
617 617
618
9.4.6
Administering Restrictions during the Transitional Period
9.4.7
Anticircumvention
9.4.8
Institutions
9.5
Concluding Remarks
10
618
618 619
Government Procurement
621
10.1
The Legal Discipline and Its Rationale
10.1.1
The Legal Discipline
10.1.2
The Rationale for the Legal Discipline
10.1.3
Discussion
618
621
621 621
622
10.1.3.1
Gains from Liberalization
10.1.3.2
Why Plurilateral?
622
10.1.3.3
“Revised” GPA
10.1.3.4
UNCITRAL Model Law
10.1.3.5
Procurement by WTO Members That Have Not Joined the GPA
622 622 623
10.2
The Relationship with GATT
10.3
Government Procurement: A Multifaceted Instrument
10.3.1
Procurement and Industrial Policy 10.3.1.1
A Worldwide Phenomenon
10.3.1.2
Buy American
627
624
624
626
626
626
Contents
xxxi
10.3.2
Procurement and Competition Policy
10.3.3
Procurement and the Fight against Corruption
10.4
The Scope of the GPA
10.4.1
Plurilateral Agreement
10.4.2
Membership
631 631
631
10.4.2.1
Acceding to the GPA
631
10.4.2.2
Current Membership
631
10.4.3
Entities Covered
10.4.4
Measures Covered
10.4.5
Modification of Commitments
631 632 634
10.4.5.1
The Meaning of “Modification”
10.4.5.2
Procedure
634
634
10.4.6
Exemptions from Coverage
636
10.5
The Obligations Assumed
636
10.5.1
Nondiscrimination
10.5.2
Reciprocity
10.5.3
Government Procurement in PTAs
10.5.4
Electronic Procurement
10.5.5
Rules of Origin
10.5.6
Offsets
10.5.7
Technical Specifications
10.5.8
Exceptions
10.6
Procurement Methods
10.6.1
Common Elements to All Methods
10.6.2
629
636
637 637
639
639
639 640
640 641 642
10.6.1.1
Conditions for Participation
643
10.6.1.2
Supplier Registration System
643
10.6.1.3
Deadlines
10.6.1.4
Notice of Intended Procurement
644 644
Umbrella Categories Included in the GPA 10.6.2.1
Open Tendering
10.6.2.2
Selective Tendering
10.6.2.3
Limited Tendering
645 646 646
645
630
xxxii
10.6.3
Contents
Variations Not Included in the GPA 10.6.3.1
647
Competitive Procedures with Negotiation and/or Competitive Dialogue
10.6.3.2
Restrictive Procedures
10.6.3.3
BOT or BOOT
648
648
10.6.4
Awarding the Contract
10.7
Transparency
10.7.1
Ex Ante
650
10.7.2
Ex Post
651
10.7.3
Transparency, Every Step of the Way
651
10.8
Special and Differential Treatment
652
10.8.1
A Carrot to Increase Participation
10.8.2
Substantive Law
10.9
Enforcing the GPA
10.9.1
Trondheim: Who Lost What?
10.9.2
The Challenge Procedures
10.9.3
First Review by the Procuring Entity: What For?
10.9.4
Dispute Adjudication
10.10
The Work Programmes
10.11
Institutional Issues
10.12
Concluding Remarks
11
The Civil Aviation Agreement
11.1
The Legal Discipline and its Rationale
11.1.1
The Legal Discipline
11.1.2
The Rationale for the Legal Discipline
11.1.3
Discussion
647
649
649
653
654 654 655
656 658
658 659
660 660 663 663
663 663
664
11.1.3.1
Industrial Policy and Effects on Trade
11.1.3.2
Duopolies
664
664
11.1.3.3
US-EU 1992 Agreement on Civil Aviation
11.1.3.4
Who Is Hurting Who?
665
667
11.2
The Relationship with the GATT and Annex 1A Agreements
11.2.1
The Relationship with the GATT
667
667
Contents
xxxiii
11.2.2
The Relationship with the SCM Agreement
668
11.2.3
The Relationship with the TBT Agreement
668
11.3
Membership
11.4
Product Coverage
11.4.1
The Original Regime
11.4.2
The Protocol Amending the CA Agreement
11.5
Elimination of Customs Duties
11.6
Disciplines on Subsidies
11.7
Other Obligations
11.7.1
Quantitative Restrictions
11.7.2
Import Licensing
11.7.3
Procurement
670
11.8
Institutions
671
11.9
Concluding Remarks
12
Transparency
12.1
The Legal Discipline and Its Rationale
12.1.1
The Legal Discipline
12.1.2
The Rationale for the Legal Discipline
12.1.3
Discussion
668 668 668 669
669
670
670 670
670
671
673 673
673 674
674
12.1.3.1
Transparency, a Commodity
12.1.3.2
Beyond Trade Concerns
674
12.1.3.3
What Influences Transparency?
12.1.3.4
Transparency and Enforcement of Obligations
12.1.3.5
The Record of Transparency in the WTO
675 676 678
12.2
Article X of GATT
12.2.1
Laws and Other Acts of General Application
12.2.2
677
678
12.2.1.1
Defining Laws of General Application
12.2.1.2
The Rationale: Due Process
12.2.1.3
Prompt Publication
678
680
680
A Halt to (Unpleasant) Surprises
681
12.2.2.1
Advance in a Rate of Duty
681
12.2.2.2
New or More Burdensome Requirement
682
678
xxxiv
12.2.3
Contents
Uniform, Reasonable, and Impartial Administration of Laws 12.2.3.1
Three Distinct Obligations
682
12.2.3.2
Minimum Standards
12.2.3.3
Laws and Their Clarifications Are Covered
12.2.3.4
Uniform
12.2.3.5
Reasonable
12.2.3.6
Impartial
682 683
683 686 687
12.2.4
The Obligation to Maintain Independent Tribunals
12.2.5
Standard of Review
12.3
The Trade Policy Review Mechanism (TPRM)
12.3.1
The Objectives
12.3.2
The Record
12.3.3
Is the TPRM Really Useful?
12.4
Into the Great Wide Open: Transparency Unlimited
12.4.1
Transparency Obligations in the WTO
12.4.2
Three Generations of Transparency Provisions
12.4.3
689 692
692
693 693
The WTO: International Watchdog? 12.4.3.1
The March toward Transparency
12.4.3.2
Crisis-Related Reports and Beyond
12.4.3.3
Ball in the Geneva Camp
Notes 701 References 795 Index 827
688
699
694 696
697 699
695
694
682
Preface
Commerce is a perpetual and peaceable war of wit and energy among all nations. —Jean-Baptiste Colbert, economic minister for Louis XVI When goods do not cross borders, soldiers will. —Frédéric Bastiat, 19th-century political economist and member of the French Assembly
I consider myself very fortunate to have learned my trade by giants in this field, in law, in economics, and in political science as well. I spent precious time next to John Jackson at the University of Michigan at Ann Arbor, whose 1969 book World Trade and the Law of GATT made a coherent whole out of GATT Secretariat papers, negotiating documents, and panel reports. It is there that I met Bob Hudec, who very generously spent a substantial amount of his time in the years since sharing his work and thoughts with me. Bob’s and John’s works have been a major influence in the way I see the world trading system, and I think I will never thank them enough for all they have done for me and for the field where I (along with many others) now work. My economist friends are many, and I will name my close collaborators/coauthors alphabetically: Kyle Bagwell, Chad P. Bown, Aaron Cosbey, Gene Grossman, Bernard M. Hoekman, Henrik Horn, Doug Irwin, Phil Levy, Patrick Messerlin, Damien Neven, Tom Prusa, Kamal Saggi, André Sapir, and Bob Staiger; thank you all very much. Jagdish Bhagwati has been my inspirational coteacher and mentor over many years at Columbia Law School. My involvement in two research consortia has been a major catalyst in my understanding of the GATT/WTO regime. Lance Liebman included me in the American Law Institute (ALI) project on “Principles of International trade: The WTO,” where I served as chief reporter along with Henrik Horn. Mark Sanctuary led with skill and bonhomie the ENTWINED project on “Trade and Environment,” where I participated as an invited author, and contributed papers that I coauthored with Henrik Horn, but also with Aaron Cosbey and Bob Wolfe. Working with specialists in various fields made me aware that it is not just the devil, but the entire citizenry of hell that lies in the details. This explains the amount of work
xxxvi
Preface
presented here, and hopefully the decreasing number (when compared to previous work) of mistakes, for which I apologize a priori. As always, I had to rely on many people who, instead of going about their lives, generously dedicated a disproportionate amount of their time reading my work. My collaborators, Neil Teller and Carlo-Maria Cantore, pretended that they found it interesting to read my work, and occasionally I believed them when they said as much. But even when I did not, I still passed on chapters for them to read and comment upon. Jonathan Chevry and Marianne Karttunen at EUI also generously shared with me their expertise, and their work. Numerous academics and practitioners have shared their precious experience in their field of expertise with me: Alberto Alemanno, Steve Charnovitz, Antonio Cortês, Bill Davey, Henrik Horn, Rob Howse, Céline Kauffmann, Patrick Low, David Palmeter, ErnstUlrich Petersmann, Frieder Roessler, Alan O. Sykes, Edwin Vermulst, Reinhard Weissinger, and Bob Wolfe. Terry Stewart shared with me various negotiating documents from his priceless archives, and responded to my incessant demands in no time. At the WTO, current and former officials Inge Bauer, Jose Blanco, Tessa Bridgman, John Dickson, Richard Eglin, Marieme Fall de Perez Rubin, Alejandro Gamboa-Alder, Rodd Izadnia, Mark Koulen, Juan-Alberto Marchetti, Darlan Marti, Gabrielle Marceau, Andrea Mastromatteo, Julie Pain, Bruno Ventrone, Peter Williams, Donna Wood, RhianMary Wood-Richards, and Müslüm Yilmaz have helped me with dozens of queries that I have addressed to them, and always in the most satisfactory manner. At the WTO always, Diwakar Dixit, Taufiqur Rahman, Roy Santana, and Erik Wijkström read chapters of my book and provided me with precious comments. Any remaining errors are, of course, my own. Humberto Jimenez, delegate for Ecuador at the WTO, shared with me his experience from participating in various WTO fora. My editor at MIT Press, Jane Macdonald, has been encouraging and absolutely wonderful from the first time we met and shared lunch at the Columbia Faculty House in New York City. It really mattered an awful lot to me to work with an editor who shared my enthusiasm for this work. Susan McClung, Marcy Ross, Emily Taber, and the staff and reviewers for MIT Press provided me with invaluable help and comments that vastly improved the quality of my original manuscript. My debt to all the individuals mentioned above is huge, as is my debt to my family. My wife, Suja Rishikesh-Mavroidis, has yet again put her own career on the back burner in order to help me finish this book. It would have probably been a better allocation of our time if the opposite had happened. My only regret when writing this book is that I spent less time with her, and with our three daughters, Meera-Natalia, Riya-Valentina, and Tara-Elena. I started making up for all lost time at the precise moment that I had finished this preface. Petros C. Mavroidis Commugny, Switzerland May 2015
Introduction
I have changed my mind a dozen times (and probably will do so in the future) about the structure that a book aiming to explain the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) regime, like this one, should have. The objective I assigned to myself was to write a book that would be accessible to lawyers, political scientists, and economists. To do that, I wanted to ask first the question, “What is the problem the GATT framers tried to solve?” before explaining how they solved it. This is why, borrowing from previous work from economic historians and political scientists, I discuss at great length the negotiating history of each and every legal institution discussed in the two volumes, and have dedicated one full chapter (chapter 1 of volume 1) to the negotiating history of GATT, the cornerstone of the world trading system. I have adopted a uniform structure for every chapter in an effort to facilitate the reader accessing the material. With the exception of chapter 1, I have included in every chapter first a discussion of the legal discipline discussed, in its context. It is followed by a discussion of the “completion,” so to speak, of the original contract through subsequent practice (that is, secondary law; e.g., law created by the various WTO bodies, as well as case law). Now what do I mean by “context”? I do not use the term as lawyers typically use it. I intend to cover two different discussions under this umbrella. First is the rationale for the provision, as evidenced in the negotiating record and in case law (and point out discrepancies between the two, if any exist). Then, under what I categorize as “Discussion” in every chapter, I provide the basic economic rationale, as well as the policy background, for each provision discussed. I ask, in other words, what a particular provision is aimed to address, and show cases from the real world that illustrate each point. The reader can thus think about the legal institutions discussed in the two volumes in terms of two benchmarks: the negotiating record (that is, the problem that the authors of the legal institution aimed to solve), and the basic economic rationale explaining the necessity for the institution discussed. The theme “negotiating record meets the economic rationale” permeates the two volumes, and it is an issue that I try to address myself as well. The main part of each chapter consists in a discussion of subsequent practice; that is, the “life” of every legal norm. In this part, I aim to achieve three different goals:
2
Introduction
First, provide a detailed, and not sketchy, presentation of case law. I myself have found it always difficult to teach this field through one leading case. For many reasons, a leading case is often hard to find in GATT/WTO. In my view, the dominant explanation is that WTO adjudicating bodies have an eclectic view of precedent. They do not start their analysis from past case law and see to what extent they should simply confirm it, or, in the presence of “distinguishing factors,” adopt new rulings. They adopt their decisions and use precedent to support them—to the extent that this can be done, of course. They thus “endogenize” precedent in their privileged approach. So I have to follow a different path, discussing the cases that have contributed to the understanding of the various terms. I try to state what the state of the art is at the moment of writing; that is, highlight the prevailing understanding of the various terms today. At the end of the day, my aim is for the reader to know how the various terms in the legal provisions discussed have been, and are today, understood in case law. This is, if you will, a “positivistic” exercise, aiming to simply reflect the state of the art in terms of case law evolution today. Second, I provide the literature that has (in my opinion, of course) contributed useful criticism of the interpretations of the various legal provisions. Criticism could be useful, in my view, if it points to a logical error, but not only for this reason. It could be, for example, that literature criticizes WTO “courts” because they have behaved like principals, not like the agents that they are. The literature has pointed to the negative institutional externalities when this happens. Or, it could be that the WTO courts have been behaving inconsistently, and thus provoking the wrath of the addressees of their decision, and so on and so forth. Third, I offer my own criticism, to the extent that it does not overlap with voices already heard. It is here that I borrow from the methodology we had adopted in the American Law Institute (ALI) project, which I have adapted for the purposes of this work. The function of case law is not simply to settle disputes, for that could be done even without the help of adjudicating bodies. Courts complete the original contract in various ways: by customizing it to a particular transaction; by filling gaps where gaps exist, and absent some lawmaking (e.g., in the area of allocation of burden of proof), where it would be impossible to issue a final decision, and so on. At the end of the day, the picture that emerges will be law (primary and secondary) plus case law; and, looking at this picture, I ask whether the final outcome is reasonable. If the answer is yes, I do not stop the discussion immediately. It could be, for example, that a reasonable outcome is the result of impermissible judicial activism, in the sense that courts have behaved as if they were legislators, interpreting provisions against the will of the framers. Although this might a very efficient way to resolve disputes, it is not recommended. Judicial activism, if perpetuated, might also lead to unsatisfactory outcomes. In similar cases, the negative external effects for the institution should not be underestimated. The WTO members would need to amend the law to preempt similar behavior in the future,
Introduction
3
and amendment requires consensus across 161 divergent trading nations. Agency costs, so to speak, are quite high. If not (that is, if I find the outcome unreasonable), I go ahead and ask the additional question of whether the source of unhappiness lies in law (in which case the trade community should be thinking in terms of amending the original contract), or case law (in which case all that is required is a change in direction). My views on this score will be recapped in the concluding section. I pay particular attention in this volume to the various WTO organs. This is an area in which I have been influenced from political scientists with whom I have cooperated over the years. The legislative activity takes place every other decade, more or less, but it is day-to-day operations in the realm of the various WTO committees that move the world trading system forward. In the book Political Order and Political Decay,1 Francis Fukuyama describes institutions in the following manner: “since an institution is nothing more than a rule of law that persists over time, human beings therefore have a natural tendency to institutionalize their behavior.” This fits perfectly well with relational contracts, and there is ample evidence that GATT operated early on within these parameters. The framers of the WTO did not undo the institutional balance that had been struck in 1947. They added new committees, since new agreements were signed, and enriched it through new layers of institutional life, since the WTO provided the “roof” that the International Trade Organization (ITO) failed to provide. One can never say enough about the GATT/WTO institutions. Hudec’s monumental 1993 work, which that I cite extensively in my own research, explains how GATT pragmatism helped transform an agreement into an institution. In this book, I discuss the institution that is called to administer the life of each and every WTO agreement in a separate section, hoping to bring out this often forgotten aspect of GATT/WTO life by focusing on its interaction with the other WTO bodies. Volume 1 focuses on regulation of trade by GATT. Chapter 1 is long, but in my view that amount of detail is quite necessary. Both Jackson and Hudec spent much time trying to understand the negotiating record. Alas, modern WTO courts have relegated its importance by insisting on a narrow understanding of the Vienna Convention, the legal instrument that they use in order to interpret the various agreements. I quote from L. P. Hartley, an English novelist who famously wrote in his 1953 classic The Go-Between, “the past is a foreign country; they do things differently there.” Even if that is so, there is much to learn from the negotiating record, including, crucially, what the GATT framers were after. In my view, knowledge of the past is a key ingredient for a thoughtful understanding of the GATT/WTO regime. This is not to deny that adjustments are welcome—indeed necessary. The need for adjustment, though, is an elusive concept when the historical angle is missing. The next step in chapter 1 is to present in colloquial (but hopefully not vulgar) terms the explanations that modern economic theory has advanced for trade agreements. The
4
Introduction
scene is thus set for a “negotiators meet economics” play, and the consequences of this discussion. Chapters 2, 3, and 4 discuss the disciplining of border instruments—namely, quantitative restrictions and tariffs. It is in chapter 4 that I entertain the discussion on the most favored nation (MFN) clause, the cornerstone of GATT, which binds both border measures (tariffs) and domestic measures. Chapters 5 and 6 focus on the exceptions to MFN, the preferential trade agreements (PTAs), and the special and differential treatment for products originating in developing countries. Chapter 7 deals with all domestic instruments, whereas chapter 8 is dedicated to the discussion of disciplines imposed on state trading enterprises (e.g., state entities through which international trade is being channeled). In Chapter 9, finally, the discussion reverts to the obligations assumed under the GATT, and presented in the first eight chapters. While chapters 1–9 are dedicated to a discussion and analysis of GATT, I present the case law (and other relevant subsequent practice) under the various provisions until December 2014, since this is not a mere historic document, but still a living international agreement. Volume 2 covers the WTO Agreements regulating trade in goods. Since the Kennedy round (in the early 1960s), GATT has added to its institutional arsenal. The current institutional design is the outcome of the successful completion of the Uruguay round (mid1990s), as well as the few areas where agreement was reached during the Doha round (which started in 2001, and had not been concluded at the time of writing). Chapter 1 focuses on all agreements dealing with customs clearance. In chapters 2–4, I present the “contingent protection” instruments—e.g., the three agreements that allow WTO members to unilaterally add to the negotiated amount of protection when a certain contingency (e.g., dumping) has occurred. Chapters 5 and 6 are dedicated to an analysis of the Technical Barriers to Trade (TBT) and Sanitary and Phyto-sanitary Measures (SPS) agreements, which deal with some domestic instruments (e.g., environmental and health policy and consumer information). Chapter 7 is about a WTO innovation, the agreement on Trade Related Investment Measures (TRIMs). It is in this context that I entertain a brief discussion on the wider “trade and investment” issue. Chapters 8 and 9 focus on the two sector-specific agreements that remained outside the GATT disciplines and were reintroduced in the world trading system following the successful conclusion of the WTO (namely, Agriculture and Textiles). Chapters 10 and 11 concern the two plurilateral agreements (namely, Government Procurement and Civil Aviation); that is, the only WTO Agreements that bind only a subset of the total WTO membership. Finally, I discuss in chapter 12 the subject of transparency, a very important GATT/WTO institution aiming to curb uncertainty in trade relations. It is my hope that this book will be helpful to students and practitioners alike, and that the audience will encompass all those interested in the current and previous regulation of international trade.
1
1.1
Annex 1A Agreements Dealing with Customs Procedures
Clearing Goods through Customs
In this chapter, we discuss four agreements: namely, the Import Licensing Agreement (ILA), the Customs Valuation Agreement (CVA), the Agreement on Preshipment Inspection (PSI), and the Agreement on Trade Facilitation (ATF). These agreements explain the obligations assumed by WTO members when it comes to clearing goods through customs. The reader might think this is a mundane subject; and yet dozens of empirical studies point to the substantial costs on international trade that come from lengthy customs procedures, and unaccounted for controls. Worse, the boundary between lengthy procedures and uncertainty is quite often easy to cross. Consequently, exporters might have a disincentive to trade in the first place. Indeed, what is the value of tariff bindings if it takes weeks to clear goods through customs, or if the method for calculating the value of imports is totally haphazard? The importance of the four agreements can thus not be overstated enough. The agreements discussed in this chapter ensure that the value of traded goods has been properly reflected in invoices, while they also simplify customs procedures (and reduce deadweight losses),1 even when import licenses have been used. 1.2
ILA
1.2.1 The Legal Discipline and Its Rationale Article 1.1 of the ILA defines the term “import licensing” as follows: For the purpose of this Agreement, import licensing is defined as administrative procedures used for the operation of import licensing regimes requiring the submission of an application or other documentation (other than that required for customs purposes) to the relevant administrative body as a prior condition for importation into the customs territory of the importing Member.
This definition falls short of meeting the test that a logician would apply to definitions since it is self-referential. The absence of a more workable definition is not for lack of trying, though.
6
Chapter 1
During the Tokyo round, the first ILA was concluded (entered into force on 1 January 1980), and has since been superseded by the Uruguay round agreement. The Tokyo-round ILA numbered only 26 participants in 1986, that is, when the Uruguay round was launched.2 During the Uruguay round of negotiations, a number of trading nations continued to adhere to the Tokyo-round ILA. Mexico, for example, adhered in 1987.3 The increased participation facilitated the decision to transform ILA from a Tokyo-round code with limited participation to an Annex 1A Agreement, which binds all WTO membership. Why have import licensing? Import licenses are imposed for a variety of good reasons, but sometimes they are imposed abusively so. The members of the World Trade Organization (WTO) aimed through this agreement to reduce the potential for abusive behavior by disciplining recourse to import licensing. The ILA also aims at preventing trade distortions that could be caused by the use of import licenses, and also aims at simplifying and bringing transparency to import licensing procedures.4 But are not the procedures of the General Agreement on Tariffs and Trade (GATT) that concern import licensing enough? Do we really need an agreement on import licensing? GATT mentions import licenses in various places (i.e., Articles XI, XIII, and XV), without, however, regulating this area in detail. Actually, Article XI of GATT leaves the impression that import licensing is GATT-inconsistent, since it bans prohibitions or restrictions made effective through, inter alia, import licenses. We saw in chapter 2, volume 1, though, that in EEC—Minimum Import Prices, a GATT panel, had held that import licensing was not inconsistent per se, so long as the granting of licenses was automatic. It did not establish criteria for automaticity, and, as a result, we are in the dark as to which forms of import licensing are permitted or not. Article XV of GATT does not regulate in detailed manner the granting of licenses either, and refers to them to the extent warranted when addressing the relationship between the International Monetary Fund (IMF) and the WTO. The only noncontroversial regulation of import licenses is, thus, the requirement for transparency by virtue of Article XIII.3(a) of GATT. Trading nations might further be subjected to the disciplines of Article VIII of GATT, to the extent that granting a license is considered to be a service at customs clearance, although, in the absence of case law on this score, it is doubtful that this is the case. The conclusion from our analysis so far is that GATT contains sporadic references to import licensing, but no detailed regulation of the issue. Practice, nevertheless, did develop, since the disciplines discussed above leave ample leeway to those interested to practice at least some of forms of import licensing (like automatic import licensing). The Tokyo-round ILA crystallized the prevailing practice into law and sanctioned the distinction between “automatic” and “non-automatic licensing.” It did not go any further than that, though. The US went so far as to characterize it as a “reporting” (as opposed to an “operational”) agreement.5 The limits of the approach adopted during the Tokyo round soon became evident. It is in the context of the biennial reviews that took place following the advent
Annex 1A Agreements Dealing with Customs Procedures
7
of the Tokyo-round ILA that trading nations became increasingly sensitized to the distortions for international trade that can result from the operation of import licensing schemes. The objective of the Uruguay round negotiators was, thus, quite naturally (in the words of the US delegation) to ensure that “... licensing procedures themselves do not constitute an obstacle to international trade.”6 Negotiators were divided into two main camps during the negotiation of the Uruguayround ILA: those who wanted to constrain recourse to import licensing and those who thwarted similar attempts. Those wishing to constrain import licensing did not want to eliminate it altogether. It should be mentioned that even the US, a very severe critic of import licensing that submitted various proposals during the negotiation and a joint proposal with Hong Kong, China,7 that was heavily relied upon by other trading nations as well, did recognize that import licensing could, in principle, serve legitimate purposes. The US aimed to ensure that import licensing would not be widespread and that it would be “functional”; i.e., that it would be used whenever necessary to achieve a particular, agreed-upon objective. Recourse to it would occur only when the agreed-upon conditions had been met.8 It managed to push this view through in the preamble, as well as in some substantive obligations: Article 2.2(b) of ILA, for example, recognizes that recourse to automatic licensing will be made when other, more appropriate means are not available. In a similar vein, nonautomatic licensing (often referred to as “discretionary” licensing) must respect the necessity discipline; e.g., it must not be more burdensome than what is required to serve the measure to which it is linked. Negotiators fell short in their attempts to define “import licensing” in a more detailed manner than in the Tokyo-round agreement. The EU had, during the Uruguay round of negotiations, proposed that an indicative list of import licensing procedures be added to this provision in order to better explain the negotiating intent. It also proposed that criteria be agreed on that would help distinguish between customs clearance procedures that would not be covered by the new ILA and other procedures with “licensing elements,” which should be covered.9 It proposed to this effect that import licensing ... covers any document that is required as a prior condition for importation by virtue of an import regime, including customs documents when they have this function.10
This definition was not retained. The failure to agree on a definition is not inconsequential. As we will see later in this chapter, in Argentina—Import Measures, the consistency of an import licensing scheme was discussed under Article XI of GATT instead of the various provisions of the ILA. This is probably because the interpreter did not have a definition of what an import licensing scheme was, under which it would have subsumed the challenged measure.11 A license might be warranted either when no quantitative restriction (QR) is in place (say, for statistical reasons), or if a legal QR (say, on balance of payments grounds) has been introduced. What matters is, in the words of Article 1.2 of the ILA:
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... that the administrative procedures used to implement import licensing regimes are in conformity with the relevant provisions of GATT 1994 including its annexes and protocols, as interpreted by this Agreement, with a view to preventing trade distortions that may arise from an inappropriate operation of those procedures ...12
It is easy to contemplate how additional deadweight losses (i.e., excess burdens) can result from import licensing. Lengthy licensing procedures might in and of themselves dissuade traders from pursuing transactions. The various obligations included in this agreement aim at reducing them (and ideally, eliminating them altogether). The ILA disciplines licensing and not licenses—that is, the process and not the outcome. There are two types of licensing provided for in the ILA: “automatic licensing” (Article 2 of the ILA), and “non-automatic licensing” (Article 3 of the ILA). 1.2.2 Automatic Licensing 1.2.2.1 Definition Automatic import licensing is defined in Article 2.1 of the ILA as follows: “Automatic import licensing is defined 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).” The wording in this provision represents an improvement compared to the definition endorsed during the Tokyo round. There, the corresponding provision (Article 2.1) read: “Automatic import licensing is defined as import licensing where approval of the application is freely granted.” The wording “freely granted” was criticized for being too imprecise, and probably confusing as well, since it denotes free-of-charge licensing schemes and says nothing about the exercise of discretion by the administering authority.13 But, of course, the amount of money paid is not what necessarily counts. True, if the amount is prohibitive, it could, in and of itself, render licensing nonautomatic, since some traders might find it economically nonviable to pay the requested sums. On the other hand, it could be that licenses are granted free of charge, but the granting authority retains discretion regarding the entities that will receive it. This is why, following the US lead in this respect, the text was amended to ensure that no discretion would be allowed in the context of automatic licensing, and also that the conditions for lawful imposition would be explicitly spelled out in Article 2.2(a) of the ILA.14 1.2.2.2 The Rationale for Automaticity The natural question to ask in order to understand the rationale for automatic import licensing is this: Why have recourse to licensing at all, if licenses will be automatically granted to all applicants? The ILA recognizes in its preamble the usefulness of automatic licensing, without however adding instances where this is the case. All we know is that automatic import licensing may be necessary when other appropriate procedures for reaching a regulatory
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objective sought are not available (Article 2.2(b) of ILA). Take thus, the example of import licensing for the purposes of procuring statistical information. A WTO member will have recourse to automatic licensing in order to monitor imports if it cannot get the information it seeks through alternative channels, and so long as the circumstances that gave rise to the need to gather similar information are present. Meeting this test should not be taken for granted. Statistical information, for example, could be easily obtained by simply monitoring import trade at the various customs offices without imposing a licensing regime.15 WTO members, consequently, might have to explain why the use of automatic licensing was necessary in the first place. It follows that the only rationale for automaticity explicitly acknowledged in the ILA is the nonavailabilty of the first best instrument to reach an objective. It is for this reason that, according to Article 2.2(b) of the ILA, import licensing may be maintained so long as the circumstances that gave rise to its introduction persist and its underlying administrative purposes cannot be achieved in a more appropriate way. 1.2.2.3 Conditions for Lawful Imposition Three conditions must be cumulatively met for automatic licensing to be WTO-consistent: • All applications must be approved (Article 2.1 of the ILA). • The “general provisions” applicable to both automatic and nonautomatic licensing have been observed (Article 1 of the ILA). • The requirements in Article 2.2(a) of the ILA must be satisfied: WTO members that have recourse to automatic licensing must also ensure that their administration of licensing procedures is such that no restrictive effects result for international trade. It is, of course, anything but a simple exercise to measure similar effects and attribute them to the administration of automatic import licensing procedures. This is why this provision creates a presumption that restrictive effects exist unless a series of obligations embedded therein have been observed. We discuss all this in what follows. 1.2.2.4 Approval Granted in All Cases By virtue of Article 2.1 of ILA, approval must be granted in all cases for licensing to be automatic. Does this mean that the relevant authorities can impose no conditions at all that should be fulfilled for requests to be approved? It turns out that they can impose conditions but that what matters most is that anyone meeting the conditions will be granted a license. Conditions however, could be quite restrictive, and the question arises whether the agreement imposes a positive or negative list to this effect, e.g., whether it proscribes some or explicitly approves of other conditions. There are two types of conditions that can be imposed: monetary security that must be paid for licensing to occur, and other (nonmonetary) trading conditions. We take them in turn.
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Monetary Conditions To understand this condition, we need to revert to the first ILA signed at the Tokyo round. Article 2.1 of the Tokyo-round ILA read: “Automatic import licensing is defined as import licensing where approval of the application is freely granted.” The term “freely granted,” though, should not be equated to the absence of monetary burden. Footnote 1 to Article 2.1 of the Tokyo-round ILA read: “Those import licensing procedures requiring a security which have no restrictive effects on imports, are to be considered as falling within the scope of paragraphs 1 and 2 of Article 2 below.” This footnote became footnote 4 in the current ILA, where it has been reproduced verbatim. One might legitimately, of course, ask: What security has no restrictive effect on imports? The only way that a security will not have restrictive effects would be if traders might find it consistently economically unjustifiable to pay it. Consequently, the amount of security should not act as disincentive and reduce the volume of transactions that would otherwise have taken place. In 1978, a GATT panel was requested to review the consistency of the licensing scheme practiced by the EU on some farm goods, including tomatoes. In EEC—Minimum Import Prices, the panel qualified as “automatic licensing” a scheme whereby, for the issuance of a certificate to import goods, traders would have to pay a guarantee (“security”). The panel reached this conclusion based on the fact that the scheme was consonant with prevailing practice at the time. In this case, it paid attention to a number of facts: other trading nations had similar schemes in place; the amount of “security” was not exorbitant; and the security paid would be reimbursed after importation had taken place. Nonmonetary Conditions Article 2.1 of the ILA defines “automatic licensing” as import licensing where all applications are approved, and where the requirements of Article 2.2(a) of the ILA are met. “Automaticity,” though, should not be equated with “unconditionality.” The ILA accepts as much when, in Article 2.2(a)(i), it states the following: any person, firm, or institution which fulfils the legal requirements of the importing Member for engaging in import operations involving products subject to automatic licensing is equally eligible to apply for and to obtain import licences.
Goods traded under import licenses could, thus, be subjected to trading conditions. Automaticity, thus, should be understood as an obligation not to add to preestablished conditions. It could be, for example, that only qualified traders could import explosive materials in Home, for reasons of public safety. This provision would suggest that any trader who was qualified to this effect should be in a position to obtain an import license. In the case, thus, of automatic licensing, national administrations retain no discretion regarding who will obtain the license once they have published the relevant statute. Anyone who conforms to the criteria established (which must respect the remaining conditions
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for legality that we discuss in the following sections of this chapter) should obtain an import license. Conversely, national administrations retain the discretion to decide who will be granted a license in the context of nonautomatic licensing. It is not at all accidental that, throughout the Uruguay round of negotiations, nonautomatic licensing was referred to in various negotiating documents as “discretionary” licensing. The type of measures that could serve as a basis for conditioning the granting of import licensing have been also discussed during the various negotiations of the ILA, albeit without much success. During the negotiations of the Tokyo-round ILA, participants tried first to dissociate automatic from nonautomatic licensing by defining the former in the following manner: Automatic import licensing is defined as licensing which is not used to administer import restrictions such as those employed pursuant to the relevant provisions of inter alia Articles XI, XII, XVII, XVIII, XIX, XX, and XXI of the General Agreement and when foreign exchange is granted automatically. The term “automatic licensing” covers technical visa requirements, surveillance systems, exchange formalities related to imports, and other administrative reviews of an equivalent kind effected as a prior condition for entry of imports.16
Had this provision been retained, we would have some clarity as to the scope of automatic licensing, with respect to both what comes under the term and what does not. The indicative list is very useful. WTO panels, alas, routinely avoid to make good use of the historic record, although in this (as in other) occasion they would greatly benefit from the study of the negotiating record of the Tokyo round. During the Tokyo round of negotiations, the following definition for “nonautomatic licensing” was proposed: Licensing procedures adopted and practices applied for the issue of licences for administration of quotas and other import restrictions such as those employed pursuant to, inter alia, the relevant provisions of Articles XI, XII, XVII, XVIII, XIX, XX, and [XXI] of the General Agreement.17
Note that the list is quite broad, since Article XX of GATT covers all “general exceptions.” Alas, this definition was not retained either. Some clarification was provided during the Uruguay round with the advent of Article 2.2 of the ILA: Non-automatic licensing shall not have trade-restrictive or -distortive effects on imports additional to those caused by the imposition of the restriction. Non-automatic licensing procedures shall correspond in scope and duration to the measure they are used to implement, and shall be no more administratively burdensome than absolutely necessary to administer the measure.
So there is a switch in the focus: instead of enumerating the subject matter of measures that could legitimately serve to condition the granting of import licenses, the framers called the attention of trading nations to the need to avoid trade-restrictive effects beyond whatever is necessary to serve the objective sought through nonautomatic licensing.18
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1.2.2.5 General Provisions Article 1 of the ILA includes various disciplines applicable to both types of licensing. Conformity with GATT WTO members must, by virtue of Article 1.2 of the ILA, ensure that their licensing regimes respect the relevant rules of GATT. The quintessential elements of GATT concern nondiscrimination and only sporadically impose specific conduct-type obligations (like Article VIII of GATT, which requires that payments for services at the border be limited to the cost of service provided). The remaining part of Article 1 of the ILA imposes additional, more specific obligations. Neutral Application of Import Licensing Procedures Article 1.3 of the ILA imposes a general obligation on WTO members to the effect that: The rules for import licensing procedures shall be neutral in application and administered in a fair and equitable manner.
The Appellate Body (AB), in its report on EC—Bananas III, held that this legal provision should be also understood as imposing on WTO members the obligation to apply the same procedures for import licensing to all other WTO members (§§ 196–198). It saw thus, an MFN requirement in Article 1.3 of the ILA, beyond the requirement for fair and equitable administration. (The term “fair and equitable is discussed in chapter 12, where we discuss transparency.) Prior Publication The products for which import licensing procedures are in place, the criteria for eligibility of persons/economic operators interested in procuring an import license, as well as the administrative agency entrusted with the granting of licenses, shall be published a period of time (ideally 21 days) before the effective date when the regime is in place (as per Article 1.4 of the ILA). Obligation to Simplify Procedures Article 1.5 of the ILA requests that WTO members guarantee that application and renewal forms are “as simple as possible.” The same obligation is imposed by virtue of Article 1.6 of the ILA with respect to application and renewal procedures. There is no additional guidance in this respect, and no panel so far has been called on to interpret this provision. Simplifying procedures and increasing transparency of import licensing regimes lay at the heart of the joint US—Hong Kong, China proposal discussed earlier in this chapter. To a large extent, it was an exercise in second best. Since the US could not totally push its line through (namely, to reduce recourse to licensing procedures to the bare minimum), it had to content itself with a half-victory on this score. To compensate for its losses, it pushed for extra transparency and simplification of procedures. Transparency and simplification reduce the restrictive effect of import licensing schemes, of course.
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Thou Shall Not Reject Lightheartedly (Ex Ante) Article 1.7 of the ILA makes it clear that applications will not be rejected for minor documentation errors that do not alter the basic data, and no disproportionate penalties will be imposed for omissions or mistakes in the documentation submitted. Thou Shall Not Reject Lightheartedly (Ex Post) In a similar vein, minor variations in value, quantity, or weight from the amount designated in the license (due, for instance, to differences occurring during shipment) will not provide grounds for refusing a license (Article 1.8 of the ILA). The agreement, thus, wants to ensure that authorities entrusted with the competence to decide on the granting of licenses will not unduly burden international trade by refusing a license for errors that do not materially affect the request. It stops short of requesting authorities to justify rejections, though. Treatment of Confidential Information The treatment of confidential information is regulated in Article 1.11 of the ILA: The provisions of this Agreement shall not require any Member to disclose confidential information which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises, public or private.
Conditions for Availability of Foreign Exchange To avoid disadvantaging trade (as opposed to a situation where no license is required), the agreement requests from WTO members that the availability of foreign exchange be guaranteed under the prevailing conditions when no import license is required (Article 1.9 of the ILA). 1.2.2.6 Presumption of Existence of Restrictive Effects The “presumption of existence of restrictive effects” provision raises a presumption that even automatic import licensing can have restrictive effects, unless the following three conditions mentioned in Article 2.2(a) of the ILA have been met, at a minimum: • Any person, firm, or institution that fulfills the legal requirements of the importing member for engaging in import operations involving products subject to automatic licensing is equally eligible to apply for and to obtain import licenses. • Applications for licenses may be submitted on any working day prior to the customs clearance of the goods. • Applications for licenses when submitted in appropriate and complete form are approved immediately on receipt, to the extent administratively feasible, but within a maximum of ten working days.
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The agreement is not explicit in this respect, but it should be the case that the three conditions must be cumulatively met. Indeed, what is the use of fulfilling the first two conditions if licenses are granted five years after the date of the request?19 The three grounds mentioned here (from Article 2.2(a) of the ILA) are of an indicative character. So what other activities could be deemed to have restrictive effects (and consequently, WTO members must avoid having recourse to them)? The Agreement implicitly suggests that there is nothing wrong with imposing conditions regarding the marketing of specific goods, which would apply irrespective of whether these goods are subjected to an import licensing regime or not. Similar conditions have of course restrictive effects since arguably the volume of imports would have been bigger if they had not been in place. What the Agreement cautions against is restrictive effects resulting from the use of import licensing, e.g., additional to whatever marketing conditions, unrelated to the licensing regime, existed before. Think of the following illustration. Governments imposing QRs might have the incentive to auction off import licenses to interested importers. Indeed, this would be the case any time there is substantial discrepancy between the world and the home price. In this case, the price for acquiring an import license (auction price) will depend on the difference between the price of the domestic good and that of the imported good.20 Should auctioning of import licenses be equated to restrictive effect (and, thus, outright banned) whenever recourse to automatic licensing is being made? An affirmative response seems appropriate in light of the definition of automatic licensing in Article 2.1 of the ILA. In the case of auctioning, there is no approval of applications in all cases, since only the winner of the auction will be allowed to import. If at all, auctioning could come under nonautomatic licensing, as discussed next. 1.2.3
Nonautomatic Licensing
1.2.3.1 Definition Nonautomatic import licensing is defined in Article 3.1 of the ILA by default and encompasses all forms of licensing that do not qualify as “automatic”: “Non-automatic import licensing procedures are defined as import licensing not falling within the definition contained in paragraph 1 of Article 2.” Recall also from the discussion earlier in this chapter that nonautomatic licensing is linked to a measure with restrictive effect, which, for all practical purposes, it is serving. Article 3.2 of the ILA reads that nonautomatic import licensing “... shall not have traderestrictive or -distortive effects on imports additional to those caused by the imposition of the restriction.” Since lawful automatic licensing presupposes that all requests will be accepted, nonautomatic licensing should encompass cases where some requests will not be granted. In other words, discretion should not, in and of itself, be punishable in the case of nonauto-
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matic licensing. Exercise of discretion should be punished only if it amounts to a restriction in addition to that resulting from the presence of the restrictive measure that it serves. The ILA does not contain, as we saw before, even an indicative list of measures that can come under nonautomatic licensing. This is regrettable. Practice sheds some light, but only some. A few disputes have arisen that concern import licensing regimes, the majority of which did not lead to the issuance of a panel report. The problems associated with the coverage of nonautomatic licensing are thus expounded by the absence of an indicative list of nonautomatic licensing, but also by the absence of an indicative list of objectives that can be pursued through nonautomatic licensing, and the very reduced number of notifications of import licensing regimes, most likely because through similar notifications WTO members would be supplying self-incriminating information.21 The negotiating record could thus be of help here. Recall that we referred above to the un-adopted proposal tabled during the Tokyo round to introduce an indicative list of instances of automatic licensing. Recall further that items such as technical visa requirements, surveillance systems, exchange formalities related to imports, and other administrative reviews of an equivalent kind had been included in that list. In contrast, practices notified as nonautomatic licensing that we discuss further on, include items such as protection of national security, environment, and public health. The inference is that whereas automatic licensing is concerned with essentially statistical information regarding international trade, nonautomatic licensing is primarily concerned with the protection of social preferences. 1.2.3.2 The Rationale for Nonautomatic Licensing The rationale for imposing a license is not prejudged in the ILA. Practice, to which we will return later in this chapter, reveals that WTO members have notified few import licensing schemes for a variety of reasons, ranging from national security to protection of public health. In fact, Article 1.10 of the ILA explicitly acknowledges the applicability of Article XXI of GATT, thus indirectly accepting that import licensing could serve objectives relating to national security. Thus pursuance of social preferences through import licensing is a possibility. It could also be that a government might simply want to pocket a percentage of the price differential between the world and the domestic price. Recall the discussion to this effect earlier in the chapter. We assume once again that Home’s price of widgets is substantively higher than the world price, and Home does not protect its widgets producers either. We also assume that trading of widgets is reserved to widgets experts. Home’s importers make, thus, substantial profit importing and reselling widgets. Home wants to pocket some of this money, and to this effect, it introduces an import licensing regime. Is there a guarantee that auctioning of import licenses will always be immune to restrictive effects? The price (assuming that the government does not intervene at all in setting it) could not be per se assimilated to a restrictive effect, since private entities will decide its level. It could, of course, be the case that the winner of the auction might be prepared
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to pay in order to exclude imported goods from the market. Some importers might, for strategic reasons, purchase licenses and contribute toward eliminating imports from their domestic market in case, for example, they are the makers of a substitutable product to the imported item. Since a restriction is in place, it might make good business sense to engage in similar action, depending, of course, on the circumstances (i.e., volume of quota, duration of quota, price of imported goods). Is there any insurance policy against similar behavior? Indirectly, yes. Under Article 3.5 of the ILA, past performance must be taken into account. In this context, members must take into account cases where the winner of an auction has not utilized the quota in full and has not provided an adequate explanation as to why this happened. There is no obligation to exclude similar importers from future auctions, but there is an obligation to demonstrate that authorities are well aware of similar behavior and have addressed it. In what follows, we have included some typical illustrations of notifications of import licensing regimes. Human/Animal Life/Health The Republic of Korea (which will be referred from here on as just “Korea”) notified the WTO of an import licensing scheme for specific goods to this effect.22 Protection against Importation of Pests and Diseases The US had notified the WTO of measures to protect against the importation of pests and diseases.23 Similar measures often work in conjunction with the procurement of certificates by international organizations mandated to act in these ways.24 Environmental Protection Cuba had put in place a regime for importation of substances that have the potential to deplete the ozone layer.25 National Security Several WTO members have notified the organization of import licensing schemes relating to the importation of military goods.26 Humanitarian Purposes New Zealand notified an import licensing scheme for antipersonnel mines. Antipersonnel mines are only allowed to be imported by the Anti-Personnel Mines Prohibition Act 1998 for the purposes of training in mine detection, deactivation, clearance, etc.27 1.2.3.3 Conditions for Lawful Imposition WTO members must respect two sets of obligations: • Obligations common to both automatic and nonautomatic licensing (Article 1 of the ILA) • Obligations specific to nonautomatic licensing (Article 3 of the ILA)
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We have already discussed the first set of obligations supra, so now we turn to a discussion of the latter set. 1.2.3.4 Disciplines Specific to Nonautomatic Licensing Article 3.2 of the ILA requests that WTO members ensure that no trade-restrictive effect in addition to the restriction in place will result from the adoption of the import licensing scheme. The key for understanding this discipline is that the regime will not entail restrictive effects in addition to whatever is necessary to serve the sought objective, e.g., national security or plant health, or whatever the objective might be. The terms “trade-restrictive or -distortive effects on imports” circumscribe the ambit of the obligation imposed. The second sentence of the same provision reads: Non-automatic licensing procedures shall correspond in scope and duration to the measure they are used to implement, and shall be no more administratively burdensome than absolutely necessary to administer the measure.
This discipline requires from WTO members to adopt the least restrictive import licensing regime in order to serve the sought objective. The term “absolutely” appearing before the term “necessary” underlines the legislative will to minimize, if not eliminate altogether, all restrictive effects resulting from the operation of the import licensing regime. Interpreting this provision, the AB, in its report on EC–Poultry, held that WTO members must ensure that, when applying import licensing schemes, distortive effects will be caused neither for the trade covered by the scheme nor for the trade not covered by the scheme. The onus is, however, on the complainant to show that distortive effects have resulted from the introduction of a licensing scheme. In EC–Poultry, the AB held that the complainant must demonstrate a causal relationship between the existence of the licensing procedure and the claimed distortion (§ 67): These arguments, however, do not address the problem of establishing a causal relationship between imposition of the EC licensing procedure and the claimed trade distortion. Even if conceded arguendo, these arguments do not provide proof of the essential element of causation. (italics in the original)
Additional obligations regarding nonautomatic import licensing—in fact, a number of them—have been reflected in Article 3.5 of the ILA: • The period of application should not be excessively long. • The period of validity of the license should not be unreasonably limited. • WTO members should not discourage full utilization of quotas. • The desirability for issuing licenses for products in economic quantities must be taken into account by the WTO member issuing an import license. • When allocating import licenses, the previous import performance of the petitioner must be taken into account.
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• If a quota is administered through a license that is not specific to country of origin, importers shall be free to choose the source of imports. • In the case of variations between the amount designated in the license and the amount actually imported (which can occur, as Article 1.4 of the ILA itself acknowledges), Article 3.5(l) of the ILA calls for compensatory adjustments to ensure that trade flows continue unimpeded. In Turkey–Rice, the panel had to entertain a claim by the US that Turkey was running afoul of its obligations under Article 3.5 of the ILA by restricting access to traders who had previously purchased a larger quantity of domestic rice with respect to in-quota rice.28 This was, in the view of the complainant, an impermissible distortive effect. The panel, for reasons of judicial economy, did not formally rule on this issue, yet the overall context and discussion in the panel report lend strong support to the view that similar practices should be considered inconsistent with the obligations assumed under the ILA (§§ 7.294ff). 1.2.4
Administration of Tariff Quotas
The “Bali package” included an Understanding on Tariff Rate Quota Administration Provisions of Agricultural Products as Defined in Article 2 of the Agreement on Agriculture.29 This document makes it clear that the administration of tariff quotas for farm goods shall be deemed to be an instance of import licensing, and, consequently, must respect the ILA (§ 3). Licensing regimes have often been in place when tariff quotas have been legally imposed, and similar measures have also led to disputes between WTO members. The AB report on EC–Bananas III accepted the legality of imposing a licensing scheme when a tariff quota is in place (§§ 193–195). Problems can of course arise since import licensing regimes might affect the marketing of the in quota imports, that is, the volume of imports that benefits from the lower rate. We referred previously to the discipline imposed through Article 3.5(j) of the ILA: this provision aims to ensure that licensees manipulate the market by excluding from it low tariff in quota regime, while promoting their own competing products. The Understanding adds to this discipline. The negotiators of the Understanding benefited from the hindsight and experience that they gained from practice in import licensing. They thus were in a good position to address many of the shortcomings that had been observed in practice in the area of import licensing. A series of new disciplines were introduced aiming to minimize the risk of additional restrictive effects resulting from the operation of the import licensing regime. For example, the WTO must be notified of “fill rates”—e.g., the quantity (i.e., percentage) of tariff quota that has been absorbed (§ 6).30 In an effort to comply with Article 3.2 of the ILA, unfilled quotas will not be subjected to administrative procedures that are more burdensome than what is required (§ 7).
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In other words, procedures to fill a quota should not become an obstacle in and of themselves and contribute to quotas being underfilled. If quotas are not filled by private operators, and there are reasons to believe that this would not be the case had a normal commercial operator been the beneficiary of the in-quota rate, then the allocating WTO member shall take into account this element when allocating new quotas as per Article 3.5(j) of the ILA (§ 8). WTO members should take action when quotas are underfilled for no reasonable commercial reason. To this effect, they should ask operators who are in charge whether they would be prepared to make unused quotas available to other potential users (§ 9). WTO members should further provide for a “reallocation mechanism” (§ 12): they may raise a specific concern before the Committee on Agriculture when fill rates have not been notified or are below 65 percent (this is the “underfill mechanism” reflected in Annex A, § 1). Once the underfill mechanism has been initiated, if the fill rate remains below 65 percent for two consecutive years, a WTO member may request that the importer modify the administration of the quota. The importer might do that, or it might take any other action it deems appropriate. If, as a result, a solution is found or the fill rates rise above 65 percent, then the issue will be “resolved”; otherwise, requests for modification might (and can) persist (Annex A, § 2).31 If, in this context, from the third year onward, fill rates do not increase beyond 65 percent (and not by 8 percent if the fill rate is 40 percent, or 12 percent if the fill rate is more than 40 but less than 65 percent), then the importing member should either adopt a “first come, first served” approach, or an automatic, unconditional license-on-demand system within the tariff quota (Annex A, §§ 3–4). 1.2.5
Transparency
1.2.5.1 Notification Requirements WTO members must observe three different notification requirements in order to comply with their obligations under the ILA. The Committee on Import Licensing has adopted procedures for notification.32 First, as we already have discussed, Article 1.4(a) of the ILA imposes a general obligation of transparency on all WTO members. They are under a duty to publish and notify the WTO of all laws, regulations, and other measures, that regulate import licensing as well as initiations of licensing procedures. The conditions for obtaining a license must be public, and the WTO must be notified of them. Publication must take place twenty-one days before the effective date of import licensing requirement in a given case, but never after the effective date of the requirement. This obligation must be read together with Article 8.2(b) of the ILA, which reads: Each Member shall inform the Committee of any changes in its laws and regulations relevant to this Agreement and in the administration of such laws and regulations.
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Second, under Article 5 of the ILA, the member must indicate the list of products, the contact points for information on eligibility, the authority deciding on applications. To cement this transparency obligation, Article 5.5 of the ILA allows the possibility of crossnotifications of licensing procedures. Finally, by virtue of Article 7.3 of the ILA, WTO members are also obliged to annually complete and transmit the Questionnaire on Import Licensing Procedures by 30 September each year.33 Also, following the submission of the questionnaire, they might be requested to provide additional, detailed information about both their legislation and practice regarding import licensing. 1.2.5.2 The Record The record of notifications is not good by any reasonable standard.34 This might be explained by the fact that there are various overlapping disciplines regarding notifications, which increase transaction costs. Moreover, the agreement does not establish a so-called one-stop shop that will be notified of all issues relating to import licenses.35 Most importantly, WTO members might on occasion be lacking the incentive to notify, because they might fear that they are providing self-incriminating information. The few disputes that have arisen so far can be explained by detection costs associated with discovering licensing regimes. Since licensing regimes often do not concern an important volume of trade (e.g., few products would come under nonautomatic licensing to promote national security anyway), and since many other WTO members often mimic licensing practices by others, the incentive to bring forward a dispute is often missing. Still, there is an undeniable problem regarding the volume of notifications, and the best evidence to this effect is that since 2009, the committee has focused on members’ compliance with the transparency obligations in the agreement. As noted in the 2011 report of the committee (G/L/968), improvements have been seen at the level of compliance with the mandatory notification obligations, particularly under Articles 1.4(a), 8.2(b), and 7.3 of the ILA. Recently, the WTO Secretariat proposed a simplified format that could be used for notification purposes.36 Information regarding the publication of the import licensing scheme, a translation into one of the three WTO official languages (English, French, or Spanish), if necessary, as well as the domestic institution in charge is provided. WTO members are encouraged to use the new format on a voluntary basis.37 1.2.6 Export Licensing The ILA deals with import licensing, not with export licensing. In fact, there is no agreement on export licensing since WTO members have refused to enter similar negotiations. There is indeed an argument that can be made in favor of establishing export licensing regimes. Improving terms of trade, protection of processing industries, raising revenue,
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domestic price stabilization, and conservation of exhaustible natural resources were the reasons previously mentioned for restricting exports. Sovereignty concerns linked to, for example, national minerals might provide WTO members with an incentive to place restrictions on the export side. In the same spirit, a country with monopoly power in the global market with respect to its rare minerals might seek to place restrictions on exports in order to facilitate price discrimination across different foreign buyers. Export licensing can thus undermine a liberal world trade order. There is some embedded discipline on export licensing, although it was far from being comprehensive. Because of most favored nation (MFN), a WTO member cannot price discriminate by issuing discretionary and discriminatory export licenses, and hence some of the incentive to impose restrictions (such as export licenses) on the export side evaporates. On the other hand, however, WTO members can always provide their domestic market (and domestic producers) with an advantage through export licenses: the size of the advantage to its domestic producers will depend on how liberal investment is in this market. One of the first discussions on export licensing was recorded in 1949. Czechoslovakia complained about the system of export licensing that the US was practicing. The US responded by arguing, inter alia, that the regime it had put in place was necessary to protect its national security. By 1949, Czechoslovakia had become communist, and the US had tightened security controls imposed on imports from and exports to similar countries. Czechoslovakia pushed its claim forward, and requested the establishment of a panel to review the legitimacy of its complaint. In US–Export Restrictions (Czechoslovakia), the panel rejected the claim by Czechoslovakia. Czechoslovakia had argued that US export licenses were discriminatory. The panel decided that no discrimination resulted from the application of the export license and consequently exonerated the imposing trading nation from any responsibility.38 The first attempt, thus, led nowhere. During the Tokyo round, there was an attempt to negotiate on export restrictions. Winham (1986, pp. 277ff) reflects the consensus view at the time when stating that similar measures were occasionally adopted in order to confer an advantage to domestic industries. Negotiations would be a means to distinguish wheat from chaff so to speak. They led yet again nowhere. It is clear from the record that a negotiation on export restrictions was not a priority.39 This was the case essentially because trading nations were, in principle, unwilling to commit on this score, fearing the repercussions of a similar commitment on their sovereignty over natural resources. The Tokyo round coincides in time with the ideas expressed by scholars promoting the so-called New International Economic Order, a central pillar of which was the permanent sovereignty over natural resources. Many developing countries had espoused these views and, under the circumstances, consensus was impossible. A Tokyo round Code between the few like-minded countries (the OECD members) would have been hardly useful, since (most of the) export licenses in the trade between OECD countries.40
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The Tokyo round though had still something to show on this front, albeit not a Code. Following a proposal in 1976 by George A. Maciel, then the Brazilian Ambassador, a negotiating group called the “Framework Group” was established. This group was, inter alia, requested to negotiate an agreement on export licensing. The end product of the negotiation was the issuance of an Understanding Regarding Export Restrictions and Charges, which dealt head on with this issue41 but which essentially called for treating export restrictions as a priority issue for the negotiators in the post-Tokyo era.42 The discussion continued for some time immediately after the conclusion of the Tokyo round, and the Consultative Group of Eighteen (CG18) was asked to advise the GATT Council on the forum and modalities of the negotiation. This body issued a document explaining the impact of export restrictions on international trade, and added an annex reflecting illustrative examples.43 This provided the impetus for further work in this area. During the preparations leading to the Ministerial Conference of the GATT CONTRACTING PARTIES in 1982, one delegation suggested the inclusion in the agenda of export restrictions, with a view to pointing to the trade-distorting effects of similar practices. The absence of wide support, though, led to this issue not being included in the Ministerial Declaration.44 Trading nations spent some time negotiating this issue in the context of the Uruguay round as well. The GATT Secretariat issued a very elaborate document45 in which it discussed the rationale for imposing export restrictions, as well as a few illustrative examples. Nothing much happened during the Uruguay round negotiations following the issuance of the Secretariat document, and the Uruguay round did not include an agreement on export licenses. Only a few of the negotiators favored introducing disciplines on export licensing. They were a minority, and there was no push for plurilateral agreements as we saw in chapter 1 of volume 1. The Uruguay round epitomizes the switch from clubs-driven trade integration to the single undertaking approach. Eventually, those willing to negotiate export licensing they had to give in to the majority that did not.46 In the absence of an agreement to deal specifically with export licenses, the question arises of how export licenses should be treated in WTO law. We stated supra that by virtue of the MFN clause export licenses cannot be discriminatory. The Panel on China—Raw Materials added that export licenses must be assessed in the context of Article XI of GATT. They do not necessarily violate this provision unless they have restrictive effects of their own, that is, additional to the objective they want to achieve. For example, an authority that requests from potential exporters a document attesting that they retain the right to export is not violating Article XI of GATT (§§ 7.881, 7.917–918). An authority that retains discretion to request a number of unidentified documents as a precondition for issuing a license is acting inconsistently with this provision (§§ 7.957–958).47 Since export licenses come under the ambit of Articles I and XI GATT, one can safely assume that, in case the WTO member issuing is found to violate any one of these provisions, it can seek to justify its measures through recourse to Articles XX or XXI of the GATT, as the case may be.
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Special and Differential Treatment
There is no special and differential section in this agreement other than Article 3.5(j), which states that: Consideration shall also be given to ensuring a reasonable distribution of licenses to new importers, taking into account the desirability of issuing licenses for products in economic quantities. In this regard, special consideration should be given to those importers importing products originating in developing country Members and, in particular, the least developed country Members.48
What exactly “special consideration” amounts to is hard to tell in absence of panel practice on this score. It seems though, that this is a procedural requirement and WTO members will be satisfying it if they can prove that they did consider the issue even though they decided to act otherwise. 1.2.8
Reservations
Reservations to the ILA are possible, assuming that the other WTO members have provided their consent to this effect (Article 8 of the ILA). This is a remarkable provision, which cannot be found in other WTO agreements. It allows, in principle, for a two-tier regime. So far, though, no WTO member has availed itself of this possibility. 1.2.9
Exceptions
Article 1.10 of the ILA explicitly provides for the relevance of the national security exception included in Article XXI of GATT. Chapter 9, volume 1, discussed the relevance of Article XX of GATT, where we concluded that indeed violations of the ILA can be justified through satisfaction of the criteria embedded in this provision. 1.2.10
Institutions
A Committee on Import Licensing was established by virtue of Article 4 of the ILA. This committee is the depository of all laws regarding import licensing. A soft conciliation procedure is established before the committee, where members can bring forward their complaints.49 If submitted complaints do not get resolved at this stage, then the complaining party can always submit its concerns to a WTO panel. 1.2.11
Relationship with Article XI of GATT
In Argentina—Import Measures, complainants argued that DJAI (the acronym stands for the Spanish translation of “Advance Sworn Import Declaration”) was in violation of the obligations of Argentina under the ILA. DJAI was a document that all importers had to fill for importation to take place (§ 6.364):
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Importers are required to submit a DJAI providing the stipulated information prior to the issuance of an order form, purchase order, or similar document issued to purchase items from abroad that are destined for consumption in Argentina. The filing of a DJAI by the importer initiates the DJAI procedure.
The procedure would require importers to fill out documents with standardized information, and, once this had been done, importers would have 180 days to import the authorized goods (§ 6.372). This looks very much like an import licensing scheme, as discussed previously. Complainants had argued that this scheme violated both GATT (specifically, Article XI) and the ILA. The panel adopted an order of analysis of claims whereby it first reviewed the claims under GATT, rather than the ILA, the more specialized agreement to deal with this issue. It did not even pronounce on whether the DJAI came under the purview of ILA. It held that, regardless of this issue, nothing stopped it from examining first the consistency of the Argentine regime with Article XI of GATT. Having established the inconsistency of DJAI with GATT, it held that it was unnecessary to also pronounce on its alleged inconsistency with the ILA (§ 6.448). This is the wrong approach. Standing case law in every other Annex 1A Agreement that we examine in this volume suggests that panels always start from the agreement dealing more specifically with the matter before it. In the case of DJAI, this is the ILA, and not Article XI of GATT. Alas, the panel report was not appealed, and the AB was deprived of the opportunity to confirm here its case law regarding the relationship of Annex 1A Agreements and the GATT. 1.3 1.3.1
CVA The Legal Discipline and Its Rationale
Customs valuation has been regulated since the inception of GATT in Article VII. Article VII of GATT however, did not provide for detailed regulation of customs valuation, and it was not long before practice in the area of customs valuation surprised trading nations, and it was felt that a separate, more detailed agreement was necessary. The CVA, the first detailed regulation of customs valuation, was successfully concluded during the Tokyo round. The CVA was a Code, to which only a few GATT contracting parties adhered. The Uruguay Customs Valuation Agreement, which is currently in force, is the successor to the CVA, Tokyo-round Code. Paradoxically, there is nothing like a statutory definition of “customs valuation.” The only available so-called official definition comes from case law (Colombia—Ports of Entry), where the panel defined the term in a rather open-ended way (§ 7.83): Essentially, customs valuation involves the process of determining the monetary worth or price of imported goods for the purpose of levying customs duties.
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The rationale for the CVA is expressed in both the preamble, as well as in various provisions that underline the aim to ensure that the customs value of goods entering a market will be properly assessed; e.g., that duties will be imposed on the “true” value of goods, not on an overvalued or undervalued commodity. As we will see later, the incentives to over- or undervalue are frequently present, and the resulting impact on international trade flows undeniable. Some transactions might, for example, never take place because of overvaluation, and the CVA aims to rid the world trading system from similar deadweight losses. It was the most sophisticated customs administrations that took the lead on drafting the discipline during the GATT negotiations, and the final text corresponds to a US proposal, with input from the UK delegation, submitted already during the London Conference.50 Negotiators felt that through manipulation of the valuation of merchandises, tariff concessions would be manipulated. There was for example, widespread agreement that underinvoicing should not be allowed, and that customs authorities would follow agreed-on procedures that would enable them to apply customs duties on the true value of traded goods. In more general terms, the driving idea of the negotiation of this provision was that, absent proper invoicing, tariff concessions on customs duties would be circumvented. The expressed fear was that similar practices would lead to an unwillingness to commit to generous tariff concessions since the incentives to this effect would have been eviscerated because of underinvoicing that could lead to increased and un-anticipated volumes of imports. This was what the GATT framers wanted to avoid at any cost. The negotiations produced already at the London Conference of 1946 a draft that reflected the spirit, but not necessarily the actual wording, of the current GATT provision. This happened through subsequent streamlining of the language.51 The final text of Article VII of GATT, though, did not manage to clarify all issues that negotiators occupied themselves with. Besides the lack of definition of “customs valuation,” the text suffers from other defects: it is a mere recognition of principles that should (as opposed to shall) apply to the valuation of imported goods. Trading nations retained, as a result, substantial discretion when designing their national valuation policies. Indeed, nothing captures this point better than Article VII.5 of GATT: The bases and methods for determining the value of products subject to duties or other charges or restrictions based upon or regulated in any manner by value should be stable and should be given sufficient publicity to enable traders to estimate, with a reasonable degree of certainty, the value for customs purposes.
The discretion of trading nations with respect to the customs valuation method used, thus, was not severely curtailed, and, as a result, regulatory diversity flourished. There is nothing wrong with regulatory diversity of course. Some however, used their discretion legitimately, and some abused their discretion when doing so. As a result, disputes regarding the consistency of methods of customs valuation with the spirit and sometimes the
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letter of the GATT emerged. Take the notorious American Selling Price (ASP) case as an illustration. Certain goods entering the US market would be valued for tariff purposes at the level of the domestically produced articles with which they competed. This regime was, of course, contrary to any reasonable understanding of “customs valuation” and ran against the heart of comparative advantage (and ultimately defeated the purpose of negotiating tariff concessions). The US had originally grandfathered this valuation method in order to keep it in place, at least provisionally.52 It would then negotiate its application on specific product markets. The US agreed, for example, not to apply this valuation method to chemical goods in the context of the Kennedy-round Agreement Relating Principally to Chemicals. Eventually, the US agreed to eliminate ASP during the Tokyo round because of the entry into force of the Tokyo-round Customs Valuation Agreement.53 In the Tokyo round, negotiators wanted to put an end to the arbitrariness resulting from national valuation systems by introducing uniformity in customs valuation. This much was achieved at that time. This agreement has since been superseded by the (even more detailed) Uruguay-round Customs Valuation Agreement (CVA).54 The main actors this time were not only the “usual suspects.” India and Brazil also played a very important role, second only to the EU and the US, in shaping the negotiation and its eventual outcome.55 The CVA started from a different baseline than its predecessor. A uniform regime was now well in place, albeit not a very detailed one. What was required of negotiators was to streamline the conditions under which specific methods for customs valuation would be legitimately used, while at the same time addressing key concerns of the trading community, like, for example, the lack of transparency regarding customs valuation methods used. As we will see in more detail later, the negotiators touched upon each and every provision of the Tokyo round agreements, but did not alter the scope of the CVA. The end product, the Uruguay round CVA, does not contain obligations concerning valuation for purposes of determining export duties or quota administration based on the value of goods, nor does it lay down conditions for the valuation of goods for internal taxation or foreign exchange control. Its sole preoccupation is the valuation of imported goods. In this respect, some important amendments were agreed, and most importantly the previous Code became a multilateral agreement. Trading nations that had not expressed their views on customs valuation in the GATT before, had now a forum to do so. They were led by Brazil and India. What were India’s and Brazil’s main preoccupations? The common ground was loss of income for the state because of improper customs valuation methods used. There were some differences, though. India paid a lot of attention to underinvoicing, since the importing state would thus be receiving less income than in the case where the proper value of goods had been declared.56 Brazil cared about “capital flight”: by overinvoicing, national producers could effectively be exporting capital abroad. For countries, like Brazil, with exchange restrictions, this was impermissible.57
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The problem with under- and overinvoicing is that exporters and importers might have divergent interests over the valuation method for the same transaction. Exporters often have an incentive to misrepresent the value of traded goods. The exporter would rather underinvoice, for example, in order to reduce the burden of ad valorem customs duties (India’s worry). The importing state, conversely, might have the incentive to overinvoice in order to increase the taxable income (especially for goods for which demand is inelastic), or for political economy reasons, since additional duties will shelter domestic products even more from foreign competition. The new CVA aims to address both under- as well as overinvoicing. Its main objective is to ensure that invoicing will correspond to the actual value of traded merchandise. It did take on the basic thrust of the Indian request, as it did address the incentive of customs authorities to overinvoice as well. It put in place a system of rules that aims at reducing (and ideally eliminating altogether) the possibility for similar behavior on both sides. While keeping the approach embedded in Article VII of GATT, whereby the actual price of traded goods is the price to be used on priority basis for valuation purposes, it adds a lot of significant detail in order to reduce the potential for abuses. 1.3.2
Transaction Value (Actual Price)
1.3.2.1 The Primacy of Transaction Value The CVA, following the approach already adopted in Article VII of GATT in this respect, states that customs valuation shall, in principle, be based on the “actual price” paid or payable for the goods to be valued, which generally appears on the invoice. This price, adjusted for certain elements featured in Article 8 of CVA, constitutes the “transaction value”—that is, the value on which duties will be calculated. Article 1 of CVA reads: “The customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation ...” Transaction value is understood as the value of imported goods upon which the buyer and the seller have agreed for the purposes of a particular transaction. It is, thus, a bargaining solution. This is the price that will be reflected on the invoice (the “invoice price”). The transaction value is elevated to the default mechanism that must be used for customs valuation purposes. Deviations will be allowed only to the extent that the conditions giving rise to them exist, as we will see in what follows. In a case where, for the reasons discussed later in this chapter, deviation from the “transaction value” methodology has occurred, customs authorities must communicate the grounds of doing so to the interested parties. The Panel on Thailand–Cigarettes (Philippines) entertained a claim to the effect that Thailand was violating its obligations under Articles 1 and 2(a) of CVA by enacting a general rule rejecting the transaction value and requiring the application of the deductive value. In §§ 7.105ff. of its report, the panel held that the grounds for rejecting the transaction value must be communicated to the importer
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by virtue of Article 1.2(a) of CVA.58 It further explained that this obligation is distinct from the obligation to provide an explanation of how the customs authority had proceeded with customs valuation (Article 16 of CVA). In its view (§ 7.218), communicating the grounds is tantamount to notifying the addressee of the customs authorities’ reasons for considering, in the light of information provided by the importer or otherwise, that the relationship influenced the price. (italics in the original)59
1.3.2.2 Arm’s Length The working hypothesis arguing in favor of using the transaction value is that the buyer and the seller are at arm’s length. The Interpretative Note of Article VII of GATT leaves no doubt to this effect. It defines “actual value” (“transaction value”) as the invoice price plus any additional legitimate expenses, provided that it is the prevailing price in the “ordinary course of trade” under “fully competitive conditions.” The term “ordinary course of trade” captures a situation where buyer and seller are unrelated. Customs authorities can exclude special discounts to exclusive agents since similar prices do not reflect “fully competitive conditions.” If not in the presence of an arm’s-length transaction, then customs authorities might legitimately have recourse to another method for calculating duties, provided that they have respected the statutory conditions for doing so, of course. Article 1 of CVA includes a series of conditions aiming to guarantee that the buyer and seller are indeed at arm’s length. It also specifies that some activities that the buyer might undertake on behalf of the seller that relate to the sold goods (such as advertising) will not be taken into account when deciding on the proper value of imported goods.60 In a similar vein, charges behind the border (such as internal taxes) cannot be added to the invoice price. If the buyer and seller are not at arm’s length, then the transaction value can be discarded. The latter, nevertheless, is not the automatic consequence of the former. The Panel on Thailand–Cigarettes (Philippines) held that the transaction value can be discarded if the buyer and seller are related [Article 1.1(d) of CVA], and if the relationship has affected the price. The relationship between buyer and seller does not, thus, automatically lead to the rejection of transaction value. Authorities must also demonstrate that their relationship has influenced the “invoice price” (“transaction value”). The panel held as much in §§ 7.169–171 of its report: The particular nature of the examination to be conducted by the customs authorities can further be inferred from Case Study 10.1 on the application of Article 1.2 of the Customs Valuation Agreement by the WTO Technical Committee on Customs Valuation: “Under Article 1.2 of the Agreement the responsibility for demonstrating that relationship [between buyer and seller] has not influenced price [sic] lies with the importer. While the Agreement
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requires Customs to provide reasonable opportunity to the importer to provide information that would indicate that prices are not influenced by the relationship, it does not require the Customs administration to conduct an exhaustive enquiry for the purpose of justifying the price difference. Thus, any decision in this regard must, to a significant degree, be based on the information provided by the importer.” The WTO Technical Committee’s comment supports the understanding that while customs authorities are responsible for providing a “reasonable opportunity” to the importer to provide information, once given this opportunity, importers are in principle liable for supplying the customs authorities with information that would indicate that the relationship did not influence the price. In sum, we consider that the customs authorities and importers have respective responsibilities under Article 1.2(a). The customs authorities must ensure that importers be given a reasonable opportunity to provide information that would indicate that the relationship did not influence the price. Importers are responsible for providing information that would enable the customs authority to examine and assess the circumstances of sale so as to determine the acceptability of the transaction value. Provided with such information, the customs authorities must conduct an “examination” of the circumstance of sale, which would require an active, critical review and consideration of the information before them.
1.3.2.3 Verifying the Truth and Accuracy of Information Received Customs authorities have the right to verify the truth and accuracy of information received (Article 17 of CVA). The Decision Regarding Cases where Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value, reached during the Uruguay round, explains that they are entitled to ask questions in order to verify whether the declared value corresponds to the amount that has actually been paid, as well as whether adjustments took place in accordance with Article 8 of CVA. This decision explains that customs authorities of WTO members must follow a particular procedure when they have reasons to doubt presented documentation: 1. When a declaration has been presented and where the customs administration has reason to doubt the truth or accuracy of the particulars or of documents produced in support of this declaration, the customs administration may ask the importer to provide further explanation, including documents or other evidence, that the declared value represents the total amount actually paid or payable for the imported goods, adjusted in accordance with the provisions of Article 8. If, after receiving further information, or in the absence of a response, the customs administration still has reasonable doubts about the truth or accuracy of the declared value, it may, bearing in mind the provisions of Article 11, be deemed that the customs value of the imported goods cannot be determined under the provisions of Article 1. Before taking a final decision, the customs administration shall communicate to the importer, in writing if requested, its grounds for doubting the truth or accuracy of the particulars or documents produced and the importer shall be given a reasonable opportunity to respond. When a final decision is made, the customs administration shall communicate to the importer in writing its decision and the grounds therefor. 2. It is entirely appropriate in applying the Agreement for one Member to assist another Member on mutually agreed terms.
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This provision was enacted very much at the request of India. India had insisted, during the negotiations, that the burden of proof should shift when customs authorities were presented with unreliable information regarding the value of imported goods. The question that was heavily debated during the negotiations was under what conditions the shift should occur. The final compromise, as reflected in the current text of the CVA, suggests that the burden of proof shifts every time the customs authority has “reasonable doubts” regarding the valuation, even when additional information had been provided following a request to this effect. This does not seem to be a very demanding test, since reasonableness standards, by definition, can accommodate divergent opinions.61 Note finally that, according to the General Introductory Commentary,62 which has been placed before the preamble to the agreement, Article 1 of CVA must be read in conjunction with Article 8 of CVA: Article 1 is to be read together with Article 8 which provides, inter alia, for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Article 8 also provides for the inclusion in the transaction value of certain considerations which may pass from the buyer to the seller in the form of specified goods or services rather than in the form of money. (italics in the original)
Of prime importance to the discussion here is Article 8.2 of CVA, which leaves it to the discretion of WTO members to privilege a free on board (FOB), or a cost, insurance, freight (CIF) price as the basis for valuing imported goods: In framing its legislation, each Member shall provide for the inclusion in or the exclusion from the customs value, in whole or in part, of the following: the cost of transport of the imported goods to the port or place of importation; loading, unloading and handling charges associated with the transport of the imported goods to the port or place of importation; and the cost of insurance.
Under this provision, adjustments are possible when calculating the transaction value. Article 8 of CVA contains a list of items that can be lawfully adjusted depending on who incurred the mentioned costs.63 1.3.3
Deviating from the Transaction Value
1.3.3.1 Hierarchy among the Statutory Methods The CVA purports to strike a balance that will allow authorities to deviate from using the transaction value when calculating customs duties, but will narrow their discretion to ensure that the overall purpose of customs valuation—to impose duties on the true price— is served. It thus provides a hierarchy among five methods that can be used when recourse to transaction value has not been the case. The amount of discretion of customs authorities increases as we go down from the first to the fifth method, recourse to which is legitimate only when no other method can be appropriately used. The five methods that the CVA provides that can be used for the purposes of customs valuation are:
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1. “Transaction value of identical goods” (Article 2 of CVA) 2. “Transaction value of similar goods” (Article 3 of CVA) 3. “Deductive method” (Article 5 of CVA) 4. “Computed method” (Article 6 of CVA) 5. “Fallback method” (Article 7 of CVA) These methods should be applied in the hierarchical order listed here. If the transaction value has been rejected, customs authorities must first make an attempt to locate prior transactions of identical goods, and use their transaction value for customs valuation purposes (Article 2 of CVA). If this has proven impossible, then they can legitimately use previous transactions of “similar” (a wider category than “identical”) goods (as per Article 3 of CVA). The term “identical” is defined in Article 15 of CVA as referring to goods that are the same in all respects, including physical characteristics, quality, and reputation. Minor differences in appearance would not preclude goods otherwise conforming to the definition from being regarded as identical.64
The same provision defines “similar” goods as: goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark are among the factors to be considered in determining whether goods are similar.
If this is not feasible, customs authorities can legitimately have recourse to the “deductive value,” loosely defined as the price at which the importer sells the imported good to an unrelated buyer (arm’s-length transaction). Customs authorities can deduct from this price a percentage reflecting the profit of the importer, as well as expenses relating to the sale of the good to the buyer. If recourse to the deductive value is not feasible, then customs authorities must rely on the “computed value,” which reflects a calculation by the customs authorities: they must calculate the production cost of the seller to which they can add general expenses, profit, and transport costs to the port of entry. Absent cooperation with the foreign producer (seller), recourse to the computed value will be difficult, if not altogether infeasible.65 The CVA does not make room for recourse to the “best information available” in case of noncooperation by the seller, as does, for example, the WTO Antidumping (AD) Agreement, which we discuss in the next chapter. As a result, customs authorities do not have a credible weapon at their disposal to enforce cooperation. On the other hand, it is, in principle, in the interest of investigated parties to cooperate; otherwise, they might find themselves in an awkward situation where they have to bear an unfavorable-to-them customs duty.
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1.3.3.2 Fallback Method: Limited Discretion Finally, and assuming all prior methods cannot be used, customs authorities can use the fallback method, which would allow customs authorities to devise their own procedure so long as it is reasonable and consistent with the principles of Article VII of GATT and the CVA. Some flexibility is, of course, inherent in any reasonable method devised without much legislative guidance. Too much flexibility, though, could be problematic in light of the incentives of domestic customs authorities.66 The agreement contains some insurance to ensure that flexibility has not been exercised in an abusive manner. Article 7 of CVA includes a list of criteria that cannot be used as a basis for deciding the customs value under any circumstances, which are described in what now follows. Minimum Customs Value The customs value cannot fall below a certain threshold under any circumstances. In practice, the term “minimum customs value” is used interchangeably with the term “reference price.” The minimum threshold that must be respected is taken from a “valuation (price) database” maintained by the customs administration. The World Customs Organization (WCO) has adopted the Guidelines on the Development and Use of a National Valuation Database as a Risk Assessment Tool, the basic message of which is that, where customs maintain a “valuation database,” prices reflected therein should only be used as part of a risk-based approach (i.e., as an indicator of possible undervaluation), and that the provisions of the WTO Decision Regarding Cases where Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value should be followed. Developing countries, nevertheless, can have recourse to this method if they have made a reservation to this effect and have shown good cause: the Decision on Texts Relating to Minimum Values and Imports by Sole Agents, Sole Distributors, and Sole Concessionaires, adopted during the Uruguay round, says as much.67 Arbitrary or Fictitious Value This term appears in Article VII.2(g) of GATT as the opposite of the term “actual value.” The term denotes that it is not only prices that simply diverge from actual value that cannot be used as basis for valuation, but prices that do so in evidently disproportionate manner. Price of Goods in the Exporting Market Prices are endogenous, in the sense that the degree of competition in a given market will define their level. It could be the case that the producer enjoys a dominant or even monopoly position in the exporting market, while facing ferocious competition in the importing market. Using the price of the exporting market for customs valuation purposes could thus lead to gross misrepresentation of the actual value of the imported good.
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Price of Goods in Third Markets The same reasoning could apply by analogy in this scenario of the price of goods in third markets as well. Cost of Production Calculated without Recourse to the Computed Value The method of calculating the cost of production without considering computed value applies in cases where the value for identical or similar goods has been calculated without figuring their value as per the requirements of the CVA. Obviously, this could lead to unrepresentative values. Allowing the Use of the Higher of Two Alternative Values There is no reason why the higher value should be privileged. On the other hand, it is clear that in this scenario, imports will be burdened—probably unduly so. The Selling Price of Goods in the Importing Market The rationale for this prohibition has to do with the decision to eliminate the so-called ASP, which functioned almost like a variable import levy that would equate the world price to the domestic price, and which had been grandfathered in until the advent of the CVA.68 So much for what customs authorities should not do. A note to Article 7 of CVA explains what customs authorities should do and, thus, sheds some additional light on how discretion should be exercised whenever recourse to the fallback method is made: previously determined customs values, for example, should be privileged. There is some litigation regarding the exercise of discretion when recourse to the fallback method has been taken. The standard of review that a WTO panel would employ when facing a challenge against the fallback method would, by construction, be more deferential than when facing a challenge against the use of one of the five previous methods. A reasonableness standard seems suitable here. In Colombia–Ports of Entry, the panel found (§§ 7.152ff) that Colombia, by basing its customs valuation of imported goods on “indicative prices,” was in violation of various provisions of the CVA (Articles 1, 3, 5, and 7). Indicative prices could be totally unrelated to market reality, of course. Indeed, this was the case in Colombia–Ports of Entry since an indicative price would serve as a basis to calculate the dutiable imposition every time the transaction value was lower than a statutory threshold (§ 7.147). In Thailand–Cigarettes (Philippines), the panel concluded that the failure of Thai Customs to properly consult the importer on the information necessary for the requested deductions rendered its decision not to deduct sales allowances, provincial taxes, and transportation costs in the determination of the customs value of the entries at issue inconsistent with Article 7.1 of CVA (§ 7.332). In practice, as Rosenow and O’Shea (2010, pp. 122ff) mention, the fallback method is typically used when imports concern repaired items, and/or damaged goods. In this con-
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text, for example, customs authorities might use one of the methods mentioned previously in an adjusted form. For example, they could look at the transaction value of similar goods by enlarging the ambit of this concept and review the price of goods with lower-than-usual substitutability.69 1.3.3.3 Right of Appeal WTO members must provide affected parties with a forum to launch an appeal against decisions of their customs authorities adopted in the context of customs valuation (Article 11 of CVA). They should not run the risk of penalty when doing so. 1.3.4 Treatment of Confidential Information It is often the case that confidential information has to be disclosed to customs authorities for customs valuation purposes. Protection of similar disclosures is quintessential for parties to disseminate it in the first place, and it is guaranteed by Article 10 of CVA. If this were not the case, competitors of the disclosing company could gain an advantage through their knowledge about pricing, or volumes of trade of their competitors (not to mention that those possessing the information might have found themselves between a rock and a hard place). In Thailand–Cigarettes (Philippines), the panel held that disclosure by the customs authorities of information regarding the pricing of a company and its overall volume of imports that had been submitted and classified as confidential constitutes a violation of this provision (§§ 7.405ff). The problem, of course, is that similar findings are little consolation for companies that have in good faith disseminated confidential information. The more serious issue is that irresponsible behavior by customs authorities might provide those interrogated with the wrong incentives and might increase the probability of recourse to the fallback method. This is one area where trading nations need to reflect and probably rework the remedies in case of a violation. 1.3.5 Cooperation across WTO Members The CVA incites WTO members to cooperate when appropriate. When, for example, recourse to the computed value is being made (such as if they suspect fraud), customs authorities could need information that they could obtain only through cooperation with the authorities in the country of origin of the imported good. The WCO has agreed on a template of the Model Bilateral Agreement on Mutual Administrative Assistance in Customs Matters, the use of which it encourages for this purpose. The WTO membership has further adopted a decision during the Doha Ministerial Conference that allows customs authorities to inquire about the accuracy of the importer’s declaration in cases of reasonable doubt. The inquired authority can legitimately refuse to respond if the request is not consistent with its domestic public order.70
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1.3.6
35
Special and Differential Treatment
The CVA provides special and differential treatment for developing members in its Article 20 and in Annex III. Article 20 of CVA allowed developing countries to delay the application of the agreement for a period of five years (counting from January 1, 1995, that is, the date of entry of the WTO Agreement). This right was not available to WTO members who had been signatories to the Tokyo-round CVA code. Several WTO members, including Bahrain, Bolivia, Jamaica, Kuwait, Senegal, Tunisia, and Sri Lanka, have used this provision. Paragraph 2 of Annex III permits developing members to retain minimum values [prohibited by Article 7.2(f) of CVA] on a limited and transitional basis under terms and conditions to be agreed to by WTO members. WTO members that have been granted this possibility include Colombia, Gabon, Honduras, Morocco, and Nicaragua (see WTO Document G/VAL/2 and its revisions).71 There is a recognition that developing countries might encounter difficulties in applying the CVA without technical assistance. Article 20.3 of CVA deals with this issue. In light of the increased number of developing countries required to implement the CVA, the Committee on Customs Valuation agreed that it was necessary to reinvigorate technical assistance. In July 2001, the committee agreed to a work program to this effect.72 1.3.7
Exceptions
We discussed in chapter 9, volume 1 the relevance of Articles XX and XXI of GATT to the CVA. 1.3.8
Reservations
As is the case with the ILA, reservations can be entered if the membership so agrees (Article 21 of CVA). 1.3.9
Institutions
In Article 18 of the CVA, a Committee on Customs Valuation is established in the WTO, in which all WTO members participate and which is entrusted with the administration of the CVA. The committee operates an annual review of the implementation of the agreement (Article 23 of CVA). In addition, it is notified of all national legislation dealing with customs valuation matters, as well as of any modifications thereof (Article 22 of CVA). Article 18.2 of CVA gave birth to the Technical Committee, also composed of representatives of all WTO members (usually customs experts), which meets twice a year in Brussels in the headquarters of the WCO. Annex II discusses in detail the various tasks of the Technical Committee. In short, it reports to the Committee on Customs Valuation and prepares technical documents aimed at helping WTO members when dealing with customs valuation issues.73 Its output comes under different denominations (explanatory
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notes, advisory opinions) and is included in a publication issued by the WCO: the WCO Compendium.74 1.4 1.4.1
The Agreement on Preshipment Inspection (PSI) The Legal Discipline and Its Rationale
Through preshipment inspection (PSI), traders aim to ensure that the value of exported goods conforms to the specifications reflected in a sales contract, as well as other relevant information, such as the quality and quantity of goods shipped. Article 1.3 of the PSI Agreement reads: Preshipment inspection activities are all activities relating to the verification of the quality, the quantity, the price, including currency exchange rate and financial terms, and/or the customs classification of goods to be exported to the territory of the user Member.
It is at the initiative of a WTO member, known as a “user member,” that recourse to PSI will take place. The term “user member” is defined as follows in Article 1.2 of the PSI Agreement: The term “user Member” means a Member of which the government or any government body contracts for or mandates the use of preshipment inspection activities.
So what is the difference between CVA and PSI?75 While the CVA deals with the valuation of goods when they enter their destination market, PSI deals with the same issue when goods are exported to the destination market. The link between the two agreements is exemplified in Footnote 4 of the PSI Agreement: The obligations of user Members with respect to the services of pre-shipment inspection entities in connection with customs valuation shall be the obligations which they have accepted in GATT 1994 and other Multilateral Trade Agreements included in Annex 1A of the WTO Agreement.76
The PSI Agreement, thus, allows WTO members to outsource their customs operations. When doing so, however, they cannot deviate from the obligations established in Article VII of GATT and the CVA. All the PSI Agreement does is discipline the subjects that will perform customs valuation, without providing a different mode of customs valuation. 1.4.2
Déjà Vu All Over Again?
The divide between developed and developing countries was present during the negotiation of PSI, as it was in so many others. Developed and developing countries managed to reach an agreement to negotiate PSI activities—that much is certain—but for different reasons. On the one hand, developed countries believed that, through PSI, “user countries” were erecting a probably unnecessary nontariff barrier (NTB). Customs valuation, in their view,
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by and large should occur within the four corners of GATT and the CVA. They, thus, viewed PSI as rather unnecessary, and were at best after an agreement that would discipline PSI activities. Developing countries took a different perspective. They had been having recourse to PSI services, and were in favor of introducing it in the WTO legal order. They wanted, when doing that, to underline the contribution of PSI to development. Zaire went so far as to characterize PSI as a “fundamental instrument” in the service of developing countries.77 Indonesia, a very vocal negotiator in this context, claimed repeatedly that recourse to PSI was a necessity for developing countries that were endowed with suboptimal customs authorities and were facing numerous issues in the context of customs valuation ranging from capital flight to underinvoicing as the means to circumvent customs duties.78 Too much disciplining of PSI activities, in their view, would deprive them of a tool necessary for their development. It is worth revisiting the historical account and explaining why we ended up with this negotiation.79 1.4.2.1 Is PSI an NTB? PSI activities have been in place since the 1800s, and twenty-five developing countries in Asia, Africa, Central America, and Latin America were actively using them in 1986 when the Uruguay round was launched.80 It was private companies that had been performing PSI activities. The five major players in this area are Société Générale de Surveillance (SGS), a Swiss company established in 1878, which, with offices in more than 140 countries and over 250 subsidiaries, is the most frequently used entity; Inspectorate, another Swiss company; Socotel, from France; Veritas, from France; and finally, Inchcape, from the UK. They all belong, of course, to the International Federation of Inspection Agencies (IFIA), a nonprofit organization founded in 1982 that represents about forty of the world’s leading companies that provide testing, inspection, and certification services worldwide. Companies like the five mentioned here will usually charge 1–2 percent of the value of the goods shipped in exchange for providing inspection services. When goods leave the port for their destination market, they will, ideally, be furnished with a Clean Report of Findings—that is, a document attesting to the valuation made. Issuance of “Non Clean” reports would not per se prohibit a transaction, but if it took place, it would be under substantial uncertainty. Whereas a Clean Report will allow the transaction to proceed, traders will have to rebut the presumption of a Non Clean Report and establish the valuation. Why do countries have recourse to similar activities? The GATT Secretariat tried to compile in a paper the various reasons advanced: capital flight, underinvoicing, overcharging (overinvoicing), and substandard products.81 Well, isn’t that the subject matter of the CVA anyway? The short answer is yes. It is their inability to clear goods through customs in an effective manner and provide, thus, an antidote to capital flight, underinvoicing, and these other issues that led many developing countries to outsource customs valuation.82
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In practice, the operation of PSI companies led to a lot of acrimony and traders’ complaints over the years. The US first took Section 301 action against PSI companies, taking, thus, the view that the activities of these companies constituted an NTB attributable to the governments using their services. When exporting to developing countries, US exporters had to cooperate with PSI companies who were performing valuation for their clients. The US administration had been inundated with requests to the effect that PSI companies: • Requested too many documents • Took a long time to file Clean Reports of Findings (if they ever did) • Had adopted very costly procedures, which reduced the volume of export transactions from the US toward the countries using similar services • Were handling large amounts of business confidential information (BCI) • Were insisting in requesting US exporters to practice “one price,” even when market conditions justified more than one price It is against this background that the US went to GATT to request the development of an international code aiming to curb the activities of PSI companies.83 Indonesia responded positively to this request in the document cited earlier, other developing countries followed soon thereafter, and soon negotiations were initiated. Nothing in GATT barred developing countries from outsourcing similar activities. The basic idea from early on was, thus, not to eliminate but to discipline PSI activities. Ancillary disciplines on both the user countries and the exporting countries where PSI would typically take place were deemed necessary as well.84 A GATT Secretariat paper summed it up very appropriately: it was not recourse to PSI companies that would be questioned in the upcoming negotiations, but the concerns of exporters because of the “undisciplined” exercise of PSI activities by private operators.85 1.4.2.2 It Is Basically Companies We Are After The US and the EU took the lead and tabled a series of proposals, most of which eventually found their way into the agreement. The US proposals concerned substantive law. The US was keen in obliging PSI companies to use international standards whenever appropriate. PSI companies should also be obliged to avoid conflicts of interest. They should also be obliged to respect customs valuation as regulated in GATT. Finally, no PSI should be requested for shipment below a threshold value (set at $10,000).86 The EU submission was a complement to, not a substitute for, the US proposals. Without distancing itself at all from the US proposals to this effect, the EU focused on the adjudication of disputes. It was the architect of the adjudication of disputes before the Independent Review Entity that we discuss later.87 The final document circulated, which constituted the basis of the new agreement, reproduced the quintessential elements of the proposals advanced by the EU and the US.88
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There was, of course, an idiosyncratic element in the negotiations, to which we alluded earlier: negotiators aimed at imposing disciplines on private companies, and not on sovereign states only.89 GATT, however, was conceived as a government-to-government contract that addressed state, as opposed to private, practices. What should be done, then? The GATT Secretariat circulated a document (MTN.GNG/W/45 of 23 October 1989) that summarized the relevance of GATT to activities by private agents. This, as well as other documents prepared by the Secretariat, held clearly that the behavior of these companies could be attributed to sovereign states in light of past case law on this issue (Japan– Semiconductors). The test of the Panel on Japan–Semiconductors (which was discussed in volume 1, chapter 2) was, of course, largely met in the case where recourse to PSI companies was made for valuation purposes. Recall that in Japan-Semiconductors, the panel had held that behavior was attributed to a state even if conducted by a private agent if the state had incentivized the private agent to behave in a particular way. In the case of PSI, WTO members would not simply incentivize private agents to perform valuation, they would request them to perform PSI activities. Obligations were of course imposed on “user members,” and not on PSI companies. “User members” were requested to discipline PSI companies that they had mandated to perform customs valuation. The PSI Agreement imposes no direct obligations on private entities. It only grants them the right to access the Independent Review Entity and resolve disputes in a speedy manner.90 1.4.3 The Ambit of the Agreement The agreement covers PSI activities operated by PSI entities. Article 1.1 of the PSI Agreement defines the scope of the agreement: This Agreement shall apply to all preshipment inspection activities carried out on the territory of Members, whether such activities are contracted or mandated by the government, or any government body, of a Member.
The use of the term “government body” denotes that the PSI Agreement covers activities that have been contracted not only by governments, but by any public authority that has the legal power to do so. 1.4.3.1 What Is a PSI Entity? Article 1.4 of ILA defines “PSI entity” in a very open-ended manner: “The term ‘preshipment inspection entity’ is any entity contracted or mandated by a Member to carry out preshipment inspection activities. 1.4.3.2 What Do PSI Entities Do? “PSI activities” are defined in Article 1.3 of the agreement as follows: Preshipment inspection activities are all activities relating to the verification of the quality, the quantity, the price, including currency exchange rate and financial terms, and/or the customs classification of goods to be exported to the territory of the user Member.
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Inspections are government-contracted but performed by private companies. Typically, the government of an importing WTO member will contract a private company and ask it to perform an evaluation. The inspecting companies will perform two functions: • They will ensure that the goods conform with the terms of the sales contract (the “qualitative” element). • They will verify the invoice price (the “quantitative” element). Government contracts with PSI companies are typically divided into “foreign exchange contracts” (FOREX), where the basic objective of the government is to prevent the exodus of capital through overinvoicing; and “customs contracts,” where the main aim is to ensure that there is no loss in customs revenue as a result of undervaluation, or misclassification of the good. A PSI company might also provide a number of subsidiary services, which include, inter alia, the verification of the origin of the product, maintenance of data for statistical purposes, technical assistance, and training. Expertise by companies is not binding on customs authorities. They might decide to neglect it and perform their own evaluation.91 The PSI entity will issue a Clean Report of Findings, which will verify the price of the good (and depending on the request made, the quantity, quality, and other data). 1.4.4
Obligations Imposed on User Members
Obligations are imposed on “user members” (e.g., the WTO members having recourse to PSI activities). It is “user members” that are requested to ensure that PSI entities will abide by a series of disciplines included in the agreement. This should not come as no surprise, since the WTO binds governments, since governments sign it, and not private parties that have no say in drafting its disciplines. The disciplines imposed concern a variety of issues ranging from the site of inspection to the treatment of business confidential information (BCI). 1.4.4.1 The Site of Inspection The preamble of the PSI Agreement leaves no doubt as to the place where PSI activities will take place: “Noting that this inspection is by definition carried out on the territory of exporter Members” (italics in the original). Inspection activities will, thus, be carried out in the territory of the exporter member. In a rather paradoxical statement, though, it is the user member that must guarantee that PSI activities will be performed in the customs territory from which goods will be exported (Article 2.3). The problem is, of course, that for the guarantee to be meaningful, the exporting WTO member must cooperate and allow inspection to take place in its territory. Alas, the obligations imposed on exporting WTO members are very limited, and hardly guarantee a reasonable degree of cooperation that is very much needed to ensure that valuation will be properly conducted.92
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1.4.4.2 Nondiscrimination The same laws will apply with respect to PSI to all exporters, regardless of their origin (Article 2.1). Recall also from our discussion in chapter 4 of volume I, that MFN covers advantages both on the import as well as the export side. 1.4.4.3 Contractual and International Standards Traders might contractually agree on the use of (product) standards that quantity and/or quality inspections must conform with. They might even agree on the use of international standards to this effect. Unlike governments, which, as we will see in chapter 5 in this volume, must in principle use international standards, private operators are under no similar obligation. Consequently, the standards contractually agreed on between traders are what will apply. If none have been agreed on, then the relevant international standards will apply. The term “international standards” is defined in a footnote to Article 2.4 in the following manner: “An international standard is a standard adopted by a governmental or non-governmental body whose membership is open to all Members, one of whose recognized activities is in the field of standardization.” This is not an unproblematic definition since, for political reasons, some standardsetting bodies are not open to all WTO members, and yet their standards have been accepted as international standards in the context of the Technical Barriers to Trade (TBT) Agreement. We will return to this issue in chapter 5 of this volume. 1.4.4.4 Transparency Recall that lack of transparency regarding activities by PSI companies was one of the major grievances of US traders. The agreement dedicates four paragraphs (Articles 2.5– 2.8) to transparency. The quintessential requirement is that all relevant information be made available to traders in a timely manner, so that they can prepare their responses in a satisfactory manner. 1.4.4.5 BCI PSI companies routinely request information that qualifies as BCI, which traders might be unwilling to share absent guarantees that it will be treated with circumspection. The agreement contains five paragraphs relating to the protection of BCI (Article 2.9–2.13). The crux of the obligations is twofold: BCI will be circulated only between the PSI entity and the user member, and some information (e.g., profit levels, internal pricing, etc.) will not be requested at all. The treatment of BCI is thus accepted as legitimate exception to the obligation to provide transparency in the realm of PSI activities. 1.4.4.6 Conflict of Interest This provision (Article 2.14) is closely connected to the preceding provision on the treatment of BCI. It requests user members to ensure that PSI entities do not share information with other entities when they might have economic/financial interests.
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1.4.4.7 Timely Inspection Timely inspection was yet another pressing request by traders exasperated with the activities of PSI entities. In five paragraphs (Articles 2.15–2.19), the agreement aims to ensure that inspection will take place within strict deadlines and thus avoid jeopardizing trade transactions. 1.4.4.8 Price Verification Article 2.20 of the agreement reaffirms that the obligations of WTO members resulting from Article VII of GATT, as well as the CVA, must be observed when price verification is performed. It sets out in clear terms the various steps that need to be taken into account if the invoice price is to be discarded. 1.4.5
Obligations Imposed on Exporter Members
Exporter members incur fewer obligations than user members. After all, it is not the exporting member that requests inspection. It must not discriminate with respect to its exports (depending on the final destination), and it must publish all laws regarding PSI activities so that traders become acquainted (Article 3). As noted earlier, surprisingly, the exporting member is under no obligation to cooperate in a meaningful manner when inspection occurs in its sovereignty. 1.4.6
Resolution of Disputes
Article 8 of the agreement makes it clear that disputes between WTO members regarding its operation will be submitted to the normal Dispute Settlement Understanding (DSU) procedures. However, it aims for a speedy resolution of disputes between traders (exporters) and PSI entities. To this effect, it establishes a two-step procedure: 1. An appeals procedure 2. Review by an Independent Entity, if necessary 1.4.6.1 Appeals Procedures Disputes might arise between PSI entities and exporters concerning the evaluation/ classification of goods. User members must ensure that PSI entities have established “designated officials” that will listen to complaints by exporters (Article 2.21 entitles “appeals procedures”). The designated officials must accord “sympathetic consideration” to grievances expressed by exporters and try to work out an amicable solution. Two days following the submission of the request to a “designated official,” either party may refer the dispute to the “Independent Entity” established under Article 4 of PSI, which will be discussed next. 1.4.6.2 The Independent Entity The Independent Entity93 is an organization consisting of representatives of two organizations: PSI entities and exporters. Its composition, function, and powers are regulated in
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Article 4 of the PSI Agreement. It keeps a list of experts nominated by three different fora: the association of PSI entities; the association of exporters; and, finally, the Independent Entity itself. In practice, the lists are prepared by IFIA, acting on behalf of PSI entities, the International Chamber of Commerce (ICC), acting on behalf of the exporters’ associations, and the administrator of the Independent Entity—that is, the WTO Secretariat.94 Disputes will be heard by a three-person body, one nominated by the PSI entities, one by the exporters’ organization, and an independent trade expert nominated by the WTO. While objections against the first two can be raised, they are impossible against the nomination of the “independent trade expert.”95 All decisions by the Independent Entity are binding on their addressees and cannot be appealed.96 So far, the Independent Entity has been requested to adjudicate disputes only twice (an infrequent occurrence by any reasonable standard) in light of the number of PSI programs listed later in this chapter. A view expressed by the ICC, reflected in the 1999 “Working Party on Preshipment Inspection” report, noted: the non-use of the Independent Entity might be because the provisions of the Agreement have removed some of the principal sources of disputes between inspection agencies and exporters, or because of exporters’ concern that identifying themselves to the PSI companies could result in aggravating rather than alleviating the situation, or because of the costs associated with its use.
The view of IFIA, contained in the same report, was that “in many cases problems had been settled between the PSI companies and the exporters concerned.”97 It is also the case that over the years, the improvement in the capacity of local customs authorities has reduced the need for recourse to PSI. The advent of the ATF has further relegated the need for recourse to PSI. We will return to this discussion later in this chapter, when we examine the record of the agreement in more general terms. Table 1.1 PSI programs for customs purposes (revenue protection) Country
Mandated Members of IFIA PSI Committee
Basis of Member Choice
Angola Bangladesh Central African Rep. Chad Dem. Rep. of Congo Irana Mauritania Uzbekistanb
BIVAC, Cotecna, SGS BIVAC, Intertek, SGS, OMIC BIVAC BIVAC BIVAC BIVAC, Cotecna, OMIC, SGS SGS BIVAC, CUI, Intertek, OMIC, SGS
Importer Geographical — — — Importer — Importer/exporter
a. Physical inspection (quantity/quality only) for foreign exchange purposes. b. Including reporting for foreign exchange purposes. No programs now include intervention on invoiced price.
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Table 1.2 Customs Support Services ((including destination inspection, selective PSI, or both) Country a,b
Burkina Faso Burundia Cameroona,b) Chada Congoa,b Côte d’Ivoirea,b Equatorial Guinea Ghanab Guinea (Conakry)a,b Haitia Liberiaa,b Mali a,b Mozambique a,b Nigera Nigeriab Senegal a,b Togob
Mandated Members of IFIA PSI Committee
Basis of Member Choice
Cotecna SGS SGS Cotecna Cotecna BIVAC Cotecna BIVAC, Cotecna BIVAC SGS BIVAC BIVAC Intertek Cotecna Cotecna, SGS Cotecna Cotecna
— — — — — — — Air & land/sea-freight —
— — Port of Arrival — —
a. “Selective” means that only certain shipments are subject to physical PSI based on risk assessment. b. Cargo destination inspection, which may include price verification and classification on a preshipment or postshipment basis. Source: Taken from WTO Document G/VAL/W/63/Rev. 14, dated 8 November 2011, which lists countries using PSI regimes. It reproduces information compiled by the IFIA Preshipment Inspection Committee. According to the IFIA, the recent trend for PSI programs shows a reduction in traditional programs (e.g., PSI programs for customs purposes), with considerable growth in more modern programs (e.g., customs support services) that are less intrusive for exporters.
1.4.7
Special and Differential Treatment
The PSI Agreement does not contain a generic provision on special and differential treatment. Article 3.3 notes, though, that “Exporter Members shall offer to provide User Members, if requested, technical assistance directed toward the achievement of the objectives of this Agreement on mutually agreed terms.” A footnote specifies that technical assistance could be bilateral, plurilateral, or multilateral. The special and differential treatment, thus, is exhausted in technical assistance, an objective shared by the ATF, as we will see in the section on that agreement, as well. 1.4.8
Exceptions
In volume 1, chapter 9, we discussed the relevance of Articles XX and XXI to the PSI Agreement.
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1.4.9
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Institutions
The PSI Agreement does not establish a committee to monitor the implementation of the agreement. It is the Committee on Customs Valuation that monitors the operation of the agreement. Article 6 of PSI states: At the end of the second year from the entry into force of the WTO Agreement and every three years thereafter, the Ministerial Conference shall review the provisions, implementation and operation of the Agreement ...
The Working Party on Preshipment Inspection was formed to perform this task. It submitted a first report in December 1997 (WTO Document G/L/214), and its life was extended by a year on two occasions. At the end of each of those extensions, a report was submitted to the General Council (WTO Documents G/L/273, in 1998; G/L/300, in 1999). In the last report, a recommendation that future monitoring of the agreement should be undertaken initially by the Customs Valuation Committee and that PSI should be a standing agenda item for this committee was adopted by the General Council. Another brief review of the PSI Agreement took place in 2006 in the Committee on Customs Valuation, and the report of the review was issued in WTO Document G/L/809. The reason for choosing the Committee on Customs Valuation to monitor the implementation of the PSI Agreement is logical given the linkages between customs valuation and PSI. One might still wonder why participants in the Uruguay round negotiating the PSI Agreement did not think that a committee on PSI was warranted. One reason might be that PSI activities were considered to be of a transitional nature. The third preambular paragraph of the PSI Agreement alludes to the transitional nature of PSI activities by recognizing the need for developing countries to have recourse to PSI “for as long and in so far as it is necessary to verify the quality, quantity or price of imported goods.” The Working Party report contained in G/L/300 also states, “All Members have accepted that recourse to PSI is a transitional measure to be used only until their national customs authorities are in the position to carry out these tasks on their own.” Exporter members and user members must notify the WTO Committee of laws and regulations implementing the PSI Agreement, any other laws and regulations relating to PSI, and changes in the laws and regulations relating to PSI. The WTO Committee must be notified immediately of all these measures after their publication (Article 5 of PSI).98 1.4.10
PSI Inspection and Trade Facilitation
In what follows, we will be discussing the Agreement on Trade Facilitation (ATF). There is an overlap, as we will see, between the two agreements, since the ATF shares the objective of facilitating customs clearance. The question arose during the negotiations whether there is still room for PSI activities following the advent of the ATF.
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The EU99 first requested that PSI activities be discontinued from the moment the ATF will be in place, only to receive a negative response by developing countries using PSI services.100 As things stand, the possibility to continue engaging in PSI activities following the advent of the ATF remains open. There is a request to reflect on the necessity of this endeavor, though, if not a clear dissuasion to do so altogether. Article 10.5 of the ATF101 reads: Members shall not require the use of preshipment inspections in relation to tariff classification and customs valuation. Without prejudice to the rights of Members to use other types of preshipment inspection not covered by paragraph 5.1, Members are encouraged not to introduce or apply new requirements regarding their use.
This provision is a toned-down variation of the original proposal, proposed by the EU, to the effect that no requirement for PSI inspections in general should exist.102 The difference between the two instruments is, of course, that ATF aims, through technical assistance, at improving the performance of customs authorities of developing countries. Technical assistance is not, as we saw earlier, at the heart of the PSI Agreement. It is at best incidental, and the continued dependence on services supplied by PSI entities is a very likely scenario with a PSI Agreement and without an ATF. Still, as we saw earlier in this chapter, some developing countries were unwilling to burn their bridges to PSI entities, the advent of the ATF notwithstanding. 1.5 1.5.1
Trade Facilitation The Legal Discipline and Its Rationale
The term “trade facilitation” is highly imprecise. Everything and anything in the WTO is meant to facilitate trade. But even if we were to take a narrower scope and think of trade facilitation as means to ensure that the basic GATT/WTO principles are implemented and do not remain empty shells, it is still difficult to delineate trade facilitation in precise manner. After all, isn’t trade facilitation what the ILA, the CVA, and the PSI Agreement are supposed to do? Thus, various questions can arise when it comes to attempting to define the scope of this term. Does trade facilitation cover only measures concerning customs clearance? Trade can, of course, also be facilitated by addressing concerns regarding behind-theborder measures. Should they also come under the concept of “trade facilitation”? It is unavoidably, one might add, a matter of definition. Various institutions in various agreements qualify as trade facilitation-related institutions. Negotiators felt that various issues had slipped through the cracks by addressing trade facilitation issues in various WTO agreements, that is, in compartmentalized manner. So a catch-all agreement was necessary (at least in their opinion) to address issues that had been insufficiently addressed
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by agreements aiming to facilitate customs clearance. Moreover, negotiators felt that various existing provisions could be streamlined and/or simplified in order to better serve the overall purpose of facilitating trade. The negotiation had to be limited to specific instruments, otherwise it would have become unmanageable. The next question was thus, which instruments should be covered in the new agreement, since various instruments come to mind when simplification of customs procedures and trade facilitation is the objective.103 The gains from cooperation would, of course, depend on the number of items included.104 Cutting red tape in customs procedures could prove to be a very ambitious endeavor. The size of gains from cooperation in this area would depend on the number of instruments committed. In principle, trade costs can take different forms ranging from border clearance procedures, to quality of transport and telecommunications infrastructure, to regulatory barriers, to the degree of competition in markets. One would not, of course, expect that they all be addressed through this agreement, since the negotiation could become a never-ending story. Furthermore, many of the instruments are already addressed in other agreements, even though some negotiators thought that the disciplines agreed were far from suitable. The negotiation of the ATF proved to be a case of discrepancy between what was finally committed by trading nations and what had originally been identified as the scope of an ambitious negotiation in literature, as we will see later in this chapter. Negotiators sized down their original aspirations to a realistic size, and eventually took a pragmatic view, and decided to narrow down the scope of the ATF to measures coming under three different GATT provisions: Article V, Article VIII, and Article X. It was not an easy ride, as we will see later, since negotiations regarding the scope of the endeavor were quite lengthy. And then there was the development dimension, quite prevalent during the negotiations. Negotiators felt that costly customs procedures represented a major hurdle especially for developing countries, which could neither access much needed imports, nor export markets. Trade facilitation would help them integrate more in the world trading system, as would Aid for Trade (that we saw in volume 1, chapter 5), which aimed at improving trade integration by addressing various behind the border issues, like infrastructure. Thus, negotiators consciously limited discussion to three instruments only while underlining the development dimension of their talks. A WTO document105 explains the rationale for negotiations on trade facilitation in the following terms: Industry and Trade gives high priority to simplification of import and export procedures as compliance with complex and numerous regulations and procedures could constitute a significant and time consuming burden to trade.
The costs can often exceed the cost of tariff duties as a percentage of the total value of goods traded. Cost savings can be obtained through rational procedures, but more signifi-
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cantly, they enable an uninterrupted physical flow of goods. As the cost burden falls especially heavily on smaller companies and on economic operators of the least developed countries (LDCs), trade facilitation also has a role to play in enabling them to participate more successfully in trade and increase their export potential, thus generating export-led growth in incomes and employment. More efficient procedures also bring greater certainty to delivery time, thus improving the service to customers. Economists are still debating on the rationale for a trade facilitation agreement. The most persuasive explanation offered so far is by Hoekman (2015). In his view, the ATF is aiming to solve an international coordination problem. Implementing commonly agreed trade facilitation measures will yield substantial economic gains as customs procedures will become more efficient and transparent. 1.5.2
The Negotiating Process
Because of the scope as described earlier, trade facilitation, in the WTO sense of the term, has to do with the reform of border management processes in order to reduce costs in this context. How did we end up with this compromise? The negotiation of the ATF was first earmarked in 1996. The Singapore Ministerial Declaration included §§ 21–22, where it was agreed that the Council for Trade in Goods (CTG) would106 undertake exploratory and analytical work, drawing on the work of other relevant international organizations, on the simplification of trade procedures in order to assess the scope for WTO rules in this area. In the organization of the work referred to in paragraphs 20 and 21, careful attention will be given to minimizing the burdens on delegations, especially those with more limited resources, and to coordinating meetings with those of relevant UNCTAD [(UN Conference on Trade and Development)] bodies. The technical cooperation program of the Secretariat will be available to developing and, in particular, least-developed country Members to facilitate their participation in this work.
In Neufeld’s (2014) account, the language quoted previously was a compromise between those that wanted a full-fledged multilateral agreement (developed nations) and those that preferred a noncommittal “work program” (developing countries). The language quoted suggests that trade facilitation was originally conceived in the WTO context as an integral part of measures in favor of developing countries. Paradoxically, the initial supporters were all developed countries, with only a few developing countries agreeing that a negotiation on a similar agreement was warranted.107 Neither the Singapore Ministerial Declaration nor the Doha Ministerial Declaration, though, included a negotiating mandate for trade facilitation. The latter (§ 27) contained a commitment to the effect that negotiations should take place after the Fifth Session of the Ministerial Conference, following, nevertheless, a decision made by explicit consensus regarding the modalities of negotiation.
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Neufeld (2014, p. 5) quotes unofficial documents demonstrating that, a month before the Cancun Ministerial Conference (2003), two diametrically opposed texts, one acknowledging that the time was ripe for a negotiation and one to the opposite effect, were submitted for consideration. The agreement to negotiate on trade facilitation was reached in 2004, in the “July package,”108 where in § 27 the negotiating mandate was included. Two groups dominated the negotiation: the “Colorado group,” consisting of the countries supporting the negotiation as mentioned previously, and the “Core group,” consisting of a group of developing countries that aimed to block, if not delay, the negotiation.109 Neufeld (2014, pp. 9ff.) mentions that Ambassador Muhamad Noor (Malaysia), the former chairman of the Core group, was selected to act as chairman of the negotiating group on trade facilitation—a rather clever choice, since he had to break away from partisan policies, and steer the group in objective manner. He, of course, enjoyed legitimacy with the Core group, and he managed to push issues that a delegate from the Colorado group or other entity might have found difficult to achieve.110 1.5.3
The Evolution of Definition
Defining the scope of the negotiation represented a challenging feature in and of itself. At one end of the spectrum, one could conceive the term “trade facilitation” to cover a very broad discussion of the customs and regulatory environment within which transactions take place, some sort of a multilateral effort to reduce the incidence of “behind-the-border” instruments that represent deadweight losses; in this reading of the term, it is very difficult to draw the line somewhere, and one could only arbitrarily decide what should and what should not come under this umbrella. Indeed, one could extend it to cover regulatory barriers of all sorts, including public health, environmental protection, and monetary charges. One could even go as far as Staples (1998) and argue that Vasco da Gama, by circumventing the Cape of Good Hope, facilitated trade, or agree with Sengupta (2007) that GATT, and now the WTO, quintessentially facilitate trade. Similarly wide definitions, their intellectual merit notwithstanding, risked rendering the ensuing negotiation on instruments to facilitate trade nonoperational. At the other end of the spectrum, a narrow definition would call for addressing issues related directly to moving goods through ports. In this vein, we could think of activities or policies that reduce transaction costs arising from eliminating or simplifying excessive and complex procedures, practices, and processes occurring at the border and relating to trade. Negotiations moved from early all-encompassing proposals to a narrow, workable definition that was eventually reflected in the agreement. Check, for example, the manner in which the WTO webpage defines “trade facilitation”: Once formal trade barriers come down, other issues become more important. For example, companies need to be able to acquire information on other countries’ importing and exporting regulations
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and how customs procedures are handled. Cutting red-tape at the point where goods enter a country and providing easier access to this kind of information are two ways of “facilitating” trade.
This phrase is a direct quotation from § 21 of the Singapore Ministerial Declaration entitled “Government Procurement,” since, as we saw earlier, there was no agreement in Singapore to add a separate entry calling for negotiations on trade facilitation. The first proposals were, thus, either too vague, or too comprehensive (including, for example, instruments such as payments and insurance that affect cross-border trade).111 Eventually, negotiators realized that, for an agreement to be concluded, both the “vagueness” and the “degree of ambition” had to be curtailed. Some welcome precisions came first in the Doha Ministerial Declaration (2001), where it was stated that the CTG would “review and as appropriate clarify and improve relevant aspects of Articles V (Freedom of Transit), VII (Fees and Formalities Connected with Importation and Exportation) and X (Publication and Administration of Trade Regulations) of the GATT 1994 and identify the trade facilitation needs and priorities of members, in particular developing and least-developed countries.”112 Annex D of the Doha Work Programme captured the essence of the agreement reached in Doha: “Negotiations shall aim to clarify and improve relevant aspects of Articles V, VIII and X of the GATT 1994 with a view to further expediting the movement, release and clearance of goods, including goods in transit.”113 It follows that negotiators have focused their attention on three types of measures: • Those covering goods in transit (Article V of GATT)114 • Those related to customs formalities and impositions at the border other than other duties and charges (ODCs) and ordinary customs duties (OCDs), as per Article VIII of GATT • Measures of general application regulating trade that must observe the transparency obligation of Article X of GATT anyway115 The narrow definition that was ultimately privileged has an undeniable benefit. The agreement became a realistic prospect. By placing fewer issues on the table, negotiators sped up the process.116 The downside is that lack of ambition means fewer benefits at the end, an issue to which we will return later in the chapter. This is not to say that there are no benefits when the scope is narrow. Production process is being gradually internationalized. This is the natural outcome of trade and investment liberalization, and the ensuing emergence of GVCs. Even modest differences in trade costs can decide who will jump on the bandwagon of GVCs, and who will not. In a world where exports depend increasingly on imports, there is an incentive to interconnect the production processes in the most efficient way. While there might be divergences regarding the scope of trade facilitation, and, in some circles, disappointment about the adopted narrow scope, there was never doubt that the WTO should be the forum to host this negotiation/agreement. The ICC, which represents the interests of the business community, went so far as to state, back in 2003:
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... a trade facilitation agreement is fundamental to the establishment of an improved and more efficient management process for international trade in goods on a global basis. Binding commitments are essential because only WTO can ensure the political support required for durable improvements in global trade.117
The WTO, the privileged forum, was not the first one to deal with this subject matter. Many institutions had looked at this issue in the past: the IMF, UNCTAD, and the WCO being among those that produced work that was usefully utilized in the WTO negotiation.118 The UN Centre for Trade Facilitation and Electronic Business (UN/CEFACT) has been particularly busy in this area, issuing a series of reports and recommendations aiming to smooth customs procedures. 1.5.4
For the Benefit of ...
There was no doubt about the forum, as there was no doubt about the intended beneficiary. Trade facilitation was conceived as the means to cut deadweight losses in developing countries, where customs procedures were laborious. From early in the negotiation, a number of initiatives were undertaken that aimed to provide the scaffolding for a development-oriented trade facilitation agreement. The Simpler Trade Procedures Board (SITPRO),119 for example, developed in tandem with the Commonwealth Business Council an initiative known as the “Boksburg Group.” The idea was to bring together customs officials and business from developing countries and brainstorm together on the eventual shape of the agreement. It should not, thus, come as surprise that a large part of the agreement consists of provisions on special and differential treatment, as we will see later. However, by facilitating trade indirectly, the agreement helps foreign companies as well, the trade of which will be eased as a result of the disciplines provided therein, and, depending on the implementation efforts, will also be substantially eased. This is probably why developed nations agreed to finance the implementation efforts, as we will see later in this chapter. There is a flip side to it, of course. When cutting red tape in customs, some parties will be unhappy—notably domestic competing industries and PSI companies, which will have less work as a result. 1.5.5
Cutting Red Tape in Customs
Beyond the general disciplines on transparency, the ATF includes two types of legal provisions: those dealing with substantive improvements and those dealing with procedural improvements to the current legal regime.120 The improvements to the existing legislative arsenal are not marginal. Even when improvements might seem mundane (such as the addition of an indicative list to measures coming under the purview of Article VIII of GATT, hardly a milestone), they still contributed to the overall objective of providing clarity regarding customs clearance while cutting
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down unnecessary red tape. Some important innovations were agreed to as well, which are detailed next. 1.5.5.1 Transparency Publication There are important innovations agreed to regarding the publication of laws dealing with customs clearance. WTO members must publish importation, exportation, and transit procedures, as well as fees and charges imposed in connection with them; applied rates; classification and valuation rules; general laws regarding rules of origin; import, export, and transit restrictions; penalties against infringements of formalities in connection with import, export, and transit trade; international agreements with other countries regarding import, export, and transit trade; procedures relating to tariff quotas; and appeals procedures relating to administrative decisions in the area mentioned previously (Article 1.1 of the ATF). Further, they must make available through the Internet information regarding import, export, and transit trade, as well as appeal procedures, and provide “enquiry points” within their sovereignty with the aim of familiarizing traders with the customs procedures applied (Articles 1.2 and 1.3 of the ATF). Thus, transparency has been extended both with respect to the measures that must be notified and the means (i.e., the Internet), in an effort to ensure that traders will possess ex ante the maximum of information regarding the conditions of competition within a given market. WTO members must, finally, provide opportunities for traders and other interested parties to comment on changes in measures regarding customs clearance (Article 2.1 of the ATF), and provide regular consultation between border agencies, traders, and other stakeholders (Article 2.2 of the ATF). Notification The WTO Committee on Trade Facilitation must be notified of all the measures mentioned previously (Article 1.4 of the ATF). As we will see later in this chapter, transparency ex post is also served since decisions regarding customs clearance cannot be opaque, and transparent appeals procedures have been introduced as well. Comparison with GATT It follows that there are important innovations here, compared to Article X of GATT. The use of the Internet for transparency purposes, the establishment of enquiry points aiming to disseminate information, consultations before publication, and advance rulings (and the ensuing right of appeal) are all improvements to the GATT regime. 1.5.5.2 Substantive Improvements in Customs Administration121 Reducing the Number of Necessary Documents WTO members cannot overburden traders by requesting from them unnecessary documents with respect to import, export, and transit formalities; they must limit themselves
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to asking for whatever is strictly necessary in light of the objective pursued through their requests [Article 10.1.1(c) of the ATF]. To this effect, they should accept electronic copies of documents, when appropriate (Article 10.2.1 of the ATF), and should not request original copies of export documentation submitted to the customs authorities of the exporting WTO member (Article 10.2.3 of the ATF). WTO members are encouraged to use international standards regarding formalities and documentation requirements. The Draft Agreement mentioned explicitly three international standards in Article 10.2: the “UN Layout Key” (“UNLK”), which provides a simplification and standardization of documents used in export trade;122 the “UN Trade Data Elements Directory,” which has a very comparable function to the UNLK; the UN/ CEFACT “Buy-Ship-Pay” model;123 and, finally, the “WCO Data Model,” which contains, besides customs-related documentation, information on regulatory agencies, health, and agricultural policies. Adoption of international standards in this context will undoubtedly reduce current transaction costs, since traders are required to compile different documentation depending on the port of exportation. Single Window There is no legal requirement to do so, but WTO members should endeavor to establish a single office (a “single window”) where traders submit documentation regarding import, export, and transit trade (Article 10.4 of the ATF). It is to be deplored that this provision was not adopted in the form of an unambiguous binding obligation, as it could have greatly contributed toward cutting red tape. Traders are routinely asked to visit different agencies in order to secure one trade transaction and absence of single window provision in the ILA has been raised, as we saw supra, as one of the main reasons why the notification record under that Agreement is poor. Practice shows that it is not wise to underestimate the cost of information about information. Still, even if expressed in best endeavors term, this provision holds a lot of promise, since it could still be implemented for simplifying customs clearance.124 Inspections WTO members can, respecting the procedures established in the Sanitary and Phytosanitary Measures (SPS) Agreement (discussed further in chapter 6 of this volume), adopt inspection procedures (or enhance the level of adopted procedures) at the border with respect to foodstuff, beverages, or feed in order to protect human, animal, or plant life or health in their sovereignty. When doing so, they must issue a notification based on risk [Article 5.1(a) of the ATF], and ensure that it applies uniformly in all relevant ports of entry [Article 5.1(b) of the ATF]. WTO members may, if requested to do so, perform a second test if, as a result of the inspection, the products concerned were found to be unfit for importation (Article 5.3.1 of the ATF). They can detain goods but must inform the concerned traders to this effect (Article 5.2 of the ATF).
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The Draft Agreement contained more elaborate provisions in this respect:125 Article 5 requested WTO members to respect a series of procedural obligations when introducing “import alerts” (the term used instead of “inspections”) regarding topics such as food safety. Crucially, similar measures should be based on “positive evidence.” The Draft Agreement wisely did not request that similar measures be based on scientific evidence since alerts could be legitimized based on observations the accuracy of which had yet to find support in scientific risk assessment. The requirement for positive evidence aimed at reducing the risk of seeing rapid alerts based on shaky or speculative foundations. Customs Fees and Charges This provision covers the same subject matter as Article VIII of GATT; Article 6.1.1 of the ATF underscores this point when explicitly stating that its coverage extends neither to customs duties (Article II of GATT) nor to internal charges (Article III of GATT). It reinforces Article VIII of GATT in two important ways: • The rationale for charges must be published (Article 6.2 of the ATF). • Penalties commensurate with the degree and severity of breach of provisions regarding charges covered by this provision are envisaged (Article 6.3 of the ATF). There is the possibility, though, for “plea bargaining” provided in the agreement (Article 6.3.6 of the ATF). Temporary Admission This provision, like the one discussed immediately hereafter regarding inward and outward processing, concerns the possibility of reducing import duties if certain conditions are met. WTO members may relieve goods imported temporarily into their market from payment of duties if they “have not undergone any change except normal depreciation and wastage due to the use made of them” [Article 10.9(a) of the ATF]. Inward/Outward Processing WTO members may further relieve goods, totally or partially, from the payment of import duties if the goods are meant for inward processing or for outward processing. “Inward processing” is the process whereby goods enter the market in order to undergo some processing and be reexported thereafter; “outward processing” refers to the process whereby goods are exported in order to undergo a specific production process and be subsequently reimported [Article 10.9(b) of the ATF]. Goods in Transit Transit was regulated in GATT as well, as we saw in chapter 7 of volume 1, albeit in a rather rudimentary manner. The ATF provides for some important additions to the regulation of goods in transit. It introduces a necessity requirement, and WTO members must consequently drop unnecessary regulation of transiting goods (Article 11.1 of the ATF). WTO members can impose on transiting goods only charges that are commensurate with administrative/transport expenses (Article 11.2 of the ATF).
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WTO members must further refrain from delaying transiting goods in an unnecessary manner (Article 10.7 of the ATF). They can apply a surety on transiting goods, limited, nevertheless, to ensuring that transport/transit requirements have been fulfilled (Article 11.11 of the ATF). Finally, technical regulations and conformity assessment procedures (in the TBT-sense of these two terms)126 will not apply on transiting goods by the WTO member allowing the transit. No Obligation to Perform PSI We briefly alluded to the relationship between the ATF and the PSI agreements when we referred to Article 10.5.1 of the ATF, which states that WTO members should not request the use of PSI as a prerequisite for tariff classification and customs valuation. Article 10.5.2 further requests WTO members to avoid adding to the existing requirements regarding the use of PSI procedures. The rationale for this provision is that skepticism regarding the activities of PSI companies is no longer due exclusively to the hostility of exporters. There is some awareness that outsourcing similar activities hardly helps developing countries improve the effectiveness of their customs procedures.127 There is also by now some empirical evidence to the effect that PSI, although it can have beneficial effects in clearing goods through customs, also adds substantially to the costs.128 1.5.5.3 Procedural Improvements in Customs Administration Advance Rulings An advance ruling is (Article 3.9(a) of the ATF): a written decision provided by a Member to an applicant prior to the importation of a good covered by the application that sets forth the treatment that the Member shall provide to the good at the time of importation with regard to: i. the good’s tariff classification, and ii. the origin of the good.
Advance rulings with respect to these two issues, of course, will greatly facilitate customs clearance. The latter, of course, crucially affects other factors as well—namely, customs valuation, exemption from duties, and requirements for quotas, tariff quotas, or both. Inconsistency of decisions by customs authorities is a real issue, and it has provoked a substantial amount of litigation in both national fora and the WTO. Moreover, inconsistency of tariff classifications is not the privilege of unsophisticated customs authorities, as the EC—Selected Matters dispute showed.129 This provision was modeled after the standard provision embedded in 9.9 of chapter 9 of the revised Kyoto Convention,130 which reads: The Customs shall issue binding rulings at the request of the interested person, provided that the Customs have all the information they deem necessary.
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Whereas WTO members must, if requested to do so, provide an advance ruling with respect to tariff classification and origin of goods to be cleared (Article 3.1 of the ATF), they are encouraged to do so only with respect to the remaining critical items. This is a shortcoming in the agreement, for sure. Advance rulings will be valid for a reasonable period of time (Article 10.3 of the ATF)131 but can be revoked or modified if the ruling was based on “incomplete, incorrect, false, or misleading information” (Article 10.4 of the ATF). In this case, written notice containing the reason for the change must be served to the applicant (Article 10.4 of the ATF). The requirements for applying for advance rulings, as well as the period for which it will be valid, must be published (Article 10.6 of the ATF).132 Release and Clearance of Goods Next to advance rulings, this is the other new major innovation helping to speed up the clearance process. The basic idea here is that goods will be cleared before importation occurs—even before the final determination regarding duties and charges has been made. Payment will be facilitated, and the following risk management procedures will be administered so as to avoid unnecessary delays: • Prearrival processing: This concept is introduced in Article 7.1 of the ATF. Traders can, when appropriate, submit information in electronic form regarding the upcoming importation before it happens, so as to expedite the release of goods. • Separation of release from payment of duties: Release of goods from customs can occur even if the final assessment of duties has not been completed (Article 7.3 of the ATF). A surety (guarantee) can be requested for separation to occur, the level of which, however, cannot exceed whatever is necessary for payment of customs duties and other charges (Article 7.3.3 of the ATF). • Electronic payment: Electronic payment is encouraged, but there is no obligation to accept this form of payment (Article 7.2 of the ATF). • Risk management:133 WTO members, when dealing with imports presenting a risk (to human/animal health/safety), must concentrate their endeavors on “high-risk” consignments and avoid delaying unnecessarily “low-risk” consignments (Article 7.4 of the ATF). • Postclearance audit: Postclearance audits of consignments are possible if two conditions are met: appropriate selectivity criteria are in place and transparency has been served (Article 7.5 of the ATF). • Expedited shipments: WTO members must adopt (or maintain) procedures for expedited shipments through air cargo facilities (Article 10.8 of the ATF). • Perishable goods: Finally, WTO members must ensure that they have adopted adequate procedures in order to ensure expedited release of perishable goods (Article 10.9 of the ATF).
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• Authorized operators: To facilitate clearance, WTO members shall provide additional measures to “authorized operators” who meet specific criteria (Article 7.7 of the ATF). To this effect, they shall provide at least three of the following measures: low data requirements; low rate of physical inspections; rapid release; deferred payment of duties, or other duties or charges.; reduced guarantees; single customs declaration; or clearance at the premises of an authorized operator. It is this last aspect (clearance at an operator’s premises) that could have substantial impact in practice, since authorized operators could facilitate imports and exports through their warehouses. Authorized operators must exhibit an appropriate record of compliance with customs and provide a system of managing records to allow internal controls, financial solvency, and supply chain security. In other words, they must be trusted based on their prior record.134 Customs Brokers WTO members cannot require the compulsory use of customs brokers. Customs brokers can continue to exist and operate trade facilitation tasks, but they will not be a bottleneck anymore since others can perform the same tasks as well. By broadening the scope of agents that will perform similar tasks, the agreement takes another step toward facilitating clearance. Note that, to the extent that national legislation provides for customs brokers (as one of the possibilities to perform trade-facilitation-related tasks), the criteria for acceding to this profession should be transparent (Article 10.7 of the ATF). Customs Cooperation and Border Agency Cooperation From early on during the negotiation, cooperation across customs authorities was high on the agenda. To facilitate the flow of goods across customs, cooperation between customs authorities is crucial. Article 12 of the ATF provides for detailed forms of customs cooperation: it regulates the form of request, the administrative burden that can be imposed, the limitations to requests, an obligation to respect confidentiality and reciprocity, and the possibility of signing bilateral and regional agreements aiming at promoting cooperation between customs authorities. Border agency cooperation is incited as well. To this effect, the Draft Agreement included a number of provisions in Article 9 aimed at facilitating cooperation (e.g., the alignment of working hours of different national customs authorities). Article 8 of the ATF enlarged the scope for border agency cooperation, adding to the alignment of working hours, alignment of procedures and formalities, sharing of common facilities, joint controls, and establishment of one-stop border post (OSBP) control. Some countries have in practice gone so far as to establish OSBPs, like the “Chirundu crossing” between Zambia and Zimbabwe, and the “Malaba crossing” between Kenya and Uganda.135
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There is no obligation to do all of this, though, since Article 8 of the ATF is drafted in best endeavors terms. Administrative Decisions and Appeals Procedures The term “administrative decision” is defined paradoxically in footnote 4 as follows: An administrative decision in this Article means a decision with a legal effect that affects rights and obligations of a specific person in an individual case. It shall be understood that an administrative decision in this Article covers an administrative action within the meaning of Article X of the GATT 1994 or failure to take an administrative action or decision as provided for in a Member’s domestic law and legal system.
We discuss Article X of GATT in chapter 12 of this volume. Suffice it to state here that WTO members must, by virtue of Article 4 of the ATF, provide appeals procedures against all administrative decisions, as defined previously. 1.5.6
Special and Differential Treatment
A large part of the ATF is dedicated to special and differential treatment. It explicitly includes “conditionality” in the relevant provisions: the idea is that the requirement to undertake a commitment depends on the capacity to implement the relevant commitment. The capacity can be asymmetric across trading nations, and, thus, the agreement breaks away from the past practice of establishing transitional periods for developing countries, and even longer ones for LDCs without “customizing” transition any further.136 To induce the presumed beneficiaries to speed up the implementation process, donors (developed nations) will enter bilateral negotiations. Provided that the financing of implementation has been agreed on, bilateral agreements will reflect the deadline by which implementation will have occurred. 1.5.6.1 Categories of Commitments Section II of the ATF reflects the provisions regarding “special and differential” treatment. Developing countries and LDCs undertake commitments, which will be reflected in three lists: “Category A,” “Category B,” and “Category C.” Both sets of countries enjoy discretion when deciding which commitments go into which list. The difference between the three lists is the entry into force of the commitments entered: commitments under Category A enter into force before those under Category B, which, in turn enter into force before those included in Category C. Specifically, Category A commitments will enter into force simultaneously with the entry into force of the ATF or, in the case of LDCs, within one year of it. Category B reflects commitments that will enter into force after a transitional period. Category C contains commitments that will enter into force after a transitional period, but that entry into force requires implementing capacity through the provision of assistance and support for capacity building (Section II, § 2).
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Footnote 16 of the ATF reads: “... assistance and support for capacity building may take the form of technical, financial, or any other mutually agreed form of assistance provided.” Consequently, and as briefly alluded to previously, negotiations between donors and beneficiaries will determine the extent of the list in Category C. Including the supply of technical assistance as a prerequisite for implementation could affect the incentives of both donors and beneficiaries to extend or reduce the length of the list: items of interest to developing countries and LDCs would be included in Category A; items of interest to developed countries would be included in Category C. Developing countries and LDCs retain discretion to shift items from Category B to C and vice versa through notifications to the Committee on Trade Facilitation. If the shift occurs from Category B to C, the WTO member concerned must also provide information regarding the status of assistance and support required to build capacity (Section II, § 7). All commitments entered under the three categories will be annexed to the ATF and become, thus, an integral part thereof (Final Provisions of Section II, §§ 10–11). Finger (2015) performed a reality check on commitments entered. As of 31 July 2014, only twenty-three developing countries had notified the WTO of their Category A schedules, and many of them simply specified where information should be published, but not what information should be published. Hence, few committed, and, among those few, many entered only shallow commitments. 1.5.6.2 Implementation: Sine Die (Until the Greek Kalends)? Whereas developed countries have to implement the ATF from the date of its entry into force, this is not the case for developing countries or LDCs. Both sets of countries have discretion when it comes to deciding the entry into force of their commitments under Categories B and C. They have to implement immediately only commitments under Category A. Section II, § 4.1, says as much as far as developing countries are concerned. Section II, § 4.2, addresses the same issue with respect to LDCs. The discretion of both sets of countries with respect to commitments under Category B is unlimited; Section II, § 4.5, supports this conclusion: No later than 60 days after the dates for notification of definitive dates for implementation of Category B and Category C in accordance with paragraphs 4.1, 4.2, or 4.3, the Committee shall take note of the annexes containing each Member’s definitive dates for implementation of Category B and Category C provisions, including any dates set under paragraph 4.4, thereby making these annexes an integral part of this Agreement.
It follows that the Committee on Trade Facilitation does not have the authority to question the dates of implementation proposed by developing countries and LDCs. The two sets of countries have unlimited discretion when it comes to scheduling commitments under Category B.
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Section II, § 4.1a, deals with Category B commitments entered into by developing countries: Upon entry into force of this Agreement, each developing country Member shall notify to the Committee the provisions that it has designated in Category B and corresponding indicative dates of implementation.
The next paragraph, 4.1(b), requests developing countries to notify their commitments under this category within one year from the entry into force of the ATF. Section II, § 4.2a, focuses on Category B commitments entered by LDCs: No later than one year after entry into force of this Agreement, a least developed country Member shall notify the Committee its Category B provisions and may notify corresponding indicative dates for implementation of these provisions, taking into account maximum flexibilities for least developed country Members.
The next paragraph, 4.2(b), requests LDCs to notify their commitments under this category within one year from the entry into force of the ATF. Nothing in the letter of these provisions curtails the discretion of the WTO member to choose its dates of implementation. As a result, developing countries and LDCs may choose long transitional periods if they deem it warranted to procrastinate the date of entry into force of their commitments. When it comes to commitments under Category C, both sets of countries will initiate negotiations with donors, since the implementation of provisions under this category is linked to supply of technical assistance, the presumption being that absent technical assistance, the WTO members concerned will be in no position to implement. Section II, § 4.1(c), (d), and (e) explain in a detailed manner the negotiation process between developing countries and donors. Section II, § 4.2(c), (d), (e), and (f), are the corresponding provisions for LDCs. The length of the period of implementation of Category C commitments is, thus, in function of the supply of technical assistance. Technical assistance involves costs for the donors, of course: therefore, it is to be expected that negotiations between donors and beneficiaries will take place in order to define the timeliness of the ATF by developing countries.137 Negotiators had agreed early on that technical assistance would be necessary in order to ensure smooth implementation of the ATF by developing countries, the intended main beneficiaries of the agreement. The 2004 Decision on Trade Facilitation138 reads in pertinent part: “Negotiations shall also aim at enhancing technical assistance and support for capacity building in this area.”139 § 3 dealt specifically with LDCs, and it provided that: “Least-developed country Members will only be required to undertake commitments to the extent consistent with their individual development, financial and trade needs or their administrative and institutional capabilities.”
Annex 1A Agreements Dealing with Customs Procedures
61
LDCs, thus, would not be requested to undertake commitments beyond what they could implement in light of their level of development. That was the basis of the negotiated agreement.140 On the other hand, this point should not be overstretched. Business and investment decisions will inevitably be affected in a negative manner if implementation drags on forever. So beneficiaries will have to balance the potential for cash flow to finance implementation of the ATF against the costs that delayed implementation will signify for their domestic economies. In any event, in an effort to facilitate implementation by developing countries and LDCs, the WTO Agreement established the Trade Facilitation Agreement Facility (TFAF). The purpose of TFAF is to provide trade facilitation—related technical assistance and capacity building, and the facility was meant to be the focal point for the implementation of commitments. TFAF will help developing countries and LDCs with technical support and implementation grants. Various organizations besides the WTO participate in this facility and have agreed to help the implementation of the agreement in this way: the International Trade Centre (ITC), the Organisation of Economic Cooperation and Development (OECD), the UNCTAD, the UN Economic Commission for Europe, the UN Economic Commission for Latin America and the Caribbean (ECLAC), the UN Economic and Social Commission for Asia and the Pacific (ESCAP), the UN Economic and Social Commission for Western Asia (ESCWA), the World Bank (WB), and the WCO. They issued a joint statement on 22 July 2014,141 announcing their commitment to participate in the facility. 1.5.6.3 Early Warning Section II, § 5, includes the so-called early warning provisions. To the extent that they find it impossible to honor their engagements regarding implementation, WTO members can request an extension from the Committee on Trade Facilitation. The latter will establish an “Expert Group,” which will report to the committee, and the committee will ultimately decide. The opinion of the Expert Group must be sought, but it is not binding on the committee (Section II, § 6). No dispute before the WTO can be raised regarding commitments by developing countries under Category A for two years following the entry into force of the ATF; for six years from the entry into force of the ATF for commitments under Category A by LDCs; and for eight years after implementation for commitments under Categories B and C by LDCs (Section II, § 8). 1.5.7
Institutions
Article 13 of the ATF provides for a Committee on Trade Facilitation. This committee will meet at least once a year, will be the depository of national schemes coming under its purview, will establish subsidiary bodies to the extent necessary, and will link with other
62
Chapter 1
institutions with overlapping mandates, such as the WCO. It will have the power to review the agreement and discuss its future shaping in light of the needs observed. Article 13.2 of the ATF contains an important innovation in that it provides for national committees on trade facilitation, which will liaise with the Committee on Trade Facilitation in an effort to better face the problems encountered in this context. 1.5.8
Entry into Force
The ATF went through a number of bumps on its way to conclusion. For some time, fearing negative reactions, the option of signing a plurilateral agreement was briefly contemplated. Similar thoughts were soon abandoned though. A basic purpose of the ATF is, as we saw supra, to contribute to development, and absent participation of all developing countries and all LDCs this very basic purpose of the ATF would have been defeated. According to a decision by the Ministerial Conference adopted in Bali in December 2013, the General Council was supposed to meet before 31 July 2014, and adopt a protocol that would be open for acceptance by WTO members until 31 July 2015. Alas, following India’s decision to link adoption of the protocol to one on food security (also adopted in Bali), and because of its dissatisfaction with the lack of progress in the latter, the protocol was not adopted in July 2014. WTO members agreed to discuss this issue again in September 2014. Finally, WTO members managed to agree on 28 November 2014 that the ATF would enter into force in accordance with Article X of the Agreement Establishing the WTO.142 The definitive entry of the ATF presupposed the adoption of the agreement by 2/3 of the WTO membership. At the time of writing (May 2015) only a handful have managed to do so. 1.5.9
Where Does the Red Tape End?
The measurement of gains from cooperation in the field of trade facilitation depends on the assumptions made. There are many papers estimating similar gains, which will be discussed in what immediately follows. Similar work certainly influenced the WTO negotiation, since there was awareness of what could be achieved through cooperation. It is doubtful, however, that it provided the original impetus for the negotiation, which was initially conceived as a means to provide technical capacity to developing countries only. Studies have focused on the cost side of existing regimes and the benefits in case some of the deadweight losses were dismantled. Speeding up the process of customs clearance has undeniable benefits. CoRe NTM (which stands for Compilation of Recorded Nontariff Measures), the US International Trade Commission (USITC) database, records issues that have been raised officially, have appeared in official documents such as the WTO Trade Policy Reviews, or both.143 The
Annex 1A Agreements Dealing with Customs Procedures
63
most common grounds for complaints are delays in customs clearance, followed by complaints regarding requests for additional documentation, and inspection.144 Sengupta (2007), for example, employed the World Business Economic Survey (WBES), and interviewed managerial staff in 10,000 enterprises spread over eighty countries to conclude that a considerable amount of their time is spent on nonproductive activities such as dealing with bureaucracy.145 Hummels (2001) linked trade facilitation measures to tariffs, finding that each day saved in shipping time (thanks to faster customs clearance) is worth a 0.5-percentage-point reduction of ad valorem tariffs. Wilson, Mann, and Otsuki (2003) construct four measures of trade facilitation (port efficiency, customs environment, regulatory environment, and e-business usage), using country-specific survey and hard data. They estimate independent effects for each of the four measures and find that trade flows are most closely associated with port efficiency. In a companion paper, Wilson and colleagues (2005) keep the four measures of trade facilitation and investigate their relationship to trade for a sample of seventy-five countries. They find that improvement in all forms of trade facilitation would yield an increase in global trade of $377 billion, which they decompose to shed some light on the GATT provisions under discussion in the WTO negotiation on trade facilitation (Articles V, VIII, and XX of GATT).146 Hufbauer and Schott (2013) estimated that the gains from a far-reaching trade facilitation agreement would increase the world gross domestic product (GDP) by $960 billion annually. Dennis and Shepherd (2011) showed that improved trade facilitation (essentially reforms to customs procedures) represents a set of policy options that would appear to have significant scope to promote export diversification. Djankov, Freund, and Pham (2010) have estimated that it takes three times as many days, twice as many documents, and six times as many signatures to trade in some African countries than in developed countries. Freund and Rocha (2011), in a similar vein, calculated that an extra day in Africa to get a consignment to its destination is equivalent to a 1.5 percent additional tax. Zaki (2014) found that gains are more significant for developing than for developed countries (regardless of whether gains are measured in welfare gains or increases in trade), that welfare effects are much higher in the long run than the short run, that both intraregional and interregional trade will be boosted, and that export diversification will be improved. In short, there is by now persuasive empirical evidence regarding the gains from improved trade facilitation. It all, thus, boils down to the coverage intended: the hands of negotiators are free, of course, since this is a new agreement, and it can be amended and expanded in the future. The business community has a rather ambitious agenda.147 In a similar vein, some fora, such as the Asia Pacific Economic Cooperation (APEC), have included under the heading “trade facilitation” a broad set of policies that may have an impact on trade costs, including policy measures that affect the efficiency of transport and logistics services.
64
Chapter 1
WTO trading partners have privileged a narrower focus, as shown previously, which, does not include such elements as infrastructure and related services. But even if we were to quantify the limited WTO agenda, the gains from an agreement on trade facilitation are quite important. A particularly careful and detailed analysis of the potential impact of the WTO trade facilitation by Moïsé and Sorescu (2013), based on a comprehensive data set of trade facilitation indicators, estimated that implementing the various elements of what has been proposed in the Doha round would lower developing-country trade costs by around 14 percent.148 1.6
Concluding Remarks
The rationale behind the WTO attempts to regulate the behavior of customs authorities rests on the premise that the multilateral regime needs to address deadweight losses associated with lengthy, unnecessary, and sometimes abusive customs procedures. The original GATT only sparingly addressed customs procedures, and it is only as of the Tokyo round that trading nations focused on this issue. The big change comes of course with the Uruguay round and the subsequent agreement to conclude the ATF. Some of the procedures employed correspond to actual needs (e.g., statistical information), but some might be the expression of protectionist pressure, and the resolve of the WTO framers is to ensure that there will be no protection in addition to whatever level of protection has been negotiated among trading partners and has been expressed in OCDs and ODCs. Other types of beggar-thy-neighbor policies could not be excluded out of hand; one could well imagine how customs agents might be tempted to delay clearance on purpose in order to extract monetary rewards. Corruption features high on the World Bank agenda in this context, and rationalization of customs procedures is an antidote to similar phenomena. The two original agreements (i.e., ILA and CVA) provided some clarity as to what was expected from customs authorities. For long periods, negotiators had probably lost interest in the ILA due to the scarce practice in this area. The resurgence of import licensing schemes, especially across Latin American countries after 2010, has raised the level of awareness regarding the negative effects of similar measures on international trade. The current disciplines do not adequately deal with some issues mentioned in this chapter, but most important, they also do not seem to address the missing incentives to increase the existing level of transparency. Information about import licensing schemes is often lacking, since notification of schemes is not incentive-compatible for those practicing them. The WTO has tried to introduce some of the missing incentives to be transparent by proposing simplified procedures for notification and publication, but at this stage, much still needs to be done in this context.
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65
Adjudication at the WTO level has been scarce, probably because similar issues are best handled before national authorities in light of the “urgency” involved. Indeed, WTO members are required to establish domestic courts or tribunals that will hear cases involving customs-administration-related complaints (Article X.3 of GATT). This is where most of the activity is (and we will be discussing this topic in detail in chapter 12 of this volume), and WTO panels have been reduced to only a handful of cases, which we have discussed in this chapter. The focus of the previous-generation agreements was on customs-related procedures: customs valuation and production of import licensing certificates. The PSI Agreement was thought of as an additional facilitating step. Goods would be cleared at the export market by private entities; hence, corruption of government agents, at the very least, would be curbed. Over the years, though, demand for PSI services dropped substantially,149 and various factors have contributed to this occurrence. Customs authorities have responded to the challenge by cleaning up their act. Some customs services have been outsourced to PSI companies (e.g., “Crown Agents” have been involved in a partnership with Angola). Others have switched to “destination inspection” companies, which look like PSI companies but always have an office in the country of importation. PSI companies were quite expensive anyway, and the outcome sometimes was thrown into question. Criticism on the activities of PSI companies has been mounting, the culmination being the introduction of the paragraph in the ATF, to which we referred earlier, which puts a halt to compulsory PSI (but also postshipment inspection). Trade facilitation emerges as the new-generation agreement with a slightly different focus. Some of its provisions address customs-related procedures, albeit in a more comprehensive manner than ever before (e.g., single window and cooperation across customs authorities). Some of its procedures, though, are the first step toward addressing behindthe-border measures, which affect the speed of clearance at customs. Research points to substantial gains from adopting similar mechanisms, which vary as a function of the content of trade facilitation. It is, of course, too early to pronounce on the welfare implications of the ATF. The signs, however, are not very positive. Finger (2015) has emerged as one of the increasingly critical voices. His concern was that the new agreement “does not provide a fertile field for reciprocal bargaining,” and he feared that, as with similar prodevelopment attempts in the past (most notably the Enabling Clause), absence of reciprocity would ensure that the gift for developing countries might prove to be form without substance. The agreement is a step in the right direction, but probably a very small step. The focus on behind-the-border measures is certainly welcome. Frontloading the information regarding commercialization of goods in markets is warranted in order to avoid surprises after clearance of goods. Future experience will show how ambitious the agenda on this front will become.
2
Antidumping
2.1 The Legal Discipline and Its Rationale 2.1.1 The Legal Discipline Antidumping is one of the three contingent protection instruments agreed already during the negotiation of the GATT, the other two being countervailing measures, and safeguards. The contingency is dumping, defined as the differential between two prices: the price of a good in the home market and the price of the same good in the export market (e.g., the “dumping margin”). Antidumping is contingent protection, it is the reaction to dumping, the contingency that it addresses. Article VI of GATT and the subsequently concluded WTO Agreement on Antidumping (AD) do not regulate dumping; rather, they deal with the conditions that must be met for AD duties to be imposed lawfully. A WTO member must show that “dumping”—has caused injury (in the form of decreasing volume of sales or reduced profitability) to the domestic industry in the importing WTO member producing the like product. If these requirements have been cumulatively met, a WTO member can impose AD duties (that is, it can add the dumping margin to its customs duties).1 To do that, it will have to initiate an AD investigation and ensure that specific due process obligations have been respected throughout the process. 2.1.2 The Rationale for the Legal Discipline Dumping is private behavior, and, as per Article VI of GATT, is an “unfair” practice that has been condemned by the WTO members: The contracting parties recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry. (italics added)2
The rationale for AD duties is, thus, to counteract an unfair practice.3 Case law has recognized as much [§ 87 of the Appellate Body (AB) report on Argentina–Footwear (EC);
Argentina Australia Brazil Bulgaria Canada Chile China Colombia Costa Rica Czech Republic Ecuador Egypt EU Guatemala India Indonesia Israel Jamaica Japan Jordan Korea Latvia Lithuania 5 3 1 4
25 1 21 11 6
13
11 4
4
33
6
4
5
22 17 18
1996
27 5 5
1995
15
13 5 3
7 41
1 1
14
14 44 11
1997
7 65
1 14 22
3
28 8 7
1
2 6
1
41 3 1 1
3 32
21 5 11 3
43 15 11
2000
6
64 8
2 2
18
23 24 16
1999
8 2 3 6 1 2
8 13 18
1998
Table 2.1 Initiations of AD investigations, 1 January 1995–30 June 2010
4 1
79 4 4 1 2
7 28
14 6
25
28 23 17
2001
9 6
1
81 4
3 20
30
14 16 8 1 5
2002
18
1
46 12
1 7
22
15
1 8 4
2003
3
21 5 1
30
27 2
11
12 9 8
2004
4
4
28
12 25
24 2 1
1
12 7 6
2005
1 7
35 5
9 35
7 1 10 9 1
11 10 12
2006
15
4
47 1
2 9
1 1 4 1
8 2 13
2007
5
55 7 1
19
3 1 14 6
19 6 23
2008
31 7 6 1
2 15
6 1 17 5 2
28 9 9
2009
3
17 3 5 1
8
1 1 4 2
7 4 5
2010
1 67 414 1 613 83 43 6 6 1 111 7 7
277 212 184 1 152 19 182 50 10 3
Total
68 Chapter 2
22
2 226
3 157
3
1 1
14
23 1
34
16
15 1 6 246
4
2 2 1
8 1
2 1
8 6 5
1997
2 4 4
1996
3 4 10
1995
Source: http://www.wto.org.
Malaysia Mexico New Zealand Nicaragua Pakistan Panama Paraguay Peru Philippines Poland Slovenia South Africa Taipei, Chinese Thailand Trinidad and Tobago Turkey Ukraine US Uruguay Venezuela Total
Table 2.1 (cont.)
10 266
36
1
4
41 6
3 3
2
1 12 1 2
1998
7 358
47
8
3
1 8 6 7 1 16
2 11 4
1999
47 1 1 298
7
1
21 4
1 2
6 9
2000
15 2 77 4 1 371
3 1
6 3
8
1 6 1
2001
1 315
18 3 35
21
4
234
11 2 37
3 2
8 2
4 1 1
3
1
13 1 3
6 14 5
2003
5 10 2
2002
220
25 6 26
3
6
1 7
3
3 6 5
2004
202
12 2 12
23
4
13
4 6
2005
203
8 1 8
3
3 5
3
4
8 6 1
2006
165
6 5 28
2
5
2
3 6
2007
213
23 7 16
1
3
3
1
2008
209
6 2 20
1
3 1
4 1
26 4
2
2009
69
1 1 2
2
1
1
2010
145 31 442 6 31 3752
43 12
43 98 53 2 53 6 2 69 18 12 1 212 23
Total
Antidumping 69
Argentina Australia Brazil Canada Chile China Colombia Costa Rica Czech Republic Egypt EU Guatemala India Indonesia Israel Jamaica Japan Korea Latvia Lithuania Malaysia Mexico
Reporting member
16
1
2 7
2 4
2
7
23 1 8 4
10
23
15
1
11 1 2 7 2
1997
5
1
1
1
20 1 6
1996
13 1 2 7 2
1995
4 7
8
22 2 6
5 28
12 20 14 10 2 3
1998
Table 2.2 AD measures, 1 January 1995–30 June 2010a
1 7
23 7 4
14 18
5 2
2 6
1 6
5
55
1 1 41
15 5 9 14
2000
9 6 5 10
1999
3
7
38 1 1 1
2 13
16 10 13 19
2001
1 4
2 2 2 1 1
64
7 25
5
22 9 5
2002
7 7
4 1
52 1
4 2
1
33
20 10 2 5
2003
7
10
29 8 1 1
1 10
14 1
1 4 5 8
2004
7 8
3
17 4
21
16 1
8 3 3 4
2005
5
8
16 2 3
12 12
24 1
5 4
2006
1
25
2 12
10 1 9 3 1 12 7 2
2007
4 12
31 5
3 15
4
6 3 11 3
2008
1
4
30 1
9
15 2 16 2 1 12 3
2009
1
2
17
1 2
7
7 1 3 2
2010
190 81 105 94 8 137 24 3 1 52 269 1 436 35 21 4 7 70 2 7 25 83
Total
70 Chapter 2
4 127 181
8 190
92
2 119
12 1
24
20
12
36 1
1 3 3
1
1999
33
13 5 2 2
1 1
1
1998
1
18 1 1
3 1
1997
11
8
2 2
2
2
4
1996
3
1995
9 237
31
170
2 1 33
2
1 8
5
1
2
2001
13 1
4 4 6
2000
1 218
11 2 27
15 2 1
7
1
1
2002
224
1 154
16 2 14
1 1
20 1 28 2 12
4
4 1 8
2
2004
1
2
7
2
2003
138
9 6 18
2
3
1
4
2005
140
21 2 5
7 1
4
6
2
2006
108
6 1 5
1 1 1
1
4
3
2007
139
11 5 23
3
2008
137
9 3 15
3
3
2
6
2009
59
5
9
1
1
2010
142 24 289 1 25 2433
22 1 24 2 48 11 9 2 128 12 31 7
Total
a. There have been many great efforts to provide databases on AD cases initiated and enforced by WTO members. Such databases are not simple matters to create, however, since the AD procedures are so complicated (especially if one takes the reviews into account). The most complete source is provided by Bown (2013), and it is posted on the following website: http://econ.worldbank.org/ttbd/gad. See also Czako et al. (2003), as well as Prusa (2001, 2005) who tries to explain the proliferation of AD duties. Finger and Nogues (2006) have studied the practice of MERCOSUR countries, and they concluded that AD has been used as a carrot to pursue economic liberalization. Source: http://www.wto.org
New Zealand Nicaragua Pakistan Paraguay Peru Philippines Poland Singapore South Africa Taipei, Chinese Thailand Trinidad & Tobago Turkey Ukraine US Uruguay Venezuela Total
Reporting member
Table 2.2 (cont.)
Antidumping 71
72
Chapter 2
§ 81 of the AB report on US–Line Pipe]. The rationale for disciplining the imposition of AD duties has to do with moral hazard. Left totally to their discretion, trading nations might have had the incentive to overreact to dumping and eviscerate the steps taken toward trade liberalization. Over the years, the discipline originally imposed through Article VI of GATT has been strengthened with the passage of successive AD agreements. The current (Uruguay-round) AD Agreement is the successor to the Kennedy-round and the Tokyo-round AD agreements.4 2.1.3
Discussion
2.1.3.1 Negotiating History Dumping is a private practice. Private practices were not a matter of concern for the GATT. They were, to the extent that they were considered to be restrictive business practices (RBPs), a matter of concern for the ITO. The ITO contained a chapter, Chapter V, that aimed at addressing RBPs. The thinking was that through similar anti-competitive practices, gains from trade liberalization would be eviscerated. Still, dumping did not figure in the list of restrictive business practices that ITO members aimed to eliminate.5 The Suggested Charter, the precursor to the GATT as we saw in chapter 1, volume 1, did not contain a reference to this effect either.6 At the London Conference (October–December 1946), there was discussions about dumping, but no statement that dumping is an “unfair practice” and, therefore, should be condemned. Article 17 of the London Draft, the corresponding provision to Article VI of GATT, did provide the possibility to counteract dumping, but dumping came to be recognized as an unfair practice at a later stage. The road to condemning dumping as unfair went through a few twists and turns. The provision on dumping had been proposed by the US delegation. Initially, while recognizing that there were four types of dumping (price, service, exchange, and social), the US delegate (Johnson) acknowledged that the US-backed provision on AD was concerned only with price dumping, without, nevertheless, condemning it as “unfair.”7 There was widespread agreement to this effect. The French delegate (Roux) requested that a paragraph be added that would make it clear that the country imposing AD duties should carry the burden of proof and justify its measures.8 In other words, the focus should not be on disciplining dumping, but on disciplining antidumping, the response to dumping. In New York, negotiators continued their efforts to discipline AD, still without condemning dumping as unfair.9 The question thus, remained what would justify AD? After all, dumping, the practice that AD aimed to counteract, was not even considered to be an RBP. It was in Geneva, in the summer of 1947, at the end of the negotiation of the GATT, that Cuba insisted on the inclusion of a paragraph against dumping. The Cuban request was not initially adopted, but Cuba finally got its wish to insert a paragraph condemning dumping.10 This paragraph
Antidumping
73
now figures prominently in the current Article VI of GATT.11 Characterizing dumping as unfair provided the rationale for allowing AD. The disciplining of AD was left for much later, for the negotiations during the Kennedy round. Before that moment, the discussions on AD during the Havana Conference did not lead to any meaningful change. New Zealand suggested that a discipline on dumping (as opposed to a discipline on AD) be inserted, which was rejected by the other trading partners.12 2.1.3.2 Economic Theory The rationale for AD has little, if any, support in economic theory. Some arguments have been voiced in favor of using AD as a selective safeguard. We will return to this discussion later in this chapter. 2.1.3.3 Contingent Protection We announced above that AD is one of the three so-called contingent protection instruments. The term “contingent protection” refers to a situation where a contingency has occurred (e.g., dumping, a subsidy, or unexpected increased imports), which allows WTO members to introduce protection (in the form of either tariffs, quotas, or a combination thereof) in favor of their domestic producers beyond the existing consolidated tariff protection.13 There are two contingent protection instruments besides AD duties: countervailing duties (CVDs) and safeguards, which can take the form of duties, quotas, or even tariff quotas. AD duties can be imposed when dumping occurs. CVDs can be imposed to counteract subsidization (e.g., government behavior aiming to help national producers). Safeguards, in turn, will be imposed when imports have increased in unforeseen, disproportionate amounts, loosely speaking. Yet in the real world, the three instruments are often used interchangeably.14 2.1.3.4 Injury to Competitors Dumping can be counteracted only when it causes injury. The injury standard in the AD Agreement is “injury to competitors” (as opposed to “injury to competition”). Article 3 of AD describes “injury” as the effect of dumped imports on domestic producers, and it does not request that investigating authorities inquire into economywide effects of dumping. Article 6.12 of AD supports this understanding since it does not place consumer organizations on equal footing with producers: consumers will, of course, benefit from dumping, but there is no obligation to take into account similar beneficial effects when deciding on AD duties.15 2.1.3.5 Combating Dumping Only through Antidumping Article 18.1 of AD makes it clear that dumping can be addressed only through AD duties and through no other measure: “No specific action against dumping of exports from
74
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another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement.”16 In US–Offset Act (Byrd Amendment), the panel found that payments under the Byrd Amendment, a US law reserving monetary compensation resulting from the collection of AD duties to the economic operators that had supported a petition to impose AD duties, was a “specific action” against dumping other than AD duties, and, hence, was illegal (§ 7.18). This law had been enacted to address a collective action problem. Especially in industries where concentration (as measured by the Herfindahl Index) is low, it is to be expected that meeting the rather demanding statutory threshold established in Article 5.4 of AD could prove to be, in practice, a test too far. (We discuss Herfindhai in some detail later in this chapter.) Article 5.4, also covered in more detail further on, requires that at least 25 percent of the domestic industry concerned must support a petition to initiate an AD investigation for it to be considered at all. The US law aimed at easing the process by incentivizing the private sector to support petitions. We discuss this aspect of the US law later. For now, we focus on another aspect—namely, whether the “Byrd payments” could be considered specific action aiming against dumping as per Article 18.1 of AD. On appeal, the AB confirmed the panel’s findings, and, recalling its prior pronouncements on this issue (US–1916 Act), it held that the Byrd Amendment17 was inconsistent with Article 18.1 of AD (§§ 255–256 and 265). In its view, Byrd payments were counteracting dumping without taking the form of AD duties since no investigation leading to their adoption would take place. As a result, the US was forced to eliminate Byrd payments and continue to counteract dumping only through AD duties, not through payments to companies. With this ruling, the AB evidenced its willingness to construe the term “specific action” in a wide sense. It is at best debatable why payments to companies might dissuade dumpers from dumping. First, there is uncertainty when payments are promised that duties will be imposed. Second, the duties imposed might give dumpers more of an incentive to dump. And, finally, recipients might want to use Byrd payments in more profitable ways, if they exist. Still, the AB concluded that Byrd payments constituted specific action against dumping. What mattered, in the eyes of the AB, was not their effectiveness. What mattered was one plausible explanation behind the signing into law of this measure.18 2.1.3.6 No Double Count In US–Antidumping and Countervailing Duties (China), the AB added that a WTO member cannot impose both ADs and CVDs to address the same situation. It prohibited, in other words, “double counting” (§§ 550ff., and especially 583 and 591).19
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If, say, export prices (EPs) decrease by 5 percent because of dumping and an additional 5 percent because of a granted subsidy, the importing nation can impose a 5 percent AD and a 5 percent countervailing duty (CVD), assuming that it has complied with the obligations of the AD and Subsidies and Countervailing Measures (SCM) agreements. If, however, they decrease by 5 percent only as a result of both dumping and subsidization, it cannot impose a 5 percent AD and a 5 percent CVD. This is a sensible finding; otherwise, exporters will be punished twice for the same offense.20 2.2 The Relationship with GATT Panels have consistently held that both Article VI of GATT and the AD Agreement in tandem regulate the legality of imposition of AD duties. Consistent practice suggests that the order of analysis is to first review submitted claims under the prism of the AD Agreement, and then follow up with an evaluation under Article VI of GATT when and if needed. In practice, this has been necessary when discussing claims relating to nonmarket economies (NMEs), since AD on goods originating in NMEs is regulated only in Article VI of GATT, not in the AD Agreement.21 Recall that AD presupposes the existence of dumping that causes injury. The WTO member interested in imposing AD duties must demonstrate the existence of all three elements (dumping, injury, causal relationship between the two). We turn to an analysis of these elements in what follows. 2.3 2.3.1
Calculating the Dumping Margin NV Must Exceed EP
According to Article 2.1 of AD, dumping exists when the price of a good in the exporting market, called “normal value” (NV), exceeds the price of the same good in the destination market, the “export price” (EP). The difference between the two prices constitutes the “dumping margin.” An investigating authority (IA) must demonstrate that the dumping margin exceeds the statutory de minimis level of 2 percent (Article 5.8 of AD), otherwise no AD duties can be lawfully imposed. An IA is not totally free when it comes to choosing methodologies for establishing a dumping margin. It must observe the requirements established in Article 2.4.2 of AD. 2.3.2
NV Can Be a Market Price
The NV is the actual market price of the allegedly dumped good in the exporting market unless one of the statutory exceptions discussed in what follows occurs.
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NV When Market Price Is Discounted
The AD Agreement allows an IA to disregard the market price if one of the following three situations occurs (Article 2.2 of AD): • There are no sales of the like product in the “ordinary course of trade”22 • A proper comparison between the NV and the EP cannot be made because of a “particular market situation” • The volume of sales in the home market is “low” An IA can, when confronting one of these three scenarios, set aside the market price in the exporter’s market and pick one of the following two alternative bases for the calculation of the NV (Article 2.2 of AD): • “Third-country sales”; that is, use data from sales of the like product in an appropriate third country, provided the price is representative • “Constructed price”; that is, calculate de novo the NV based on the cost of production in the country of origin, a reasonable amount for selling, general, and administrative (SG&A) expenses, and a reasonable amount for profits Recourse to nonmarket prices is, thus, reserved to a few specific situations where there are reasons to believe that the market price is not representative. If recourse to nonmarket prices is made, the discretion of IAs is somewhat curtailed since they will either have to use third-country sales or constructed price, but not any method they might deem appropriate. The idea is that, independent of the methodology used, the nonmarket price would be an appropriate proxy for the elusive market price. 2.3.3.1 Ordinary Course of Trade Article 2.2.1 of AD provides that sales made below the per-unit cost of production (fixed and variable) plus SG&A expenses may, under certain circumstances, be considered sales that are not in the ordinary course of trade. This is so only if sales have been made within an extended period of time (normally one year, but never less than six months), in substantial quantities (if the weighted average selling price of the transactions under consideration is below the weighted average per-unit cost, or if the volume of sales at a loss represents at least 20 percent of the volume of transactions),23 and at prices that do not allow the recovery of all costs within a reasonable period of time. Sales made at prices that are below per-unit costs at the time of sale, but above weighted average per-unit costs for the period of investigation (POI), shall be taken into account as means for the recovery of costs within a reasonable period of time. The wording of Article 2.2.1 of AD does not suggest that what is described here is the only case of sales that are not in the ordinary course of trade. Case law has provided additional examples of sales outside the ordinary course of trade.
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In US–Hot-Rolled Steel, sales between parties with common ownership were identified by the AB as a case of sales outside the ordinary course of trade, but the AB was quick to point out that, even where the parties were entirely independent, a transaction might still not be in the ordinary course of trade (§ 143), citing as an example a liquidation sale by an enterprise to an independent buyer, which may not reflect normal commercial principles (§ 148). The AB held in the same case, though, that IAs cannot cherry-pick among sales between related parties. A test applied by the US, which excluded sales transactions between related parties24 that were marginally low priced while including all high-priced sales except those proved to be aberrantly high priced, ran, in the AB’s view, afoul of Article 2.2.1 of AD (§ 154). 2.3.3.2 Low Volume of Sales Footnote 2 to the AD Agreement defines the term “low volume of sales.” Assume that Home is the exporter and Foreign the importing WTO member. Sales shall be considered sufficient in volume (and thus, not “low volume sales”), if their volume in Home’s market represents at least 5 percent of the sales of the product in Foreign’s market. It is clear from the text of this footnote that the “5 percent benchmark” is not an absolute criterion. Evidence can be submitted that sales at a lower ratio are still of sufficient magnitude to provide a proper comparison.25 The agreement is silent as to what kind of proof is warranted to make the case that a lower (than the statutory 5 percent) volume of sales would still allow a proper comparison between NV and EP. One would imagine, though, that the exporter would need to show why prices of similar lower volume are still representative of its pricing policy, rather than being extreme outliers that bear no relation to the pricing policy in other markets. 2.3.3.3 Particular Market Situation The text of the agreement does not define this term, and practice is quite rare. As a result, the term “particular market situation” remains largely uninterpreted. A GATT panel (EEC–Cotton Yarn) found that hyperinflation combined with a fixed exchange rate did not necessarily constitute a particular market situation. This panel held that the complainant had failed to demonstrate that prices used as basis of the NV were themselves so affected by the combination of high domestic inflation and a fixed exchange rate, that they did not permit a proper comparison (§§ 478–479). 2.3.4
Calculating NV when Market Price Is Discounted
Recall that, with one of the three scenarios mentioned previously, an IA can have recourse to either of the two statutory methods to calculate the NV: third-country sales or constructed price.
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2.3.4.1 Third-Country Sales In this case, the IA will use data from sales of the “like product” in a third country. The danger here is that the IA might have the incentive to use data from, say, a high-income country when investigating imports from a low-income country, and thus overshoot the dumping margin. This is where the requirement of similarity kicks in: the third country chosen must exhibit similar traits to that under investigation. Sweden and Norway are quite similar for the purposes of an AD investigation; Sweden and St. Kitts and Nevis are not. There is not much case law in this area, most likely because practice is overwhelmingly in the realm of “constructed price,” an instrument that provides IAs with substantial flexibility, as we will see in the next section. In EU–Footwear (China), the EU used Brazil as a surrogate country for China in order to establish NV.26 This choice was challenged by China under Articles 2.1 and 2.4 (first sentence) of AD, but the Panel found that neither of those legal bases covered the choice of surrogate country in an NME investigation (§§ 7.295ff.). We do not know, nevertheless, what the outcome would have been in the same case had China not been considered an NME.27 2.3.4.2 Constructed Price This method of establishing the NV consists in IAs constructing the NV themselves (e.g., without paying attention to the prevailing market price). Their choice to use data, however, is somewhat constrained, as we detail in what now follows. Moving to constructed price could prove to be a huge burden for the exporter who will be left, in principle, at the discretion of the IA, which is part and parcel of the domestic political economy of the importing state and, thus, could be prone to overstating the dumping margin. Over the years, the negotiating efforts of exporting countries have concentrated on limiting the discretion of IAs. Recall from our brief discussion earlier that an IA will construct a price based on three elements: cost data, SG&A, and a reasonable amount of profit. The efforts of negotiators concentrated in limiting the discretion of IAs in these three areas. Cost Data In principle, the cost data to be used as a basis for constructing the NV are those of the exporter or producer in question. The IA has limited discretion in constructing the NV since it must perform a calculation on the basis of28 actual cost data of the examined producer or exporter, provided that records are kept in accordance with the generally accepted accounting principles (GAAP) of the exporting country,29 and that they reasonably reflect the costs associated with the production and sale of the product under consideration. Only when similar data are not available can the IA go ahead and construct de novo the cost using data from similar companies in similar situations. Limits have been imposed by case law regarding the methodology used when constructing the NV. Reversing the Panel’s findings in this respect, the AB on US–Softwood
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Lumber V held that, occasionally at least, an IA should compare alternative methodologies on cost allocation and prefer the one that better suits the facts of the case (§§ 138–139). An IA can make appropriate adjustments for costs of nonrecurring items, which benefit future or current production, or for circumstances in which costs during the POI have been affected by startup operations. Case law has also dealt with the issue of cost allocation in this context. This term refers to assigning common costs to various cost objects. For example, a company might use the same input for the production of two different goods. Sometimes it is easy to perform this exercise, but other times, it is not. How, for example, should one allocate the cost of a new computer center, which might serve also functions unrelated to the production function of the company? In China–Broiler Products, the panel faced a novel issue. The US was exporting chicken paws to China. Chicken paws are part of a chicken, and not the most lucrative part as far as US consumers are concerned. Paws are considered, nonetheless, a delicacy in China. To export paws, of course, chickens must be split. Pre- and post-split costs are incurred, and the question of allocation arises. The issue here was whether a weight-based or a value-based allocation was WTO-consistent. China adopted a value-based allocation, and used the value of paws in the Chinese, as opposed to the US, market when constructing the dumping margin. Because of the increased value of paws in China, it was, thus, easy for it to construct a dumping margin. The question thus arose whether its approach was WTO-consistent. The Panel did not respond directly to this question; rather, it found against China on procedural grounds: China had not explained the reasons for discarding the market price (§§ 7.160ff.). SG&A There is no statutory definition of the term “SG&A expenses.” The Panel on US–Softwood Lumber V held that all costs affecting all or nearly all products manufactured by a company should be considered “general” costs, while “administrative” costs relate to the management of the company’s affairs (§ 7.263). When constructing SG&A and profits (which we will discuss next), an IA must, in accordance with Article 2.2.2 of AD, base its calculations on the investigated exporter’s actual data pertaining to the production and sales in the ordinary course of trade of the like product in their domestic market. If this cannot be the case, they can use the weighted average (WA) of other producers and exporters selling the like good. If this is also impossible to do, they can use any other “reasonable” method. In this case, however, Article 2.2.2 of AD imposes a limit: the calculated amount of profit (which we also discuss later) cannot exceed that of producers or exporters of the same general category of the product concerned (that is, of producers/exporters similarly situated). Article 2.2.2 of AD provides, thus, three alternative methods for calculating SG&A and profits, which, in the words of the Panel in EC–Bed Linen (§ 6.60):
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are intended to constitute close approximations of the general rule set out in the chapeau of Article 2.2.2. These approximations differ from the chapeau rule in that they relax, respectively, the reference to the like product, the reference to the exporter concerned, or both references, spelled out in that rule.30
The first methodology provides, as briefly mentioned earlier, that calculations can be based on the actual amounts incurred by the investigated exporter for the same general category of products (which may include the like product). How broad the general category of products may be is not defined in the agreement. The Panel in Thailand–H-Beams found that the text of Article 2.2.2 of AD does not provide (§ 7.111) “precise guidance as to the required breadth or narrowness of the product category.”31 According to the second methodology, calculation of SG&A and profits may be based on the WA32 of costs incurred by other investigated exporters (or producers) for the like product. The AB (EC–Bed Linen, § 80) clarified that all sales of other exporters or producers of the like product are to be included for determining SG&A and profit data, whether made in the ordinary course of trade or not. The third alternative methodology provides that SG&A and profits may be based on any other reasonable method, with the proviso that the amounts shall not exceed the amounts incurred and realized by other investigated exporters for the same general category of products. The Panel on EC–Bed Linen concluded that (§ 6.98) “in case a Member bases its calculations on either the chapeau or paragraphs (i) or (ii), there is no need to separately consider the reasonability of the profit rate against some benchmark.” The Panel on US–Softwood Lumber V held that, since SG&A benefit the production and sale of all goods that a company may produce, they must relate or pertain to those goods, including to the product under investigation. It, thus, concluded (§ 7.267) that “unless a producer/exporter can demonstrate that the product under investigation did not benefit from a particular SG&A cost item, an IA is not precluded from attributing at least a portion of that cost to the product under investigation.”33 In EC–Tube or Pipe Fittings,34 the question arose whether data relating to sales that had been discarded by an IA under Article 2.2 of AD (“low volume of sales”) could still be used for the purposes of constructing SG&A and profits in the context of Article 2.2.2 of AD. Specifically, Brazil had complained that the EU IA had used in its calculations under Article 2.2.2 of AD data relating to sales previously discarded under Article 2.2 of AD (“low-volume sales”). The AB, upholding the Panel finding in this respect, made it clear that an IA that had discarded the market price for one of the reasons reflected in Article 2.2 of AD, other than for the reason that such sales were made outside the ordinary course of trade, can still use market data for the calculation of SG&A when constructing the NV (§ 101). The Panel on EC–Salmon (Norway) added that actual domestic profit data and actual SG&A data should not be excluded because of the low volume or the low level of profitability of the sales to which they pertain (§§ 7.309, 7.318).35
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Profit Calculation Article 2.2.2 of AD applies here as well, so our discussion regarding the construction of SG&A applies to constructed profits as well. In EC–Bed Linen, the AB discussed the consistency of the methodology used by the EU in constructing profits with the agreement. The IA had had recourse to profit data from one exporter only. In the AB’s view, this was inconsistent with the statutory requirements (Article 2.2.2 of AD), since this provision requests that IAs use the WA of similarly situated producers/exporters, not that of one producer/exporter. The rationale for this provision is obvious: if WTO members were free to select the profit margin of one producer/exporter, they could select the profit margin of an outlier and thus shoot up the dumping margin (§ 74). Prior to the completion of the Uruguay round, US law used a statutory 8 percent profit in constructed value situations [Section 206(a) of the 1921 US Antidumping Act]. With the passage of the Uruguay Round Agreements Act in 1994, US law was modified to conform to provisions in the AD Agreement, since 8 percent could, on occasion, be a rather unreasonable profit margin. 2.3.5
Export Price (EP)
Determining the NV is only the first part of establishing a dumping margin. The second is the establishment of EP. 2.3.5.1 EP Can Be a Market Price According to Article 2.3 of AD, the IA will use market prices unless the exporter and importer are somehow “related.” 2.3.5.2 EP when Market Price Is Discounted In cases where an exporter and importer are related, a constructed EP can legitimately be used. Article 2.3 of AD does not use the term “related.” It uses the terms “association” and “compensatory adjustment” to denote cases of dependency between exporter and importer. In this case, one could suspect that unrealistic prices might be reflected in transactions in order to artificially reduce the dumping margin. Article 2.3 of AD provides an insurance policy against similar practices. In this vein, the Panel on US—Stainless Steel (Mexico) underscored the rationale for constructed EP (§ 6.99): ... an export price is constructed, and the appropriate allowances made, because it appears to the investigating authorities that the export price is unreliable because of association or a compensatory arrangement between the exporter and the importer or third party. By working backwards from the price at which the imported products are first resold to an independent buyer, it is possible to remove the unreliability. Thus, we agree with the United States that the purpose of these allowances is to construct a reliable export price to use in lieu of the actual export price or, as expressed by the EC as third party, to arrive at the price that would have been paid by the related importer had the sale been made on a commercial basis.
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The quoted passage seems to suggest that IAs should test the reliability of prices between related parties by comparing them with those charged in transactions with nonrelated parties.36 In case of a divergence between the two prices, it is the price of the product when sold for the first time to an independent buyer that may form the basis for the constructed EP.37 If the product is not resold, or not resold in the condition that it is being imported into the market where the AD investigation takes place, the EP may be determined on another “reasonable” basis. In this case, IAs have freedom to develop similar bases, provided they are reasonable. Reasonableness is an open-ended standard. There is some practice in this context that helps shed light on this standard. In US–Hot-Rolled Steel, a methodology was challenged for failing the “reasonableness” standard. According to the US methodology, investigated exporters or foreign producers may own as little as 5 percent of another company, and yet a transaction between the two would still be considered as taking place between affiliated (“related”) parties. The panel found that there was nothing wrong with the US methodology.38 The Panel on US–Stainless Steel (Mexico) held that, as the constructed EP should be reliable, costs incurred between importation and resale could be deducted only if they were foreseen (§ 6.100). Interestingly, the same panel highlighted that there is no obligation to make adjustments (§ 6.93) “because the failure to make allowance for costs and profits could only result in a higher export price—and thus a lower dumping margin.” In other words, because not making similar allowances would not constitute a disadvantage to the exporter (as a higher EP, and consequently resulting in a lower dumping margin), the absence of adjustments does not make the calculation of EP inconsistent with the agreement. Reasonableness has thus, been understood as a standard that should protect exporters from arbitrary practices by IAs. 2.3.6 The Duty to Perform Fair Comparison between NV and EP Once an NV and an EP have been determined (regardless of whether they are market or constructed prices), the IA will proceed to establish whether a dumping margin exists by comparing the former to the latter. It must perform a “fair comparison” to this effect (Article 2.4 of AD). The duty to perform a “fair comparison” is distinguished into three obligations: • To compare prices at the same level of trade • To make due allowances whenever appropriate • To use the appropriate methodology for comparing NV to EP The purpose of this requirement is, in the words of the Panel on US–Stainless Steel (Mexico) (§ 6.77) “to neutralise differences in a transaction that an exporter could be expected to have reflected in his pricing.”
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The Panel on US–Softwood Lumber V explained that this process involves judgment on the part of the IA,39 which must ensure that both actions and omissions have been accounted for, and that, at the end of the day, it is comparing apples to apples, not apples to oranges (§§ 7.357–358): Comparability is a term which, in our view, cannot be defined in the abstract. Rather, an investigating authority must, based on the facts before it, on a case-by-case basis decide whether a certain factor is demonstrated to affect price comparability. We can imagine of situations where, although differences exist, they do not affect price comparability. For instance, this could occur where in the exporting country all cars sold are painted in red, while cars exported are all black. The difference is obvious; in fact, it is one of those differences listed in Article 2.4 itself—a difference in physical characteristics. However, there might be no variable cost difference among the two cars because the cost of the paint—whether red or black—might be the same. If instead of differences in cost, we were looking at market value differences, we might reach the same conclusion if, either the seller or the purchaser, would be willing to sell or purchase at the same price, regardless [of] whether the car is red or black. It is also important to note that there are no differences “affect[ing] price comparability” which are precluded, as such, from being the object of an allowance. In addition, we consider that the obligation on an investigating authority is to examine the merits of each claimed adjustment and to determine whether the difference affects price comparability between the allegedly dumped product and the like product sold on the domestic market of the exporting country. (italics in the original)
It is now well settled in case law that the onus falls on IAs to demonstrate that fair comparison has been performed. In this vein, the Panel on Argentina–Poultry Antidumping Duties held that an IA must indicate to the parties concerned the type of information that is necessary to ensure fair comparison, and it must not impose an unreasonable burden of proof on the interested party (§ 7.239).40 The Panel on Egypt–Steel Rebar, without undermining the obligations of IAs as discussed earlier, held that the process of determining what types of adjustments need to be made for a fair comparison to take place is something of a dialogue between interested parties and the IA. This panel also seemed to accept that an IA may be required to make adjustments even when not explicitly requested or identified by the interested parties, in case it is demonstrated “by the data itself” that a given difference affects price comparability (§ 7.352). This seems to be the correct approach in light of the overall obligation imposed on IAs to conduct their investigation in a fair and unbiased manner. 2.3.6.1 Prices Must Be at the Same Level of Trade The rationale for this requirement is obvious since, in the opposite scenario (that is, if a comparison took place between incomparable prices), the dumping margin could be artificially much higher than what it actually is. This would be the case if, for example, an IA were to compare prices at the wholesale level in the exporter’s market with retail prices in the importing market.
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Usually, fair comparison at the same level of trade entails a comparison of prices at the ex-factory level. This practice is also known as “netting back,” and it amounts to establishing an ex-factory NV, and an ex-factory (e.g., price declared at the customs of importation) EP. This does not mean that an IA cannot compare NV and EP at the wholesale or the retail level. What matters is that both prices are at the same level of trade. 2.3.6.2 Due Allowances Can Be Made Article 2.4 of AD provides an indicative list of due allowances that can legitimately be made once prices have been brought to the same level of trade: Due allowance shall be made in each case, on its merits, for differences which affect price comparability, including differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, and any other differences which are also demonstrated to affect price comparability. In the cases referred to in paragraph 3, allowances for costs, including duties and taxes, incurred between importation and resale, and for profits accruing, should also be made. If in these cases price comparability has been affected, the authorities shall establish the normal value at a level of trade equivalent to the level of trade of the constructed export price, or shall make due allowance as warranted under this paragraph. The authorities shall indicate to the parties in question what information is necessary to ensure a fair comparison and shall not impose an unreasonable burden of proof on those parties.
It follows that the indicative list included in this provision contains both factors “exogenous” to the allegedly dumping economic operator (e.g., taxation) and factors controlled by it, such as quantity discounts or differences between the quality of the exported product and that of the product sold domestically. It also makes sense that both can affect price comparability and can appropriately form the subject matter of due allowances. An IA cannot limit itself to a review of the factors included in the indicative list. Article 2.4 of AD requires that due allowances be made for any “other” (e.g., other than the statutory factors affecting price comparability) difference that affects price comparability. The Panel on EC–Tube or Pipe Fittings, for example, accepted that due allowance could be made for “packaging expenses,” an item not explicitly mentioned in Article 2.4 of AD (§ 7.184). It is, of course, difficult to draw up an exhaustive list of factors that affect price comparability.41 In line with the overall standard of review applied by WTO panels, it might be reasonable to suggest that IAs, at any rate, must take into account the factors mentioned in Article 2.4 of AD, as well as any other factor affecting price comparability brought to their attention. WTO panels have, in general, avoided extending the scope of review of IAs any further, by requesting from them, for example, to actively search for factors not submitted to them by the interested parties. They must entertain requests for adjustment though. This solution has been privileged by the AB in EC–Fasteners, which confirmed that, whereas IAs might be unduly burdened if they were to assess differences in every case irrespective of a request to this effect, they should anyway review the need for adjustment, whenever a request has
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been submitted by an interested party (§§ 517–519). Accordingly, the Panel on HP-SSST found that China had violated its obligations under Article 2.4 AD by refusing to entertain a request for adjustment that had been tabled by an investigated company (§ 7.86). The method to use when making due allowances is not prejudged in the AD Agreement.42 The Panel on EC–Tube or Pipe Fittings dealt with a claim by Brazil to the effect that the EU had denied a request to make due allowances for differences in indirect taxation because of the methodology it had privileged to address this issue. The panel rejected Brazil’s argument. In its view, the AD Agreement did not specify a particular manner in which differences in indirect taxation should be accounted for. As a result, any methodology used, to the extent “reasonable,” should be considered WTO-consistent (§ 7.178). In EC–Tube or Pipe Fittings, the parties did not agree on the nature of the evidence that should be submitted in support of a claim for adjustment, nor whether it was the IA or the exporter that bore the burden of identifying and substantiating the claimed adjustment. According to the panel, at the end of the day it was for the IA, based on input from exporters and the domestic industry, to decide whether due allowances were in order, and abide by the disciplines of Article 2.4 of AD (§ 7.158).43 This implies that for those differences that have been identified as requiring adjustment, it is incumbent upon the IA to evaluate them and decide whether adjustment is indeed required.44 The Panel on US–Stainless Steel (Mexico) clarified that only differences that the exporter could reasonably have anticipated and could have taken into account in the price determination may be subject to adjustments (§ 6.77). 2.3.6.3 Statutory Methodologies to Decide on the Dumping Margin Assuming that prices have been brought to the same level of trade, and due allowances have been made as well, then the IA will be ready to perform the final task: comparing the prices established in order to define the dumping margin. The AD Agreement includes the methods that IAs must use when calculating dumping margins (Article 2.4.2 of AD): ... the existence of margins of dumping ... shall normally be established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction-to-transaction basis. (italics added)
Weighted average to weighted average (WA-WA), and transaction-to-transaction (T-T) are, thus, the two normal methods mentioned in the agreement. There is a third method as well, an exceptional one that we will discuss later. The AB on EC–Tube or Pipe Fittings, made it clear that the two methods (WA-WA, T-T) are offered as alternatives, and WTO members are free to choose one or the other.45 Note that the AD Agreement (Article 2.4.2) states that, when using the WA-WA methodology, the WA NV should be compared to a WA of prices of all “comparable export transactions,” not of “all sales.”46
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The T-T methodology does not necessarily involve an evaluation of all sales occurring during the investigation period, since, for example, there could be a discrepancy in the number of sales in the home market, in the export market, or both. It could also be that a number of transactions occur in the domestic market at a given point in time, while only a few exports occur. In similar instances, IAs will have to exercise judgment. Their discretion is, of course, justiciable. If, for example, a domestic transaction that occurred, say, in January is compared not an export transaction that occurred the same day, but to an export transaction that occurred months later, a panel might legitimately inquire into the reason for this action. We stated previously that the two methods are equivalent in the eyes of the legislator. Still, the choice of method might affect the outcome. Assume four domestic transactions taking place on 1 January for $80, 1 March for $100, 1 June for $120, and 1 November for $100. The volume is similar each time. The WA NV is $100. Assume further that three export transactions take place on 2 January, 2 June, and 2 July. All are of equal volume and are worth $100 each. So on a WA-WA basis, there is no dumping. Using a T-T methodology, an export transaction on 2 January for $100 will be compared to a domestic transaction on 1 January for $80. There is no dumping margin, since the EP is higher than the NV. The export transaction on 2 June will be compared with the 1 June domestic transaction for $120, resulting in a dumping margin of $20. And the export transaction on 2 July will also be compared with a domestic transaction on 1 June since this is the closest in terms of time, again finding a dumping margin of $20. On average, using this methodology, a positive dumping margin of $20 will have been established. The reverse could also be the case, of course. We stated previously that T-T, and WA-WA are the two normal methodologies. A third, exceptional methodology is provided in Article 2.4.2 of AD. In specific circumstances, a comparison between a WA NV and prices of specific export transactions is allowed: A normal value established on a weighted average basis may be compared to prices of individual export transactions if the authorities find a pattern of export prices which will differ significantly among different purchasers, regions or time periods, and if an explanation is provided as to why such differences cannot be taken into account appropriately by the use of a weighted average–to– weighted average or transaction-to-transaction comparison.
This provision aims to counteract “targeted dumping.” If an exporter dumps substantial volumes of exports during, say, only one month in a year, and does not dump the rest of the year, then an IA can, for the calculation of dumping margins, legitimately take into account EPs as reflected in the transactions during this month.47 The AB on EC–Bed Linen recognized as much (§ 62).48 This provision was largely an exception in practice as well, until the US started using it more often as a result of the condemnation of “zeroing,” a methodology for comparing NV to EP that we discuss immediately hereafter.
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2.3.6.4 Zeroing: Dead and Loving It “Zeroing” is not a statutory methodology for comparing NV to EP. Zeroing is not reflected in the AD Agreement. It is a matter of practice. Some WTO members started zeroing positive dumping margins when calculating the amount of dumping.49 Now what exactly does this practice amount to? When an IA practicing zeroing faces a situation where the EP exceeds the NV (negative dumping margin), it will disregard the transaction altogether. It will consider that exports are not dumped, and a fictitious margin of “zero” dumping will be attributed. The justification for this approach is that similar transactions are not dumped, and hence the AD Agreement does not care about them since the subject matter of this agreement is dumping, not nondumping. So the argument that IAs practicing zeroing have advanced to justify it is that, since the purpose of the AD Agreement is to counteract dumping, nondumped imports can conveniently be disregarded. Transactions where no dumping margin exists are not “comparable export transactions,” and, for this reason, they do not have to be taken into account at all, as per the wording of the AD Agreement discussed earlier (i.e., Article 2.4.2 of AD). Defenders of zeroing, in other words, have argued that they see nothing wrong about this practice since the whole idea of antidumping is to counteract dumping. This is what zeroing allows them to do by focusing on dumped imports and disregarding totally nondumped imports. Consequently, not all transactions occurring during the investigation period50 are taken into account when establishing the dumping margin. All transactions occurring during this period are investigated—that much is certain. Nevertheless, only those transactions yielding a dumping margin are retained in order to calculate the dumping margin. As a result, assuming that there are other transactions that yield dumping margins, the overall dumping margin will be inflated, since negative dumping margins are not able to moderate the outcome of the calculation of the overall dumping margin during the investigation period. The practice of zeroing, thus, has flourished. It has been used whenever recourse to calculating the dumping margin is being taken at different stages of the investigation—e.g., “original investigations” (Article 5.3 of AD), “administrative reviews” (Article 9.3.1 of AD), “sunset reviews” (Article 11.3 of AD), “interim” or “changed circumstances reviews” (Article 11.2 of AD), and “new shipper reviews” (Article 9.5 of AD). There have been dozens of disputes on zeroing, and the ensuing case law is made of diverging panel reports, dissenting opinions,51 a panel overturning itself,52 and the AB changing its reasoning to deal with the issue on several occasions. There are even two panel reports that openly disagreed with the AB and refused to follow its reasoning.53 This is a very rare occurrence in WTO practice, where panels almost always follow the AB reasoning. And the AB reports notwithstanding, disputes continue to arise regarding the consistency of zeroing with the AD Agreement, as the recent China–Autos (US) evidences.54
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It is clear that the AD Agreement does not contain an express prohibition of or permission for zeroing. In fact, the term “zeroing” is not even mentioned in the AD Agreement. Panels and the AB have used different legal bases to outlaw zeroing: Article 2.1 of AD, which defines dumping margins; Article 2.4.2 of AD, which deals with the methods for comparing NV and EP in order to establish a margin of dumping; and the general requirement of Article 2.4 of AD to conduct a fair comparison between NV and EP. The AB held time and again that Article 2.1 of AD is where the negotiating partners in the Uruguay round agreed to anchor the prohibition of zeroing. This provision, however, echoes verbatim the corresponding provision in the Tokyo-round AD Agreement, when many IAs were practicing zeroing.55 The Tokyo round AD Agreement did not condemn zeroing. The second ground (Article 2.4.2 of AD) is closely linked to the third (Article 2.4 of AD), and it is probably the most appropriate basis on which to condemn zeroing, for the reasons developed in Prusa and Vermulst (2009). The idea is that the finding of a dumping margin is predicated on an investigation of prices that occur during a certain period. Trends, thus, matter. Trends are particularly important for injury purposes as well, since it is highly unlikely that an industry will go out of business because of momentary troubles. Since trends matter, then both positive and negative dumping margins should be taken into account when properly defining the dumping margin. The term “comparable export transactions” should thus be read as export transactions that occur at a comparable point in time or are of comparable volume to domestic transactions, the comparator for defining the dumping margin. Furthermore, there is an insurance policy against “targeted dumping,” the third exceptional method discussed earlier. Opening the door to zeroing would defeat the requirement for fair comparison between prices during an investigation period by allowing the IA to cherry-pick only those prices that suit the dumping scenario.56 It seemed that the discussion on zeroing (both on the academic and the WTO fronts) is now moot since the AB has hermetically shut the door to similar practices under any circumstances.57 And yet it now seems like a pyrrhic victory for those fighting zeroing, since the US has in practice multiplied the use of the exceptional methodology (aimed at addressing targeted dumping only).58 The consistency of this practice across the board with the AD Agreement has yet to be tested.59 The question here would be whether the conditions for recourse to the exceptional methodology have been respected.60 2.3.7
Calculating the Amount of Dumping Margin
2.3.7.1 Dumping Margin Must Not Exceed the Statutory De Minimis Level We have already mentioned that an IA must demonstrate that the dumping margin exceeds the statutory de minimis level of 2 percent (Article 5.8 of AD). This means that if, as a result of the comparison that should be conducted as discussed previously, the dumping
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margin is below 2 percent (or, of course, if there is no dumping margin at all), no AD duties can be lawfully imposed. 2.3.7.2 Calculating Duties for Individual Exporters Article 6.10 of AD reads: “The authorities shall, as a rule, determine an individual margin of dumping for each known exporter or producer concerned of the product under investigation.” There are exceptions to the obligation to calculate individual dumping margins: (a) “Sampling” of exporters; (b) “New shipments”; (c) “Unknown exporters”; and, finally the case of (d) “Single entity.” We turn to a discussion of these terms in what immediately follows. Before we do, though, we should deal with a point of controversy regarding the number of exceptions to the obligations to calculate individual dumping margins. In EC–Fasteners (China), the panel had held that sampling is the only exception to this obligation, a finding that the AB subsequently overturned. China had complained about the imposition by the EU of AD duties on various classes of fasteners. One of the claims concerned the issue of whether sampling was the only permissible deviation from the obligation to calculate individual dumping margins or not. NME exporters interested in avoiding a constructed price (or application of a third-country price) would have to meet the market economy test (MET) established by the EU Basic AD Regulation. Failure to do so would lead the EU authorities to impose a dumping margin calculated on third-country sales on all of them except for those who had applied for individual treatment (IT) in accordance with the conditions included in the IT test (which was an integral part of the EU Basic AD Regulation). The EU, thus, would not calculate individual dumping margins for all exporters who had not managed to reverse the statutory presumption by raising a MET defense. The panel held that indeed sampling was the only permissible deviation from the obligation to calculate individual dumping margins, and, on this basis, found that the EU law was in violation of the AD Agreement (§ 7.90). The AB disagreed, adding that there are other cases where departures are permitted, noting that they had all been reflected in the covered agreements (§§ 328–329). The AB offered examples of this sort: unknown exporters do not benefit from the calculation of individual dumping margin (§ 324); new shippers can only benefit from calculation of individual dumping if they make a request to this effect, otherwise no individual margin will be calculated for them (§ 326). The AB finally, held that (§ 364) unless the EU had used sampling or any other statutory exception, it could not have legitimately deviated from the rule established in Article 6.10 of AD to
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calculate individual dumping margins for each exporter.61 Violation of this rule would lead to violation of Article 9.2 of AD as well—that is, of the obligation to collect the appropriate amount of duty (§ 339). It follows that the statutory exceptions exhaust the possibilities for deviating from the obligation to calculate individual dumping margins. 2.3.7.3 Sampling Exporters The practice of sampling is explicitly provided for in Article 6.10 of AD. Assuming a large number of exporters, an IA may legitimately restrict its investigation to only a few companies (i.e., a “sample”). It will then determine an individual dumping margin for each of the sampled companies. Nonsampled exporters will be burdened, by virtue of Article 9.4 of AD, by a duty corresponding to the WA of the dumping margins of the sampled exporters. Whenever recourse is made to sampling, the IA can either limit the examination to the largest percentage of exporters that can reasonably be investigated, or investigate a statistically valid sample (Article 6.10 of AD). The two alternatives are, from a purely legal perspective, substitutes. Recourse to econometrics seems warranted in order to define what a “statistically valid sample” is. It must thus be shown that the properties of the sampled investigated operators are the same as those of the whole. If this proves to be the case, then one can safely argue that the dumping margins established will more or less reflect those of the nonsampled exporters. The Panel on EC–Salmon (Norway) held that the term “statistically valid sample” refers only to a sample of known exporters without any further specification (§ 7.162). The term “known exporter” has been interpreted by the AB as referring to all exporters that have been identified in the petition, as well as those that have voluntarily appeared before the IA (Mexico–Antidumping Measures on Rice). There is, of course, no guarantee that those investigated will be representative when recourse to the other possibility is taken, that is, when the number of exporters is reduced to whatever can be reasonably investigated. This is so, because in this case administrative capacity matters, and nothing else. Moreover, an IA might be tempted to pick outliers (i.e., nonrepresentative cases). Consequently, this method leaves more discretion to an IA since it does not exclude the possibility that a statistically nonvalid sample has been chosen.62 In principle, thus, the choice between the two sampling methods could lead to divergent results. In EU–Footwear (China), the consistency of the EU criteria for sampling with Article 6.10 of AD was challenged. The EU had sampled those with the largest volume of sales in both the domestic and the export markets. The panel found that the EU approach was consistent with Article 6.10 of AD, applying, for all practical purposes, a “reasonableness” standard in this case (§§ 7.221ff). WTO members must select the sampled exporters, preferably in consultations with them and with their consent. There is, nevertheless, no obligation for IAs to proceed this way (Article 6.10.1 of AD). Nonsampled exporters could request to be individually investigated
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(Article 6.10.2 of AD). They might have a strong incentive to do so if they fear that the WA of the calculated individual duties will be high. For reasons of administrative capacity, the IA concerned might legitimately refuse to concede to similar requests. 2.3.7.4 New Shipments Duties are imposed against all exports originating in a country where dumping occurs, even to exporters who started producing and shipping like products subsequent to the termination of the investigation (“new shippers”). No individual dumping margins can be calculated for “new shippers,” of course, and they will be burdened with the WA of duties calculated for individual exporters. Article 9.5 of AD allows an expeditious procedure to take place, upon request, in order to calculate individual dumping margins for them. We will discuss this issue later in this chapter. 2.3.7.5 Unknown Exporters This exception comes from practice, as the AD Agreement does not make specific provision for it. “Unknown exporters” are distinguished from “new shippers” in that they managed to escape the original investigation even though they were producing and exporting goods when the investigation took place. “Unknown exporters” have never been sampled, nor do they belong to the producers that qualified as nonsampled. Practice reveals that they pay duties without having their dumping margins individually calculated. We discuss later in this chapter the level of duties imposed in these instances. 2.3.7.6 Single Entity/Collapsing This exception to the obligation to calculate individual dumping margins was added by case law. In Korea–Certain Paper, the panel held that an IA can legitimately calculate the same margin for a group of companies that together constitute one economic entity, a “single entity” being the term explicitly used. In this case, the Korean IA “collapsed” the calculation of dumping margins of various companies, which were somehow interlinked into one, arguing that it was the same entity that controlled all of them. Korea had calculated a single margin of dumping for three legally independent Indonesian companies, which it considered to constitute one entity for the purposes of its AD investigation. It collapsed three margins into one. Collapsing, it was argued, was intended to ensure the efficiency of the AD measure. The fear of the Korean IA was that, if separate companies are closely linked, they may be able to start selling through the company for which the lowest duty had been calculated. The panel held that Article 6.10 of AD does not necessarily preclude treating distinct entities as a single exporter, adding that (§ 7.161) “in order to properly treat multiple companies as a single exporter or producer in the context of its dumping determinations in an investigation, the IA has to determine that these companies are in a relationship close enough to support that treatment.”
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In other words, according to the panel (§ 7.162), collapsing would be permissible only when the “structural and commercial relationship between the companies in question is sufficiently close to be considered as a single exporter or producer.” In the case before it, the panel accepted Korea’s decision in light of the following factors: (i) the commonality of management and shareholding; (ii) the use of the same trading company by all three exporters; and (iii) the existence of cross-sales of the subject product among the three companies, which evidenced (§ 7.168) “the ability and willingness of the three companies to shift products among themselves.”63 In EC–Fasteners (China), the AB endorsed this view, and it further explained in § 376 that the situations envisaged by the Panel on Korea–Certain Paper may include either or both of the following: • The existence of corporate and structural links between the exporters, such as common control, shareholding and management • Control or material influence by the state in respect of pricing and output And later, it noted (§ 381): ... an investigating authority might have to take into account factors and positive evidence other than those establishing a corporate or commercial relationship in assessing whether the State and a number of exporters are a single entity and that, therefore, the State is the source of price discrimination. These, for instance, may include evidence of State control or instruction of, or material influence on, the behaviour of certain exporters in respect of pricing and output. These criteria could show that in the absence of formal structural links between the State and specific exporters, the State in fact determines and materially influences prices and output.
So, an inquiry into control or influence is not necessary when corporate and structural links between exporters exist. The terms “control” and “influence,” on the other hand, are quite open-ended. To the extent that one can show that prices and output have been influenced by the state, these criteria will have been ipso facto satisfied. This test leaves, of course, a lot of discretion to WTO panels. It seems that, in this respect, the AB has opened wide the front door, and not a back window, to deviations from the obligation to calculate individual dumping margins. 2.3.8
Calculating Dumping Margins for NMEs
IAs can, but do not have to, calculate dumping margins when investigating companies originating in an NME, as has already been discussed in this chapter. Because prices in NMEs are considered untrustworthy, IAs can discard them and use “fictitious” prices instead. Their discretion to do so is not unlimited, nevertheless, as described in what follows. Prices practiced by NMEs are considered untrustworthy, because they are not reflective of scarcity.
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2.3.8.1 Defining NMEs NMEs are defined in the Interpretative Note of Article VI of GATT as “a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the state.” This definition leaves a lot to be desired. The term “and” should lead to the conclusion that NMEs must satisfy both conditions; e.g., a “complete or substantially complete monopoly of trade” should be in place, and all domestic prices should be fixed by the state. 2.3.8.2 The Rationale for Including Separate Calculation for NMEs Czechoslovakia explained in the 1954–1955 Review Session why there was a need to introduce alternatives to market prices for establishing NV: ... difficulties caused by the application of certain standards relating to the definition of normal value ... are due to the fact that no comparison of export prices with prices in the domestic market of the exporting country is possible when such domestic prices are not established as a result of fair competition in that market but are fixed by the State.64
2.3.8.3 Third-Country Sales, Constructed Prices The Interpretative Note of Article VI of GATT allows WTO members to deviate from the obligations reflected in Article VI of GATT when addressing dumping by companies originating in NMEs. However, it does not explain the exact methodology that they should follow in similar cases: It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.
In practice, an IA will either use data from third-country producers or construct the NV. In EU–Footwear (China), the panel faced a claim by China that, by choosing Brazil as a surrogate country for China, the EU had violated its obligations under the AD Agreement. The panel discarded the claim, underlining the wide, in principle, discretion that IAs have when choosing surrogate countries for NMEs (§§ 7.253ff).65 2.3.8.4 The Case of China Not surprisingly, the NME status of China was an important issue in the process of Chinese accession to the WTO. The Chinese Protocol of Accession discusses this issue in considerable detail. WTO members can use Chinese prices or not. Chinese producers under investigation can, when facing “diffident” IAs, request the use of actual prices if they can “clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production, and sale of that product.”66
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Upon demonstration of the abovementioned condition, the importing WTO member is obliged to use Chinese prices. This is not an easy test to meet by any reasonable benchmark. It should not come as a surprise, therefore, that China has been routinely treated as an NME in AD practice. In the opposite case—that is, if the exporter manages to demonstrate that market conditions prevail in the industry producing the like product (quite an unrealistic prospect under the circumstances, one is tempted to add)—a different methodology may be used, but the WTO Antidumping Committee must be notified thereof. China’s Accession Protocol does not set forth which methodology is to be used, but the final report of the Working Party on China’s Accession67 provides some clarification in this respect. The IA shall normally utilize (to the extent possible, and assuming cooperation) the prices or costs in one or more market-economy countries that are significant producers of comparable merchandise and that are either at a level of economic development comparable to that of China, or are otherwise an appropriate source for prices or costs to be utilized in light of the nature of the industry under investigation. This leaves IAs with substantial discretion.68 The NME status of China will expire no later than fifteen years after accession (that is, by 2016).69 Recall, nevertheless, that Chinese producers might still not benefit from the calculation of individual dumping margins even after 2016, if an IA shows that the state exercises influence in its pricing policy. This is the logical consequence of the AB findings in EC–Fasteners (China), discussed earlier. This exception from the obligation to calculate individual dumping margins does not expire in 2016. 2.4
Injury Analysis
IAs must demonstrate that dumping has caused injury, otherwise, no AD duties can be lawfully imposed. In this vein, an IA has to demonstrate that the domestic industry producing the like product has been injured (Articles 3.2 and 3.4 of AD) as a result of dumped imports (Article 3.5 of AD). The term “injury” refers to a situation of current “material” injury, “threat of injury,” “material retardation,” or any combination in the establishment of an industry.70 Recall that the standard embedded in the AD Agreement is an injury-to-competitors standard. The AD Agreement does not condition the initiation of injury analysis on a prior finding of dumping. In practice, the two legs of the analysis (that is, the investigation of dumping margins and of injury) often take place in parallel.71 2.4.1
Injury Must Be “Material”
The title of Article 3 of AD is “determination of injury,” and a footnote reads:
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Under this Agreement, the term “injury” shall, unless otherwise specified, be taken to mean material injury to a domestic industry, threat of material injury to a domestic industry or material retardation of the establishment of such an industry and shall be interpreted in accordance with the provisions of this Article.
According to Article 3.1 of AD, an IA, in order to establish that injury has been caused by dumped imports, must examine the volume of dumped imports (Articles 3.2 and 3.3), the price effects of dumped imports (Articles 3.2 and 3.3), and the impact of these phenomena on the health of the domestic industry (Article 3.4). We will be discussing all these requirements in detail in what follows. We should also note that, beyond substantive requirements, there are procedural requirements that an IA must also satisfy on its way to showing injury. It must undertake “objective examination” of the effects of dumped imports on prices and producers of the like product, and must further provide “positive evidence” that injury has indeed occurred as a result of dumping (Article 3.1 of AD).72 The AB on US–Hot-Rolled Steel explained that the term “objective examination” relates to the way in which evidence has been gathered and requires an IA to conduct the process without favoring the interests of any interested party in the investigation (§ 193). Injury is usefully distinguished into “quantity effects” (e.g., what is the volume of dumped imports?) and “price effects” (e.g., by how much has the price of the competing domestic good been reduced as a result of dumped imports?). Quantity effects refer to displacing or impeding exports, increase in market share. By price effects, we mean the undercutting, suppression, and depression of price. We will be discussing the terminological differences between the terms in the next sections. We note for now that quantity effects will be observed regardless of whether it is a large or a small company doing the dumping since, other things equal, dumping might lead to a displacement of sales by the domestic industry. Price effects will be observed only when large companies dump—that is, companies that because of their (combined) size can affect terms of trade.73 2.4.1.1 Quantity Effects Article 3.2 of AD requires an IA to consider whether there has been a “significant” increase in dumped imports, either in absolute terms or relative to production or consumption in the importing member. The Panel on Thailand—H-Beams took the view that Article 3.2 of AD required an IA to consider whether there had been a significant increase, but it did not require it to make an explicit finding that increases of dumped imports were significant (§ 7.161). The AB on EC–Tube or Pipe Fittings clarified this finding even further when stating that injury can exist even if the increase in significant imports has not been significant (footnote 114). IAs must therefore consider whether dumped imports have been significant, but an overall finding of injury is not conditioned on a prior affirmative finding to the effect that the increase of dumped imports has been significant. In the joint reports China-HP-SSST (EU), and China-HP-SSST (Japan), the AB underscored that that the analysis under this provision was relevant for the analysis under Article 3.4 of AD, where, as we will see later, injury factors are examined one by one. It further
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held that this analysis is relevant for establishing causality between dumping and injury as well, §§ 5.205–212. Although demonstrating increased dumped imports is not a necessary condition for demonstrating injury, the volume of dumped imports must anyway be above a statutory de minimis level; otherwise, the injury analysis is flawed. If imports originate in one country, they must represent at least 3 percent of total imports, and if in more than one market, they must cumulatively represent at least 7 percent (Article 5.8 of AD). An IA cannot cherry-pick among imports, as per the AB report on EC–Bed Linen (Article 21.5–India): if a producer or exporter is found to be dumping, all imports from that producer or exporter may be included in the volume of dumped imports, but, if a producer or exporter is found not to be dumping, all imports from that producer or exporter must be excluded from the volume of dumped imports. (§ 115)
In this case, the AB dealt with injury analysis in a sampling scenario. The EU had sampled Indian exporters, and, of the five sampled exporters, three were found to be dumping. The EU did not impose duties on the two exporters found not to be dumping, but it did impose the WA of the duties imposed on the three dumpers on the nonsampled Indian exporters. India protested, noting that during the investigation of Indian exporters of bed linen, 53 percent of imports in the EU market (the volume represented by the two nondumping Indian exporters) had been found not to be dumping. The AB did not explicitly state how to determine the volume of dumped imports in the case of a sample, but it did indicate that it was difficult to perceive of any other way than to do this on the basis of some extrapolation of the evidence relating to the investigated producers/exporters (§ 137).74 Finally, the existence of a lawful quota does not provide arguments to support the idea that no injury through dumped imports can exist on similar occasions, even if dumped imports are in-quota. The GATT panel on EEC–Cotton Yarn dealt with the following argument: the EU could not have suffered injury because the products concerned were in-quota products since the Multifiber Arrangement (MFA) was still in force at the time of the dispute. The MFA, discussed in chapter, established a system of quotas between importing and exporting countries. The panel dismissed this argument, stating that a quota system does not amount to “carte blanche” to dump (§§ 532–544). 2.4.1.2 Price Effects An IA must inquire whether, as a result of increased dumped imports, “price undercutting,” “price suppression,” or “price depression” has occurred. Article 3.2 of AD makes it clear that IAs should inquire whether dumped imports have resulted in one (or more) of the three price effects, which appear in the SCM Agreement as well. “Dumped imports” are of course defined in the first sentence of Article 3.2 of AD, where it is made clear that IAs must consider whether there has been a significant increase either in absolute or in relative terms. Once the significant increase has been established, IAs must examine whether price effects have resulted as well. IAs cannot presume that this is the case always.
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They must establish that this has indeed been the case on the basis of an objective examination that they have conducted to this effect. The Panel on China–GOES (Article 21.5– US) established as much (§ 7.50). The duty to conduct an objective examination had been confirmed by the Panel on China–HP-SSST (EU), and China–HP-SSST (Japan), which had established that Article 3.2 of AD must be read together with Article 3.1 of AD. In its view, the duty to perform “objective examination” obliged an IA to assess whether, the risk that prices are distorted, resulted from the fact that there were significant differences between the volumes of products the prices of which were being compared. Differences in volumes can of course, affect the level of prices, but an IA must establish whether this has been the case and not simply assume that it is so (§ 7.114). In similar vein, the Panel on China–GOES (Article 21.5–US) held that China had violated its obligations under Article 3.2 of AD by not properly examining the effect of nonsubject imports to the prices charged by the domestic industry. The Chinese IA, MOFCOM (Ministry of Commerce), had established that during the investigation period dumped imports (e.g., subject imports) had increased their share of the Chinese market by 5.65 percent. At the same time the domestic industry producing the like product had decreased its market share by 5.56 percent. The remaining market share went to nondumped imports (e.g., nonsubject imports). The data provided by MOFCOM itself regarding the corresponding numbers and the effect of nonsubject imports nonetheless, cast doubt on the overall conclusion by MOFCOM, and plainly contradicted some of the findings reached, and the panel found that China had violated its obligations under Article 3.2 of AD (§§ 7.42ff., and especially 7.54–7.58). The same report established that the AD Agreement (like the SCM Agreement in Article 15.2, the corresponding provision to Article 3.2 of AD) did not establish a particular methodology that should be followed when examining price effects (§ 7.41). As a result, IAs had some discretion to devise their own methodology. No matter what their choice, however, they should always abide by the obligation to perform objective examination, which entails the duty to examine the impact of factors other than dumped imports on prices charged by the domestic industry (§ 7.42). As we will be making clear in this chapter, it is for the parties to the dispute to submit factors that might influence prices. The inquiry into price effects seems, prima facie at least, to inherently carry an inquiry into causality as well: price suppression, for example, should not be understood in a contextual manner, but as a consequence of dumping. This impression is wrong. It is, of course, Article 3.5 of AD that includes the requirement to show a causal relation between dumping and injury. Articles 3.2 and 3.5 of AD are not perfect substitutes. A finding that price undercutting is the outcome of dumped imports under Article 3.2 of AD does not absolve an IA from the obligation to check the injury factors mentioned in Article 3.4 of AD and to perform a causality analysis under Article 3.5 of AD. It is the totality of the evidence under the three provisions (Articles 3.2, 3.4, and 3.5 of AD) that will enable an IA to make an informed judgment about whether the health of the domestic industry has
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suffered as a result of dumped imports. The same approach is pertinent for analysis under the SCM Agreement. Having stated that, we also note that the Panel on HP–SSST saw a difference in the nature of review of the three different price effects. Whereas for the purposes of price undercutting a mere price comparison suffices, an inquiry into the effects of price depression and suppression on imports was warranted (§ 7.124). This inquiry does not amount to an examination of causality as stated above, but it is a more elaborate process than a mere price comparison. With this in mind, we turn to the definition of the three price effects, which are not defined in the AD Agreement but have been interpreted in the WTO jurisprudence. Price Undercutting Price undercutting refers to a situation where imported products are priced below domestic products. Price undercutting must be substantial. A 20 percent differential was judged substantial in EC–Tube or Pipe Fittings (§ 7.268ff).75 In the joint reports China–HP-SSST (EU), and China–HP-SSST (Japan), the AB held that price undercutting might but does not have to lead to price suppression/depression. What mattered was that trends as opposed to isolated cases were examined. The latter provide no basis for finding of undercutting, §§ 5.156–181. Price Suppression/Depression In US–Upland Cotton,76 the AB dealt with the interpretation of these two terms (§§ 423–424): In explaining this term, the Panel stated, in paragraph 7.1277 of the Panel Report: Thus, “price suppression” refers to the situation where “prices’—in terms of the “amount of money set for sale of upland cotton” or the “value or worth” of upland cotton—either are prevented or inhibited from rising (i.e., they do not increase when they otherwise would have) or they do actually increase, but the increase is less than it otherwise would have been. Price depression refers to the situation where “prices” are pressed down, or reduced. Although the Panel first identified “price suppression” and “price depression” as two separate concepts in paragraph 7.1277, footnote 1388 of the Panel Report suggests that, for its analysis, the Panel used the term “price suppression” to refer to both price suppression and price depression. We recognize that “the situation where “prices” ... are prevented or inhibited from rising” and “the situation where “prices” are pressed down, or reduced” may overlap. Nevertheless, it would have been preferable, in our view, for the Panel to avoid using the term “price suppression” as short-hand for both price suppression and price depression, given that Article 6.3(c) of the SCM Agreement refers to “price suppression” and “price depression” as distinct concepts. We agree, however, that the Panel’s description of “price suppression” in paragraph 7.1277 of the Panel Report reflects the ordinary meaning of that term, particularly when read in conjunction with the French and Spanish versions of Article 6.3(c), as required by Article 33(3) of the Vienna Convention on the Law of Treaties (the Vienna Convention). (italics in the original)
It follows that “depression” refers to cases where prices of domestic industry articles are reduced, whereas “suppression” refers to cases where prices are prevented from going up, always as a result of dumped imports.
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In all scenarios (undercutting, suppression, and depression), an IA must first control if two products are comparable. Otherwise (that is, if the products concerned do not compete with each other, or even if they are not in the same level of trade), Article 3.2 of AD has not been violated. The AB ruled as much in China–GOES (§ 200). In China–X Ray Equipment, the panel applied this ruling (§ 7.48) and found that because high- and low-energy scanners had different physical characteristics, the observed price undercutting for the latter category could not be attributed to dumped imports of the former category (§§ 7.50–85). 2.4.2
Injury to Competitors
Dumped imports must be injuring the domestic industry producing the like product. Article 4.1 of AD defines the “industry producing the like product” as follows: For the purposes of this Agreement, the term “domestic industry” shall be interpreted as referring to the domestic producers as a whole of the like products or to those of them whose collective output of the products constitutes a major proportion of the total domestic production of those products.77
The terms “like product” and “major proportion” emerge as the key determinants of the domestic industry. 2.4.2.1 Like Product The term “like product” is defined in Article 2.6 of AD as follows: Throughout this Agreement, the term “like product” (“produit similaire”) shall be interpreted to mean a product which is identical, i.e., alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration.78
It is, of course, not easy to find a product “alike in all respects.” The phrase “characteristics closely resembling” leaves the entity in charge of the investigation with some discretion in defining the like product. The choice to go for “narrow” or “wide” understanding of the term is not obvious. Defining “like products” in a narrow sense could lead the subject country or countries to perform slight changes in product specifications, and thus avoid the AD order in place. There is, thus, risk for circumvention in this scenario. On the other hand, expanding the product definition in an effort to avoid circumvention might lead to fewer findings of injury, since the effect of dumped imports would be diluted in dozens of economic operators.79 In practice, it is usually narrow definitions that IAs typically privilege. Indeed, the careful reader of titles of AD investigations around the world will be struck by titles such as steel tubes or pipes of a certain length or diameter, as opposed to steel tubes. Sometimes similar narrow constructions are functional, in the sense that say only steel pipes of a certain diameter only can have a particular industrial use. Sometimes this is not the case. What matters, though, is that the criterion employed to define likeness (“characteristics closely resembling”) allows for similar constructions.
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Think of the following. It could be that domestic industry produces two goods (say the Fiat Cinquecento and the Opel, which are comparable in all respects), as does the exporter, and still the petition requests that an AD investigation be initiated in order to eventually impose duties against the former only (even if we assume that the domestic industry is profitable in the other market). Indeed, two panels had to deal with this question, and although the panelists on both occasions showed some sympathy for the claim that the products under investigation had been defined in unduly restrictive manner, none of them questioned the IA’s discretion on this score.80 Consequently, whereas the Panel in China–X Ray Equipment put a stop to overly large constructions of the term “like product” as we saw above, case law has put no stop to overly narrow constructions of the same term. In a case involving claims that certain practices constituted illegal subsidies, the AB followed a different attitude when discussing like products. In EC and Certain Member States–Large Civil Aircraft, the AB went on to state that both demand- and supply-substitutability are relevant when establishing whether two goods are like (§ 1121). This is the notorious litigation between the EU and the US concerning subsidies paid to Airbus and Boeing respectively. In light of this case law, and because of the fact that the “like product” definition is identical in the AD and the SCM contexts, one cannot dismiss the idea that this line of thinking might find application in future practice in the AD context as well. In this case, the AB was facing a claim by the US that EU subsidies had displaced US aircraft from world markets. The panel had defined the market as comprising all aircraft produced by Boeing and Airbus, the duopoly in large aircraft. The EU objected to this market definition and appealed, arguing that finer distinctions across the various aircraft types should be made since not all aircrafts compete in the same relevant product market (§ 1113). The AB first noted the “like product” definition in the SCM Agreement, which is identical to that in the AD Agreement (§ 1118). It then went on to agree with the EU argument finding in §§ 1119–1120: We construe the concept of displacement as relating to, and arising out of, competitive engagement between products in a market. Aggressive pricing of certain products may, for example, lead to displacement of exports or imports in a particular market. This, however, can only be the case if those products compete in the same market. An examination of the competitive relationship between products is therefore required so as to determine whether such products form part of the same market. We conclude therefore that a “market,” within the meaning of Articles 6.3 (a) and 6.3(b) of the SCM Agreement, is a set of products in a particular geographical area that are in actual or potential competition with each other. An assessment of the competitive relationship between products in the market is required in order to determine whether and to what extent one product may displace another. Thus, while a complaining Member may identify a subsidized product and the like product by reference to footnote 46, the products thereby identified must be analyzed under the discipline of the product market so as to be able to determine whether displacement is occurring. Ordinarily, the subsidized product and the like product will form part of a larger product market. But it may be
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the case that a complainant chooses to define the subsidized and like products so broadly that it is necessary to analyze these products in different product markets. This will be necessary so as to analyze further the real competitive interactions that are taking place, and thereby determine whether displacement is occurring ... Indeed, whether two products compete in the same market is not determined simply by assessing whether they share particular physical characteristics or have the same general uses; it may also be relevant to consider whether customers demand a range of products or whether they are interested in only a particular product type. In the former case, when customers procure a range of products to satisfy their needs, this may give an indication that all such products could be competing in the same market. (italics in the original)
2.4.2.2 Major Proportion Recall that it is not necessary that the totality of the domestic industry producing the like product suffers injury. It suffices that this is the case for a major proportion of the domestic industry. The term “major proportion” has been understood in case law in qualitative terms, although the relevance of quantitative terms has not been dismissed altogether. There is, because of the preeminence of qualitative criteria, no clarity as to the threshold that must be satisfied. In EC–Fasteners (China), the AB outlawed an EU decision to examine only 27 percent of the Chinese fasteners industry, finding that this percentage does not constitute a “major proportion” (§ 430). In doing so, it provided its understanding of what “major proportion” is (§ 419): In sum, a proper interpretation of the term “a major proportion” under Article 4.1 requires that the domestic industry defined on this basis encompass producers whose collective output represents a relatively high proportion that substantially reflects the total domestic production. This ensures that the injury determination is based on wide-ranging information regarding domestic producers and is not distorted or skewed. In the special case of a fragmented industry with numerous producers, the practical constraints on an authority’s ability to obtain information may mean that what constitutes “a major proportion” may be lower than what is ordinarily permissible in a less fragmented industry. However, even in such cases, the authority bears the same obligation to ensure that the process of defining the domestic industry does not give rise to a material risk of distortion.
A high proportion is necessary, but which quantitative benchmark satisfies this threshold? In Argentina–Poultry Antidumping Duties, the panel rejected the argument that this term implies that producers must account for at least 50 percent of total domestic production. It sufficed that the domestic producers that constitute the domestic industry for purposes of the AD investigation represent (§ 7.341) “an important, serious, or significant proportion of total domestic production.”81 So 27% is not high enough, whereas 50% is not necessary. One thing is for sure. IAs cannot examine the portion of the industry that better suits its case. In US–Hot Rolled Steel, the AB held as much (§ 204).82 In similar vein, in Mexico–Steel Pipes and Tubes, the Panel found that Mexico had failed to comply with this requirement as it had analyzed a number of injury factors with respect to three firms representing 88 percent of the
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national production, while its analysis of financial injury factors was based on only one firm constituting 53 per cent of national production only (§ 7.322). In other words, once a determination has been made as to which producers constitute the domestic industry for purposes of the investigation, and assuming of course that they represent a major proportion of the industry, it is the data from all of these producers that must be used to assess the impact of the dumped imports on the domestic industry. The AD Agreement allows for the exclusion from the definition of “domestic industry” of those producers who are related to the exporters or importers, or are themselves importers of the allegedly dumped product. The rationale for this provision is that these producers may not be representative, as they may be benefiting from the success of the dumped imports themselves. The term “related” is defined in the agreement (footnote 11) in terms of control. A company shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter. The fact that a producer is controlled by, or itself controls, an exporter or an importer does not suffice, though: there must also be grounds for believing or suspecting that the effect of the relationship is such as to cause the producer to behave differently from nonrelated producers.83 Therefore, one can understand that what matters most in these cases is the proper construction of the counterfactual—that is, whether an economic agent would have behaved differently if it was unrelated to the controlling party. 2.4.3
Statutory Indicators of Injury
Article 3.4 of AD contains an indicative list of factors that an IA must review in order to satisfy the injury requirement of the AD Agreement: ... including actual and potential decline in sales, profits, output, market share, productivity, return on investments, or utilization of capacity; factors affecting domestic prices; the magnitude of the margin of dumping; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments. This list is not exhaustive, nor can one or several of these factors necessarily give decisive guidance.
The list of factors included in Article 3.4 of AD seems to combine both indicators of the state of the domestic industry (such as sales, profits, output, market share, productivity, return on investments, and capacity utilization), and factors, which prima facie would seem relevant in resolving the causation question (such as factors affecting domestic prices or the magnitude of the margin of dumping). A number of panel84 and AB reports85 have held that all factors included in Article 3.4 of AD must be examined, although the provision explicitly states that none of them by itself or in combination with other factors mentioned therein is necessarily decisive for the outcome of the analysis.86 The AB, in its report on EC—Tube or Pipe Fittings, held that even though in its decision to impose duties, the EU had not explicitly referred to one
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of the factors mentioned in Article 3.4 of AD, it sufficed for the purposes of consistency with Article 3.4 of AD that it had implicitly examined it. In the case at hand, the EU had not reflected in its order a separate examination of growth, a factor listed in Article 3.4 of AD. It was clear from the record, however, that the IA had taken into account this factor (§§ 161–162). It is, thus, the overall record of the investigation that matters and not simply the final decision when it comes to deciding whether an IA has examined all factors reflected in Article 3.4 of AD.87 The list of Article 3.4 of AD is of an indicative nature. The term “including,” which precedes the statutory indicators of injury, leaves no doubt to this effect. The question is, what else should an IA examine—e.g., which factors beyond those enlisted in this provision? The AB, in its report on US–Hot-Rolled Steel, held that an IA must examine “all relevant economic factors,” not only those mentioned in Article 3.4 of AD (§ 194): Article 3.4 lists certain factors that are deemed to be relevant in every investigation and must always be evaluated by the investigating authorities. However, the obligation of evaluation imposed on investigating authorities by Article 3.4 is not confined to the listed factors; it extends to “all relevant economic factors.”88 This might sound like an investigation too far. In principle, anything can affect trade, and, thus, a myriad of economic factors might lead to injury. Case law has narrowed down the scope of review to factors raised by the parties to an investigation. We will return to this discussion later in this chapter when we discuss the causality requirement. The nature of the review of injury factors was discussed in the panel report on Egypt– Steel Rebar, where it held that Article 3.4 of AD does not require a full causation analysis, and stated that (§ 7.62) “as a whole, these factors are more in the nature of effects than causes.”89 There is, thus, no requirement to show a causal relationship between dumped imports and the injury indicators mentioned in Article 3.4 of AD on the one hand, but mere reference to each of them does not suffice for a WTO member to absolve its obligations under Article 3.4 of AD, either. The Panel on EC–Tube or Pipe Fittings insisted that an evaluation of the injury indicators was required (§§ 7.310ff., and especially § 7.314). Consequently, when reviewing consistency with Article 3.4 of AD, panels will check whether the factors indicated in the list have been examined (e.g., have profits decreased?), without asking questions regarding causality (e.g., have profits decreased because of dumped imports?). To be more precise, an IA will be required to: • Gather relevant data for each of the 15 factors cited therein and put them in the determination. • Discuss trends in each of such factors separately. • Discuss other factors not mentioned in the body of this provision, but which have been brought to its attention, as we will see later in this chapter.
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• When doing so, with respect to factors that show, in part or in full, positive trends, explain why that trend does not affect the conclusion that there is injury caused by dumped imports. • Once done with the factor-specific assessment, provide an overall analysis of the consequent impact of dumped imports on the domestic industry by drawing an overall picture where the 15 (at least) factors examined are evaluated in conjunction with one another.90 When it comes to the causation analysis that we discuss later in this chapter, an IA must, under Article 3.5 of AD: • Explain why dumping, through the effect of dumped imports, is causing injury to the domestic industry, and ideally identify the main pillars of the causation determination. • Analyze other known factors, either those that were brought to the attention of the IA by interested parties, or those that are so obvious that any reasonable IA would have analyzed them, and see how they add to or detract from the conclusions reached. All in all, there is inevitably some overlap between the two exercises, but one does not make the other redundant. 2.4.4
Cumulating Injury from Various Sources
It could very well be the case that injury is caused by dumped imports originating in various WTO members, and an IA might want to perform cumulative injury analysis, in the sense that it might be inquiring into the effects of dumped imports from various sources. To this effect, it can investigate simultaneously exporters originating in various WTO members and can even cumulate the effect of imports originating in various sources, if it respects the statutory threshold provided in Article 3.3 of AD, to wit: • The margin of dumping established in relation to the imports from each country is more than de minimis (>2 percent). • The volume of imports from each country is not negligible (>3 percent). • A cumulative assessment of the effects of the imports is appropriate in light of the conditions of competition between the imported products from the various countries examined and the conditions of competition between the imported products and the like domestic product. This provision does not go so far as to require from IAs to demonstrate that an export cartel has been dumping goods in a given market. In EC–Tube or Pipe Fittings, the AB upheld the panel’s finding that “cumulation” is only possible after a prior country-specific analysis of volume and price effects of dumped imports (§§ 116–117).91
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Sampling in Injury Analysis
There is no provision in the AD Agreement that allows sampling in the context of injury analysis. Yet, this is what customarily happens in some quarters, such as in the EU. In EU—Footwear (China), China challenged the EU practice, and the panel held that the absence of a specific provision does not per se outlaw sampling. It held that the sampled companies must be representative of the whole, and their volume of production is a relevant, but not the sole, criterion for sampling (§§ 7.368ff., and especially 7.381ff.).92 On appeal against the panel report in EC–Fasteners (China), the AB found nothing wrong with the EU practice to sample exporters in the context of injury analysis. In its view, the absence of specific language allowing sampling in injury analysis is no reason in and of itself to disallow similar practice (§ 436). The percentage chosen by the EU (sampled exporters represented 27 percent of dumped imports) did not run afoul of its obligations under the AD Agreement, since the EU did not have to pick a statistically valid sample (it could also have picked a sample of producers that it could reasonably have investigated). Finally, the EU had every right to exclude producers that had not responded within 15 days to its questionnaire, since otherwise, the whole investigation process would have been jeopardized (§ 460). 2.4.6 Threat of Injury AD duties can also be imposed in order to address the threat of (as opposed to material) injury. It is Article 3.7 of AD that sets forth the requirements that an IA has to comply with in this case—namely, adopt a certain standard of review that will not relegate evidentiary standards to mere speculation simply because it is future (as opposed to present) injury that is being addressed through antidumping. 2.4.6.1 Factors of Threat of Injury IAs must consider a number of factors (Article 3.7 of AD): • Factors concerning whether dumped imports have been increasing at a significant rate • Whether there is sufficiently freely disposable or imminent substantial increase in the capacity of the exporter indicating a likelihood of substantially increased dumped exports • Whether the prices of dumped imports are such that they have a significant pricedepressing or -suppressing effect on domestic prices and therefore would likely increase demand for further imports • The state of the inventories of the subject product93 The totality of these factors must lead to the conclusion that further dumped exports are imminent and that, unless protective action has been taken, material injury would occur. According to the Panel on US–Softwood Lumber VI, an IA is required to consider these
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factors in the same way that it is required to consider the volume and price effects of dumped imports in Article 3.2 of AD, that is when it enquires into actual and not threat of injury (§ 7.67). The Panel on Mexico–Corn Syrup held that the factors listed in Article 3.7 of AD relate specifically to the question of the likelihood of increased imports and do not relate to the consequent impact of the dumped imports on the domestic industry. An examination only of the factors listed in Article 3.7 of AD, consequently, does not suffice to reach a determination of threat of injury (§ 7.126). This panel summarized the relationship between Articles 3.1, 3.4, and 3.7 of AD (§§ 7.131–132): In sum, we consider that Article 3.7 requires a determination whether material injury would occur, Article 3.1 requires that a determination of injury, including threat of injury, involve an examination of the impact of imports, and Article 3.4 sets out the factors that must be considered, among other relevant factors, in the examination of the impact of imports on the domestic industry. Thus, in our view, the text of the AD Agreement requires consideration of the Article 3.4 factors in a threat determination. Article 3.7 sets out additional factors that must be considered in a threat case, but it does not eliminate the obligation to consider the impact of dumped imports on the domestic industry in accordance with the requirements of Article 3.4. ... an investigating authority cannot come to a reasoned conclusion, based on an unbiased and objective evaluation of the facts, without taking into account the Article 3.4 factors relating to the impact of imports on the domestic industry. These factors all relate to an evaluation of the general condition and operations of the domestic industry—sales, profits, output, market share, productivity, return on investments, utilization of capacity, factors affecting domestic prices, cash flow, inventories, employment, wages, growth, ability to raise capital. Consideration of these factors is, in our view, necessary in order to establish a background against which the investigating authority can evaluate whether imminent further dumped imports will affect the industry’s condition in such a manner that material injury would occur in the absence of protective action, as required by Article 3.7.
The Panel on US–Softwood Lumber VI agreed with this view, but it did not consider that an IA, once it had examined and evaluated the factors mentioned in Article 3.4 of AD, was required to make projections as to the likely impact of future dumped imports on each of these factors (§ 7.105). Nor would it be necessary, according to this panel, for an IA to reexamine the factors mentioned in Article 3.2 of AD concerning the volume and price effect of dumped imports in a predictive context in making a threat of material injury determination (§ 7.111). In sum, it suffices for an IA to conduct an injury examination on the basis of Articles 3.2 and 3.4 of AD, and also to consider some of or all the factors mentioned in Article 3.7 of AD in order to be able to conclude that further dumped imports are imminent and that, unless protective action is taken, material injury will occur. What matters therefore is that unless action is taken, threat of injury will emerge as clear and present danger that will inevitably lead to injury of the domestic industry producing the like product.
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2.4.6.2 Reasoned and Adequate Explanation In US–Softwood Lumber VI (Article 21.5–Canada), the AB held that a panel, when reviewing the factual basis for a threat of injury determination, must determine (§ 98): whether the investigating authority has provided “a reasoned and adequate explanation” of: how individual pieces of evidence can be reasonably relied on in support of particular inferences, and how the evidence in the record supports its factual findings; how the facts in the record, rather than allegation, conjecture, or remote possibility, support and provide a basis for the overall threat of injury determination; how its projections and assumptions show a high degree of likelihood that the anticipated injury will materialize in the near future; and how it examined alternative explanations and interpretations of the evidence and why it chose to reject or discount such alternatives in coming to its conclusions.94
It follows that IAs must, having examined the factors mentioned here, provide a “reasoned and adequate explanation” of why, unless action is taken, injury will inevitably occur. 2.4.6.3 The Special Care Obligation Article 3.8 of AD states that, in case of threat of injury, the application of AD measures shall be considered and decided with “special care.” The Panel on US–Softwood Lumber VI held that this implies that “a degree of attention over and above that required of investigating authorities in all anti-dumping and countervailing duty injury cases is required in the context of cases involving threat of material injury” (§ 7.33). The special care obligation applies during the process of investigation, in the establishment of whether the prerequisites for application of a measure exist, and not merely afterward, when final decisions about whether to apply a measure are made (§ 7.34). The reason for the special care-obligation is this: because there is no certainty that injury occurred, IAs should move beyond their usual duty of objective assessment of evidence before them; they should make sure that absent imposition of duties, injury will materialize. It is the special care-obligation that crucially influences the standard of review that the WTO adjudicating bodies will apply when facing disputes regarding the legality of imposition of AD duties in cases where imports threaten to injure the domestic industry. We turn to this question in what immediately follows. 2.4.6.4 The Standard of Review: Clear and Present Danger A determination of threat of injury must be based on facts that are about to have an impact on the domestic industry, not merely on allegations, conjecture, or remote possibility. The expected injury must be imminent and clearly foreseen. The term “threat of injury,” of course, suggests a future, as opposed to an actual, occurrence of an event. As with all future events, some degree of uncertainty is unavoidable. WTO panels and the AB have tried to impose a standard that will not equate “uncertainty” to a speculation that the unlikeliest event will occur. They, thus, aimed to ensure that the imposition of duties will not be based on speculative but rather on serious probabilistic analysis. The time factor
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is, in and of itself, a factor reducing uncertainty. According to the Panel on US–Softwood Lumber VI, the change in circumstances that would give rise to a situation in which injury would occur must be predicted to occur imminently (§ 7.57). In a similar vein, the AB, in its report on Mexico–Corn Syrup (Article 21.5–US), provided its understanding as to the applicable standard of review (§ 136): In our view, the “establishment” of facts by investigating authorities includes both affirmative findings of events that took place during the period of investigation, as well as assumptions relating to such events made by those authorities in the course of their analyses. In determining the existence of a threat of material injury, the investigating authorities will necessarily have to make assumptions relating to “the “occurrence of future events” since such future events “can never be definitively proven by facts.” Notwithstanding this intrinsic uncertainty, a “proper establishment” of facts in a determination of threat of material injury must be based on events that, although they have not yet occurred, must be “clearly foreseen and imminent,” in accordance with Article 3.7 of the Antidumping Agreement. (italics and emphasis in the original)
Consequently, the AB has taken the view that an IA can lawfully have recourse to threat of injury in order to justify the imposition of AD duties only if the injury is imminent in the short run, rather than an event that could, speculatively, occur in the distant future. According to the Panel on US–Softwood Lumber VI, this implies that (§ 7.33) “a degree of attention over and above that required of investigating authorities in all antidumping and countervailing duty injury cases is required in the context of cases involving threat of material injury.” We can conclude that the standard applied by panels is reminiscent of the “clear and present danger” test, which was established by Justice Oliver Wendell Holmes, Jr. in Schenck v. United States (249 US 47, 1919) concerning the ability of the US government to regulate speech against the draft: The question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that the United States Congress has a right to prevent. It is a question of proximity and degree.
Demonstration of threat of injury is a question of proximity and degree: it cannot be pure speculation that might or might not occur in the future. 2.5 The Causality Requirement The obligation for IAs to establish a causal link between dumped imports and injury (and/ or threat of injury) rests on a substantive and a procedural leg. The substantive obligation is to guarantee through this analysis that injury will be attributed to dumped imports and not to other factors. AD duties should not be used in order to address injury factors other than dumping. Injury can, and usually is, caused by various factors simultaneously, and dumping is one of them. The question thus, arises whether IAs should be obliged to inquire
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into any potential factor of injury. This is the function of the nonattribution requirement. The list of plausible factors could vary, and, in principle, could be quite long. In quest for the perfect outcome, one could end up extending the length of investigation, and thus sacrifice an important objective of the whole endeavor: the data used must be recent, and not of historic value. This is where the case low construction of “known factors” comes into play. Inspired by systems of adversarial justice, case law leaves it to the parties to a dispute to draw the list of factors that have caused injury, the IA not being obliged to search for additional factors that might have also contributed to the establishment of injury. When applying this test to the specifics of case, the question arises as to what happens when multiple factors have contributed to the establishment of injury. Some domestic statutes (in the US, for example) do address this issue by requesting that dumping, in similar cases, be a “substantial” cause of injury. WTO case law has distanced itself from similar constructions, holding that all that matters is that dumping be a contributing factor. The procedural leg concerns the duty to investigate. IAs can rely on the evidence supplied by domestic industry and exporters, but they have to satisfy themselves through the investigation conducted to this effect that dumping has indeed caused injury. During the investigation process, IAs must guarantee that all interested parties enjoy adequate opportunities to present their views. Through these obligations, WTO members must ensure that they have demonstrated a genuine and substantial relationship between dumping and injury. We take each issue in turn. 2.5.1
Causal Relationship between Dumping and Injury
The causality obligation95 is embedded in Article 3.5 of AD, which imposes a dual obligation on an IA, namely to show that injury is: • Attributed to dumped imports • Not attributed to factors other than dumped imports The second requirement is often referred to as “nonattribution.” An IA will be required to examine the impact of all known factors, other than dumped imports, on the state of the domestic industry, and ensure that injury caused by such factors is not attributed to dumped imports. Article 3.5 of AD contains an indicative list of factors that may appropriately be taken into account in the context of this exercise: Factors which may be relevant in this respect include, inter alia, the volume and prices of imports not sold at dumping prices, contraction in demand or changes in the patterns of consumption, trade restrictive practices of and competition between the foreign and domestic producers, developments in technology and the export performance and productivity of the domestic industry. (italics in the original)
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Implications for Data Gathering
Case law has limited the ambit of known factors to factors produced by interested parties during the investigation process, thus limiting the duty of an IA to search for information.96 The IA is thus construed as an arbiter presiding over an adversarial system: it has a duty to look for alternative explanations of all evidence submitted, but no duty to look for evidence itself.97 2.5.3
Genuine and Substantial Relationship
Once the list of known factors has been established, IAs must, by virtue of the nonattribution requirement mentioned previously, separate and distinguish the effects of dumped imports from the effects of any other factor on the domestic industry producing the like product. Consequently, the nature and extent of the injurious effects of the other (than dumping) known factors need to be identified and separated from the effects of dumping on the domestic industry (AB, US–Hot-Rolled Steel, § 223, § 227).98 The AB conceded in the same report that the discipline imposed is quite demanding (§ 228); in § 224, it held that an IA can choose any methodology that it deems useful in order to disentangle the effects of the various factors causing injury.99 Should the impact of factors other than dumped imports be examined both individually and collectively? The AB addressed this issue in its report on EC—Tube or Pipe Fittings. An assessment of the collective effects of other causal factors is not necessarily required in every case, but it might be necessary in order to honor the nonattribution obligation depending on the facts of the case.100 The AB did not provide any examples of circumstances that would make such an evaluation a compulsory requirement (§§ 191–192).101 At the end of the day, as dozens of reports have confirmed, what matters is whether there is a genuine and substantial relationship of cause and effect between dumping and injury.102 Injury analysis in the AD context is informed by the ruling of the AB in its report on US–Lamb.103 There, the AB indicated that an evaluation of alternative explanations was in order, in the sense that IAs cannot pick only the one explanation that best suits their conclusion if other, less forthcoming explanations are plausible (§ 106): Panels must, therefore, review whether the competent authorities’ explanation fully addresses the nature, and, especially, the complexities, of the data, and responds to other plausible interpretations of that data. A panel must find, in particular, that an explanation is not reasoned, or is not adequate, if some alternative explanation of the facts is plausible, and if the competent authorities’ explanation does not seem adequate in the light of that alternative explanation. Thus, in making an “objective assessment” of a claim under Article 4.2(a), panels must be open to the possibility that the explanation given by the competent authorities is not reasoned or adequate.
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Once an IA has shown that injury has been caused, at least partially, by dumped imports, the whole injury analysis becomes moot for the remaining part of the process. AD duties will be imposed to counteract the dumping margin, and not the resulting injury for the domestic industry producing the like product. So, although the obligation to disentangle effects of various factors might seem onerous, once dumping has been shown to cause some injury, the AD authority can leave the injury analysis behind and concentrate on counteracting the established dumping margin. 2.6
Imposing Antidumping Duties
2.6.1 The Decision to Impose Duties Assuming that an IA has established that dumping has caused injury, it will decide whether to impose AD duties (Article 9.1 of AD). There is no obligation to impose duties, and no automaticity to this effect results from a finding that injurious dumping has been established. If a WTO member decides to impose AD duties, it must collect them on nondiscriminatory basis—e.g., from all sources where dumped goods originate (Article 9.2 of AD). The decision to impose duties marks the end of the original investigation. The record as established by the IA is what interested parties can challenge. The rationale for imposing duties cannot change after that point. The AB has made it clear in its report on US— Tyres (China), that Members may not offer during WTO dispute settlement proceedings a new rationale for its IAs determinations (§329). AD duties protect domestic producers from competition in their own market. They do not protect them from injury suffered from dumped exports into third markets. This is in large part the reason why it is big domestic markets (e.g., Brazil, EU, India, US) that have most frequently taken recourse in AD duties, and not WTO members like Singapore or Switzerland, countries with stronger interests in export markets than in their own market.104 2.6.2
Public Interest Clause
Article 6.12 of AD reads: The authorities shall provide opportunities for industrial users of the product under investigation, and for representative consumer organizations in cases where the product is commonly sold at the retail level, to provide information which is relevant to the investigation regarding dumping, injury and causality.
Consumers and producers, of course, have antithetical interests when it comes to deciding whether AD duties will be imposed. Industrial users of dumped imports should be on the side of consumers in a dumping scenario.105 An IA will, through Article 6.12 of AD,
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provide enemies of antidumping actions with a forum. This provision does not at all put into question the injury-to-competitors standard. All an IA has to do is invite consumers to present their opinions. It is under no obligation whatsoever to respond to them. Furthermore, the AB held in US–OCTG Reviews that this obligation does not confer unlimited rights, since the investigation must be conducted in an expeditious manner anyway (§§ 241–242). Some WTO members go a bit further than Article 6.12 of AD when it comes to acknowledging the interests of consumers. The EU106 and Canada are illustrations of this approach. They have imposed an additional (to Article 6.12 of AD) requirement on themselves, since their IAs are required by domestic law to examine whether the imposition of duties would be against their public interest. In EU practice, typically, the interests of industrial users, rather than consumers at large, are at stake when recourse to this provision is being made. Hoekman and Mavroidis (1996a) discuss the “Extramet” jurisprudence, where the Court overturned an imposition of AD duties because the EU Commission had overlooked the interests of an industrial user.107 The EU market for the downstream good (pure calcium, mainly used in the metallurgical industry) was a duopoly. One of the two companies involved (Péchiney) was also producing the basic input (calcium metal) for the downstream good. Péchiney refused to sell calcium metal to its competitor (Extramet), which was forced to import it from China. At the request of Péchiney, the EU Commission investigated Chinese exports of calcium metal, and found them to be dumped. To address the injury suffered by Péchiney, AD duties were imposed, which had nefarious effects on Extramet. Extramet initiated proceedings against Péchiney, accusing it of abusing its dominant position, and also against the EU Council for imposing AD duties without properly taking into account that Péchiney, by its refusal to sell calcium metal, had contributed to the injury that it subsequently suffered. The Court held that, in this case, the EU Council had not properly controlled for the reasons behind the injury suffered by Péchiney and annulled the AD duties imposed.108 Overall, consumers’ rights have not proved to be a formidable obstacle to imposition of AD duties, especially in the case of the EU. Few invocations have taken place, and the European Court of Justice has been quite reluctant to interpret the “Union (ex-Community) interest,” leaving thus the executive organ of the EU, the Commission, with substantial discretion in this respect.
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2.6.3 The Various Forms of Impositions 2.6.3.1 Provisional Duties WTO members might want to impose provisional duties before the investigation process has been terminated, if they respect the statutory conditions established in Article 7 of AD, namely: • No provisional duties can be imposed earlier than 60 days from the date of initiation of the investigation (Article 7.3 of AD). • Parties must have had an opportunity to present their views during the course of the investigation up to that stage [Article 7.1(i) of AD]. • An affirmative preliminary determination of dumping and consequent injury to the industry has been made [Article 7.1(ii) of AD]. Note that there is no absolute requirement to make preliminary determinations, but absent preliminary determinations, provisional duties cannot be lawfully applied. • Preliminary duties have been judged necessary to prevent injury caused during the investigation [Article 7.1(iii) of AD]. Duties imposed should preferably be in the form of “security” (“cash deposit” or “bond”), although additional customs duties remain a possibility (Article 7.2 of AD). The level of duties shall not be higher than the provisionally estimated margin of dumping. Provisional duties should be limited in time and, in principle, they can be imposed for up to four months. Assuming a request by exporters representing a significant percentage of the trade involved, their imposition can run for up to six months (Article 7.4 of AD). Absent a request to this effect, IAs cannot automatically extend provisional duties to six months. The Panel on China–HP-SSST (EU) ruled as much (§ 7.334). The Panel on Mexico–Corn Syrup109 found that the application of provisional measures by Mexico for more than six months was inconsistent anyway with Article 7.4 of AD (§ 7.183). 2.6.3.2 Definitive Duties A product will be subjected to an AD duty as soon as the investigation has been terminated, and a final determination has been made to the effect that AD duties should be imposed (Mexico–Antidumping Measures on Rice, AB, § 347). As the AB noted in the same report (§ 346): the [AD and SCM] Agreements use the term “definitive” to distinguish duties imposed after a final determination (following an investigation) from “provisional” duties that may be imposed under certain conditions during the course of an investigation, namely, after a preliminary determination.
2.6.3.3 Variable Antidumping Duties The Panel on Argentina–Poultry Antidumping Duties noted that nothing in the AD Agreement explicitly identifies the form that AD duties must take, and that nothing in the AD
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Agreement explicitly prohibits the use of “variable duties” (§ 7.355). It thus held that variable duties could be an option (§ 7.364): the variable antidumping duties at issue are not inconsistent with Article 9.3 simply because they are collected by reference to a margin of dumping established at the time of collection (i.e., the difference between a “minimum export price,” or reference normal value, and actual export price).
Of course, IAs have the duty to verify in subsequent investigations (sunset administrative reviews, discussed later in this chapter) whether the margin of dumping is still the same as that in the original investigation. In practice, though, ad valorem are the most frequently used AD duties, followed by fixed duties. 2.6.3.4 Price Undertakings WTO members can request or accept price undertakings from willing exporters (Article 8 of AD). Through a price undertaking, an exporter agrees to raise prices to the level of the dumping margin, or to the level established in application of the lesser duty rule if the IA agrees to this latter level.110 The consideration is that no AD duties will be imposed. Price undertakings may not be offered to exporters until a preliminary affirmative determination of dumping, injury, and the causal link has been made. There is no obligation to offer price undertakings, nor is there an obligation to accept undertakings if offered by exporters. The Panel on US–Offset Act (Byrd Amendment) emphasized the freedom of the IA to accept or reject price undertakings, holding that an IA is not required to examine a proposed price undertaking in objective manner (§ 7.81). The acceptance of a price undertaking puts an end to the investigation with respect to the exporter concerned, unless this exporter wants the IA to continue with the investigation. In the case of continuation, if the investigation ultimately leads to a negative finding of dumping or injury, the undertaking shall automatically lapse except in cases where a negative determination is in large part due to the price undertaking itself, in which case the undertaking may be maintained for a reasonable period of time. An IA may request from exporters to provide information periodically relevant to the fulfillment of the undertaking, thus permitting verification (Article 8.6 of AD). In the case of a violation of agreed undertakings, an IA is entitled to take expeditious action, which may include the immediate application of provisional measures using the best information available (BIA). Definitive duties may be levied retroactively up to 90 days before the application of such provisional measures. No duties may be levied on imports predating the violation.
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2.6.4 The Level of Permissible Imposition 2.6.4.1 Duties Cannot Exceed the Dumping Margin Article 9.3 of AD reads: “The amount of the anti-dumping duty shall not exceed the margin of dumping as established under Article 2.” 2.6.4.2 Lesser Duty Rule The level of AD duties does not have to be equal to the established dumping margin. It can be lower if a lower duty can adequately take care of the injury caused by dumping. The possibility of a lesser duty exists in the AD Agreement (Article 9.1). It is a bestendeavors clause, as there is no obligation to observe the lesser duty rule: It is desirable that the imposition be permissive in the territory of all Members, and that the duty be less than the margin if such lesser duty would be adequate to remove the injury to the domestic industry. (italics added)
The decision to impose a lesser duty rests solely with the IA. The lesser duty rule is a consequence of the legal nature of dumping. It is not illegal but simply unfair, and it should not be punished as such so long as its nefarious consequences (i.e., injury) have been eliminated. Although not a matter of legal compulsion under WTO law, some jurisdictions, and most prominently the EU, have adhered to this rule and consistently observe it in their antidumping practices.111 2.6.5
Duties Imposed Prospectively, Retrospectively
The AD Agreement prejudges the time from which duties will be imposed through a provision on retroactive application of duties of duties, which we discuss later in this chapter. It does not prejudge at all the timing when the assessment of duties will take place. Two systems are observed in practice: prospective and retrospective assessment of duties, discussed next. 2.6.5.1 Prospective Assessment In practice, most WTO members apply a prospective assessment of duties. Once the dumping margin has been calculated (and assuming that it has been established that dumping has caused injury), all dumped imports in the market will be burdened with the applicable AD duty that they have to pay from that moment onward. 2.6.5.2 Retrospective Assessment The US applies a system calling for retrospective assessment of duties.112 Once an AD order has been imposed, the importer will have to pay a provisional duty113 based on the rate calculated during the investigation. The products that enter the US market during the first year that the AD order is in place are not liquidated until a final duty has been paid.
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This final duty will be calculated on the basis of the EP of the product during the year following the imposition of the AD order. In the course of a “duty assessment review,” or, in US parlance, “administrative review,”114 the US authority will compare EPs of the goods over that year, and recalculate the dumping margin that it will be applying on a definitive basis for all imports to its market (retrospective assessment). The definitive duty may be higher than the provisional duty, in case the dumping margin during the first year exceeds that found during the initial investigation, or lower in the opposite case. Consequently, this may lead to either an additional bill for the importer or to reimbursement. Only upon payment of the definitive duty, goods will be considered liquidated. It is this newly calculated rate, which will then form the basis for the provisional duties to be paid the following year, and the process described previously will start all over again.115 Exporters, thus, enter a trial-and-error phase with this system. If the dumping margin increases during the first year, they risk paying for it during the second year in the form of definitive duties. It could be said, thus, that the US regime has a taming effect since exporters know that they are under surveillance and might find it in their interests to increase their prices during the trial phase.116 In a nutshell, the differences between the US duty assessment and a prospective assessment of duties are that in the prospective system, the importer pays a duty, whereas in the US system, the provisional duty may take the form of a cash deposit or guarantee; and in the US system, the administration itself will automatically review the duties in light of prices observed the preceding year, whereas in the prospective system, the interested parties have to submit a request for reimbursement (in case the duties imposed no longer correspond to margins).117 2.6.6
Retroactive Application of Duties
Retrospective assessment should not be confused with retroactivity. Duties in retrospective assessment are applied “prospectively” (e.g., from the moment dumping has occurred). It is because the first burden is not definitive that the US methodology for calculating is called “retrospective.” Retroactive application of duties denotes the case where duties are imposed on imports that occurred in the past, and entered the market without having to pay AD duties. In principle, AD duties cannot be imposed retroactively except under the very limited conditions provided for in Article 10 of AD: • Duties can be imposed retroactively up to the moment when provisional measures had been imposed, if, following a finding of injury, provisional duties had been imposed; or, following a finding of threat of injury and a demonstration that in the absence of provisional measures, injury would have materialized, provisional measures had been imposed (Article 10.2 of AD).118
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• Duties can be imposed retroactively until 90 days prior to the imposition of provisional measures (but in no case prior to the initiation of investigation119) if there is a history of dumping and injury, or if the importer was aware of dumping practices, and, in either case, if the injury was caused by “massive dumped imports” in a short period which, because of the timing and volume of the dumped imports, are likely to seriously undermine the remedial effects that AD duties might have (Article 10.6 of AD).120 In order to be able to collect duties retroactively to the period preceding the application of provisional measures, the agreement provides in Article 10.7 of AD that the authorities may, after initiation, take measures such as the withholding of appraisement or assessment as may be necessary for that purpose. Authorities must have sufficient evidence that the conditions for extended retroactive application have been satisfied. The Panel on US–HotRolled Steel tried to square the requirements of Article 10.7 of AD with the role that this provision is called to play when holding that (§ 7.163): Article 10.7 measures serve the same purpose as an order at the beginning of a lawsuit to preserve the status quo—they ensure that at the end of the process, effective measures can be put in place should the circumstances warrant.
A retroactive application of the duty up to the moment of initiation aims to address injury from massive dumped imports that takes place between the initiation of the investigation and application of (provisional) measures. The dumper uses this window to quickly dump its product on the market before leaving it. The Panel on US—Hot Rolled Steel agreed with the approach of the US authority to compare a period prior to the reference data with data for the period following it (§§ 7.166–167). 2.6.7 Who Are Duties Imposed Against? Dumping is, of course, a private business practice, and individual dumping margins must be calculated for each exporter. There is a presumption in the AD Agreement, though, that all producers originating in the same country are dumping, even if they had not been studied at all during the original investigation. Consequently, AD duties are imposed in practice on a countrywide basis. Article 9.2 of AD reads: ... The authorities shall name the supplier or suppliers of the product concerned. If, however, several suppliers from the same country are involved, and it is impracticable to name all these suppliers, the authorities may name the supplying country concerned.
The AD provisions on sampling (Article 6.10 of AD) and new shippers (Article 9.5 of AD) at the very least implicitly support this proposition. How can an IA impose duties on noninvestigated exporters unless countrywide orders were permissible? All this is, however, at least questionable, if not faulty. Mavroidis and Sapir (2008) note that there is no a priori reason to believe that two or more firms behave identically in terms
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of their pricing in different markets simply because they happen to produce the same product in the same country, unless they operate under perfect competition in both the home and the export markets. If perfect competition prevailed, though, it would have been hard to understand how dumping could occur in the first place. Dumping is a form of price discrimination, and it requires that firms are able to set prices in different markets rather than take them as given (as is the case under perfect competition). If markets were perfectly competitive, in other words, the “law of one price” would prevail and all identical products would have been priced in an identical manner, at least within the same geographical or national market. Perfect competition is clearly an extreme case that is unlikely to prevail in many circumstances, and therefore, as Varian (1980, p. 651) states, “the ‘law of one price’ is no law at all.”121 Against this background, it is remarkable that the agreement implies that all firms producing the allegedly dumped product in the country in question engage in injurious dumping unless proven otherwise. The burden of proving innocence is shifted to all exporters, both “known” and “unknown,” originating in the country of the dumper. The AD Agreement mentions four categories of exporters that can be subjected to the imposition of AD duties: • Known exporters • Sampled exporters • Non-sampled exporters • New shippers 2.6.7.1 Known Exporters An IA must calculate a dumping margin for each known exporter concerned (Article 6.10 of AD).122 The term “known exporter” has been interpreted by the AB as referring to all exporters that have been identified in the petition, as well as those that have voluntarily appeared before the IA (Mexico–Antidumping Measures on Rice). 2.6.7.2 Sampled Exporters Individual duties will be imposed on all sampled exporters as well. 2.6.7.3 Nonsampled exporters Article 9.4 of AD reads: When the authorities have limited their examination in accordance with the second sentence of paragraph 10 of Article 6, any antidumping duty applied to imports from exporters or producers not included in the examination shall not exceed: the weighted average margin of dumping established with respect to the selected exporters or producers or, where the liability for payment of antidumping duties is calculated on the basis of a prospective normal value, the difference between the weighted average normal value of the selected exporters or producers and the export prices of exporters or
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producers not individually examined, provided that the authorities shall disregard for the purpose of this paragraph any zero and de minimis margins and margins established under the circumstances referred to in paragraph 8 of Article 6. The authorities shall apply individual duties or normal values to imports from any exporter or producer not included in the examination who has provided the necessary information during the course of the investigation, as provided for in subparagraph 10.2 of Article 6.
Consequently, an IA will apply the WA of individual dumping margins to sampled exporters.123 When calculating the WA that will be imposed on nonsampled exporters, an IA must disregard de minimis as well as zero dumping margins and cannot base its rulings on margins established through recourse to the facts-available provision of Article 6.8 of AD.124 2.6.7.4 New Shipments Article 9.5 of AD allows exporters that did not export any products during the POI (or that simply did not produce at all during the same period) to request from the IA to calculate an individual margin of dumping in order to determine their duty rate. Article 9.5 of AD provides for them as follows: If a product is subject to antidumping duties in an importing Member, the authorities shall promptly carry out a review for the purpose of determining individual margins of dumping for any exporters or producers in the exporting country in question who have not exported the product to the importing Member during the period of investigation, provided that these exporters or producers can show that they are not related to any of the exporters or producers in the exporting country who are subject to the antidumping duties on the product. Such a review shall be initiated and carried out on an accelerated basis, compared to normal duty assessment and review proceedings in the importing Member. No antidumping duties shall be levied on imports from such exporters or producers while the review is being carried out. The authorities may, however, withhold appraisement and/or request guarantees to ensure that, should such a review result in a determination of dumping in respect of such producers or exporters, antidumping duties can be levied retroactively to the date of the initiation of the review.
There is no dispute that it is the exporter who must take the initiative and identify itself, and the exporter who must also show that it has no business relation to producers already subject to AD duties. The reason for this latter requirement is to prevent “new” companies circumventing the duty order in place. The AD Agreement, presumably, suggests that new shippers should be independent exporters that do not have to follow the pricing policies of another exporter already subjected to AD duties.125 A review has to be carried out promptly, but it should be sufficiently lengthy to allow a proper basis to compare NV with EP. The Panel and the AB on Mexico–Antidumping Measures on Rice held that Article 9.5 of AD “clearly does not subject the right to an expedited new shipper review to a showing of a ‘representative’ volume of export sales.”126 While this may well be true, it appears that, inevitably, a new exporter will have to wait before it can ask for an expedited
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review so as to allow a certain period of export sales to provide the basis for a determination of information on NV and EP.127 Now, the question naturally arises: what happens in the meantime? Do new shippers have to pay duties while awaiting the outcome of an individual review? Both the spirit of the law and relevant practice respond in the affirmative to this question. New shipments will be burdened with duties from the moment they export to the country imposing AD duties on goods originating in their country or customs territory. If no request for an expedited review has been submitted, duties will remain in place. Assuming that a request has been submitted, there will be a truce. Duties will not be imposed during the investigation and, pending its outcome, they might be imposed retroactively—that is, as of the date of the initiation of the investigation. What about the level of duties to be imposed on new shipments prior to the calculation of the individual dumping margin? Should it be the WA, as per Article 9.4 of AD? Or should it be some other rate? At the heart of this discussion is the legal relationship between Articles 9.4 and 9.5 of AD. In practice, most IAs impose a “residual duty” at the level of the WA of individually calculated dumping margins. There is, thus, an implicit assimilation of new shippers to nonsampled exporters. Similar practices have not been challenged, and, hence, panels have had no opportunity to rule on this score. 2.6.7.5 Unknown Exporters Practice reveals the existence of yet another category of exporters, not foreseen in the AD Agreement: namely, the unknown exporters that had not been identified by the authorities at the time of the investigation (either as sampled or nonsampled), and are not new shippers either. Exporters could be unknown because they managed to hide (let us call this “uncooperative behavior”), or because the authority did not take any reasonable efforts to identify them (for example, they continued to export and were never requested to appear before the adjudicating body), or for other reasons. Unknown exporters can exist regardless of whether individual margins have been calculated or producers have been sampled. With respect to unknown exporters, the AD Agreement is silent as to whether they should pay a duty at all, and if so, how much. In principle, they should be treated either as nonsampled exporters or as new shipments. Indeed, this seems like the obvious approach, except that it does not square with practice everywhere. Practice suggests that a residual rate is calculated and imposed on their exports, but practice regarding the amount of the residual rate is disparate. The US, for example, applies the duty that it applies to nonsampled exporters, the so-called all others’ duty (or all others’ rate). Is corresponds to the WA of the individually calculated dumping margins for sampled exporters. EU practice128 suggests otherwise. Assume that the EU authority has sampled three exporters who ship equal volumes to the EU market and that their dumping margins are,
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respectively, 20 percent, 40 percent, and 60 percent. The EU authority will impose the duties mentioned here on the three investigated exporters; a 40 percent (WA) duty on all identified nonsampled exporters; and a 60 percent (residual) rate on nonidentified exporters and new shipments (until an individual duty has been calculated for the latter category). In Mexico–Antidumping Measures on Rice, the Mexican IA (Economía) had imposed on unknown exporters duties equaling the amount of the highest individual dumping margin (echoing the EU practice). The question raised by the US claim was whether the AD Agreement imposes any limits on the amount of the residual duty. The US put forward a claim that, consistent with its own practice, Mexico had to impose on new shipments, prior to the expedited review, a maximum AD duty that should not exceed the WA of duties imposed. In other words, the residual rate should equal the all others’ rate of the US. The panel was not convinced by this argument, as it considered that Article 9.4 of AD left WTO members with discretion in this respect (§ 7.158). As § 7.159 states: The US argument that the placement of this provision immediately preceding Article 9.5 of the AD Agreement dealing with new shipper reviews implies that its rules also apply to non-shipping exporters is not convincing, as we do not find that anything can be deduced in and of itself from the sequence of provisions in the Agreement, particularly when the provision in question relates to an exceptional situation, while the subsequent provision does not. The United States also argues that the non-sampled interested parties and the new shippers dealt with by Article 9.5 are in a similar position and that by analogy the same Article 9.4 methodology for the calculation of a residual duty rate should apply. We are not convinced that the text of the Agreement supports this view. In this respect, we find particularly relevant the absence of any cross-referencing in Article 9.5 of the AD Agreement dealing with new shippers to the calculation methodology of Article 9.4 of the AD Agreement. This absence of cross-referencing is particularly conspicuous if one were to accept, arguendo, the analogous situation of non-sampled and non-shipping exporters. Indeed, especially in such a situation, one would expect the drafters to have explicitly referred to Article 9.4 of the AD Agreement. As on other occasions, where the drafters intended to see obligations apply in similar circumstances, they explicitly provided for such cross-referencing. We recall in this respect that the AB also found that the absence of such cross-referencing to obligations contained in other provisions is revealing of the absence of such an obligation. We find that Article 9.4 of the AD Agreement does not refer to non-shipping exporters outside a sampling situation, and that there was therefore no obligation for the Mexican authorities to calculate a residual duty margin for Producers Rice based on the “neutral” methodology set forth in Article 9.4 of the AD Agreement. We therefore reject the US claim in this respect. (italics in the original)
The AB, on appeal, did not uphold this panel finding; instead, it went on to state that an authority is not permitted to impose a residual duty rate based on the available facts alone, without having given unknown foreign exporters notice of the information required and without giving them an opportunity to submit information. An IA that does not respect these requirements would be acting in violation of Article 6.8 of AD and Annex II of AD (§§ 259–60). According to the AB, putting exporters on notice that the available facts will
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be used is a precondition for the use of such facts. It objected, thus, to the process followed in this case, and avoided responding to the substantive request regarding the level of duties imposed. The question arises, of course, of how an IA can satisfy similar requirements especially since it is dealing here with “unknown” exporters. Practice did not take long to provide a WTO panel with an opportunity to address this issue. In China–Autos (US), China initiated an investigation against US producers. Three companies (General Motors, Ford, Chrysler) had been identified already in the notice of initiation of investigation. In addition, the Ministry of Commerce of the People’s Republic of China (MOFCOM), the Chinese IA, sent notices of initiation and the public version of the petition to launch the investigation to the US Embassy in Beijing and requested from the US government to provide copies to all interested parties. Four new firms (Mercedes Benz USA, BMW USA, Honda USA, and Mitsubishi USA) came forward and registered for participation in the proceedings (§ 7.125). The panel held that this was a necessary, but not sufficient, condition for compliance with Article 6.8 of AD and § 1 of Annex II of AD. China also should have provided the information required in sufficient detail (§ 7.133). This is where MOFCOM fell short of meeting the requirements of the AD Agreement. By requesting generic information, such as information regarding the identity, volume, and value of exporters of the product concerned, MOFCOM did not provide exporters with sufficient guidance as to the information that it would use in order to determine the dumping margin. In the words of the panel (§ 7.134): “There is a parallel between the scope of the information requested and not provided by an interested party and the scope of facts available used by an IA in place of the missing information to make necessary determinations.” The panel felt that because the type of information given was not detailed enough, MOFCOM and China had violated their obligations under Article 6.8 and Annex II of AD (§§ 7.135ff., and especially, 7.139). In China–HP-SSST, the panel reached the opposite conclusion. This time, however, China had published on the Internet not simply generic information but the questionnaire, which was addressed to both known and unknown exporters. In the panel’s view, but doing that, China had fully observed its obligations under the AD Agreement (§ 7.218). The maximum amount of duty to be imposed in similar cases remains an open question. In conclusion, on this score, there is undeniably a problem with the lack of precision of the AD Agreement. 2.6.8 Refunding AD Duties In both systems of assessing duties (prospective and retrospective), a refund is mandated where an importer has paid duties in excess of the margin of dumping, and the importer has requested a refund. Article 9.3 of AD provides for time limits within which refund will take place. The rationale for this provision is that the level of AD duties should not
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exceed the dumping margin established through the investigation process. As the AB stated in Mexico–Antidumping Measures on Rice (§ 312): The refund of duties is conditioned solely on (i) the request being made by an importer of the product subject to the antidumping duty; and (ii) the request having been “duly supported by evidence.” Other than these requirements, we see no basis for an investigating authority to decline to affect the mandated refund. Indeed, failure to do so would result in the importer having paid a duty in excess of the dumping margin, contrary to Article 9.3.
2.7 Administrative Review of AD Duties Recall that AD duties represent one of the three contingent protection instruments. Their life cycle, therefore, is inherently linked to the life cycle of the contingency. When dumping ceases to exist, then the payment of AD duties should cease to exist as well. There are of course some nuances. Dumping might cease to exist strategically, in order to provoke withdrawal of the AD order (and the ensuing payment of AD duties). It could, in this scenario, reemerge when the AD order has been withdrawn. The Tokyo round AD Agreement had put into place a regime aiming to guarantee that the continued imposition of AD duties would be linked to the continued practice of dumping. This is the system of administrative reviews that aimed to inquire into whether the continued imposition of AD duties was necessary. The Uruguay round agreement went one step further. It kept administrative reviews in place, and it also outlawed in principle the imposition of AD duties after five years from the date of their imposition. Extension beyond the five-year period could occur only if a review to this effect were undertaken, the outcome of which was in favor of continued imposition. Thus, sunset reviews were introduced into the WTO legal system. Administrative reviews, which, in principle, can take place at any time after the imposition of AD duties, and sunset reviews, which must take place before five years have lapsed from the imposition of AD duties, constitute the legal instruments that aim to ensure that AD duties will be sued as instrument of contingent, and not constant, protection. We start with a discussion of administrative reviews before we move to an analysis of sunset reviews. 2.7.1 The Function and Rationale for Administrative Reviews As per Article 11.1 of AD, “An antidumping duty shall remain in force only as long as and to the extent necessary to counteract dumping which is causing injury.” Article 11.3 of AD completes this provision when stating that duties will lapse five years after their original imposition. During the five-year period that AD duties are in place, an administrative review (sometimes referred to as “changed circumstances review”) might take place. The term “administrative review” or “changed circumstances review” aims to capture the discipline imposed under Article 11.2 of AD.
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Pricing policies of exporters might change over time for various reasons, and their resulting impact on the domestic industry producing the like product might consequently change as well. A review is meant to address similar changes. 2.7.2 The Ambit of Review An IA, when conducting an administrative review, must (as per Article 11.2 of AD), “examine whether the continued imposition of the duty is necessary to offset dumping, whether the injury would be likely to continue or recur if the duty were removed or varied, or both.”129 An IA is thus free to vary the extent of the review. If a narrow review has been privileged (e.g., if the review focuses on either the issue of whether the continued imposition of duties is necessary to offset dumping or whether injury would likely occur if the duty were removed), duties will remain in place for a maximum period of five years from the date of the original imposition. If a comprehensive review takes place (e.g., if an IA examines the impact of removal of duties on both dumping and injury), then duties will remain in place for five years from the end of the administrative review—assuming, of course, that the outcome of the review is that withdrawal would lead to revival of dumping or recurrence of injury (Article 11.3 of AD). If the review leads an IA to conclude that AD duties are no longer warranted, they should be terminated immediately (Article 11.2 of AD). Articles 11.1 and 11.2 of AD reproduce Articles 9.1 and 9.2 of AD of the Tokyo-round AD Code. The unadopted GATT panel report on US—Swedish Steel Plate discussed the relationship between the two provisions. It held that the US was under no obligation to undertake specific actions under Article 9.1 of AD. In the view of this panel, Article 9.2 of AD explained the specific steps to take in order to honor the mandate of Article 9.1 of AD (§ 226): The Panel considered that it would not be consistent with this interpretation of the relationship between Articles 9:1 and 9:2 to interpret Article 9:1 as containing an obligation of Parties to conduct a factual examination of the necessity of the continued application of anti-dumping duties (in the form of “monitoring” or “surveillance”), distinct from their obligation to carry out reviews under Article 9:2 of the Agreement. The silence of Article 9:1 regarding the means by which a Party was to determine when an anti-dumping duty was no longer necessary within the meaning of that provision, together with the mandatory review procedure specifically provided for in Article 9:2, the purpose of which could only be understood in light of the requirement embodied in Article 9:1, contradicted the view that Article 9:1 by itself obliged Parties to take specific procedural steps to satisfy themselves as to the continued need for the imposition of an anti-dumping duty distinct from those required under Article 9:2.
WTO adjudicating bodies, hence, should focus on whether the test in Article 11.2 of AD has been met. If this were the case, then Article 11.1 of AD will have, ipso facto, been complied with as well.
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Ex Officio and Upon Request Reviews
A review can be initiated either on the initiative of the IA (usually referred to as a self-initiated-, or ex officio review) or upon request (Article 11.2 of AD). The former will take place when warranted, but the latter only after a reasonable lapse of time has passed: The authorities shall review the need for the continued imposition of the duty, where warranted, on their own initiative or, provided that a reasonable period of time has elapsed since the imposition of the definitive anti-dumping duty, upon request by any interested party which submits positive information substantiating the need for a review.
In US–Shrimp II (Viet Nam), the panel rejected a claim by the US to the effect that exporters for which no individual dumping margin had been calculated were barred from requesting a review under Article 11.2 of AD. In the panel’s view, the fact that an individual dumping margin or an all others’ rate had been imposed was immaterial, so far as the right of exporters to request a review was concerned (§§ 7.386ff.). 2.7.4
Reasonable Period of Time
Recall that Article 11.2 of AD obliges an IA to review the need for continued imposition of duties if a request to this effect has been made after a “reasonable period of time” has lapsed. In US–Shrimp II (Viet Nam), the panel held that the passage of four years satisfied this requirement (§ 7.380). The law says nothing regarding the point in time when an ex officio review is warranted. The leading case in the GATT years was US–Swedish Steel Plate. This panel decided that it was not warranted for the US to review 20-year-old duties, even though the following was true: • Sweden had reduced its production of steel products. • It was selling more to the EU because it had signed a free trade agreement (FTA) with it (and EU had eliminated duties on imports of Swedish steel). • Avesta (a Swedish company) had bought a mill in Indiana and, consequently, was selling to the US market through its Indiana site. • US had concluded a voluntary export restraint with many exporters, as a result of which the health of US industry had considerably improved (§§ 246ff.). This is a very restrictive interpretation of the “where warranted” standard, by any reasonable benchmark, and it was typical in the manner the US reviewed the necessity for continued imposition of duties. The US was at the time one of the most frequent users of antidumping. Because of the trade impact of US antidumping measures, a lot of litigation was directed against impositions of AD duties by the US. A lot of case law on this score
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thus, concerned the consistency of US law with the AD Agreement. In US, nevertheless, as has been discussed, a retrospective system of imposition of duties has been privileged. The level of duties initially imposed is calculated on a provisional basis, and interested parties may request an annual recalculation. If no dumping has been found for three years in a row, then the exporter can request revocation of duties. So there is an overlap between the reviews under Article 11.2 of AD and those under domestic US law, and the case law described in what follows concerns the overlap only. In US–Antidumping Measures on OCTG, the panel discussed the consistency of a US law, which imposed, in Mexico’s view, stringent conditions for the initiation of an administrative review. As the panel explained, under the US system, a request for a “changed circumstances” review could be based on the general review provisions or on the basis of no dumping for three years. In the latter case, a company seeking revocation on the basis of no dumping for three years must demonstrate that it had made sales in the US market in commercial quantities during that period. Both in this case (§§ 7.173–174), and in US–DRAMS (§§ 6.58–59),130 WTO panels have held that the absence of dumping for a period of three years and six months did not, in and of itself, mandate a self-initiated review. One can question the reasonableness of this approach. If review is not warranted after 70 percent of the lifetime of duties has lapsed and no dumping has occurred, then one might legitimately wonder when this would be the case. Some of the litigation concerned AD measures imposed by other WTO members, and helped illuminate a few aspects of the obligation to conduct administrative reviews when warranted. In Mexico–Antidumping Measures on Rice, the AB agreed with the panel that to require that a “representative volume of export sales” has taken place as a condition for conducting a changed circumstances review was inconsistent with the agreement (§ 316): Article 68 of the Act requires as a rule that each time an interested party is unable to show that volume of exports during the review period was representative, such a review is to be denied. ... The change in circumstances is unrelated to the export side of the equation. An interested party is entitled to a changed circumstances review under Article 11.2 of the AD Agreement and 21.2 of the SCM Agreement, if it submits positive information substantiating the need for a review. What such positive information relates to will depend from case to case, and such positive information does not, in our view, necessarily include that a representative number of exports sales were made. We consider that, by requiring the authority to reject a review each time the volume of export sales was not representative, even in cases where the change in circumstances is unrelated to the export price, Article 68 of the Act requires the authority to reject reviews in a manner which is inconsistent with Article 11.2 of the AD Agreement. (italics in the original)
The Panel on EC–Tube or Pipe Fittings dealt with the argument by Brazil that the devaluation of its national currency (which coincided in time with the last weeks of the
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investigation) was, in and of itself, a reason for the EU to launch on its own initiative a review of the necessity to keep in place the AD duties. The panel responded in the negative (§ 7.116) and concluded, invoking the findings of the Panel on US–DRAMS to this effect, that even cessation of dumping does not in and of itself mandate the initiation of a review (§ 7.118).131 This brings us straight into a discussion of the standard of review that WTO adjudicating bodies will apply when facing challenges regarding the consistency of administrative reviews conducted by WTO members. 2.7.5
Standard of Review
Although there is not much case law regarding the standard of review that WTO adjudicating bodies will apply in cases concerning the administrative review, it seems plausible to conclude that WTO adjudicating bodies have shown deference to decisions by IAs. In this vein, the Panel on US–DRAMS held that since the subject matter of an administrative review was a forward-looking analysis, which necessarily entailed uncertainty, some degree of imprecision would be unavoidable and permissible (§ 6.43). This much makes sense. When it comes to the questions asked in this context, though, WTO adjudicating bodies have been applying a test that overlooks the main purpose of Article 11 of AD—that is, whether something has changed with time that would make a review, but not necessarily a revocation, warranted. Recall the outcome in US–DRAMS and in US–Antidumping Measures on OCTG, where the passage of substantial time was not enough to warrant an administrative review. This is odd. Ex officio reviews slowly become a dead letter, and the discussion concerns the standard of review when a review has been requested. This was probably unavoidable with the advent of sunset reviews. Why, one might ask, should WTO members review ex officio the necessity of imposing AD duties, when we have all agreed that five years is a reasonable period for imposition? Still, the attitude of WTO adjudicating bodies is far from sensible in this respect. The fact that duties can does not mean that duties must stay in place for five years. Moreover, reviewing duties should not be equated to revoking duties. Howse and Staiger (2007) have criticized this attitude, stating that the conditions for reviewing duties should be distinguished from the conditions for revoking them, in the sense that less evidence should be required for the former than for the latter. In deciding whether revocation is warranted, an IA should ask whether a change in competitive conditions did occur, and whether because of this change, a review was required.132 This seems like the appropriate test. It is quite demanding, and panels would have to engage with the facts in order to honor it, but, alas, there is no way around it.
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Sunset Reviews Duties Will Lapse in Five Years, Absent Review
One of the major innovations of the Uruguay-round AD Agreement was the introduction of “sunset clauses.” AD duties, as per this provision, will lapse five years after their introduction unless if the IA has determined, as per Article 11.3 of AD: in a review initiated before that date on their own initiative or upon a duly substantiated request made by or on behalf of the domestic industry within a reasonable period of time prior to that date, that the expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury. The duty may remain in force pending the outcome of such a review.
In the words of the AB in US–Carbon Steel133 (§ 88): An automatic time-bound termination of countervailing duties that have been in place for five years from the original investigation or a subsequent comprehensive review is at the heart of this provision. Termination of a countervailing duty is the rule, and its continuation is the exception.
Because continuation is an exception, it is for IAs to prove that unless duties are maintained injury will recur, by conducting a sunset review to this effect. The five-year period runs from the date of the original imposition, from the date of the most recent administrative review under Article 11.2 of AD if the review covered both dumping and injury, or from the date of the most recent sunset review. Since duties can stay in place after the five year period only following a review, absent review, the antidumping order will have to be withdrawn. The introduction of sunset clauses was perceived as a major victory for the negotiators of southeast Asian countries that were quite frequently the targets of AD activity during the GATT years.134 Before their introduction, AD duties could be imposed for long periods and the only way exporters could limit the imposition of duties in time was through a request for initiation of an administrative review (a possibility in the Tokyo-round AD agreement as well). De facto, the only possibility was a requested administrative review, since case law, as we saw previously, had adopted a very deferential attitude toward IAs who routinely refused ex officio reviews. Recall that, in US—Swedish Steel Plate, a GATT panel ruled that the US was not obliged to ex officio initiate a review to evaluate the need to keep 20-year-old AD duties in place. A request for review entails, of course, substantial costs for the exporter, a new round of request and supply of information, and there is no guarantee of the outcome. It was hoped that the introduction of sunset reviews would put an end to all this by introducing the presumption (in principle, at least) that duties must lapse after five years unless the IA could show that their duration was warranted. The initiative and (to some extent) onus to do so would, thus, shift from exporters to the IA.
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There was a “birth defect” from day one, however, that few noticed. An original investigation would be typically initiated following a request to this effect. Sunset reviews would be initiated either upon request (by the domestic industry) or on the initiative of the IA. In some quarters, nothing in the statutory language prohibited an IA from automatically initiating an investigation, such as at a fixed point in time preceding the five-year period. As a result, duties would not necessarily lapse five years after they had been imposed. They would lapse only if the automatically initiated review would support a similar conclusion. This is in and of itself an important observation, since in some quarters the outcome of similar reviews was (almost) consistently pro-continuation. 2.8.2 The Ambit of Sunset Review Article 11.3 of AD reads: ... any definitive anti-dumping duty shall be terminated ... unless the authorities determine, in a review initiated before that date on their own initiative or upon a duly substantiated request made by or on behalf of the domestic industry within a reasonable period of time prior to that date, that the expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury.
What needs to be shown by the IA, thus, is that the expiration of duty would lead to continuation of recurrence of dumping and injury. The methodology is not prejudged in the WTO statute. One would rationally expect serious discussion of the counterfactual, that is, a review of the market situation without AD duties in place, and the incentives this scenario would provide exporters with. Alas, a very deferential standard of review that has been adopted in case law has removed the possibility for serious analysis along these lines. 2.8.3 The Standard of Sunset Review Article 11.3 of AD does not subscribe to a particular methodology to show that unless duties continue to be in place, continuation or recurrence of injury is “likely.” It is case law that provided some precision. While it has stressed that the whole exercise if forwardlooking, and hence some degree of deference to the IA is unavoidable, case law has stressed that IAs must show an appropriate degree of diligence, and reach a reasoned conclusion based on the information before them why it is likely that injury will continue or recur if duties were to be removed (US–Corrosion-Resistant Steel Sunset Review, §§ 1o5ff.). Without saying so, adjudicating bodies have seen a but-for test here: but for the continued imposition of duties, injury is likely to continue or recur.135 2.8.3.1 Likelihood of Continuation or Recurrence of Injury The terms “continuation” and “recurrence” appearing in the body of this provision refer to two different factual situations. The first term presupposes that dumping, injury, or both
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have not ceased to exist during the period of imposition of AD duties. The latter presupposes that the opposite has happened. The rationale for including recurrence is this: if injury has stopped not because of the behavior of the exporters but because of the duties in place, removing duties would lead to recurrence of injury. This should not happen, as the whole purpose of imposing duties is to remove injury. The rationale for the “continuation” standard is harder to follow, as it seems to imply that duties have not effectively addressed injury. One might wonder why, for example, if the dumping of margin has increased since the original imposition, the level of AD duties has not been adjusted as well, following an ex officio or upon request administrative review to this effect? There is no persuasive response to this question. Continuation or recurrence should be likely. The term “likely” has been understood in case law by the AB to be equivalent to the term “probable,” rather than “possible” (US–Corrosion-Resistant Steel Sunset Review, § 111). Probable implies of course a higher degree of likelihood than possible that something will occur. The methodology used to demonstrate the likelihood of continuation or recurrence is not prejudged by the AD Agreement since Article 11.3 of AD imposes an obligation of result rather than of specific conduct. The panel, in its report on US–Corrosion-Resistant Steel Sunset Review, dealt with the consistency of a US statute that expressed the “likelihood” standard in negative formulation. Duties would be removed only if it was unlikely that their removal would lead to recurrence or continuation of dumping and injury. It did not find the US statute to be inconsistent with Article 11.3 of AD (§§ 7.227–228), and the AB did not disturb this finding either. The AB, in its report on US–OCTG Sunset Reviews, addressed an argument by the complainant (Argentina) to the effect that an IA is obliged, by virtue of Article 11.3 of AD, to establish a precise time frame within which continuation or recurrence of dumping and injury would likely occur. The US statute did not specify the time horizon within which the likelihood of recurrence or continuation should occur, and in Argentina’s view, this was unlawful since Article 11.3 of AD imposes a temporal limitation that must be imminent (§ 358). The AB rejected Argentina’s argument. It underscored the panel’s finding that likelihood should be evaluated within the reasonably foreseeable future (with no further precision being required) (§ 360, 364).136 2.8.3.2 Positive Evidence The likelihood of continuation or recurrence of dumping, injury, or both must be determined by the IA. The term “determine,” appearing in the body of Article 11.3 of AD, has been interpreted in case law as dictating a standard that obliges authorities to reach their conclusions on “positive evidence” and justify them as well (AB on US–OCTG Sunset Reviews, §§ 179–180).
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The AB, in its report on US–Hot-Rolled Steel, determined that the requirement of “positive evidence” implied that the evidence must be objective and verifiable (§ 192). The “positive-evidence” standard was also discussed in US—OCTG Sunset Reviews. Where an interested party waives its right to participate in the review process, the US IA will presume the likelihood of continuation or recurrence of dumping, without having to investigate to what extent this has actually been the case. The US law contained two types of waivers: those applicable in situations where an interested party (exporter) had provided incomplete information to questions asked by the IA during the review process (in US parlance, a “deemed waiver”); and those applicable in situations where the exporter had declared that it will not participate in the proceedings (an “affirmative waiver,” in US parlance). The Panel on US–OCTG Sunset Reviews had found both types of waivers to be WTOinconsistent (§§ 7.91–99). On appeal, the US argued that the panel had erred since it had not sufficiently taken into account the process followed by US authorities. Waivers were used when a company-specific review had been conducted; company-specific reviews, however, were only the first leg of the sunset review, since the US IA would also examine the likelihood of recurrence or continuation of dumping on an orderwide basis.137 The AB rejected the US argument. In its view, even though reviews were orderwide, the input to the final determination was flawed since the determination had been based on waivers—that is, not on positive evidence (§ 234): We agree with the Panel’s analysis of the impact of the waiver provisions on order-wide determinations. Because the waiver provisions require the USDOC [US Department of Commerce] to arrive at affirmative company-specific determinations without regard to any evidence on record, these determinations are merely assumptions made by the agency, rather than findings supported by evidence. The United States contends that respondents waiving the right to participate in a sunset review do so “intentionally,” with full knowledge that, as a result of their failure to submit evidence, the evidence placed on the record by the domestic industry is likely to result in an unfavorable determination on an order-wide basis. In these circumstances, we see no fault in making an unfavorable order-wide determination by taking into account evidence provided by the domestic industry in support thereof. However, the USDOC also takes into account, in such circumstances, statutorilymandated assumptions. Thus, even assuming that the USDOC takes into account the totality of record evidence in making its order-wide determination, it is clear that, as a result of the operation of the waiver provisions, certain order-wide likelihood determinations made by the USDOC will be based, at least in part, on statutorily-mandated assumptions about a company’s likelihood of dumping. In our view, this result is inconsistent with the obligation of an investigating authority under Article 11.3 to “arrive at a reasoned conclusion” on the basis of “positive evidence.”
In US–OCTG Sunset Reviews, the AB, while agreeing with Argentina that the “likelihood” determination should be based on positive evidence, it accepted nonetheless that, since a review is by definition a forward-looking exercise, some speculation about future events cannot be avoided. In other words, the requirement to use positive evidence to show likelihood should not be understood as a requirement to completely eliminate uncertainty
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about the course of future events (§§ 340–341). In a similar vein, the AB pointed out in Mexico–Antidumping Measures on Rice that this requirement does not eliminate the possibility for an IA to resort to assumptions. But, as per § 204, “these assumptions should be derived as reasonable inferences from a credible basis of facts, and should be sufficiently explained so that their objectivity and credibility can be verified.”138 In US–OCTG Sunset Reviews, the complainant (Argentina) had asked whether an IA could base its conclusions solely on information already used during the original investigation, and to what extent reliance on similar information satisfied the positive evidence requirement. The AB, citing US–Carbon Steel,139 held that reliance exclusively on the determination made in the original investigation would not suffice. Nothing precluded an IA from using information in the record, provided that it took a fresh look at it (§ 328). 2.8.3.3 Irrelevance of Standards Applied in the Original Investigation Panels and the AB have held that, since sunset reviews and original investigations are distinct processes with different purposes, the disciplines applicable to original investigations cannot be automatically imported into review processes.140 De Minimis Thresholds The Panel on US–Corrosion-Resistant Steel Sunset Review held that the de minimis thresholds applicable during the original investigation, in the absence of explicit language or cross-referencing to this effect, are not applicable in the context of a review (§§ 7.70–71), and especially, at § 7.85: On the basis of this textual analysis of the relevant provisions of the Antidumping Agreement, we conclude that the 2 per cent de minimis standard of Article 5.8 does not apply in the context of sunset reviews. In this context, we again observe that, in light of the qualitative differences between sunset reviews and investigations, it is unsurprising that the obligations applying to these two distinct processes are not identical. (italics in the original)141
In this vein, the AB on US–OCTG Sunset Reviews, upholding the panel’s view in this respect, held that the small volume of export sales to the US market was not an impediment to a finding that dumping would continue to occur were the duties to be revoked (§ 346).142 It went on to find that, when it comes to establishing injury, an IA does not have to respect the standards included in Article 3 of AD (§ 280).143 The AB did not go the full distance and establish what exactly needs to be observed for an injury determination at the sunset stage to be WTO-consistent.144 The AB did add, on the other hand, that an IA may, without being obliged to do so, borrow from its analysis under Article 3 of AD (the original investigation) when conducting its review analysis (§ 284). If it were to borrow from its analysis under Article 3 of AD, and if its analysis were to be judged inconsistent with Article 3 of AD, it would be ipso facto deemed inconsistent with Article 11.3 of AD as well: a subsequent panel, EU–Footwear (China), held as much (§§ 7.337ff.).
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Cumulation The Panel on US–OCTG Sunset Reviews had to deal with a claim that, in the absence of specific language to this effect, cumulation was not permissible at the sunset review stage. It held that cumulation was permissible throughout the investigation and the review processes, but that the standards regarding cumulation during the original investigation reflected in Article 3.3 of AD were not applicable in the context of reviews (§§ 7.323– 336).145 The AB confirmed this finding (§§ 300–302).146 In US–Antidumping Measures on OCTG, the AB confirmed its view that Article 3.3 of AD did not apply to sunset reviews, but it emphasized that on occasion, a cumulative assessment might be inappropriate depending on the conditions of competition in the marketplace (§ 171). Calculation of Dumping Margin The Panel on US–Corrosion-Resistant Steel Sunset Review held that during the review, an IA need not calculate precisely the dumping margins, which would result if it removed the duties. Rather, because uncertainty is inherent in any forward-looking study, some reasonableness standard was warranted; consequently, an IA should not be requested to make a determination of dumping in the sense of Article 2 of AD and provide a precise amount of dumping margins (§§ 7.162–180). This did not mean, according to the panel, that evidence of dumping was not relevant for a likelihood of recurrence or continuation of dumping determination (§ 7.180). On appeal, the AB confirmed this view (§§ 123–124), but it made one important clarification, thus overturning the panel’s ruling in this respect. If a WTO member went ahead and calculated dumping margins, it should do so only in accordance with Article 2 of AD (§§ 127–128).147 The same panel (US–Corrosion-Resistant Steel Sunset Review) faced the question of whether an IA would be required, by analogy with the obligation included in Article 6.10 of AD, to calculate an individual margin of dumping for each exporter or producer investigated, and to make a determination of likelihood of recurrence or continuation of dumping and injury for each exporter or producer under review. The panel considered that no such company-specific likelihood determination was required, and a determination could thus be made on an orderwide basis (§§ 7.207–208). The AB confirmed this view. It acknowledged that Article 11.4 of AD contained an explicit cross-reference to the provisions of Article 6 of AD (regarding evidence and procedure), making these rules applicable to review situations. Article 6.10, however, requiring from IAs to calculate individual margins of dumping, could not apply in a review because, according to the AB, an IA in a review was not required under Article 11.3 of AD to calculate dumping margins in the first place. Hence, the requirement to make an individual company-specific determination as set forth in Article 6.10 of AD cannot apply in a review situation (§ 155).
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It follows that neither individual dumping margins nor precise margins need to be calculated at the review stage. Causal Link The AB held in US–Antidumping Measures on OCTG that Article 11.3 of AD requires an IA to make a determination concerning the likelihood of dumping and injury, but not to make a causal link between the two (§§ 123–124): Therefore, what is essential for an affirmative determination under Article 11.3 is proof of likelihood of continuation or recurrence of dumping and injury, if the duty expires. The nature and extent of the evidence required for such proof will vary with the facts and circumstances of the case under review. Furthermore, as the Appellate Body has emphasized previously, determinations under Article 11.3 must rest on a “sufficient factual basis” that allows the investigating authority to draw “reasoned and adequate conclusions.” These being the requirements for a sunset review under Article 11.3, we do not see that the requirement of establishing a causal link between likely dumping and likely injury flows into that Article from other provisions of the GATT 1994 and the Antidumping Agreement. Indeed, adding such a requirement would have the effect of converting the sunset review into an original investigation, which cannot be justified. Our conclusion that the establishment of a causal link between likely dumping and likely injury is not required in a sunset review determination does not imply that the causal link between dumping and injury envisaged by Article VI of the GATT 1994 and the Antidumping Agreement is severed in a sunset review. It only means that re-establishing such a link is not required, as a matter of legal obligation, in a sunset review. (italics in the original)148
That last paragraph is probably at odds with the wording of Article 11.3 of AD (“dumping and injury”). It also seems to suggest that the causal link between dumping and injury will persist but does not need to be shown, since it had been established in the original investigation. It is doubtful, though, whether dumping always leads to injury. Why introduce Article 3.5 of AD in the first place, then, if dumping is always injurious? What if there is no domestic production anymore? Of all the AB interventions in this regard, this is the most dramatic. By reducing a demonstration of causality at the review stage to redundancy, it effectively tilted, the balance of probabilities in favor of positive response to the question of whether continuation or recurrence of dumping and injury would persist if duties were to expire. 2.8.3.4 Zeroing in Sunset: Illegal as Well The panel in its report on US–Shrimp II (Viet Nam) held that there is no need to calculate individual dumping margins when performing a sunset review either. It also confirmed that IAs must respect the disciplines imposed if they were to calculate dumping margins. It then concluded that that the US was in violation of its obligations under Article 11 of AD because it had not taken into account “zeroed” negative margins. The US was in violation of its obligations, but not because it had to calculate individual dumping margins. It was in violation because it chose to do so, but then zeroed all negative margins. (§§ 7.305ff., and especially §§7.311 and 7.312).
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2.8.4
135
Ex Officio and Upon Request Reviews
A sunset review may be initiated either ex officio or upon a duly substantiated request. When the latter occurs, the request must be deposited within a reasonable period of time prior to the expiration of the five-year period. The AD Agreement does not impose an obligation to start ex officio sunset reviews on a specific date. As a result, WTO members retain some discretion on this score. US law provides for automatic initiation of sunset reviews. The AB report on US—Carbon Steel describes the process as follows (§ 101):149 Section 751(c)(2) of the Tariff Act directs USDOC to publish a notice of initiation of a sunset review no later than 30 days before, inter alia, the fifth anniversary of the date of publication of a countervailing duty order. Section 351.218(b) of Title 19 of the Regulations confirms that USDOC will conduct a sunset review of each countervailing duty order. Both the Sunset Policy Bulletin and the SAA describe the initiation of sunset reviews by USDOC as “automatic.” (italics in the original)
The AB held that this law was not inconsistent with the requirements of the SCM Agreement (§ 118). Confirmation that this interpretation is good law in the AD context as well came with the panel report on US–Corrosion-Resistant Steel Sunset Review. The panel held that automatic self-initiation procedures in the context of sunset review were not inconsistent with the AD Agreement because they did not necessarily150 result in continuation of the duties in place (§ 7.55). The panel declined to rule on a related argument made by Japan to the effect that an automatic sunset review takes away the discretionary authority to initiate a sunset review that is implied by the terms “on its own initiative,” as this claim was not, according to the panel, properly before it (§§ 7.46–54). Automatic initiation of sunset reviews reduces of course, the probability that duties will lapse at the end of the five year period. This is so because irrespective of the merits of keeping them in place, the discontinuation of duties is function of the outcome of the review. The deferential standard of review applied at the sunset stage by WTO panels that we have discussed above, might incentivize IAs to keep duties in place. The last sentence of Article 11.3 of AD clarifies that duties will remain in place during the review process. Since the imposed duties will remain in place while the review is continuing, there is a risk that WTO members might keep duties in place for a period longer than the statutory five-year period by starting a review as late as possible. This risk is somewhat addressed through the discipline included in Article 11.4 of AD that stipulates that a review should normally be completed within 12 months. One would expect that, if a review extends beyond the five-year deadline and the outcome is that duties should not be imposed beyond “sunset,” IAs would reimburse duties perceived after the completion of the fifth year.
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Due Process
Article 11.4 of AD provides that the provisions of Article 6 of AD (regarding evidence and certain procedural requirements) shall apply to sunset reviews. Reviews shall be carried out expeditiously and shall, normally, be concluded within 12 months of initiation of the review. The due process rights of interested parties must be respected in the context of a sunset review, the expedited character of reviews notwithstanding. In US—Corrosion-Resistant Steel Sunset Reviews, and US–OCTG Sunset Reviews, the AB held that IAs had to allow interested parties to present evidence and defend their case in sunset reviews as well. In the words of the AB on US–Corrosion-Resistant Steel Sunset Reviews (§ 152): Article 6 requires all interested parties to have a full opportunity to defend their interests. In particular, Article 6.1 requires authorities to give all interested parties notice of the information required and ample opportunity to present in writing evidence that those parties consider relevant. Articles 6.2, 6.4, and 6.9 provide other examples of the kind of opportunities that investigating authorities must give each interested party ... They therefore confirm that investigating authorities have certain specific obligations toward each exporter or producer in a sunset review.
As we will see in more detail later in this chapter, “interested parties” (that is, exporters, foreign governments where exporters originate, and the domestic industry, as per Article 6.11 of AD) have the right to participate and defend their interests from the moment an investigation has been launched until it has been concluded. Article 6.2 of AD reads: Throughout the anti-dumping investigation all interested parties shall have a full opportunity for the defence of their interests. To this end, the authorities shall, on request, provide opportunities for all interested parties to meet those parties with adverse interests, so that opposing views may be presented and rebuttal arguments offered.
They enjoy equal rights at the stage of administrative and sunset review as well. The reason why we entertain this issue here is that we want to underscore a point that often sneaks by. The identity of exporters can change from one stage of the investigation to another. It could be, for example, that Home investigates A and B during the original investigation and imposes an all others’ rates duty on C, D, and E. Then, during the sunset review, it might choose to investigate how the behavior of C would be affected by the elimination of duty. It could be, for example, that an IA is led to believe that dumping will recur in case duties were removed, not because A and B will be dumping, but because C will be dumping. C, in our illustration, had not been reviewed during the original investigation, but might be reviewed at the sunset review stage. There is, in other words, no obligation to review the same exporters consistently throughout the investigation.151
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137
Sunset Practice
Cadot et al. (2006) examined data from 1979 to 2005 and concluded that, since the advent of sunset clauses, the majority of AD duties imposed are not renewed beyond the five-year period. Recall nevertheless, that up until the end of the Tokyo round, the EU and US held a quasi-monopoly in the imposition of AD orders. The new players appeared during and after the Uruguay round. In this vein, Cadot et al. (2006) also observed that, originally, the five-year deadline did not change much with respect to EU practice, where duties had been rarely imposed for longer than five years. This was the policy recommendation by a group of experts that had been formed following a recommendation by the then Trade Commissioner for the EU, Peter Mandelson.152 The recommendations of the group were short-lived. Karel De Gucht, the next Trade Commissioner for the EU, started an ambitious project to modernize, among other things, the EU Antidumping Regulation. At the time of writing, the modernization package is going nowhere; it is still a project. It is noteworthy, though, that duties are now imposed for five years, and the EU has started doing sunset reviews as before. US practice, nevertheless, tells a different story, according to the results in Moore (2004) and Cadot et al. (2006). Duties will routinely remain in place in the US beyond the initial five-year period, following sunset reviews to this effect. 2.8.7 Administrative and Sunset Reviews: The Overlap In its report on US–Shrimp II (Viet Nam), the panel provided its understanding of the common function that administrative and sunset reviews share, since they both aim to ensure that duties will stay in place only to the extent necessary (§ 7.364): ... each paragraph provides for a review of the continuing need for the duty, one at a specified point in time, on the investigating authority’s own initiative or on the basis of a substantiated request by the domestic industry, in order to justify continuing the duty at all; the other available at any time, on the investigating authority’s own initiative or on the basis of a substantiated request by an interested party (provided in the latter case that a reasonable period of time has elapsed since the imposition of the definitive duty) to examine the continued need for the duty.
So much for similarities. The panel saw an important difference between the two instruments, though. Whereas in the context of the administrative review it is the level of the individual duty of the exporter requesting a review that will be examined, it is the countrywide duty that will constitute the subject matter of a sunset review. In the panel’s view, this conclusion as warranted because in the case of a request for administrative review, it is only the level of the individual dumping margin that will be entertained. This is not the case in the context of a sunset review (§§ 7.369ff.).
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Duties Can Be Imposed Only Following Investigation Conducting Investigation Is a Legal Requirement
Article 1 of AD reads: “An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of GATT 1994 and pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement.” A footnote to this provision reads: “The term ‘initiated’ as used in this Agreement means the procedural action by which a Member formally commences an investigation as provided in Article 5.” Absent investigation, thus, no duties can be lawfully imposed. A GATT panel report, Brazil–EEC Milk, found that, by not conducting an investigation to this effect, Brazil had unlawfully imposed CVDs against EU exports of milk and milk powder. The same should be true with respect to AD duties as well. 2.9.2 Who Can Request Investigation? 2.9.2.1 Ex Officio An AD investigation can be launched ex officio (Article 5.6 of AD). 2.9.2.2 Upon Request An AD investigation can also be launched upon request (Article 5.1 of AD). Since ex officio initiations are highly exceptional, we concentrate in what follows on investigations launched upon request. Mutatis mutandis, our analysis in what follows applies to ex officio requests as well. 2.9.3
Standing Requirements
2.9.3.1 The Rationale for Standing Requirements Article 5.4 of AD lays down the standing requirements that the domestic industry filing an application must fulfill: An investigation shall not be initiated pursuant to paragraph 1 unless the authorities have determined, on the basis of an examination of the degree of support for, or opposition to, the application expressed by domestic producers of the like product, that the application has been made by or on behalf of the domestic industry. The application shall be considered to have been made “by or on behalf of the domestic industry” if it is supported by those domestic producers whose collective output constitutes more than 50 per cent of the total production of the like product produced by that portion of the domestic industry expressing either support for or opposition to the application. However, no investigation shall be initiated when domestic producers expressly supporting the application account for less than 25 per cent of total production of the like product produced by the domestic industry.
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The inclusion of this provision was intended as a guarantee to the effect that initiations of investigations will not take place in a rushed or unthinking way. Empirical work conducted by Prusa (1992) and Rutkowski (2007) confirms that initiation of investigation in and of itself can have nefarious effects on exporters because of the resulting uncertainty regarding transaction costs for the products under investigation.153 By requiring that a relatively high percentage of domestic industry is behind a request, the AD Agreement wanted to ensure that there was some serious concern that needed to be addressed. The percentage will, of course, be reached more easily if the market is concentrated in a few dominant players. 2.9.3.2 Statutory Thresholds When reading Article 5.4 of AD that we have quoted in full above, we are led to conclude that there are two thresholds that must be met simultaneously: the application needs to be supported by those producers (i) whose collective output is more than 50 percent of the total production of that portion of the domestic producers expressing an opinion in favor or against the initiation, and (ii) more than 25 percent of the total production of the like product in the importing WTO member.154 Assume that A, B, C, and D are the only companies producing a like product to the dumped good, and they are producing 10 tons, 20 tons, 50 tons, and 20 tons, respectively. A and B support the initiation, C is opposed to initiation, and D remains outside the fray. The joint production of A and B is 30 tons, which is less than 50 percent of the total production of the producers expressing an opinion (A, B, and C, which together produce 80 tons). If C had stayed out of it, and it had been D who had voiced opposition to the idea of an initiation, A and B would have met the first threshold, as together they produce 30 tons, which is more than 50 percent of the 50 tons produced by A, B, and D. In either scenario, A and B together produce 30 tons, which is more than 25 percent of the total production of the domestic industry (A, B, C, and D), which amounts to 100 tons. The Panel on US–Offset Act (Byrd Amendment) faced a complaint to the effect that the US had disrespected Article 5.4 of AD. The US administration had promised to afford all US companies that would actively back a petition to impose AD duties a redistribution of the eventually imposed duties. These were the notorious Byrd payments, alluded to earlier in this chapter. We stated previously that this measure was enacted in the hope of addressing a collective action problem that would inhibit petitions from meeting the statutory thresholds established in Article 5.4 of AD. Concentrated industries are likelier to meet the statutory threshold since it might suffice that two or three companies get together and agree on petitioning an investigation. The problem is more acute when markets are not concentrated. To ensure that AD actions will not be inhibited in the latter case, Byrd payments were introduced.155 A caveat is necessary here. Hansen and Prusa (1996) showed that low-concentration industries are not without hope in getting their petitions through, since they would typically
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command broader political support than would high-concentration industries. The authors acknowledged that high-concentration industries would typically find it easier to organize their petitions, and their main findings were simply meant to relax somewhat the anxiety that low-concentration industries were feeling about petitioning AD duties. Various papers support the finding that high-concentration industries find it easier to launch of an investigation. Bown and Crowley (2013), using four-firm concentration (CR4), found that it is likelier that high-concentration industries will enjoy protection. Reynolds (2006) examined the effects of Byrd payments and found that, by awarding payments only to firms that had actively supported the petition, the law mitigated the “free rider” problem traditionally associated with collective actions. Empirical results in this study provide strong evidence that industries have filed more AD petitions under the new law. Crucially, the average proportion of firms in the industry filing these petitions increased under the law. This finding suggests that the law at least partially alleviated free-riding incentives. Similar studies help unveil the rationale behind the enactment of the Byrd Amendment. A host of trading nations complained about its enactment. The major claim advanced was that, by providing operators with an incentive to support an application, the US authority had reduced a statutory requirement to redundancy (Article 5.4 of AD). The panel agreed with the complainants, finding that the US measure (Byrd payments) was inconsistent with the terms of Article 5.4 of AD since, in its view, it violated the principle of good faith (“bona fides”). It held that the US measure undermined the value of the standing requirement (§§ 7.59–65).156 On appeal, the AB reversed the panel’s conclusions in this respect (§ 283): A textual examination of Article 5.4 of the Antidumping Agreement and Article 11.4 of the SCM Agreement reveals that those provisions contain no requirement that an investigating authority examine the motives of domestic producers that elect to support an investigation. Nor do they contain any explicit requirement that support be based on certain motives, rather than on others. The use of the terms “expressing support” and “expressly supporting” clarify that Articles 5.4 and 11.4 require only that authorities “determine” that support has been “expressed” by a sufficient number of domestic producers. Thus, in our view, an “examination” of the “degree” of support, and not the “nature” of support is required. In other words, it is the “quantity,” rather than the “quality,” of support that is the issue.
Consequently, in the AB’s view, Article 5.4 of AD imposed a formal requirement to ensure that a certain percentage of the domestic industry supported an application, and nothing more. In the eyes of the AB, the influence that the measure exerted on companies that might have stayed idle if not for this law was irrelevant altogether. The AB refused to enter into the rationale for enacting the Byrd Amendment. It did not even acknowledge the issue of collective action at all. Consequently, a WTO member that manipulated the standing requirements, and thus reduced the “bite” of a provision that had been negotiated amid fierce opposition against it, managed to “get away with it.”157
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The quintessential purpose of this provision was to ensure that petitions would be genuine, in the sense that domestic industry would be reacting to cheaper imports that threatened its existence. Recall that the idea was that an AD investigation should not be initiated at the drop of a hat, precisely because of the nefarious impact it can have on international trade. US companies might support a filing, not necessarily because they feel they have a strong case of injurious dumping to show before the authorities, but in the hope of receiving windfall profits (Byrd payments). In the meantime, they are shifting costs to their competitors through the petition, as Prusa (1992) and Rutkowski (2007) have shown.158 One of the conclusions of Reynolds (2006) was that, by increasing the total benefits accruing to industries filing successful petitions, the law subsidizes rent-seeking. The AB ruling, unfortunately, condoned all of the above. 2.9.4 The Content of Requests An investigation will be initiated if the IA decides that the evidence submitted through the application of the domestic industry is adequate and justifies the initiation of the process. Article 5.2 of AD reflects the elements that an application must contain: An application under paragraph 1 shall include evidence of (a) dumping, (b) injury within the meaning of Article VI of GATT 1994 as interpreted by this Agreement and (c) a causal link between the dumped imports and the alleged injury. Simple assertion, unsubstantiated by relevant evidence, cannot be considered sufficient to meet the requirements of this paragraph.
Article 5.2 of AD further specifies that “the application shall contain such information as is reasonably available to the applicant” concerning the domestic industry, the allegedly dumped product and the alleged dumpers, the NV and EP, the volume and price effect of the imports, and their consequent impact on the domestic industry. The term “simple assertion,” featured in the body of this provision, denotes that what must be avoided is unsubstantiated information. The term “evidence,” also in this provision, should not be equated to full proof, or proof beyond reasonable doubt. The Panel on Mexico–Corn Syrup clarified that the application need not contain information on all injury-related factors listed in Article 3.4 of AD (§ 7.73). In the same vein, the Panel on Thailand–H-Beams held that (§ 7.77) “raw numerical data would constitute ‘relevant evidence’ and not merely a ‘simple assertion’ within the meaning of this provision.” More generally, according to the Panel on Mexico–Corn Syrup (§ 7.76), “Article 5.2 does not require an application to contain analysis, but rather to contain information, in the sense of evidence, in support of allegations. While we recognize that some analysis linking the information and the allegations would be helpful in assessing the merits of an application, we cannot read the text of Article 5.2 as requiring such an analysis in the application itself.”159
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To recap, it follows that on the one hand, there is no requirement to submit analysis and proof, but, on the other, information submitted must be relevant. Of course, it would be unreasonable to request full information at this stage. Petitioners might be facing cases of genuinely private information (e.g., the pricing policy of the exporter in its own market). Since even requests that have only a slim chance of success can have nefarious effects on trade, the “relevance of information” standard emerges as the first attempt to thwart frivolous requests. Is it truly the case, though, that frivolous requests create problems for exporters? Prusa (1992) looked at a wide sample of cases, including those where a petition was withdrawn. His data showed that withdrawn cases have comparable effects on trade as cases that resulted in duties. What he termed “nuisance suits” (that is, petitions with a low probability of success) can confer large gains on the domestic industry supporting the petition.160 Actually, an effect on the market might exist from the moment that an announcement of a petition is made public. Rutkowski (2007) examined 45 such withdrawals in EU practice (between 1992 and 2004) and tested this hypothesis, with similar results.161 The manner in which IAs will implement their discretion and distinguish wheat from chaff at this stage of the process will largely provide the response to the question of whether frivolous requests will have a short life or a longer one. We turn to this question in what immediately follows. 2.9.5 The Decision to Initiate Investigation The decision to initiate an investigation or not to do so belongs to the IA. The process is internal in the sense that, following the request by domestic industry, the IA concerned will decide whether to launch or not, without having to entertain the opinion of exporters as well beforehand. When presented with an application (“petition”), an IA is not obliged to initiate an investigation, since it retains discretion to this effect. Article 5.3 of AD provides that, even in cases where the application contains evidence on dumping, injury, and the casual link between them, no investigation may be initiated unless the IA has examined the record and verified the accuracy and adequacy of the information contained therein. When the IA is persuaded as to the accuracy of the information provided and the wellfounded nature of the allegations, it may decide to launch a formal investigation. In other words, a petitioner is not guaranteed an investigation even if it has satisfied the requirements embedded in Article 5.2 of AD. This is the natural consequence of the fact that the WTO regulates rights and obligations of WTO members, and not of private entities. Governments are sums of interests, and, in principle at least, (should) act in the name of social welfare. By retaining discretion, WTO members can extract promises and contributions from those interested in the imposition of AD duties. It could also be the case that, presented with enough evidence of injurious dumping, a WTO member might decide to
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use the petition in order say to fend off challenges by other WTO members (where exporters that allegedly dump are located). The key point here is that IAs retain discretion, as a matter of WTO law, to initiate an investigation even if presented with robust evidence of injurious dumping. 2.9.5.1 The Duty to Examine Supplied Information Article 5.3 of AD reads: “The authorities shall examine the accuracy and adequacy of the evidence provided in the application to determine whether there is sufficient evidence to justify the initiation of an investigation.” This provision should be read in conjunction with Article 5.7 of AD, which requires from IAs that: “The evidence of both dumping and injury shall be considered simultaneously (a) in the decision whether or not to initiate an investigation, and (b) thereafter, during the course of the investigation, starting on a date not later than the earliest date on which in accordance with the provisions of this Agreement provisional measures may be applied.”162 An IA has a duty to actively check the accuracy and adequacy of the information submitted under Article 5.2 of AD. The Panel on US–Softwood Lumber V held as much (§§ 7.74ff.). In a similar vein, the GATT Panel on US–Norwegian Salmon AD, held that IAs cannot automatically initiate an investigation. They are under the duty to evaluate the information submitted, and retain discretion with respect to the ultimate decision to initiate or not (§ 358). 2.9.5.2 IAs Retain Discretion to Initiate An IA that has found that submitted information is inadequate can go ahead and complete the record ex officio. It has, however, no obligation to do so. The panel held as much in its report on US–Softwood Lumber V (§ 7.75). If the IA thinks that the submitted information was inadequate, or if, after having tried to complete it itself, it did not manage to do so, it will reject the application, as per Article 5.8 of AD: “An application under paragraph 1 shall be rejected and an investigation shall be terminated promptly as soon as the authorities concerned are satisfied that there is not sufficient evidence of either dumping or of injury to justify proceeding with the case.” In the opposite scenario, it will issue a notice of initiation of investigation. Assuming that the decision is taken to initiate an investigation, an IA will have to issue a public notice to this effect. When issuing this notice, the IA concerned will have to observe the requirements reflected in Article 12.1 of AD. The authorities must during the course of the investigation satisfy themselves as to the accuracy of the supplied information upon which their findings will be based (Article 6.6 of AD). Now what does this duty specifically entail? The Panel on Guatemala–Cement II (§ 8.31), as well as the Panel on Argentina–Poultry Antidumping Duties (§ 7.60) were of the view that, while the accuracy and adequacy of the evidence are relevant to the authorities’ determination whether there is sufficient evidence to justify initiation, “it is, however,
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the sufficiency of the evidence, and not its adequacy and accuracy per se, which represents the legal standard to be applied in the case of a determination whether to initiate an investigation.” Sufficiency, thus, as opposed to adequacy or accuracy, is what matters. This does not mean that information can be inadequate or inaccurate. Sufficiency is a complement and not a substitute to adequacy and accuracy. Information submitted must be judged sufficient to initiate an investigation. The Panel on US–Softwood Lumber V held that the IA concerned was justified to initiate investigation in the presence of the following information: • Cost-related evidence from smaller surrogate domestic producers (as a proxy for cost data from the exporters/producers allegedly dumping) satisfies the requirements of Article 5.3 of AD (§ 7.95). • Cost allocation to specific products can legitimately not take place at this stage, and hence absence of evidence concerning such cost allocation is not at odds with the requirements of Article 5.3 of AD (§ 7.97). • If cost data from various surrogate companies covers the whole year and cost data from one company covers the whole period, Article 5.3 of AD has not been violated (§ 7.99). • The fact that evidence of dumping is found only with respect to some categories of the product among those for which an initiation of investigation has been requested is not at odds with the requirements of Article 5.3 of AD (§ 7.101). • Prices for domestic sales (home market) can legitimately be taken from a specialized magazine, even though it reflects a number of sales and is not related to a specific sale (§ 7.105). • An affidavit that reflects deleted (confidential) information can legitimately be taken into account (§ 7.120). • Price information on only two out of seven categories of lumber products under investigation suffices to meet the requirements of Article 5.3 of AD, so long as the evidence concerns more than an insignificant subset of the imported product (§ 7.123). • Freight cost information related only to truck freight does not violate Article 5.3 of AD, as nothing before the authority indicated that only rail was used to transport lumber, or even that rail was mostly used (§ 7.126). It is important to point out that the exporters alleged to have been dumping are not involved at all in the preinitiation phase. Article 5.5 of AD expressly provides that an IA shall avoid publicizing the application for initiation of an investigation unless a decision has been made to initiate it. The only obligation that exists is to notify the government of the exporting country of the receipt of a properly documented application prior to initiation of the investigation. The reason for this is to avoid a chilling effect on trade, which even
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the submission of an application may have, given the likelihood that it may lead to the initiation of an investigation and subsequent imposition of AD duties. Having sufficient submitted evidence leaves IAs with substantial discretion to decide on the next steps. Case law has provided some clarifications that act as restraining factors to the exercise of discretion. The Kind of Evidence Required Article 5.3 of AD does not expressly provide that the evidence in question should relate to the questions of dumping, injury, and the casual link, but panels, reading Article 5.3 of AD in the context of Article 5.2 of AD, have consistently held that this is the kind of evidence required to justify initiation.163 Unbiased and Objective IA In order to determine whether there is sufficient evidence of dumping and injury, an IA cannot entirely disregard the elements that configure the existence of that practice as outlined in Articles 2 and 3 of AD.164 In other words, even though the various provisions of Article 2 of AD relating to NV and EP do not apply, as such, to the initiation determination, they are certainly relevant to the authorities’ determination regarding the sufficiency of evidence.165 According to the Panel on US–Softwood Lumber V (§ 7.80): this does not, of course, mean that an investigating authority must perform a full-blown determination of dumping in order to initiate an investigation. Rather, it means simply that an investigating authority should take into account the general parameters as to what dumping is when inquiring about the sufficiency of the evidence. The requirement is that the evidence must be such that an unbiased and objective investigating authority could determine that there was sufficient evidence of dumping within the meaning of Article 2 to justify initiation of an investigation.
Evidence of NV and EP at Different Levels of Trade In Guatemala–Cement II, the panel held that the Guatemalan IA was not justified in initiating an investigation based on an application that presented data for NV and EP at different levels of trade, and with important differences in the sales quantities, without examining the possible effects of such differences on price comparability (§§ 8.37ff.). Comparability of Submitted Evidence The Panel on Mexico–Steel Pipes and Tubes held that the information contained in a request for initiation was not sufficient if the information regarding NV consisted of one invoice and one price quote that did not even pertain to the known exporter but to a distributor, was related only to a small subset of the product under investigation, and concerned one single day. By contrast, the EP information reflected the full spectrum of products imported by Mexico from Guatemala over the entire POI, at the level of the Guatemalan producer or exporter. The panel found that differences of this kind typically
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lead to a distortion of the NV vis-à-vis the EP and thus, if not adjusted, they could give rise to apparent margins of dumping where no dumping in fact exists (§ 7.42). In Argentina–Poultry Antidumping Duties, the panel held that the Argentine IA had not justifiably initiated an investigation, even though the application contained evidence about at least a number of transactions that were dumped, since not all comparable export transactions had been included in the preliminary dumping analysis. Incomplete Information An investigation cannot be initiated on incomplete information. In Guatemala–Cement II, the IA was faulted for initiating an investigation involving a claim of threat of injury that contained information on dumping, injury, and the causal link, but did not provide information on the additional threat factors of Article 3.7 of AD. The Panel on Mexico–Steel Pipes and Tubes held that the Mexican IA could not have initiated an investigation on the basis of the volume of import data at the tariff-line level without any breakdown of such data at the specific product level. Interestingly, the Mexican IA had acknowledged this problem, stating, at the time of initiation, that this was one of the issues that it was going to investigate in the course of the investigation in order to determine the exact trend in the volume of imports of the subject product as part of its injury analysis. Actually, the investigation confirmed that the subject product constituted a substantial portion of the imports under this more general tariff line, thus confirming the reliability of the data. The panel did not consider any of this to be relevant in its assessment of whether, at the time of initiation, the Mexican IA was in possession of information sufficient to justify the investigation (§§ 7.58–60).166 2.9.6
Rights and Duties of Investigating Authorities during Investigation
An IA, when initiating an investigation, will possess information regarding dumping and injury, but still will have some way to go to establish that dumping indeed had caused injury. To do that, it might have to request additional information (by sending questionnaires to the parties to this effect), and it might need to verify all submitted information. At the end of the investigation process, it must be demonstrated that dumping has caused injury. The road that an IA must cover from the launch to the end of an investigation travels from sufficient information to launch the process to proof that dumping has caused injury. Throughout the process, an IA must perform an objective examination of the record before it as it develops, and respect due process. Parties to the process are under a duty to cooperate. 2.9.6.1 The Right to Request Information through Questionnaires IAs typically send out questionnaires to the domestic industry (requesting information on the injury), and the exporters (requesting information regarding the dumping margin). According to Article 6.1.1 of AD:
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Exporters or foreign producers receiving questionnaires used in an anti-dumping investigation shall be given at least 30 days for reply. Due consideration should be given to any request for an extension of the 30-day period and, upon cause shown, such an extension should be granted whenever practicable.
The AD Agreement does not provide for a definition or mandatory table of contents for questionnaires. The AB in EC–Fasteners (China) rejected the idea that an EU formulary requesting information regarding the market economy status of individual exporters was a questionnaire because of its limited scope.167 It briefly provided its understanding of the term “questionnaire” (§ 613): We therefore find that the “questionnaires” referred to in Article 6.1.1 are a particular type of document containing substantial requests for information, distributed early in an investigation, and through which the investigating authority solicits a substantial amount of information relating to the key aspects of the investigation that is to be conducted by the authority (that is, dumping, injury, and causation). While in many investigations one “questionnaire” may be employed to solicit such information on these aspects of the investigation, we consider that, depending on how different Members organize the conduct of the investigation process, a party may receive several substantial requests soliciting such comprehensive information that are “questionnaires” within the meaning of Article 6.1.1. (italics in the original)
The gist of the quoted excerpt, although admittedly it is not a monument of clarity, is that a questionnaire should have wide scope. The panel, nonetheless, does not exclude the possibility that various requests can occur within the investigating period. The question that this panel has left unanswered is whether questions of limited scope must still respect the thirty days limit provided for in Article 6.1.1 of AD. 2.9.6.2 The Right to Conduct On-the-Spot Verification IAs might find it useful to conduct on-the-spot verification to ensure the accuracy of submitted information. On-the-spot verification may take place only in cases where the firms to be verified agree to them, and the authorities of the exporting member have been notified and have not objected to their conduct (Article 6.7 of AD).168 Annex I of AD contains further details relating to on-the-spot verification. We should note, however, that verification is not compulsory. The aim of verification is to ensure that supplied information is accurate. IAs can have an opinion about the accuracy of supplied information even without going through the verification process. In the view of the Panel on US–DRAMS, the authorities (§ 6.78) “could ‘satisfy themselves as to the accuracy of the information’ in a number of ways without proceeding to some type of formal verification, including for example reliance on the reputation of the original source of the information.”169 The authorities must explain in clear terms the information required for verification purposes to the exporters/foreign producers (Argentina–Ceramic Tiles, panel report, § 6.57).170 They must also secure the agreement of firms where verification will take place, and WTO members where the firms are located (AB, China–HP-SSST (EU), and China– HP-SSST (Japan) at §§ 5.70ff. Verification does not have to be limited to information
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submitted prior to the visit, but it also may include information that will be provided during the course of verification. The Panel on Guatemala–Cement II ruled as much (§ 8.203).171 In China–HP-SSST, the panel dealt with the following request by the EU: an EU company had provided for the first time during the verification the Chinese IA with rectification of information that had been supplied before. The IA refused to accept it. The panel held that, in light of the fact that verification of the supplied information was quite simple, China had violated its obligations under Art. 6.7 AD and Annex 1§7 of AD by refusing to accept the rectification provided by the investigated company (§§7.98–101). The AB upheld this finding in §5.76. The results of verification must be made available to the verified firms, as well as to the applicants. The Panel on Korea–Certain Paper held that this disclosure does not necessarily have to be made in writing (§ 7.188). This finding is not totally unproblematic in light of evidentiary problems in the case of challenges regarding whether disclosure occurred or not. The obligation to disclose the results of the verification is intended to ensure that exporters can structure their cases for the rest of the investigation in light of those results. The Panel on Korea–Certain Paper also held that disclosure must contain adequate information regarding all aspects of the verification, including a description of the information that was not verified, as well as of the information that was successfully verified, since both could be relevant to the presentation of the interested parties’ case (§ 7.192). 2.9.6.3 The Right to Draw Inferences IAs might face cooperative or uncooperative behavior. There is an undeniable duty to cooperate, which has statutory underpinnings, and has been acknowledged in case law as well (Panel report on EC–Countervailing Measures on DRAM Chips). Briefly, when faced with uncooperative behavior, panels can have recourse to suboptimal available information to decide on the imposition of AD duties (the so-called best information available, BIA, the statutory underpinnings of which are in Article 6.8 of AD, are discussed later in this chapter). The Panel on EC–Countervailing Measures on DRAM Chips went one step further and found that an authority can draw adverse inferences in case interested parties fail to cooperate (§§ 7.60–61).172 We will discuss this point in more detail later in this chapter since it is intimately linked with the right of IAs to have recourse to the BIA when facing uncooperative behavior by investigated exporters. 2.9.6.4 The Duty to Observe Due Process There is nothing like a “World Antidumping Authority” composed of international officials. IAs are national administrative entities, and as such, they are part of the political economy constraints in any given sovereignty. The framers of the AD Agreement, mindful of the potential influence that domestic constituencies might exercise on IAs, opted for institutional guarantees that would reduce the risk for politically motivated decisions. This is where the requirement for evenhandedness imposed on IAs begins. It is a multi-
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faceted requirement, since IAs must observe this requirement at different stages of the investigation process. Since exporters and domestic industry have antithetical interests, they must be afforded equal chances to present their views. In this vein, interested parties are to be given timely opportunities to see all information that is relevant to the presentation of their case, that is not confidential,173 and that has been used by the investigating authorities. Article 6.1 of AD captures the essence of this obligation: “All interested parties in an anti-dumping investigation shall be given notice of the information which the authorities require and ample opportunity to present in writing all evidence which they consider relevant in respect of the investigation in question.” This obligation is explained further in a series of more specific obligations. Interested parties must be allowed to prepare presentations174 on the basis of this information, and authorities must keep a public record of the investigation to serve this duty (Article 6.4 of AD). For example, in the case of a constructed NV, the actual figures for cost of manufacture, SG&A expenses, or profits used in the calculation of the constructed NV are to be disclosed to the interested party requesting such information.175 IAs must thus divulge information submitted by other interested parties, as well as information from other sources or documents prepared by the authorities, to comply with this obligation. This obligation, thus, corresponds in part to the duty to access the file that interested parties have, and which is discussed in detail later in this chapter.176 2.9.6.5 The Duty to Protect Confidential Information During AD investigations, a substantial amount of information requested (and often submitted) is of a confidential nature. To provide interested parties with the incentives to submit information of this nature, which might be crucial during the investigation process, the AD Agreement guarantees that it will be disclosed only with the permission of the party submitting it (Article 6.5 of AD). According to the agreement, there are two types of confidential information: information that is confidential by nature (the agreement contains an illustrative list of information that is confidential by its very nature), and information for which the party supplying it has requested confidential treatment. Regardless of whether the supplied information is by nature confidential or a request to be treated as such has been lodged, it is always the party that provides the information that must show “good cause”177 why the information supplied should be treated as confidential. Several panels (e.g., Guatemala–Cement II; Korea–Certain Paper) have held as much.178 The party aiming to show good cause must point to the prejudicial effect that it wishes to avoid in order to substantiate its request. The IA is obligated to evaluate objectively the request made for confidentiality. The Panel on EC–Fasteners (Article 21.5–China) must balance the prejudicial effect for the party showing good cause, with the prejudicial effect on due process because of nondisclosure (§ 7.30ff.). In the same report, the panel held that the lack of contest by exporters does not absolve an IA from its obligation to
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objectively evaluate request for confidentiality based on good cause. The absence of evidence that the UE IA had done so, led to a finding that the EU had acted inconsistently with its obligations under the AD Agreement (§ 7.42ff.). The Panel on China–HP-SSST saw a ‘procedural requirement’ as well in this context. It held that China had violated its obligations under Article 6.5 of AD by not providing evidence to the effect that it had objectively reviewed the alleged ‘good cause’ for confidential treatment (§ 7.299). The AB upheld this finding adding that, merely summarizing reasons by petitioners to this effect, was inconsistent with Article 6.5 of AD §§ 5.99–100. IAs have no discretion when it comes to information that the AD Agreement characterizes confidential. They must treat it as such. This is the case for all information coming under one of the headings included in the indicative list, as well as with respect to all similar information. IAs retain discretion, and they can refuse to adhere to a request to treat some information as confidential. If they do so, they can disregard the submitted information unless the interested party has proved its correctness. Article 6.5.2 of AD reads: If the authorities find that a request for confidentiality is not warranted and if the supplier of the information is either unwilling to make the information public or to authorize its disclosure in generalized or summary form, the authorities may disregard such information unless it can be demonstrated to their satisfaction from appropriate sources that the information is correct.
When an IA accepts a request for confidentiality, no justification is required under Article 6.5 of AD explaining why it has accepted it. The Panel on Mexico–Steel Pipes and Tubes ruled in this way (§ 7.380). When confidential information has been submitted, a nonconfidential summary will be requested and, in principle, disclosed. The summary should be sufficiently detailed to permit a reasonable understanding of the substance of the information submitted in confidence. The Panel on Argentina–Ceramic Tiles held that the purpose of nonconfidential summaries was to inform interested parties of the information provided and to enable them to defend their interests. In EC–Fasteners (China), the AB upheld this point, stating that the purpose of nonconfidential summaries was to permit interested parties develop a “reasonable understanding” of the substance of the information withheld (§§ 541–542).179 The purpose of nonconfidential summaries is, therefore, not to provide a detailed account of the situation. An IA is, therefore, not allowed to reject an exporters’ response because the summary was not sufficiently informative to allow the calculation of NV, EP, and the margin of dumping (Panel report, EC–Fasteners (China), § 6.39). If, in exceptional circumstances, parties indicate that the information provided cannot be summarized, they will be asked to justify their opinion (Article 6.5.1 of AD).180 Failure by the IA to request an explanation of why it is impossible to supply a nonconfidential summary amounts to a violation of Article 6.5.1 of AD. The AB found this to be the case in EC–Fasteners (China), at §§ 556ff. China had claimed that the EU producers had not pro-
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vided a nonconfidential summary, and that the EU had not insisted that they do so. As a result, so the argument went, the right of defense of the Chinese exporters had been negatively affected since they were deprived of information that probably was crucial to their eventual success before the European IA. For example, Agrati, an EU producer, had provided a nonconfidential summary of information concerning some injury factors, but not others. For the latter, the following statement was included: “the information cannot be summarized without disclosing confidential information, which can cause damage to our company. The information has been provided as limited” (§ 550). Fontana Luigi, another EU producer, did not supply a nonconfidential summary with regard to distribution systems and price setting. The reason for doing so was presented in the following terms: “... the information is by nature confidential because its disclosure would be of significant competitive advantage to a Competitor” (§ 551). In the AB’s view, none of the information provided met the “exceptional circumstance” standard established in Article 6.5 of AD, which must be met in order for the obligation to provide a nonconfidential summary to be waived (§ 553). Consequently, the AB, upholding the panel, found that the EU had violated its obligations under Article 6.5 of AD by accepting the justifications of the two companies as valid reasons to waive their obligation to provide a nonconfidential summary.181 Now what if confidential information submitted to an IA is then submitted to a panel? Art. 17.7 AD deals with this issue. When an IA transmits confidential information in its possession to a panel, the panel may not disclose it absent authorization from the entity that had supplied the information to the IA. The Panel on China–HP-SSST held as much (§§7.21–29), and the AB upheld this finding (§§ 5.315–316). 2.9.6.6 The Duty to Respect Transparency Article 12.2 of AD requests an IA to make public any preliminary or final determination or acceptance of price undertakings. Articles 12.2.1–3 of AD reflect the elements that should figure in the public notice. Before making a final determination, IAs must inform all interested parties of the “essential facts,” which formed the basis for the decision to apply AD measures. In China–HP-SSST, the Panel held that the description must include sufficient detail to ensure that the IA’s reasons for concluding as it did can be discerned and understood by the public, e.g., not only interested parties, but also consumer organizations etc. (§7.270). What should be considered to be essential facts? Let us start with what this duty does not imply. Case law reveals that the duty to inform stated in Article 6.9 of AD does not imply that the IA is required to inform the parties of their legal determinations during the course of an investigation, or of the reasons for accepting or rejecting certain arguments.182 Case law has also established that the disclosure obligation under Article 6.9 of AD relates to factual information only—that is, it does not extend to cover legal evaluations.183 In EC–Salmon (Norway), the panel held that this term refers to the “body of facts essential to the determinations that must be made by the IA before it can decide whether to apply definitive measures. That is, they are the facts necessary to the process of analysis and
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decision-making by the IA, not only those that support the decision ultimately reached” (§ 7.807). This finding leaves discretion to IAs, of course, to pick and choose among the facts that they have reviewed, but discretion is justiciable. The Panel on China—Autos (US) provided the parameters of the test that should guide IAs when choosing what to disclose as essential facts (§ 7.72): What constitute essential facts must therefore be understood in light of the content of the findings needed to satisfy the substantive obligations with respect to the application of definitive measures under the Anti-dumping Agreement, as well as the factual circumstances of each case.184
“Essential,” thus, refers to the facts that help explain the findings reached by an IA with respect to definitive measures, regardless of whether they take the form of duties or price undertakings. This disclosure should take place early enough for the parties to be in a position to defend their interests (Article 6.9 of AD). The modalities of performing disclosure are left to the discretion of IAs (Panel on Argentina–Ceramic Tiles, § 6.125). In China–Broiler Products, the panel found that a narrative description of the data cannot ipso facto be considered insufficient if the essential facts the authority is referring to are in possession of the respondent (§ 7.95). In this, as well as in its report on China–HPSSST the Panel held that the formula used to compare normal value to export price is an essential fact (§ 7.239). In China–HP-SSST, the Panel also held that China should have disclosed (properly summarized) all of the domestic and import price data in its possession as well (§ 7.250). The AB upheld this finding, and went one step further. In its view, facts essential to impose duties but also to reject imposition are essential, elements such as home market sales, export sales, adjustments of prices, calculation methodologies used (§§ 5.130–131). In China–GOES (Article 21.5–US), the panel held that the obligation to disclose essential facts could not be overlooked, even in cases where disclosure of information could prejudice the position of a party to the dispute. In this case, the panel contemplated whether disclosure of essential facts should take place at all, when only two competitors existed in a market. In this case disclosure of average domestic sales prices, that constituted an essential fact on which the decision by the IA had been based, could allow the competitor to proceed to calculations that would provide it with an advantage in terms of information regarding the costs incurred by the other party. The panel decided that in similar cases, IAs must at the very least publish a nonconfidential summary of similar information that constituted an essential fact in reaching their final decision (§§ 7.168–7.173). 2.9.7 The Rights and Duties of Interested Parties The counterpart to the rights and duties of IAs are of course the rights and duties of interested parties. The term “interested parties” is defined in Article 6.11 of AD, and includes all of the following:
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(i) An exporter or foreign producer or the importer of a product subject to investigation, or a trade or business association, a majority of the members of which are producers, exporters, or importers of such product; (ii) The government of the exporting member; (iii) A producer of the like product in the importing member or a trade and business association, a majority of the members of which produce the like product in the territory of the importing member. This list shall not preclude members from allowing domestic or foreign parties other than those mentioned here to be included as interested parties. Categories (i) and (ii) refer, of course, to the entities threatened with the imposition of duties,185 whereas category (iii) should comprise entities interested in imposing AD duties. 2.9.7.1 The Right to Access the File The right to access the file is included in Article 6.2 of AD, quoted previously. Recall that a request must be made to the IA in order for interested parties to exercise this right.186 2.9.7.2 The Right to Be Heard The right to be heard is a direct consequence of the duty of IAs to observe due process. Interested parties have the right under Article 6.2 of AD to defend their views and present them orally. They do not incur the obligation to appear in meetings, even if invited to do so, and their position will not be prejudged because of failure to appear. Appearance before the IA is left within the discretion of interested parties. The right to be heard should be read in conjunction with the duty of IAs to ensure evenhandedness in the conduct of the investigation as far as the rights of the interested parties are concerned. IAs are free to organize hearings, for example, if they deem it appropriate. If they do, they should provide all interested parties with an opportunity to present their views at the hearing. If some accept to do so, and some do not, the latter parties should not be negatively prejudged simply because they decided not to attend the hearing. An interested party might, for example, decide to send its views by email. It is a totally different case if a party decides to behave uncooperatively. We will discuss this issue later in this chapter. The right to be heard includes the manner in which oral presentations will be made. In China–Broiler Products, the US government had requested from MOFCOM (the Ministry of Commerce, the Chinese IA) to meet with the petitioner in order to clarify some issues regarding the request to impose AD duties. China replied that the issues raised by the US did not directly concern the petitioner, and consequently, it decided to hear its opinions by way of presentation. There was no evidence in the record that it had informed interested parties about the US request, though, although China did assert something to this effect before the panel. The panel, in light of the absence of evidence, found that China had violated its obligations under Article 6.2 of AD (§§ 7.20–25).
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2.9.7.3 The Duty to Cooperate The AD Agreement does not explicitly mention a duty to cooperate for interested parties. Case law has interpreted Article 6.8 of AD as implying a similar duty: In cases in which any interested party refuses access to, or otherwise does not provide, necessary information within a reasonable period or significantly impedes the investigation, preliminary and final determinations, affirmative or negative, may be made on the basis of the facts available. The provisions of Annex II shall be observed in the application of this paragraph.
It is the AB, in its report on US–Hot Rolled Steel, that deduced a “duty to cooperate” from this wording. An IA is entitled to expect a very significant degree of effort from investigated exporters. They must cooperate to the “best of their abilities” (§ 102). Based on this finding, the Panel on EC–Countervailing Measures on DRAM Chips187 considered that a duty to cooperate exists in the SCM context as well (§§ 7.60– 61). Failure to observe this duty might lead to recourse to BIA, the subject of the next discussion. 2.9.8
Balancing Rights and Duties: Recourse to BIA
An IA will rarely, if ever, launch an AD investigation on its own initiative. The process belongs to the parties, the IA being reduced to the role of “honest broker.” Even when an investigation has been launched on its own initiative, an IA must still play the role of honest broker, ensuring that the rights and obligations of all interested parties have been respected. When evidence proves insufficient, IAs will decide against the imposition of duties. When evidence is insufficient because of uncooperative behavior of the exporter, though, they have the right to continue and complete the process using “second best” information to this effect. This is what recourse to “best information available” amounts to, for all practical purposes. Recourse to similar procedures is possible only under very strict conditions, as detailed later in this chapter. Article 6.8 and Annex II of AD provide the legal basis for recourse to BIA, the legal institution that enables an IA to continue with the investigation in spite of the lack of cooperation from an interested party. 2.9.8.1 The Rationale for This Provision Recourse to BIA is the stick that threatens exporters with sanctions in case they behave in uncooperative manner, as explained in Annex II, § 7: It is clear, however, that if an interested party does not cooperate and thus relevant information is being withheld from the authorities, this situation could lead to a result which is less favorable to the party than if the party did cooperate.
It is the risk to see “second best” information used against it that will prompt exporters to behave cooperatively, in the eyes of the legislator at least.
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Recourse to BIA, however, is not meant to open the door to abuses by the IA in the name of uncooperative behavior by the interested parties that they might be facing. The AD Agreement provides for a series of measures aimed at reducing this risk. It is probably the Panel on Mexico–Antidumping Measures on Rice that provided the most authoritative understanding of the aims pursued through the enactment of this provision. This panel faced the following situation. According to Mexican laws, the IA would always apply the highest dumping margin (assuming a range of margins) based on the facts available to all those exporters that had refused to cooperate with it during the investigation process. The panel held that this law was based on a misunderstanding of Article 6.8 of AD, which was not aimed at punishing uncooperative parties. In fact, in this panel’s view, case law had made it clear that, even when presented with imperfect responses, an IA must always try to make good use of them (§ 7.238). The AB agreed with the explanation of the panel concerning the term “best information available.” In its view, this term required an assessment in order to determine which facts are best suited to fill in the missing information (§ 297): The use of the term “best information” means that information has to be not simply correct or useful per se, but the most fitting or “most appropriate” information available in the case at hand. Determining that something is “best” inevitably requires, in our view, an evaluative, comparative assessment as the term “best” can only be properly applied where an unambiguously superlative status obtains. It means that, for the conditions of Article 6.8 of the AD Agreement and Annex II to be complied with, there can be no better information available to be used in the particular circumstances. Clearly, an investigating authority can only be in a position to make that judgment correctly if it has made an inherently comparative evaluation of the “evidence available.” (italics in the original)188
What the AB effectively did was underscore the term “best” at least as much as the term “available,” and ensure thus that recourse to the “best information available” does not amount to opening the door wide to abuses. 2.9.8.2 When Is Recourse to BIA Appropriate? Recourse to BIA is legitimized if a requested party (Article 6.8 of AD) does any one of the following: • Refuses access to necessary information • Fails to provide necessary information within a reasonable period of time • Significantly impedes the investigation189 The Panel on China–Autos (US) underscored this point, rejecting an argument by China that recourse to BIA was conditioned on a general failure to cooperate by declining to participate in an investigation. It held that recourse to BIA is legitimized only when one of the three statutory grounds has been met. Failure, thus, of an unknown exporter to register and participate in the proceedings does not absolve an IA from its duty to request information and have recourse to BIA in case its request is not answered (§ 7.138).
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Case law has established that IAs have a triple duty. First, they must clearly describe the information it requests. The Panel on Argentina–Ceramic Tiles noted to this effect (§ 6.55): Thus, the first sentence of paragraph 1 [of Annex II] requires the investigating authority to “specify in detail the information required,” while the second sentence requires it to inform interested parties that, if information is not supplied within a reasonable time, the authorities may make determinations on the basis of the facts available. In our view, the inclusion, in an Annex relating specifically to the use of best information available under Article 6.8, of a requirement to specify in detail the information required, strongly implies that investigating authorities are not entitled to resort to best information available in a situation where a party does not provide certain information if the authorities failed to specify in detail the information which was required.
Second, they must always inform the supplying party of the reasons for rejecting submitted information and provide it with the possibility to provide additional explanations within a reasonable period of time (Annex II, § 6 of AD). This provision, though, should not be understood, according to the Panel on Korea–Certain Paper, as the means to provide the interested party with a second chance to submit information (§ 7.85). The ambit of submissions is, thus, circumscribed. Third, as we will see later in this chapter in detail, when recourse to the best information available is made, it should be done with what has been called “special circumspection.” IAs thus must describe accurately the information requested, explain the reasons for rejecting information supplied, and use best information available with special circumspection irrespective of the reason they have decided to have recourse to it. It is of course, one thing to face total absence of information, and another thing altogether when some information has been provided. In the latter case, a balancing test is required before recourse to BIA is taken. On the one hand, exporters might be procrastinating the process by submitting inappropriate information.190 On the other, an IA driven say by political economy considerations might reject useful, submitted information lightheartedly, and thus jeopardize the chances of exporters to have a fair trial. The AD Agreement strikes a balance between these two concerns, stating that IAs do not have total discretion to reject submitted information. § 3 of Annex II of AD reads: All information which is verifiable, which is appropriately submitted so that it can be used in the investigation without undue difficulties, which is supplied in a timely fashion, and, where applicable, which is supplied in a medium or computer language requested by the authorities, should be taken into account when determinations are made.
This means that recourse to BIA should not be made lightheartedly when some information has been submitted. According to the Panel on US–Steel Plate, an IA is required to take into account information that is verifiable and satisfies all the criteria of § 3 of Annex II of AD (§ 7.57). According to this panel (§ 7.71), information is verifiable if the
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“accuracy and reliability of the information can be assessed by an objective process of examination.” The fact that verifiable information was not actually verified is irrelevant. The duty to take into account similar information is not affected by the absence of verification (Panel on Guatemala–Cement II, § 8.252).191 Submitted information does not necessarily have to be used, though, even if it is verifiable. One should not confuse the obligation to consider verifiable information with a duty to use it. IAs might decide for good reasons not to do so. This could be the case when, for example, submitted information cannot be used without undue difficulty. The Panel on US–Steel Plate held that it is not possible to determine in the abstract whether information can be used without undue difficulty. IAs are under a duty to explain why they could not have used verifiable information, and it is on the basis of similar explanations that WTO Panels will decide whether they were legitimized in refusing it (§ 7.74). Finally, note that information must be submitted in accordance with the IA’s domestic laws, otherwise it can be legitimately set aside. The Panel on Argentina–Poultry Antidumping Duties (§ 7.191) held that information submitted by Brazilian exporters without respecting the Argentine accreditation requirements had not been appropriately submitted, and thus, had lawfully been set aside. With this in mind, we turn now to the three grounds justifying recourse to BIA and discuss them one by one in what follows. 2.9.8.3 Refusing Access to Necessary Information The agreement does not specify what is meant by “necessary information.” Since it is IAs that request information, the question naturally arises of whether the mere fact that information was requested or required by the authorities suffice to label it necessary. Additionally, one might also legitimately ask whether IAs should ex ante define what is necessary, or, conversely, whether they should be allowed to ex post decide whether nonsupplied information was necessary. Recall that IAs will use questionnaires to request information, which they might or might not use. Information that has been requested is thus, not by definition “necessary.” Furthermore, as we saw previously, the Panel on US–Steel Plate allowed for the possibility to discard information that cannot be used without undue difficulty, provided that an explanation to this effect has been supplied (§ 7.74). Yet again, unused information of the sort cannot be deemed to be necessary to reach an outcome. Lack of provision or use of requested information, thus, as a threshold issue, should not be equated to opening the door to the “best information available.” IAs must still decide whether the nonsupplied information was “necessary.” Case law recognizes as much, but has been rather deferential toward similar judgments by IAs, probably even too deferential. We explain. In Korea—Certain Paper, a certain percentage of the domestic sales of two exporters was made through a related company (called CMI), and the IA, for this reason, had considered that it needed the financial
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statements of CMI for the purposes of verifying the completeness of the NV data submitted. In spite of the fact that the two exporting companies and CMI had submitted all their domestic sales data, the IA considered that the failure to provide CMI’s financial statements implied that necessary information had not been provided (§ 7.51). On this basis, the IA decided to reject all the domestic sales data submitted. The panel upheld this approach. The IA had decided to base its NV determination on the prices charged by the related company (CMI) to independent buyers. For this reason, in the panel’s view, the financial statements of CMI were necessary information (§§ 7.43–44). A legitimate question can be raised here as to whether supporting evidence (like that requested from CMI) actually constituted necessary information. Arguably, with reasonable additional effort, the IA could have procured the information it needed to establish the NV from the domestic sales data of the two companies and the CMI. Should panels simply endorse whatever an IA deems as “necessary” information? Should not the IA at least explain what kind of information the financial data of CMI included that could not be traced in the information already supplied? These questions seem reasonable. And yet, the approach taken in Korea–Certain Paper was also largely followed in Egypt–Steel Rebar, where the panel held (§ 7.155): On the question of the “necessary” information, reading Article 6.8 in conjunction with Annex II, paragraph 1, it is apparent that it is left to the discretion of an investigating authority, in the first instance, to determine what information it deems necessary for the conduct of its investigation (for calculations, analysis, etc.), as the authority is charged by paragraph 1 to “specify ... the information required from any interested party.” This paragraph also sets forth rules to be followed by the authority, in particular that it must specify the required information “in detail,” “as soon as possible after the initiation of the investigation,” and that it also must specify “the manner in which that information should be structured by the interested party in its response.” Thus, there is a clear burden on the authority to be both prompt and precise in identifying the information that it needs from a given interested party.
It simply cannot be, though, that the authority has to observe two procedural requirements (i.e., specifying the information required and the manner in which it should be communicated), and then be left alone to decide what is (and what is not) necessary information, without its judgment being subjected to judicial review.192 This is not a satisfactory solution. Intuitively, one would expect panels to link the term “necessary information” to the term “essential facts,” the cornerstone of a final determination. By this, we mean that necessary information must anyway be reflected in the essential facts communicated to interested parties. One could even go one step further, and argue that some information might be necessary to decide on what the essential facts are.193
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2.9.8.4 Failure to Provide Necessary Information within a Reasonable Period of Time The second grounds for legitimate recourse to BIA, concerns the failure by investigated entities to provide necessary information within a reasonable period of time. The difference with the first ground is that, in this case, information might have been provided, albeit belatedly so. The term “necessary information” has not been meaningfully interpreted in this context either. Case law has responded to questions regarding the procedural aspects of failure to provide information within a reasonable time, but it has not addressed head on the understanding of the term “necessary information.” The Panel on US–Hot-Rolled Steel dealt with a challenge by Japan against a US decision to reject submitted information. The US authority (DOC) had rejected information by a Japanese company (Nippon Steel Corporation, NSC) because it had been submitted after the deadline it had unilaterally fixed. NSC did not respect the deadline, but it still sent its responses to DOC before the initiation of the verification process. In the panel’s view, what mattered was not respecting unilateral deadlines, but rather whether the process had suffered as a result of NSC’s behavior. In its view, this was not the case since there was ample time for DOC to verify the submitted information (§ 7.57). On appeal, the AB confirmed the panel’s finding and explained in some detail how the term “reasonable period of time” (within which information must be provided) should be understood (§ 85): In considering whether information is submitted within a reasonable period of time, investigating authorities should consider, in the context of a particular case, factors such as (i) the nature and quantity of the information submitted; (ii) the difficulties encountered by an investigated exporter in obtaining the information; (iii) the verifiability of the information and the ease with which it can be used by the investigating authorities in making their determination; (iv) whether other interested parties are likely to be prejudiced if the information is used; (v) whether acceptance of the information would compromise the ability of the investigating authorities to conduct the investigation expeditiously; and (vi) the numbers of days by which the investigated exporter missed the applicable time-limit.
In this vein, the Panel on Korea–Certain Paper examined whether information had been provided within the deadline set by the IA, and, if not, whether it had nevertheless been submitted within a reasonable period of time by applying the criteria set forth by the AB in the US–Hot-Rolled Steel report (§§ 7.48–55) quoted previously. This approach has become standing case law. 2.9.8.5 Significant Impediment of Investigation The third grounds for having legitimate recourse to BIA comes into play when IAs encounter a significant impediment to the investigation. This provision has not been interpreted in many instances, and the report from the Panel on Guatemala–Cement II emerges as one of the few exceptions. This report stands for the proposition that the IA must have acted
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itself in reasonable, objective, and impartial manner, otherwise it cannot claim that the investigated party is responsible for significantly impeding the investigation process. In the case at hand, Guatemala sent a verification team to review information that had been provided by Cruz Azul, a Mexican cement company. Guatemala had included in its verification team two US nongovernmental experts, who, had participated in prior US antidumping proceedings regarding allegations of dumping against Mexican cement producers. Cruz Azul had not been an interested party in those proceedings, and Guatemala further claimed that it had signed confidentiality agreements with the US experts. The Panel found that Mexico’s reluctance to allow the visit by the verification team was not unreasonable. In its view (§ 8.250): In particular, there is no guarantee that the role of the two non-governmental experts in the US proceedings (i.e., to assist US domestic producers in their claims against Mexican cement exporters) would not undermine their objectivity and impartiality during the verification visit to Cruz Azul. The fact that steps may have been taken to ensure that the non-governmental experts did not violate the confidentiality of Cruz Azul’s data provides no guarantee that their role in the US proceedings would not undermine their objectivity and impartiality during the verification visit to Cruz Azul, since it is possible to be partial and non-objective while preserving confidentiality.
According to the Panel, the agreement “does not require cooperation by interested parties at any cost” (§ 8.251). This report conditions recourse to BIA on the behavior. 2.9.8.6 Special Circumspection Even when the authority is entitled or forced to make determinations on the basis of the available facts, it is not entirely free to make its determinations on whatever basis it chooses. The determination should still be based on facts, not on assumptions or conjecture. The agreement imposes two distinct obligations in this respect. First, in light of the requirements set forth in §§ 3 and 5 of Annex II of AD, an IA must use the information submitted by the interested parties as much as possible.194 Second, Annex II, § 7 of AD, requires from IAs to use “special circumspection” when basing a determination on secondary sources of information. “Secondary sources” could, in principle, cover a variety of sources of information, including “interested parties.” When doing that, there are specific obligations that they must respect. In this vein, if IAs use information from the petitioner without verifying its accuracy, they will be running afoul of their obligations under Annex II of AD (Panel on Mexico–Steel Pipes and Tubes, § 7.193). On the other hand, an IA cannot claim that it does not need to verify information that it receives simply because it verified it at a prior stage of the investigation in order to comply with Article 5.3 of AD. The Panel on Korea– Certain Paper underscored this point in § 7.124 of its report. More generally, the AB, in its report on Mexico–Antidumping Measures on Rice, held that an IA must not use data from secondary sources without ascertaining the reliability and accuracy of such information. It must check this information, where practicable, against information obtained from
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other independent sources at its disposal, including material submitted by interested parties (§ 289).195 2.9.9 The Length of the Period of Investigation The investigation itself normally runs from a period of 12 months to a maximum of 18 (Article 5.10 of AD). During the investigation, IAs will be reviewing data concerning dumping, injury and the causal link between the two. It would have been unreasonable to extend the period for which data is collected and analyzed to eternity. Some reasonable boundaries must be drawn that will allow IAs, by observing past and as close to present as possible behavior, draw reasonable conclusions about the future. After all, no matter whether the prospective or the retrospective system have been privileged, it is future transactions that will be burdened with the imposition of AD duties. 2.9.9.1 The Function of POI This is where the notion of “period of investigation” (POI) kicks in. The term “POI” refers to the period for which dumping and injury-related data are collected and analyzed. This period normally precedes the initiation of the investigation, which runs from 12 to 18 months, as already stated, and should be as close as possible to the date of initiation of investigation. It is of course not the case that all WTO members have symmetric administrative capacity to process data. The POI, therefore, will be influenced by endogenous to national administrations factors as well. 2.9.9.2 Recommendation on Length of POI Strangely enough, the AD Agreement does not expressly discuss the length of the POI. The Panel on EC–Tube or Pipe Fittings acknowledged that (footnote 116): The concept of a set period of investigation to examine the existence of dumping has been present in the GATT system for over 40 years. Indeed, a 1960 Report by a Group of Experts concerning antidumping and countervailing duties considered the use of a “pre-selection system.” See Group of Experts, Second Report on Antidumping and Countervailing Duties, adopted on 27 May 1960 (L/1141) BISD 9S, 194.
This is strange omission, since the importance of the choice of POI cannot be overstated. The Panel on Mexico–Antidumping Measures on Rice summed it up very well at § 7.56: The choice of the period of investigation is obviously crucial in this investigative process as it determines the data that will form the basis for the assessment of dumping, injury and the causal relationship between dumped imports and the injury to the domestic industry.
What the framers of the AD Agreement did not do, the members of the WTO Antidumping Committee addressed a few years later. The WTO Antidumping Committee (ADP Committee) adopted a “Recommendation Concerning the Periods of Data Collection for Antidumping Investigations” (hereinafter
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called the “POI Recommendation”). In the words of the Panel on Guatemala–Cement II (§ 8.266), “this recommendation reflects the common practice of Members.” The POI Recommendation196 distinguishes between periods of data collection for dumping and injury investigations. The period of data collection for dumping investigations normally should be 12 months, and in any case no less than six months. This period should end as close to the date of initiation as is practicable. The period of data collection for injury investigations should normally be at least three years unless a party from whom data is being gathered has existed for a lesser period. The period of data collection for injury investigations should include the entirety of the period of data collection for the dumping investigation. The ADP Committee stated in the POI Recommendation that it was merely issuing guidelines, which should not preclude an IA from choosing a different POI. In this case, an IA should include in public notices, or in separate reports, an explanation of the reason for the selection of a particular period for data collection. There is, thus, no legal compulsion imposed on WTO members to follow the POI Recommendation verbatim. The Panel on US–Hot-Rolled Steel, based on discussions in the ADP Committee concerning the nature of the committee’s recommendations, confirmed that the POI Recommendation was a nonbinding instrument. Accordingly, in the panel’s view, all obligations imposed on an IA with respect to the length of the POI have to be found in the AD Agreement itself (footnote 152 of the report).197 Subsequent panels, nevertheless, have shown considerable deference to the substantive part of the POI Recommendation, its nonbinding nature notwithstanding. In Argentina–Poultry Antidumping Duties, the panel held (§ 7.287): Furthermore, we note that the issue of periods of review has been examined by the Antidumping Committee. It has issued a recommendation to the effect that, as a general rule, “the period of data collection for injury investigations normally should be at least three years, unless a party from whom data is being gathered has existed for a lesser period, and should include the entirety of the period of data collection for the dumping investigation.” It would appear, therefore, that the period of review for injury need only “include” the entirety of the period of review for dumping. There is nothing in the Antidumping Committee’s recommendation to suggest that it should not exceed (in the sense of including more recent data) the period of review for dumping.
The Panel on Mexico–Antidumping Measures on Rice, while recognizing its nonbinding nature, used the POI Recommendation as support for its findings (§ 7.62). On appeal, the AB upheld this approach in its totality (§ 169): It appears to us that the Panel referred to the Recommendation, not as a legal basis for its findings, but simply to show that the Recommendation’s content was not inconsistent with its own reasoning. Doing so does not constitute an error of law.198
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2.9.9.3 POI Ends before Initiation of Investigation The POI ends before the initiation of the investigation, at least most of the time. The Panel on EC–Tube or Pipe Fittings explained the rationale for using a POI that ends before the initiation of the investigation in the following terms (§ 7.101): There are practical reasons for using an investigation period, the termination date of which precedes the date of initiation of the investigation. This ensures that the data that will form the basis for the eventual determination are not affected in any way by the initiation of the investigation and any subsequent actions of exporters/importers. The rationale is thus to acquire a finite data set unaffected by the process of the investigation. This can form the basis for an objective and unbiased determination by the investigating authority. The period of investigation terminates as close as possible to the date of initiation of the investigation in order to ensure that the data pertaining to the investigation period, while historical, nevertheless refers to the recent past. The use of a sufficiently long period of investigation is critical in order to ensure that any dumping identified is sustained rather than sporadic.
2.9.9.4 Recent Data Should Be Used In US–Hot-Rolled Steel, the US IA had gathered data for a three-year period (1996–1998) and acknowledged that this was required for purposes of conducting injury-analysis. It then used data from 1996 and 1997 to decide on injury. The US had argued that the reason that it had not compared data for 1996 and 1997 with that for 1998 was that “changes created a new economic context for the performance of the industry.” The US did not explain why it considered the data no longer relevant in light of the changed economic circumstances. Nevertheless, the panel did not consider it inappropriate for the IA to examine only data from two years, as similar data was germane to the most recent period and included the period of alleged dumped imports (§ 7.234). The panel emphasized that no endpoint-toendpoint comparison was required and that, in certain circumstances, it would be reasonable for an IA to examine only part of the data covering a two-year period. So long as three recent years of data had been gathered, and these three-year data had been used, at least in part, the authority would seem to be able to get away with the fact that it did not analyze part of the data for certain factors mentioned in Article 3.4 of AD. In Mexico–Antidumping Measures on Rice, the US had challenged the decision by the Mexican IA to use a POI for injury that ended more than 15 months prior to the initiation of the investigation. The panel considered that while the AD Agreement does not contain any specific and express rules concerning the period to be used for data collection in an AD investigation, this does not mean that the authorities’ discretion in using a certain period of investigation is boundless (§ 7.57). The panel took the view that there was necessarily an inherent real-time link between the investigation leading to the imposition of measures, and the data on which the investigation was based.
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In spite of the fact that an AD investigation out of necessity relies on historical data gathered during a past POI, such information should be the most recent information reasonably available (§§ 7.58ff.). The panel considered that a 15-month gap between the end of the period of investigation and the initiation of the investigation was long enough to impugn the reliability of the evidence. In the panel’s view, Mexico had thus failed to use data that met the criterion of positive evidence pursuant to Article 3.1 of AD (§ 7.64). The AB fully upheld the reasoning of the panel (§§ 163–72). It emphasized that the determination of whether injury exists should be based on data that provides indications of the situation prevailing when the investigation takes place, because the conditions to impose an AD duty are to be assessed with respect to the current situation (§ 165). The Panel on Mexico–Steel Pipes and Tubes considered that an 8-month gap between the end of the POI and the initiation of the investigation was reasonable. It acknowledged that this 8-month gap implied that the IA did not have “the most pertinent, credible, and reliable information,” but considered that “practical time constraints inherent in the production of data that must then be collected and analyzed by the applicant (in order to be relied upon and submitted in the application), and then analyzed by the investigating authority,” and the fact that “the investigation occurred within the overall time constraints envisaged by the Agreement,” were sufficient reasons to conclude that the temporal gap did not preclude the authority from making a determination of injury that was based on positive evidence and that involved an objective examination (§ 7.239). 2.9.9.5 Shorter Periods Can Be Lawful In Guatemala–Cement II, the panel rejected the idea that the use of a 1-year period of data collection would be a priori inconsistent with the requirement of Article 3.2 of AD (to consider whether there has been a significant increase in the volume of dumped imports). Recall that the examination of whether a significant increase has occurred is part of the injury analysis for which the POI Recommendation considered that a 3-year period of data collection was the norm. The panel considered that no provision in the agreement specified the precise duration of the period of data collection. In this case, Guatemala had argued that the reason for the shorter period of data collection was that exports by the Mexican producer, Cruz Azul, did not become significant until the year of data collection, a conclusion supported by the record of the investigation. Under these circumstances, while the panel took the view that a longer data collection period might have been preferable, it was unable to find that the use by Guatemala of a 1-year data collection period was inconsistent with Guatemala’s obligation under Article 3.2 of AD (§ 8.266). 2.9.9.6 Cherry Picking Is Not Permissible In Mexico–Antidumping Measures on Rice, the US claimed that the AD Agreement had been violated because the Mexican IA had analyzed data pertaining to only six months for each of the three years of data collection. Mexico asserted that it was necessary to
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examine these particular 6 months of every year, instead of the full year, in order to ensure that the period of injury analysis paralleled the 6-month period chosen for the analysis of dumping, so as to avoid any distortions. The panel saw no a priori reason why the POI for the injury analysis should be chosen to fit the POI for the dumping analysis if the latter covers a period of less than 12 months. The panel considered that the choice of the POI was crucial, as it determined the data that would form the basis for the assessment of the impact of dumping, and that an examination or investigation could be objective only if it was based on data that provided an accurate and unbiased picture of what was being examined. The panel thus reached the following conclusion (§ 7.86): In sum, we find that the injury analysis of the Mexican investigating authority in the rice investigation, which was based on data covering only six months of each of the three years examined, is inconsistent with Article 3.1 of the AD Agreement as it is not based on positive evidence and does not allow for an objective examination, as it necessarily, and without any proper justification, provides only a part of the picture of the situation. In addition, we find that the particular choice of the limited period of investigation in this case was not that of an unbiased and objective investigating authority as the authority was aware of, and accepted, the fact that the period chosen reflected the highest import penetration, thus ignoring data from a period in which it can be expected that the domestic industry was faring better.
Similarly, the Panel on EC–Tube or Pipe Fittings took the view that an IA is precluded from limiting its dumping analysis to a selective subset of data from only a temporal segment of the POI. The panel relied on the requirement of Article 2.4.2 of AD, which generally calls for a comparison of a WA NV with a WA of prices of all comparable export transactions, or for a comparison of NV and EPs on a T-T basis. According to the panel, these methodologies would generally seem to require that data throughout the entire investigation period would necessarily be consistently taken into account. In Argentina–Poultry Antidumping Duties, the use of different periods for different injury factors was found to be inconsistent with the requirement to conduct an objective examination (§ 7.283). To examine only a part or a segment of the domestic industry was also considered to be inconsistent with the requirement to conduct an objective examination. The AB stated in US–Hot-Rolled Steel that, where an IA undertakes an examination of one part of a domestic industry, it should, in principle, examine in a like manner all other parts that make up the industry, as well as the industry as a whole. A partial examination of the domestic industry could make it easier to find injury. This led the AB to conclude that this practice was inconsistent with the AD Agreement (§ 204). It follows from the case law above that IAs cannot address the two POIs endogenously, in the sense that one fits, in principle, the result of the other. While IAs enjoy some flexibility in selecting the POI, they should never use their discretion in a biased manner. Flexibility in selecting the POI, in other words, should not result in selection bias. One
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way to avoid this occurring is by shortening the time gap between the two POIs. We discuss this next. 2.9.9.7 Overlap between Dumping and Injury POI The Panel on Argentina–Poultry Antidumping Duties held that an overlap between the two POIs (dumping and injury) was desirable, but it rejected the argument that the POI for dumping and the POI for injury should also end at the same time. The panel added that there may be a time lag between the entry of dumped imports and the injury caused by them, and that therefore, it may not be appropriate to use identical periods of review for the dumping and injury analyses in all cases (§ 7.287). This is sensible. The two POIs, nonetheless, should be close to each other, otherwise the probability that dumping has caused the observed injury becomes remote. 2.10
Special and Differential Treatment
The AD Agreement does not contain elaborate provisions on special and differential treatment for developing countries. In fact, Article 15 of AD is all we have in this respect. The WTO, though, organizes a series of workshops and conferences aiming at improving the administrative capacity of developing countries in handling antidumping investigations. Article 15 of AD requests that WTO members explore the possibility of imposing constructive remedies when facing allegations that exporters originating in developing countries have been causing injurious dumping. 2.10.1 What Are Constructive Remedies? Article 15 of AD does not define the term “constructive remedies.” The Panel on EC–Tube of Pipe Fittings held that both the “lesser duty rule” and “price undertakings” came under the ambit of this term (§§ 7.77ff.).199 In some way, both could be characterized “constructive.” Application of the lesser duty rule would lead to lower level of AD duties. Price undertakings, even when they are equal to the level of AD duties imposed, have one beneficial effect for exporters: it is exporters that will pocket the mark up (dumping margin); it is not importers that will do so, in the form of AD duties. 2.10.2
Constructive Remedies Must Be Explored
The provision makes it clear that constructive remedies must be “explored.” This does not mean, of course, that IAs must always lessen duty rule and/or price undertakings when they review petitions to impose AD duties against exporters originating in developing countries. The obligation to explore constructive remedies requires from WTO members some active behavior. IAs cannot stay idle. Furthermore, in EC–Bed Linen, the panel held
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that an outright rejection of remedies proposed by the investigated developing country (India) amounted to a violation of this provision (§ 6.238). IAs will thus observe this obligation when they can demonstrate that they took active steps during the investigation inquiring into the possibility of imposing similar remedies. Although the agreement falls short of imposing a procedural requirement to this effect, IAs, if challenged, should be in position to show that they had indeed adopted similar active behavior. The best proof is, of course, the adoption of constructive remedies. As stated though, there is no obligation to this effect. This obligation takes effect before definitive, and not provisional, AD duties will be imposed (Panel on EC–Bed Linen, at § 6.231; Panel on EC–Tube or Pipe Fittings, at § 7.82). 2.11 The Standard of Review by WTO Adjudicating Bodies 2.11.1
One or Two Standards of Review?
WTO adjudicating bodies must observe the generic standard of review included in Article 11 DSU anyway. They must perform an “objective assessment” of the matter before them. The AD Agreement is the only agreement coming under the aegis of the WTO (“covered agreement,” in WTO parlance), which includes its own standard of review reflected in Article 17.6 of AD: In examining the matter referred to in paragraph 5: in its assessment of the facts of the matter, the panel shall determine whether the authorities’ establishment of the facts was proper and whether their evaluation of those facts was unbiased and objective. If the establishment of the facts was proper and the evaluation was unbiased and objective, even though the panel might have reached a different conclusion, the evaluation shall not be overturned; the panel shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law. Where the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the panel shall find the authorities’ measure to be in conformity with the Agreement if it rests upon one of those permissible interpretations.
The question thus, arises whether WTO adjudicating bodies must respond to the generic standards of review or to the specific ones—or both. Law is silent on this point. Case law has provided a response by inquiring into the relationship between the two provisions (Article 11 of DSU and Article 17.6 of AD). The AB report on US–Hot-Rolled Steel captures best the basic line adopted. The two standards are complements and not substitutes (§ 62): Finally, although the second sentence of Article 17.6(ii) of the Antidumping Agreement imposes obligations on panels which are not found in the DSU, we see Article 17.6(ii) as supplementing, rather than replacing, the DSU, and Article 11 in particular. Article 11 requires panels to make an “objective assessment of the matter” as a whole. Thus, under the DSU, in examining claims, panels
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must make an “objective assessment” of the legal provisions at issue, their “applicability” to the dispute, and the “conformity” of the measures at issue with the covered agreements. Nothing in Article 17.6(ii) of the Antidumping Agreement suggests that panels examining claims under that Agreement should not conduct an “objective assessment” of the legal provisions of the Agreement, their applicability to the dispute, and the conformity of the measures at issue with the Agreement. Article 17.6(ii) simply adds that a panel shall find that a measure is in conformity with the Antidumping Agreement if it rests upon one permissible interpretation of that Agreement.” (italics in the original)
What does this mean in practical terms? The AB suggests that a panel can make an objective assessment and reach a range of permissible interpretations. There is no antinomy between the two. There is very scarce practice to this effect though, as we will see in what follows. Panels, since the very first dispute adjudicated (US–Gasoline) have always employed the Vienna Convention on the Law of Treaties (VCLT) in order to interpret the terms in the various covered agreements. We saw in chapter 1, volume 1, that they understood the reference to customary rules of interpretation in Article 3.2 of DSU as synonymous to the VCLT. The VCLT offers a rule for interpretation: terms should be interpreted in accordance with their ordinary meaning, in their context, and taking into account other relevant rules of international law, subsequent agreement and/or practice. Recourse to preparatory work is commendable but not compulsory. The question arises thus, whether, following recourse to the VCLT, one can still end up with a range of permissible interpretations. A priori one would be hard-pressed to suggest that this can never be the case. Is this nonetheless what negotiators had in mind when drafting Article 17.6 of AD? Did they aim at the range of permissible interpretation that can equally well serve the treaty? The Panel on US–Softwood Lumber VI held differently. In its view, the AD standard of review might lead to a more “tolerant” approach toward the findings of IAs. In this view, the term “permissible interpretations” should be equated with deference. It could not point to specific examples, though (§ 7.22): ... it seems to us that there might well be cases in which the application of the Vienna Convention principles together with the additional provisions of Article 17.6 of the AD Agreement could result in a different conclusion being reached in a dispute under the AD Agreement than under the SCM Agreement. (italics in the original)
This report is an outlier. Most panels have avoided reference to this or similar statements and have construed the two standards as mutually coherent, without however explaining what to do when more than one interpretation is permissible.200 One might legitimately ask whether this provision was necessary at all. Indeed, one of the interpretative maxims that have been used in WTO case law is that if an obligation can be understood in two different ways, then it should be understood in the manner that prejudges national sovereignty the least (in dubio mitius). Why all the fuss then? Why did negotiators bother to spend time and effort on including this provision in the AD Agreement, and why a similar provision was included only in the AD Agreement? It is quite telling that a similar standard
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of review was not included in either the SCM or the Safeguards (SG) Agreement, the two other agreements regulating contingent protection. There are good reasons to support the argument that the negotiating intent was to provide more deference toward IAs dealing with antidumping, toward making the unwritten interpretative maxim “in dubio mitius” discussed above, explicit.201 The negotiating record lends support to this point, especially the proposals tabled by the US delegation, the “architect” of this provision.202 The above would argue in favor of construing Article 17.6 of AD as a substitute, and not a complement to Article 11 DSU. The degree of deference is of course, difficult to measure. The AB sees the applied (applicable) standard somewhere within the continuum “no total deference, no de novo,” which leaves us with dozens of possibilities to choose from. The overall conclusion must be that the record is mixed. There are instances where case law shows considerable degree of deference toward IAs (e.g., sunset reviews), and areas where case law has been quite strict (e.g., zeroing).203 In other words, WTO adjudicating bodies have not explicitly stated that Article 17.6 of AD includes a more deferential standard than Article 11 DSU, but have de facto deferred to IAs in some specific areas, but not in others. 2.11.2
De Novo Review Is Not Total Deference
WTO adjudicating bodies will evaluate whether the IA has properly established facts, and whether it has evaluated them in an unbiased manner, by using Article 17.6(i) of AD. They will also evaluate whether the overall conclusion reached rests on a permissible interpretation of the AD Agreement under Article 17.6(ii). We return to this latter issue in the next subsection. Article 17.6(i) has been understood in case law as a statutory requirement not to engage in de novo review. However, there is no statutory definition of the term “de novo review.” Roughly, following this standard, GATT and WTO adjudicating bodies will sanction WTO members for not properly establishing the record and for reaching conclusions that are inconsistent with the requirements of the AD Agreement, but they will refrain from substituting their own judgment for that of an IA.204 Panels have cautioned that the absence of de novo review should not be equated to total deference to the IA. But again, what does total deference mean? It seems that total deference and de novo review are the two ends of the spectrum, and the question is at what point in the continuum will WTO adjudicating bodies intervene? Case law has provided some clarifications in this respect. 2.11.2.1 Panels Cannot Use New Evidence Under the “no de novo no total deference” standard now applied, panels will not substitute their judgment for that of an IA. Panels will not reopen the investigation process and redo the whole procedure. However, a panel will review whether an IA has properly established
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the factual record before it. In practice, this amounts to examining whether the IA has diligently assembled facts. The Panel in US–Hot-Rolled Steel summed all this up as follows (§ 7.26): The question of whether the establishment of facts was proper does not, in our view, involve the question whether all relevant facts were considered including those that might detract from an affirmative determination. Whether the facts were properly established involves determining whether the investigating authorities collected relevant and reliable information concerning the issue to be decided—it essentially goes to the investigative process. Then, assuming that the establishment of the facts with regard to a particular claim was proper, we consider whether, based on the evidence before the US investigating authorities at the time of the determination, an unbiased and objective investigating authority evaluating that evidence could have reached the conclusions that the US investigating authorities reached on the matter in question. In this context, we consider whether all the evidence was considered, including facts which might detract from the decision actually reached by the investigating authorities.
This means that panels cannot reach their conclusions based on new evidence (e.g., on evidence that was not before the IA), and the consistency of the decision of which with the multilateral rules is being challenged. To decide whether evidence was before an IA or not, one needs a benchmark, and that cannot be the “essential facts” revealed before a decision has been issued. Recall that an IA will be required to make public only the essential elements of the investigation that led it to its decision (Article 12 of AD). As a result, it could be the case that an IA does not disseminate all the information it had used to reach its conclusions. The question may arise whether nondisclosed information should be considered as part of the record and, if so, under what conditions. Following inconsistent case law on this issue, the Panel on EC–Tube or Pipe Fittings held that facts that have not been disclosed by the IA, but on which the authority relied to reach its decision, can (and should) be reviewed by a WTO panel (§§ 7.35 and 7.45). On appeal, the AB upheld the panel’s approach (§§ 125ff., and especially § 133).205 Panels, on the other hand, cannot take into consideration evidence that was not submitted to the IA or that was not appropriately submitted to the IA, and which, as a result, the IA had refused to take into account (Panel on Egypt–Steel Rebar, § 7.21). In the words of the Panel on US–Hot-Rolled Steel (§ 7.6): Thus, for example, in examining the USITC’s determination of injury under Article 3 of the AD Agreement, we would not consider any evidence concerning the price effects of imports that was not made available to the USITC under the appropriate US procedures. (italics in the original)
Summing up prior case law, the Panel on EC–Bed Linen206 explained what constitutes new facts and evidence in the following manner (§ 6.43): Article 17.5(ii) of the AD Agreement provides that a panel shall consider a dispute under the AD Agreement “based upon ... the facts made available in conformity with appropriate domestic procedures to the authorities of the importing Member.” It does not require, however, that a panel consider
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those facts exclusively in the format in which they were originally available to the investigating authority. Indeed, the very purpose of the submissions of the parties to the Panel is to marshal the relevant facts in an organized and comprehensible fashion in support of their arguments and to elucidate the parties’ positions. Based on our review of the information that was before the European Communities at the time it made its decision, in particular that presented by India in its Exhibits, the parties’ extensive argument regarding this evidence, and our findings with respect to India’s claim under Article 5.4, we conclude that the Exhibit in question does not contain new evidence. Thus, we conclude that the form of the document (that is, a new document) does not preclude us from considering its substance, which comprises facts made available to the investigating authority during the investigation. There is in our view no basis for excluding the document from consideration in this proceeding, and we therefore deny India’s request. (italics in the original)
Note, however, that the Panel on US–Softwood Lumber V excluded a regression analysis based on data that had been submitted to the IA because it considered that regression analysis constituted new evidence that went beyond a mere mechanical reformatting of appropriately submitted facts (§§ 7.40–41). The same panel accepted charts that were not before the IA, nonetheless, since they only (§ 7.168) “display in graphical form data which was before DOC during the course of the investigation.” Still, both the regression analysis and the graph were based on evidence that had already been submitted to the IA, so some additional explanation for the differential treatment would be warranted in this case. It seems there is a thin line between evidence that is merely “marshalling” the already submitted evidence and, hence, can be taken into account by a panel, and evidence that constitutes “a manipulation of already submitted facts and evidence,” on which the panel would not be allowed to base its review if it wants to avoid a de novo review.207 2.11.2.2 Absence of a Reasoned and Adequate Explanation It is clear by now (US–Lamb, AB report, §§ 106–107) that absence of a reasoned and adequate explanation of the decision is fatal for the order. US–Lamb dealt with a dispute under the SG Agreement. Its standard of review, however, soon found application in cases coming under other contingent protection instruments. In its report on US–Softwood Lumber VI (Article 21.5–Canada), the AB explained that a panel must examine the IA’s determination in light of other plausible alternative explanations, rather than in the abstract. This did not imply, according to the AB (§ 117, and footnote 176), that panels must reject the IA’s explanation if, in its view, it did not rebut the alternatives. What is important is that the IA has taken account of and responded to plausible alternative explanations that were raised before it and that, having done so, the explanations provided by it in support of its determination remain “reasoned and adequate.” Ultimately, it must be the totality of factors and evidence that should support the findings reached for panels to be satisfied with the outcome of an investigation (§ 138):
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In sum, the Panel’s analysis, viewed as a whole, reveals a number of serious infirmities in the standard of review that it articulated and applied in assessing the consistency of the Section 129 Determination with Articles 3.5 and 3.7 of the Antidumping Agreement and Articles 15.5 and 15.7 of the SCM Agreement. First, the Panel’s repeated reliance on the test that Canada had not demonstrated that an objective and unbiased authority “could not” have reached the conclusion that the USITC did, is at odds with the standard of review that has been articulated by the Appellate Body in previous reports. As we noted earlier, the standard applied by the Panel imposes an undue burden on the complaining party. Secondly, the “not unreasonable” standard employed by the Panel at various reprises is also inconsistent with the standard of review that has been articulated by the Appellate Body in previous reports, and it is even more so for ultimate findings as opposed to intermediate inferences made from particular pieces of evidence. Thirdly, the Panel did not conduct a critical and searching analysis of the USITC’s findings in order to test whether they were properly supported by evidence on the record and were “reasoned and adequate” in the light of alternative explanations of that evidence. Fourthly, the Panel failed to conduct an analysis of whether the totality of the factors and evidence considered by the USITC supported the ultimate finding of a threat of material injury. (italics in the original)
2.11.3
Permissible Interpretations
Article 17.6(ii) of AD requests from WTO adjudicating bodies not to overturn conclusions by IAs that rest on “permissible interpretations” of the AD Agreement, even if they would have reached a different conclusion. The Panel on US–Hot-Rolled Steel held that it would have to start from the VCLT in order to evaluate whether the interpretation reached was permissible (§ 7.27). It thus, did not a priori exclude the possibility that recourse to VCLT can yield more than one permissible interpretations. On appeal, the AB confirmed the panel’s position (§§ 59–60). In US–Continued Zeroing, the AB explained that the term should refer to a “range” of interpretations, but there should be no contradiction across the terms in the range (§§ 272–273): However, the second sentence allows for the possibility that the application of the rules of the Vienna Convention may give rise to an interpretative range and, if it does, an interpretation falling within that range is permissible and must be given effect by holding the measure to be in conformity with the covered agreement. The function of the second sentence is thus to give effect to the interpretative range rather than to require the interpreter to pursue further the interpretative exercise to the point where only one interpretation within that range may prevail. ... The purpose of such an exercise is therefore to narrow the range of interpretations, not to generate conflicting, competing interpretations. Interpretative tools cannot be applied selectively or in isolation from one another. It would be a subversion of the interpretative disciplines of the Vienna Convention if application of those disciplines yielded contradiction instead of coherence and harmony among, and effect to, all relevant treaty provisions. (italics in the original)
Similar statements are hard to prove or disprove. What matters at the end of the day is practice in this area. So far, there is little evidence of permissible interpretations, with the
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exception of the case law on zeroing of course. Recall that in zeroing case law, panels did not conform to the AB interpretations. Panels defended their views invoking Article 17.6 AD, arguing that both interpretations were permissible. Except for this case law, the Panel on Argentina–Poultry Antidumping Duties was requested to judge whether 46 percent of all domestic producers should be considered a “major proportion” of the total domestic production, in accordance with Article 4.1 of AD. Without delving into a thorough discussion of this issue, the panel accepted that this was indeed a permissible interpretation of the term (§ 7.341). This is probably the only case where a panel insinuated that this was one of a range of permissible interpretations and, since it was in the range, it was acceptable. For the rest, panels have (implicitly, at the very least) construed Article 17.6(ii) of AD to be perfectly consistent with the VCLT. There has been no case thus far, nevertheless, where panels have pointed to two permissible interpretations and accepted one of them on the grounds that it was permissible. 2.11.4
Investigating Authorities: Honest Brokers or Active Investigators?
Earlier in this chapter, we alluded briefly to the fact that there is nothing like a World Antidumping Authority. Investigations are handled by entities that are part and parcel of political economy within WTO members. The political economy of protectionism has been discussed in numerous publications. Of interest here are two studies. Finger et al. (1982) discussed the US bureaucracy and concluded that it is politicians that are decisive (with the “high policy track,” in their terminology), rather than US bureaucrats, who have a narrow mandate and are restricted to the “low policy track.” Messerlin (1981) argued that this does not apply to the EU bureaucracy, as it is EU bureaucrats that retain substantial discretion regarding the eventual imposition of contingent protection measures. Both studies concluded that AD authorities, their differences in design notwithstanding, are heavily influenced by political economy considerations and routinely take a pro– domestic producers stance. These two authorities were among the first to be established and deal with the administration of contingent protection. They have provided the blueprint for others to follow. It is, thus, only safe to assume that similar institutional design has been followed elsewhere as well. The legislator, mindful of this background, imposed the requirement for due process in order to ensure paritas armis between exporters and domestic producers. It should not come as any surprise that Article 6.12 of AD was drafted the way it is. Trade agreements, as stated in volume 1, chapter 1, are meant to solve international cost-shifting. They are not meant to solve domestic problems. The other element of the involvement of IAs has to do with the intensity of their involvement in the process. Should they be honest brokers that will decide on facts as presented
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by the disputing parties, or should they go ahead and conduct, ex officio, their own investigation? Law here leaves the issue largely open. Case law has made some steps toward suggesting that it favors active IAs. The requirement to examine “all relevant economic factors” and the requirement to evaluate submitted evidence in light of alternative explanations are illustrations to this effect. Case law has also taken steps in the opposite direction, however. By limiting the realm of “known factors” to whatever has been placed before the authority, it effectively understood IAs to be honest brokers. In short, in light of law and case law as it currently stands, it seems fair to conclude that IAs do not have to spend resources establishing the factual record ex officio, but they do have to take the lead when analyzing the established record. 2.12
Remedies against Illegally Imposed AD Duties
The question of remedies against illegal imposition of AD duties is distinct from the obligation to refund provisional duties (or wrongly calculated duties before liquidation in the prospective assessment system). Here, we deal with situations where duties have been definitively imposed and the consistency of their imposition is being challenged before a WTO panel. In the GATT era, a handful of panels, inspired by the standard of compensation in case of the commission of an illegal act in customary international law, had recommended that, in the case of illegally imposed (AD and countervailing) duties, the GATT contracting party imposing duties was under the obligation to reimburse the injured exporter.208 This is how it works. In this line of thinking, a court’s judgment that an illegality has been committed has declaratory and not constitutive effect, and a judicial decision acknowledges that an illegal act was committed when the act occurred. An illegal act cannot produce legal effects (ex injuria non oritur jus); hence, all consequences of an illegal act must be wiped out. Reimbursement of duties in many cases will not take care of all the damage done, but it will contribute to full compensation. Moreover, the knowledge that duties might have to be reimbursed might disincentivize trigger-happy IAs. The GATT panels that opted for similar solutions did not have statutory language to rely upon, since the GATT did not explicitly address the issue of reimbursement of illegally perceived AD duties. They constructed GATT (implicitly at the very least) as an international contract that must respect customary international law. The situation in this respect did not change with the advent of the WTO. The contract remains silent on the issue whether retroactive (ex tunc) remedies are permitted or excluded in WTO law. The Panel on Guatemala–Cement II, facing a specific request by Mexico to suggest reimbursement of illegally imposed AD duties, acknowledged that in the specific circumstances of the case, a request for reimbursement might be justifiable. Ultimately, however, the panel refused to pronounce on this score (§§ 9.6–7). On more or less the same wavelength, the
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Panel on Australia–Automotive Leather II held that the DSU did not exclude the possibility for retroactive remedies. These two panel reports, nonetheless, are outliers. Typically, a finding that duties have been illegally imposed will be accompanied by a statement that the WTO member concerned should bring its measure into compliance. Although WTO members can still go ahead and reimburse illegally perceived duties as a matter of domestic law, there is no compulsion to this effect as a matter of WTO law; hence, typically WTO members that have illegally imposed duties will simply stop doing so in the future (that is, after the end of the reasonable period of time defined in Article 21 of DSU within which they must bring their measures into compliance with their obligations). 2.13
Institutional Issues
The ADP Committee is established by virtue of Article 16 of AD. WTO members must, by virtue of Article 18.5 of AD, notify the committee of any changes in their laws. In US–Customs Bond Directive, the panel found that the US, by not notifying the committee of its new legislation, had acted inconsistently with its obligations under this provision (§ 7.285). The ADP Committee is not simply a depository of national AD-related initiatives. It administers the day-to-day operation of the agreement and can intervene to further the achievement of the objectives by the WTO members in this respect. To this effect, it can set up subsidiary bodies (Article 16.2 of AD). The Working Group on Implementation is an appropriate illustration to this effect. It was established back in 1996, following a recommendation by the Committee on Antidumping Practices of the Tokyo-round code, and was originally named an “ad hoc Group on Implementation.”209 The group was supposed to make recommendations on issues that arise under the agreements and where agreement was possible. It was clear that the group would have the power to recommend, and, following its recommendation, it fell to the committee to adopt, reject, or modify the recommended action. This group, it was decided, should concentrate on technical and procedural questions, and participation of experts from capitals was deemed necessary. In 2001, it was renamed the “Working Group on Implementation.”210 Based on input by this body, the ADP Committee has produced decisions and recommendations, like the one on the duration of the POI,211 that WTO adjudicating bodies have used in case law. 2.14
Is Dumping Unfair?
Dumping is a price discrimination scheme. Characterizing it as unfair seems odd, since as we will see soon, similar schemes are not only everyday business practice, but crucially
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legal under domestic laws. The question thus arises: Why is most domestic price differentiation lawful, while international price differentiation is not? Indeed, one way to look at Article VI of GATT is as an exception to Article III of GATT.212 WTO members apply one statute (domestic antitrust) to domestic price differentiation, while applying a different statute (i.e., the AD Agreement) when the operator practicing the scheme is of foreign origin.213 Does the fact that the subject of price discrimination is foreign suffice to characterize as unfair a practice that is considered normal business when practiced by domestic economic agents? To respond to this question, we need to inquire first into the history of antidumping before moving into today’s regulation of price discrimination. 2.14.1 The Origins of Modern Antidumping Antidumping precedes Article VI of GATT timewise. It seems that originally it was conceived as instrument aiming to punish, in targeted manner, international punish discrimination. Indeed, William S. Fielding, Canada’s finance minister who is considered the father of the first Canadian AD legislation, has been quoted saying in 1904: “It was unscientific to meet special and temporary cases of dumping by a general and permanent raising of the tariff wall and that the proper method was to impose special duties upon dumped goods.”214 So, AD was originally (in Canada, at least) thought to be the means to avoid punishing innocent bystanders. The Australian AD statute, the 1906 Industries Preservation Act, seems to have had a narrower focus, since it protected the Australian market from international predation. § 19 of the statute left no doubt in this respect.215 In a similar vein, protecting against international predation, and not simply price discrimination, seems to have been the thrust of the US laws as well. Stewart et al. (1993, p. 1401) reflected the following opinion by US Congressman Joseph Fordney, expressed in 1921, as follows: We have no law and we have no means of preventing concerns in a foreign country combining to sell their goods at a sacrifice in this country until competition here has been destroyed and thus control our markets at such prices as they wish to charge.
Indeed, in American Banana Co v United Fruits Co,216 Justice Oliver Wendell Holmes, writing for the US Supreme Court, held that one could not use domestic laws to attack foreign price discrimination. Citing prior case law to the effect that all legislation is prima facie territorial,217 he went on to write (p. 357): Words having universal scope, such as “every contract in restraint of trade,” “every person who shall monopolize,” etc., will be taken as a matter of course to mean only everyone subject to such legislation, not all that the legislator subsequently may be able to catch. In the case of the present statute, the improbability of the United States’ attempting to make acts done in Panama or Costa Rica criminal is obvious, yet the law begins by making criminal the acts for which it gives a right to sue. We think it entirely plain that what the defendant did in Panama or Costa Rica is not within the
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scope of the statute so far as the present suit is concerned. Other objections of a serious nature are urged, but need not be discussed.
Antidumping was thus conceived as the instrument to punish restraints of trade committed by foreigners, and predation emerges as the key concern that antidumping statutes in Australia, Canada and the US aimed to address. Recall that, through predatory pricing, an economic operator wants to eliminate competition from the market and eventually raise its prices in order to recoup the investment made. Similar practices were (and continue to be) prohibited in various domestic antitrust statutes irrespective whether the predator was (is) national or foreigner. Consequently, the statutes cited so far applied the predation standard in nondiscriminatory manner to domestic and foreign agents. Over the years, antidumping evolved, first in the US and subsequently elsewhere as well, into an instrument that punishes any price discrimination instead of focusing exclusively on predation.218 Indeed, the US proposal to introduce antidumping in the GATT did not contain any references to the rationale for antidumping other than a reference to redress price discrimination (irrespective of predatory intent or effect). And when Cuba, as we have seen above, added that antidumping was the instrument to address “unfair” (e.g., discriminatory) pricing, again it did not narrow price discrimination down to a predation scenario.219 AD statutes took time to proliferate. A 1956 GATT study reveals that only 24 countries had AD laws in place, and only 8 of them had used them by that time.220 Institutions were gradually established at the national level to deal with the procedural aspects of AD investigation.221 Eventually, they multiplied. The two Antidumping agreements signed first at the Kennedy round, and later at the Tokyo round, contributed to this outcome. The explosion of domestic antidumping statutes is a post—Uruguay round phenomenon, when the Tokyo round code became a multilateral agreement. The negotiation of the Uruguay-round AD Agreement has been discussed in several publications.222 A division between the then-main users, the EU and the US, and the exporters emerged right from the start of the negotiations. The former were fighting a rearguard battle in an attempt to keep as much discretion as possible in the hands of IAs and introduce stringent anticircumvention mechanisms, such as third-country circumvention and country-hopping.223 The latter aimed to do the exact opposite—e.g., “tighten the screws” so that recourse to AD measures would become an onerous exercise. A series of drafts prepared by the New Zealand delegate Hugh McPhail (“McPhail drafts” I, II, and III) were rejected, and only a compromise draft at the end of the round (the “Cartland draft,” named after the Hong Kong ambassador, Michael Cartland) managed to gather the necessary support. The main users failed in introducing anticircumvention but, at the insistence of the US, they did manage to introduce a standard of review that, prima facie, looks quite deferential toward IAs, as explained previously. Exporters can claim victory for introducing new disciplines regarding recourse to constructed prices, best
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information available, etc. Then, there are some issues like zeroing where no agreement proved possible and the matter was left for discussion at a later date, and eventually to adjudication with the results discussed previously. The trend has been toward “tightening the screws,”224 at least at the legislative level, and various factors have contributed to this outcome, including the following: • Abuses of the past were definitely key. • The identity of AD users, which has changed over the years (as table 2.1 showed earlier in this chapter), and yesterday’s users have become today’s victims. • Supply chains have emerged, which suggests that industrial users interested in cheap inputs have multiplied around the world • There has been an increasing awareness that, whereas a safeguard clause is necessary, in practice, AD duties often harm more than they protect. Nonetheless, no amendment of the antidumping agreements so far has led to a link between antidumping and antitrust. Antidumping continues to address price discrimination. It continues to include an injury to competitors (as opposed to injury to competition) standard. The only concession to antitrust, if it can be characterized as such, was the inclusion of Article 6.12 of AD, which allows but does not oblige IAs to invite the opinions of parties negatively affected by the imposition of AD duties. 2.14.2
Price Discrimination in Domestic Antitrust Statutes
In antitrust practice,225 a price differential226 is not necessarily viewed with skepticism. In the EU system, for example, price differentiation will be treated as an abuse of single or collective dominance. As a result, for price differentiation to enter the picture of antitrust enforcement, a prior finding of dominance is required. The European Court of Justice (ECJ) had the opportunity to pronounce on this issue in its AKZO and Tetrapak case law.227 We quote from the Tetrapak decision (§ 41), which can be considered the authentic expression of the test for predatory pricing established by the ECJ: In AKZO, this Court did indeed sanction the existence of two different methods of analysis for determining whether an undertaking has practised predatory pricing. First, prices below average variable costs must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails a loss for the undertaking. Secondly, prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown.
With respect to some of the sales, the ECJ found that the prices charged were between average variable cost and average total cost. This sufficed for the ECJ to find that prices were predatory (§ 44):
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... it would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated. ... The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors.
A dominant company that prices below a certain threshold is thus found to be practicing predatory prices, in EU practice, and there is no need to further show a realistic possibility to recoup the investment. In the eyes of the court, a company behaving in this manner can only intend to monopolize the market.228 In the US statute, monopolization plays a comparable role to abuse of dominance in the EU regime, and it is under its aegis that the Supreme Court discussed this issue. The leading case is Brooke Group:229 A plaintiff must prove (1) that the prices complained of are below an appropriate measure of its rival’s costs and (2) that the competitor had a reasonable prospect of recouping its investment in below cost prices. ... The plaintiff must demonstrate that there is a likelihood that the scheme alleged would cause a rise in prices above the competitive level sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it. Evidence of below cost pricing is not alone sufficient to permit an inference of probable recoupment and injury to competition. The determination requires an estimate of the alleged predation’s cost and a close analysis of both the scheme alleged and the relevant market’s structure and conditions. Although not easy to establish, these prerequisites are essential components of real market injury. ... Predatory pricing schemes, in general, are implausible ... and even more improbable when they require coordinated action among several firms. ... They are least likely to occur where ... the cooperation among firms is tacit, since effective tacit coordination is difficult to achieve; since there is a high likelihood that any attempt by one oligopolist to discipline a rival by cutting prices will produce an outbreak of competition; and since a predator’s present losses fall on it alone, while the latter supracompetitive profits must be shared with every other oligopolist in proportion to its market share, including the intended victim.
This ruling requires some explanation. A predator’s pricing is a strategy that has two phases. Eliminating competitors necessarily generates costs for the predator during the first phase, and recouping these costs during the second phase almost necessarily creates incentives for old competitors to come back or new competitors to enter a market that they ignored before the price war. A predator should follow a predatory pricing strategy only if the second phase brings higher profits than the losses generated by the first phase. If phase 1 is long, the likelihood of recouping in phase 2 thereby becomes slimmer. At the end of the day, only an evaluation of the barriers to entry in the market where the predator operates can provide responses as to the likelihood of recouping the original investment. The unlikelihood of this occurrence is supported by an additional argument. If the goal of predation is monopolization of a market, there is a better, less costly manner to do it: merger. A predator can buy the other companies in the relevant market where it operates,
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at a price that would reflect their stock value in the expected monopolistic (not competitive) market.230 The evidentiary standard in US law is, thus, higher, and makes the possibility of successful challenges against predatory schemes quite unlikely. Both antitrust statutes, though, punish behavior, which causes injury to competition as opposed to injury to competitors.231 Antitrust statutes, thus, when dealing with price discrimination, look into the welfare implications of price differentiation for the whole of the society, whereas the AD statute looks simply into the implications for a subset of the society, the injured producers. What is unfair or plain illegal in antitrust (price predation), and what is unfair in trade law (price discrimination) partially only overlap. In practice, this is very seldom the case as Messerlin’s (2001) study, that we quote in what follows, shows. 2.14.3
In Defense of AD
Policy makers, nevertheless, advance four categories of arguments to justify continuing recourse to AD:232 • Discriminatory pricing is wrong. • AD addresses predatory prices. • “Strategic dumping” can reduce the incentives for participating in the WTO. • AD is necessary to “level the playing field.” • AD is a necessary safeguard. 2.14.3.1 Price Discrimination AD demonizes price discrimination when it causes injury. It does not address the reasons that give rise to it. Price discrimination will occur when price arbitrage is impossible. This could be the case for various reasons. The absence of arbitrage may be the consequence of factors outside the control of the exporting firm, such as different technologies in the two markets; the home-country consumers could be much more sensitive to the latest technologies than the foreign-country consumers; other technical barriers to trade; it might be generated from the firm itself in its effort to protect the home market. Whatever the reason, the fact remains that dumping occurs because there is no price arbitrage. If discriminatory pricing is the true concern of the proponents of AD duties, why address the proximate and not the ultimate cause? Why have recourse to a secondbest instrument such as AD (which leads to increasing prices to the level of the higher price) and not try to move prices to the level of the lower price? Do we really need to burn the village to save it? More practically, the first question to ask would be why importers do not simply reexport the dumped products to the exporting country charging the higher price?
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Arguably, this would have been quite profitable. Is it because of state trade barriers, product differentiation, or any other reason? The former could be decomposed into tariffs, quantitative restrictions (QRs), export subsidies, and domestic instruments. But QRs and export subsidies are illegal per se, and domestic instruments have to be applied in a nondiscriminatory manner. Hence, the only remaining issue would be whether the reason for price arbitrage relates to import tariffs. Assuming that this is indeed the case, it would be more sensible to try to reduce the level of tariffs in the context of multilateral rounds rather than increase prices by adding the dumping margin to the bound tariff. As we have seen in volume 1, chapter 3, though, tariffs are at an all-time low, while AD activity is blossoming, the low tariffs notwithstanding. Cases of product differentiation can also be discarded, since, assuming this is indeed the concern, AD duties can hardly provide the antidote since the IA will not be in a position to overcome the like product requirement.233 Price arbitrage can also occur because of legitimate prohibition of parallel imports, since the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement does not include an outright prohibition of similar instruments.234 One, thus, may legitimately suspect that there must be some truth in that AD duties are used more and more as customs duties fall, as some sort of safeguard or antidote to the “procedures-heavy” requirements included in Article XXVIII of GATT. At any rate, inquiring into the reasons for lack of arbitrage will allow trading partners to use the first-best instrument to address distortions.235 It will, in all likelihood, also lead to fewer AD investigations.236 2.14.3.2 Predatory Dumping Complaining firms in AD cases often suggest that dumping is driven by the will of foreign firms to eliminate domestic competitors in their own market in order to increase prices when they will ultimately be in a monopoly position in the import-competing market. If this was indeed true, one could simply reduce AD actions to cases of predatory pricing and address them as discussed previously.237 2.14.3.3 Strategic Dumping In this case, an exporting firm will benefit from a closed home market (a safe harbor), where it can charge the home consumers the full (fixed and variable) costs of production, allowing the sale of the product in the export market at a price only inclusive of the variable cost (its competitors in the export market are assumed not to operate in a safe harbor). The competitors of the strategic dumper cannot emulate its behavior. They thus must be disadvantaged enough, in terms of the relative size of accessible markets and scale economies, with respect to the strategic dumper. Strategic dumping could, thus, originate in companies operating in vast domestic markets (the EU, US, China, and India are good examples). If at all, it could be a concern for
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companies originating in China, and India, since the EU and US markets are quite open. But then, it could hardly be offered as excuse to impose AD duties, when the safe harbor is small relative to the export market, since in this case, it is highly unlikely that strategic dumping will occur. In this vein, a high percentage of AD investigations (of goods originating in, say, Singapore, or Hong Kong, China) cannot be justified on strategic dumping grounds. And, of course, the question whether it is more profitable to impose AD duties instead of negotiating away the barriers, making the Chinese or Indian market difficult to access, remains unaddressed by proponents of AD duties to respond to strategic dumping. 2.14.3.4 Leveling the Playing Field We referred previously to the statutory acknowledgment that dumping is unfair. Proponents of AD duties have advanced a series of arguments in this respect. The heart of similar arguments is this: the playing field is not level since some enjoy relax competition laws, whereas others do not; some face low labor costs, and others do not; and some can profit from tax havens, and others cannot. In short, because of differences across trading nations, some will always be better off than others. AD, in this logic, is the necessary instrument to level the playing field. Absent some corrective action, cheaters will always profit. Who are the cheaters? The WTO is based on regulatory diversity. Indeed, one might go so far and ask: How much trade would we have if all nations were identical? There is definitely no will, and no good arguments at all to harmonize conditions of production and competition on a global basis, and an effort to do so will prove counterproductive, as it will create its own negative external effects. Cass and Boltuck (1996) have provided the most persuasive response to this argument, to which we totally adhere (p. 404): The “level-playing-field” analogy that producers have so freely invoked is inapposite. And equitable international competition is a mirage. We cannot begin to make the conditions of production equivalent across nations, and we should not have that as a goal. The effort to do so is bound to produce mischief and to use up resources unproductively in the process.
2.14.3.5 AD as Safeguard In defense of AD, the argument has also been made that AD introduces a flexibility element into the WTO contract. Trading partners will be induced to make more commitments than otherwise because they know that they can always increase their protection by the dumping margin (if need be). AD thus functions like a safeguard.238 Finger and Nogues (2006) provided some empirical support for the argument that AD can be put to good use as a safeguard mechanism by researching the Mercosur experience. In their account, national administrations in the Mercosur countries used the potential for AD as a carrot to persuade domestic lobbies to support trade-liberalizing commitments. This argument rests on the premise that the current safeguard clause does not operate to the satisfaction of the trading partners. This is probably true, as we will see in chapter
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4 of this volume. But the natural question to ask is this: Why do negotiating efforts not concentrate on fixing the current safeguard clause instead of adding a new one that comports numerous negative external effects? If what is truly needed, a question that still needs to be put squarely before negotiators, is a “targeted safeguard,” then why not simply renegotiate Article 5.2(b) of SG?239 This discussion points to the inability to mount a serious intellectual defense of AD. Its advent in the WTO world is better explained on political economy grounds.240 2.14.4 AD and ... More Problems In what follows, we turn to costs caused by AD that are less obvious than those described so far. 2.14.4.1 A Procartel Instrument There is evidence that AD measures have a procartel effect at the stages of both the complaint and the decision. Messerlin (2001) persuasively argued that exchanging information for lodging a complaint requires a minimum exchange of information from the complainant. Even if handled through lawyers, plaintiffs could draw common conclusions from the complaint. On the other hand, nascent collusion between plaintiffs can be made sustainable by AD measures. It is not by accident that, on Messerlin’s count, at least one-quarter of EU AD cases of the 1980s were “twin” AD and competition cases dealing with similar products and EU firms. A more systematic indication of this procartel dimension flows from the fact that the combined market shares of the plaintiffs and defendants are often extremely high—on average, around 80–85 percent in the US and the EU. Defendants and complainants have a combined market share of less than 90 percent in only 55 percent of the US and EU AD cases examined in the 1980s and mid-1990s. In addition, foreign cartels (that is, those outside the country enforcing AD measures) have been created by AD cases, as best illustrated by the quasi-official Canadian potash cartel triggered by US AD. Another interesting observation that Messerlin (2001) reported is echoing in AD investigations. It has been shown that EU and US AD actions against China targeted the same Chinese exports in 75 percent of AD cases initiated against Chinese exports by the US and in 68 percent of the cases initiated by the EU. Most of these cases echoed each other within a year or less, and all but three of these cases (cycles, hammers, and pocket lighters) resulted in AD measures of some kind. Such a large proportion of “echoing cases” and the similarity of their outcomes are signs that AD is a protectionist instrument that petitioners are using in a strategic way to segment the two largest world markets. World cartels are likely to be fostered by a series of AD cases echoing each other all over the world. Large firms almost simultaneously lodge AD complaints in Brussels, Washington, D.C., and elsewhere in order to segment the world market as they wish (AD duties and measures increase the transaction costs,
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and hence the firms’ ability to charge different prices—that is, discriminate—in different locations). 2.14.4.2 AD Wars China–X Ray Equipment was nothing like a memorable dispute. It dealt with mundane issues and provided unsurprising responses. It can rank among the leading cases and can hardly serve as a teaching tool. And yet, underneath the surface, lie some interesting facts. This case concerned the imposition by China of AD duties on scanners. In fact, both the EU and China imposed AD duties on each other’s scanners. Scanners are an oligopolistic market, with a few companies dominating it. Smith, an EU company, detained 80 percent of the EU market and 29 percent of the world market. Nuctech, its Chinese competitor, enjoyed for its part 90 percent of the Chinese market, and was rapidly raising its stakes in the world market as well.241 The EU initiated an investigation in February 2009, imposing a preliminary duty of 36.6 percent in December 2009 and a final duty of 34 percent a few weeks later. China initiated an investigation in August 2009 (i.e., a few months later) imposed a preliminary duty of 43.2 percent in January 2010, and a final duty of 33.5 percent a few weeks later. The strikingly similar level of AD duties meant that both companies suffered a loss in each other’s market. Confirming the predictions of Martin and Vergote (2008), discussed in volume 1, the imposition of duties by the EU led to the imposition of duties by China in the same product market. 2.15
Concluding Remarks
It is probably not an overstatement that AD is the one WTO instrument that has provoked most of the wrath in economic literature. The valiant effort to justify it as a necessary safeguard begs the question: Why not address the existing safeguard clause head on instead? Judges are not legislators, of course, so WTO panels cannot put into question the rationale for AD: the distortion lies in the law itself. This is the elephant in the room. There is nothing quintessentially “unfair” about price discrimination. In the meantime, there is an increasing use of AD duties as the users of the system multiply. Brazil, for example, recruited over 100 AD investigators in 2012. There has also been an increase in tit-for-tat cases, mainly because of US–China feuding. AD is definitively popular. Against this background, case law has been quite strict on occasion vis-à-vis the IAs involved, and deferential as well. There are good arguments in favor of contract flexibility and we will be discussing them in chapter 4 of this volume.
3
Subsidies
3.1 The Legal Discipline and Its Rationale 3.1.1 The Legal Discipline The Subsidies and Countervailing Measures (SCM) Agreement aims to discipline two instruments: subsidies granted by WTO members and countervailing duties (CVDs) imposed on injurious subsidized imports. To this effect, it requests that WTO members avoid using two types of prohibited subsidies (local content and export subsidies); avoid causing adverse effects to other WTO members through the use of subsidies other than the two prohibited types; and to impose CVDs when addressing nefarious effects of subsidies only in accordance with the agreement’s provisions. 3.1.2 The Rationale for the Legal Discipline The SCM Agreement does not contain a preamble, where the negotiating rationale and the objectives of the agreement are usually included. It was not for lack of trying. Negotiators simply could not agree on what the objectives should be.1 To understand the rationale, we have to look into the specific provisions of the SCM Agreement, as well as their negotiating history. Recall that the rationale for the nondiscrimination discipline imposed on domestic policies was to provide an insurance policy against tariff concession erosion through unilateral actions. Concession erosion was perceived as a risk, since it would affect the incentive of trading nations to continue reducing their level of tariffs at a time when tariffs in and of themselves constituted the main instrument for market segmentation. Subsidies, like any other discriminatory domestic instrument, could erode the value of tariff concessions. Indeed, the first disputes regarding subsidies (discussed later in this chapter) reflected precisely this point: trading nations, by subsidizing, eroded the value of tariff concessions for which consideration had been paid. Something needed to be done about this. The necessity to act against subsidies became all the more pressing since they were exempted from the coverage of Article III of GATT, by virtue of Article III.8 of GATT.
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Trading nations could, thus, through subsidization, favor domestic producers only. What to do, then? GATT contained a mild discipline on subsidies in Article XVI, and also allowed the imposition of CVDs, an instrument akin to antidumping (AD) duties, in order to counteract the effects of subsidization. Case law allowed for subsidies to be challenged through nonviolation complaints. Law and case law point in the same direction. WTO members should not, through payment of subsidies, eviscerate the value of trade concessions, and risk the beneficial effects of tariff liberalization. Indeed, the very existence of nonviolation complaints (NVCs), the legal instrument meant to compensate trading nations even from legal actions that however negatively affected the value of tariff concessions, provides ample testimony to this effect: the majority of NVCs have been raised against subsidies granted by WTO members.2 3.1.3
Discussion
3.1.3.1 Negotiating Subsidies in GATT/WTO The original GATT had adopted a rather benign attitude toward subsidies. It explicitly acknowledged the harmful effects of export subsidies without outlawing them, and imposed only a notification requirement with respect to all subsidies aiming to increase exports or reduce imports (Article XVI.1). From early on during the negotiation (London Conference, 1946) subsidies were divided into export and domestic subsidies. The former would be paid only upon demonstration of export sales. The latter would be paid irrespective of the destination of sales. The historical underpinnings of the bifurcation between domestic and export subsidies merit some additional discussion at this point. Article 30 of the London Draft reflects the first multilateral regulation of subsidies. A bifurcated approach was favored.3 Export subsidies, on the one hand, would be, in principle, prohibited. Some exceptions were provided in this provision, such as price stabilization schemes.4 All other subsidies would be notified and, assuming they caused serious prejudice to the interests of another country, the subsidizing state would be requested to enter into consultations with affected countries. The bifurcation was deemed necessary “in view of the fact that export subsidies were recognized as being more likely to distort trade than so-called ‘domestic’ subsidies.”5 No elaborate justification for the distinction was offered. We will return to this point later in this chapter. In subsequent negotiations, the US circulated a text6 during the New York Conference that retained the distinction between domestic and export subsidies and found support among some, but not all, delegations. Then, during the discussion within the 7 Subcommittee on Tariff Negotiations, a document was circulated that did not include any disciplines on export subsidies. It merely reproduced the discipline on domestic subsidies. By that time, a majority of countries felt that the discipline on export subsidies should be part of the ITO Charter, not GATT.8 Recall
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that the Havana Charter was supposed to also continue disciplines on restrictive business practices. This approach was followed in all subsequent negotiations leading to the adoption of the original GATT. The Geneva Draft also contained no mention of a discipline on export subsidies.9 No change of substance is recorded in the Havana Conference.10 It is, of course, difficult to sustain that, as a matter of principle, export subsidies are always more likely to distort trade than their domestic counterparts. What constitutes plausible grounds justifying the bifurcation is the fact that, when subsidizing their domestic markets, trading nations might also be promoting social preferences (besides helping domestic producers). When providing export subsidies, though, trading nations can safely be presumed to aim exclusively at helping domestic producers. Indeed, except for extraordinary circumstances, what is the interest for Home to promote public health in Foreign? After the entry into force of GATT, the attitude of the trading nations toward subsidies changed once again. During the preparatory work of the Review Session (1954), discussions centered on the link between negotiating tariff concessions and the erosion of their value through subsidies. Negotiators had by now gained some experience with subsidies that were eviscerating the value of tariff concessions. A series of generous subsidization programs were put in place following World War II in order to reignite national economies. The existence of the New Deal policies, the Marshall Plan for the reconstruction of Europe are appropriate illuminations of the generous subsidization programmes that saw the light of day during that time. They were not uncontroversial. Some GATT contracting parties went so far as to question the value of negotiating additional tariff concessions without the discipline of subsidies.11 Furthermore, a consensus emerged to the effect that strengthening the disciplines on subsidies was warranted indeed. The fiercest opponents of subsidies proposed an outright ban on export subsidies,12 whereas delegates of some developing countries adopted a two-tiered approach and backed India’s proposal for a series of exceptions for developing countries.13 The final compromise was to reintroduce a legal discipline on export subsidies. The emerging consensus was not in favor of banning them altogether but rather for taming export subsidies. The US delegate should be credited with the formulation that export subsidies should not lead to the subsidizing state acquiring more than an “equitable share of world trade.”14 The US then secured a waiver and heavily subsidized its farm sector as of the mid-1950s. Eventually, it became one of the world’s leading farm producers and exporters.15 A few years later, the signing of the Treaty Establishing the European Economic Community (EEC), which entered into force on 1 January 1958, signaled the advent of the common agricultural policy (CAP), one of the cornerstones of the EU integration process. The CAP effectively amounted to a “license to subsidize.” The EU, in the name of self-sufficiency with respect to farm goods (probably inspired by the terrible experience that European countries lived through World War II), provided subsidies aimed to incite domestic production. The incitement, nonetheless, was too generous, and the EU also became an important producer of farm goods.16
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The US had in the meantime become a very efficient producer of farm goods, and did not need to rely on subsidies as much as before. It could not fully exploit its newly found prowess as a major farm producer because of the subsidies practiced elsewhere. The US adopted a series of initiatives aiming to curb subsidization both with respect to farm goods and in general. The next time the treatment of subsidies was negotiated was during the Tokyo round, since the Kennedy round came probably a bit too early, and produced only one code anyway, the Antidumping (AD) Agreement. During the Tokyo round, the US delegation backed the adoption of a code on subsidies that would reflect the following approach: Such a code should deal with three basic problems. First, subsidization can lead to increased exports by one country artificially distorting normal market forces. Second, a country may experience loss of sales in third-country markets if another country’s subsidies result in increased exports to those markets. The United States considers this situation to be a problem of increasing frequency and importance affecting the exports of both developed and developing countries. Finally, a country may experience loss of sales in a subsidizing country’s market when the subsidy results in import replacement in that market. Moreover, subsidies that result in import replacement in one country may deflect other countries’ exports previously entering that country to third-country markets, often to the detriment of producers in those third countries.17
The US was an active negotiator during the Tokyo round, 17 and a number of US proposals found their way into the Tokyo-round Agreement (“Code”) on Subsidies, which bound the discretion of only a subset of GATT contracting parties with respect to subsidies. When arriving at the negotiating table, the EU position was influenced by discussions on farm trade where subsidies played a prominent role, whereas the US position was heavily influenced by talks on aircraft subsidies. The Tokyo round agreement distinguishes between export and other subsidies, imposing stronger disciplines on the former. It requests its signatories to avoid using export subsidies on goods other than primary goods (Article 9), and to avoid earning more than an “equitable share of world trade” of primary goods through subsidies (Article 10). The regulation of other domestic subsidies was reflected in a carefully worded provision. On the one hand, signatories recognized that domestic subsidies (Article 11.1) are widely used as important instruments for the promotion of social and economic policy objectives and do not intend to restrict the right of signatories to use such subsidies to achieve these and other important policy objectives which they consider desirable. On the other hand, however, they also recognized that subsidies could harm the interests of other traders. Acknowledging their harmful effects, the agreement went on to impose the following discipline (Article 11.2): [S]ignatories shall therefore seek to avoid causing such effects through the use of subsidies. In particular, signatories, when drawing up their policies and practices in this field, in addition to evaluating the essential internal objectives to be achieved, shall also weigh, as far as practicable, taking account of the nature of the particular case, possible adverse effects on trade. They shall also
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consider the conditions of world trade, production (e.g. price, capacity utilization, etc.) and supply in the product concerned.
The obligation thus imposed was very mild. The Tokyo-round agreement provided for consultations in case effects were caused anyway. Two features of the Tokyo-round agreement influenced subsequent negotiations. First, the differential treatment of export subsidies based on whether they are granted to primary products, is the criterion for distinguishing between export subsidies under the Uruguay-round SCM Agreement and the Agreement on Agriculture (AG). Second, Article 11.1 of the Tokyo-round agreement included an indicative list of “legitimate” objectives that trading nations might be pursuing through subsidies. We find reflected therein subsidies aiming to address regional disparities and promote employment policies, environmental protection, research and development, as well as interests of developing countries. Some of these policies found their way into the now-defunct Article 8 of the Uruguay-round SCM Agreement, as we will see later in this chapter. The Tokyo round agreement on subsidies was made possible because of the statesmanship that key delegates showed at crucial times. The EU and US delegations locked their horns in a sometimes bitter battle. The EU, fearful that farm subsidies might be questioned and eventually disciplined, adopted a very negative attitude throughout the negotiation. It took all the skill of Canadian Ambassador Rodney De C. Grey, who acted as the middleman between EU and US during Tokyo round, and managed to lead the negotiation to successful conclusion. It was not easy. The US was forced to give up a very cherished advantage that it had obtained already in the negotiation of the GATT. Rivers and Greenwald (1980) explain that the US had been exempted from the obligation to perform an injury analysis when imposing countervailing duties. The US had requested (and obtained) this permission, since the US law did not provide for injury analysis, and the US was unwilling to amend its domestic laws as a result of the advent of the GATT. The signing of the Tokyo round agreements signaled the end of this practice. The Tokyo round did provide some additional disciplines to subsidization. It did not match the expectations of some players though, and crucially, the US. No disciplines on farm subsidies were included, and the threshold to counteract subsidies was increased, since now the US would have to demonstrate that subsidies by its trading partners were causing injury to its domestic production. The next stop was Punta del Este, in 1986. The US entered the Uruguay round in a bullish mood, aiming to discipline subsidies in a drastic manner and go beyond what had been decided in the Tokyo round. This line of thinking was very much in line with the prevailing economic “philosophy” of the Ronald Reagan administration, which was well in place throughout the preparatory work and the early years of the Uruguay round. For all practical purposes, the economic plan that became known as “Reaganomics” marked a sharp curb in government spending. The New Deal days were long gone, as President
190
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Reagan and his advisers decisively turned the page on government spending. The Reagan administration expected others to emulate its example. The EU, on the other hand, wanted to defend its farm subsidies, of course, and the relationship between the two agreements was far from clear, at least early in the negotiations. It, thus, naturally moved to the opposite camp (i.e., opposite to the US position). Some developing countries that wanted to keep the possibility to subsidize intact practiced a difficult balancing act. They liked the ideas advanced by the EU, but in an effort to differentiate themselves from the EU (since, among other things, their interests with respect to farm trade were at the antipodes of the EU interests), privileged a two-tiered approach, where developing countries only would have substantial possibilities to subsidize.18 Developing countries (or at least some of them) emerged as important players in the negotiation because of the decision to adopt “single undertaking” during the Uruguay round. The Tokyo-round agreement bound only its few signatories, the Organisation of Economic Cooperation and Development (OECD) world. This would not be the case anymore. For some time, it seemed like a deal would be impossible, since the EU was unwilling to back down. Laura D’Andrea Tyson (1992), and Hoekman and Mavroidis (1996b) have argued that the shift in the US position in November/December 1993, when George H. W. Bush’s administration was about to leave office, and Bill Clinton’s administration was about to enter the White House, was the catalyst. A rapprochement was possible because of the affinity that the Clinton administration and the EU bureaucracy shared regarding subsidies.19 This was a defining moment in the evolution of the Uruguay round, and, for this reason, it deserves a few more words here. In the 1980s, the US was quite hostile to the idea of government intervention in the life of business. It was emerging from the biggest deregulatory experience in its history. Many still remember how, in dramatic fashion, President Reagan ordered the dismantlement of the national telecoms carrier AT&T in 1982, which henceforth was limited to international services. This action left the US market to other firms (which became known as the “Baby Bells”). Deregulation, a process that had started earlier under the presidency of Jimmy Carter, was not limited to telecoms, of course.20 This is how the US delegate to GATT described what lay behind deregulation: The motive behind deregulation in a number of sectors in the United States had been the feeling that there was not enough competition, nor enough companies. As could be seen from the situation in coastal shipping, the degree of free competition needed was also an issue in his country. On the other hand, the dynamism that may have resulted from deregulation, say in telecommunications, could be attributed to management styles rather than to global trade trends, and of course some dominant firms remained in the market.21
During the first six years of the Uruguay round, the US maintained its hostile attitude toward subsidies, which made a deal on the SCM and the AG agreements an impossibility.
Subsidies
191
In 1992, President Clinton came to power, and his group of advisors included a few proponents of a different philosophy regarding subsidies as a means of industrial policy. Many of them saw the merits of subsidization under certain conditions, especially in globalized markets where other participants routinely were subsidized.22 The US, previously proponents of the “zero option” to farm subsidies, accepted transitional periods for their elimination. The “zero option” meant that the US was prepared to commit to zero percent tariffs on farm goods, if the EU was prepared to do the same. The EU was not prepared to do the same though, and the Agreement on Agriculture was signed, which aimed to bring farm goods within the disciplines of the multilateral trading system, and made room for provisional periods during which subsidies would be progressively reduced. In a similar vein, the US toned-down hostility to subsidies, and paved the way toward the emergence of the “traffic light” approach (in which red meant prohibited subsidies, green permitted, and, amber challengeable) and the deal in the SCM Agreement. As a result, the Tokyo-round compromise was further developed. Export subsidies became outright illegal, whereas some domestic subsidies became legal and immune to challenges. There was an in-between category—namely, domestic subsidies that were considered nonactionable. They would be left to micromanagement by those interested in granting them, and eventually to adjudication. The traffic light approach had entered the world trading system.23 3.1.3.2 Subsidies in the Realm of Economic Theory Economists have taken a nuanced position toward subsidies. There are so-called good and bad subsidies, subsidies that address distortions, and subsidies that are mandated by political economy–conscious governments that should not exist in the first place. It is clear that subsidies distort the allocation of resources, and if it is optimal allocation of resources that is being sought, then subsidies have no place. Markets, however, supply some goods and not others; “they work well for ice cream and not so well for clean air,” as one saying goes (see Mankiw 2011). In a trade agreement context, which is the focus of this volume, there are some good arguments in favor of limiting the potential for subsidization. The value of tariff commitments might be eviscerated through the use of subsidies, regardless of the rationale for subsidization.24 Early GATT panel reports, like Australia–Ammonium Sulfate, made trading nations aware of their impact. Domestic subsidies shift demand from imported to domestic goods, thus eroding the value of tariff concessions for which consideration had been paid. Without naming subsidies “unfair,” as they did with dumping, negotiators wanted to buy insurance against this risk. Addressing negative effects that subsidies might have on the value of tariff concessions emerges, hence, as a sensible regulatory strategy. The question, however, arises of how much more one should regulate subsidies in a context like the WTO.25
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Several arguments have been advanced in favor of adopting a benign attitude toward subsidies. For starters, subsidies expand trade, as producers will have an extra incentive to produce and increase the volume of traded goods. Foreign consumers would be the first to be grateful to subsidizers, whereas foreign producers of competing goods (and not producers in the downstream industry using the subsidized good as input for the production of their final product) would be hurt, at least in principle. Should not, then, the SCM Agreement reflect on both effects and recommend antisubsidy action accordingly? Furthermore, subsidies are not as distorting as tariffs since they affect one margin (i.e., producers), whereas tariffs have an impact on two margins (i.e., producers and consumers). Additionally, overdisciplining subsidies in the WTO context might make WTO members reluctant to make tariff commitments in the first place, as Bagwell and Staiger (2002) and (2006) noted.26 Losing some flexibility through disciplining of subsidies might make them unwilling to lose any more flexibility through disciplining of tariffs. Finally, the rationale for subsidies should be accounted for since, as many have noticed, subsidies are adopted for a variety of reasons, and some of them will primarily aim to address distortions (say, environmental pollution). Should, then, a trade agreement punish similar subsidies that might affect international trade, if only in an ancillary manner? It could be that firms are unable to take into account the social benefits associated with their production, and, thus, produce less than they should. Assuming market failure, a subsidy might on occasion be a first-best instrument to respond to it. In such a case, a production subsidy could be a solution. Strategic trade theory has also made a strong case for subsidization. The basic idea of this literature is that subsidies (and other trade policy instruments) can raise domestic welfare by shifting profits from foreign to domestic firms. It is simple to see, for example, that a subsidy will reduce welfare in a country that exports products that compete with the subsidized good. Brander and Spencer (1985) should be credited probably more than anyone else with this insight. They constructed a two-stage game where Home and Foreign produce substitutes (homogeneous products) and export to the world market. During stage 1, Home pays an export subsidy to its firm. In stage 2, Home and Foreign take each other’s volume of production as given. The subsidy paid by Home lowers the price for its firm and makes it want to export more for any level of volume of exports from Foreign. The foreign firm must then reduce its output. As the subsidy increases, the quantity of exported goods rises, economies of scale work, Home’s prices fall, and rents for Home rise, while rents for Foreign fall. Rents are, thus, shifted from Foreign to Home.27 Strategic trade theory has been criticized for various reasons28 and has been understood by some in practice as a recommendation for active subsidization in order to induce enhanced productivity. There is, of course, the other side as well. There are those who argue for a tough attitude toward subsidies. Recall the point about misallocation of productive resources: subsidies often constitute the preferred instrument of industrial policy and might shift profits from
Subsidies
193
nonsubsidizing to subsidizing trading nations.29 And then some subsidies are “predatory.” The intent behind similar policies is to drive competitors out of the market. Predatory subsidies can reduce aggregate welfare in an importing country, both because the local producers that leave the industry forfeit their prospective profits, and because the consumer price may rise once the local competitors exit.30 Depending on the circumstances, thus, there might be good arguments to regulate subsidies in the context of a trade agreement. Most economists, however, would agree that the rationale for subsidization should be relevant in designing the legal discipline.31 3.1.3.3 From Economic Theory to WTO Practice The original Uruguay-round SCM Agreement did try to distinguish the treatment of subsidies depending on their rationale. To this effect, for example, “green” subsidies aimed at addressing environmental hazards would remain unanswered.32 This is not the case anymore, though, and, as we will see in detail later in this chapter, the current SCM Agreement does not condition the treatment of subsidies on their rationale. Subsidies can nowadays be counteracted regardless of their rationale. Grossman and Mavroidis (2007a) argued that the quintessential purpose of the SCM Agreement is to address the shifting of costs to domestic producers. This is what they say: Policies that are set with no regard to their potentially adverse effects abroad are bound to be globally inefficient, in the sense that an alternative set of policies could be found that all governments would agree is preferable to the chosen ones. To further global efficiency, a trade agreement should make it costly for a government to choose policies that inflict harm on its trading partners.33 So, in what ways might a subsidy inflict harm on another country? One possibility would be to associate harm with a loss of aggregate economic welfare. An interpretation of the SCM Agreement that associates harm with a loss in aggregate economic welfare cannot, however, be sustained in light of the manner in which the agreement was structured. If product and factor markets are competitive and well functioning, then a foreign subsidy of production of a good cannot reduce aggregate welfare in an importing country. A subsidy typically encourages production in the subsidizing country. Thus, at each price, local firms are willing to produce more output when subsidized than otherwise. The effect of the subsidy is to reduce the world price of the subsidized good. If markets were competitive and well functioning in the importing countries, and governments were concerned only about aggregate economic welfare, then importing countries would be grateful when a trading partner introduced a subsidy and would have no reason to discourage such subsidies with the threat of countervailing actions.34 Therefore, if the members had intended the SCM Agreement to discourage actions that would inflict welfare losses on others, they would have directed the test for actionable subsidies toward identifying conditions where aggregate loss is most likely to occur: i.e., an external welfare loss is more likely to occur when a government subsidizes firms that sell in an imperfectly competitive market.
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Similarly, a welfare loss is more likely when wages are rigid (e.g., unresponsive to changes) in the importing country than when they are flexible, so the agreement might have made reference to the labor-market conditions there. The agreement might also have allowed for countervailing measures in member countries that export goods in competition with the subsidized good, inasmuch as these countries are quite likely to suffer welfare losses as a result of a foreign subsidy. In fact, the SCM Agreement does not confine the use of CVDs to situations in which an importing country has established the presumption of a welfare loss. The agreement makes no reference to labor-market conditions, to market structure, or even to consumer welfare. And the agreement makes no allowance for countervailing measures in countries that export the subsidized good, where the presumption of welfare losses surely exists.35 Rather, countervailing measures are permitted only when there has been injury or injury is threatened to a domestic industry in an importing country.36 Evidently, thus, the signatories meant to discourage certain policy actions that would harm competing producer interests. This objective is understandable in the light of recent studies on the political economy of trade policy, which have emphasized that governments often set their trade policies with objectives in mind other than the maximization of aggregate economic welfare.37 The policies that are chosen typically reflect a compromise among competing constituent interests. Moreover, some interests, especially those that are relatively concentrated, are given more weight in the political process than others. Less concentrated groups are not so successful in the political arena, in part because they have difficulty overcoming the free-rider problems that plague collective political action (Olson 1965). Thus, governments often are induced by political pressure to place more weight on producer interests than consumer welfare when making decisions about trade policy. The interpretation that the main objective of the SCM Agreement is to discourage subsidies that might harm producers in importing countries finds support in many provisions of the agreement. Article 15.1 of the SCM requires that a determination of injury ... shall be based on positive evidence and involve an objective examination of both (a) the volume of the subsidized imports and the effect of the subsidized imports on prices in the domestic market for like products and (b) the consequent impact of these imports on the domestic producers of such products.
Articles 14 and 19 of the SCM require the size of CVDs to be set so as to just offset the adverse effects of the subsidy on conditions in the domestic industry: the latter provision can only be understood as an attempt to restore competitive conditions in the industry to what they would have been absent the subsidy. The various provisions of the agreement should hence be interpreted in light of this overarching objective, which is very similar, if not altogether identical, to that permeating the AD Agreement.38 Having said that, it is worth noting that economists would prefer to look at economywide effects. Subsidies are viewed by economists as an instrument whereby governments, at
Subsidies
195
least in a perfect competition model,39 subsidize foreign consumers. A reduction in the marginal cost of foreign firms (which may be the consequence of a subsidy) generally reduces prices for the domestic firms. Hence, as briefly alluded to previously, many economists have made the point that instead of imposing countervailing measures to offset subsidization, governments affected by foreign subsidies should be thanking the subsidizing government.40 3.1.3.4 Action against Subsidies WTO members who do not believe in showing such gratitude can impose CVDs against subsidized imports, request a panel to judge that the subsidizing WTO member should stop subsidizing, or both. Both legal actions are available, and whereas CVDs aim to address injury that WTO members suffer in their own market, they can also introduce a legal challenge aimed at stopping subsidization in general when they experience injury in third markets. This last provision was deemed necessary for good reason. Suppose that Home and Foreign produce a good that Foreign subsidizes but Home does not. If Third consumes the good, and it has no interest in stopping Foreign from subsidizing, it belongs in the company of these grateful countries. Home will be shortchanged as a result, even when it imposes CVDs, and unless the SCM Agreement acknowledges its right to intervene and stop Foreign from subsidizing, it will lose out in Third’s market. CVDs are a form of unilateral relief, much like AD measures. While the unilateral nature of the remedy has obvious advantages, it also presents some shortcomings in dealing with subsidies. CVDs may protect the domestic industry of Home from injury suffered in its domestic market due to subsidized imports from Foreign, but it does not provide any relief in cases where the subsidies are distorting a third-country market in which the domestic industry has an export interest.41 However, if Home imposes CVDs on imported goods originating in Foreign, it cannot recover twice the damage it has suffered through CVDs and through countermeasures against Foreign (in case Foreign refuses to adhere to an adverse panel ruling asking it to stop subsidization, thus opening the way for Home to adopt countermeasures). It cannot do double-dipping, as we will see later in this chapter. CVDs are a powerful weapon in the hands of members with a substantial internal market. They will not have to await a multilateral ruling (which can take up to four years) to provide their domestic industry with adequate relief since it is highly likely that most of the injury will be felt in their domestic market, and they will be addressing it through unilateral action within short time limits (around 18 months). The de facto absence of retroactive remedies in the WTO legal system makes this option quite attractive. Conversely, members with small internal markets with exporting interests cannot get much from the threat of CVDs. The size of their domestic market takes a lot of wind out of their sails, and multilateral action emerges as the only option for them to address injury.42
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Article 32.1 of the SCM makes it clear that subsidies can be addressed only through the provisions of the SCM Agreement: No specific action against a subsidy of another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement.
Recall the discussion in chapter 2 of this volume about the Byrd Amendment. The Appellate Body (AB) held that the same applies with respect to CVDs (§ 256). CVDs and legal challenges aimed at causing the subsidizing WTO member to withdraw or adjust its subsidies constitute the only specific action against subsidies. In a subsequent case, though, called EC–Commercial Vessels, the panel faced an argument by Korea to the effect that the EU Temporary Defense Mechanism (TDM) Regulation violated Article 32.1 of the SCM. Korea and the EU had reached an agreement to stop subsidizing their respective shipyards. Through the TDM, the EU had deviated and granted subsidies to its shipbuilding sector, arguing that its action was in response to Korea’s disrespect of its own commitments.43 The panel held that the TDM was a specific action relating to subsidization but distanced itself from the view that it came under the ambit of Article 32.1 of the SCM (§§ 7.154–74). For a scheme to counteract a subsidy, the panel held that it must contain some element in addition to the potential impact on competition (§§ 7.160ff.).44 It, thus, did not outlaw this scheme simply because of its potential to counteract a subsidy, thus relaxing the ruling that the AB had adopted when discussing the legality of the Byrd Amendment. 3.2 The Relationship with GATT The SCM Agreement is an Annex 1A Agreement, and the General Interpretative Note governs its relationship with GATT, as we saw in chapter 1, volume 1. To the extent of conflict, the SCM Agreement will prevail. Very few GATT provisions are relevant in the operation of the SCM Agreement. Subsidies are, by virtue of Article III.8 of GATT, an exception to national treatment. We explained, in chapter 9, volume 1, why Article XX of GATT should not be construed as an exception to the SCM Agreement. There is an overlap (albeit partial, of course) between the subject matter of the SCM Agreement on the one hand, and that of the Civil Aviation, the Trade-Related Investment Measures (TRIMs), and the AG agreements on the other. We discuss the relationship between the SCM and the TRIMs Agreement in chapter 7, volume 2, with the AG Agreement (which deals with a subset of subsidies—namely, farm subsidies) in chapter 8, and its relationship with the Agreement on Civil Aviation (which deals with another subset of subsidies—namely, subsidies to civil aviation) in chapter 11.
5 3 1 4
25 1 21 11 6
13
2
11 4 4
33
4
3
5
6
22 17 18
27 5 5
Argentina Australia Brazil Bulgaria Canada Chile China Colombia Costa Rica Czech Republic Ecuador Egypt European Union Guatemala India Indonesia Israel Jamaica Japan Jordan Korea Latvia Lithuania Malaysia
1996
1995
Reporting Member
8
15
13 5 3
7 41
1 1
14
14 44 11
1997
1
3
28 8 7
8 2 3 6 1 2 1 14 22
8 13 18
1998
2 6
1 2
41 3 1 1
3 32
21 5 11 3
43 15 11
2000
6
64 8
7 65
1
2 2
18
23 24 16
1999
1
4 1
79 4 4 1 2
7 28
14 6
25
28 23 17
2001
Table 3.1 Countervailing initiations: by reporting member, 1 January 1995–30 June 2010
5
9 6
1
81 4
3 20
30
14 16 8 1 5
2002
6
18
1
46 12
1 7
22
15
1 8 4
2003
3
3
21 5 1
30
27 2
11
12 9 8
2004
4
4
4
28
12 25
24 2 1
1
12 7 6
2005
8
1 7
35 5
9 35
7 1 10 9 1
11 10 12
2006
15
4
47 1
2 9
1 1 4 1
8 2 13
2007
5
55 7 1
19
3 1 14 6
19 6 23
2008
31 7 6 1
2 15
6 1 17 5 2
28 9 9
2009
3
17 3 5 1
8
1 1 4 2
7 4 5
2010
277 212 184 1 152 19 182 50 10 3 1 67 414 1 613 83 43 6 6 1 111 7 7 43
Total
Subsidies 197
8 1
34
2 1
16
2 226
3 157
Source: http://www.wto.org.
22
14
1 1
4 4
4 10
Mexico New Zealand Nicaragua Pakistan Panama Paraguay Peru Philippines Poland Slovenia South Africa Taipei, Chinese Thailand Trinidad and Tobago Turkey Ukraine United States Uruguay Venezuela Total
1996
1995
Reporting Member
Table 3.1 (cont.)
15 1 6 246
4
23 1 3
2 2 1
6 5
1997
10 266
36
4 1
41 6
3 3
2
12 1 2
1998
7 358
47
3 8
1 8 6 7 1 16
11 4
1999
47 1 1 298
1 7
21 4
1 2
6 9
2000
6 3 3 1 15 2 77 4 1 371
8
6 1
2001
1 315
18 3 35
21
4
234
8 2 3 2 11 2 37
4 1 1
3
1
13 1 3
14 5
2003
10 2
2002
220
25 6 26
3
6
1 7
3
6 5
2004
202
12 2 12
23
4
13
6
2005
203
8 1 8
3 5 3
3
4
6 1
2006
165
6 5 28
2
5
2
3 6
2007
213
23 7 16
1
3
3
1
2008
209
6 2 20
3 1 1
4 1
26 4
2
2009
69
1 1 2
1 2
1
2010
98 53 2 53 6 2 69 18 12 1 212 23 43 12 145 31 442 6 31 3752
Total
198 Chapter 3
2 5
19
1
2
1996
5
1
7
5 1
1995
Source: http://www.wto.org.
Argentina Australia Brazil Canada Chile China Costa Rica European Union Japan Mexico New Zealand Peru South Africa Turkey United States Venezuela Total
Reporting Member
3
2
1
1997
6
1
1
2
2
1998
14
11
3
1999
21
2
1
10
5 2
1
2000
14
10
1 2
1
2001
Table 3.2 Countervailing measures: by reporting member, 01 January 1995–30 June 2010
14
10
2
2
2002
6
2
1
3
2003
2 1 8
1
1 2
4
1
2
2005
1 1
2004
3
2
1
2006
2
1
1
2007
11
7
1 3
2008
9
1 6
1
1
2009
4
2
1
1
2010
4 2 7 16 2 1 1 25 1 8 4 3 5 1 62 1 143
Total
Subsidies 199
200
3.3
Chapter 3
Defining a Subsidy
The definition of the term “subsidy” depends on the objectives of the agreement where it will be embedded, and it is not at all anomalous that different regimes regulating subsidies include divergent definitions.45 Defining the objectives, though, does not eliminate interpretative difficulties regarding the ambit of the subsidy. The basic problem facing the interpreter will be the construction of the appropriate counterfactual. One can construe numerous examples where the difficulties surrounding the definition of “subsidy” become obvious. Take, for example, a case where, in the context of litigation before the WTO, the question arises whether a company that wants to raise capital and hence offers its stock for sale has been subsidized or not. Assume that the company offers its stock for sale at the stock exchange for $1,000/share. What if no private party buys a share at this price and the state steps in and buys at this price after 5, 35, or 135 days? Has a subsidy has been granted in all three cases? What if the state pays $800/share after 5, 35, or 135 days? What if the state pays $1,000/share after individuals have (massively or moderately) purchased stocks for $900/share? The response to whether a subsidy has been granted in many of these scenarios comes close to being a quixotic test. As we will see later in this chapter, a number of WTO panels simply failed to construct the appropriate counterfactual. It should not come as surprise then that the Palgrave Dictionary for Political Economy has no entry for the term “subsidy.” Additional difficulties result from the different attitude that the GATT and the GATS (General Agreement on Trade in Services) have adopted towards subsidies. The GATS (Article 15) has established a working group aiming to negotiate disciplines on subsidies. At this stage though, there are no disciplines on subsidies for services. And yet, sometimes the distinction between a goods- and a servicessubsidy is hard to draw. Some of the subsidies to national banks in the post-2008 era (e.g., following the financial crisis) are paid on the condition that the money received will be paid to domestic (national) economic agents. De facto, maybe producers of goods profit, the subsidy nonetheless is paid to a service supplier. Are we, in similar instances, in presence of a GATT subsidy (subject to the SCM Agreement), or a GATS subsidy (where no disciplines exist)? Maybe the jurisprudence on pass through of subsidies that we will discuss later in this chapter can help us respond to this question. Arguments nonetheless, can be made for either point of view. What do then, in light of definitional difficulties? Sykes (2005), (2010) went so far as to ask whether, because of the indeterminacy of the term, inaction against subsidies is probably the better option. Snape (1991, p. 140), in a similar vein, took the view that “Virtually every government action can be regarded as subsidy for someone, and virtually all such actions can affect international trade.” It should, thus, come as no surprise that not only the Palgrave Dictionary of Political Economy, but until 1995 (that is, the advent of the WTO), no agreed-on definition of the
Subsidies
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term “subsidy” existed in the multilateral trading system. Various GATT provisions (e.g., Articles III.8, VI, and XVI) dealt with subsidies but failed to provide a definition of the term. In fact, negotiators did not even consider it necessary to do so. The 1961 Working Party report on “Operation of the Provisional Article XVI,” where the trading nations considered it, stated that it was ... neither necessary nor feasible to seek an agreed interpretation of what constitutes a subsidy. It would probably be impossible to arrive at a definition which would at the same time include all measures that fall within the intended meaning of the term in Article XVI without including others not so intended.46
Similarly, the 1979 Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (the Tokyo-round subsidies “code”) elaborated rules on the use of subsidies as well as on protective responses to them, but it, too, failed to include a definition of the term. One thing has always been clear: the term “subsidy” was supposed to cover government action, not private endeavors. For example, the Working Party on the “Review Pursuant to Article XVI.5” states “... there was no obligation to notify schemes in which a group of producers voluntarily taxed themselves in order to subsidize exports of a product.”47 Against this background, one might legitimately ask how panels dealt with disputes where a subsidy scheme was being challenged for being inconsistent with GATT, or even the Tokyo-round agreement. Panels had, in fact, adopted a working definition of “subsidy.” The 1950 GATT Panel on Australia–Ammonium Sulfate should be credited with the first definition. Australia had been granting subsidies on ammonium sulfate and sodium nitrate, two competitive products. Subsidies were in place for both goods, which were deemed necessary by Australia for various reasons during World War II. Chile requested and obtained a 0 percent tariff duty on ammonium sulfate from Australia. Subsequently, Australia removed the subsidy from sodium nitrate, but not from ammonium sulfate. As a result, Chile found that its exports of ammonium sulfate to Australia suffered, and so it brought a case against Australia. One of the first questions was how should the term “subsidy” be understood in the absence of a statutory definition. The panel provided the following definition (§ 10): ... the type of subsidy which it was intended to cover was the financial aid given by a government to support its domestic production and to improve its competitive position either on the domestic or on the foreign markets.
The definition of “subsidy” provided in the WTO SCM Agreement borrows heavily from this panel finding: “subsidy” is a financial contribution by a government that confers a benefit to a specific recipient. The first two elements have been included in Article 1 of the SCM,48 whereas the latter is included in Article 2 of SCM. The SCM Agreement
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distinguishes between two types of subsidies: actionable and prohibited. The definition of “subsidy” is valid for both categories.49 3.3.1
Financial Contribution by Government
A government or public body provides financial contribution in the following cases (Article 1.1 of the SCM): (a) In case of “direct transfer of funds” (such as grants, loans, and equity infusions), or potential direct transfer of funds or liabilities (e.g., loan guarantee); or (b) When government revenue that is otherwise due is foregone or not collected (such as fiscal incentives in the form of tax credits); or (c) Where the government provides goods or services other than general infrastructure, or when it purchases goods; or (d) The government entrusts a private body to do the activities mentioned above; or (e) There is any other form of income support as spelled out in Article XVI of GATT. The forms of financial contribution are exhaustively mentioned in the body of Article 1 of the SCM.50 Article 1.1 (e) of the SCM is wide enough to function as anticircumvention device. Furthermore, there is no firewall, between the forms of financial contribution. In Canada–Renewable Energy,51 the AB held that the same transaction could conceivably come under more than one of the subparagraphs of Article 1.1 of the SCM. A panel, however, once satisfied that the challenged measure comes under one of the subparagraphs, does not have to also examine whether it comes under another subparagraph to decide that a financial contribution has been granted, as the AB held in § 5.120: When determining the proper legal characterization of a measure under Article 1.1(a)(1) of the SCM Agreement, a panel must assess whether the measure may fall within any of the types of financial contributions set out in that provision. In doing so, a panel should scrutinize the measure both as to its design and operation and identify its principal characteristics. Having done so, the transaction may naturally fit into one of the types of financial contributions listed in Article 1.1(a)(1). However, transactions may be complex and multifaceted. This may mean that different aspects of the same transaction may fall under different types of financial contribution. It may also be the case that the characterization exercise does not permit the identification of a single category of financial contribution and, in that situation, as described in the US —Large Civil Aircraft (2nd complaint) Appellate Body report, a transaction may fall under more than one type of financial contribution. We note, however, that the fact that a transaction may fall under more than one type of financial contribution does not mean that the types of financial contributions set out in Article 1.1(a)(1) are the same or that the distinct legal concepts set out in this provision would become redundant, as the Panel suggests. We further observe that, in US–Large Civil Aircraft (2nd complaint), the Appellate Body did not address the question of whether, in the situation described above, a panel is under an obligation to make findings that a transaction falls under more than one subparagraph of Article 1.1(a)(1). (italics in the original)52
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The various examples of financial contribution reflected in the SCM Agreement underscore the impression that what matters, is that economic value is being transferred. The AB, in its report on US–Softwood Lumber IV, held that (§ 51) the concept of subsidy defined in Article 1 of the SCM Agreement captures situations in which something of economic value is transferred by a government to the advantage of a recipient.53
There are many schemes, on the other hand, that do not qualify as financial contributions, their economic value notwithstanding. Imposition of an export restraint or an export tax on an input has economic value, since local downstream producers may benefit from it. As the government, nevertheless, is not providing funds, foregoing revenue that is due, or providing a good or service, an export ban or tax does not amount to a financial contribution in the sense of the SCM Agreement, and therefore, there will be no subsidy to the downstream producers: a good or service needs to be provided.54 The Panel on US–Export Restraints noted to this effect that (§ 7.83) the introduction of the two-part definition of subsidy, consisting of “financial contribution” and “benefit,” was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies.
This panel went on to conclude that, even if a government measure has an effect that is equivalent to that of a financial contribution as defined in Article 1 of the SCM, it will not be considered a “subsidy” unless the measure takes the form of a financial contribution as defined in Article 1.1(a) of the SCM (§§ 8.73–74). Form, thus, matters. 3.3.1.1 Contribution by Government (or Public Body) Paragraphs (a)–(c) of Article 1 of SCM deal with practices by government entities, whereas there is a change of focus in paragraph (d), where a government acts through another nonstate entity. Government The term “government” is not defined in the SCM Agreement. Contextual arguments55 would support the view that it covers federal, state, or provincial authorities. Recall, however, that under Article XXIV.12 of GATT: Each contracting party shall take such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territories.
Public Body The term “public body” is not defined in the SCM Agreement either. A definition of a related concept, “public entity,” was included in paragraph 5(c)(i) of the GATS Annex on Financial Services:
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a government, a central bank, or a monetary authority of a Member, or an entity owned or controlled by a Member, that is principally engaged in carrying out governmental functions or activities for governmental purposes, not including an entity principally engaged in supplying financial services on commercial terms.
The Panel on Korea–Commercial Vessels questioned the relevance of the General Agreement on Trade in Services (GATS) Annex on Financial Services to the interpretation of Article 1.1(a)(1) of the SCM. It went on to construe “public body” as an entity controlled, and not necessarily owned by, government (§ 7.47). In this understanding, a “public body” does not have to also engage principally in carrying out governmental functions. What matters is that it is governments that control it. Before we discuss the evidentiary standard associated with the control-criterion, it is warranted to explain the context of this dispute. The EU, the complainant in Korea–Commercial Vessels, had suggested two criteria that should be decisive in determining what a public body is: (a) An entity would be considered a “public body” only if it pursued a public policy objective, and (b) had access to state resources (§ 7.32). The panel dismissed the relevance of the public policy objective (§ 7.55), and did not express an opinion on whether access to state resources should be a relevant criterion. This panel argued against a “lock, stock, and barrel” transposition of this definition in the SCM context but found it plausible to endorse only the “control-criterion” embedded in the GATS definition. The panel had to also entertain an argument by Korea to the effect that only “inherently” governmental practices were captured by Article 1.1 of SCM. In other words, when public bodies behave as private investors, their policies do not come under the purview of this provision at all. Korea had argued that KEXIM, the Korean public body in question, was set up for the specific purpose of meeting the needs of an industrial or commercial nature; i.e., activities involving the extension of financing facilities in markets. In doing so, it competed with other public or private operators based on market-oriented principles. Korea was thus arguing that, when the “nature” of activity is essentially “private,” then the “private investor’ test becomes inapplicable and all similar activities escape the purview of the SCM Agreement. According to the panel in this case, the term “government practice” is used to denote the “author” of the action, rather than the “nature” of the action, and thus covers all acts of governments or public bodies, regardless of whether or not they involve the exercise of regulatory powers or taxation authority (§§ 7.26ff., and especially § 7.29). This panel accepted that a public body might operate in accordance with commercial considerations. Hence, actions by public bodies should not be equated with subsidies simply because they
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have been carried out by public bodies (§ 7.44). On the other hand, though, activities will not escape the purview of the SCM Agreement only because they are perceived to be inherently private. The panel thus dissociated the test for defining whether an entity is a public body from the test of whether a benefit had been bestowed, an issue to which we return later in this chapter. The panel focused on the fact that the Korean government controlled some of the main appointments and enjoyed extensive “control” over the shaping of the mandate of KEXIM—that is, the entity whose public body status was in dispute (§ 7.53). In its view, the combination of these two factors sufficed for the entity to be considered a public body. In two subsequent “twin” cases, both the US and the EU in their respective countervailing duty examinations into imports of dynamic random access memory (DRAM)56 from Korea had not considered that a number of Korean banks, which were either 100 percent or 80 percent (or even less, but in large proportion anyway, e.g., where government was majority shareholder) owned by the government, were public bodies. Instead, their national investigating authorities (IAs) had examined whether these entities had been “entrusted” or “directed” by the government to provide various financial contributions; that is, to what extent their activities were “controlled” by the government. For the US IA especially, ownership of the investigated company was one of the five factors examined in order for it to conclude whether the Korean government had made a financial contribution or whether the investigated activity was of a private nature.57 The Panel on US– Countervailing Duty Investigation on DRAMs held that 100 percent ownership will be a factor that will weigh heavily when deciding if the body is public. This factor per se will not, nevertheless, decide the issue (footnote 29): Depending on the circumstances, 100 per cent government ownership might well have justified the treatment of such creditors as public bodies but that on the basis of the criteria provided for in US law, however, the DOC treated these 100 per cent owned Group B creditors as private bodies.58
Similarly, the Panel on EC–Countervailing Measures on DRAM Chips stated that it did not (footnote 129) “wish to imply that it would not be possible or justified to treat a 100 per cent government-owned entity as a public body, depending on the circumstances.” These two panels thus unambiguously took the position that ownership is not a perfect substitute for control. In other words, they left room for state companies to behave like private agents, in which case their activities would escape the disciplines of the SCM Agreement (if, of course, they have not been entrusted to pursue a government objective). In subsequent investigations, the US changed its attitude. In investigations involving China, ownership emerged as the decisive criterion to characterize an entity as a “public body,” and not one among several criteria deployed to this effect. This approach was challenged by China before a WTO panel. China claimed that the previous US approach was the correct one, and that the new approach amounted to a
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mere presumption that government had been involved and provided financial contributions. The panel endorsed the US view, and China appealed. The AB held in its report on US–Antidumping and Countervailing Duties (China) that the panel had mistakenly characterized Chinese state-owned enterprises (SOEs) as public bodies by essentially equating government “ownership” to government “control” (§ 320).59 In its view, the panel should have examined other factors as well, such as those that the US Department of Commerce (USDOC) had examined in the past but did not in this case (§ 343): The five factors that the USDOC had examined in the past are: (i) government ownership; (ii) government presence on the board of directors; (iii) government control over activities; (iv) pursuit of governmental policies or interests; and (v) whether the entity was created by statute.60
What mattered for the AB, therefore, was whether the entity possessed, exercised, or was vested with government authority. Mere ownership should not be equated with possession or exercise of government authority. In this report, the AB did not explicitly distance itself from its ruling in Korea–Commercial Vessels, where it had adopted the control criterion as the decisive criterion to characterize an entity as “public body.” There are nonetheless nuances between the two tests. Applying its test to the specifics of the dispute before it, the AB found that there was nothing wrong with the treatment of Chinese state-owned commercial banks (SOCBs) as public bodies by the USDOC. In this case, the US authority had examined extensive evidence (other than ownership) pointing to meaningful control of those entities by the Chinese government that was effectively exercising government authority through them, and, consequently, in the AB’s view, the examined entities qualified as public bodies (§ 355).61 In US–Carbon Steel (India), the same question was asked yet again. In this case, the Indian public body under investigation (NMDC, National Mineral Development Corporation) by the US authority was 98 percent owned by the Indian government (§ 4.1). Moreover, the government of India had the power to appoint two and the power to approve a further seven out of a total of 13 executive directors of the NMDC. India had argued before the panel and the AB that, as per prior case law, ownership should not be equated with control. It also argued that ownership and the power to appoint directors did not suffice for the entity to be characterized as a “public body” (§ 4.54). In India’s view what mattered was whether NMDC was effectively exercising government authority. The panel rejected the Indian claim holding that NMDC was effectively controlled by the government of India and this is all that mattered. India appealed this finding. The AB endorsed the Indian argument. It dedicated a lengthy passage to the discussion of this issue, and it first gave the impression that it was opting for a rather loose test. Indeed, it conceded that there was no need to possess the power to regulate (§ 4.17) 62 It then went so far as to state that (§ 4.29):
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The absence of an express statutory delegation of governmental authority does not necessarily preclude a determination that a particular entity is a public body. Instead, there are different ways in which a government could be understood to vest an entity with “governmental authority,” and therefore different types of evidence may be relevant in this regard. In order properly to characterize an entity as a public body in a particular case, it may be relevant to consider “whether the functions or conduct [of the entity] are of a kind that are ordinarily classified as governmental in the legal order of the relevant Member,” and the classification and functions of entities within WTO Members generally.
But then in the following paragraphs it made a U-turn. In §§ 4.36 of the report, the AB distanced itself from the panel’s findings. It held that what mattered was whether a public body possessed, exercised, or was vested with government authority. In its view, the panel had confused the substantive—with the evidentiary standard that the AB had already established in its prior case law. The AB clarified that panels have to inquire into whether a government has effectively exercised control in order to decide whether we are in presence of a public body. The possibility that it may do so does not suffice. To do that, panels will have to delve into the intricacies of domestic legal regimes. Since the panel had not inquired into this issue, the AB found that it could not have legitimately reached the conclusion that NMDC was a public body (§ 4.55). It follows that with this case law, the AB set the record in favor of the approach that it had followed in its report on US–Antidumping and Countervailing Duties (China). What matters for an entity to be acknowledged as public body is that it possesses, exercises, and is vested with government authority. To show that this has indeed been the case, panels must review not the mere possibility, but the actual exercise of control. 3.3.1.2 Government Acts Through a Private Agent Financial contribution by the government exists also in cases where the government “entrusts” or “directs” a private body to provide a financial contribution, in the sense of subparagraphs (i)–(iii) of Article 1 of the SCM [Article 1.1(a)(1)(iv) of the SCM]. The AB noted in its report on US–Countervailing Duty Investigation on DRAMs that the purpose of this provision was to act as an anticircumvention device (§ 113): Paragraph (iv), in particular, is intended to ensure that governments do not evade their obligations under the SCM Agreement by using private bodies to take actions that would otherwise fall within Article 1.1(a)(1), were they to be taken by the government itself. In other words, Article 1.1(a)(1) (iv) is, in essence, an anticircumvention provision.
The two key terms (“entrust,” “direct”) were interpreted in two disputes between the EU and the US, on the one hand, and Korea, on the other. The disputes (EC– Countervailing Measures on DRAM Chips and US–Countervailing Duty Investigation on DRAMs)63 involved a claim against the subsidization of Hynix, a Korean company. Hynix produced DRAMs (that is, data-storing devices routinely used in personal computers, desktops, and laptops alike). Hynix was the successor to Hyundai Electronics, its original
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name, and had left the Korean chaebol (conglomerate) when it changed its name in 2001. Following the Asian financial crisis in 1997, an industrial program of the Korean government called “Big Deal” was put in place with the goal of curbing overcapacity in the production of DRAMs (among other things). It was the consistency of the government involvement in the Big Deal program with the SCM rules that was questioned through the two disputes. The EU and US had initiated investigations and imposed CVDs against exports of DRAMs from Korea—that is, from Hynix and Samsung, another Korean producer. In their view, they possessed enough evidence that Korean producers had benefited from generous financial contributions by the Korean government that had instructed, inter alia, private operators such as the Korean First Bank (KFB) to behave in this way. Korea claimed before the panel that the CVDs had been imposed unlawfully since Hynix had not profited from financial contribution by the Korean government at all. The Panel on EC– Countervailing Measures on DRAM Chips held first that a distinction must be drawn between private and public behavior. For the “entrust” or “direct” test to be met, an entity must be acting “on behalf of” a government since purely private actions escape the purview of the WTO Agreement (§§ 7.52–53). The panel stated that it did not (§ 7.109): want to be seen as requiring an investigating authority to come up with the smoking gun in the sense of a written order by the government to a private body to provide a financial contribution. We understand that, in most cases, the authority will have to base its decision on a number of arguments and pieces of evidence which perhaps when considered in combination may all point in the direction of government entrustment or direction, especially in cases where the level of cooperation by the interested parties is low.64
The AB expressed this test in even clearer terms in its report on US–Countervailing Duty Investigation on DRAMs, where it held that an IA must (§ 108) “identify the instances where seemingly private conduct may be attributable to a government for purposes of determining whether there has been a financial contribution within the meaning of the SCM Agreement.” Echoing the case law on Japan–Semiconductors,65 the AB held that it was not necessary that the government threaten sanctions (§ 116). The panel had held that “entrust” should be understood as a form of “delegation,” whereas “direct” as implying a “command,” but the AB disagreed. It held that “delegation” was too narrow a test since that implied that “entrusting” needed to be carried out in a particular form. This was not consonant with the wording of the SCM Agreement, however, which, in the AB’s view, implied that even informal delegation of authority satisfied the “entrust” test. In a similar vein, the AB refused to endorse the panel’s understanding of the term “direct” as being synonymous with “command.” In its view, a lesser degree of compulsion appropriately met the “direct” test (§§ 109ff.). The AB made one additional noteworthy finding in this context. KFB had been requested to make a financial contribution (under the so-called Fast Track Debenture
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Programme), which it did not do. The question was whether, in light of its inaction, the “entrust” or “direct” test had still been met. The AB held that this could not have been the case since failure to carry out the directives of the government meant that no financial contribution had been paid at all (§§ 121ff., and especially § 125). In EC–Countervailing Measures on DRAM Chips, the EU IA had relied on circumstantial evidence to reach the conclusion that the government of Korea was entrusting or directing private bodies to participate in the restructuring of a failing Korean DRAMs producer. The IA had relied heavily on two factors: first, that the Korean producer had not adopted “commercial” behavior, in the sense that its actions were not consistent with those of a “typical” profit maximizer; and second, that government ownership of the investigated operator was duly taken into account as well. The panel found this approach reasonable and also held that even if an IA decided not to treat an entity with important government control as a “public body,” this did not imply that government control or shareholding had become irrelevant. Quite the contrary, in fact: government shareholding in a private body may lower the evidentiary threshold for establishing that the government “entrusted” or “directed” a private agent to act in a particular way. Ownership, thus, is relevant when it comes to deciding whether an entity is a public body, as it is when it comes to deciding whether a government has entrusted a “private” operator (i.e., a nonpublic body) to act in a particular way. In both cases, it does not in and of itself suffice to prove that the corresponding legal test has been met. It is, nevertheless, an appropriate criterion to be taken into account when deciding whether the legal test has been met. More to the point, the panel held that there must be “probative and compelling” evidence that government had “entrusted” or “directed” private agents to act in a particular way.66 The US appealed the “compelling” part of the test, arguing that it meant that only one conclusion was possible (§ 137). The AB agreed with the US that indeed this would have been the wrong standard to apply. In the AB’s view, a reasonableness standard was appropriate since panels could not reject conclusions reached by IAs simply because they disagreed with them (§ 139, 187). The AB added, however, that de facto, the panel had applied a reasonableness standard. It went on to state that panels were required to make an “objective assessment” of the matter before them, and it clarified what this test implied for panels—namely, that they should explain how submitted evidence supported their findings and how the findings reached supported the final determination (§ 186).67 The AB also held that panels could not do de novo review since, unlike IAs, they were not “initial triers of facts” (§§ 187–188). The AB underlined that panels cannot base their findings on evidence that was not reasonably before the IA. In its words, panels would be violating the standard of review embedded in Article 11 of the Dispute Settlement Understanding (DSU), if they operated with the “benefit of hindsight” (§ 175). The AB also emphasized the importance of reviewing evidence in its totality, not in bits and pieces (§ 150). The AB noted that this approach was particularly relevant in cases of entrustment
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or direction under Article 1.1(a)(1)(iv) of the SCM, where much of the publicly available evidence would likely be circumstantial (footnote 277). 3.3.1.3 Direct Transfer of Funds by Government Any time a government or public body disburses funds to a recipient directly (as opposed to entrusting or directing a private agent to do so), a financial contribution has taken place. An appropriate illustration of this form of financial contribution is offered in the AB report on EC and Certain Member States–Large Civil Aircraft (§§ 830ff.).68 In US– Carbon Steel (India), the AB held that a transfer of funds is “direct” even when it occurs through an “intermediary,” if the latter has no discretion regarding the disbursement of funds (§ 4.94). It bears repetition that direct transfer of funds, like any form of financial contribution, should not be equated to subsidy. The fact that government directly transfers funds does not mean that it has paid a subsidy. Governments can transfer funds and still evade the disciplines of SCM if they have behaved like private agents. For a subsidy to exist, the direct transfer of funds must represent a transfer that private agents cannot obtain under market conditions. We will return to this discussion later in this chapter, when we discuss the term “benefit.” 3.3.1.4 Revenue Otherwise Due to Government Is Foregone A financial contribution also exists when a government forgoes or does not collect revenue otherwise due. The key term is “otherwise due.” Footnote 1 to the SCM Agreement, as well as Annexes I—III, identify certain situations when revenue foregone will not confer a benefit. Footnote 1 to the SCM Agreement explains that exempting exported goods from consumption taxes is not a financial contribution by a government in the sense of foregone income otherwise due.69 Instruments aimed at avoiding double taxation, an issue that we will discuss in more detail later in this chapter, constitute another instance of income foregone that is not considered to be a financial contribution by a WTO member (Annex I). So are some “drawback schemes” (remission of import charges levied on inputs consumed in the production of exported goods, featured in Annexes II and III). In US–FSC, the AB held that the basis for deciding whether tax income otherwise due had been foregone must be the national tax rules applied by WTO members. In this case, the EU had challenged the consistency of US tax practices with the SCM Agreement. In fact, US–FSC is not the first time that the transatlantic partners disagreed on the consistency of their domestic tax systems with the WTO regime. This is a long-standing dispute between them. The WTO Agreement, like GATT before it, allows its members to freely choose the level and form of taxation. It does not impose on WTO members a particular taxation system. WTO members are free to design their own national tax schemes.70 The EU member states and the US have followed different systems of taxation (the EU favors indirect taxation and adheres strictly to the territoriality principle, while the US system is at the
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antipodes of the EU regime on both counts). Before long, they would dispute the consistency of each other’s regime with GATT. The origin of their dispute lies back in the 1970s, as we saw already in chapter 7 of volume 1.71 European countries and the US were interlocked in litigation arguing that each other’s fiscal system violated the rules, and more specifically, Article XVI.4 of GATT. In Belgium–Income Tax, the US complained that the Belgian tax system that exempted from taxation Belgian companies’ income made abroad was inconsistent with this provision. A GATT panel found that Belgium had indeed foregone income (§ 34), and was, thus, in violation of its obligations under GATT (§ 40). The “twin” GATT panels on France– Income Tax and Netherlands–Income Tax reached similar findings. The US was the complaining party in all three cases. In a mirror case, another GATT panel sanctioned the US practices. In US–DISC, the GATT panel dealt with US tax practices. The US originally deferred payment of taxes for income earned abroad. In 1962, following a tax reform, similar income was taxed in the US. In 1972, the Domestic International Sales Corporation (DISC) legislation allowed tax exemptions of similar income by companies that qualified as domestic international sales corporations (DISCs). A company would be considered a “DISC company” if it was domestic and 95 percent of its assets and income were “qualified exports receipts” and “qualified exports income,” respectively. The panel found that the US measure was in violation of Article XIV.4 of GATT (§ 74). When entertaining the argument by the US that the measure was designed to address the impact that similar taxation by European countries had had on US companies competing worldwide, the panel held that similar behavior was not permissible and the US should act within its rights under GATT and not mimic an illegality (§ 79). The panel was effectively requesting that, now that it had secured a favorable outcome in Belgium–Income Tax, the US should request authorization to impose countermeasures if Belgium continued to disregard the panel’s decision, rather than adopting equally unlawful legislation in retaliation. The DISC legislation underwent some changes, but its substance was not altered. The US and the EU had reached an agreement to abstain from litigating this type of disputes, pending action to avoid future trade friction.72 Its reincarnation was the Foreign Sales Corporation (FSC) Act. The EU complained again.73 In US–FSC, the EU had argued that the US system, under which companies earning income outside the US were exempted from the obligation to pay US taxes, constituted an export subsidy. This was so since, absent enactment of the FSC, those companies would have been obliged to pay taxes for income made both in the US and outside the US market. The panel and the AB agreed with the complainant, arguing that national law should serve as the benchmark to decide whether income was otherwise due (§§ 90ff., and especially 98). In US–FSC (Article 21.5–EC), the AB confirmed (§§ 86, 91–92) that the benchmark to establish whether income was otherwise due was national law.74
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The rationale behind the US law was to reestablish competitive conditions among companies of different national origins, as EU companies did not have to pay taxes on income made outside the EU and could thus profit from tax havens.75 The AB held that the rationale for foregoing income was irrelevant (§§ 93ff.). Should the rationale be immaterial? Think of it this way. The WTO does not impose a particular fiscal (taxation) policy that its members should follow. Why, then, is it impermissible for WTO members to subject some companies to the obligation to pay taxes in the US while exempting others? If this is an issue at all, it should be a constitutional issue that should give rise to litigation under US, not WTO, law. In this vein, the US argued before the panel and the AB that, when it comes to income foregone, WTO adjudicating bodies should limit their review to issues of enforcement (or lack of it). The US would thus be at fault only if it was supposed to collect income and did not do so. The US approach has an undeniable advantage. Panels (assuming factual information) cannot go wrong when it comes to adjudicating disputes regarding income foregone. Is it enough to limit their discretion in this way? Does this limitation faithfully reproduce the negotiating intent? Probably not. To go beyond what the US claimed, though, requires a legal benchmark. The AB offered one in the case regarding implementation of this report. In US–FSC (Article 21.5–EC), the AB held in § 91: In identifying the normative benchmark, there may be situations where the measure at issue might be described as an “exception” to a “general” rule of taxation. In such situations, it may be possible to apply a “but for” test to examine the fiscal treatment of income absent the contested measure. We do not, however, consider that Article 1.1(a)(1)(ii) always requires panels to identify, with respect to any particular income, the “general” rule of taxation prevailing in a Member. Given the variety and complexity of domestic tax systems, it will usually be very difficult to isolate a “general” rule of taxation and “exceptions” to that “general” rule. Instead, we believe that panels should seek to compare the fiscal treatment of legitimately comparable income to determine whether the contested measure involves the foregoing of revenue which is “otherwise due,” in relation to the income in question. (italics in the original)
A footnote to this paragraph reads: We recognize that Member may have several rules for taxing comparable income in different ways. For instance, one portion of a domestic corporation’s foreign-source income may not be subject to tax in any circumstances; another portion of such income may always be subject to tax; while a third portion may be subject to tax in some circumstances. In such a situation, the outcome of the dispute would depend on which aspect of the rules of taxation was challenged and on a detailed examination of the relationship between the different rules of taxation. The examination under Article 1.1(a)(1) (ii) of the SCM Agreement must be sufficiently flexible to adjust to the complexities of a Member’s domestic rules of taxation. (italics in the original)
The Pythia oracle in Delphi pronounced simpler decisions. The AB seems to suggest that it is not illegal per se to provide tax exemptions in a law. Why, then, was the FSC law not judged accordingly? At the end, the outcome of the dispute will be heavily predi-
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cated on the understanding of the term “comparable income.” We have no guidance on this score. It is suggested that were one to go beyond what the US claimed before the panel and punish tax exemptions, one would need to establish a benchmark akin to an intent test. The question should be whether, by designing rules and exceptions, a WTO member intended to forego income otherwise due from a taxable source, or whether there was no intention to tax income in the first place. There is not much case law on this score. In Canada–Autos, an import duty exemption granted to certain cars was considered to be revenue otherwise due. This exemption implied that the normal most favored nation (MFN) import duty of 6.1 percent would not have to be paid and, consequently, the Canadian government had, in the eyes of the AB, foregone revenue that it otherwise would have raised (§ 91). 3.3.1.5 The Special Case of Double Taxation Instruments aimed at avoiding a transaction being taxed twice by two different jurisdictions will not be assimilated to financial contributions by governments, even though in similar instances, income is foregone. It is the Illustrative List of Export Subsidies (Annex 1 to the SCM) that discusses the treatment of double taxation. Paragraph (e) of that list reads: The full or partial exemption, remission, or deferral specifically related to exports, of direct taxes or social welfare charges paid or payable by industrial or commercial enterprises.
Footnote 59 explicitly excludes measures taken to avoid double taxation from the scope of this paragraph:76 Paragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of foreign-source income earned by its enterprises or the enterprises of another Member.
Of course, the same transaction can, in principle, be taxed twice. Assume, for example, that Home imposes taxes by virtue of the nationality of the economic operator, and Foreign by virtue of the territoriality principle, and the national of the former resides in the latter. Double taxation could be a disincentive for beneficial foreign investment. Consequently, a number of WTO members have signed treaties aimed at avoiding double taxation.77 The AB on US–FSC (Article 21.5–EC)78 held that a measure falls under footnote 59 if it exempts from taxation only foreign-source income. If it further exempts other income, then it cannot benefit from this provision (§§ 184–186). 3.3.1.6 Provision of Goods or Services by Government A government provision of goods or services other than general infrastructure or purchase of goods can constitute a financial contribution [Article 1.1(a)(1)(iii) of SCM]. In both US–Softwood Lumber III79 and US–Softwood Lumber IV, the question before the WTO adjudicating bodies was whether the Canadian so-called stumpage arrangements amounted to provision of goods in the sense of the SCM Agreement. Through these arrangements,
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Canadian harvesters of timber would rent land at less than market value. As a result, their exported products would benefit from a substantial cost advantage vis-à-vis the corresponding US products since US harvesters had to pay a market price for renting land where they would harvest timber. The AB concluded that since the Canadian stumpage arrangements gave tenure holders the right to enter government lands, cut standing timber, and enjoy exclusive rights over the timber that was harvested, they represented financial contributions. The AB disagreed with Canada’s argument that the granting of an intangible right to harvest standing timber could not be equated with the act of providing a good (e.g., standing timber itself). By granting a right to harvest, the provincial government put particular stands of timber at the disposal of timber harvesters and allowed enterprises to use government resources. Stumpage programs, thus, amounted to the provision of goods or services other than general infrastructure (§ 75). There is, of course, a direct link between the right to harvest and cutting timber, since there is no uncertainty that timber is physically located on land rent for discounted prices. Private agents can easily be informed about the commercial value of their purchase by simply visiting the location. As such, by providing the right to use land at discounted prices, the government is effectively providing goods at discounted prices. In other words, the commercial value of the legal entitlement to use the land is easily ascertained. What if, however, uncertainty exists in similar situations regarding the existence and quantities involved? This situation arose in US–Carbon Steel (India). India had granted “mining rights” to private agents. US had countervailed the end product, and India claimed that the US actions were inconsistent with the WTO. The rationale offered by India was that there was no certainty that minerals would be discovered at all, since all mining rights guaranteed was an entitlement to explore. It could be that exploration led to nothing (§§ 4.61ff.). The AB disagreed with this line of reasoning. In its view, the granting of mining rights and the production of final goods were “reasonably proximate.” Because of their “reasonable proximity,” mining rights should be considered as provision of goods (§ 4.73). This is not unreasonable, although the AB would have made a much stronger case for its finding had it based it on the “commercial value” of mining rights. In Canada–Renewable Energy80, the same issue arose again. Canada had introduced FIT (feed in tariffs) payments for producers of renewable energy to the extent that they had used Canadian machinery to produce it.81. The question then arose as to whether the payments made were payments for a service or a good. The panel had found that the Canadian measure was a provision of goods for the following reasons (§§ 5.110–113 of the AB report): First, it noted that the OPA transfers funds to FIT suppliers for “delivered electricity” into Ontario’s electricity grid. ... The Panel highlighted that, while FIT and microFIT Contracts facilitate suppliers’ search for project financing, it would be wrong to characterize the Contract Payments themselves as finance payments for the construction of a generation facility.
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Second, the Panel found that the Government of Ontario takes possession over electricity and thus “purchases electricity.” The Panel found that government “purchases [of] goods” will arise under the terms of Article 1.1(a)(1)(iii) of the SCM Agreement when a “government” or “public body” obtains possession (including in the form of an entitlement) over a good by making a payment of some kind (monetary or otherwise). In particular, given the specific characteristics of electricity, the Panel preferred to characterize a purchase of electricity as involving the transfer of an entitlement to electricity, rather than the taking of physical possession of the electricity. ... Third, the Panel found that the legislative and regulatory framework of the FIT Programme and Contracts supports the conclusion that the challenged measures are perceived by the Government of Ontario and by others in Ontario as governmental activity that involves the procurement or purchase of electricity. (italics in the original)
The AB upheld these findings (§ 5.128). 3.3.1.7 Any Form of Income or Price Support Article 1.1(a)(2) of SCM provides that any form of “income or price support” should be considered a “financial contribution.” This term was copied directly from the first paragraph of Article XVI of GATT and was meant to be some sort of catch-all provision, an anticircumvention device, as we see in the following discussion. Income or price support mechanisms play an important role in farm goods and commodities in general. It is, thus, not accidental that the first cases dealing with this issue concerned income support for farmers. In the GATT report on “Review Pursuant to Article XVI.5,” for example, various schemes were considered to run afoul of this provision: “A government fixes by law a minimum price to producers which is maintained by quantitative restrictions or a flexible tariff or similar charges.”82 In recent years, panels have used this provision to deal with measures that could not fit under the more specific provisions of Article 1 of SCM. There are some limits, though—it is not that anything goes. In China–GOES, the panel held (§ 7.93) that a voluntary export restraint (VER) cannot be considered a form of price support. In the panel’s view, it cannot be that all measures that result in a benefit can in principle come under the aegis of this term. The form of financial contribution matters (§§ 7.85–86). In footnote 104, it referred to a GATT panel that had dealt with this issue in a similar vein:83 ... GATT panel, which speculated on the circumstances under which “a system which fixes domestic prices to producers at above the world price level might be considered a subsidy in the meaning of Article XVI.” The panel agreed that “a system under which a government, by direct or indirect methods, maintains such a price by purchases and resale at a loss is a subsidy.” However, the Panel speculated that “where a government fixes by law a minimum price to producers which is maintained by quantitative restrictions ... there would be no loss to government” and consequently, no subsidy. We note that the conclusion regarding the latter example is less relevant in the context of the SCM Agreement, under which the benefit of a subsidy is defined by reference to market benchmarks, rather than by the cost to government. However, both examples used by the GATT panel at least illustrate that it envisaged “price support” to involve the government setting and maintaining a fixed
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price, rather than a random change in price merely being a side-effect of any form of government measure.
This panel equated VERs to “side-effects,” and thus refused to classify them under “any form of price or income support.” In a similar vein, in US–Export Restraints, the issue was whether the US legislation, which required that export restraints be treated as a countervailable subsidy, was consistent with the WTO. The panel ruled that an “export restraint” could not be understood as a “financial contribution” in the sense of Article 1 of SCM, since it was (§ 8.17) a border measure that takes the form of a government law or regulation which expressly limits the quantity of exports or places explicit conditions on the circumstances under which exports are permitted, or that takes the form of a government-imposed fee or tax on exports of the product calculated to limit the quantity of exports.
The Panel on US–Countervailing Measures (China) cited this report to support its finding that a series of similar Chinese export restraints could not be considered a “financial contribution” in the sense of the SCM Agreement (§ 7.393). 3.3.2
Benefit to the Recipient
A finding that financial contribution has occurred is only the first step toward a finding that a subsidy has been granted. The term “and” appearing in Article 1.1 of SCM leaves us with no doubt that the terms “financial contribution” and “benefit” are two separate constitutive elements of the term “subsidy.” A financial contribution should not be equated to a “benefit.” The AB has consistently understood the two terms (“financial contribution,” “benefit”) as distinct requirements that must both be fulfilled for a subsidy to exist. Canada–Aircraft (§ 157) has underscored this point when understanding “the issues—and the respective definitions—of a “financial contribution” and a “benefit” as two separate legal elements in Article 1.1 of the SCM Agreement, which together determine whether a subsidy exists.” In this vein, the Panel on EC–Countervailing Measures on DRAM Chips held that, whereas the requirement to show that a financial contribution has been paid is a question that needs to be addressed from the perspective of the donor, the response to the question whether a benefit has indeed been conferred needs to be assessed from the perspective of the recipient (§§ 7.212ff., and especially § 7.175). There is, thus, a sequence in the analysis of the terms “financial contribution” and “benefit.”84 The AB explained the sequence in the most pertinent terms in its report on US–Countervailing Duty Investigation on DRAMs, when it held that if no contribution took place, no benefit can result either (§ 205).85 The reason why the framers dissociated financial contribution from benefit is that they did not want to bar WTO members from investing in the market if they acted as private investors. Deciding that states have indeed acted as private investors is not easy, since
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involvement by a state in a market sends signals to the market and to the private investors. Say that a private company wants to raise capital and offers its shares for sale at $1,000/ share. A total of 5,000 shares are sold to private parties right away, and a public body buys 20 more shares at the same price. After the public involvement, private investors continue to purchase shares at the same or higher price. In this case, a financial contribution has been made, but no benefit to the private company has been bestowed since the private company here would have ended up with this contribution anyway under market conditions.86 Sometimes financial contribution and benefit coincide. Home does not enforce tax laws and effectively liberates a private company from payment of taxes up to $100,000,000. The contribution here equals benefit. Or, when market rates for commercial loans are at, say, 7 percent, and Home provides through its state banks loans to beneficiaries at 2 percent, it is providing beneficiaries with a net benefit equaling the difference between the two rates.87 The discussion so far leads to one unavoidable conclusion that is, at the same time a methodological challenge: understanding “benefit” requires a counterfactual. We will need to compare the situation where financial contribution has been bestowed with another fictitious situation in order to assess whether the contribution amounted to benefit. In a nutshell, this is what is termed as the “private investor” test—that is, the test routinely employed by WTO panels to decide whether a benefit has indeed been conferred. It is not always easy to construct the appropriate counterfactual. It is one thing to state that a comparison with the “prevailing market conditions” will be made. It is a totally different issue, on occasion, to describe the “prevailing market conditions” with the accuracy necessary to measure the size of the benefit bestowed. The counterfactual in the two examples we cited earlier is quite straightforward: the private company benefiting would have to pay $1 billion in taxes, or 7 percent instead of 2 percent, when asking for a loan. This is not always the case, though. Case law, to which we will turn in what immediately follows, offers many an example of “inappropriate” counterfactuals that panels have used when attempting to measure the size of benefit bestowed. 3.3.2.1 The Identity of the Recipient Intuitively, recipients should be producers of a commodity (an enterprise or an industry, or a group thereof). Note though, that Article 1 of SCM does not request from the recipient to be a producer; rather, Article 2 of SCM does that. This provision deals with “specificity,” and we analyze this term later in this chapter. Specificity is the third and final constitutive element of the term “subsidy.” This provision requests that payments be made to an enterprise or group of enterprises. The recipient of a payment though is not necessarily the recipient of a benefit. What if, for example, Home pays domestic car producers a premium for using plastic components
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(an area where Home has comparative advantage) instead of steel (a good that Home does not produce)? Recall also the example we cited above where post-crisis money is paid to banks in order to divert it to domestic economic operators. Practice offers dozens of examples where the recipient of a financial contribution and the recipient of a benefit do not coincide. In one of the earlier disputes, the Panel on EEC–Oilseeds I refused to characterize an EU scheme whereby industrial users of oilseeds were paid the difference between the price charged by EU producers of oilseeds and the world price of this commodity (i.e., a subsidy).88 The argument that the panel used to reach this conclusion was that the subsidy was not being paid exclusively to producers. Similar arguments should not be of any significance nowadays since the SCM Agreement does not require “exclusive” payments. As a result, industrial users should qualify as “enterprise or industry or group of enterprises or industries” (Article 2 of SCM). The “pass through” jurisprudence, which we discuss in detail later in this chapter, has established that plaintiffs can successfully challenge schemes paid to entities other than the “direct” beneficiary. Benefits “indirectly” bestowed can also come under the purview of Article 1 of SCM. 3.3.2.2 “Private Investor” Test: Benefit That Market Does Not Yield The AB has espoused the so-called private investor test to decide whether a benefit has been conferred. In brief, the question it will ask in this context is the extent to which the recipient could have obtained under market conditions the benefit that it obtained from a public body. This test was elaborated by the European Court of Justice (ECJ) first in its landmark decision Belgium v. Commission,89 where the Court stated that, by virtue of this test, it would inquire (§ 14) “... whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional policy and sectorial considerations, would have subscribed the capital in question.” The test, hence, requests that courts evaluate state behavior by using as counterfactual a private actor that does not have a motive other than profit maximization. Article 14 of SCM, which deals with the calculation of the amount of subsidy bestowed, uses market prices as the benchmark for determining the amount of benefit gained.90 Inspired by this provision, the AB on Canada–Aircraft91 explained its understanding of the term “benefit” as follows (§§ 157–158): We also believe that the word “benefit,” as used in Article 1.1(b), implies some kind of comparison. This must be so, for there can be no “benefit” to the recipient unless the “financial contribution” makes the recipient “better off” than it would otherwise have been, absent that contribution. In our view, the marketplace provides an appropriate basis for comparison in determining whether a “benefit” has been “conferred,” because the trade-distorting potential of a “financial contribution” can be identified by determining whether the recipient has received a “financial contribution” on terms more favorable than those available to the recipient in the market.
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Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison. The guidelines set forth in Article 14 relate to equity investments, loans, loan guarantees, the provision of goods or services by a government, and the purchase of goods by a government. A “benefit” arises under each of the guidelines if the recipient has received a “financial contribution” on terms more favorable than those available to the recipient in the market.
This is the notorious private investor test, and it is by now standard case law.92 Case law has used it consistently in all but two cases so far (Canada–Dairy,93 and EC–Export Subsidies on Sugar94). These cases (discussed in more detail in chapter 8) concerned farm subsidies and were adjudicated under the WTO Agreement on Agriculture. We underlined earlier the difficulties associated with the private investor-test, because of the difficulty in designing the appropriate counterfactual. This is not always the case. A financial contribution consisting of revenue foregone or not collected is an example of a rather easy case to show that benefit has been conferred. The Panel on US–FSC put it this way (§ 7.103): Having found that the various tax exemptions under the FSC scheme give rise to a financial contribution, our next task is to consider whether a benefit is thereby conferred. In our view, the financial contribution clearly confers a benefit, in as much as both FSCs and their parents need not pay certain taxes that would otherwise be due.95
The quoted passage implies that comparison to the marketplace conditions, the benchmark in the private investor test, should not be understood as comparison to an unregulated, ideal world. The comparison is rather with the regulated market before the challenged action has taken place. In the quoted example above, a tax level has been set, which all economic agents but FSC companies have to pay. Benefit, except for cases like a tax break, often involves a difficult demonstration. Alas, as if this was not enough, WTO adjudicating bodies, and especially the AB, have made it even more difficult. In Canada–Renewable Energy, the AB made a distinction between subsidies that help create markets that otherwise would not exist and other subsidies, stating that the former should not be considered subsidies. The AB did not refer to public goods, or, more generally, to rationales for subsidization. It simply distinguished between cases where, through a subsidy, a new market has been established, and cases where subsidies are bestowed to recipients operating in a given market.96 Recall that Ontario, a Canadian province, was providing a financial contribution to producers of wind-power and solar photovoltaic energy. Through feed in tariffs (FIT), it offered a guaranteed rate for electricity over a specified period (20 to 40 years in the case of Ontario), the consideration being delivery of energy from renewables into the grid both from commercial producers of energy and from individual homeowners.97 Electricity markets are quite idiosyncratic. They are highly regulated (probably because they are imperfectly competitive), and electricity goods are rarely traded internationally.
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FIT-type regulations became quite fashionable because there was widespread unrest due to the awareness that consumption of fossil fuels could have negative (if not catastrophic) effects on the environment. Canada’s, however, was no ordinary FIT program. It was accompanied by an industrial policy component since producers of renewable energy would profit from support only if they had used Canadian machinery for the production of energy (local content). Canada was not alone in that. A number of other WTO members had similar green measures in place, accompanied by naked industrial policy elements. The panel (§§ 7.243ff.) had held that the measure could not be considered a subsidy because, on the evidence shown, it could not establish whether a benefit had indeed been bestowed. The first step in this endeavor should have been the delineation of the relevant product market.98 However, the panel possessed no information on the rate of return in the electricity market. To decide whether a benefit had been bestowed, a comparison between the average rate of return for electricity producers and the average rate of return for business of comparable risk profile was necessary. As the panel did not possess information on this score, it could not decide this issue. One member of the panel issued a dissenting opinion, holding that a benefit had indeed been conferred since by Canada’s own admission, producers of solar energy would not be in the market in the first place if not for the Canadian measure. The price differential between renewable and nonrenewable energy made it clear that producers of renewable energy would never enter the market absent the subsidy conferred (§§ 9.11ff.).99 The AB followed a different line of thinking to reach essentially the same result. The AB first held that two markets were involved: the market for energy and the market for renewable energy (§§ 5.176ff.). It then argued that the panel should have defined the market from the supply side—that is, it was not demand substitutability that mattered (§§ 5.170–172).100 Having made this distinction, the next logical question was whether a benefit had been bestowed on producers of renewable energy, distinct from the conventional electricity market. Two paragraphs of the AB report are important in this context. First, § 5.185: Nevertheless, while introducing legitimate policy considerations into the determination of benefit cannot be reconciled with Article 1.1(b) of the SCM Agreement, we do not think that a market-based approach to benefit benchmarks excludes taking into account situations where governments intervene to create markets that would otherwise not exist. For example, governments create electricity markets with constant and reliable supply. By regulating the quantity and the type of electricity that is supplied through the network (base-load, intermediate-load, or peak-load) and the timing of such supply, governments ensure that there is a continuous supply-demand balance between generators and consumers, thus avoiding imbalances that would destabilize the network and cause interruptions of power supply. Although this type of intervention has an effect on market prices, as opposed to a situation where prices are determined by unconstrained forces of supply and demand, it does not exclude per se treating the resulting prices as market prices for the purposes of a benefit analysis under Article 1.1(b) of the SCM Agreement. In fact, in the absence of such government intervention, there could not be a market with a constant and reliable supply of electricity.
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Then, § 5.188: Nevertheless, a distinction should be drawn between, on the one hand, government interventions that create markets that would otherwise not exist and, on the other hand, other types of government interventions in support of certain players in markets that already exist, or to correct market distortions therein. Where a government creates a market, it cannot be said that the government intervention distorts the market, as there would not be a market if the government had not created it. While the creation of markets by a government does not in and of itself give rise to subsidies within the meaning of the SCM Agreement, government intervention in existing markets may amount to subsidies when they take the form of a financial contribution, or income or price support, and confer a benefit to specific enterprises or industries. (italics in the original)
The AB states that governments can establish new markets without having to fear the disciplines included in the SCM Agreement when doing so. In similar thus, cases no benefit is bestowed, according to the AB. Is the AB saying that, regardless of the reason behind it, subsidies leading to the establishment of new markets do not run afoul of the disciplines included in the SCM Agreement? For example, could Home spend money to establish its own car industry? If yes, then the finding of the AB could lead to moral hazard and to abuses, but also to legitimate disagreements regarding the scope and the novelty of the market established. If not, what is a “new market’? The multimedia market, for example, nowadays comprises goods that previously belonged to separate markets (e.g., telecommunications and personal computers). The possibilities are endless. Would intervention in similar markets be considered an intervention to a “new market”?101 The AB finding is, of course, also based on an incorrect market definition (§§ 5.158ff.). In doing that, the AB misquoted prior case law. It borrowed from injury analysis, where supply substitutability indeed matters; otherwise, no injury to competitors (the standard adopted in the SCM Agreement) can be shown. Market definition, however, has a different function from injury analysis, as what is at stake in the former is whether consumers treat two goods as substitutable. Solar PV (photo-voltaic) and wind power technologies were so much more inefficient than conventional technologies that they could not possibly compete in the same market with an energy source like fossil fuels. The AB, by distinguishing between two electricity markets, explicitly opened the door for governments to intervene and establish “inefficient” markets that otherwise would not exist. The possibilities for extensive industrial policy (that is, the very policy that the SCM Agreement aims to discipline) seem immense.102 Since the AB had held that the two markets were distinct, it needed information regarding the prevailing market conditions in renewable energy in order to decide whether a benefit had indeed been conferred (since there was no doubt that a financial contribution had been paid). This was a new market, though, and information was lacking. In §§ 5.190
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and 5.245, the AB indicated the type of information it was looking for in order to decide whether a benefit had indeed been conferred: In the light of the above, and in particular in view of the fact that the government’s definition of the energy supply-mix for electricity generation does not in and of itself constitute a subsidy, we believe that benefit benchmarks for wind- and solar PV-generated electricity should be found in the markets for wind- and solar PV-generated electricity that result from the supply-mix definition. Thus, where the government has defined an energy supply-mix that includes windpower and solar PV electricity generation technologies, as in the present disputes, a benchmark comparison for purposes of a benefit analysis for windpower and solar PV electricity generation should be with the terms and conditions that would be available under market-based conditions for each of these technologies, taking the supply-mix as a given. ... In sum, we have found evidence on the Panel record that is relevant to a benefit analysis based on a benchmark that takes into account the Government of Ontario’s definition of the energy supplymix. Based on this evidence, we have considered that RES prices for windpower generation contracts awarded through competitive bidding may qualify as benchmarks for a benefit comparison and seem to suggest that benefit may exist in the case of FIT windpower generation contracts. We conclude, however, that such evidence was neither sufficiently debated before the Panel, nor before us. Moreover, the Panel did not make factual findings on this evidence that would assist us in completing the analysis. (italics in the original)
The AB held that Canada should have organized competitive bidding, and set prices inspired by the level of the prices submitted by the relatively more efficient producer. Consequently, plaintiffs, in order to prevail, should have provided the price that would have emerged had competitive bidding occurred (or some price along these lines). This finding is strikingly similar to the Altmark decision by the ECJ,103 where the Court held that a compensation that is necessary for providing public service is not a subsidy if the level of compensation corresponds to the price that would have resulted had competitive bidding occurred. The insistence of the AB on this feature probably underscores its desire to use this benchmark to define “benefit” in similar cases in the future. One can, of course, only wonder whether this convoluted approach is warranted since it rests on the erroneous basis that renewable and nonrenewable energy are two distinct markets. Demand side considerations, as we have stated above, would seem to support the opposite position. In this vein, the benefit is easy to show since it will be reflected in the difference between the two prices, that for renewable and for nonrenewable energy. Recall that at the panel level, a dissenting opinion followed this simple route to show that a subsidy had indeed been conferred (§§ 9.1ff.). The basis for the minority opinion was that we were in the presence of one market; hence, the counterfactual was the price for nonrenewable energy. The majority opinion in the panel, as well as the unanimous verdict of the AB, disagreed, arguing that we were in the presence of two markets. The discussion above supports one conclusion. While the private investor test to demonstrate the existence of benefit sounds reasonable, it is hard to practice. Alas, the AB
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error in Canada–Renewable Energy is testimony to this point. Hopefully, this decision is an outlier imposed on grounds of political expediency only. Even so, panels and the AB will have to distance themselves from this approach in the future. 3.3.2.3 Cost of Production: An Appropriate Benchmark to Discern Benefit? In Canada–Dairy, the AB had to decide whether Canadian milk producers had been receiving a benefit by the government. Canadian producers had been receiving payments by the government, and the question was whether a benefit had been conferred through similar payments. The term “payments,” used in the AG Agreement, refers to a transfer of economic resources. According to the AB, a payment has occurred if the product is supplied at less than its proper (i.e., market) value. The AB rejected both the domestic and the world market price as appropriate benchmarks for determining the proper value of the good provided, the latter because it was not a market but an administered price (§ 81). With regard to the world price, the AB took the view that it provided one possible measure of the value of the milk to the producer, but it gave no clear indication regarding the response to the key question—namely, whether a benefit had been bestowed on Canadian production (§ 84). The AB decided instead that the total cost of production offered a more appropriate benchmark for comparison. The average total cost of production (fixed and variable costs of producing milk), whether destined for domestic or export markets, would be divided by the total number of units of milk produced in order to define the amount of subsidization per unit of production (§§ 87–96).104 The same test was applied in a subsequent case: EC–Export Subsidies on Sugar.105 The facts of the case are reflected in § 2 of the AB report: EC Regulation 1260/2001 is valid for the marketing years 2001/2002 to 2005/2006 and establishes, inter alia: quotas for sugar production; an intervention price for raw and white sugar, respectively; a basic price and a minimum price for beet for quota sugar production; quota (that is, “A” and “B”) sugar as well as non-quota (that is, “C”) sugar; import and export licensing requirements; producer levies; and preferential import arrangements. Furthermore, the EC sugar regime provides “export refunds” to its sugar exporters for certain quantities of sugar, other than C sugar. These “refunds,” which are direct export subsidies, cover the difference between the European Communities” internal market price and the prevailing world market price for sugar. Non-quota sugar (that is, C sugar) must be exported, unless it is carried forward, but no “export refunds” are provided for such exports. (italics in the original)
The panel took the view that (§ 7.264): in the present dispute, the total cost of production of C beet is an appropriate benchmark for determining whether the sales of C beet to C sugar producers provide a “payment” to the producers of C sugar within the meaning of Article 9.1(c) of the Agreement on Agriculture. (italics in the original)
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The AB endorsed this opinion. This test is potentially at odds with the private investor test, where cost of production of subsidized entities is simply immaterial, since all that matters is whether the same benefit could have been procured under market conditions. Before one rushes to unwarranted conclusions, note that this test has been applied only in cases involving farm subsidies, and never in cases involving subsidies of nonfarm goods. Why has this been the case? It is simply because the relevant provision in the AG Agreement refers to “payments,” not to “subsidies.” “Payments” are a concept akin to “financial contribution,” only one of the three constitutive elements of a “subsidy,” as we detail in chapter 8 of this volume. There is, thus, no inconsistency in case law at all. The private investor test has been consistently applied in subsidies-related disputes where a benefit must be calculated. It has not been applied in the context of the AG Agreement when panels were called to interpret the term “payments,” a term that is not a substitute for the term “subsidy” and hence does not require a benefit analysis. One final point is warranted here, since there is dissonance between economic theory and the WTO law. Horn and Mavroidis (2005a) raised the point that, in theory, absence of benefit does not necessarily amount to a no-subsidy benchmark. The latter is not necessarily a situation where the subsidy has been removed and nothing else has changed, for it could very well be the case that removal of the subsidy equals its replacement by another lawful measure. Here is the relevant passage: ... consider the following highly stylized illustration. A government has two instruments, an actionable specific subsidy of s and a non-actionable lawful instrument with effects equivalent to a smaller specific subsidy r. The government’s preferred rate of subsidization is equal to s. Its first choice would therefore be to use the actionable subsidy, but when unable to do so, it uses the other instrument, and provides a subsidy equal to r. Now let the CVD equal the difference in price with and without the subsidy. How large will it be? If the no-subsidy benchmark were taken to be the situation where neither of the instruments is used, then the CVD would equal s, this being the difference in price between the two situations. But if instead the no-subsidy benchmark is meant to capture the situation as it would be absent the actionable subsidy, the difference in price would be s – r, which is potentially a much smaller number than s. Differently put, the effect of the actionable subsidy is not to change the subsidy with the amount s but with s – r.
The authors conceded, however, that these problems may or may not be important in practice. On the other hand, although probably theoretically sound, the evidentiary standards associated with this approach are very demanding. There are good reasons to avoid going down this road, especially if the likelihood of a counterfactual where a legal avenue is privileged over a subsidy (as opposed to no action at all) is quite small. 3.3.3
Pass Through of Benefits to New Owners
3.3.3.1 The Issue We have alluded in various places of our discussion so far that there could be a discrepancy between the party that receives government payments and the actual beneficiary. And it
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is clear that the framers did not want to close the door to benefits only to let them through the window. This brings us directly to the following question: Under what conditions can benefits that have passed through to entities be counteracted, even if those benefiting from them are not the original recipients? The SCM Agreement does not explicitly discuss “pass through.” The stylized facts reproduced here capture the essence of disputes that have arisen between trading nations that gave rise to the discussion whether a subsidy had “passed through’: • A government had provided an economic operator with a capital infusion. • Subsequently, the company that benefited from the infusion would be privatized at arm’s length (usually through auction), or its corporate identity would change. • WTO members affected by the original subsidization take action against it. For example, if the company faced CVDs, the new owners would initiate a dispute before a WTO panel arguing that the subsidy had been bestowed to a different owner/entity and had not “passed through” to them. Trading nations reacted to similar cases and countervailed products from privatized companies that had benefitted from payments before the change in corporate identity. Exporters reacted arguing that they had never benefited from payment subsidies and disputes were unavoidable, which led to litigation. Panels have examined pass through when questioning whether a benefit has been bestowed. This is so because the beneficiary of the financial contribution is not the party that received the original financial contribution, but a party that simply has benefited from it. There is, in these cases, no doubt that a financial contribution has been paid. The remaining questions are: Has the benefit passed through to a different entity? Can one take legitimately action against a beneficiary of a payment that it has never received? It must be the case, of course, that a subsidy had been paid previously to a different owner/legal entity, and the only question remaining in pass-through analysis is whether the benefit that had already been conferred has passed through to the new owner/entity.106 3.3.3.2 A Typology of Pass Through We referred previously to the “typical” pass through case. It is typical because many of the cases that have been disputed before panels echoed the facts described earlier. The key is that there is an intervening factor, an event that occurs that eliminates the possibility for a benefit resulting from an undisputed payment. In EC and Certain Member States– Large Civil Aircraft, the panel and the AB was requested whether a series of different intervening events could extinguish benefits. The issue concerned the subsidization of Airbus, an EU carrier. The company had received subsidies—this much was undisputed. The question was whether because of a series of intervening events (extinction, extraction of subsidies, and change of legal structure of the company), subsidies continue to exist within the “new” company. In § 716, the AB distinguished between these scenarios:
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• Shares in an enterprise that has previously received subsidies are subsequently bought by new private owners in sales transactions conducted at arm’s length and for fair market value, resulting in the “extinction” of subsidies. • A parent company removes cash or cash equivalents from a wholly owned subsidiary that has previously received subsidies, resulting in the “extraction” of subsidies. • A company that has previously received subsidies is restructured and legally reorganized to form a new company, resulting in a situation in which the subsidies do not “pass through” to the new company. “Extinction,” “extraction of subsidies,” and “change of corporate identity” of a company are three distinct scenarios where the question of “pass through” will be entertained. This is not an exhaustive list. Pass through can occur in other cases as well. A subsidy has been paid, for example, to inputs, and the claim is raised that downstream production has also benefited. The question arises of why the affected parties have not taken action against the subsidized input. In practice, this has been the case simply because the input is not traded. Examples abound: subsidized cherries and traded glacé cherries offer an appropriate illustration. The softwood lumber saga, a series of disputes between the US and Canada that date from the 1970s and were only settled in the twenty-first century, is a good example where subsidy has been paid to the input, but action has been taken against the final product. In US–Softwood Lumber III and US–Softwood Lumber IV, the US had imposed CVDs on imports of softwood lumber from Canada based on a determination of subsidization of the lumber producers through so-called stumpage programs, through which a good (standing timber, in this case) was provided to the tenured timber harvesters at less than market price. The timber harvesters sold the trees to log producers, who sold logs to lumber producers, who turned them into lumber products. It was neither the trees nor the logs that were exported or countervailed, but only the lumber products. The question before the panel and the AB was, thus, whether the exported lumber products nevertheless benefited from the cheap trees that were provided by the government to the harvester/log producers. In other words, had the benefit to harvesters passed through to the lumber producers? The AB started with a plea for a facts-intensive investigation in order to respond to the question whether a subsidy had indeed passed through. The AB cautioned against making presumptions, especially in cases where harvesters and lumber products producers operated at arm’s length, asking from panels to investigate whether the subsidy had actually passed through (§ 144, US–Softwood Lumber IV): Thus, for a potentially countervailable subsidy to exist, there must be a financial contribution by the government that confers a benefit on a recipient. Where a subsidy is conferred on input products, and the countervailing duty is imposed on processed products, the initial recipient of the subsidy and the producer of the eventually countervailed product, may not be the same. In such a case, there is a direct recipient of the benefit—the producer of the input product. When the input is subsequently
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processed, the producer of the processed product is an indirect recipient of the benefit—provided it can be established that the benefit flowing from the input subsidy is passed through, at least in part, to the processed product. Where the input producers and producers of the processed products operate at arm’s length, the pass-through of input subsidy benefits from the direct recipients to the indirect recipients downstream cannot simply be presumed; it must be established by the investigating authority. In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product.
In this case, the panel and the AB agreed that a subsidy had indeed passed through, since the producers of the final good had benefited from the cheaper input—that is, they had received a benefit that they could not have obtained under market conditions. The two reports differed on the calculation of the subsidy, an issue to which we will turn later in this chapter. There is a difference between a case where a payment is made to an input, and a case of arm’s length sale of a company that has received payments. In the former case, it could be, for example, that the same company produces the input and the final good, or the two companies are vertically integrated. In this case, one cannot properly speak of pass through of subsidies. Pass through is properly understood when two distinct economic agents (companies) interact. We turn to this question in what follows.107 3.3.3.3 The Test (in Full Mutation) Assume that a state builds a cement factory, which it then auctions off. The highest bidder purchases it and then sees its exports countervailed. Is countervailing under these circumstances consistent with the WTO? Should the purchasing price matter? In similar cases, case law has been quite inconsistent. It started from the premise that the price paid for acquisition of subsidized entities is all we should care about when deciding pass through cases. It then nuanced its position, eventually moving to establish a test, an inventory of circumstances explaining when pass through has not occurred. We explain. The question whether a subsidy has passed through first arose in US–Lead and Bismuth I, a dispute in the GATT years and it concerned the subsidization of the German (Saarstahl), the French (Usinor Sacilor), and the British (British Steel) steel industries. Following years of running into trouble, all three companies had been privatized through arm’s length sales. Arguably, the new owners had paid a market price for their acquisition. The US continued to impose CVDs against exports of the three companies even postprivatization. The EU challenged the legality of imposition arguing that, since a market price for the assets had been paid, no subsidy had passed through. The EU had argued before the panel that it had hired a private consulting company (McKinsey), which had elaborated a report regarding the restructuring of the ailing EU steel industry, which it had followed. The whole process was meant to ensure that the EU steel industry would be operating under market conditions. It further argued that the new owners of the steel plants had paid market prices for their acquisition, as recommended in the McKinsey report. The EU managed to prevail almost with respect to the entirety of the claims that it had
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submitted before the panel. This panel report was never adopted, and the US continued to impose CVDs. In the GATT years, recall from our discussion in volume 1, chapter 1, unadopted panel reports had limited legal value. The EU could not argue that its rights had been impaired because of the US decision to ignore the panel decisions. Following US–Lead and Bismuth I, the issue of CVDs against the EU steel industry arose again in the WTO era, in two cases: US–Lead and Bismuth II and US– Countervailing Measures on Certain EC Products.108 This time, we were squarely within the WTO era, and panel reports would be adopted if the successful complainant so wished. Panel reports would thus, automatically acquire legal significance. The EU complained again about the continuing imposition of CVDs against its steel exports to the US. The US considered that, even following privatization at arm’s length, it was still entitled to impose CVDs on the products of these companies since the subsidies bestowed on them preprivatization had not been exhausted through the sale at arm’s length. The US had determined, in a “changed circumstances review” under Article 21.2 of SCM, that the benefit to the productive operations of the company continued to exist, although it was reduced. The EU considered that the CVDs were no longer justified as the new owner of the firm had paid a fair market value in order to acquire the firm and could, therefore, not be considered to have received a benefit. In other words, in the EU’s view, payment of market price in and of itself exhausted any benefit received (since the market price paid, so goes the argument, would reflect the subsidy paid as well). The panel and the AB sided with the EU. Having established that the recipient must be a natural or legal person (AB, US–Lead and Bismuth II, § 58), they concluded that by paying a market price for the company, the new owner was not better off than it would have been otherwise, that is, if the assets it was buying had not been subsidized (AB, US–Lead and Bismuth II, § 68). Vital to the AB’s consideration was the fact that the marketplace served as a benchmark for determining the existence of a benefit, and it is, therefore, not the “utility value” of the assets of the firm that was important, but their “market value.” In the AB’s view, when a market price has been paid for the firm and its assets, there can be no benefit. In a subsequent case (dealing with almost identical facts), the AB nuanced its position, holding that payment of fair market value does not in and of itself exhaust previously bestowed benefits. The AB report on US–Countervailing Measures on Certain EC Products (§ 103) stated: We agree with the United States that, irrespective of the price paid by the new private owner, privatization does not remove the equipment that a state-owned enterprise may have acquired (or received) with a financial contribution and that, consequently, the same firm may “continue” to make the same products on the same equipment. However, this observation serves only to illustrate that, following privatization, the utility value of equipment acquired as a result of a financial contribution is not extinguished, because it is transferred to the newly-privatized firm. But, the utility value of such equipment to the newly-privatized firm is legally irrelevant for purposes of determining the continued existence of a “benefit” under the SCM Agreement. As we found in Canada–Aircraft, the value
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of the “benefit” under the SCM Agreement is to be assessed using the marketplace as the basis for comparison. It follows, therefore, that once a fair market price is paid for the equipment, its market value is redeemed, regardless of the utility the firm may derive from the equipment. Accordingly, it is the market value of the equipment that is the focal point of analysis, and not the equipment’s utility value to the privatized firm. (italics in the original)
The AB disagreed with the panel that had argued that there is an irrebuttable presumption to the effect that every time a fair market value has been paid, the benefit disappears.109The AB held that the presumption is rebuttable even in case of payment of the market value, and that the facts of the case will reveal whether a benefit continues to exist postprivatization (§§ 121–124). The AB gave no indication at all regarding the nature of circumstances that can successfully rebut a similar presumption. We will explain below why the AB got it wrong not once, but twice. For now, we turn to the three scenarios envisaged in EC and Certain Member States–Large Civil Aircraft,110 We want to show the extent of confusion on the test for pass through, following the back and forth of the AB regarding the relevance of arm’s length transactions to the extinction of benefit. 3.3.3.4 Extinction of Subsidies Bestowed The US had argued in EC and Certain Member States–Large Civil Aircraft that extinction of subsidies could exist only when full privatization occurs, and then again, there is nothing axiomatic about it. In other words, even full privatization does not necessarily lead to the extinction of subsidies. The EU, conversely, had argued that extinction also exists when partial privatization or sales between private parties have occurred. The latter refers to cases of trading of shares in publicly listed companies (§ 720), to cite one example. The AB held that the inquiry that panels must make in order to decide whether subsidies have been extinguished is facts-intensive and due attention must be paid to all factors that might influence the inquiry (§ 725). It understood that the panel had examined whether (§ 729): the transactions at issue involved changes in ownership where (i) benefits resulting from a prior non-recurring financial contribution (ii) are bestowed on a state-owned enterprise (iii) following a privatization at arm’s length and for fair market value, and (iv) the government transfers all or substantially all the property and retains no controlling interest in the privatized producer.
The AB did not disapprove of the test (§ 733), but of its application in the present case since (§ 733) “the Panel should have assessed whether each of the sales was on arm’slength terms and for fair market value, and to what extent they involved a transfer in ownership and control to new owners.” The AB, however, could not have completed the analysis in this respect (§ 735) since it did not possess enough facts. One might wonder how it could have done so, since it is the same AB that in the same report explicitly stated that the three members of the division
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had three different opinions regarding extinction of subsidies as a result of privatization at arm’s length when a “fair market value” had been paid (§ 726): (a) Noting that the Appellate Body has previously ruled in privatization cases that a full privatization, conducted at arm’s length and for fair market value involving a complete or substantial transfer of ownership and control, “extinguishes” prior subsidies, one Member is of the view that this rule does not apply to partial privatizations or to private-to-private sales. (b) One Member noted that, as discussed above, the Appellate Body ruled in US–Countervailing Measures on Certain EC Products that, in the context of Part V of the SCM Agreement, full privatization at arm’s length and for fair market value may result in extinguishing the benefit received from the non-recurring financial contribution bestowed upon a state-owned firm. In response to an argument made by the United States in that case, the Appellate Body observed that privatization at arm’s length and for fair market value does not remove the equipment that a state-owned enterprise may have acquired with the financial contribution and that, consequently, the same firm may continue to make the same products with the same equipment. The Appellate Body agreed with the United States that the utility value of equipment acquired as a result of the financial contribution is not extinguished as a result of a privatization at arm’s length and for fair market value. However, as the Appellate Body explained, the utility value of such equipment to the newly privatized firm is legally irrelevant for purposes of determining the continued existence of a “benefit” under the SCM Agreement. The Appellate Body recalled that it had found in Canada–Aircraft that the value of the benefit under the SCM Agreement is to be assessed using the marketplace as the basis for comparison. It follows, therefore, that once a fair market price is paid for the equipment, or more broadly the assets of a company, their market value is redeemed, regardless of the utility value a firm may derive therefrom. In response to the argument by the United States that nothing about the company changes as a result of the privatization, the Appellate Body agreed with the panel in US–Countervailing Measures on Certain EC Products that the new private owners are “profitmaximizers” who will seek to “recoup{} through the privatized company ... a market return on the full amount of their investment.” Therefore, the new private owners may no longer benefit from any subsidies received by the company before its privatization. This Member considers the rationale underlying the Appellate Body’s case law on full privatization in the context of Part V of the SCM Agreement equally to apply in situations of partial privatization and private-to-private transactions and in the context of Part III of the SCM Agreement. However, this Member also notes that, as the Appellate Body emphasized in US–Countervailing Measures on Certain EC Products, there is “no inflexible rule” that a “benefit” derived from pre-privatization financial contributions expires following privatization at arm’s length and for fair-market value. Rather, as the Appellate Body stated, “{i}t depends on the facts of each case.” An important question in this context is to what extent the partial privatization or private-to-private transactions resulted in a transfer of control to new owners who paid fair market value for shares in the company. (c) One Member of the Division, though affirming the general test that an extinction of benefit is to be determined upon a consideration of all relevant facts, entertains no small measure of doubt that an acquisition of shares, concluded at arm’s length and for fair market value, constitutes relevant circumstances warranting the conclusion that an extinction of benefit has taken place. A subsidy granted to a recipient company contributes to the net asset value of that company. The value of that asset permits the recipient to enjoy an enhanced stream of future earnings over the life of the asset. The asset is the property of the recipient. The recipient’s shareholders enjoy the right to the dividends that may be declared by the recipient and to any capital gains that arise from the enhanced earnings
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attributable to the recipient. When shares change hands on an arm’s-length basis and for fair market value, the buyer pays a price that, in the estimation of the buyer, places a proper value on the future earnings of the recipient. Those earnings derive from all the assets of the recipient, including the benefit of any subsidy paid to the recipient. One shareholder may not accurately value or properly manage the assets of the recipient. Precisely for this reason, sales of shares take place: the buyer believes that the assets, properly managed, will be worth more over time than the price paid, and the seller believes the opposite. Time will tell who is correct. The central point is that a sale of shares, whether or not it conveys control, transfers rights in the shares to a new owner. The assets of the company, to which the shares attach, do not change at all. Nor could it be otherwise, because the buyer would then not acquire the full benefit of the bargain: the buyer would pay for an asset (the subsidy) that had in the very sales transaction been “extinguished.” Shares in listed companies are traded on stock exchanges with great frequency and without any fear that sales on the market diminish the underlying value of the assets owned by these companies. The changing price of listed securities reflects the different valuations that buyers and sellers place upon companies and their underlying assets. However, nothing about these trades extracts the value of any asset, including the benefit of any subsidy granted. That subsidy continues to benefit the recipient, even if the ownership of the recipient’s shares changes from one day to another. Given that the Appellate Body in this case does not need to come to any final view on the issue of extinction in the context of a partial privatization or private to private sales, these matters do not require more definitive determination. (italics in the original)
So, the three members of the AB that adjudicated this dispute could not see eye to eye in the manner they understood the case law regarding the test to apply in pass-through cases. It could not have been otherwise. As we have stated previously, the AB has decided in drastically different manner the first two disputes on this score brought before it in the WTO-era. This is where we stand right now. While we know that arm’s-length transactions coupled with transfer of control can lead to the extinction of subsidies, we are still in the dark as to how exactly this will be done. 3.3.3.5 Extraction of Subsidies Bestowed In EC and Certain Member States–Large Civil Aircraft, the EU had argued before the panel that cash extractions took place in two of Airbus’s partners before their contribution to the joint effort and, in the EU’s view, the panel had not sufficiently considered this issue (§ 740, AB report): the Panel understood the European Communities to argue that, in order for a cash disbursement to be capable of removing or reducing the benefit of prior financial contributions to a company, two requirements would have to be met: “(i) there must be a causal relationship of some sort between the cash “extraction” and the subsidy and (ii) the “extraction” must effectively move the money beyond the reach of the “company shareholder unit.”111
The AB endorsed the panel’s approach on this issue (§ 745). It explained what the EU should have demonstrated in order to prevail in its “extraction” claim in the following terms (§ 746):
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Although we do not mean to suggest that a “euro-for-euro” link between the subsidies and the cash extracted is necessary to prevail on an argument on “extraction,” we do consider that, at a minimum, the European Communities was required to explain how the specific subsidies received by Dasa and CASA were reflected in the balance sheets of those companies, and how the cash removed or “extracted” represented the remaining or unused value of these subsidies. The mere assertion by the European Communities, without more, that subsidies to Dasa and CASA increased the value of those companies and that therefore any cash taken out represents the subsidy or its “incremental value,” does not in our view satisfy the requirement of establishing a “causal relationship” between the “cash extraction” and the subsidy, as argued by the European Communities before the Panel. (italics in the original)
The AB on these grounds found against the EU, but without excluding the possibility that subsidies can be extracted in different scenarios, leading to the absence of pass through. The absence of detail regarding the required extracted sums that will lead to a no-pass through scenario is deplored here, of course. The AB went on, though, and provided some useful guidance as to how the term “extraction” should be understood and what it entails. It held that “extraction” should not be confused with withdrawals (Article 4.7 of SCM), since in the latter case, it had been proven that a subsidy has been bestowed, whereas in the former, the whole matter is still under investigation (§§ 754ff.). It further underscored that financial contribution and benefit do not need to coincide timewise (§ 712), opening the door to the possibility that subsidies bestowed in order to develop previous Airbus models (that are not being produced at the time of investigation) could have had an impact on the development of models produced when the investigation took place (§ 772). 3.3.3.6 Change of Corporate Identity In EC and Certain Member States–Large Civil Aircraft, the AB examined the issue of change of corporate identity.112 Airbus GIE (“groupement d’intérêt économique”) had been transformed to Airbus SAS (“société par action simplifiée”). GIE and SAS are two distinct forms of companies under French law. The panel had found that the legal transformation had not altered the “economic reality.” Airbus continued to be the same company, as its ownership had not changed. The AB endorsed this view, also holding that, in light of these facts, the US (the complainant) was not required to show pass through from Airbus GIE to Airbus SAS (§§ 767–768). Only if the two companies had been unrelated would the US have been obliged to demonstrate pass through. This was hardly the case, though, because of the absence of change in ownership (§ 776).113 3.3.3.7 Critique Grossman and Mavroidis (2007a) and (2007d) have taken issue with the decisions of the AB in the privatization cases. In their view, the price paid is irrelevant when it comes to deciding whether a benefit continues to exist. At the heart of their disagreement with the AB’s decision is their understanding of the term “benefit.” They argued that the only
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interpretation consistent with the aims and objectives of those who drafted the agreement is one that attributes benefit whenever a firm’s competitive position is advantaged relative to what it would have been “but for” the government’s financial contribution. To achieve this objective, it makes no sense to interpret “benefit” in terms of the financial wealth of the owners of a firm. Rather, the potentially adverse effects of a subsidy on producers in an importing country can be avoided only if a subsidy is deemed to exist whenever a government’s financial contribution affects the competitive situation in an industry. The price at which a change in ownership takes place has no bearing on the subsequent competitive conditions. Consequently, no presumption that the benefit has passed through is legitimate either. It is through an investigation that national authorities will determine whether pass through of subsidies has indeed been the case. Events that occur subsequent to the payment of a subsidy may render inframarginal an investment that was formerly unprofitable. If an investment becomes inframarginal, it is impossible to argue that the subsidy is the cause of ongoing injury. In this case, the injury would be present even if the subsidy had never been paid.114 3.3.4
Calculating the Amount of Benefit
3.3.4.1 Why Calculate Subsidies in Terms of Benefit Granted? The SCM Agreement provides for the calculation of the amount of the subsidy in terms of benefit to the recipient. Article 14 of SCM contains a list of guidelines to this effect. A benchmark other than those mentioned in Article 14 of SCM can be contracted in a Protocol of Accession.115 The rationale for Article 14 of SCM is simply that a financial contribution should not be equated to a subsidy. Think of it this way. Home lends money to private investors at 4 percent interest rate. The market rate is 6 percent. The benefit to recipient (assuming creditworthiness of the beneficiary) is not 4, but only 2 percent, and this is the amount that Foreign should be allowed to countervail.116 In practice, the question of the calculation of a benefit is sequential to the question of whether a benefit exists.117 The Panel on EC–Countervailing Measures on DRAM Chips underscored this point (§§ 7.187–9). The same panel emphasized the importance of approaching the question from the perspective of the recipient, rather than from that of the provider of the financial contribution, since it is the benefit that is being calculated, and benefits are bestowed on recipients (§§ 7.211–212). The calculation of the amount of benefit bestowed serves two purposes. It provides the maximum amount of CVDs and the maximum amount of countermeasures (in case a subsidy is not withdrawn and recourse to countermeasures is requested and authorized). 3.3.4.2 The Guidance Provided in Article 14 of SCM This provision condones regulatory diversity and encapsulates, for all practical purposes, the private investor test. It explicitly accepts that WTO members can use any
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methodology they deem appropriate, provided that three conditions have been cumulatively satisfied: • The methodology is transparent. • It has been properly justified. • It respects the guidelines established in the four subparagraphs included in this provision. What are these guidelines? Article 14(a) of SCM states that a capital infusion in conformity with prevailing investment practice in the territory of the WTO member providing the infusion does not confer benefit. Article 14(b) of SCM explains that government loans are not conferring a benefit unless if there is a difference between their rate and that of commercial loans, the practice in the territory of the WTO member supplying the loan providing the benchmark to determine this. Article 14(c) applies the same logic to loan guarantees. Finally, Article 14(d) of SCM stipulates that the provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration or the purchase is made for more than adequate remuneration (the latter defined in light of prevailing market conditions in the territory of the WTO member buying or selling the products in question).118 It follows that it is the practice in the WTO member supplying the subsidy that matters when calculating the benefit. It is not practice in the territory of the affected member or any other WTO member that matters. Although the introductory paragraph of Article 14 of SCM makes it clear that the agreement does not prescribe a particular methodology that must be used, the same paragraph makes it also clear that any methodology used must calculate benefit by using values in the market of the subsidizing WTO member. It is the “prevailing market conditions” in that market, in other words, that is significant when calculating the benefit. 3.3.4.3 Does Article 14 of SCM Reflect an Exhaustive List? It was not long before the test established in Article 14 of SCM was put to a test. The Panels on US–Softwood Lumber III, and US–Softwood Lumber IV examined the USDOC calculation of the benefit conferred on the lumber producers by the Canadian government. The US had used US prices, since, in its view, none of the benchmarks mentioned in the body of Article 14 of SCM was reasonable. The US claimed that it would be meaningless to use Article 14(d) of SCM (which refers to the “prevailing market conditions” in the subsidizing country), since there were no market conditions at all in Canada with respect to the lumber market: the price of land was heavily subsidized almost throughout the Canadian territory, leaving no room for market forces to establish a price. The price in the few private lands would necessarily follow the government price.
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The panel disagreed, holding that the US should have used the price for trees on the few private lands that still existed in Canada as the benchmark for the calculation of benefit. The panel’s analysis was based on the language of Article 14 of SCM (§ 7.45). It concluded that (§ 7.60): as long as there are prices determined by independent operators following the principle of supply and demand, even if supply or demand are affected by the government’s presence in the market, there is a “market” in the sense of Article 14(d) [of the] SCM Agreement. (italics in the original)
The panel explicitly acknowledged that, as a matter of economic logic, the US argument stood on strong grounds. However, in the panel’s view, its role was not to amend the clear content of a provision; that role was reserved to the WTO membership, even if it was not itself persuaded by the logic of it (§§ 7.58–60). The AB overturned the panel’s decision, stating that it could well be the case that the subsidizer’s market is so distorted by the government’s financial contribution that using it as a benchmark might be inappropriate. It could be the case, in other words, that no market conditions existed (§ 90): investigating authorities may use a benchmark other than private prices in the country of provision under Article 14(d), if it is first established that private prices in that country are distorted because of the government’s predominant role in providing those goods.
In the AB’s view, Article 14 of SCM reflected “guidelines”; that is, not rigid rules that foresaw each and every foreseeable situation; the introductory paragraph of Article 14 of SCM used this term, as stated earlier (§ 92). As a result, deviations, to the extent “reasonable,” were warranted when a “new” situation (e.g., a factual situation that had not been included in the body of Article 14 of SCM) arose, to honor the spirit of this provision. Only this interpretation was, in the eyes of the AB, consistent with the objective of Article 14(d) of SCM, which is to establish whether the recipient is better off than it would have been without the government’s financial contribution (§ 93): Under the approach advocated by the Panel (that is, private prices in the country of provision must be used whenever they exist), however, there may be situations in which there is no way of telling whether the recipient is “better off” absent the financial contribution. This is because the government’s role in providing the financial contribution is so predominant that it effectively determines the price at which private suppliers sell the same or similar goods, so that the comparison contemplated by Article 14 would become circular.
The AB concluded that the Canadian market was so distorted that it could not serve as a benchmark. More generally, it would not be possible to use Canadian market prices to calculate the benefit when the government’s participation in the market as provider of the same or similar goods was so predominant that private suppliers would align their prices to those of the government-provided goods (§§ 95ff., and especially 101). The AB added, nevertheless, a caveat to the effect that determination of whether private prices were
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distorted because of the government’s predominant role in the market as a provider of certain goods must be made on a case-by-case basis, according to the particular facts underlying each CVD investigation (§ 102). The AB behaved here more as a lawmaker than as an adjudicating body. It saw a legislative shortcoming and corrected it through judicial activism. The premise of the SCM Agreement is that market conditions exist in a given market, and a specific government intervention alters the conditions of competition for some producers. It is not that markets are so heavily distorted anyway that no reliable market price can be used as a benchmark to derive the amount of benefit bestowed. True, Article 14 of SCM uses the term “guidelines,” but it requests that WTO members observe “the following” guidelines, not just any guidelines. The guidelines enlisted all use prevailing market conditions in the subsidizing WTO member as a benchmark to calculate the benefit. There is a problem, of course, when there are no prevailing market conditions in the subsidizing WTO member (as in many instances where GATT/WTO law is incomplete). The question is whether WTO adjudicating bodies should take the initiative and complete the contract, or whether they should satisfy themselves by merely signaling the problem, pronouncing either a “non liquet” (there is no law to address the particular transaction), or pronouncing an unsatisfactory decision to the effect that a violation has been committed when the facts half-support similar conclusions. The panel’s approach (spotting the problem and signaling it to lawmakers) offers undeniable benefits from an institutional perspective. The panel respected the equilibrium established in the DSU, whereby panels cannot alter the balance of rights and obligations decided by the WTO membership. The AB did not pay too much attention to institutional details in this case. Be that as it may, it is by now moot. The Panel on EC–Countervailing Measures on DRAM Chips held in this vein that when facing problems with the prescribed methodology, an IA is entitled to considerable leeway in adopting a reasonable methodology (§ 7.213). In US–Antidumping and Countervailing Duties (China), the AB approved the IA’s decision to refuse to use Chinese interest rates as a benchmark to examine whether loans by SOCBs had been subsidized (§ 470): ... because of pervasive government intervention in the banking sector, which created significant distortions, restricting and influencing even foreign banks within China. Having rejected interest rates in China as benchmarks, the USDOC resorted to an external benchmark. Specifically, the USDOC constructed, using a regression-based methodology, an interest rate benchmark based on inflation-adjusted interest rates of a group of countries with a gross national income (“GNI”) similar to that of China.
The AB added a word of caution, though. It held that the fact that government was a significant supplier of a commodity did not necessarily lead to the conclusion that prices in the exporting market were unreliable, and, hence recourse to another benchmark was warranted (§ 441):
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We read that Appellate Body report as indicating that, if the government is a significant supplier, this fact alone cannot justify a finding that prices are distorted. Instead, where the government is the predominant supplier, it is likely that private prices will be distorted, but a case-by-case analysis is still required. (emphasis in the original)
In this case, however, the Chinese state company possessed a 96.1 percent market share and 3 percent of total imports. In the AB’s view, this information was enough for it to find that the IA had the right to move away from the four corners of Article 14 of SCM and use another standard to calculate the benefit granted to the Chinese companies (§§ 455ff.).119 The AB went on to examine whether the US had exercised its discretion in a reasonable manner. To do that, the AB held that it had to evaluate whether the external loan chosen was comparable to that under investigation (§ 476): Thus, a benchmark loan under Article 14(b) should have as many elements as possible in common with the investigated loan to be comparable. The Panel noted that, ideally, an investigating authority should use as a benchmark a loan to the same borrower that has been established around the same time, has the same structure as, and similar maturity to, the government loan, is about the same size, and is denominated in the same currency. The Panel, however, also considered that, in practice, the existence of such an ideal benchmark loan would be extremely rare, and that a comparison should also be possible with other loans that present a lesser degree of similarity. We agree with both of these observations by the Panel.
It went on to state that commercial loans can be provided by governments as well. An IA that wants to prove the opposite must show how government involvement was at odds with prevailing market conditions (§§ 479–480). “Predominance,” in other words, by a government body in a product market does not mean that an IA can refuse to consider evidence relating to factors other than government market share (§§ 496ff.). In this vein, for example, we could hypothesize that an IA might want to perform a barrier-to-entry analysis to see to what extent competitive pressure might lead “predominant” government entities to behave like price takers. In US–Carbon Steel (India) as well, the panel and the AB were dealing with a US methodology that was not in absolute conformity with those reflected in Article 14 of SCM. The difference between this case and US–Softwood Lumber IV is this: in the latter, the state (Canada) was a predominant supplier of the commodity. Here, that was not the case since the US methodology (“Tier II”) would allow deviation from using the prices in the subsidizing state even when the state was not the predominant supplier. India had argued that deviations from the standard set by Article 14(d) of SCM should be allowed only if the government were the predominant supplier. The AB dismissed the argument, stating that this reading of the findings in US–Softwood Lumber IV was unwarranted (§§ 4.172ff.). The AB did not have to do much more than simply dismiss the Indian claim. It was not called to establish a test when the government is not the predominant supplier. This finding is not much help in understanding what the test should be in case the government entity
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is not predominant in the territory of the subsidizing state. The unanswered question is when and how does government influence market conditions when it is not the predominant supplier? The nuts and bolts of the test are far from straightforward.120 In US–Countervailing Measures (China), the AB confirmed that “predominance” by a government entity simply creates a presumption that prices are distorted. It is no proof of distorted prices. The AB went so far as to state that there was no hierarchy between using “in country-” and “out of country prices.” The key question is whether prices are distorted? It is not to ask whether they originate in a particular source, that is in a government entity which might (or might not) be predominant. (§§ 4.37ff., and especially 4.48, 4.52, and 4.105). The case law on this score, thus, can be summarized as follows: • An IA can use prices from a market other than the market of the subsidizing WTO member. • When doing that, it does not have to first evaluate whether in-country prices are appropriate to use. • When the government entity is predominant in the market of the subsidizing WTO member, a presumption that prices are distorted is created. An IA must not, if this is the case, refuse to consider evidence relating to factors other than government market share, since the key question is whether prices are distorted, not whether they originate in a government entity. 3.3.4.4 Allocation of Benefits over Time The issue here is how long productive assets will benefit from a subsidy paid today. This is a different issue from pass through. In pass through, either an auctioning of previously state property or a subsidy to an input when only the final product is being traded must be the working assumption. Here, the issue is how long assets will profit from a subsidy even if no change of ownership is observed. The “Guidelines on Amortization and Depreciation,” adopted by the Committee on Subsidies and Countervailing Measures in April 1985,121 provided guidance regarding the issue of allocating subsidies over time. In US–Lead and Bismuth I, an unadopted GATT panel report, this issue figured prominently. This case was about the imposition of CVDs by the US against imports from the steel industries of Germany (Saarstahl), France (Usinor Sacilor), and the United Kingdom (British Steel). All the companies involved had been privatized but had received state grants beforehand, and the question was whether the allocation of subsidies to productive period by the US was consistent with GATT. In § 611 of the report, it states: The Panel noted that in these investigations, the DOC explained the use of a period of 15 years for the allocation of certain subsidies by stating that this period was “reflective of the average useful life of assets in the steel industry.”
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In § 618, the panel acknowledged the legal relevance of the guidelines, while in § 622, it expressed its understanding of the disagreement between the EU and the US on this sector in the following terms: These conflicting views resulted in particular from different interpretations of the statement in paragraph 3.2 of the Guidelines on amortization and depreciation that investigating authorities should select “a reasonable period for the firms being investigated.” While the EC argued that this expression implied the need for an analysis of the life of assets of the individual firms under investigation, the United States argued that this expression permitted the use of an industry-wide standard for the average useful life of assets of firms in a given industry.
In §§ 624–625, the panel held that the USDOC (the IA responsible for investigating the subsidization of the EU steel industry) did not have to determine the allocation over time on the basis of company-specific analysis. The average useful life of assets was a reasonable benchmark as well, in its view. In §§ 628ff., however, the panel noted that the USDOC had not responded at all to arguments made by France to the effect that the 15-year period was unreasonably long. It is the absence of justification for using this benchmark that the panel sanctioned and found that the US had acted inconsistently with its obligations since it had imposed a CVD in excess of the amount of the subsidy granted. It did not find against the US decision to employ the same period on imports from the other two European countries, UK and Germany. Neither the UK (§ 641), nor Germany questioned the US methodology in this respect (§ 645). 3.3.4.5 Allocation of Benefit over Productive Assets The question of allocation of benefit over productive assets concerns the issue whether, when imposing CVDs, an IA should allocate the subsidy (in the form of equity infusion) to all productive assets of a multinational company or, conversely, whether it could legitimately allocate them only to the assets of the parent company, and if so, under what circumstances. This issue arose for the first time as well in US–Lead and Bismuth I.122 Allocating them to a narrower subgroup increases the amount of subsidy per asset; this is what the US had done and what the EU was complaining about (§ 590): From this explanation, it appeared to the Panel that the DOC’s decision to include only sales attributable to domestic production in the sales denominator resulted from an analysis which involved two steps. Firstly, the DOC examined whether the subsidies were tied to domestic production. Secondly, having found that the subsidies were tied to domestic production, the DOC decided to allocate those subsidies exclusively to domestic production because (1) the DOC believed that it was reasonable to allocate benefits of subsidies tied to domestic production only to domestic production, and (2) there was no adequate evidence giving a clear reason to believe that the benefits of the subsidies encouraged foreign production
The legal challenge mounted by the EU against the US practice is reflected in § 592:
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Firstly, by ignoring the nature of the subsidies the DOC had improperly allocated the subsidies only to domestic production in France, which had resulted in the imposition of a countervailing duty in excess of the amount of the subsidy found to exist. The DOC had failed to take into account that a subsidy provided in the form of an equity infusion into a holding company of a multinational firm by its very nature could only benefit the recipient company as a whole. This had been acknowledged by the DOC in its Proposed Countervailing Duty Regulations in which it treated subsidies arising from equity infusions as untied subsidies. The DOC’s conclusion in the present case that the subsidies in question were tied to domestic production was without a rational basis and unsupported by evidence. Secondly, by taking the position that the subsidies should be allocated exclusively to French domestic production, unless there was adequate evidence providing a clear reason to believe that the benefits at issue benefitted foreign production, the DOC had relied on an impermissible presumption, contrary to the requirement to make a finding based on an examination of all relevant facts. The factors mentioned by the DOC (the nature of the programmes from which the alleged subsidies arose, the contemporaneous controlling ownership position of the French Government and the intention of the Government of France to promote domestic social policy and domestic economic activities and therefore to encourage domestic production) did not support the presumption that the subsidies were tied to domestic production in France. The presumption established by the DOC was in practice irrebuttable in a substantive sense, because of the nature of the subsidies in question
In § 597, the panel explained the test for consistency of the US practice: The Panel concluded from the arguments summarized in the preceding paragraphs that the key issues on which the parties differed with respect to the DOC’s decision to allocate subsidies only to domestic production in France were: (i) whether the DOC had failed to take into account that the subsidies in question arose from equity infusions and therefore benefitted the firm as a whole; (ii) whether the DOC’s analysis rested on a presumption, rather than on a factual analysis; (iii) whether the factors mentioned by the DOC in its determination adequately supported the DOC’s decision to allocate subsidies only to domestic production in France; and (iv) whether interested parties had been afforded an adequate opportunity to submit evidence.
The panel did not explain what it meant by “factual analysis” in its point (ii) quoted above. It did not provide for a test that would help IAs to allocate subsidies over assets. In § 609, the panel found that the US had acted inconsistently with its obligations by not providing exporters with an adequate opportunity to present their views on this test. 3.3.5
Specificity
A financial contribution must confer a benefit to a specific recipient; otherwise, no subsidy has been conferred. The specificity-requirement is the third and final condition that must be met for a demonstration that a subsidy has been bestowed. Demonstration of financial contribution and benefit alone do not suffice to show that a subsidy has been granted.
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A subsidy is specific if it is granted to (or if it benefits) an enterprise or a group of enterprises, or to an industry or a group of industries, within the jurisdiction of the granting authority (Article 2.1 of SCM).123 The problems that we have encountered previously when discussing the indeterminacy of the term “subsidy” are present here, and are expounded as well. What exactly is specific? Assume that a WTO member is a monoculture, e.g., it produces only copper. Is an education program offered to industry executives a specific subsidy? Is the same program, when offered by a WTO member that has only labor-intensive industries, a specific subsidy? These questions are hard to answer. It seems that the rationale for the specificity requirement reflects the desire of the framers not to question the role of government in general. Governments subsidize various aspects of life, and do so in asymmetric manner. In many countries, primary education is free of charge, and in some even secondary education. Nonmarket prices are paid in state hospitals. In other countries, education and health services have been privatized. The examples of the sort abound. And yet, although similar schemes help domestic producers, no WTO member wanted to put them into question. The problem was how to exclude them from the reach of the SCM Agreement. Specificity emerged as the compromise to do that. Although not an intellectually satisfying concept, specificity was thought of as the opposite to general available schemes that do not target specific recipients. In the words of the Panel on US–Upland Cotton, subsidies will not be specific if they are (§ 7.1142) “sufficiently broadly available throughout an economy as not to benefit a particular limited group of producers of certain products.”124 Unavoidably, disputes will arise and have already arisen regarding the proper understanding of the term “specificity.” The SCM Agreement attempted to reduce the size of the problem. Prohibited subsidies (export and local content subsidies) are considered specific per se (Article 2.3 of SCM). The Panel on US–Upland Cotton underscored this point (§ 7.1153). In a similar vein, subsidies limited to certain enterprises located within a designated geographical region are specific by virtue of Article 2.2 of SCM. In contrast, two government activities are considered nonspecific: the setting or change of generally applicable tax rates by all levels of government (Article 2.2 of SCM), and the granting of subsidies according to objective criteria or conditions [Article 2.1(b) of SCM]. The former is the natural consequence of the fact that the WTO Agreement does not prescribe common tax policies. The latter is defined in footnote 2 to the SCM Agreement as follows: Objective criteria or conditions, as used herein, mean criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.
For the rest, the SCM Agreement addresses both de jure and de facto specificity. Whereas the former concept refers to cases where the statute explicitly names the addressees of a subsidy, the latter captures the instances where an attempt is made to circumvent the
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prohibition of de jure specificity. Subsidies, therefore, can be specific either de jure (because they are by law limited to a group of industries, enterprises, or both) or de facto (because, although by law generally available, their use is in fact confined to a group of industries, enterprises, or both). 3.3.5.1 De Jure Specificity Article 2.1(a) of SCM explains what de jure specificity amounts to: Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.
In US–Antidumping and Countervailing Duties (China), the AB held that a subsidy will be specific if access to either the financial contribution or the benefit is explicitly limited to specific beneficiaries (§ 378). The Panel on EC and Certain Member States–Large Civil Aircraft understood the term “explicitly limits” appearing in Article 2.1(a) of SCM as equivalent to the establishment of a limitation that expressly and unambiguously restricts the availability of a subsidy to certain enterprises and thereby does not make the subsidy broadly available throughout an economy. The AB confirmed (§ 949).125 The SCM Agreement does not define “industry” in a particular way. The Panel on US–Softwood Lumber IV rejected the argument that the term “industry” should be defined with reference to a particular, and specifically defined product. The subsidy may be specific to an industry such as the steel industry or, in the case in question, the lumber industry, even when this industry produces a wide variety of slightly different products. In this case, Canada had argued, that over 200 separate products were manufactured by companies holding harvesting rights, forming thus a total of about 23 separate industries. In Canada’s view, the wooden door and window industry should, for example, be distinguished from the wooden kitchen cabinet and bathroom vanity industry. In Canada’s view, a subsidy granted to all those different industries was hardly being granted to a limited number of industries. Rejecting Canada’s approach, the panel expressed the view that specificity under Article 2 of SCM must be determined at the enterprise or industry level, not at the product level. The text of Article 2 of SCM did not require a detailed analysis of the end products produced by the enterprises involved, nor did Article 2.1(c) of SCM provide that only a limited number of products should benefit from the subsidy (§§ 7.120–121). The Panel on US–Upland Cotton126 held that the breadth of industry may depend on several factors. In its view, the breadth or narrowness of specificity is not susceptible to rigid quantitative definition (§ 7.1142). It, thus, came to the following conclusion (§ 7.1151): In our view, the industry represented by a portion of United States agricultural production that is growing and producing certain agricultural crops (and certain livestock in certain regions under restricted conditions) is a sufficiently discrete segment of the United States economy in order to qualify as “specific” within the meaning of Article 2 of the SCM Agreement. (italics in the original)
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3.3.5.2 De Facto Specificity Article 2.1(c)SCM reads: If, notwithstanding any appearance of non-specificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation.
A footnote to this provision reads: In this regard, in particular, information on the frequency with which applications for a subsidy are refused or approved and the reasons for such decisions shall be considered.
In US–Measures Affecting Trade in Large Civil Aircraft (Second Complaint), the AB explained the sequence between the paragraphs (a) and (b) in Article 2.1 of SCM (§ 876): ... the application of Article 2.1(c) proceeds on the basis of the conclusions reached as a result of the application of the preceding subparagraphs of Article 2.1. We therefore consider that it was correct for the Panel to assess whether the legislation pursuant to which the IRBs were granted explicitly limited access to certain enterprises within the meaning of Article 2.1(a), even though it was not claimed by the European Communities. Having found that the IRB subsidies are not specific within the meaning of Article 2.1(a), analysis by the Panel under Article 2.1(b) was not necessary.
It follows that subsidies that have not been limited to few enterprises, or that have been provided in accordance with objective criteria, can still be specific.127 To decide if this has indeed been the case, an IA must review whether the scheme is (Article 2.1(c) of SCM): • Used by a limited number of enterprises • Predominantly used by certain enterprises • Paying disproportionately large amounts to certain enterprises • Administered in a manner that legitimately raises questions regarding the exercise of discretion to grant a subsidy128 There is no obligation to examine all four factors, as the Panel on US–Softwood Lumber IV made clear (§ 7.123). In this case, Canada had argued that the Canadian government had never intentionally limited access to the stumpage programs. In its view, the predominant use of the stumpage programs by lumber producers could be explained by the fact that the alleged financial contribution consisted of the provision of trees, which, thanks to
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inherent characteristics, are of interest mainly to a limited number of log and lumber producers. The same panel took the view that there was no need to show intent in order to satisfy the de facto specificity requirement, although deliberate action by the government might be revealing; what matters is that at least one of the four criteria mentioned in Article 2.1(c) of SCM had been met. In this case, stumpage programs could only benefit lumber producers (§ 7.116).129 The presence of a “generally available support program” does not eliminate the potential for “specificity.” The Panel on Japan–DRAMs (Korea) provided the generic test that should be applied by panels when dealing with similar cases (§ 7.374): As a general matter, ... if an investigating authority were to focus on an individual transaction, and that transaction flowed from a generally available support programme whose normal operation would generally result in financial contributions on pre-determined terms (that are therefore not tailored to the recipient company), that individual transaction would not, in our view, become “specific” in the meaning of Article 2.1 simply because it was provided to a specific company. An individual transaction would be “specific,” though, if it resulted from a framework programme whose normal operation (1) does not generally result in financial contributions, and (2) does not pre-determine the terms on which any resultant financial contributions might be provided, but rather requires (a) conscious decisions as to whether or not to provide the financial contribution (to one applicant or another), and (b) conscious decisions as to how the terms of the financial contribution should be tailored to the needs of the recipient company.
Use by a Limited Number of Enterprises In EC and Certain Member States–Large Civil Aircraft, the panel explained the conditions under which a subsidy should be considered for use to a limited number of enterprises (§ 7.931): As we have already noted, it follows from the ordinary meaning of the word “explicit” that it is not any limitation on access to a subsidy that will make it specific within the meaning of Article 2.1(a), but a limitation that “{d}istinctly express{es} all that is meant; leaving nothing merely implied or suggested”; a limitation that is “unambiguous” and “clear.” Above we have found that the normal operation of the EIB’s lending programme involves the granting of loans, with a degree of discretion, to entities of all nationalities, on terms and conditions that, to varying degrees, reflect the particular characteristics and features of the funded project and finance transaction, for activities contributing to the development of a wide array of economic sectors across the EU. While it could be argued that the EIB lending objectives, although very broad, do establish an explicit limitation on its lending activities, we do not consider these to result in a limitation on the availability of its loans to “certain enterprises.” In our view, the wide array of economic sectors covered by the EIB’s explicit lending objectives means that its operations are expressly intended to benefit recipients well beyond a particular enterprise or industry or group of enterprises or industries. Moreover, the fact the EIB loans to Airbus (and other borrowing entities) may contain one or more terms and conditions that are not exactly the same, does not render access to those loans explicitly limited to the particular recipients. This is because the normal operation of the EIB’s lending programme places no explicit limitation on access to the same financing opportunity for any other recipient having the same funding needs
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for a comparable project. Thus, contrary to what the United States has argued, the fact that the subsidy loans to Airbus were negotiated individually between the EIB and Airbus, and granted on terms and conditions that were not always identical to other loans granted by the EIB, does not mean that they are specific within the meaning of Article 2.1(a) of the SCM Agreement. Bearing in mind that the concept of specificity under Article 2.1 of the SCM Agreement has to do with whether a subsidy is sufficiently broadly available throughout an economy so as not to benefit “certain enterprises,” we believe there is, in principle, no express, “unambiguous” and “clear” limitation on access to EIB lending to “certain enterprises.” Accordingly, we dismiss the United States claim that the EIB loans to Airbus are specific, within the meaning of Article 2.1(a).
The limitation should, thus, be “clear” and “unambiguous”; otherwise, the requirements of Article 2.1(a) of SCM would not have been met. The US, in the same dispute, had also argued that the EU subsidies met the statutory requirements since the contracts signed between donor and beneficiary were identical, but it failed to provide evidence to this effect and, thus, its claim was dismissed (§§ 7.392ff.). Predominant Use by Certain Enterprises In EC and Certain Member States–Large Civil Aircraft,130 the panel explained the statutory requirement for a finding of predominant use as follows (§ 7.975): In considering whether there is “predominant use {of a subsidy programme} by certain enterprises’ for the purpose of making a finding of specificity, the last sentence of Article 2.1(c) requires that account be taken of: (i) “the extent of diversification of economic activities within the jurisdiction of the granting authority”; and (ii) “the length of time during which the subsidy programme has been in operation.”
Assuming economic activities are diversified, one would expect that the risk for predominant use would be reduced. Lengthy programs when economic activities are not diversified would, conversely, increase the probability for predominant use by few economic agents. Disproportionately Large Amounts to Certain Enterprises In US–Measures Affecting Trade in Large Civil Aircraft (Second Complaint), it was claimed that disproportionately large amounts of subsidy (a concept very similar to “predominant use”) had been granted to Boeing and Spirit (two US aircraft companies), and the AB clarified the proper standard of review (§ 879): Article 2.1(c) indicates that the first task is to identify the “amounts of subsidy” granted. Second, an assessment must be made as to whether the amounts of subsidy are “disproportionately large.” This term suggests that disproportionality is a relational concept that requires an assessment as to whether the amounts of subsidy are out of proportion, or relatively too large. When viewed against the analytical framework set out above regarding Article 2.1(c), this factor requires a panel to determine whether the actual allocation of the “amounts of subsidy” to certain enterprises is too large relative to what the allocation would have been if the subsidy were administered in accordance with the conditions for eligibility for that subsidy as assessed under Article 2.1(a) and (b). In our view, where the granting of the subsidy indicates a disparity between the expected distribution of that subsidy, as determined by the conditions of eligibility, and its actual distribution, a panel will be
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required to examine the reasons for that disparity so as ultimately to determine whether there has been a granting of disproportionately large amounts of subsidy to certain enterprises.
The AB found that the fact that over two-thirds of subsidies had been absorbed by Boeing was in and of itself an indication of disproportionality (§ 884). It held that the share of employment of Boeing and Spirit was not a particularly relevant factor in deciding if it had received disproportionately large sums (§ 886). The panel should have examined the sum of “qualifying” investments in order to form a view on whether Boeing and Spirit had been receiving disproportionately large amounts (§ 887); that is, it should have examined whether use was predominant among those who could qualify for subsidy, and not in general. Since the US had adduced no arguments to this effect, the AB fatally agreed with the panel’s findings holding that the US had not managed to convince why Boeing and Spirit receiving 69 percent of all subsidies was not disproportionately large (§ 888): We would nonetheless expect that the allocation of such benefits over the 25-year period between 1979 and 2005 would have produced a wider distribution of those benefits across different sectors of the Wichita economy. The fact that Boeing and its successor received over two thirds of all IRB property tax abatements from the City of Wichita over a 25-year period, in our view, provides a reason to believe that the IRB subsidies were granted in disproportionately large amounts to certain enterprises. ... We do not consider that the focus by the parties and the Panel on determining what share of employment Boeing and Spirit had within the Wichita economy is particularly relevant to the inquiry of whether the IRB subsidies granted to Boeing and Spirit were disproportionately large. ... On appeal, the United States ... argues that IRBs are not available to the entire economy of Wichita, and that, as a result, calculating Boeing’s and Spirit’s share of economic participation as a ratio of employment levels of the entire Wichita manufacturing sector is not informative. As the United States argues, “only those companies that fund, construct or improve industrial and/or commercial property during the relevant time period actually had access to the IRB program,” and there is therefore no reason to assume “that there is necessarily a logical and “proportionate” relationship between the number of employees of a particular company or group of companies as compared to all employment in the Wichita manufacturing sector, and the amount of IRB tax benefits received.” It would have made much more sense, the United States argues, to take a look at “qualifying investments” during the relevant period of time—that is, “those companies that actually made investments in industrial or commercial property.” We agree that examining qualifying investments would have been a reasonable basis on which to show why the 69% figure does not indicate that IRB subsidies were granted in disproportionately large amounts. In particular, such a showing may have explained why, for IRB benefits seemingly broadly available over a 25-year period to enterprises seeking to develop commercial or industrial property, one company and its successor received over two thirds of those benefits. However, we do not see on the Panel record that the United States provided evidence in support of such an explanation. In sum, we do not see that the United States provided sufficient reasons supported by evidence to undermine the assessment that the granting to Boeing and Spirit of 69% of the amounts of IRB
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subsidy represents an allocation at variance from what would have been expected from the allocation of IRBs in accordance with their conditions for eligibility.
In a similar vein, in EC and Certain Member States–Large Civil Aircraft, the panel held that (§ 7.969): Where the amount of a subsidy granted to one or more recipients under a broadly available subsidy programme represents a proportion of total subsidies granted under the same programme that significantly exceeds the economic activity attributable to the same recipient(s) in the broader economy, the amount of the subsidy at issue would be “disproportionately large.”
The same report underscored the importance of the time factor, holding that it would be wrong to draw definitive conclusions from the short-term use of particular programs (§ 7.976). Manner in Which Discretion Has Been Exercised to Grant a Subsidy There is no practice so far in this area. Is There Room for an Intent Test? The statutory examples denote the legislative will to avoid punishing governments for actions benefiting the society at large. The specificity test, in other words, is there to ensure that governments are not reduced to redundancy. And yet, one could very well imagine cases where only a few companies use a subsidy, and still the government was aiming at promoting the social welfare. Home wants, for example, to build a bridge, and there is only one constructing company in its sovereignty. Shouldn’t we be looking for the intent in this and similar cases? Shouldn’t we ask what whether the intent was to subsidize the construction company or to promote social welfare by linking two parts of the country that were divided before? In US–Softwood Lumber IV, Canada had argued before the panel that, a subsidy is specific only if the government had intentionally (“deliberately,” in its terminology), limited access to a few enterprises. The panel rejected the argument that intent was necessary for a finding of specificity. What mattered was whether de facto, only a few could enjoy the gift (§ 7.116). This is a problematic statement, as we might end up making specificity an easy-to-meet test, contrary probably to the intentions of the drafters, and thus commit false positives. This is especially dangerous in light of the fact that there is no room for “nonactionable” subsidies anymore, as we will see later in this chapter in more detail.131 WTO adjudicating bodies should rethink this issue. The term “specificity” is hard to define. The rationale is easier to grasp. Under the circumstances, unless an intent test is introduced, that will allow panels to inquire into the reasons for bestowing subsidies, the risk for errors increases.
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3.3.5.3 Regional Subsidies Article 2.2 of SCM reads: “A subsidy which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority shall be specific.”132 The Panel on EC and Certain Member States–Large Civil Aircraft faced the following question: should a subsidy be deemed specific if it is restricted to a certain region, or, as the EU had argued, should it be specific only if it is also specific to certain enterprises within that region? The panel refuted the EU argument (§§ 7.974ff., and especially 7.1223).133 3.3.5.4 Positive Evidence Article 2.4 of SCM requires that “[a]ny determination of specificity under the provisions of this Article shall be clearly substantiated on the basis of positive evidence.” We have already discussed the positive evidence standard in chapter 2 of this volume. Our analysis there finds application here as well. 3.4 Three Categories of Subsidies 3.4.1
Classifying Subsidies: Actionable, Nonactionable, Prohibited
The SCM Agreement distinguishes among three categories of subsidies: “actionable,” “non-actionable,” and “prohibited” subsidies.134 3.4.2
Legal Consequences of Classification
Two important legal consequences stem from this classification. First, WTO members must immediately withdraw a subsidy that is declared prohibited, whereas WTO members are simply required to remove the “adverse effects” of actionable subsidies, incurring no obligation to withdraw them, and no action can be raised against nonactionable subsidies. The latter category is by now defunct, as detailed later in this chapter. Second, the agreement differentiates the “intensity” of reaction to each of the three categories of subsidies, in case the subsidizing member refuses to comply with its obligations, and withdraw a prohibited subsidy or remove the adverse effects of an actionable subsidy. Injured WTO members can impose “appropriate” countermeasures to counteract the effects of prohibited subsidies, whereas they can only impose “commensurate” countermeasures to address the effects of actionable subsidies. Earlier case law differentiated the level of countermeasures that injured WTO members could impose when facing nonimplementation: the amount would be linked to the amount of subsidy paid if a prohibited subsidy had not been withdrawn, but only to its effects if the effects of an actionable subsidy had not been addressed. Subsequent case law has since then eliminated this distinction.
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3.5 Actionable Subsidies Title III of the SCM Agreement is entitled “Actionable Subsidies.” The term “actionable” implies that action can be taken against similar schemes. Action can take two forms. Affected WTO members can have recourse to CVDs, assuming that the conditions of the SCM Agreement concerning lawful imposition of CVDs have been complied with. Through imposition of CVDs, a WTO member can counteract injury in its domestic market only, and cannot address injury in third-country markets. To do that, an affected WTO member must challenge the consistency of an actionable subsidy with the WTO rules before the WTO adjudicating bodies.135 Both actions can be taken in parallel. If the WTO member concerned imposes countermeasures (because the subsidizing member has refused to comply with the rulings of the panel or AB), it can address injury in its market through either CVDs or countermeasures, but not through both. Double-dipping is disallowed, as we will see later in this chapter. 3.5.1 Three Forms of Adverse Effect: Injury, Nullification or Impairment, and Serious Prejudice Article 5 of SCM reads: No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.: (a) injury to the domestic industry of another Member; (b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994; (c) serious prejudice to the interests of another Member.
To prove adverse effects, IAs and ultimately the WTO adjudicating bodies (panels or ABs) need to construct a counterfactual; for example, compare the actual situation that the claimant is complaining about with another hypothetical situation where no subsidy would have been paid and, consequently, no injury because of a subsidy would have been caused. As stated before, constructing the appropriate counterfactual is far from simple. The problems in constructing the test that we underlined earlier when discussing the private investor test are also present here in the context of injury analysis. Panels and ABs have often been criticized for comparing apples to oranges. Take, for example, the AB report on US–Large Civil Aircraft (Second Complaint). Neven and Sykes (2014) found fault with the AB’s (and the panel’s) decision because it did not consider what the situation would have been had Boeing not received subsidies and thus delayed the production of the Boeing 787. In their view, Airbus would, in all likelihood, have also delayed the production of its Airbus 350 model since the decision to launch it was contingent on the decision of Boeing to launch the corresponding model. Consequently, the authors
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legitimately raised the point that the AB should have considered what would have happened to Airbus’s profits had both companies developed their new models later (as opposed to simply inquiring into injury because of the subsidies paid toward the Boeing 787). In-depth knowledge of the particular market will be necessary, as will be knowledge that transcends the frontier of “trade law.” Indeed, the Boeing-Airbus dispute will be a riddle to panelists who are not conversant in industrial organization. 3.5.2
Injury
Footnote 11 to Article 5 of SCM states that the term “injury” is used here in the same way as it is used in the CVD context, which we discuss later in this chapter. In what follows, we focus on the other two forms of adverse effects. 3.5.3
Nullification and Impairment
Article 5(b) of SCM states that adverse effects can take the form of nullification or impairment of benefits accruing either directly or indirectly to other WTO members—in particular, the benefits of concessions bound under Article II of GATT. A footnote to this provision explains that the term “nullification or impairment” should be understood as synonymous with the term included in Article XXIII.1(b) of GATT. There is, nonetheless, an important difference regarding the evidence of nullification and impairment in the GATT and SCM contexts. The Panel on US–Offset Act (Byrd Amendment) held that whereas nullification or impairment of benefits may be presumed under GATT (since any violation of a provision presumably leads to nullification of benefits according to standing case law), no similar presumption exists in the SCM Agreement, where nullification must be proven (§ 7.119). The same panel held that three elements must be established in order to uphold a claim to this effect (§ 7.120): • The existence of a benefit (typically in the form of tariff concession) • The subsequent introduction of a measure by a WTO member (typically a subsidy) • The nullification or impairment of a benefit must be the result of the application of a measure136 The Panel on EEC–Oilseeds I considered that nullification or impairment would arise when the effect of a tariff concession is “systematically” offset or counteracted by a subsidy program. The Panel on US–Offset Act (Byrd Amendment) confirmed this approach (§ 7.127). This finding’s value closes the door to claims of nullification resulting from measures the negative impact of which on the value of concession has been incidental, or even accidental. The measure must somehow consistently undermine the value of concessions, even if it was not intended to do so.
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Serious Prejudice
The term “serious prejudice” is defined in Article 6.1 of SCM as follows: Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in the case of: (a) the total ad valorem subsidization of a product exceeding 5 per cent; (b) subsidies to cover operating losses sustained by an industry; (c) subsidies to cover operating losses sustained by an enterprise, other than onetime measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems; (d) direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment. A footnote to the text (footnote 16) reads: Members recognize that where royalty-based financing for a civil aircraft programme is not being fully repaid due to the level of actual sales falling below the level of forecast sales, this does not in itself constitute serious prejudice for the purposes of this subparagraph.
Article 6.1 of SCM provides the complainant with an important evidentiary advantage, since it is relieved of the burden to demonstrate the prejudicial effects of a subsidy.137 Since this provision was enacted to serve on a provisional basis and WTO members could not agree on its extension, it has been repealed by Article 31 of SCM. This does not mean that it is totally irrelevant nowadays. The Panel on US–Upland Cotton took the view that it could still provide useful guidance in interpreting serious prejudice (footnote 1487 of the report), even if the evidentiary advantage has ceased. The Panel on Korea–Commercial Vessels adopted a similar attitude (§ 7.583). Its legal relevance, however, should not be overstated since panels can but do not have to draw inspiration from Article 6.1 of SCM.138 Article 6.3 of SCM identifies the following situations of serious prejudice that may arise:139 (a) The effect of the subsidy is to displace from or impede in the market of the subsidizing member the exports of a like product originating in another member; (b) The effect of the subsidy is to displace from or impede in a third-country market the exports of a like product originating in another member; (c) The effect of the subsidy is a significant price undercutting or significant price suppression, price depression, or lost sales in the same market; (d) The effect of the subsidy is an increase in the world market share of the subsidizing member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.140
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Adverse effects are, thus, distinguished into quantity (displacing or impeding exports, increase in market share) and price effects (undercutting, suppression, depression). This distinction sits on a solid foundation, as we saw in the previous chapter: recall that quantity effects will be observed regardless of whether it is a large or a small country that is providing the subsidy since, other things being equal, subsidies might lead to displacement of imports. Price effects, however, will be observed only when large countries (that is, countries that can affect terms of trade) subsidize. Hence, in cases of serious prejudice, panels dealing with price effects should at the outset establish whether the world price has been affected. The standard of review for serious prejudice cases has occupied the minds of the trading community for a long time now. We will be discussing it in detail in what follows when we revert to the specific forms of serious prejudice. At the outset, nevertheless, we should note the relevant discussion in the 1960 Working Party report on “Review Pursuant to Article XVI.5,” where the following generic standard was elaborated: The criterion is therefore what would happen in the absence of a subsidy. While the panel agreed that in most cases such a judgment cannot be reached only by reference to statistics, nevertheless, a statistical analysis helps to ascertain the trends of imports and exports and may assist in determining the effects of a subsidy. The panel considers it fair to assume that a subsidy which provides an incentive to increase production will, in the absence of offsetting measures, e.g., a consumption subsidy, increase exports or reduce imports.141
The assumption is, thus, that subsidies will affect competitive conditions in a given market, and it is through the construction of an appropriate counterfactual that their effects will be measured. 3.5.4.1 Quantity Effects Displacing or Impeding Exports Articles 6.3(a) and 6.3(b) of SCM provide that a subsidy has an adverse effect if it has the effect of “displacing” or “impeding” exports into the market of the subsidizing WTO member or a third-country market. The Panel on Indonesia–Autos examined claims relating to displacement and impediment of car exports to the Indonesian market (particularly cars originating in Japan, the EU, and the US) due to subsidization of the Indonesian carmaker (producing the Timor model). To decide whether displacement had occurred, the panel reviewed data concerning market share and sales. It appeared that, while market share of the European cars had fallen, sales volume in absolute figures had not gone down (§ 14.210). The explanation was that the size of the Indonesian market had expanded after the introduction of the subsidized Indonesian Timor, since consumers who could not afford to purchase a car at all could now do so because of the low price at which “Timor” was selling (§§ 14.216–17). The data regarding the question whether sales of EU models in absolute terms would have been higher than the actual had the Indonesian model not been introduced were inconclusive. As a result, the panel rejected the claim of displacement
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(§ 14.220), since, in its view, serious prejudice must be demonstrated on positive evidence (§ 14.222). The same panel understood the term “impediment” as follows (§ 14. 218): the question before us is therefore whether the market share and sales data above would support a view that, but for the introduction of the subsidized Timor, sales of EC C Segment passenger cars would have been greater than they were while impedance relates to a situation where sales which otherwise would have occurred were impeded. (italics added)
The panel also considered to what extent the nonintroduction of new EU models was due to the Indonesian subsidization of its motor industry (§ 14.227). Once again, the panel took the view that the complainants failed to adduce sufficient positive evidence (§ 14.236). The core evidence submitted by the complainants consisted in journalists’ articles in newspapers regarding the effects of Indonesian subsidies. The panel did not consider similar evidence to be sufficient to substantiate the claim advanced by the EU. It did give an indication of the kind of evidence it was expecting (§ 14.234): We do not mean to suggest that in WTO dispute settlement there are any rigid evidentiary rules regarding the admissibility of newspaper reports or the need to demonstrate factual assertions through contemporaneous source information. However, we are concerned that the complainants are asking us to resolve core issues relating to adverse trade effects on the basis of little more than general assertions. This situation is particularly disturbing, given that the affected companies certainly had at their disposal copious evidence in support of the claims of the complainants, such as the actual business plans relating to the new models, government documentation indicating approval for such plans (assuming the “approval” referred to by the complainants with respect to the Optima means approval by the Indonesian government), and corporate minutes or internal decision memoranda relating both to the initial approval, and the subsequent abandonment, of the plans in question.142
In US–Large Civil Aircraft (Second Complaint), the AB held that because of subsidies paid, there had been “technology effects” (e.g., new products had been produced faster than otherwise and they resulted in increasing the share of subsidized goods). As a result, sales of competing planes had been displaced since the market valued so-called new products more than even the most reliable old ones (§§ 16ff.). Increase in the World Market Share Article 6.3(d) of SCM states that with respect to primary products or commodities, a subsidy has an adverse effect if it leads to an increase in the world market share of this commodity as compared to the average share it had had during a previous period of three years. It adds that this increase has to follow a consistent trend over a period when subsidies had been granted. The Panel on US–Upland Cotton held that the term “world market share” (§ 7.1464) “refers to share of the world market supplied by the subsidizing Member of the product concerned.” The panel defined “world market” as the global geographical area of economic activity in which buyers and sellers come together and the forces of supply and demand affect
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prices. It gave no credence to the argument that this term would necessarily not include the domestic market of the subsidizing WTO member (§§ 7.1431–1432). It consequently rejected Brazil’s argument that the term “world market share” refers to the world market share of exports only (§§ 7.1434–1435). 3.5.4.2 Price Effects Price Undercutting, Suppression, or Depression Article 6.3(c) of SCM lists price suppression, price depression, and price undercutting as three forms of adverse effects.143 Information regarding these issues typically involves a fact-finding process in the subsidizing country, the complaining WTO member, and thirdparty countries. To this effect, Annex V of the SCM Agreement organizes the fact-finding process and even makes room for the participation of a Dispute Settlement Body (DSB) representative to serve as a “facilitator” during the information-gathering process. Article 6.8 of SCM indicates that the existence of serious prejudice, pursuant to Articles 5(c) and 6.3(c) of SCM, is to be determined on the basis of information submitted to or obtained by the panel, including information submitted in accordance with Annex V. All three terms (price undercutting, price suppression, and price depression) refer to effects on the pricing policy of the nonsubsidized traders, and one might question the wisdom of using three terms for essentially the same purpose.144 “Price undercutting” is equated with selling below a certain price, and the term “price suppression” refers to a situation where prices are either prevented or inhibited from rising (that is, they do not increase when they otherwise would have done, or they do increase but the increase is less than it otherwise would have been). “Price depression” refers to the situation where prices are pressed down or reduced (AB, US–Upland Cotton, § 423). Article 6.3(c) of SCM states that price undercutting, price suppression, or price depression must occur in the same market, but it does not specify any further which market that is. In US–Upland Cotton, the AB agreed with the panel that, in the absence of specification in Article 6.3(c) of SCM, the market in question could be national, regional, or even the world market, if it can be demonstrated that the subsidized product and the other product compete in it (AB, US–Upland Cotton, §§ 406–409). The AB, in its report on US–Upland Cotton, understood the term “geographic product market” to mean the following (§ 408): the scope of the “market,” for determining the area of competition between two products, may depend on several factors such as the nature of the product, the homogeneity of the conditions of competition, and transport costs.145
For two products to be considered to be in the same market, they must engage in actual or potential competition in that market even if they are not necessarily sold at the same time and in the same place or country (AB, US–Upland Cotton, § 408). This finding comes close to the “orthodoxy” in antitrust law, whereby the geographic extent of a
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market is a function of homogeneity of conditions of competition. It follows that the geographic scope of the market can be subnational, national, regional, or even the world market if conditions of competition are homogeneous in each of the aforementioned constellations. The subsidized and the competing product necessarily have to be substitutes in order to be able to be in the same market. Whether they have to be “like products” as well was a question that the AB did not believe it needed to resolve. The Panel on Korea–Commercial Vessels held that it was not required that the products concerned were “like products” (§ 7.553): that “like product” as defined in footnote 46 to Article 15 of the SCM Agreement is not a legal requirement for claims of price suppression/price depression pursuant to Article 6.3(c). (italics in the original)146
Price undercutting, price suppression, and price depression must be “significant.” The Panel on Indonesia–Autos upheld a claim to the effect that the subsidized Indonesian car, the Timor, significantly undercut the prices of EU products in the Indonesian market because the level of undercutting was 42–54 percent (§§ 14.251–4). It thus provided a “quantitative” benchmark of “significance.” Quantification is certainly helpful, although, it appears that it is not strictly necessary. In US–Upland Cotton, the panel understood the term “significant price depression or suppression” to mean “important, notable, or consequential” (§ 7.1326).147 The same panel added that (§ 7.1330): a relatively small decrease or suppression of prices could be significant because, for example, profit margins may ordinarily be narrow, product homogeneity means that sales are price sensitive or because of the sheer size of the market in terms of the amount of revenue involved in large volumes traded on the markets experiencing the price suppression.
The same panel had found that price suppression indeed existed based on three factors (§ 7.1280): the relative magnitude of the US production and exports in the world upland cotton market; general price trends (in the world market); and the nature of the subsidies at issue, and in particular, the fact that they had discernible price suppressive effects. This panel did not consider it necessary to quantify the suppression to conclude that it was significant. Rather, these three factors, as well as the readily available evidence of the order of magnitude of the subsidies, led the panel to the conclusion that the price suppression in question was indeed significant (§ 7.1333). The AB upheld all of the panel’s conclusions and pointed to the relevance of such factors as the general price trends, the nature of the subsidies, and the relative magnitude of the subsidized product share of the market (§ 434): In the absence of explicit guidance on assessing significant price suppression in the text of Article 6.3(c), we have no reason to reject the relevance of these factors for the Panel’s assessment in the present case. An assessment of “general price trends” is clearly relevant to significant price suppres-
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sion (although, as the Panel itself recognized, price trends alone are not conclusive). The two other factors—the nature of the subsidies and the relative magnitude of the United States’ production and exports of upland cotton—are also relevant for this assessment.
The requirement to show “significant” price depression/suppression is not trivial, regardless of whether a “quantitative” or a “qualitative” benchmark has been privileged. Korea–Commercial Vessels presents an instance where the panel found that “significance” had not been demonstrated. In this case, the panel was dealing with subsidies paid by the Korean government (§ 7.676), and the question before it was to what extent they had contributed to price depression in the EU (§ 7.677). For reasons that have to do with the manner in which the complainant (EU) pleaded the case, only a handful of schemes were properly before the panel, and, as a result, the panel’s review of the claim regarding price depression was limited to an examination of the impact of these schemes (§ 7.670). In §§ 7.682–683, the panel noted that it had before it data concerning only three out of dozens of transactions, and that small sample could not, in its view, sustain a claim that “significant” price depression had indeed been caused to the EU industry by the Korean subsidies. When examining price suppression, the effects of recurring subsidies may be allocated over time and are not limited to the year in which the subsidy was granted. The AB held as much in its report on US–Upland Cotton (§ 482): we are not persuaded by the United States’ contention that the effect of annually paid subsidies must be “allocated” or “expensed” solely to the year in which they are paid and that, therefore, the effect of such subsidies cannot be significant price suppression in any subsequent year. We do not agree with the proposition that, if subsidies are paid annually, their effects are also necessarily extinguished annually.
Embedded Causality During the GATT era, panels equated price depression to serious prejudice resulting from a subsidy. They did not feel compelled to ask the additional question whether serious prejudice in the form of price effects was the result of subsidization.148 WTO panels have followed a similar path. First, the Panel on Indonesia–Autos rejected the approach followed by Panels in the GATT-era (§ 14.238). In this vein, the panel report on US–Upland Cotton includes the clearest expression of the test followed in the WTO-era (§ 7.1390): the Article 6.3(c) examination is determinative ... for a finding of serious prejudice under Article 5(c). That is, an affirmative conclusion that the effects-based situation in Article 6.3(c) exists is sufficient basis for an affirmative conclusion that “serious prejudice” exists for the purposes of Article 5(c) of the SCM Agreement.149
The AB on US–Upland Cotton summed it up as follows (§ 433):
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However, the ordinary meaning of the transitive verb “suppress” implies the existence of a subject (the challenged subsidies) and an object (in this case, prices in the world market for upland cotton). This suggests that it would be difficult to make a judgment on significant price suppression without taking into account the effect of the subsidies.
The Panel on Korea–Commercial Vessels found that the text of Article 6.3 of SCM implies a “but for” test and would require that a panel examine the counterfactual (§ 7.612). The complainant should demonstrate that, but for the subsidy, it could have expected to participate in a growing market (in the case of displacement of its shipments from a particular market). In the case of impeding exports, it should demonstrate that, but for the subsidies, its sales, market share, or both would have increased or would have increased more than they actually did. The counterfactual in this case was, thus, ceteris paribus, how would the world look like without the subsidy? This framework of analysis still requires, in the eyes of the panel, an evaluation of the various factors contributing to the particular market situation forming the subject of the complaint—that is, supply and demand factors, production costs, relative efficiency of the market actors, etc. (§ 7.615). The Panel on US–Upland Cotton found that there was a causal link between price-contingent subsidies and significant price suppression for four reasons (§§ 7.1347–1355): • The US had exerted substantial influence on the world upland cotton market. • The price-contingent subsidies were directly linked to world prices for upland cotton, thereby insulating US producers from low prices. • There was a discernible temporal coincidence of suppressed world market prices, on the one hand, and the price-contingent US subsidies, on the other. • Credible evidence concerning the divergence between US producers’ total costs of production and revenue from sales of upland cotton since 1997 supported the proposition that US upland cotton producers would not have been economically capable of remaining in the production of upland cotton, had it not been for the US subsidies, and that the effect of the subsidies was to allow US producers to sell upland cotton at a price lower than would otherwise have been necessary to cover their total costs. The AB upheld the panel’s reliance on these factors (§§ 449–53). It emphasized that the nature of the subsidies, as well as the magnitude of the subsidy, played an important role in establishing price suppression, but that, ultimately, all relevant factors had to be taken into consideration (§ 461): However, in assessing whether “the effect of the subsidy is ... significant price suppression,” and ultimately serious prejudice, a panel will need to consider the effects of the subsidy on prices. The magnitude of the subsidy is an important factor in this analysis. A large subsidy that is closely linked to prices of the relevant product is likely to have a greater impact on prices than a small subsidy
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that is less closely linked to prices. All other things being equal, the smaller the subsidy for a given product, the smaller the degree to which it will affect the costs or revenue of the recipient, and the smaller its likely impact on the prices charged by the recipient for the product. However, the size of a subsidy is only one of the factors that may be relevant to the determination of the effects of a challenged subsidy. A panel needs to assess the effect of the subsidy taking into account all relevant factors.
The AB in US–Upland Cotton endorsed the nonattribution requirement when performing causality analysis (§§ 436–437). The AB juxtaposed the panel’s findings on subsidized sales with other than subsidized sales factors (§ 7.1363) and held that they also indeed contributed to price suppression, but, in its view, the challenged subsidy schemes, even in the presence of these factors, still had had a significant price-suppressing effect. The AB found no legal error in the panel’s causation analysis, although it expressed its disappointment about the fact that, in its reasoning, the panel did not offer a detailed enough analysis (§ 458). The key here is that, so long as subsidies have caused significant price suppression, it is irrelevant if other factors have added to this effect. Recall, nevertheless, that as already discussed in the previous chapter, performing causality analysis with respect to price suppression, price depression, or price undercutting does not absolve WTO members from examining whether subsidies have negatively affected the health of the domestic industry (Article 15.5 of SCM) by reviewing the factors mentioned in Article 15.4 of SCM. A finding of price depression, price suppression, or price undercutting is not a finding concerning the health of the industry. An industry can be in “good health” even when its prices have been suppressed (depressed or undercut). The AB put it very well in its report on China–GOES when it held that (§ 154) Article 15.2 of SCM is not equal to causality analysis, but it is the necessary first step. Annex V Procedures Any time that serious prejudice has been caused as a result of subsidization and WTO members cannot find a mutually agreed solution, the matter can be referred to a panel (Article 7.4 of SCM). When information is hard to obtain, following a request to the DSB, recourse can be made to the procedures established in Annex V to the SCM: § 2 of Annex V reads: In cases where matters are referred to the DSB under paragraph 4 of Article 7, the DSB shall, upon request, initiate the procedure to obtain such information from the government of the subsidizing Member as necessary to establish the existence and amount of subsidization, the value of total sales of the subsidized firms, as well as information necessary to analyze the adverse effects caused by the subsidized product.
The DSB shall appoint a “Facilitator,” as per § 4 of Annex V, to help with the gathering of information. The facilitator can ask questions of the parties and has discretion to accept any submitted requests. If a party disagrees with the exercise of discretion, it can always challenge it. In this case, the legal benchmark to decide of discretion has been lawfully
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exercised would be whether the facilitator made an objective assessment of the facts (Article 11 of DSU). Failure to cooperate with the facilitator will be noted and transmitted to the panel and could lead to recourse to best information available (§ 6), which can even draw inferences from noncooperative behavior (§ 7). However, § 3 explains that the facilitator should not be placing an unreasonable burden on parties, while § 9 acknowledges that the panel can complete the record anyway through subsequent investigation. In addition, § 2 lays out the procedure for the appointment of the facilitator: The DSB shall designate a representative to serve the function of facilitating the informationgathering process. The sole purpose of the representative shall be to ensure the timely development of the information necessary to facilitate expeditious subsequent multilateral review of the dispute. In particular, the representative may suggest ways to most efficiently solicit necessary information as well as encourage the cooperation of the parties.
The Panel on US–Large Civil Aircraft (Second Complaint) held that the DSB can decide by negative consensus whether to initiate this procedure. Consequently, the request by the WTO member interested in initiating this procedure suffices. Nevertheless, total inaction before the DSB (e.g., absence of request) is the sole consequence indicating that the procedure has not been initiated (§§ 721ff.). The AB disagreed and held that the DSB should have initiated the procedure at the time of the panel’s establishment since the request suffices for initiation of this procedure to occur (§§ 511, 524). The process should last 60 days, and eventually the panel should receive from the facilitator information regarding (§ 5) [the] amount of the subsidy in question (and, where appropriate, the value of total sales of the subsidized firms), prices of the subsidized product, prices of the non-subsidized product, prices of other suppliers to the market, changes in the supply of the subsidized product to the market in question and changes in market shares. It should also include rebuttal evidence.150
3.5.4.3 The Causality Requirement The complainant will need to show that adverse effects are the causal effect of subsidization. Demonstration of subsidization and adverse effects will not suffice since the former might not “cause” adverse effects, and the latter might be the effect of a cause other than subsidization. Causality is, of course, a tough test as covered in the previous chapter, which discussed several related concepts such as “correlation” and “substantial cause.” The difficulty lies here: the trade outcome (adverse effects) might in practice be due to more than one factor, and subsidization is just one factor. The question, thus, arises how one can isolate the influence of factors other than subsidization to show the effect of the latter on the domestic industry. The additional question is how much subsidization should “contribute” to injury (e.g., what part of the adverse effects should be due to subsidization) for the causality requirement to be satisfied? Moreover, the number of players might in and of itself present both IAs as well as WTO adjudicating bodies with difficult issues to handle.
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It is one thing to discuss injury and causality when a duopoly (à la Boeing/Airbus or Embraer/Bombardier) is present, and a different thing when dozens of producers participate in the market. In US–Upland Cotton, the AB held that Article 6.3 of SCM did not impose a particular methodology that IAs had to employ in order to satisfy the causality requirement. As we will see in more detail in the next chapter where we discuss the same issue in the context of the Agreement on Safeguards, econometric analysis suggests particular methodologies that could be employed in order to “approximate” causality. In line with its case law in the other two contingent protection instruments, the AB did not even require econometric analysis. Anything, in principle, will do, so long as it shows causality. So what has to be shown? The AB requested in this report from IAs to review all factors that caused serious prejudice (one of the forms of adverse effects) and, at the same time, to see how other factors affected the “influence” that causal factors exercised on the outcome. This is another way of stating that the nonattribution requirement (e.g., serious prejudice caused by factors other than subsidies should not be attributed to subsidies) is alive and kicking in this context (§§ 436–437): As the Panel pointed out, “Articles 5 and 6.3 ... do not contain the more elaborate and precise “causation” and non-attribution language” found in the trade remedy provisions of the SCM Agreement. Part V of the SCM Agreement, which relates to the imposition of countervailing duties, requires, inter alia, an examination of “any known factors other than the subsidized imports which at the same time are injuring the domestic industry.” However, such causation requirements have not been expressly prescribed for an examination of serious prejudice under Articles 5(c) and Article 6.3(c) in Part III of the SCM Agreement. This suggests that a panel has a certain degree of discretion in selecting an appropriate methodology for determining whether the “effect” of a subsidy is significant price suppression under Article 6.3(c). Nevertheless, we agree with the Panel that it is necessary to ensure that the effects of other factors on prices are not improperly attributed to the challenged subsidies. Pursuant to Article 6.3(c) of the SCM Agreement, “[s]erious prejudice in the sense of paragraph (c) of Article 5 may arise” when “the effect of the subsidy is ... significant price suppression.” If the significant price suppression found in the world market for upland cotton were caused by factors other than the challenged subsidies, then that price suppression would not be “the effect of “ the challenged subsidies in the sense of Article 6.3(c). Therefore, we do not find fault with the Panel’s approach of “examin[ing] whether or not “the effect of the subsidy” is the significant price suppression which [it had] found to exist in the same world market” and separately “consider[ing] the role of other alleged causal factors in the record before [it] which may affect [the] analysis of the causal link between the United States subsidies and the significant price suppression.” (italics in the original)
It remains to be seen, of course, how such an elaborate requirement can be satisfied without sophisticated econometric analysis, but this issue can be discussed on a case-bycase basis by focusing especially on cases where no econometric tools had been deployed, and yet the AB took the view that causality had been demonstrated. EC–Bed Linen (Article 21.5–India) fits this profile.151 There, the EU found that imports from three countries (India included) were cumulatively contributing to injury. Injury
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consisted in reduced profit rate from 3.6 to 1.6 percent over a five-year representative period. India complained that the EU had proved nothing, especially because its share of the EU import market had only marginally increased, to 1.9 percent. The panel disagreed with India’s assertion to the effect that a small percentage of dumped imports could not lead to injury. It repeated the often expressed finding that dumping (subsidy) should not be the sole cause of injury, it sufficed that it was one of them. It found nothing wrong with the EU’s qualitative evaluation of the situation before it, whereby, to the extent that India’s dumped imports had increased and at the same time profit share of the EU industry had fallen, the causality requirement embedded in Article 3.5 of AD had been satisfied (§§ 6.226–233, and especially, 6.229, 6.230, and 6.231). This statement is, of course, much closer to correlation than to causality. However, the panel called it a “causal link.” 3.5.5
Remedies
A WTO member wishing to remove adverse effects from subsidization must initiate a complaint before a WTO panel. Assuming that it has secured a favorable outcome, a panel will, by virtue of Article 7.8 of SCM, require from the WTO member causing adverse effects through its subsidies “to remove the adverse effects or ... withdraw the subsidy.” In case of noncompliance, the affected WTO member can take countermeasures “commensurate” with the degree and nature of the adverse effects determined to exist. Article 7.9 of SCM reads in this respect: In the event the Member has not taken appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six months from the date when the DSB adopts the panel report or the Appellate Body Report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request.
In case of disagreement between the parties as to whether the proposed countermeasures are indeed commensurate, recourse will be made to an “Arbitrator” who will define their level (Article 7.10 of SCM). There has been no practice so far in the context of Article 7.9 of SCM. There are good arguments to construe the term “commensurate countermeasures” in parallel with the term “equivalent countermeasures,” which appears in Article 22.4 of DSU. As stated earlier, the purpose of the SCM Agreement is to reestablish the balance across producers that would have existed absent subsidization. In this vein, the benchmark for calculation should be the injury suffered by the affected party, and countermeasures will be commensurate if they are “substantially equivalent” to the level of injury suffered.
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Nonactionable Subsidies
The so-called nonactionable subsidies were negotiated first without success during the Tokyo round, only to find their way in the WTO regime following the Uruguay round talks (Article 8 of SCM). The idea was to carve out from prosecution a category of subsidies primarily aimed to achieve multilaterally agreed social objectives. This category is by now defunct, as we explain in what follows. The interest in the study of nonactionable subsidies remains all the same though, since the ongoing awareness of the necessity to reverse climate change has put the relationship between trade and environment squarely before trade negotiators once more. The haphazard effort of the AB to address this issue in its report on Canada-Renewable Energy has intensified the need to reopen this discussion.152 Next to border tax adjustments, the tradable carbon permits, and the ongoing WTO negotiation on environmental goods, environmental subsidies could offer those interested in averting the course towards environmental degradation one more instrument to usefully employ. 3.6.1
The Statutory Criteria
Three types of subsidies were considered nonactionable: • Regional aid • Environmental subsidies • Subsidies for research and development (R&D) purposes Nonactionable subsidies coming under these three categories must also respect quantitative statutory criteria regarding the amount of subsidization that have been included in Article 8 of SCM. They were initially contracted for a five-year provisional period. The idea was to reassess at the end of the transitional period the necessity to keep this carve out in place and, if so, under what conditions. 3.6.2
The Limits of Nonactionability
There should be no doubt that the intent of negotiators was to insulate nonactionable subsidies from legal challenges.153 Does this mean that affected nations could not even raise NVCs (nonviolation complaints) against them? This is unclear if not doubtful altogether, since the wording of Article XXIII of GATT leaves little room to doubt that similar complaints can be raised against any legal measure. This question is, of course, a moot point since nonactionable subsidies are now defunct, as we explain later in this chapter.
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The Origins of Nonactionable Subsidies
The distinction154 between “prohibited,” “actionable,” and “nonactionable” subsidies was first proposed by the US during the Tokyo round, as we briefly mentioned earlier. The US proposal distinguished between “prohibited,” “conditional,” and “permitted” subsidies in the following terms: New international rules, on subsidies and offsetting measures “should deal with all three of these problems. The objective of these rules would be to categorize all types of subsidy practices and set forth the conditions by which offsetting measures could be taken against such practices. In particular, rules are needed to: Effectively delineate that category of subsidies that should be prohibited; Place limits and constraints on the use of domestic subsidies” that benefit exports to the detriment of other nations; Delineate which subsidy measures should be permitted; ... Permitted. The permitted category would consist of practices that are considered to have minimal impact on international trade. Permitted practices would be limited to those specifically agreed as falling within that category. Such practices and any practices judged to result in a de minimis subsidy, would not be subject to offsetting measures.155
The US proposal made waves, and was reflected in various official GATT publications: in 1975 a proposal was tabled that there should be an international code to deal with export subsidies, third country subsidization, import-replacing measures, and offsetting measures. The code should categorize all types of subsidy practices and set out the conditions on which offsetting measures could be taken against such practices. Subsidies should be divided into the following three categories: • prohibited (practices designed to increase the competitiveness of national producers, thereby distorting international trade); • conditional (practices directed toward domestic economic, political or social objectives, but which may distort international trade); • permitted (practices with little or no impact on international trade against which offsetting measures could not be taken). Although this proposal was not maintained as a basis for the negotiations, elements of it were eventually carried over into the final Agreement.156 The GATT Activities of 1975 even reflect a passage where the term “traffic light” had been privileged, although environmental subsidies were not explicitly mentioned: One suggestion would have a new single international code which would classify export subsidies into three major categories: prohibited, intermediate, and permitted practices. The intermediate category in this “tricolour” or “traffic light” scheme, as it has been dubbed, could include incentives such as research and development grants, regional development grants and the like.157
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Eventually, the US dropped the proposal. In an effort to facilitate the conclusion of the round, they shifted the focus of the negotiation toward the issues that would form the bedrock of the Tokyo-round agreement. Winham (1986, p. 173) recounted the events in this way: In a major initiative, the United States agreed in principle to work from existing GATT rules on subsidy/countervail, which carried the implication of moving toward an international definition of material injury. The United States also dropped the traffic-light approach that rested on the notion of defining prohibited categories of subsidies. Negotiation on this basis quickly isolated the irreducible minimum for both partners. On the American side, this was the need to demonstrate that the Europeans were willing to accept increased international surveillance and discipline on the use of subsidies, while on the European side it was simply a matter of having the Americans accept a material injury clause in their countervail legislation. These two demands eventually formed the basic quid pro quo of the subsidy/countervail negotiation.158
3.6.4
Back to the Future
It was first the EU that brought back the issue of nonactionable (i.e., permitted) subsidies during the negotiations of the Uruguay round. The original EU proposal, though, did not see room for green subsidies: generally available (e.g., tax concessions), regional, structural adjustment, and indirect subsidies (e.g., subsidies to input products) exhausted the realm of permitted subsidies in the EU proposal.159 Colombia followed suit and proposed illustrative lists for each category of subsidies (and for permitted subsidies as well).160 Switzerland followed soon afterward along the same lines.161 The various proposals found their way in the so-called “Cartland drafts”, named after Michael Cartland, the ambassador of Hong Kong, China, to the GATT, who was chairing the negotiating group on subsidies. Eventually, environmental subsidies found their way there, and the original idea was that nonrecurring subsidies could be paid in order to adapt existing facilities to new environmental requirements, without fear that they might be counteracted through CVDs. The idea was that through similar subsidies, WTO members could alleviate the financial burden that economic operators would have otherwise incurred in order to meet environmental targets. If economic operators were to incur similar costs themselves, their competitiveness would have suffered of course. So, similar schemes were not supposed to be totally innocent. The primary objective though, was to address environmental concerns, and trading nations were prepared to take a step in this direction and exonerate environmental subsidies from liability under the multilateral trading rules.162 The US was now hostile to the idea of introducing a category of permitted subsidies: the Carter administration of the Tokyo round had given way to the Reagan administration, which was in place when the Uruguay round was launched (and the George H. W. Bush administration that followed almost in the same wavelength). In 1992, though, the Clinton administration came to office, which marked a sudden and complete shift in the US position. In November/December 1993, there was an oscillation from the Bush
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administration’s attempt to remove green-light categories from the list of negotiated items, to the Clinton administration’s attempt to expand them.163 The ground was now anyway more fertile for an agreement on nonactionable subsidies. Differences among negotiators persisted as to the list of items that should be included in the list, and the criteria for nonactionability. The concept though, was now well embedded in the negotiations. Article 8 of SCM represents the final compromise. Three categories of subsidies (environmental subsidies figuring prominently therein) would be “tolerated,” assuming that a certain “cap” (in the form of total financial contribution) would not be violated. This provision thus, did not only limit the types of nonactionable subsidies, but also the amounts of money that could be spent within each category. Article 31 of SCM clarified that this provision was of a temporary nature: The provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years, beginning with the date of entry into force of the WTO Agreement. Not later than 180 days before the end of this period, the Committee shall review the operation of those provisions, with a view to determining whether to extend their application, either as presently drafted or in a modified form, for a further period.
The negotiating record as reflected in the various documents circulated does not illuminate us as to the identity of the author of this provision. There is nothing shocking about it. The GATT/WTO regime is full of similar transitional clauses, and agreements to renegotiate in order to ensure that trial has not led to error. Alas, in the case of Article 8 of SCM, there was no interest in keeping the provision in place even though no one claimed error. 3.6.5 They Did Not Overstay Their Welcome Article 8 of SCM expired at the end of 2000. It is clear that there was no consensus to renew it. It is unclear why this has been the case. The discussions before the SCM Committee reveal a divide between developed and developing countries: the former were in favor of keeping it in place, while the latter saw no use for it.164 Developing countries might have feared that subsidizing nations were encouraging industrial policy under the guise of environmental measures. And yet, no complaint to this effect was lodged before 2000, and the discussions in the SCM Committee do not reveal substantial worries to this effect either. The minutes of the SCM Committee reveal a second attempt to save this provision, alas to no avail: Switzerland underscored that it would be bad publicity for the WTO to do away with green subsidies. US gave a halfhearted backing to the Swiss proposal, whereas, Brazil, speaking for most developing countries, argued that the list would be maintained only if its content would be modified so as to suit the interests of developing countries.165 No one was prepared to start negotiating the content of Article 8 of SCM anew, and no discussions on this item are reflected in the subsequent meetings of the SCM Committee.166
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Another plausible explanation as to why this provision was not renewed has to do with the fact that developing countries wanted to reintroduce at the same time a clause whereby all development-related subsidies should become nonactionable. This is a quid pro quo that OECD countries did not want to accept. A different explanation is equally (if not even more) plausible. Stewart (1993) took the view that there was, ab initio, a trade-off between Article 6.1 and 8 of SCM, in the sense that extending the life of nonactionable subsidies was always conditioned on agreeing on stronger disciplines through presumptions of adverse effects for subsidies. Since WTO members could not agree on the latter, they would not agree on the former either.167 In the absence of agreement to keep this category in place, nonactionable subsidies ceased to exist as of 1 January 2000 (Article 31 of SCM). Consequently, a scheme that qualifies as a subsidy under the SCM Agreement is, nowadays, either a prohibited or an actionable subsidy, even if the purpose for subsidizing is environmental protection. 3.6.6
Lo and Behold: Stimulus Packages
In the years since 2000, only one scheme that could, in principle, qualify as nonactionable was challenged for being inconsistent with WTO: in Canada–Renewable Energy, the claim was that a partially environmental subsidy scheme was in violation of the multilateral rules. WTO members have shown some restraint in challenging the consistency of similar schemes with the SCM rules. Canada is not the only WTO member that provided subsidies (also) in order to promote environmental protection. The fact that there are no disputes does not mean that green subsidies have ceased to exist altogether. The financial crisis added a new dimension to this discussion. Stimulus packages came to light on both sides of the Atlantic and even beyond. Either because some economic operators were “too big to fail,” or because the economic philosophy of some governments supported it, similar schemes proliferated as a means to address the crisis. To the extent that they concern trade in services (e.g., aid to banks), they escape the bite of the SCM disciplines, in principle. As we explained previously, though, good arguments could be made to support claims against payments made to banks on the condition that they benefit goods- producing industries. The US168 and the EU bailouts of their automotive industries could of course, anyway be challenged (and eventually successfully so) before the WTO. In fact, Argentina led the chorus of countries that voiced their dissatisfaction with these and similar schemes, stopping short, however, from lodging a formal complaint before the WTO.169 It is remarkable that some antitrust laws do know of “crisis cartels”; that is, they allow cartels to address similar imbalances, whereas trade law does not. As things stand, no challenge has been mounted against a stimulus package, although one could, in principle, make good arguments why similar challenges would be successful. The question, of
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course, remains whether it is wise policy to void reintroducing a new provision à la Article 8 of SCM, hoping that trading nations will continue to behave like gentlemen in a gentlemen’s club. 3.6.7 Are Nonactionable Subsidies Legally Irrelevant? Should deletion be equated to legal irrelevance? Article 6.1 of SCM might be of interest to this discussion. This provision has been rescinded by virtue of Article 31 of SCM, and yet panels continuously use it as a legal context. Article 6.1 of SCM provides the complainant with an important evidentiary advantage since it is relieved of the burden to demonstrate the prejudicial effects of a subsidy. The Panel on US–Upland Cotton took the view that Article 6.1 of SCM could still provide useful guidance in interpreting serious prejudice (footnote 1487 of the report), even if it has been rescinded. The Panel on Korea– Commercial Vessels adopted a similar attitude (§ 7.583). The legal relevance of this provision, though, is largely that while Article 6.1 of SCM has been rescinded, the concept of “serious prejudice” has not. It is very much alive. Conversely, the concept of nonactionable subsidies has been taken out from the WTO arsenal of rights and obligations. It follows that Article 8 of SCM has lost its legal relevance altogether, and parallels with Article 6.1 of SCM are not persuasive. Both Howse (2010) and Rubini (2010) have voiced their concerns over the deletion of nonactionable subsidies from the SCM Agreement: as the argument goes, in the current fight against climate change, their usefulness should not be underestimated. Rubini (2010) has argued that if there is no agreement to reinstate nonactionable subsidies in the SCM Agreement, Article XX of GATT could be an acceptable second-best option since it would allow subsidies ostensibly justified on environmental grounds to become de facto nonactionable.170 At the heart of similar claims lies the frustration of trade experts with the absence of recognition in the SCM context of the rationale for subsidization. Subsidies might be a very appropriate instrument to deal with market distortions and, as the saying goes, “markets work well when it comes to ice cream, but not necessarily so when it comes to clean air.” Alas, as things stand, similar voices have not had the effect that they should have had on those around the table negotiating the WTO agreements. Still, it is not all doom and gloom in this department, since many of the schemes (e.g., environmental subsidies) will typically be nonspecific and will escape the purview of the SCM Agreement. 3.7
Prohibited Subsidies
Prohibited subsidies constitute the third and last category of subsidies in the system of the Uruguay round SCM Agreement. Local content and export subsidies are the two forms of
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prohibited subsidies. WTO members found to be providing a prohibited subsidy do not have the option to address their address effects. They must remove them immediately.171 3.7.1
Export Subsidies
A scheme qualifies as an export subsidy if a recipient receives a benefit from government only upon exportation of goods. The contingency that must be filled for payment to occur is thus, sales to an export market. 3.7.1.1 The Changing Attitude toward Export Subsidies The attitude of the world trading system toward export subsidies has evolved remarkably since the inception of GATT. Initially, as we saw earlier in this chapter, GATT took a lenient approach toward export subsidies—more lenient, anyway, than the current SCM Agreement.172 A bifurcation between domestic and export subsidies had already been agreed upon during the London Conference (1946), but it was not accompanied by a prohibition on export subsidies. It was in the context of the 1955 Review Session of GATT that trading nations agreed to amend Article XVI of GATT. They introduced § 4 (Section B), which banned export subsidies on manufactured goods, whereas export subsidies on farm goods were not banned. There was not much opposition to this amendment. From the moment of the GATT Review Session onward, the US gradually toughened its stance toward export subsidies. The emergence of the EU common agricultural policy, and the notorious EU export subsidies on farm goods were the main reason for the change in the US attitude towards export subsidies. Already the Working Party on Subsidies (1960) aimed, inter alia, at ensuring the faithful implementation of Article XVI.4 of GATT.173 § 5 of this Working Party report reflected an agreed list of illegal subsidies—namely, illegal currency restriction, direct subsidies, remission of direct taxes, exemption of charges in connection with imports or exports other than indirect taxes, charging of prices below world prices for delivery by governments of raw materials, export credit guarantees at manifestly inadequate rates, export credits at nonmarket rates, and government-borne costs for obtaining credit. The list was comprehensive and nonexhaustive, and yet the US was not happy with the fact that some export refunds were not outlawed as well.174 Subsequently, GATT contracting parties accepted a Declaration Giving Effect to Provisions of Article XVI.4, promising action on the front of export subsidies within set deadlines.175 The US attempted in the GATT years to tighten the screws on export subsidies even further came with the establishment of the Working Party report on Border Tax Adjustments (BTAs) which, as we saw in chapter 7 of volume 1, ended with a result that was not what the US had expected. In the meantime, its efforts to curb subsidization of EU farm goods were consistently thwarted by the EU. USTR (United States Trade Representative) Robert Strauss had to drop his demands to this effect in order to save the fate of the Tokyo round (1973–1979).
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What the US did not manage to obtain in the first seven negotiating rounds, it did in the Uruguay round. Export subsidies were banned, in principle, for both manufactured and farm goods. The latter would be “tolerated,” in the short to medium run, if they respected statutory thresholds.176 We should note though, that the US has not been consistent in formulating its policy towards export subsidies. Back in 1971, the US declared that even measures to counteract currency devaluations should be considered a prohibited export subsidy:177 special government measures to offset, in whole or in part, the price disadvantages on exports that result from its own or other countries’ exchange rate adjustment.
As it happens, 1971 is when the US unilaterally decided to throw the Bretton Woods system of fixed parities into the trash bin of history by simply using the “delete” function. The US has defended the exact opposite position, of course, in recent years following the willful (in its view) undervaluation of the renminbi, the Chinese currency. We discussed the attitude of the WTO regime towards currency devaluations and exchange rates in volume 1, chapter 2. We have stated previously that two types of subsidies are prohibited, export subsidies, and local content. Annex I of the SCM Agreement contains 12 types of export subsidies that have all been included in an Illustrative List. These 12 types are more detailed descriptions of export subsidies, and help clarify the negotiating intent, e.g., what should be understood as export subsidy. The AB report on Brazil–Aircraft (Article 21.5–Canada) held that a scheme that falls under the purview of the Illustrative List is ipso facto prohibited. There is, thus, no additional requirement to demonstrate that it is contingent upon export performance under Article 3.1(c) of SCM. Assuming, conversely, that a scheme has not been reflected in the Illustrative List, the complainant must demonstrate that it is either a de jure or de facto export subsidy. The letter of Article 3.1 of SCM (“either in law or in fact”) leaves no doubt that this is the correct conclusion. In a nutshell, we have moved from the GATT world of relative tolerance to the WTO world of strict intolerance of export subsidies (Article 3 of SCM). One plausible explanation why export subsidies have been declared illegal outright, without looking into economywide effects, is that de facto, it is sellers (i.e., producers) who influence government positions in this respect and not consumers. Implicit in this argument is the collective action problem that we have discussed earlier in volume 1. Few would argue with a prohibition on predatory subsidization, but this is not what the agreement outlaws. Green and Trebilcock (2010), and Coppens (2014) have argued that it is sensible to treat export subsidies differently from domestic subsidies since they often upset world markets.177 This can, of course, be true. If nonetheless, the criterion for disciplining export subsidies in drastic manner is that they upset markets, then some domestic subsidies should be disciplined in similar manner. If trade effects become the key criterion for
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disciplining subsidies, both the regulation as well as litigation (and the ensuing evidentiary issues) will become cumbersome. The most cogent argument in favor of distinguishing between export and domestic subsidies has to do with the rationale for subsidizing the domestic and the export market. In the former case, it could be that a subsidy is being bestowed in order to address, say, an environmental hazard. In the latter case, the reasonable presumption should be that a subsidy is bestowed to increase market share. Why would Home care about the standard of environmental protection in Foreign? Does it makes sense, though, to introduce a blanket prohibition (per se) against export subsidies when it is fairly easy to construct scenarios where domestic subsidies can be more distorting? Is it not more sensible to inquire into the rationale of similar schemes? As we will see in chapter 8 on the Agreement on Agriculture, some export subsidies are quite welcome—when, for example, they address needs by poor net food-importing countries that cannot pay the world price for foodstuffs. As things stand, and following the elimination of nonactionable subsidies, the rationale for subsidization is irrelevant for the purposes of applying the SCM Agreement. 3.7.1.2 De Jure Export Subsidies A case where the law itself conditions the payment of a subsidy upon exportation would amount to a de jure export subsidy. Proof of a de jure export subsidy is relatively easy. The AB explained its understanding of the evidentiary standard associated with proof of de jure export subsidy in § 112 of its report on US–FSC (Article 21.5—EC): ... a subsidy is contingent “in law” upon export performance when the existence of that condition can be demonstrated on the basis of the very words of the relevant legislation, regulation or other legal instrument constituting the measure ... [F]or a subsidy to be de jure export contingent, the underlying legal instrument does not always have to provide expressis verbis that the subsidy is available only upon fulfilment of the condition of export performance. Such conditionality can also be derived by necessary implication from the words actually used in the measure. (italics in the original)
3.7.1.3 De Facto Export Subsidies A scheme is a de facto export subsidy when—although the statutory language does not lead to this conclusion—payments will be made only upon exportation. De facto export subsidies address the need for some kind of insurance policy against circumvention. WTO members might have avoided the discipline of Article 3 of SCM and still granted export subsidies, if this provision was limited to a ban of de jure export subsidies only. Yet, as much as opening up to de facto export subsidies seems to be the correct move, the opening itself presents serious evidentiary issues.179
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3.7.1.4 The Evidentiary Standard The evidentiary standard associated with de jure subsidies is straightforward, as we have states previously. An analysis of many (usually complicated) facts, though, is necessary in order to decide whether a scheme operates as a de facto subsidy. The AB in its report on Canada–Aircraft discussed the different evidentiary standards required to demonstrate the existence of a de jure or a de facto subsidy. It explained why, in its view, the latter was a more demanding standard in the following terms (§ 167): In our view, the legal standard expressed by the word “contingent” is the same for both de jure and de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent. De jure export contingency is demonstrated on the basis of the words of the relevant legislation, regulation or legal instrument. Proving de facto export contingency is a much more difficult task. There is no single legal document which will demonstrate, on its face, that a subsidy is “contingent ... in fact ... upon export performance.” Instead, the existence of this relationship of contingency, between the subsidy and the export performance, must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy, none of which on its own is likely to be decisive in any given case . ... We note that satisfaction of the standard for determining de facto export contingency set out in footnote 4 requires proof of three different substantive elements: first, “the granting of a subsidy”; second, “is ... tied to ... “; and third, “actual or anticipated exportation or export earnings.” (italics in the original)
The evidentiary standard associated with a demonstration of de facto export subsidy was discussed in the panel report on Australia–Automotive Leather II as well (§§ 9.36–66). In this case, the panel found that a subsidy was de facto an export subsidy based on the following factors. First, Australia had agreed to pay Howe (a private economic operator) 30 million Australian dollars in three installments, if Howe met certain sales and investment targets. Second, the terms of the contract between Australia and Howe did not require Howe to export, though it provided the latter with incentives to do so. Third, the government’s awareness, at the time the contract was concluded, that Howe earned the majority of its income from exports was crucial to the panel’s evaluation. Fourth, for Howe to meet the set targets, exporting was required since the Australian market was too small to absorb its production. This panel’s conclusion, that an export subsidy had indeed been paid, was thus based, inter alia, on the quasi-impossibility for the recipient to benefit from financial contribution absent exporting its produce.180 The scheme, thus, incentivized Howe to continue its prior sales strategy—namely, to continue to earn most of its income through exports. In EC and Certain Member States–Large Civil Aircraft,181 a subsequent case, the AB confirmed that for a scheme to be judged a de facto export subsidy, it must incentivize producers toward exporting rather than selling in the domestic market. In this case, the additional factor was that similar behavior (e.g., favoring exports in lieu of domestic sales), did not correspond to the market conditions of supply and demand (§ 1102):
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We find that the factual equivalent of de jure conditionality between the granting of a subsidy and anticipated exportation can be established where the granting of the subsidy is geared to induce the promotion of future export performance of the recipient. The standard for de facto export contingency under Article 3.1(a) and footnote 4 of the SCM Agreement would be met when the subsidy is granted so as to provide an incentive to the recipient to export in a way that is not simply reflective of the conditions of supply and demand in the domestic and export markets undistorted by the granting of the subsidy. (italics in the original)
It is difficult to assess what was the key criterion that led the Panel on Australia–Automotive Leather II to conclude that it was in presence of a de facto export subsidy. Was it the fact that the measure incentivized private operators to export, or that private operators could not have reached the target unless if they exported? Do incentives suffice, or must exports be inevitable? The AB in its report on EC and Certain Member States–Large Civil Aircraft quashed any doubts when holding that all that matters is that the WTO member provides private agents with incentives to export. The counterfactual is that private agents, absent the government measure, would not have engaged in exporting their produce. 3.7.1.5 Permanent Group of Experts (PGE) When entertaining a dispute under Article 3 of SCM, Panels can request the help of the Permanent Group of Experts (PGE) in order to decide whether a challenged scheme constitutes a prohibited subsidy or not. The PGE is composed of trade experts of renown expertise. Panels retain discretion to call on the expertise of the PGE. If requested to pronounce on a case, the opinion of the PGE binds the panel (Article 4.5 of SCM). So far, panels have refused to use this institutional facility. One can only speculate on the reasons for this. Maybe panels do not want to limit their discretion, and this is why they have not taken recourse to the PGE so far, since, if they did, they would have to accept its decision as final. On the other hand, there is no a priori guarantee that PGE will respect its own case law. Panels may be ad hoc institutions, but are expected to abide by the case law created by the AB, as the AB itself in its report on Mexico–Stainless Steel has stated. There is no similar guarantee for the PGE, the members of which are appointed for a fixed term. Under the circumstances, it is not illegitimate for panels to take the view that deferral to the PGE is risky. There are, thus, good arguments in favor of rethinking the legal significance of decisions by the PGE. It would probably be more beneficial to reduce the PGE to a consultative role. Panels could thus, benefit from their input without having to put into question the coherence of the WTO legal order. 3.7.2
Local Content
Government schemes that condition the payment of a benefit upon the use of local content are also illegal (Article 3 of SCM). In parallel with export subsidies, a scheme can violate
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this provision either de jure (with an explicit contingency in a statute linking payment of a sum upon the use of local content), or de facto. Local content subsidies are illegal irrespective of the destination of the subsidized good. 3.7.2.1 Local Content and Production Subsidies Sykes (2005) has argued that there is an issue with the prohibition of local content subsidies. He pertinently asks why local content schemes should be outlawed when the same is not done with respect to production subsidies. The two schemes can have similar effects on the market.182 The only plausible explanation is that local content subsidies view exclusively the conferral of advantage to domestic production, whereas domestic subsidies could be bestowed for a variety of reasons. In practice, however, this is often highly debatable and, if at all, a “rule of reason” here would have been more appropriate than an outright per se prohibition. 3.7.2.2 Local Content in the GATT, and the SCM Agreement Recall that local content requirements are also punished in Article III.5 of GATT, and an issue that has emerged in case law concerns the dividing line between Article III.5 of GATT and Article 3 of SCM. In Canada–Renewable Energy, one of the claims before the panel and the AB was that the challenged measure was a prohibited subsidy since money would be paid to users of renewable energy that had utilized Canadian machinery to produce renewable energy (i.e., solar panels). The panel and the AB (§ 6.1) concurred that the Canadian measure was a local content requirement, and thus violated Article III.5 of GATT. The AB, as we saw earlier, also held that it did not possess sufficient evidence to conclude that benefit had indeed been bestowed on users of renewable energy, and thus the contested measure could not qualify as a subsidy. Consequently, the AB did not concur with the complainants’ claim that the Canadian measure was a prohibited subsidy (because it conditioned the payment of money upon the use of local content machinery). This case law has not addressed the key issue here: Where do we draw the line between Article III.5 of GATT, and Article 3 of SCM? Article 3 of SCM addresses only subsidies that are paid if local content requirements have been observed. Article III.5 of GATT is not explicit on its coverage. One way to ensure that both provisions have their own distinct coverage is to construe Article III.5 of GATT as a ban on regulatory (as opposed to financial) measures promoting local content. If for example, a payment is paid in order to incite consumers to buy national, then Article 3 of SCM would be applicable. If conversely, a measure would require the use of domestic steel in the production of cars, then Article III.5 of GATT would come into play.
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Remedies against Prohibited Subsidies
3.7.3.1 The Process Injured parties can impose CVDs to counteract the damage done by an illegal subsidy in their own market, request from a panel to ask the subsidizer to end the prohibited subsidy, or both. CVDs cannot of course address damage suffered in third countries’ markets as a result of the payment of subsidies. Panels that are asked to pronounce on this issue are requested, in contrast to their usual procedures, to reach a speedy judgment (i.e., within 90 days), as per Article 4.6 of SCM. Assuming that the complainant has prevailed, the panel, the AB, or both will recommend that the subsidy be withdrawn without delay (Article 4.7 of SCM).183 In case the author of the illegality refuses to implement the recommendation, the injured party can have recourse to appropriate countermeasures (Article 4.10 of SCM). A footnote to Article 4.10 of SCM explains that the term “appropriate” means not disproportionate.184 Recall that Article 7.9 of SCM provides that in case of actionable subsidies, commensurate countermeasures (that is, countermeasures commensurate with the degree and nature of the adverse effects determined to exist) may be authorized. The choice of words, prima facie at least, cannot be accidental. 3.7.3.2 “Appropriate” Countermeasures WTO adjudicating bodies have faced requests to quantify “appropriate” countermeasures. Their attitude in this respect has been inconsistent. They moved from using the amount of subsidy paid as a benchmark to a trade effects-test, where the benchmark is no more the amount of subsidy paid, but rather the damage suffered as a result of the payment. It is in Brazil–Aircraft (Article 22.6–Brazil), that the panel (Arbitrators)185 explained for the first time in comprehensive manner the relationship between Article 4.10 of SCM and Article 22.4 of DSU.186 Recall, that the latter provision provides for the generic standard of countermeasures applied in all disputes submitted to a Panel. Article 22.4 of DSU limits the amount of permissible countermeasures, in case a report has not been implemented, to suspension of concessions the level of which is substantially equivalent to the damage suffered. The question before the Panel on Brazil–Aircraft (Article 22.6–Brazil) was whether Article 4.10 of SCM should be construed so as to allow the same level of countermeasures (“substantially equivalent” to the damage suffered), or not. Brazil–Aircraft, as well as its “twin” dispute Canada–Aircraft, concerned the export subsidization by Canada and Brazil of their respective national aircraft producers. Embraer for Brazil and Bombardier for Canada, a duopoly producing regional (short- to medium-haul) jets, was in place, and both parties saw an interest in subsidizing their domestic producer. One might, of course, legitimately ask, if the market was a duopoly, why subsidize in the first place? Why not cartelize the market? A small detour into economics is warranted here, since the response to this question is quite relevant in order to understand what was
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really at stake in these two disputes. In some cases, assuming barriers to entry, a credible commitment to subsidize might act as a deterrent to market entry. Nonsubsidized operators might find it unprofitable to compete when they have the safe knowledge that a subsidy will be paid to their competitor, if they enter the market. Since the payment of the subsidy will have as consequence their impossibility to compete, they will not enter the market in the first place. That is, if only Brazil had made a credible commitment to subsidize Embraer, Bombardier would not have entered the market of regional jets. In this case, Embraer and Bombardier both had credible commitments from their respective governments (Brazil, Canada) that they would continue to receive subsidies, so they entered a subsidy war, which could only profit consumers of their products.187 Absent a “credible” commitment by both parties to stop subsidizing, the incentive of each market participant would be to continue subsidizing. This is what the SCM Agreement purports to do. Its role is akin to a commitment that no one will export subsidize. The credibility of the commitment depends of course, on various factors. At any rate, by outlawing some subsidies, the SCM Agreement aims to change the payoffs if subsidization occurs. Subsidizers know that they will be hit with countermeasures in case they export subsidize. Assuming that countermeasures will always be imposed (a very generous assumption but worth making for the purposes of this case) the credibility of countermeasures will depend on the level of countermeasures. This was, in essence, the issue that arbitrators had to face in this case and the other cases discussed in this subsection. The arbitrators first explained the difference they saw in the function of the remedy against a prohibited subsidy, as opposed to remedies that address any other nullification or impairment of WTO members’ rights (Article 22.4 of DSU). Important to their reasoning was the fact that they considered that the purpose of Article 4 of SCM is to achieve the withdrawal of the prohibited subsidy (§ 3.48): the purpose of Article 4 is to achieve the withdrawal of the prohibited subsidy. In this respect, we consider that the requirement to withdraw a prohibited subsidy is of a different nature than removal of the specific nullification or impairment caused to a Member by the measure. The former aims at removing a measure which is presumed under the WTO Agreement to cause negative trade effects, irrespective of who suffers those trade effects and to what extent. The latter aims at eliminating the effects of a measure on the trade of a given Member; the fact that nullification or impairment is established with respect to a measure does not necessarily mean that, in the presence of an obligation to withdraw that measure, the level of appropriate countermeasures should be based only on the level of nullification or impairment suffered by the Member requesting the authorisation to take countermeasures.188
Based on this analysis, the arbitrators went on to find that the level of countermeasures should be decided using the amount of subsidy as benchmark. In other words, the aggrieved party should be allowed to impose countermeasures not up to the amount necessary to recover the injury it had suffered, but up to the amount of the subsidy paid. In the panel’s
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view, the subsidy benchmark was not too onerous since, in all likelihood, Brazil gained much more from its subsidies than it had actually invested. The panel also rejected an argument to the effect that their benchmark amounted to punitive damages, since, in its view, the subsidy paid was illegal in the first place (§§ 3.54–55).189 The same logic was followed in the arbitrators’ report on US–FSC (Article 22.6–US). The arbitrators, extensively referring to public international law and the International Law Commission (ILC) reports on state responsibility,190 held that the EU (the complainant) should be authorized to adopt countermeasures up to US$4,043 million; that is, the amount of subsidies paid by the US to its national producers [beneficiaries under the Foreign Sales Corporation (FSC) scheme].191 The arbitrators also claimed that, had they used an injury standard (trade effects of subsidized sales on EU producers of the like product) as a benchmark, they would have ended up with a similar number anyway.192 The arbitrators also clarified that a trade effects test was not a priori ruled out.193 They simply took the view that Article 4.10 of SCM does not require it.194 The arbitrators in Canada–Aircraft Credits and Guarantees (Article 22.6–Canada) went a step further. They used the amount of the subsidy as the benchmark195 to calculate the amount of countermeasures at US$206,497,305.196 In their view, an upward adjustment of this amount was justified to induce compliance, in light of Canada’s statements before the panel that it did not intend to withdraw the subsidy.197 Therefore, the arbitrators added 20 percent to the level of the countermeasures to induce compliance.198 This is the only genuine case of “punitive damages” in the WTO jurisprudence so far. We use this term to denote a case where the amount of compensation is not linked to a statutory benchmark (the damage suffered; the amount of subsidy paid), but is decided independently of similar benchmarks, in order to provoke a change in the behavior of the culprit. A sea change with respect to the calculation of “appropriate countermeasures” occurred with the report on US–Upland Cotton (Article 22.6–US). The arbitrators in this case decided that it was appropriate to use trade effects and not the amount of subsidy paid as a benchmark to calculate appropriate countermeasures (§ 4.114): In conclusion, we have found that the terms “appropriate countermeasures,” as informed by footnote 9 of the SCM Agreement, entitle the complaining party to countermeasures that are suited to the circumstances of the case. This can lead to a countermeasure being authorized at a level that is within the range of the trade-distorting impact that can fairly be said to arise for the complaining Member from the failure to withdraw the illegal measure. We have also determined that footnote 9 further invites us to ensure that the countermeasures to be authorized are not excessive, having regard to the extent to which the trade of the complaining party has been affected, and taking into account also the prohibited nature of the subsidy. (italics in the original)
Paying only lip service to prior case law, this report introduced a trade effects test as a benchmark to calculate appropriate countermeasures (and, as a result, equated the level of appropriate countermeasures with that of commensurate countermeasures). To defend their decision, the arbitrators argued that otherwise, WTO members that could have suffered
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little injury would have been compensated as much as those who had suffered substantially more (§ 4.60). Reducing the effect of countermeasures provides subsidizers with more of an incentive to subsidize. The upshot, of course, is that subsidies (unless predatory) expand trade, not reduce it, in principle at least. 3.7.3.3 Benefit, Injury, and the Missing Incentives The report on US–Upland Cotton (Article 22.6–US) deserves some more discussion. The arbitrators wanted to avoid overcompensating injured parties, and this is why they moved to the remedy described previously. The emerging picture, thus, is as follows: • If a WTO member countervails, it will impose a duty up to the benefit bestowed on the recipient (we discuss this later in this chapter). • In the same scenario, it can impose duties of a lesser level, if this action suffices to remove the injury suffered.199 • If a WTO member complains before a panel, and it prevails, and the losing party takes action to address adverse effects, the benefit calculation offers an appropriate benchmark to this effect. • If, however, the losing party is recalcitrant, then the complainant can request authorization to impose countermeasures, which cannot exceed the level of adverse effects suffered, regardless of whether we are dealing with an actionable or a prohibited subsidy. The last point is what the arbitrators in US–Upland Cotton (Article 22.6–US) decided. From a pure legal perspective, it is difficult to accept the idea that the framers used two terms (“appropriate” and “commensurate”) in the same provision to describe the same concept. Be it as it may, though, this is the least of the concerns. The key point is that cooperative governments will pay up to the benefit paid, whereas uncooperative governments up to the amount of injury they have caused. There is no basis to believe, however, that the level of injury suffered is larger than the amount of benefit bestowed. Think of it this way. In an industry, there is at the outset an incumbent monopoly firm A, making the profit (R − F), where R is the net of revenue and variable costs and F is a fixed cost. A foreign firm B is the only possible competitor, and it has the same production technology as firm A. If B were to enter, there would be intense Bertrand price competition, driving variable profit down to zero. However, since firm B would have to pay an entry cost K in order to get into the market, it will not enter. It does not pay to invest K to get 0 back because of the intense price competition. Hence, firm B stays out, and firm A enjoys its monopoly profit R. Assume now that the foreign government (where B originates) institutes a subsidy scheme. If B were to enter, it receives the fixed amount S > K, with S < R. Entry now suddenly becomes profitable. As a result, either of two things might occur, and in either case, the injury to A would be the foregone profit R.
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One possibility is that both firms remain in the market. In this case, the benefit to B is S − K > 0, which is smaller than the contribution (benefit), which is S. Importantly, note that both these entities are smaller than the injury to A, which is R. The other possibility is that A exits the market. Assume that once this is done, it would have to incur the entry cost K to get back in. If so, entry will not be profitable and B will enjoy a monopoly position, making the net profit R − K + S. In this case, the benefit would be R − K + S (since B would make zero profit absent the subsidy), and the contribution would be S. The benefit would now be larger than the injury: R − K + S > R. The difference between the two scenarios is that in the first one, price competition is assumed to dissipate profits. The surplus hence goes to consumers. In the second case, it stays in the industry but is just shifted from A to B, and since B gets the subsidy S, it benefits more than A is harmed. This example points to the principle that it is more likely to get a benefit that is less than the injury if the subsidy triggers changes in behavior in the industry that outside interests benefit from. If we were to assume instead that the products are slightly differentiated, so that with entry, there is a small profit to be made for A from remaining in the industry, A will stay, and case 2 does not occur. In this case, injury is larger than the benefit. The terms “benefit” and “injury” are used here, of course, as contemplated in the SCM Agreement (that is, from producers’ perspective, not from a national perspective), since we do not factor consumer and taxpayer benefits/costs into the calculation. When benefit outweighs injury, then subsidizing WTO members have an incentive to behave in an uncooperative manner. In the opposite case, they can “drag their feet,” procrastinate (and keep injuring their competitors), since the reaction against them will be the same regardless of whether they behave cooperatively (but if they do not, they will have inflicted more damage on their competitors). These results are to a point mitigated by the incentive that affected WTO members might have to impose CVDs. As already argued earlier, this will be the case when a substantial amount of the injury suffered is in the domestic market. 3.8 3.8.1
CVDs: Substantive Requirements CVDs, if Subsidies Cause Injury
A WTO member wishing to impose CVDs has to demonstrate that a subsidy is causing injury to the domestic industry producing the like product. CVDs are similar to AD duties, the difference being that whereas the former address a government act, the latter aim to counteract private practice. It should come as no surprise, then, that case law has consistently held that interpretations of AD provisions give good guidance for the interpretation
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of similar provisions in the SCM Agreement, and vice versa. The panel report on US–Countervailing Duty Investigation on DRAMs is an appropriate illustration to this effect (§ 7.351): The non-attribution requirement in antidumping investigations has been addressed by the Appellate Body in several recent cases. Although it has not been specifically considered in a countervailing duty case, given that the relevant provisions in the two Agreements are identical, and in light of the “need for the consistent resolution of disputes arising from antidumping and countervailing duty measures” (Ministerial Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 or Part V of the Agreement on Subsidies and Countervailing Measures), it is clear to us that the requirement is the same in the context of both antidumping and countervailing duty investigations.200
3.8.2
Calculating the Amount of Benefit That Subsidies Have Conferred
3.8.2.1 The Rule: CVDs Cannot Exceed the Amount of Subsidy Granted Article 19.4 of SCM reads: No countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist, calculated in terms of subsidization per unit of the subsidized and exported product.
3.8.2.2 Calculating the Amount of Subsidy in Terms of the Benefit Granted Recall the discussion of Article 14 of SCM earlier in this chapter. The calculation of benefit matters when calculating the maximum amount of CVDs. The amount of financial contribution is immaterial for the purposes of calculating the maximum amount of CVDs. 3.8.2.3 Investigated Exporters Article 19.3 of SCM reads: When a countervailing duty is imposed in respect of any product, such countervailing duty shall be levied, in the appropriate amounts in each case, on a non-discriminatory basis on imports of such product from all sources found to be subsidized and causing injury, except as to imports from those sources which have renounced any subsidies in question or from which undertakings under the terms of this Agreement have been accepted. Any exporter whose exports are subject to a definitive countervailing duty but who was not actually investigated for reasons other than a refusal to cooperate, shall be entitled to an expedited review in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter.
The SCM Agreement does not set forth an express obligation to calculate individual duties for each exporter, as Article 6.10 of AD does. Still, it appears that, as the amount of subsidization will be different for each exporter, an individual duty will normally be imposed. In EC–Countervailing Duty on DRAM Chips, for example, the IA calculated individual margins and ended up imposing duties on Hynix, but not on Samsung (recall
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from earlier in this chapter that Hynix and Samsung were the two Korean companies that had been subjected to investigation).201 3.8.2.4 Noninvestigated Exporters Article 19.3 of SCM allows WTO members to impose duties on an aggregate basis. All imports originating in a country found to be granting subsidies will be burdened with CVDs, regardless of whether all individual exporters have benefited from subsidies. Individual noninvestigated exporters have the right to request an expedited review to establish their rate of subsidies received (AB, US–Softwood Lumber IV, §§ 152–153). An application of duties on an aggregate basis does not imply that there is no longer a need to establish the basic conditions for the imposition of CVDs—that is, subsidy, injury to the domestic industry, and causation. In the case of subsidies to upstream producers, this implies that it must in any case first be established that the subsidy was passed through to the downstream producers (AB, US–Softwood Lumber IV, § 154). 3.8.3
Injury Analysis
The demonstration of injury is addressed in Article 15 of SCM. As in the AD context, the term “injury” is used to refer to a situation of “material injury,” “threat of material injury,” or “material retardation”202 in the establishment of an industry. Articles 15.1–15.6 of SCM deal with injury in general, while Articles 15.7 and 15.8 contain special additional obligations in cases of threat of injury. For injury to be shown, a WTO member must conduct an objective examination based on positive evidence regarding (Article 15.1 of SCM): the volume of the subsidized imports, their effect on prices in the domestic market for like products, as well as the subsequent impact of these imports on the domestic producers of such like products. Demonstration of injury is required irrespective of whether a WTO member is conducting an investigation in order to impose CVDs, or has submitted a complaint requesting withdrawal of a subsidy. In the former case, demonstration of injury is a procedural requirement. Injury must be shown, but once this is done, CVDs can be imposed up to the level of the financial contribution made. The lesser duty rule, as in the case of the AD Agreement, is recommended but not compelled. In the latter case, as we have seen already above, the extent of injury suffered circumscribes the level of countermeasures in case the defendant refuses to comply with the panel’s ruling. The standard of review applied by WTO adjudicating bodies is the same in both instances. 3.8.3.1 Statutory Indicators of Injury Article 15.4 of SCM requires that the examination of the impact of the subsidized imports on the domestic industry includes an evaluation of all relevant economic factors and indices with a bearing on the state of the industry, including actual and potential decline in output, sales, market share, profits, productivity, return on investment, or utilization of
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capacity; factors affecting domestic prices; and actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments, and, in the case of agriculture, whether there has been an increased burden on government support programs.203 This list is not exhaustive, nor can one or several of these factors necessarily give decisive guidance. Case law, as in the case of case under the AD Agreement, has made it clear that all factors mentioned in the body of Article 15.4 of SCM, must be evaluated by the IA (§ 7.356 of the panel report on EC–Countervailing Measures on DRAM Chips). The obligation to evaluate imposed by this provision (Article 15.4 of SCM) is not confined to the listed factors, however, but extends to all relevant economic factors. Whether a factor is relevant depends, inter alia, on the nature of the industry being examined (§ 7.363 of the panel report on EC–Countervailing Measures on DRAM Chips). Alas, case law has not clarified the extent of inquiry that an IA should perform in order to honor this duty. The Panel on EC–Countervailing Measures on DRAM Chips has clarified a related issue. It stated that relevant economic factors are not to be confused with other causal factors, such as the general economic downturn or the export performance of the domestic industry, which are to be examined as part of the causation and nonattribution analysis of Article 15.5 of SCM (§ 7.365). 3.8.3.2 Injury to Competitors (Like Product Analysis) Injury (or threat of injury) must be caused to the domestic industry producing the like product. In perfect symmetry with the AD Agreement, the SCM Agreement provides that the term “domestic industry” refers to the domestic producers as a whole of the like product, or to those of them whose collective output of the products constitutes a “major proportion” of the total domestic production of those products. In cases where producers are “related” to the exporters or importers, or are themselves importers of the allegedly subsidized product or a like product from other countries, such producers may be excluded (Article 16.1 of SCM). The term “related” is explained in footnote 48 to Article 16.1 of SCM: producers shall be deemed to be related to exporters or importers only if (a) one of them directly or indirectly controls the other; or (b) both of them are directly or indirectly controlled by a third person; or (c) together they directly or indirectly control a third person, provided that there are grounds for believing or suspecting that the effect of the relationship is such as to cause the producer concerned to behave differently from non-related producers. For the purpose of this paragraph, one shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter.
Exclusion of related producers increases the likelihood of an affirmative finding of injury of course, since the trade impact will now be concentrated on a smaller number of economic agents. It would be rather unlikely to establish that excluded related agents were
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injured, since they themselves arguably benefited from the subsidization. In any case, they would have no interest to claim that they had been injured, since they are related anyway to the subsidized agent. The term “like product” is defined in footnote 46 to the SCM Agreement: Throughout this Agreement the term “like product” (“produit similaire”) shall be interpreted to mean a product which is identical, i.e. alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration.
This definition is identical to that provided for in the AD Agreement and shows a statutory preference for a narrow definition of the term. Originally, GATT panels followed this approach. In US–Wine and Grape Products, for example, the panel held that since wine and grapes were separate products, CVDs on wine were unlawful if subsidies had been paid on grapes (§ 4.3). In a similar vein, the Panel on US–Canadian Pork held that the US could not lawfully impose CVDs on imports of fresh, chilled, and frozen pork originating in Canada because a subsidy had been given to producers of live swine (§ 2.1). It went so far as to reject the US argument that its producers would be helpless since Canada was not exporting live swine to the US. It exported only fresh, chilled, and frozen pork, which, before slaughtered and packaged had benefited from subsidies. The panel held firmly that, the argument by the US notwithstanding, it could not depart from the clear wording of Article VI.3 of GATT (§ 4.7). Similar arguments had also been raised in Australia–Glacé Cherries, which resulted in an unadopted report. In that case, subsidies had been paid on cherries, the input to glacé cherries, the final good that was being exported to Australia. This approach is, of course, at odds with the “pass through” discussion that came earlier in this chapter. At any rate, subsequent case law, to which we now turn, has opted for a more open-ended understanding of the term “like product.” The Panel on Indonesia–Autos departed from the tradition to construe the term “like product” in such narrow terms. It established a parallelism between Article III.2 of GATT, first sentence, and the SCM Agreement, and held that the following criteria should be pertinent in evaluating likeness (§ 14.173): In our view, the analysis as to which cars have “characteristics closely resembling” those of the Timor logically must include as an important element the physical characteristics of the cars in question. This is especially the case because many of the other possible criteria identified by the parties are closely related to the physical characteristics of the cars in question. Thus, factors such as brand loyalty, brand image/reputation, status and resale value reflect, at least in part, an assessment by purchasers of the physical characteristics of the cars being purchased. Although it is possible that products that are physically very different can be put to the same uses, differences in uses generally arise out of, and assist in assessing the importance of, different physical characteristics of products. Similarly, the extent to which products are substitutable may also be determined in substantial part by their physical characteristics. Price differences also may (but will not necessarily) reflect physical differences in products. An analysis of tariff classification principles may be useful
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because it provides guidance as to which physical distinctions between products were considered significant by Customs experts. However, we do not see that the SCM Agreement precludes us from looking at criteria other than physical characteristics, where relevant to the like product analysis. The term “characteristics closely resembling” in its ordinary meaning includes but is not limited to physical characteristics, and we see nothing in the context or object and purpose of the SCM Agreement that would dictate a different conclusion.
This panel went on to find that a kit car is a like product to a finished car (§ 14.197). It thus, understood the term “like product” as encompassing a wide category of goods competing in the same product market. This had not been the attitude of panels in the AD context, as we saw earlier. The AB confirmed this approach for the first time in EC and Certain Member States–Large Civil Aircraft, as we saw in the previous chapter. There, the AB adopted a wide understanding of the term “like product” encompassing substitutable goods. In a similar vein, in US–Large Civil Aircraft (Second Complaint), the AB decided that the market for large civil aircrafts could be subdivided into three categories: 100–200 seats, 200–300 seats, and 300–400 seats. In doing that, it echoed the approach often followed by antitrust authorities—that is, it paid attention to market forces when deciding on “likeness” instead of focusing on textualist interpretations of the term “like product.” Since these are later-in-time reports, and it is the AB deciding it, the approach followed here should be understood as the predominant approach to define “like products.” The reports cited in the preceding paragraphs do point towards a wide understanding of the term “like product”, but did not reverse the GATT case law suggesting that no CVDs can be imposed on final products if inputs had been subsidized. This is what the Panels on US–Softwood Lumber III and US–Softwood Lumber IV204 did. They acknowledged that subsidies to an input (upstream subsidies) can result in benefits for the final product (downstream benefits). As a result, an IA can lawfully impose CVDs on the final product, even though it is not a like product to the subsidized good. Thus, they clearly departed from the GATT case law cited earlier, where CVDs could not be paid on final goods if subsidies had been only on inputs. The rationale for the new approach is that subsidies can on occasion pass through and lead to injury, freeing the way for legitimate imposition of CVDs.205 Since the subsidized upstream good is not traded, it is the downstream (un)like good that will be hurt if CVDs were not to be imposed.206 The discussion above might sound quite straightforward, and yet it is far from that when it comes to applying the test discussed above to specific cases. If the subsidized and the injured company produce one good only, then the test will be easy to implement. The moment nonetheless the subsidized and/or the injured company produce more than one good, then both the quantification of the subsidy received, as well as the quantification of the damage, become difficult to measure. We have previously discussed the difficulties associated with allocating subsidies to specific assets of an economic operator. The same is true when it comes to the injury test.
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Utilization rates, and other financial information usually concern the company as a whole, and not the production of a particular good by that company. Ahn and Spearot (2015) argue that elaborate statistical techniques can of help to this effect. They explore the possibilities offered by a method called “difference in differences,” where one tries to calculate the effects of a treatment on a “treatment group” (e.g., the group receiving the treatment) and compare them to the change in the “control group” (e.g.. a group that closely resembles the treatment group, but which is not receiving the treatment). The second sentence of Article 15.6 of SCM deals with an exceptional circumstance: If such separate identification of that production is not possible, the effects of the subsidized imports shall be assessed by the examination of the production of the narrowest group or range of products, which includes the like product, for which the necessary information can be provided.
The danger when having recourse to this method lies in that interested party might invoke this provision in order to provoke an injury finding that they could not ensure by sticking to the like product. On the other hand, for the reasons mentioned above, sometimes recourse to similar techniques might be warranted. Note though that contrary to the cases discussed in Ahn and Spearot (2015), this provision does not require that the wider analysis must concern products by one company only. Case law has not addressed this issue, so all we can do for now is highlight the potential for abuse. 3.8.3.3 Quantity Effects The previous analysis regarding adverse effects finds application here as well. Briefly, an evaluation of the volume of imports requires from an IA to consider whether there has been a significant increase in subsidized imports, either in absolute terms, or relative to production or consumption in the importing member. Article 15.2 of SCM includes three alternative ways in which an IA could comply with this provision, suggesting that it suffices for an IA to consider either an absolute increase, or an increase relative to production, or an increase relative to consumption.207 In EC–Countervailing Measures on DRAM Chips, the panel held that the ordinary meaning of the term “significant” encompasses “important,” “notable,” “major,” and “consequential,” all of which suggest something more than just a nominal or marginal movement (§ 7.307). It did not provide for a quantitative benchmark, though, leaving it to the imagination of future panels to decide whether movement has been nominal. The Panel on US–Countervailing Duty Investigation on DRAMs (§ 7.245) held that: “Article 15.2 does not require an investigating authority to demonstrate that all of the subject imports covered by the period of injury investigation are subsidized.” What matters, consequently, is that some of them are subsidized—to the extent, of course, that they satisfy one of the three conditions mentioned earlier. It is, further, irrelevant under Article 15.2 of SCM that subsidized imports decreased in relative terms compared to nonsubsidized imports, since the latter is not the focus of the determination
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under this provision (Panel on US–Countervailing Duty Investigation on DRAMs, at § 7.243). The term “subsidized imports” refers to all imports from a source found to have been subsidized above the de minimis level. The Panel on EC–Countervailing Measures on DRAM Chips approvingly referred to findings by panels and the AB in the AD context and, in particular, to § 113 of the AB report on EC–Bed Linen (Article 21.5–India), and held as much (§ 7.298 and footnote 227).208 Recall, finally, that the evaluation of the volume of subsidized imports is not, by itself, determinative in an injury determination, but it forms part of an overall assessment (§ 7.290 of the panel report on EC–Countervailing Measures on DRAM Chips).209 3.8.3.4 Price Effects210 Article 15.2 of SCM does not impose any particular methodology for analyzing prices. What matters is that the methodology chosen is reasonable and objective (§§ 7.334–336 of the panel report on EC–Countervailing Measures on DRAM Chips). Reasonableness is, of course, a standard that allows some considerable leeway to panels reviewing the record of IAs. 3.8.3.5 Cumulating Various Sources of Injury Article 15.3 of SCM provides that an injury analysis may be conducted on a cumulative basis under the following conditions: • Imports of a product from more than one country are simultaneously subject to CVD investigations. • The amount of subsidization established in relation to the imports from each country is more than de minimis, as defined in Article 11.9 of SCM. • The volume of imports from each country is not negligible. • A cumulative assessment of the effects of the imports is appropriate in light of the conditions of competition between the imported products and the conditions of competition between the imported products and the like domestic product. This provision is, thus, quite similar to Article 3.3 of AD. The amount of subsidy is considered de minimis if it is less than 1 percent ad valorem (Article 11.9 of SCM). When developing countries have subsidized, this threshold is set at 2 percent, and when least developed countries (LDCs) and so-called Annex VII countries have subsidized, it is 3 percent.211 Article 27.10 of SCM defines the term “negligible volume” for imports originating in developing countries only. If subsidized imports are less than 4 percent of total imports, they are negligible; if subsidized imports from developing countries whose individual shares represent less than 4 percent and collectively account for less than 9 percent of total imports, they are negligible as well.
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In parallel with the AD Agreement, there is no requirement to demonstrate that exporters in various WTO members being “cumulatively” investigated have been engaging in some sort of collusive behavior. In US–Carbon Steel (India), the issue of cross-cumulation arose: Section 1677(7)(G) of the US legislation obliges the IA to cross-cumulate injury assessment when, for example, an antidumping investigation and a countervailing investigation are initiated simultaneously. Arguably, this practice violates Article 3.5 of AD, for example, which requires that injury should be exclusively the outcome of dumping and not of other reasons. The AB found the US practice was inconsistent with the SCM Agreement. In its view, cumulative assessment of injury can occur only under the restrictive conditions of Article 15.3 of SCM, that is, when simultaneous CVD investigations occur (§§ 4.602ff.). This raises again the issue where the AD and the SCM Agreements should be construed in total isolation from each other, an issue that occupied the mind of the AB members in the US–Antidumping and Countervailing Duties (China). The AB has changed its mind on this issue, and whereas in the latter case it refused to drive a wedge between the AD and the SCM Agreements, in US–Carbon Steel (India) it did drive a wedge at least as far as the injury analysis is concerned. We signaled in the previous chapter that probably the AB aims to ensure that IAs avoid double dipping, e.g. that exporters are punished twice for the same sin. This conclusion holds here as well. 3.8.3.6 Injury Based on Positive Evidence A finding that injury has occurred must be based on positive evidence, following an objective examination by the IA. The Panel on US–Softwood Lumber VI dealt with the interpretation of the term “positive evidence”. It quoted verbatim § 114 of the AB report on EC–Bed Linen (Article 21.5–India), which dealt with an AD investigation, and held that this term obliges IAs to use evidence that is affirmative, objective,, verifiable and credible (§ 7.28). The term “objective examination” aims at a different aspect of the IAs’ determination, and relates to the way in which the evidence is gathered, and evaluated. The Panel on US-Softwood Lumber VI held that IAs, because of this obligation, must behave in good faith and guarantee procedural fairness (§ 7.28). The AB in subsequent case law insisted on the requirement for procedural fairness, and the obligation to avoid biased judgments.212 An IA, thus, cannot base its findings on speculative statements, as it cannot conduct an investigation without respecting basic due process requirements—notably, a requirement of evenhandedness toward the parties to the dispute.213 3.8.3.7 Threat of Injury If CVDs are imposed on “threat of injury,” the SCM Agreement requires that a demonstration that a threat of injury exists be based on facts and not merely on allegation, conjecture, or remote possibility. In addition, the change in circumstances, which would create a
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situation in which the subsidy would cause injury, must be clearly foreseen and imminent (Article 15.7 of SCM). In making a determination regarding the existence of a threat of material injury, the IA should consider, inter alia, factors such as (i) the nature of the subsidy or subsidies in question and the trade effects likely to arise therefrom; (ii) a significant rate of increase of subsidized imports into the domestic market, indicating the likelihood of substantially increased importation; (iii) sufficient freely disposable or imminent substantial increase in capacity of the exporter, indicating the likelihood of substantially increased subsidized exports to the importing WTO member’s market and taking into account the availability of other export markets to absorb any additional exports; (iv) whether imports are entering at prices that will have a significant depressing or suppressing effect on domestic prices and would likely increase demand for further imports; and (v) inventories of the product being investigated. The agreement adds that none of these factors by itself can necessarily give decisive guidance, but that the totality of the factors must lead to the conclusion that further subsidized exports are imminent and that, unless protective action is taken, material injury would occur. The application of CVDs must be considered and decided with “special care” (Article 15.8 of SCM). The Panel on US–Softwood Lumber VI,214 addressed this issue and concluded that, although it found it hard to define “special care,” it still believed that something more than mere violation of the agreement should be proved (§ 7.34): It is not clear to us what the parameters of such “special care” in the context of an objective evaluation based on positive evidence would be. In these circumstances, we consider it appropriate to consider alleged violations of Articles 3.8 and 15.8 only after consideration of the alleged violations of specific provisions. While we do not consider that a violation of the special care obligation could not be demonstrated in the absence of a violation of the more specific provision of the Agreements governing injury determinations, we believe such a demonstration would require additional or independent arguments concerning the asserted violation of the special care requirement beyond the arguments in support of the specific violations.
The same panel held that the authorities do not have to go so far as to specify one particular event that will cause injury in the future. Indicating a progression of circumstances by and large suffices to meet the requirements of the SCM Agreement in this respect (§ 7.60). This panel agreed with the views expressed by the Panel on Mexico–Corn Syrup that, in every case in which threat of injury has been found, it is necessary to proceed to an evaluation of the condition of the industry in light of the factors included in Article 15.4 of SCM to establish the background against which the impact of future dumped/ subsidized imports must be assessed, in addition to an assessment of the specific threat factors (§ 7.105). But the same panel added that this requirement should not be interpreted as though a second predictive injury analysis is required (§§ 7.105, 111). With regard to the factors that must be examined in order to show threat of injury (Article 15.7 of SCM), the Panel on US–Softwood Lumber VI found that an IA has an obligation to consider the factors mentioned in Article 15.4 of SCM but is not obliged to
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make a finding or determination with respect to the factors considered (§ 7.67). Moreover, the failure to consider a factor, or to adequately consider a particular factor, would not necessarily demonstrate a violation of this provision. The outcome in any given case will depend on the particular facts of the case, the totality of the factors considered, and the explanations given (§ 7.68). The Panel on US–Softwood Lumber VI (Article 21.5–Canada) discussed the applicable standard of review in cases involving threat of injury and held that it should be more deferential to the IA when examining a threat of injury determination compared to a material injury determination (§ 7.13): The possible range of reasonable predictions of the future that may be drawn based on the observed events of the period of investigation may be broader than the range of reasonable conclusions concerning the present that might be drawn based on those same facts. That is to say, while a determination of threat of material injury must be based on the facts, and not merely on allegation, conjecture, or remote possibility, predictions based on the observed facts may be less susceptible to being found, on review by a panel, to be outside the range of conclusions that might be reached by an unbiased and objective decision maker on the basis of the facts and in light of the explanations given.
There are two conflicting considerations. On the one hand, it is true that it is more difficult to interfere with predictions than with facts; on the other, in cases of threat of injury, injury has not yet happened and the measures taken are meant to protect an otherwise healthy domestic industry. The quoted panel report seems to pay more attention to the former rather than the latter consideration. The key question will be whether injury is really “imminent” or not. The SCM Agreement, like the AD Agreement, does not condition the imposition of CVDs (AD duties) upon failed prior attempts to address the emerging situation in other ways. 3.8.3.8 Public Interest Clauses The SCM Agreement contains a public interest clause. It is desirable that procedures be established that would allow IAs to take due account of representations made by domestic interested parties, including consumers, and industrial users of the imported product subject to investigation (Article 19.2 of SCM and footnote 50). The discussion in chapter 10 regarding this point will find application here as well. 3.8.4 The Causality Requirement Even if the domestic industry has been injured, no action can be taken to redress the situation in accordance with the SCM Agreement, unless if the injury has been caused by the subsidies bestowed to its competitors. The general requirement to establish a causal link between the subsidized imports and injury is expressed in Article 15.5 of SCM. In parallel with the AD context, it contains two obligations: first, an obligation to demonstrate that
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it is subsidized imports that are causing the injury (attribution); and second, an obligation not to attribute to subsidy injury caused by factors other than subsidized imports (nonattribution). In order to honor the requirement of nonattribution, an IA must compile a list of factors, the impact of which it will evaluate in order to decide whether subsidy caused injury. To avoid misunderstandings, at this stage we are discussing causal factors, and not factors indicating injury. The latter are reflected in Article 15.4 of SCM as we have previously seen. Article 15.5 of SCM requires from an IA to examine any “known factors” other than subsidized imports, which are injuring the domestic industry, and explicitly refers to some of them: Factors which may be relevant in this respect include, inter alia, the volumes and prices of nonsubsidized imports of the product in question, contraction in demand or changes in the patterns of consumption, trade restrictive practices of and competition between the foreign and domestic producers, developments in technology and the export performance and productivity of the domestic industry.215
Parties to the dispute will also bring forward factors, and IAs must inquire into their contribution even though they retain the right to disagree with the assessment of those submitting the information. We will return to this point later in this chapter, when we will also discuss the obligation of an IA to examine factors even beyond those mentioned in the body of this provision. Having examined causal factors other than subsidization, and ensured that it has not attributed injury to one of them, the IA must be in position to show a “genuine and substantial relationship” between cause (subsidies) and effect (injury), in parallel with everything we saw in the previous chapter. Panels and the AB have not specified what exactly this requirement entails. They have used it as some sort of qualitative benchmark. In China–GOES (§ 7.634), for example, the panel found that increase in domestic production and capacity was more than the increase in the volume of subject imports. In its view, this finding defeated the point advanced that the increase in domestic production was not a cause of injury. The Panel on EC–Countervailing Measures on DRAM Chips, echoing prior case law, held that mere assertions will not suffice to satisfy the genuine and substantial relationship-requirement (§§ 7.408, 413, 420, 427, 434). If we were to make a simplification on this score, we would say that the test looks like a “more probable than not” standard rather than a “beyond a reasonable doubt” standard. Panels have adopted a “reasonableness” standard without explicitly saying so. To conclude on this before we get on with a more detailed discussion, although how much should be done has not been (and probably cannot be) explained in precise terms, it is becoming increasingly clear what IAs cannot do. Finally, a proper evaluation of the impact of subsidized imports on the domestic industry is dynamic in nature and should take account of changes in the market that determine the
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current state of the industry (§ 7.372 of the Panel on EC–Countervailing Measures on DRAM Chips). 3.8.4.1 Nonattribution Recall from the discussion in the previous chapter that nonattribution is an onerous yet necessary requirement that IAs must observe. In § 357 of its report on US–Upland Cotton (Article 21.5–US), the AB acknowledged as much adding that the difficulty of the test was not an exonerating factor for an IA. Panels will, thus, often be confronted with elaborate econometric evidence that they would need to evaluate. Indeed, although the SCM Agreement (like the AD or the Safeguards (SG) Agreement that we examine in the next chapter) do not prejudge the methodology that IAs can use in order to honor the nonattribution requirement, it is hard to see how this can happen absent recourse to econometrics. Indeed, IAs will need to evaluate the contribution of various factors to the injury of the domestic industry. In case law the question has arisen: What should happen after the nonattribution analysis has taken place. Subsidized imports must, of course, still cause injury but how much? To put it differently, should subsidized imports be the only cause of injury, or can counteracting measures still be adopted even if subsidized imports are one of the various causes of injury? Nonattribution should ideally lead to some quantification of injury caused by the various factors. One should also keep in mind that precise quantification of the relative importance of contributions by various factors is a tough exercise. As the saying goes, “It is better to be roughly right than precisely wrong.” In US–Large Civil Aircraft (Second Complaint), the AB added that at the end of the day, it suffices that a subsidy has caused injury. It does not have to be the only cause of injury—indeed, it does not even have to be a “substantial cause” of injury. Attribution, however, must take place anyway so there is a finding that subsidies were at least a contributing factor to the overall injury (§ 914). We still do not know how important contribution, as a matter of principle, in this respect must be. Case law, thus, prefers to err in favor of the IA imposing duties: it suffices to show that subsidy was a cause of injury. Recall that quantification of injury caused by subsidized imports is decisive only in case a request has been submitted to a panel to find that subsidies have caused to injury, and the defendant refuses to implement the adverse to it conclusions of the panel. 3.8.4.2 Temporal Correlation between Imports and Injury Intuitively, one might think that imports and injury should coincide; otherwise, how could injury exist in the first place? Indeed, the passage of time in and of itself could be decisive, and the greater the wedge between the moment that subsidized imports entered a market and the demonstration of injury, the unlikelier that the latter is the effect and the former the cause.
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On the other hand, absolute temporal correlation between imports and injury is not necessary either, since the effect could be delayed. In this vein, the Panels on EC– Countervailing Measures on DRAM Chips (§ 7.320) and US–Countervailing Duty Investigation on DRAMs (§ 7.399) found that absence of temporal correlation between increased subsidized imports and injury does not necessarily break the causal link. According to the Panel on EC–Countervailing Measures on DRAM Chips (§ 7.399, footnote 277): “the absence of a temporal correlation certainly raises a flag, but it is not an absolute barrier to a finding of injury.” 3.8.4.3 Controlling for Factors Not Mentioned in the Agreement The Panel on US–Softwood Lumber VI faced the question under what conditions an IA should examine factors other than those mentioned in Article 15.5 of SCM. The panel condemned the fact that the IA had itself acknowledged the relevance of one “other factor” (future effects of subsidization on the domestic supplies of lumber) and yet failed to evaluate its impact. In the panel’s view, this failure was a “glaring omission” and constituted a breach of the obligation to respect nonattribution (§§ 7.135–137). The extent of the duty to investigate “other factors” is very much a point of debate in case law. As we will see in the next chapter, the duty of an IA, when it comes to imposing safeguards, is to be an “active IA” that will on its own initiative look for factors that have caused injury. In the AD and SCM contexts, what emerges from case law is that an IA must review factors brought to its attention, as well as factors otherwise explicitly acknowledged by it, without incurring the duty to go out and look for each and every factor that potentially could have a bearing on the outcome of the investigation. Rather, their resources should be invested in analyzing the facts gathered by the parties to the dispute, as well as factors that the IA itself has acknowledged for being relevant. This is where the requirement to examine facts in light of alternative explanations, which WTO panels and the AB have imposed on IAs, kicks in. The Panels on US–Countervailing Duty Investigation on DRAMs (§§ 7.3513) and EC–Countervailing Measures on DRAM Chips (§ 7.404) have delved into the quality of review of factors by IAs. According to the latter panel, an IA must do more than simply list other known factors and then dismiss their role with bare qualitative assertions such as “the factor did not contribute in any significant way to the injury.” In the panel’s view (§ 7.405): an investigating authority must make a better effort to quantify the impact of other known factors, relative to subsidized imports, preferably using elementary economic constructs or models.
3.8.5 The Types of CVDs There are three types of CVDs, namely, provisional, definitive, and price undertakings. There is thus, absolute parallel between the AD and SCM Agreements in this respect.
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3.8.5.1 Provisional CVDs Article 17 of SCM allows for the possibility of imposing provisional measures when an IA judges it necessary to prevent injury being caused during the investigation process. These measures may be imposed only after a preliminary affirmative determination has been made that a subsidy exists and that there is injury to a domestic industry already being caused by subsidized imports. The SCM Agreement provides that provisional measures are not to be applied earlier than 60 days from the date of initiation of the investigation (Article 17.3 of SCM). Duties can be lawfully imposed for a period not extending beyond four months (Article 17.4 of SCM). This four-month period does not mean the period during which cash deposits or bonds are paid, but the period during which the affected imports enter for consumption. The Panel on US–Softwood Lumber III faulted the US for having imposed provisional measures earlier than 60 days after initiation and for a period of more than four months (§ 7.101). 3.8.5.2 Definitive CVDs Definitive CVDs will be imposed in accordance with Article 19 of SCM. We return to this discussion later in this chapter. 3.8.5.3 Price Undertakings The SCM Agreement allows voluntary price undertakings (Article 18.1 of SCM). Article 18.4 of SCM provides that the investigation may be continued at the request of the exporting WTO member, or simply when the importing WTO member so decides, in spite of the acceptance of any voluntary undertakings, and the undertaking might lapse if it is established that no subsidization exists: If an undertaking is accepted, the investigation of subsidization and injury shall nevertheless be completed if the exporting Member so desires or the importing Member so decides. In such a case, if a negative determination of subsidization or injury is made, the undertaking shall automatically lapse, except in cases where such a determination is due in large part to the existence of an undertaking. In such cases, the authorities concerned may require that an undertaking be maintained for a reasonable period consistent with the provisions of this Agreement. In the event that an affirmative determination of subsidization and injury is made, the undertaking shall continue consistent with its terms and the provisions of this Agreement.
The initiative to propose an undertaking may originate in the exporting WTO member, which might undertake to eliminate or limit the subsidy or take other measures concerning its effects. It may also concern a commitment by one or more of the exporters under investigation to revise prices so that the IA is satisfied that the injurious effect of the subsidy has been eliminated. Undertakings proposed by an individual exporter require the prior consent of the exporting WTO member. Price increases shall not be more than necessary to eliminate the amount of the subsidy, and it is desirable that price increases be less than the amount of the subsidy if that would
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suffice to remove the injury to the domestic industry. Once accepted, compliance with an undertaking may be monitored, and any government or exporter who made an undertaking may be requested to periodically provide information relevant to its fulfilment and to permit verification of pertinent data. Article 18.6 of SCM provides that if an undertaking is violated, the authorities of the importing WTO member may take expeditious actions, such as immediate application of provisional measures using the best information available. In addition, definitive duties may be levied retroactively up to 90 days before the application of provisional measures, except that any retroactive assessment shall not apply to imports before the violation of the undertaking. Undertakings are completely voluntary, both when the initiative is that of the exporters or exporting WTO members and when it is that of the importing country’s authorities. Not offering or not agreeing to an undertaking cannot be held against the exporter, nor can the IA be forced to accept undertakings (Article 18.5 of SCM). For example, an IA may refuse to accept undertakings because of their impracticality, if the number of actual or potential exporters is too great, or for other reasons, including reasons of general policy. Where practicable, the IA should provide the reasons for rejecting an offered undertaking, and, to the extent possible, give the exporter an opportunity to comment (Article 18.3 of SCM). 3.8.6
Imposition and Collection of Definitive CVDs
3.8.6.1 CVDs up to the Amount of Benefit Conferred Article 19.2 of SCM provides that upon completion of an investigation, and where a final determination is made confirming the existence and amount of the subsidy causing injury, CVDs may be imposed. The maximum amount of CVDs is the amount of the subsidy that is found to exist, calculated in terms of subsidization per unit of the subsidized and exported product.216 3.8.6.2 Lesser Duty Rule The SCM Agreement also contains a “lesser duty rule,” providing that it is desirable that the duty be less than the total amount of the subsidy if a lesser duty would suffice to remove injury to the domestic industry (Article 19.2 of SCM). 3.8.6.3 Retroactive Application of Duties In principle, CVDs, whether provisional or final, may not be imposed retroactively. This means that where the final determination is negative, any provisional duties paid shall be refunded and any bonds will be released in an expeditious manner (Article 20.5 of SCM). However, there are two exceptions to this general principle (similar to the corresponding provisions in the AD context). First, definitive CVDs may be levied retroactively as of the date of application of provisional measures in the case of a finding of current material injury. The Panel on
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US–Softwood Lumber III underscored that the possibility to impose retroactive duties exists only with respect to definitive, not provisional, duties (§§ 7.93–94). Second, if a determination of threat of injury has been made, duties may be applied retroactively if it can be shown that provisional measures prevented the injury from materializing. Final duties may be applied retroactively in similar circumstances for the period for which provisional measures, if any, have been applied. Retroactivity is, therefore, limited to the period of application of provisional measures. Duties that have been retroactively imposed cannot exceed the amount of provisional duties. Indeed, the SCM Agreement provides that if the definitive CVDs are higher than the amount guaranteed by the cash deposit or bond, the difference shall not be collected (Article 20.3 of SCM). If the definitive duty is less than the amount guaranteed by the cash deposit, the excess amount shall be reimbursed or the bond will be released in an expeditious manner. It is clear, of course, that, if no provisional measures had been applied, definitive duties may not be applied retroactively (Article 20.2 of SCM). Article 20.6 of SCM allows retroactive application beyond the period of application of provisional measures in certain critical circumstances where the authorities find that injury that is difficult to repair is caused by massive imports in a relatively short period of time. When an IA deems it necessary, definitive CVDs may be assessed on imports entered for consumption up to 90 days prior to the date of application of provisional measures in order to preclude recurrence of injury. The SCM Agreement, unlike the AD Agreement, does not explicitly allow WTO members to take measures such as the withholding of appraisement or assessment. WTO members, nevertheless, have had recourse to similar measures de facto, and panels saw nothing wrong with that (US–Softwood Lumber III, § 7.95): We agree with the United States that a Member is allowed to take measures which are necessary to preserve the right to later apply definitive duties retroactively. In our view, an effective interpretation of the right to apply definitive duties retroactively requires that a Member be allowed to take such steps as are necessary to preserve the possibility of exercising that right. What kind of measures may thus be taken by the Member concerned will have to be determined on a caseby-case basis.217
3.8.7
Duties Imposed Prospectively, Retrospectively
As in the AD context, the SCM Agreement does not request from WTO members a particular manner of assessing CVDs. In practice, the overwhelming majority imposes duties prospectively, whereas the US practices in this context retrospective assessment of duties as well.218
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No Double Counting: CVDs or Countermeasures
CVDs are discussed in Part III of the SCM Agreement, and countermeasures in Part II. Footnote 35 to the SCM Agreement reads: The provisions of Part II or III may be invoked in parallel with the provisions of Part V; however, with regard to the effects of a particular subsidy in the domestic market of the importing Member, only one form of relief (either a countervailing duty, if the requirements of Part V are met, or a countermeasure under Articles 4 or 7) shall be available. The provisions of Parts III and V shall not be invoked regarding measures considered non-actionable in accordance with the provisions of Part IV. However, measures referred to in paragraph 1(a) of Article 8 may be investigated in order to determine whether or not they are specific within the meaning of Article 2. In addition, in the case of a subsidy referred to in paragraph 2 of Article 8 conferred pursuant to a programme which has not been notified in accordance with paragraph 3 of Article 8, the provisions of Part III or V may be invoked, but such subsidy shall be treated as non-actionable if it is found to conform to the standards set forth in paragraph 2 of Article 8.
It follows that a WTO member can initiate a CVD investigation and impose CVDs, and at the same time, request that a panel find that it has suffered adverse effects as a result of an actionable subsidy (or claim that a prohibited subsidy has been bestowed that must be removed with immediate effect). In that case, if the subsidizer refuses to withdraw the adverse effects or the prohibited subsidy, it might be authorized to impose countermeasures (assuming a request to this effect). When doing so, it must deduct the amount of CVDs already in place. In other words, the SCM Agreement does not allow double counting.219 3.9
CVDs: Procedural Requirements
Investigation concerns only the imposition of CVDs. A request to remove a subsidy, its adverse effects, or both should follow the disciplines established in the DSU (request for consultations, establishment of panel, etc.). 3.9.1
Duties Can Be Imposed Only Following an Investigation
According to Article 10 of SCM: Countervailing duties may only be imposed pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement and the Agreement on Agriculture.
This should mean that, absent investigation, no duties can be lawfully imposed.220 The corresponding discussion in chapter 2 of this volume finds application here as well.
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Initiating an Investigation
3.9.2.1 Ex Officio Article 11.6 of SCM allows for the possibility to initiate an investigation ex officio. This provision clarifies that, in the case of ex officio initiation, an IA must possess sufficient evidence regarding subsidization, injury, and a causal link between the two, as is the case when the initiated investigation has been requested by the domestic industry. 3.9.2.2 Investigation upon Request Article 11.2 of SCM explains that an investigation can be launched by or on behalf of the domestic industry. In this case, which is the typical case in practice, standing requirements must be fulfilled and required information must be submitted. The Panel on US– Norwegian Salmon CVD held (§ 225) that there was no hierarchy between the two options (e.g., “by” or “on behalf of”). 3.9.3
Standing Requirements (Locus Standi)
3.9.3.1 The Rationale for Standing Requirements Article 11.4 of SCM states that standing requirements identical to those applicable in the AD context must be met when a request to launch an investigation is submitted. The rationale for standing requirements is the same across the two agreements, as explained in the panel and AB reports on US–Offset Act (Byrd Amendment), which dealt with both AD duties and CVDs.221 3.9.3.2 The Statutory Thresholds As stated earlier, Article 11.4 of SCM contains statutory thresholds identical to those included in the AD context. Hence, let’s recall the discussion in the previous chapter. 3.9.4 The Content of the Request Article 11.2 of SCM deals with the initiation of an investigation. A written application on behalf of the industry (Article 11.4 of SCM) must be filed, and it must contain “sufficient” evidence of the existence of a subsidy (and, if possible, its amount), an injury, and a causal link between the two. The application shall also contain information regarding the identity of the applicant, the allegedly subsidized product or products, etc. 3.9.5 The Decision to Initiate an Investigation 3.9.5.1 IAs Must Examine the Accuracy of Supplied Information If the evidence provided is judged sufficient, then an investigation will be launched (Article 11.3 of SCM). In the opposite case, it will be closed with immediate effect (Article 11.9 of SCM):
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An application under paragraph 1 shall be rejected and an investigation shall be terminated promptly as soon as the authorities concerned are satisfied that there is not sufficient evidence of either subsidization or of injury to justify proceeding with the case.
IAs are thus under a duty to investigate the accuracy of supplied information. 3.9.5.2 Consultation with the Exporting WTO Member A special feature of a CVD investigation is the requirement to enter into consultations with the exporting government (Article 13 of SCM). Consultations should be held as soon as possible after an application has been accepted and, in any event, before the initiation of any investigation. The aim is to clarify the situation as to the matters referred to in the application and to arrive at a mutually agreed solution, if possible. The agreement emphasizes that no affirmative determination, whether preliminary or final, may be made unless the investigating WTO member had first offered any interested parties a reasonable opportunity for consultation (Article 13.2 of SCM and footnote 44). The agreement adds that the provisions regarding consultations are not intended to prevent the authorities of a WTO member from proceeding expeditiously with regard to initiating the investigation, reaching preliminary or final determinations (whether affirmative or negative), or from applying provisional or final measures in accordance with the provisions of the agreement. 3.9.5.3 IAs Retain Discretion Article 11.3 of SCM reads: The authorities shall review the accuracy and adequacy of the evidence provided in the application to determine whether the evidence is sufficient to justify the initiation of an investigation.
It follows that an IA retains discretion to decide whether a request for initiation should be responded affirmatively or negatively. The decision to initiate an investigation lies solely with the competent IA.222 In China– GOES (§§ 7.54ff.), the panel held that the joint reading of Articles 11.2 and 11.3 of SCM leads to the conclusion that an IA must satisfy itself as to the adequacy of the evidence presented, which does not have to be conclusive. In making this determination, an IA is balancing two competing interests: namely, the interest of the domestic industry in securing the initiation of an investigation and the interest of respondents to ensure that investigations are not initiated on the basis of frivolous or unfounded suits. Thus, it must satisfy itself that supplied evidence relates to the financial contribution, benefit, and nature of the subsidy (e.g., its specificity) (§ 7.62). The exercise of discretion is justiciable, of course. In China–GOES, the panel found that the Chinese IA should not have initiated the investigation for several reasons: (i) the US subsidies to sponsors of healthcare plans were judged de jure unspecific (§ 7.62); (ii) 26 years had passed from the date of the subsidy to the date of the request to initiate the
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investigation, which was too long a period, and hence no reasonable IA could conclude that the submitted evidence was sufficient (§ 7.69); (iii) the law providing tax breaks that were being challenged for violating the SCM Agreement had been put in place 15 years before the request for initiation of investigation was submitted, which again was too long a period of time (§ 7.78).223 3.9.6 The Rights and Duties of IAs 3.9.6.1 The Right to Seek Information through Questionnaires An IA can send questionnaires and provide the addressees with at least 30 days to reply (Article 12.1.1 of SCM). The SCM Committee can review the content of the questionnaires (footnote 54 to the agreement). This is a very welcome innovation since “abusive” questionnaires could open the door wide to second-best sources of information. Annex VI explains that questionnaires can be explained to the addressees, if necessary. Sending out a questionnaire usually precedes chronologically on-the-spot verifications, which are meant to confirm the responses to questionnaires. 3.9.6.2 The Right to Conduct On-the-Spot Verifications An IA must satisfy itself as to the accuracy of the information supplied by interested members or interested parties upon which their findings are based. This may be done through on-the-spot verifications or through investigations on the premises of a company of its records if the company so agrees, and if the WTO member in question has been notified and does not object to it (Annex VI). The Panel on US–Countervailing Duty Investigation on DRAMs took the view that an interested WTO member cannot be considered to have objected to the verification if it simply expressed concerns about certain aspects of the conduct of the verification. The panel found that the right of objection cannot be extended to encompass the right to dictate the specific procedures to be followed during the investigation proceedings. The panel further disagreed that an outright refusal to allow a verification visit to take place leads inevitably to the application of the available facts: whether that is so will actually depend as much on the IA, and whether it has itself acted in a reasonable, objective, and impartial manner (§§ 7.404–407). 3.9.6.3 The Right to Draw Inferences In EC–Countervailing Measures on DRAM Chips, the panel took the view that an IA would be entitled to make adverse inferences from a refusal to cooperate with the authorities (§ 7.245). 3.9.6.4 The Obligation to Observe Due Process Article 12 of SCM almost verbatim reproduces the language of Article 6 of AD, with one noteworthy difference: the involvement of the subsidizing government. A CVD investigation does not simply relate to private parties’ behavior; it inevitably also involves an
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examination of the practices of another WTO member. This feature makes the investigation more politically sensitive. The quintessential requirement imposed on an IA is to ensure evenhandedness (due process) when performing its tasks. During the investigation process, different interests will be represented since both the foreign exporters and domestic consumers and the domestic industry will be presenting their views. As is the case with the corresponding provision in the AD Agreement, this duty is given further in a series of more detailed specifications. For example, an IA is required, by virtue of Article 15.1 of SCM, to perform an objective examination of the matter before it. Because of the almost identical wording between the AD and the SCM agreements in this respect, WTO panels and the AB have relied on case law under one agreement to interpret provisions of the other. In its report on EC–Countervailing Measures on DRAM Chips, the panel quoted approvingly (§§ 7.271–276) from a report issued in the area of antidumping. In US–Hot-Rolled Steel, the AB provided its understanding of the term “objective examination” (§ 193): The term “objective examination” aims at a different aspect of the investigating authorities’ determination. While the term “positive evidence” focuses on the facts underpinning and justifying the injury determination, the term “objective examination” is concerned with the investigative process itself. The word “examination” relates, in our view, to the way in which the evidence is gathered, inquired into and, subsequently, evaluated; that is, it relates to the conduct of the investigation generally. The word “objective,” which qualifies the word “examination,” indicates essentially that the “examination” process must conform to the dictates of the basic principles of good faith and fundamental fairness. In short, an “objective examination” requires that the domestic industry, and the effects of dumped imports, be investigated in an unbiased manner, without favoring the interests of any interested party, or group of interested parties, in the investigation. The duty of the investigating authorities to conduct an “objective examination” recognizes that the determination will be influenced by the objectivity, or any lack thereof, of the investigative process.
An IA must respect due process in numerous other instances reflected in various paragraphs and subparagraphs of Article 12 of SCM. Interested WTO members and all other interested parties (e.g., the exporter and the domestic industry) must be given notice of the information that the authorities require, as well as ample opportunity to present in writing all evidence that they consider relevant with respect to the investigation in question. Subject to the requirement to protect confidential information, evidence presented in writing by one party shall be made available promptly to the others. Interested WTO members and interested parties also shall have the right, upon justification, to present information orally. An IA shall, whenever practicable, provide timely opportunities for all interested WTO members and interested parties to see all information that is relevant to the presentation of their cases (provided that it is not confidential) and that is used by the authorities in a CVD investigation, and to prepare presentations on the basis of this information.
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3.9.6.5 The Obligation to Protect Confidential Information Any information that is by nature confidential (for example, because its disclosure would provide a competitor with significant competitive advantage, or because its disclosure would have a significantly adverse effect upon a person supplying the information or upon a person from whom the supplier acquired the information), or which is provided on confidential basis by parties to an investigation shall, upon “good cause” shown, be treated as such by the authorities (Article 12.4 of SCM). A nonconfidential summary of confidential information must be furnished, unless a summary is not possible (Article 12.4.1SCM).224 The Panel on China–GOES provided an excellent explanation of the obligation imposed on IAs with respect to the treatment of confidential information (§ 7.189): The obligations in Articles 12.4.1 of the SCM Agreement and 6.5.1 of the Anti-Dumping Agreement fall upon the investigating authorities. The Appellate Body agreed with this interpretation in EC– Fasteners (China). The Appellate Body found that in respect of information treated as confidential under Article 6.5, Article 6.5.1 imposes an obligation on the investigating authority to require that a non-confidential summary of the information be furnished. The Appellate Body noted that this accommodates the concerns of confidentiality, transparency and due process. Where “exceptional circumstances” exist, such that non-confidential information is not susceptible of summary, Article 6.5.1 requires that the party identify the exceptional circumstances and provide a statement explaining why summarization is not possible. The investigating authority must scrutinize such statements to determine whether they establish “exceptional circumstances.” (italics in the original)
Confidential information shall not be disclosed without the specific permission of the party submitting it. If the IA finds that a request for confidentiality is not warranted, and if the supplier of the information is either unwilling to make the information public or to authorize its disclosure in generalized or summary form, the IA may disregard such information unless it can be demonstrated to its satisfaction from appropriate sources that the information is correct (Article 12.4.2 of SCM). Requests for confidentiality should not be arbitrarily rejected. An IA may request the waiving of confidentiality only regarding information relevant to the proceedings. Panels will typically adopt specific procedures to deal with the provision and dissemination of business confidential information (BCI) in a particular case.225 Panels at the request of parties might adopt not only BCI, but also HSBI (Highly Sensitive Business Information). In EC and Certain Member States–Large Civil Aircraft, a similar request was tabled. The panel agreed to adopt HSBI procedures (Annex E to the panel report), the main characteristics of which were: • the nomination of “HSBI Approved Persons”, that is persons approved by parties that could have access to HSBI; • the selection of a “HSBI location”, that is a room located in the WTO headquarters where HSBI information would be stored, and which only HSBI Approved Persons could have access to.
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3.9.6.6 The Obligation to Ensure Transparency The authorities shall, before a final determination is made, inform all interested WTO members and interested parties of the essential facts under consideration, which form the basis for the decision about whether to apply definitive measures. The disclosure should take place in sufficient time for the parties to defend their interests (Article 12.8 of SCM). In China–GOES, the AB held that the obligation to disclose “essential facts” meant that an IA had to disclose whatever elements it considered significant in the process of reaching a decision on whether to apply CVDs (§ 240). It added (§ 247), that it did not suffice for an IA to state that prices had dropped, but it had to disclose price comparisons; otherwise, essential facts had not been revealed and, consequently, exporters could not know how prices had led to depression. It justified its approach by stating that the purpose of disclosing essential facts was to allow interested parties to eventually pursue judicial review of decisions against them, if they decided to do so (§ 258). 3.9.7
Rights and Obligations of Interested Parties
Article 12.9 defines “interested parties” as follows: an exporter or foreign producer or the importer of a product subject to investigation, or a trade or business association a majority of the members of which are producers, exporters or importers of such product; and a producer of the like product in the importing Member or a trade and business association a majority of the members of which produce the like product in the territory of the importing Member. This list shall not preclude Members from allowing domestic or foreign parties other than those mentioned above to be included as interested parties.
3.9.7.1 The Right to Access the File The right to access the file is the specification of the “due process” obligations incurred by IAs and has been included in Article 12.3 of SCM. 3.9.7.2 The Duty to Cooperate In EC–Countervailing Measures on DRAM Chips, the panel held, that an IA is entitled to expect a high degree of cooperation from interested parties (§ 7.245). 3.9.8
Balancing Rights and Duties: Recourse to BIA
Article 12.7 of SCM reads: In cases in which any interested Member or interested party refuses access to, or otherwise does not provide, necessary information within a reasonable period or significantly impedes the investigation, preliminary and final determinations, affirmative or negative, may be made on the basis of the facts available.
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Recourse to best information available (BIA) can take place only when in the presence of one of the three factual situations (namely, a WTO member or interested party refuses access to, or otherwise does not provide necessary information within a reasonable period of time, or significantly impedes the investigation). In EC–Countervailing Measures on DRAM Chips, the panel held that (§ 7.245): Article 12.7 thus allows an authority to make determinations on the basis of the facts available in case certain necessary information is not provided within a reasonable period, or if access to such information is refused, or in case an interested party or interested Member significantly impedes the investigation. Article 12.7 thus enables an authority to continue with the investigation and make determinations based on the facts that are available in case the information necessary to make such determinations is not provided by the interested parties, or, for example, verification of the accuracy of the information submitted is not allowed by an interested party, thereby significantly impeding the investigation. In other words, Article 12.7 identifies the circumstances in which investigating authorities may overcome a lack of information, in the response of the interested parties, by using “facts” which are otherwise “available” to the investigating authority.
Case law has sought to establish a parallelism between the two agreements, and recourse to BIA has been interpreted in a symmetric manner. The legal relevance of Annex II in the SCM context also was explicitly acknowledged in the AB report on US–Carbon Steel (India) (§ 4.423), as we note later in this chapter.226 Law and case law aim to strike a balance between the right to respond to uncooperative behavior on the one hand, and the need to avoid abuses when doing so on the other. To this effect, law makes it clear that recourse to BIA can take place only in the three factual situations described earlier, and case law has insisted on this score. On the other hand, the possibility to draw inferences through BIA has not been put into a straitjacket either. The AB report on US–Carbon Steel (India), for example, recognized that an IA does not need to male comparative evaluations of all available evidence and select the best possible information when having recourse to BIA. It established a reasonableness standard that IAs must observe, and asked that IAs operate within its bounds when replacing the missing information (§§ 4.434–435). 3.9.8.1 The Rationale for Recourse to BIA The SCM Agreement does not explicitly refer to the rationale for recourse to BIA. As is the case in the AD Agreement, absent similar provision the exporters could bring the negotiation to a halt simply because they would refuse to cooperate with IAs. On the other hand, of course, recourse to BIA should not provide IAs with carte blanche to do as they please, since they (might) have the incentive to overshoot the level of CVDs. This last point has been often underscored in case law. In China–GOES for example, the panel noted (§ 7.302) that the purpose is not to punish noncooperative parties that did not produce info. It is, rather, to facilitate the course of investigation without imposing undue hardship on noncooperating parties.
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3.9.8.2 Duty to Include Requested Information in the Questionnaire Article 12.7 of SCM reproduces the corresponding provision of the AD Agreement as we have seen previously, and case law has interpreted the key terms. In China–GOES, the panel held (§§ 7.446–447) that, by not including information that was required in its request, an IA could not have had legitimate recourse to BIA on the grounds that unrequested information could not be deemed to be “necessary” in the sense of Article 12.7 of SCM. In the same report, the panel held that generic questions, such as asking about information relating to value and volume of exports, do not meet the Article 12.7 of SCM threshold: recourse to BIA is legitimized only when information that is necessary and required has not been provided (§ 7.448).227 In EC–Countervailing Measures on DRAM Chips, the panel concluded that the IA was legitimized to have recourse to BIA since it had indicated in its request questions that remain unanswered (§ 7.266). 3.9.8.3 Refusal to Supply Necessary Information The AB has underscored that information must qualify as “necessary”; otherwise, lack of cooperation cannot lead to recourse to BIA [US–Carbon Steel (India) at § 4.416]. It is, of course, difficult to define what “necessary” is. We stated in the previous chapter that the essential facts on which final decisions are based provide a benchmark for “necessity.” The question arises what beyond essential facts could qualify as necessary. The AB has consistently held that its case law under Annex II of the AD Agreement can serve as guidance for its case law under the SCM Agreement as well. The AB report on US–Carbon Steel (India) is a good illustration (§ 4.423). Consequently, instances found to justify recourse to BIA under the AD Agreement will also justify recourse to BIA under the SCM Agreement. In EC–Countervailing Measures on DRAM Chips, the panel equated supply of insufficient information to refusal to supply necessary information, and it held that recourse to BIA was legitimate if the requested party had provided insufficient information when requested to respond (and no information at all when subsequently requested to complete it). In the case at hand, Korea provided the EU IA with a 1-page excerpt from a 200-page report. The EU took the view that the report was quite relevant to the investigation, and it requested additional information but did not obtain any information (besides the 1-page excerpt). The panel took the view that, in light of Korea’s response, the EU could legitimately have had recourse to information from secondary sources (§ 7.259). 3.9.8.4 Significant Impediment of Investigation In EC–Countervailing Measures on DRAM Chips, the panel equated supply of incorrect information with a significant impediment of the investigation. It held that recourse to BIA was legitimate if the requested party had provided false information. In the case at hand,
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Korea had denied that high-level government officials took part in a meeting, and subsequently it refused to supply full proof that the meeting took place, or that it had been attended by high-level dignitaries, when similar information became available. In the eyes of the panel, the EU had had legitimate recourse to Article 12.7 of SCM and it could look for information from secondary sources since necessary information had not been disclosed (§ 7.254). 3.9.9 The POI 3.9.9.1 The Length of the Investigation Process Investigations shall, except in special circumstances, be concluded within one year. Article 11.11 of SCM adds that the period of investigation (POI) shall never be more than 18 months from its initiation. In its report on Mexico–Olive Oil, the panel addressed a dispute regarding the timing of the initiation, as well as the ensuing question of the length of investigation. The EU had held the view that the investigation had been initiated when the competent authority had signed the document initiating the process, whereas Mexico contended that, according to its own law, an investigation is not initiated before the signed act is published. The panel agreed with Mexico that municipal law should be the criterion for deciding this issue (§§ 7.21ff., and especially 7.30).228 The panel also found that Mexico had violated its obligations under Article 11.11 of SCM by extending the investigation beyond the 18-month period prescribed in the SCM Agreement (§ 7.123). 3.9.9.2 The Function of POI The POI covers the period for which data relating to subsidy and injury will be collected. The Panel on EC–Countervailing Measures on DRAM Chips rejected the argument that a pricing analysis must include the most recent period prior to initiation. The data on which the injury analysis is based should be sufficiently recent for them to be sufficiently relevant and probative to constitute positive evidence. The panel considered that since the EU had gathered data that covered three years, including the last full year for accounting purposes prior to the initiation, its analysis was clearly based on the recent past (§ 7.341). The Panel on Mexico–Olive Oil faced a claim by the EU to the effect that Mexico had been acting inconsistently with its obligations under Article 15.5 of SCM by using data from some months every year only (April–December) and for the whole 12 months of the years under investigation. The panel agreed with the complainant that Mexico was indeed running afoul of its obligations since it offered no explanation for its approach (§§ 7.273ff, and especially 7.289).
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3.10 Administrative Reviews 3.10.1 The Function and Rationale for Administrative Reviews Article 21.1 of SCM229 states that CVDs can remain in place as long as, and to the extent, necessary to counteract injurious subsidization. The need for SCMs must be reviewed anyway after five years, after which they will automatically expire unless if a sunset review has been initiated before. In parallel with the AD Agreement, sunset clauses have thus found their way in the SCM Agreement as well. Within the five years, though, either ex officio or upon request, an IA can review the necessity to keep CVDs in place. If the IA determines as a result of a review that CVDs are no longer warranted, their imposition shall be terminated immediately. 3.10.2 The Ambit of Review Regardless of whether it has been initiated ex officio or upon request, an IA could investigate whether any of the following is true: • The continued imposition of duties is necessary to offset subsidization • Whether the injury would be likely to recur if the duty in place were removed or varied • Whether subsidization resulting in injury will continue or recur, assuming that the duties in place were to be varied or removed From the three options listed here, only the third one corresponds to the subject matter of a sunset review. When a review covers both subsidization and injury, it may form the basis to extend the measure for another five years (assuming that it concludes that extension is necessary). In an original investigation, an IA must establish that all conditions set out in the SCM Agreement for the imposition of CVDs have been fulfilled. In an administrative review, however, an IA need only address those issues that have been raised before it by the interested parties or, in the case of an investigation conducted on its own initiative, the issues that warranted the examination. The AB held as much in its report on US–Lead and Bismuth II (§ 63). In the same dispute, the AB held that in the context of an administrative review under Article 21.2 of SCM, an IA need not always establish the existence of a benefit during the period of review. Rather, an IA might legitimately presume that a benefit continues to flow from an untied, nonrecurring financial contribution. However, this presumption cannot be irrebuttable. In the scenario of change of ownership, such as in the case before it, an IA should review whether a benefit did indeed continue to exist (§§ 61–62): We have already stated that in a case involving countervailing duties imposed as a result of an administrative review, Articles 21.1 and 21.2 of the SCM Agreement are relevant. As discussed
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above, Article 21.1 allows Members to apply countervailing duties “only as long as and to the extent necessary to counteract subsidization... “. Article 21.2 sets out a review mechanism to ensure that Members comply with this rule. In an administrative review pursuant to Article 21.2, the investigating authority may be presented with “positive information” that the “financial contribution” has been repaid or withdrawn and/or that the “benefit” no longer accrues. On the basis of its assessment of the information presented to it by interested parties, as well as of other evidence before it relating to the period of review, the investigating authority must determine whether there is a continuing need for the application of countervailing duties. The investigating authority is not free to ignore such information. If it were free to ignore this information, the review mechanism under Article 21.2 would have no purpose. Therefore, we agree with the Panel that while an investigating authority may presume, in the context of an administrative review under Article 21.2, that a “benefit” continues to flow from an untied, non-recurring “financial contribution,” this presumption can never be “irrebuttable.” In this case, given the changes in ownership leading to the creation of UES and BSplc/BSES, the USDOC was required under Article 21.2 to examine, on the basis of the information before it relating to these changes, whether a “benefit” accrued to UES and BSplc/ BSES. (italics in the original)230
It should come as no surprise at all, then, that the AB sanctioned in subsequent cases recourse to irrebuttable presumptions. In US–Countervailing Measures on Certain EC Products, WTO adjudicating bodies had to deal with the so-called same person methodology applied by the US when reviewing the need for continued imposition of CVDs following the privatization of a previously subsidized firm. The factual aspects of the method are described in detail in § 145 of the report, where it is made clear that the US was having recourse to irrebuttable presumptions that affected parties could not challenge under any circumstances. The IA would never be in a position in the context of an administrative review to examine whether a benefit continued to exist, even if presented with evidence to this effect. Therefore, the review was not based on facts, but on fiction. In § 146, the AB explained that this method was inconsistent with US obligations under Article 21.2 of SCM. According to the AB, Article 21.2 of SCM sets forth an obligation to take into account positive information substantiating the need for a review: presumptions are not positive information. This is why the AB found that the US legislation violated Article 21.2 of SCM (§ 147). 3.10.3
Initiating Reviews
3.10.3.1 Ex Officio Article 21.2 of SCM stipulates that duties will be reviewed by an IA when warranted. The corresponding discussion in chapter 10 of this volume finds application here as well. 3.10.3.2 Review upon Request An administrative review to examine whether the continued imposition of the duty is necessary can be initiated upon request by an interested party, provided that a reasonable
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time has passed since the imposition of the CVD. The interested party can submit positive information that substantiates the need for a review (Article 21.2 of SCM). 3.10.4
Standard of Review
3.10.4.1 Standard of Initiation The SCM Agreement distinguishes the requirements to initiate a review depending on who has requested it: whereas in the context of a review upon request, the submission of positive evidence is a threshold issue, no similar requirement exists in the case of ex officio initiation (Article 21.2 of SCM). The AB confirmed this distinction in its report on US–Carbon Steel (§ 108). 3.10.4.2 Irrelevance of de Minimis Standards Applicable to Original Investigations In US–Carbon Steel, the AB underscored the nonapplicability of de minimis standards in administrative reviews (§ 71). The US legislation governing reviews imposed a 0.5 percent ad valorem threshold in order for a subsidy to continue to be countervailable. The panel had agreed with the complainants that the de minimis threshold (1 percent ad valorem) that could apply to the original imposition of CVDs was legally relevant for reviews as well. The US appealed this finding, arguing that legislative silence had to mean that a de minimis standard did not apply. The AB concurred with the US and reversed the panel’s findings on this score (§§ 88–89). 3.11 3.11.1
Sunset Reviews Duties Will Lapse in Five Years Absent Review
All CVDs must be withdrawn five years after their imposition unless a WTO member has conducted a review and concluded that the expiry of the duty would be likely to lead to the continuation or recurrence of subsidization and injury (Article 21.3 of SCM). The AB, in its report on US–Carbon Steel, underlined that (§ 88) “termination of a countervailing duty is the rule and its continuation is the exception.” Absent a sunset review, all CVDs in place must immediately be withdrawn, as the AB held in this dispute (§ 63).231 3.11.2 The Ambit of Review Article 21.3 of SCM reads: any definitive countervailing duty shall be terminated on a date not later than five years from its imposition (or from the date of the most recent review under paragraph 2 if that review has covered both subsidization and injury, or under this paragraph), unless the authorities determine, in a review
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initiated before that date on their own initiative or upon a duly substantiated request made by or on behalf of the domestic industry within a reasonable period of time prior to that date, that the expiry of the duty would be likely to lead to continuation or recurrence of subsidization and injury. The duty may remain in force pending the outcome of such a review.
It follows that duties will lapse five years after their imposition unless it is demonstrated that their expiry would lead to the continuation or recurrence of subsidization and injury. 3.11.3
Initiating Reviews
A sunset review may be initiated on the importing member’s own initiative before the five-year deadline, or upon a duly substantiated request made by or on behalf of the domestic industry within a reasonable period of time before the five-year deadline expires. There are no specific evidentiary requirements for initiating sunset reviews. Unlike the original investigation, where Article 11.6 of SCM requires from the IA to have sufficient evidence of subsidization, injury, and a causal link to justify initiation of an investigation, sunset reviews may be initiated automatically every five years (AB, US–Carbon Steel, §§ 103, 116). 3.11.3.1 Ex Officio Article 21.3 of SCM explains that ex officio sunset reviews are possible if they have been initiated prior to the end of the fifth year since the imposition of CVDs. 3.11.3.2 Review upon Request Interested parties can request a sunset within a “reasonable period” before the expiry of five years since the imposition of CVDs. 3.11.4 The Standard of Review 3.11.4.1 Continuation or Recurrence of Injury If, in the context of a sunset review, an IA has demonstrated that withdrawal of CVDs would likely lead to continuation or recurrence of subsidization and injury, then the CVDs may remain in place. The agreement does not set forth any precise methodology for making a determination of the likelihood of continuation or recurrence of subsidization and injury (Article 21.3 of SCM). 3.11.4.2 Positive Evidence Article 21.4 of SCM makes it clear that the evidentiary standards of the original investigation (Article 12 of SCM) find application in the context of sunset reviews as well. The Panel on US–Carbon Steel considered that a sunset determination, although inherently prospective, must nevertheless rest on a sufficient factual basis (§§ 8.95–96). In this case, the IA had begun by taking the CVD rate established in the original investigation,
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and then subtracted from that rate the share of two subsidy programs that had been terminated after the imposition. In other words, the factual basis of the USDOC determination was limited to the original rate of subsidization and the fact that two of the original subsidy programs had been terminated after the imposition of the original CVD order (§ 8.116). The panel found that the USDOC determination, which did not go beyond simple arithmetic calculation, lacked a sufficient factual basis, particularly because the USDOC had refused to accept information that could have been relevant to the assessment of the likelihood of subsidization (§ 8.117). The USDOC had declined the request made by the German exporters that a calculation memorandum from the original investigation be placed on the record of the sunset review on the grounds that the submission was untimely, while it concerned information that was actually in the IA’s possession and that was clearly relevant to the likelihood determination.232 The AB upheld the standard adopted by the panel (§ 88). 3.11.4.3 Irrelevance of Standards Applied to the Original Investigation In US–Carbon Steel, the AB held that the mere fact that a review leads to a rate of subsidization below the de minimis level, as set forth in Article 11.9 of SCM (applicable to original investigations), does not require an IA to terminate the measure. The AB came to this conclusion on the basis of the absence of de minimis standards in the text of Article 21 of SCM in general, and Article 21.3 of SCM in particular, as well as the fact that original investigations and sunset reviews are distinct processes with different purposes, and thus different rules may well apply in these circumstances (§§ 87–88). 3.12
Special and Differential Treatment for Developing Countries
Article 27 of SCM includes essentially two types of provisions in favor of developing countries: • Longer transitional periods: For example, export subsidies will not bind the countries mentioned in Annex VII (essentially LDCs, as well as a few others named individually), and will have to be phased out within eight years by the remaining developing countries. During the transitional period, they cannot increase their level (Article 27.4 of SCM), and must stop them if they have reached a certain level of competitiveness measured in terms of 3.25 percent of world trade for the product concerned for two consecutive calendar years (Articles 27.5 and 27.6 of SCM). In a similar vein, subsidies aiming to promote local content can be used by developing countries for five years after the entry into force of the Agreement Establishing the WTO, and for eight by LDCs (Article 27.2 of SCM). • De minimis thresholds: It establishes more favorable de minims thresholds for subsidy and injury (Article 27.10 of SCM).
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This provision reflects requests by developing countries during the Uruguay round.233 3.13 The Standard of Review Applied by WTO Adjudicating Bodies Unlike what we saw in the previous chapter, the SCM Agreement does not contain its own standard of review. Still, the AB on US–Lead and Bismuth II was confronted with the issue of whether the standard of review in the context of the SCM Agreement should be identical to that practiced in the WTO AD (Article 17.6 of AD) or, conversely, whether the generic standard of review included in Article 11 of DSU was the sole applicable one in the context of the SCM Agreement. The AB ruled that in the absence of specific language mandating an exception (similar to that embedded in Article 17.6 of AD), the generic standard of review was applicable in the SCM Agreement context as well (§§ 44–51). Note, however, that in a subsequent case, the Panel on US–Softwood Lumber VI did not consider it “either necessary or appropriate to conduct separate analyses of the USITC determination” (§ 7.17) involving a single injury determination with respect to both subsidized and dumped imports under the two Agreements. The panel indicated that given the similarity of the CVD and the AD processes, inconsistent results should be avoided. In other words, the standard of review should be the same when examining an injury determination in a CVD case and an AD case (§ 7.18): We consider this result appropriate in view of the guidance in the Declaration of Ministers relating to Dispute Settlement under the AD and SCM Agreements. While the Appellate Body has clearly stated that the Ministerial Declaration does not require the application of the Article 17.6 standard of review in countervailing duty investigations, it nonetheless seems to us that in a case such as this one, involving a single injury determination with respect to both subsidized and dumped imports, and where most of Canada’s claims involve identical or almost identical provisions of the AD and SCM Agreements, we should seek to avoid inconsistent conclusions.
So far, this case remains an isolated incident and is quite idiosyncratic anyway because of the single injury determination that was performed by the IA for both dumped and subsidized imports. 3.14
Fisheries Subsidies
3.14.1 The Issue During the Doha round, not much has been achieved in terms of redrafting the controversial parts of the agreement. One of the innovations has been the discussion of fisheries subsidies. A series of studies submitted to the Negotiating Group on Rules, which discusses the treatment of fisheries subsidies as well, point to two facts: there is overfishing, largely
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aided by subsidies, and roughly 40 percent of total production is being traded.234 Overfishing has led to the depletion of natural resources. The negotiation aims to put the brakes on subsidies that have led to overfishing, while allowing subsidies that will help fisheries management and making provisions for special and differential treatment of developing countries that depend on fisheries. 3.14.2 The Negotiation The mandate to negotiate about fisheries subsidies had already been included in the Doha Ministerial Declaration235 and was reiterated in more concrete terms in the Hong Kong Ministerial Declaration.236 A coalition of like-minded countries was formed early on, the “Friends of Fish,” which pushed the negotiation along the lines suggested previously.237 The chair of the negotiating group issued a text that essentially captured the ideas mentioned here: subsidies for construction of new vessels, covering operating costs of fishing, or both, would be prohibited; subsidies aimed at reducing current fishing levels such as “fisheries management,” “vessel decommissioning programs,” or both (e.g., subsidies for retiring fishing vessels permanently) would be tolerated.238 Negotiations on this issue are ongoing. The Bali Declaration contains a commitment (expressed in “best endeavors” terms) to stop subsidies that lead to overfishing while continuing to look for a permanent solution to depletion of fish stocks around the world.239 In the most recent document adopted, the WTO members agreed to include fuel subsidies, and reporting requirements regarding fish stock status, production and trade.240 3.15
Institutional Issues
The Committee on Subsidies and Countervailing Measures (SCM Committee) was established by virtue of Article 24 of SCM. Its tasks are quite open-ended since it is responsible for administering the operation of the agreement and discuss any issues regarding the furtherance of its objectives. Its tasks include the establishment of a Permanent Group of Experts (PGE) to assist a panel, if requested, under Article 4(5) of SCM (inquiries regarding whether a scheme qualifies as prohibited subsidy). 3.16
Concluding Remarks
The SCM Agreement is largely the product of an EU/US negotiation. The US, in general, has not seen subsidies with a lot of sympathy. Both Democratic as well Republican administrations have been hostile towards subsidies, although nuances between them exist. The US, except for periods of crisis (as in the Great Depression. when New Deal policies were enacted, or in 2008, following the financial crisis) has not engaged in
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massive subsidization. The only outlier is the 1955 program for farm subsidization, that we will discuss in chapter 8 of this volume. European countries had adopted a more friendly attitude towards subsidies. Indeed one of the most important foundations of the EU treaties has been the prohibition of subsidies, since they affect competition both between EU member states, as well as between private operators of different origin. The organization of common markets was designed with subsidies as integral part of them though, and EU farm subsidies replaced national farm subsidies. To a lesser extent, EU wide subsidies found their way in other areas as well, research and development being a prominent example. The SCM Agreement was a last-minute compromise, and its design has suffered because of that. Panels have had to struggle with imperfect lawmaking, both at the conceptual level and at the drafting stage. The agreement as it now stands is, in many respects, in stark contrast with prevailing economic theory. We have criticized the fact that the rationale for subsidization has not been adequately taken into account, as well as the fact that economywide effects are immaterial for injury analysis, as we did the formulation of various terms employed in this agreement. It is for negotiators to address the deficiencies in the current agreement if we want to avoid, for example, legal acrobatics like those that we observed in the AB report on Canada–Renewable Energy. Moreover, this agreement has proved quite a challenge for the institutional design of WTO adjudication. Panels have found it hard, as we observed earlier, to cope with notions such as “pass through,” “allocation over productive assets,” and the “causalityrequirement.” Recall that three members of the AB had three distinct readings of the AB case law regarding “pass through.” And it is not as if the situation is going to be smoother in the future. The (correct) insistence of panels on nonattribution, for example, will unavoidably invite elaborate econometrics expertise submitted to panels and might in the near future test the design of panels themselves. Remarkably, while they insist on similar evidence, panels refuse to use the PGE, which, in theory at least, could be the expert group that would help panels with technical questions beyond the reach of the average, typical member of a panel.241 This agreement is in dire need of redrafting. The shortcomings we observed in the approach that panels have taken to address the very demanding issues associated with the provisions of the SCM Agreement should also provide the impetus for a serious discussion in the WTO regarding the future design of WTO adjudication.
4
Safeguards
4.1 The Legal Discipline and Its Rationale 4.1.1 The Legal Discipline The term “safeguards” sounds quite generic and, in fact, could be in principle used to describe all sorts of measures that are meant to safeguard against a contingency, antidumping and countervailing duties included. In WTO parlance, it has a narrower coverage. It is the third and last contingent protection instrument aiming to protect domestic industry from excessive legal, as opposed to dumped or subsidized, imports. It comprises different measures, such as tariffs, quotas, or tariff quotas, that can be lawfully imposed by WTO members who can show that, as a result of “unforeseen developments,” imports have risen and caused injury to the domestic industry producing the “like product.” Thus, the contingency that is safeguarded against is an increase in imports that could not have been reasonably foreseen and that has resulted in injury for the domestic industry producing competing goods. 4.1.2 The Rationale for the Legal Discipline To understand the rationale for the safeguard mechanism in the WTO, we need to briefly delve into the historical record. Maruyama (1989) explains that the first formal safeguard mechanism was included in the 1934 US–Mexico Reciprocal Trade Agreement.1 The basic premise for the clause was for the US to be allowed to pull back from commitments made if US negotiators had reduced tariffs, and, as a result, domestic industry had found it hard to adjust fast to the new market conditions: The “escape clause” is aimed at providing temporary relief for an industry suffering from serious injury, or the threat thereof, so that the industry will have sufficient time to adjust to the freer international competition.2
The US, as we saw in chapter 1, volume 1, had signed a series of similar treaties before the advent of GATT. The US administration came to grips with the realities of trade
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liberalization. It was a “win win” (as opposed to “zero sum”), but not a Pareto superior outcome. Inside the market there would be winners (those profiting from new export possibilities), as well as losers (those exposed to new competition from abroad). Safeguards were thought of as the mechanism to compensate the latter and thus, it should not come as any surprise that it was the US that introduced the escape clause into the original GATT negotiation. The GATT safeguard clause was modeled after the clause in the aforementioned 1934 agreement.3,4 It was during the London Conference that negotiators managed to agree on the essential conditions for safeguard (emergency) action in Article 34 of the London Draft. The basic idea was that, assuming that a contingency had occurred (injury resulting from unforeseen developments), a country should be in a position to withdraw benefits that it had accorded to its trading partners (by raising its tariffs or by imposing a quota). A country wishing to avail itself of this possibility and withdraw benefits that it had promised would be required to enter into consultations with all other countries with a substantial interest in the withdrawn benefit.5 No countermeasures would be imposed if negotiating partners could not arrive at a solution, and there was no “Plan B” if an agreement regarding the amount of compensation could not be reached.6 Nothing in the drafting of the provision changed during the New York Conference.7 In Geneva, there was an effort to address the shortcomings of the draft. The discussion focused on whether or not agreement with affected parties should always precede the imposition of safeguards.8 The US delegation proposed that this should not be the case. Delays might have been, in the US view, damaging to the country that wished to avail itself of the possibility of imposing safeguards. The compromise was to allow the imposition of safeguards even without any agreement between the interested parties as to the amount of compensation, but to allow affected parties to take countervailing action. The problem was that the negotiators did not manage to identify who the “affected parties” were each time in clear terms—a problem that, as we will see later on in this chapter, persists nowadays. Still, the absence of agreement on this point notwithstanding, the GATT framers privileged flexibility and agreed on the right to impose safeguards even when interested parties had not managed to agree on the amount of compensation before the imposition of trade restricting measures. The US proposal found its way into the current Article XIX of GATT.9 No change occurred after that.10 Following the advent of GATT, two safeguard agreements were signed: the Tokyo-round agreement, to which only a subset of the membership had adhered and its successor, the Uruguay-round agreement which was a multilateral agreement. Both agreements build on the disciplines and the spirit of Article XIX of GATT. Thus, the purpose of the current Safeguards (SG) Agreement is to help ailing industries that suffered because of trade liberalization. Safeguards are strictly confined to providing relief in the short run, and not to help develop an industry.11 Drawing from the negotiating record, the first GATT panel that dealt with this issue, Hatters’ Fur Sales,12 confirmed that Article XIX of GATT was
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not meant to provide permanent protection to a domestic industry, as it was not meant to protect infant industries as Article XVIII(c) of GATT does. The new SG Agreement introduced specific language that leaves no doubt as to the transitional nature of safeguard action. In doing so, it distinguishes safeguard action not only from infant industry protection, but also from the provision concerning renegotiation of customs duties (Article XXVIII of GATT), which, as discussed in chapter 3, volume 1, is a permanent, not transitional measure. 4.1.3
Discussion
4.1.3.1 Why Safeguards? There are good arguments in favor of introducing safeguards into a trade agreement, as there are costs associated with them. The economic environment13 is constantly changing. New products and production technologies are discovered, consumer tastes change, governments come and go, new firms see the light of day, there could even be wars or warlike situations, and so on.14 For a trade agreement to be fully efficient, it would need to adapt to all these changes. Adaptation could be achieved only under two circumstances. If the parties could perfectly foresee the path of events, then they could write an agreement that would identify how its terms would change along the path. Alternatively, in the absence of perfect information, the parties may want to renegotiate the agreement any time a change occurs and write a fully state-contingent contract specifying commitments for each possible outcome of the underlying economic environment. It would, under either of these circumstances, be possible to specify a trade agreement that ex post ensures the desirable levels of trade. If desirable, this agreement could ensure a gradual adjustment to the changed environment. Hence, in neither case would there be a role for any provision that allowed for ex post change in tariff bindings.15 There are limits to human foresight, of course, and for this reason alone, the first option is utopic, especially in agreements of undefined duration (in principle, at least), like GATT. The second option requires a negotiation and a new agreement. Negotiations can be costly though, and their outcome is often unpredictable. The advantage of safeguard measures is this: they can be unilaterally imposed and, for this reason, they provide a quicker response to changes in the economic environment in particular industries (depending on the administrative requirements imposed on safeguard investigations). To understand this point, think of the following illustration. Consider an import-competing domestic industry that has suffered a severe negative shock. As matters stand, the industry has to shed 12,000 jobs. Suppose, first, that former employees could all immediately find employment, but at lower wages. This lowering of the wage would obviously be costly to workers. It would not be considered as an adjustment cost since it would simply reflect differences between two full-capacity equilibria, with no transitional period in between: the lowering of the wage is not a cost incurred during the transition from one
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employment situation to another. Suppose, now, that it takes each worker six months to search for new employment, no matter what; and during this period, the worker has to remain unproductive. This would be a social adjustment cost. During the transition period, the economy is temporarily producing at less than its long-run full capacity; but this cost does not depend on the speed of adjustment, since each worker by assumption has to be unemployed for six months, no matter what. This period of reduced output is, essentially, an unavoidable investment in a more efficient production pattern. It would, hence, not provide a rationale for imposing a safeguard measure that gradually moved workers to another industry since this measure would not affect the total magnitude of adjustment costs but would just cause a costly delay in the necessary adjustment. As a third possibility, assume that each quarter, 6,000 vacancies come up in another industry. A fine-tuned safeguard that gradually reduced the workforce in the declining industry could then ensure that 6,000 workers were reallocated during the first quarter and another 6,000 the next, without anyone having to be temporarily unemployed. By contrast, if all 12,000 workers had to leave the declining industry immediately, 6,000 of them would be unemployed for a quarter. The speed at which the adjustment takes place, thus, affects the aggregate adjustment costs, and there is a case for a safeguard: namely, to reduce temporarily the pace of adjustment in order to reduce adjustment costs.16 In their capacity to provide an escape from inflexible contract terms, safeguards may thus increase the efficiency of the contract after external shocks, as they may also reduce temporarily the rate of adjustment in order to reduce the total amount of adjustment costs.17 This does not mean, of course, that safeguards resolve the problem of lack of competitiveness in a sector. Something needs to be done when safeguards are in place—something that will enable the nation imposing them to avoid losing in terms of competitiveness in the medium-to-long run what it has gained in the short run through the imposition of safeguards. The agreement does take one decisive step in this direction by imposing a “dynamic use constraint” (as we will see later in this chapter), which obliges WTO members to stop imposing safeguards after a certain time. Those benefiting from safeguards cannot thus benefit forever. Although the agreement does not require some “corrective” action, absent similar action, those in need of protective action in the past will, in all likelihood, continue to need protection in the future.18 Safeguards can, thus, be beneficial ex post (e.g., after concessions have been agreed upon). Safeguards are beneficial ex ante as well, as they might induce countries to liberalize. Trading nations will be more generous when making tariff concessions in the knowledge that they can always retreat from their original position should things go awry than in the opposite case.19 Safeguards are, thus, like insurance contracts to some extent.20 They insure those making a commitment that they can always renege if the expected result does not match the actual return.
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4.1.3.2 Costs Associated with the Imposition of Safeguards Safeguards do not represent a cost-free option. There are costs (sometimes important costs) associated with the imposition of safeguards. If the source of wage rigidity in the example used in the previous subsection cannot be removed, for instance, it might still be preferable to use employment subsidies, or even production subsidies, since these instruments do not distort consumer prices to the same extent that safeguards do. Subsidies address one margin (that of producers), whereas safeguards address two (those of producers and consumers). Think of adjustment costs. Firms and workers often remain in the protected industry with the (rational) expectation that their government will continue to adopt adjustment measures in the future, if necessary. It has been shown that tariffs or quotas that remain in place until a firm adopts a new technology (in such a case, “adjustment” is defined as the need for a domestic firm to catch up with foreign technology) always delay the timing of the firm’s decision to start using that technology. Even worse, it could be the case that safeguarded action is not accompanied by adjustment at all. Then, it could mean facing the worst of all worlds. A cost will be imposed on consumers without removing the potential for repetition of safeguard action in the future. Furthermore, Bown (2005) shows why the targeting principle (one instrument for one problem)21 suggests that it is not possible for a single restricting safeguard policy to be the most efficient instrument at inducing both resource entry and resource exit. The weight that a government puts on adjustment costs may depend on who bears them. It is worth noting that the economic literature, taking into account the interactions between industry adjustment, lobbying, and the political response, suggests that the use of safeguard measures can raise future protection to the extent that it reduces adjustment, hence failing to reduce future lobbying efforts. Finally, very little is empirically known about the magnitude of social adjustment costs. Economists often dismiss these as being small and swamped by the gains from trade liberalization, even though it is acknowledged that they typically fall upon a few individuals, while the benefits from trade liberalization are spread over many more. Even less is known empirically about the extent to which adjustment costs depend on the speed of trade liberalization. The speed of adjustment, though, might often affect aggregate adjustment costs in a major way. Spence (2011, p. 73) elegantly describes the fallacy of safeguards when stating that their basis is that they protect people by protecting their jobs, whereas they should be protecting people rather than jobs.22 The discussion so far points to the conclusion that safeguards can be beneficial but do not come free. They buy time necessary to make adjustments, but adjustments are necessary anyway. Nonetheless, since adjustment is a domestic concern, the WTO does not deal with it, and does not even compel it. The downside is that the argument for protection risks becoming a recurring theme.
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4.1.3.3 Safeguards, Antidumping, and Countervailing Safeguards differ from both antidumping (AD) and countervailing duties (CVDs) in one important way. The reason for action in the safeguard context (the “contingency”) is the failure of the domestic import-competing industry to compete with the foreign industry. It is not exposed to unfair competition, and hence the injury suffered is not the effect of unfair behavior (e.g., dumping or subsidization) by the trading partners. There is another, less important difference between the three instruments. Whereas AD and CVDs can stay in place so long as the circumstances that gave rise to them continue to exist, following sunset (and/or administrative) reviews to this effect, safeguards cannot extend beyond eight years, even if the circumstances that gave rise to them continue to exist.23 Domestic industry can be alternatively protected through AD and safeguards. In many WTO members there is no firewall between the administrative units that deal with antidumping and/or safeguards. When going through a contraction (recession) in the business cycle, an investigating authority (IA) will have no difficulty to show that the domestic industry is injured. When looking for causal factors, it might find it easy to construe a dumping margin, especially when constructing the normal value. In similar scenarios, antidumping could play the role safeguards were supposed to perform. IAs might have strong incentive to use antidumping instead of safeguards. When imposing AD duties, they shut out the exporters that represent the competitor for their domestic industry from their market. When imposing safeguards, they will also be punishing innocent bystanders (and alienating their governments as well). 4.2 The Legal Relationship with GATT The SG Agreement is an Annex 1A Agreement. Hence, its relationship with GATT is regulated in the General Interpretative Note discussed in chapter 1 of volume 1. In this vein, panels have consistently held that a particular order of analysis of claims submitted would be followed when the consistency of a measure is challenged under both GATT and the SG Agreement. They would review claims made under the SG Agreement first, and then, to the extent necessary, under GATT. It is by acknowledging the legal relevance of GATT that panels and the Appellate Body (AB) have moved also to acknowledge the relevance of unforeseen developments as a condition for the lawful imposition of safeguards, a condition that is missing in the SG Agreement. The term “unforeseen developments” does not appear in the SG Agreement, but is a condition for lawful imposition of safeguards under Article XIX of GATT.
1995
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1
ReportingMember
Argentina Australia Brazil Bulgaria* Canada Chile China, P.R. Colombia Costa Rica Croatia Czech Republic* Dominican Republic Ecuador Egypt El Salvador Estonia* European Union* Hungary* India Indonesia Israel Jamaica Japan Jordan Korea, Rep. of
0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2
1996 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0
1997 1 1 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 5 0 0 0 0 0 0
1998 0 0 0 0 0 2 0 1 0 0 1 0 2 1 0 0 0 0 3 0 0 0 0 0 1
1999 1 0 0 1 0 3 0 0 0 0 2 0 0 1 3 0 0 0 2 0 0 0 1 1 0
2000 1 0 1 1 0 2 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0
2001
Table 4.1 Safeguard initiations by reporting member—29 March 1995–31 October 2010
0 0 0 3 1 2 1 0 1 0 5 0 1 0 0 0 1 1 2 0 0 0 0 8 0
2002 0 0 0 1 0 0 0 0 0 0 0 0 4 0 0 1 1 2 1 0 0 1 0 0 0
2003 1 0 0 0 0 1 0 2 0 0 0 0 0 0 0 0 1 0 1 1 0 0 0 0 0
2004 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0 1 0 0 1 0 0 0 1 0
2005 1 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 1 0
2006 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0
2007 0 0 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1 2 0 0 0 2 0
2008 0 0 0 0 0 1 0 0 0 1 0 3 0 0 0 0 0 0 10 0 1 0 0 0 0
2009 0 0 0 0 0 0 0 0 0 0 0 2 1 0 0 0 1 0 0 7 0 0 0 1 0
2010
6 2 3 6 3 12 1 3 1 1 9 5 8 4 3 1 5 3 26 12 1 1 1 15 4
Total
Safeguards 319
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 2
Kyrgyz Rep. Latvia* Lithuania* Mexico Moldova Morocco Pakistan Panama Peru Philippines Poland* Slovak Republic* Slovenia* South Africa Tunisia Turkey Ukraine United States Venezuela Totals
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 5
1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 3
1997 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 10
1998 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 2 0 15
1999 0 0 0 0 0 2 0 0 0 0 1 1 0 0 0 0 0 2 4 25
2000 0 0 1 0 0 0 0 0 0 3 0 0 0 0 0 0 0 1 1 12
2001 0 1 0 1 0 0 0 0 0 0 4 1 0 0 0 0 0 0 1 34
2002 0 0 0 0 1 0 0 0 0 3 0 0 0 0 0 0 0 0 0 15
2003 0 0 0 0 1 0 0 0 1 0 0 0 0 0 0 5 0 0 0 14
2004 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 7
2005 0 0 0 0 0 0 0 1 0 1 0 0 0 0 2 5 0 0 0 13
2006 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 3 2 0 0 8
2007 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 1 0 0 10
2008 2 0 0 0 0 1 0 0 1 1 0 0 0 0 0 1 2 0 0 25
2009 1 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 3 0 0 18
2010
3 2 1 2 2 5 1 1 2 9 5 3 1 1 2 15 8 10 6 216
Total
Note: The EU enlarged its membership on 1 May 2004 and on 1 January 2007. The newly acceded countries still appear in the tables in this database as individual WTO members. All figures pertaining to the EU are counted: (a) on a 15-member basis for the period between 1 January 1995–30 April 2004; (b) on a 25-member basis for the period between 1 May 2004–31 December 2006; and (c) on a 27-member basis for the period after 1 January 2007.
1995
ReportingMember
Table 4.1 (cont.)
320 Chapter 4
1996
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1
Reporting Member
Argentina Brazil Bulgaria* Chile China, P.R. Croatia Czech Republic* Dominican Republic Ecuador Egypt European Union* Hungary* India Indonesia Jordan Korea, Rep. of Kyrgyz Rep. Latvia* Lithuania* Moldova Morocco Panama Philippines Poland* Slovak Republic* South Africa Turkey Ukraine United States Total
1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 3
1997 0 0 0 0 0 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 5
1998 0 0 0 0 0 0 1 0 0 1 0 0 1 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 1 5
1999 0 0 0 2 0 0 0 0 0 1 0 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 2 7
2000 2 0 0 1 0 0 1 0 1 1 0 0 0 0 1 0 0 0 0 0 1 0 0 0 1 0 0 0 0 9
2001 0 1 2 2 1 0 1 0 0 0 1 0 2 0 1 0 0 0 1 0 0 0 1 0 0 0 0 0 1 14
2002
Table 4.2 Safeguard measures by reporting member—29 March 1995–31 October 2010
0 0 0 0 0 0 2 0 1 0 0 3 0 0 2 0 0 1 0 0 0 0 1 4 1 0 0 0 0 15
2003 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 1 0 0 3 0 0 0 0 0 0 6
2004 0 0 0 1 0 0 0 0 0 0 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 2 0 0 6
2005 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 0 0 4 0 0 7
2006 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 1 1 0 0 5
2007 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 1 0 6
2008 0 0 0 0 0 1 0 0 0 0 0 0 3 2 0 0 1 0 0 0 0 0 1 0 0 0 1 1 0 10
2009 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2
2010
4 2 2 7 1 1 5 1 3 4 3 3 12 3 7 2 1 2 1 1 2 1 6 4 2 1 12 2 6 101
Total
Safeguards 321
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4.3 The Road to the SG Agreement The Uruguay-round SG Agreement24 was very much a request by target countries (usually in southeast Asia) to put an end to voluntary export restraints (VERs). Now, what exactly are VERs? In principle, in the GATT regime, safeguards had to be imposed erga omnes, and, as a result, many innocent bystanders would often pay the price for injury caused by a few mavericks, e.g., the most competitive producers worldwide.25 Through VERs, importers could target the mavericks and request them to limit the amount of their exports. Innocent bystanders would stand in harm’s way. VERs emerged, thus, as a de facto selective safeguard. It was highly unlikely that the consistency of VERs with GATT would be challenged, for the incentives to do so were missing, as we detail later in this chapter. The targets of VERs requested an end to this practice. This request is basically the reason why we moved from Article XIX of GATT to the WTO Agreement on Safeguards. 4.3.1 The Original Safeguard Clause Article XIX of GATT allowed modification of concessions if, as a result of unforeseen developments, increased imports caused injury to the domestic industry producing the like product. The implicit understanding was that safeguards would be imposed on a nondiscriminatory basis. Article XIX of GATT did not explicitly request that imposed safeguards be nondiscriminatory. Originally, the Havana Charter (ITO) contained an explicit requirement to impose safeguards in a nondiscriminatory manner. The relevant subcommittee had gone so far as to propose an Interpretative Note to Article 40 of the Havana Charter (the corresponding provision to Article XIX of GATT) that would read: It is understood that any suspension withdrawal or modification under paragraphs 1(a), 1(b) and 3(b) must not discriminate against imports from any member country.26
However, no explicit mention of the obligation to impose safeguards on a nondiscriminatory basis was included in the body of Article XIX of GATT, which reads in part: “the contracting party shall be free ... to suspend the obligation in whole or in part or to withdraw or modify the concession.” In the absence of language permitting selective action, the inference was that concessions would be modified or withdrawn erga omnes. This conclusion is further strengthened by the terms “in respect of such product” appearing in the body of Article XIX.1(a) of GATT. The reference to “such product” was understood as a nondiscriminatory change in the customs duty for a particular tariff line. Two notes by the GATT Secretariat (one of which was by the Executive Secretary) reached the same conclusion.27 A GATT panel, Norway−Textiles, provided additional support for this understanding. Norway had imposed quotas on textiles, but it did not impose any on textiles originating in European countries
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[members of the European Economic Community (EEC) and the European Free Trade Association (EFTA)]. The panel held that this measure was inconsistent with the obligations of Norway under GATT (§ 16): The Panel was of the view that to the extent that Norway had acted with effect to allocate import quotas for these products to six countries but had failed to allocate a share to Hong Kong, its Article XIX action was not consistent with Article XIII.
Recall that Article XIII of GATT reflects this nondiscrimination obligation. By construing Article XIX of GATT in light of Article XIII of GATT, the Panel on Norway–Textiles effectively held that safeguards can only be imposed on nondiscriminatory basis. 4.3.2
Practice Evolves Contra Legem: VERs
Neither the EU nor the US liked the idea of nondiscriminatory safeguards. Their domestic lobbies would be served through selective actions, and national administrations would not have to face the wrath of the GATT membership when doing so. The first opportunity they had to change the rules in this respect was during the Tokyo round, where a code on safeguards was negotiated. The Leutwiler report28 makes references to intense negotiations during the Tokyo round, where the EU and the US tried in vain to persuade the rest of the membership to provide explicitly for country-specific safeguards.29 What the EU and the US did not manage to get transparently, by law, they achieved by stealth. In the absence of a formal agreement to adopt selective safeguards, target countries would, upon request, voluntarily agree to limit their exports toward particular destinations.30 This was the advent of VERs. The name “VER” probably stems from the fact that no formal treaty would be signed to this effect. VERs amounted to unilateral reductions of exports. They were hardly unilateral, of course, since they were informally concluded at the request of the importing state. Thus, the term “VER” was an embellishment of the underlying situation, and through these measures, an exporter, at the informal request of another trading nation, would agree to cap its volume of exports or raise their prices.31 4.3.2.1 Why VERs? The attractiveness of VERs lies in that they allow the requesting state to achieve a politically desirable result of questionable legality without running much of a risk that its practices will be unveiled. The requesting nation does not have to instigate a formal investigation provoking the wrath of either its own user industry or of its own consumers at large. Behind closed doors, it would advance the agenda of its producers, which for reasons of political economy matters to them, and insulate the national market from foreign competition. In doing that, concerns of the local workforce would also be served. The cost of the policy will not be unveiled. VERs are, thus, politically advantageous measures so far as the importing
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(requesting) country was concerned, because of the nontransparency associated with them. At the same time, they are not that burdensome to exporters, as we detail next. 4.3.2.2 VERs and GATT VERs were of dubious GATT consistency, if not outright illegal. The legality of VERs, though, was never formally tested before a GATT panel.32 Incentives were lacking. The requesting state would not normally attack a practice that it had requested. The country limiting its exports had little incentives to do so as well. First, the requesting state was often the country with the greater bargaining power that could threaten retaliation in various fields. Second, the argument for litigation was weakened by the fact that, as anecdotal evidence suggests, requests for VERs were often accompanied by nonobservable consideration.33 But even if this were not the case (that is, even if no compensation was paid), a request to conclude a VER had some built-in compensation for exporters, and Ethier (1991), and Smith and Venables (1991) have, in separate papers, persuasively explained why this is the case. In the absence of an expectation of capturing the totality of a market, exporting countries that have agreed to a VER will raise the price of their exported goods to that of the competition and will pocket monopoly rents.34 The best solution for them would, of course, be to capture the whole of the market. The second best would be to make more money from fewer sales and then, depending on the magnitude of “switching costs,” attempt to sell their remaining produce to other markets. Literature has pointed to other gains for “capped” exporters. They could trade up (that is, move from low- to high-value goods) and increase product differentiation. Furthermore, accepting a VER could buy the nation limiting its exports substantial goodwill. The conclusion is that, for good reason, exporters requested to cap exports had little if any incentives to challenge their consistency with GATT. In practice, they never did. But what about consumers bringing forward complaints? Ample empirical work suggests that it is consumers in the importing market that will be burdened by paying higher prices. Consumers, however, have no standing before the WTO,35 and if they tried to litigate a case before domestic courts, they would have to face the substantial costs of gathering information and the associated collective action problem: they would find it difficult to persuade all consumers to participate financially in the litigation process. Barring consumer-wide participation, a few would face the dilemma of whether to finance an endeavor themselves from which many other, nonparticipating consumers would profit, or whether to drop the charge altogether. Unsurprisingly, because of the associated cost and the magnitude of the free-riding issue, litigation did not occur. Moreover, some legal regimes would not even allow courts to interpret “public interest” in this context. Who else, then, could bring forward a complaint? Well, practice has already provided us with a response that we discussed in chapter 2 of volume 1. In Japan–Semiconductors, the EU, a third market, brought a complaint against the US–Japan VER on Semiconductors
Safeguards
325
because it felt the negative consequences of the hike in export prices that Japan had agreed to. In this case, nevertheless, it was not the consistency of the VER with the GATT rules that was at stake. It was, rather, the “unilateral” conduct by Japan that was judged inconsistent with Article XI of GATT, as we saw in chapter 2 of volume 1. Moreover, this case concerns third-country effects, not the effects of the VER on the market of the country requesting it. VERs did not have to include similar clauses regarding third-country effects. As a result, although good arguments could be advanced regarding the inconsistency of VERs with the relevant GATT rules, GATT panels never had the opportunity to pronounce on this score, for the reasons mentioned previously. 4.3.3
US Safeguard Practice
It is not only the proliferation of VERs that was a cause of concern for exporters. The US, the leading trading nation, had adopted legislation over the years that eased the way for petitioners to successfully request safeguard action. The laws were of doubtful consistency with GATT. The US initiatives made its own national safeguard clause, the notorious Section 201 of the US Trade Act, quite flexible. First, the US Congress relaxed the “causality requirement,” introducing a new paragraph, § 6(a), that stated: “... increased imports are attributable in part to circumstances which ...”36 Consequently, even if injury was only partly caused by increased imports, safeguard action could still be undertaken under US law. Then, the Trade Act of 197437 amended the requirement that the resulting injury be a “substantial” cause of injury, and adopted instead a different, less stringent standard: imports should be a “major” cause of injury. The US, through similar initiatives, facilitated frequent recourse to safeguards in the 1980s and 1990s. Its practices were often challenged before the WTO, as we will see later in this chapter, but also at the negotiating table. On the face of it, neither of the two requirements was unreasonable. It is hardly ever the case that injury is the outcome of one factor only. Moreover, the difference between “substantial” and “major” could, in principle at least, be pure semantics. It was the manner in which these amendments were implemented that provoked litigation. Litigation can of course lead to ad hoc solutions only. What affected parties wanted most was a return to more stringent standards. This could be obtained only through a renegotiation of the safeguard clause. 4.3.4
Onto the Agreement on Safeguards
During the Uruguay round, a number of exporting nations requested that the practice of VERs be explicitly outlawed, and the requirements for safeguard action be tightened. They managed to get their argument through, but not without concessions. Two provisions underscore the conclusion that their view won the day. Indirectly, Article 2.2 of SG makes
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it legally impossible to have recourse to VERs nowadays, since “[s]afeguard measures shall be applied to a product being imported irrespective of its source.” More directly, Article 11.1(b) of SG explicitly outlaws recourse to VER. It reads: Furthermore, a Member shall not seek, take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side. These include actions taken by a single Member as well as actions under agreements, arrangements and understandings entered into by two or more Members. Any such measure in effect on the date of entry into force of the WTO Agreement shall be brought into conformity with this Agreement or phased out in accordance with paragraph 2.
The term “orderly marketing arrangement” is not further explained in the agreement, but it is often used in practice as a synonym for “VERs,” and, on occasion, as having a wider connotation—that is, as referring to coordination of the total supply of a commodity in order to achieve the joint market objectives of both sellers and buyers. The inclusion of this term in the agreement, as well as the inclusion of the term “other similar measures,” is evidence of the intention to outlaw not only VERs, but also any measure that has a similar function. A footnote to this provision provides some additional information regarding the ambit of the term “other similar measures”: Examples of similar measures include export moderation, export-price or import-price monitoring systems, export or import surveillance, compulsory import cartels and discretionary export or import licensing schemes, any of which afford protection.
The list of measures included in this list underscores the point made earlier; that is, that the intent was to outlaw all measures exhibiting characteristics similar to a VER. A footnote to this provision introduces a caveat to the in principle prohibition to have recourse to VERs: An import quota applied as a safeguard measure in conformity with the relevant provisions of GATT 1994 and this Agreement may, by mutual agreement, be administered by the exporting Member.
Consequently, a safeguard measure in the form of a quantitative restriction (QR), which is administered by the exporter, is lawful. This looks like opening the back door to VERs— déjà vu all over again, in other words. There are some differences, though, between a VER and a mechanism like the one described in this footnote. The term “administered,” featured in the footnote, could mean that the exporting country is simply entrusted with the duty to ensure that no more than the quantities unilaterally defined by the WTO member taking the safeguard action will be exported. It does not necessarily mean that the rents will stay with the exporter. The rents could (theoretically at least) stay with the importer. And, of course, we are talking about legal QRs here—that is, QRs that can be justified through recourse to one of the provisions discussed in chapter 2, volume 1. There was one more concession that exporters had to make. They accepted that importers can modulate quotas, provided that some conditions have been respected, and
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punish some exporters harder than others. We will discuss this mechanism later in this chapter. Does the in principle prohibition to use VERs represent a victory for exporters? Our brief discussion of monopoly rents earlier in this chapter shows that the incentives could be there to agree on VERs, the legal prohibition notwithstanding. Prohibiting them by law, in other words, does not necessarily amount to extinguishing them in practice. Under the circumstances, one might legitimately wonder whether the fight to eliminate VERs was worth fighting at all. To make matters worse for those requesting their elimination, there is another unwanted effect of overdisciplining safeguards. It might incentivize those interested in providing their producers with breathing space to fewer tariff concessions, more frequent use of the AD Agreement, or both. Through AD, they could target “mavericks” (their true concern) and leave innocent bystanders in peace. Moreover, unlike what happens in the SG Agreement, recourse to AD is not conditioned upon the payment of consideration. This is not to say that VERs should be encouraged; it is simply to suggest that the victory exporters won at the negotiating table of the Uruguay round has all the signs of a “pyrrhic victory.” 4.4 The Right to Safeguard Action The AB, in its report on US–Line Pipe, advanced a distinction between the “right” to impose a safeguard and the “lawful application” of a safeguard. For a right to exist, a WTO member must ensure that it has met all of the statutory requirements to this effect, which will be discussed in what immediately follows. For an application to be lawful, the safeguard measure may be applied only to the extent necessary to counteract the resulting damage (§§ 83–84): A WTO Member seeking to apply a safeguard measure will argue, correctly, that the right to apply such measures must be respected in order to maintain the domestic momentum and motivation for ongoing trade liberalization. In turn, a WTO Member whose trade is affected by a safeguard measure will argue, correctly, that the application of such measures must be limited in order to maintain the multilateral integrity of ongoing trade concessions. The balance struck by the WTO Members in reconciling this natural tension relating to safeguard measures is found in the provisions of the Agreement on Safeguards. This natural tension is likewise inherent in two basic inquiries that are conducted in interpreting the Agreement on Safeguards. These two basic inquiries are: first, is there a right to apply a safeguard measure? And, second, if so, has that right been exercised, through the application of such a measure, within the limits set out in the treaty? These two inquiries are separate and distinct. They must not be confused by the treaty interpreter. One necessarily precedes and leads to the other. First, the interpreter must inquire whether there is a right, under the circumstances of a particular case, to apply a safeguard measure. For this right to exist, the WTO Member in question must have determined, as required by Article 2.1 of the Agreement on Safeguards and pursuant to the provisions of Articles 3 and 4 of the Agreement on Safeguards, that a product is being imported
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into its territory in such increased quantities and under such conditions as to cause or threaten to cause serious injury to the domestic industry. Second, if this first inquiry leads to the conclusion that there is a right to apply a safeguard measure in that particular case, then the interpreter must next consider whether the Member has applied that safeguard measure “only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment,” as required by Article 5.1, first sentence, of the Agreement on Safeguards. Thus, the right to apply a safeguard measure— even where it has been found to exist in a particular case and thus can be exercised—is not unlimited. Even when a Member has fulfilled the treaty requirements that establish the right to apply a safeguard measure in a particular case, it must do so only to the extent necessary. ... (italics in the original)
It is doubtful what this distinction entails, if anything at all. It looks like a false dichotomy. For example, couldn’t one take the view that all of these statements refer to conditions for lawful application of safeguards? The AB has insisted on this dichotomy in subsequent case law as well, and this is the reason why we divide the discussion that follows in line with the dichotomy established by the AB. In this section, we discuss the “right” to safeguard action, and in the next section, we focus on the conditions for lawful application of safeguards. According to Article 2 of SG, two conditions must be cumulatively met for the lawful imposition (Article 2 of SG): (a) A product must be imported in increased quantities; (b) So as to cause serious injury to the domestic industry producing the like or directly competitive product. Case law has added one more condition. Increased imports have to be the result of “unforeseen developments.” The AB on Argentina–Footwear (EC) held that the imposition of safeguards must observe the conditions spelled out in the SG Agreement, as well as in Article XIX of GATT. It is the latter provision that contains the “unforeseen developments’ requirement. We quote from its report on Argentina–Footwear (§ 181): Therefore, the provisions of Article XIX of GATT 1994 and the provisions of the Agreement on Safeguards are all provisions of one treaty, the WTO Agreement. They entered into force as part of that treaty at the same time. They apply equally and are equally binding on all WTO Members. And, as these provisions relate to the same thing, namely the application by Members of safeguard measures, the panel was correct in saying that “Article XIX of GATT and the Safeguards Agreement must a fortiori be read as representing an inseparable package of rights and disciplines which have to be considered in conjunction.” Yet a treaty interpreter must read all applicable provisions of a treaty in a way that gives meaning to all of them, harmoniously. And, an appropriate reading of this “inseparable package of rights and disciplines” must, accordingly, be one that gives meaning to all the relevant provisions of these two equally binding agreements. (italics in the original)
The argument advanced by the AB in order to support its decision that the unforeseen developments-requirement kept its relevance following the advent of the SG Agreement is rather shaky. Article 2 of SG is entitled “Conditions,” and it does not mention “unforeseen
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developments” among the conditions for the lawful imposition of safeguards. The AB held, nonetheless, that the legal basis for adding “unforeseen developments” to the statutory requirements for lawfully imposing safeguards was not Article 2 of SG, but rather Article 1. This provision, entitled “General Provision”, states that safeguard measures will be understood to be the measures provided for in Article XIX of GATT (§§ 81ff., and especially 83, 84, 93, and 94).38 This was far from being a persuasive argument. Article 1 of SG refers to the “types” of measures that can be used as safeguards. In contrast, it is Article 2 of SG, as mentioned previously, that discusses the “conditions” for lawful imposition, and it does not mention the “unforeseen developments” requirement. Be it as it may, this is by now water under the bridge, as panels and the AB have consistently held that the two agreements apply in tandem, and hence safeguards will be legally imposed only if they comply with the requirements of both GATT and the SG Agreement.39 4.4.1
Unforeseen Developments
4.4.1.1 The Rationale Recall that in the 1934 US–Mexico Agreement, a safeguard clause was included to “protect” US industries from damage resulting from tariff concessions. It is true that as a result of tariff concessions, other things equal, imports will be boosted. Trading nations can, based on the information before them, roughly calculate the amount of imports that they will take when making tariff cuts. The more sophisticated national administrations are, the more robust calculations will be. Practice, nevertheless, can surprise even the most sophisticated administrations. A technology shock, or simply the passage of time, can throw elaborate evaluations out there. Indeed, how many books were written in the 1970s forecasting that Japan would have overtaken the most advanced Western economies in terms of gross domestic product (GDP) per capita by the end of the twentieth century? Trade contracts like GATT/WTO, which run indefinitely and are renegotiated once every decade or even less frequently, carry inherently with them the risk of miscalculations of this sort. Concessions can thus prove to be more of a burden than Home had originally planned, and it might end up importing many more widgets than it thought would have been the case when entering into an agreement with Foreign. The term “unforeseen developments” was contracted to provide insurance, should the original calculations prove wrong that no flood of imports will occur. Recall from the discussion earlier in this chapter that negotiation of a “complete” contract that would provide each possible contingency and the mechanism for adjusting the contract correspondingly is a futile, if not impossible, exercise altogether. Recall, also, that renegotiation of the contract can be quite costly. It is for good reason that recourse to unilateral action was privileged. All this is fine, but why should unilateral action be conditional upon the satisfaction of the unforeseen developments-requirement? Saggi (2010) has convincingly argued that
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there is a real need to include this requirement. Here is how his argument goes. Whenever tariff concessions are made, other things equal, the quantity of imports will increase (since their price drops as a result of the reduction of the level of customs duties). So something more than “increased imports” should be required in order to trigger the safeguard action. Absent the “unforeseen developments” requirement, WTO members would be taking with one hand what they would be giving with the other, since they would almost always be in a position to satisfy the increased imports requirement.40 The unforeseen developments requirement was meant to fill the gap between the anticipated (because of the reduction of the tariff level) and unanticipated (because of other, nonmentioned factors) level of imports. It is a necessary condition in order to avoid the fact that trading nations consistently “take with one hand what they have given with the other.” A number of issues, of course, naturally arise here: • What kind of events should trigger this clause? • What if the importing state had contributed to the event provoking the import surge? The SG Agreement did not respond adequately to any of these questions, which are quite important in understanding the function of the term “unforeseen developments,” and this has left the interpreter with a mountain to climb. At any rate, the first point given here could not have been contracted. The whole idea of GATT was to do away with QRs. We are undeniably facing a conundrum here: GATT is premised on the idea that trade liberalization will not occur by exchanging volumes, and yet absent some sort of quantitative estimation about expected trade the unforeseen developments requirement becomes unworkable. This is not necessarily a contradiction, though, since there is no contractual arrangement regarding the volumes of goods that will be traded. The accent is on the event that triggers the safeguard clause: the unforeseen development. Nevertheless, a benchmark to evaluate the impact of unforeseen developments on the volume of trade must exist, and this should somehow be established. This could be done in two ways. One could imagine that a comparison is performed between anticipated and actual volume of trade. In this scenario, the additional question must be whose anticipation matters, the importer’s or the exporter’s? Another way to respond to the question is by comparing trade volumes before and after the occurrence of the unforeseen event. The unforeseen event must, in this scenario, occur after concessions have been exchanged, or, at the very least, its impact should be felt after this point in time. Case law has more sympathy for this second view. It has left a series of questions open though, as we detail in what follows. The second point was not explicitly contracted either. The term “unforeseen developments” was privileged, which can cover a wide range of situations that share only one feature: they had not been foreseen when the contract (tariff concession) was signed. However, it must be that events that are regarded as unforeseen could not have been
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forecasted by the WTO member making the concession. The underlying assumption must be that, had the member making the concession foreseen the event, it would have addressed its impact through its commitment. The SG Agreement is silent on the last point as well. There is general public international law that could be utilized to address this issue. With all this in mind, we now turn to practice. 4.4.1.2 The (Lack of) Definition In the absence of a statutory definition of the term “unforeseen developments,” case law has contended itself to examining on a case by case basis whether a particular circumstance raised by the parties to a dispute qualifies as an “unforeseen development.” There is one exception to this rule, but it is not helpful at all. In Korea–Dairy, the AB attempted to interpret the term “unforeseen developments” and held that “unforeseen” should be read as being synonymous with “unexpected.” It should not be understood as being synonymous with “unpredictable,” which in turn would be synonymous with the term “unforeseeable” (§ 84). The consequences of this finding are hard to grasp, but it seems that the AB wanted to make it easier for investigating authorities (IAs) to meet the test. The functionality of the requirement has also been discussed in case law. The AB, in its report on US–Steel Safeguards, underscored that unforeseen developments must result in increased imports of the product under investigation (to which safeguard measures will eventually be applied). In §§ 316ff., it held that there must be a “logical connection” (§ 318) between the unforeseen developments mentioned in the order and the product the imports of which will be restricted (§ 320). The logical connection standard is the manner in which the AB interpreted the term “as a result of” appearing in the body of Article XIX of GATT. It probably wanted to denote that the statutory requirements have been satisfied to the extent that imports have increased as a result of, inter alia (as opposed to exclusively), unforeseen developments. It did not clarify whether unforeseen developments should be a proximate or the ultimate cause. We will revisit this issue later in this chapter. In what follows, we explore specific cases where an IA claimed that it was facing unforeseen developments. Fashion In Hatters’ Furs Sales, the panel held that it was not so much the development that had to be unforeseen (in this case, the change in fashion), but rather its damaging effect on the domestic industry. This case related to the withdrawal of a concession by the US on women’s fur hats and hat bodies. The members of the Working Party agreed that the fact that hat styles had changed did not constitute an unforeseen development within the meaning of Article XIX of GATT, but that the effects of this development did (§§ 11–12):
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... the other members of the Working Party, Except the representative of the United States, Agreed with the Czechoslovak Representative that the fact that hat styles had changed did not constitute an “unforeseen development” within the meaning of Article XIX. These Members and the representative of the United States considered, however, that the United States negotiators in1947 could not reasonably be expected to foresee that this style change in favour of velours would in fact subsequently take place, and would do so on as large a scale and last for as long a period as it in fact did. ... particularly the degree to which the change in fashion affected the competitive situation, could not reasonably be expected to have been foreseen by the United States authorities in 1947, and that the condition of Article XIX that the increase in imports must be due to unforeseen developments and to the effect of the tariff concessions can therefore be considered to have been fulfilled.
This GATT panel report was adopted even though the complainant, Czechoslovakia, had disagreed with the findings, and was published because of the contribution it made to the understanding of Article XIX of GATT. It has often been cited in subsequent case law, which is proof of its continuing legal relevance. What is interesting in this case is the attitude toward the term “unforeseen developments.” It is not the event (namely, “change of fashion”), but its extent that was considered the “unforeseen development.” In other words, the term “unforeseen developments” in this reading is wide enough to also capture situations where a contingency was (or could have been) “foreseen,” but its nefarious consequences could not have been foreseen. Macroeconomic Events Could financial crises or currency variations be considered as unforeseen developments? This was one of the claims presented in US–Steel Safeguards, where the US had argued that safeguards were meant to address macroeconomic disequilibria. The US had argued that the combination of a strong dollar with the overall prevailing situation in the Asian and Russian markets (financial crisis) had exacerbated the amount of imports of steel products into the US market. Both the panel and the AB agreed that this was a plausible scenario mandating the use of safeguards, but they found fault with the US since it did not manage to demonstrate how, because of the strong dollar and the prevailing financial crisis in the Russian and Asian markets, exports of steel to the US market had been boosted (§§ 308, AB report). Safeguard Measures Could safeguard measures taken by Home be considered an unforeseen development, and hence constitute the basis for Foreign to adopt safeguards? Safeguards could, in theory, trigger a cascade of safeguards, since the closing of one market might lead to trade deflection, that is, to switching exports to another market. Indeed, this is what happened in the steel industry in the early 2000s. US–Steel Safeguards represents a litigation that originates in this context. Some WTO members closed down their import markets by imposing safeguards and, as a result, exports were redirected to markets with no safeguards in place. To make
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matters worse, production of steel worldwide at that time exceeded demand, and storage costs were quite high. As a result, many producers dumped their production into the world market. Under the circumstances, the effect of a safeguard indeed could be unforeseen. The panel report on US–Steel Safeguards offers a lengthy discussion of this issue (§§ 10.110ff.). The discussion above leads us to conclude that case law has failed to come up with an understanding of the term “unforeseen developments” except for mundane interpretations like “unforeseen” should not be equated to “unforeseeable.” The good news is that this requirement does not seem to matter much in practice. The passage of time in and of itself is a factor that reduces the capacity of administrations to foresee developments. When rounds take a long time to conclude (as routinely happens nowadays), and there is a substantial passage of time between them, it could be that meeting the unforeseen developments requirement becomes easy. Moreover, since the capacity to foresee is highly endogenous, and since various administrative authorities have asymmetric endowments and capacities, the test will be easier to meet for those with fewer resources. Against this background, Sykes (2003a) questions whether this requirement should be maintained at all. As he explains, since anything can in equilibrium affect trade, it is simply impossible to reasonably request from a WTO member to foresee events that will occur in the notimmediate future. This seems quite reasonable and is probably in line with the negotiating intent of the SG Agreement, where, as we saw, this requirement was omitted from the list of Article 2 of SG. 4.4.1.3 Unforeseen When? The Panel on Hatters’ Fur Sales held that (p. 10) the term “unforeseen development” should be interpreted to mean developments occurring after the negotiation of the relevant tariff concession which it would not be reasonable to expect that the negotiators of the country making the concession could and should have foreseen at the time when the concession was negotiated.41
This seems prima facie quite reasonable. The most recently concluded tariff concessions occurred at the end of the Uruguay round (1994), and those immediately before them, back in 1979. Could anyone reasonably foresee in 1979 what would occur in 1994? Could anyone foresee today’s events back in 1994? This is precisely why we suggested previously that, when considering the time necessary to conclude a multilateral round of trade negotiations, the test is easier to meet. 4.4.1.4 Procedural Requirements Law imposes only a substantive requirement that must be met when recourse to safeguard action is made: increased imports must be the result of unforeseen developments. Case law has added two procedural steps that IAs must observe. First, an IA must demonstrate that it has reviewed how the unforeseen developments requirement has been met. And,
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second, the evaluation should not be en passant, since an IA must demonstrate how the safeguards are linked to the unforeseen developments requirement. The AB on US–Lamb held that an IA must explain, in the order imposing safeguard measures, how it has observed the unforeseen developments requirement. Failure to satisfy this procedural requirement is fatal (§§ 72–73).42 In this vein, the Panel on US–Steel Safeguards concluded that the question of whether an explanation that developments were indeed unforeseen is sufficient and adequate will depend on the circumstances of the case (§ 10.115). In this case, the US IA had prepared a special report (referred to as the “Second Supplementary Report” in the panel report), which focused on unforeseen developments (§ 10.116). For both the panel and the AB, it was immaterial that the report had been prepared separately (e.g., following the issuance of the final report imposing safeguards). It sufficed that it was part of the record of investigation.43 Still, the measure was judged to be WTO-inconsistent, since, in the eyes of the panel, the IA had failed to provide a sufficient, adequate, and reasoned explanation linking the possible unforeseen developments to the specific increase in imports of the products covered by the measure (§ 10.122). The panel found that the US IA had referred to a plausible set of circumstances concerned with the Asian and Russian financial crises at the end of the 1990s, as well as the strong US dollar and economy (§ 10.121). It had not examined whether the actual circumstances in the case at hand could have given rise to unforeseen developments, and this is why the US, in the panel’s view, had acted inconsistently with the requirements of the SG Agreement. In other words, had the US managed to connect increased imports in the US market to the financial crises abroad and the strong US dollar, it would have prevailed. It did not, and it lost.44 The Panel on Argentina–Preserved Peaches found that a “reasoned” explanation as to why developments were unforeseen was required (§ 7.33): A mere phrase in a conclusion, without supporting analysis of the existence of unforeseen developments, is not a substitute for a demonstration of fact. The failure of the competent authorities to demonstrate that certain alleged developments were unforeseen in the foregoing section of their report is not cured by the concluding phrase.
In a similar vein, the AB on US–Steel Safeguards held that, for an IA to satisfy this requirement (“reasoned and adequate explanation”), it did not suffice that a WTO member considered data, which could be relevant. It should also explain how such data satisfied the unforeseen developments requirement (§ 279, §§ 318–319, § 322, and § 329).45 Echoing this approach, in Argentina–Footwear (EC), the AB considered unforeseen developments to be “a circumstance which must be demonstrated as a matter of fact” (§ 92). What needs to be demonstrated is not merely the existence of unforeseen developments, but rather the existence of a logical link between unforeseen developments and the resulting increase in imports for each of the products subject to the safeguard measure.
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Increased Quantities of Imports
Article 2.1 of SG provides that, for safeguards to be imposed, a product must be imported in such increased quantities, absolute or relative to domestic production, as to cause serious injury.46 Recall that Article 2 of SG does not mention the unforeseen developments requirement among the conditions that must be met for lawful safeguard action to be taken. Nevertheless, because of the manner in which case law has developed (as we have seen previously in this chapter), it must be that increased imports are the result of unforeseen developments. 4.4.2.1 Recent, Sudden, Sharp, Significant Increase: Trends Matter Case law suggests that, for the increased imports requirement to be satisfied, it is trends that matter, and not point-to-point comparisons. In this vein, IAs must show a “recent, sudden, sharp, and significant” increase in imports. In Argentina–Footwear (EC), the AB explained why it is an evaluation of trends that matters when it comes to satisfying the requirements of Article 2.1 of SG. It ruled that panels should not look at isolated transactions or absolute numbers based on a point-to-point comparison (§ 129). It used the term “trend” to denote the need to show a pattern.47 The AB emphasized that if an increase occurred early on in the presented data and was followed by a decrease, then the increased imports requirement might not be satisfied. It is necessary for the competent authorities to focus on recent imports, keeping in mind that it is trends that matter (§ 130). The AB upheld (§ 131): We recall here our reasoning and conclusions above on the meaning of the phrase “as a result of unforeseen developments” in Article XIX:1(a) of the GATT 1994. We concluded there that the increased quantities of imports should have been “unforeseen” or “unexpected.” We also believe that the phrase “in such increased quantities” in Article 2.1 of the Agreement on Safeguards and Article XIX:1(a) of the GATT 1994 is meaningful to this determination. In our view, the determination of whether the requirement of imports “in such increased quantities” is met is not a merely mathematical or technical determination. In other words, it is not enough for an investigation to show simply that imports of the product this year were more than last year—or five years ago. Again, and it bears repeating, not just any increased quantities of imports will suffice. There must be “such increased quantities” as to cause or threaten to cause serious injury to the domestic industry in order to fulfill this requirement for applying a safeguard measure. And this language in both Article 2.1 of the Agreement on Safeguards and Article XIX:1(a) of the GATT 1994, we believe, requires that the increase in imports must have been recent enough, sudden enough, sharp enough, and significant enough, both quantitatively and qualitatively, to cause or threaten to cause “serious injury.” (italics in the original)
The Panel on US–Steel Safeguards provided graphic illustrations of trends in imports that were considered to satisfy and not satisfy the requirements of Article 2.1 of SG. Figure 4.1 (reflected in § 10.179 of the panel report), and figure 4.2 (§ 10.202) are instances where, in the panel’s view, imports do not satisfy the requirements of Article 2.1 of SG, essentially because the most recent events had not been taken into account (§§ 10.183,
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10.209). Figure 4.3 (§ 10.212) and figure 4.4 (§ 10.222) are instances where, in the panel’s view, the requirements of Article 2.1 of SG have been met. The AB upheld these findings (§§ 360ff.). In line with the finding that trends matter, panels and the AB have stressed that an absolute decrease of imports between the start and the end of investigation is not fatal. It is a warning signal—that much is for sure—but maybe an explanation can “heal” the prima facie conclusion that we are not in the presence of increased imports. In this vein, the Panel on Argentina–Preserved Peaches took the view that an overall decrease of imports between the start and the end of the reference period implies that the increased imports requirement is not satisfied unless an adequate and reasoned explanation to the contrary has been provided to this effect (§§ 7.60–61). Note that in this case, the panel did not examine an increase or decrease in terms of the relative
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changes in domestic production. The Panel on US–Steel Safeguards held in a similar vein that (§ 10.218) “as a legal matter, a decrease in absolute terms does not invalidate the sufficiency of a relative increase.” The AB upheld this finding, and clarified that (§ 367): We agree with the United States that Article 2.1 does not require that imports need to be increasing at the time of the determination. Rather, the plain meaning of the phrase “is being imported in such increased quantities” suggests merely that imports must have increased, and that the relevant products continue “being imported” in (such) increased quantities. We also do not believe that a decrease in imports at the end of the period of investigation would necessarily prevent an investigating authority from finding that, nevertheless, products continue to be imported “in such increased quantities.” (italics in the original)
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Annual data Semiannual (Jan-Jun) data
According to the AB, what matters is the explanation by the IA as to why, in the presence of a recent decrease in imports, the increased imports condition nevertheless has been met (§§ 368, 370). This finding is in line with the concept that trends matter. It could be, for example, that a sudden drop of imports at the end of investigation can be explained, and that in the near future, additional increased imports are expected. 4.4.2.2 Recent, Sudden, Sharp, Significant Increase: No Injury Analysis The Panel on US–Steel Safeguards added that an absolute increase in imports, provided that it is “recent, sudden, sharp, and significant” enough so as to cause injury, satisfies the requirements of Article 2.1 of SG, even if the increase has not been examined in relative terms. The panel added that even a finding to the effect that an increase in absolute terms has been accompanied by an equally strong, or even stronger, increase in domestic
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production will not disturb a finding that imports have increased. If anything, a similar finding would lead to the conclusion that no injury resulted for the domestic industry. The two requirements (increased imports and injury), however, are totally dissociated in the panel’s view (§ 10.234): The Panel recognizes the possibility that, due to the gradual and steady pattern of an increase, the domestic industry manages to adjust and, therefore, suffers no injury. However, this is a question to be addressed within the context of whether there is serious injury and whether it has been caused by increased imports. An increase in absolute terms may even go hand in hand with an equally strong, or stronger increase of domestic production and a flourishing domestic industry. In such a case, there would be no relative increase, and there may not be any causation of serious injury. However, for the purposes of the first condition of Article 2.1 of the Agreement on Safeguards, an absolute increase (without a relative increase) is sufficient.
It follows that a finding of increased imports should not be confused with a finding that injury has occurred, even though increased imports must be of such nature as to cause injury. 4.4.3
Injury to Competitors (Like Product Analysis)
The SG Agreement allows for the imposition of safeguard measures if a WTO member has shown that increased imports have caused either “serious injury” or “threat of injury.” 4.4.3.1 Injury Must Be “Serious” Injury must be serious as per Article 4.1 of SG, and is defined as “a significant overall impairment in the position of the domestic industry.” This statutory definition of “serious injury” denotes, prima facie at least, a higher and more demanding standard than the “material injury” standard48 required in AD investigations. This reading is probably warranted anyway since safeguards are not a response to “unfair trade,” but rather a restrictive measure against foreign competitors who compete on fair terms. The AB on US–Lamb condoned this reading (§ 124). The SG Agreement, echoing the AD and SCM Agreement in this respect, provides for an indicative list of factors that indicate injury. 4.4.3.2 Statutory Factors Indicating Injury To reach the conclusion that injury has occurred, the SG Agreement has included in Article 4.2(a) of SG eight factors indicating injury: namely, the rate and amount of the increase in imports of the product concerned in absolute and relative terms, the share of the domestic market taken by increased imports, changes in the level of sales, production by the domestic industry, its productivity, its capacity utilization, its profits and losses, and employment. This list is of an indicative nature, as the wording of the provision makes it abundantly clear.
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The AB held in US–Lamb that an IA is required to always examine and evaluate, at the very least, the eight factors (§ 136). Note the absence of a sentence equivalent to that included in Article 3.4 of AD and Article 15.4 of SCM, to the effect that no single relevant factor can be accorded decisive importance in the SG context. Still, the AB on US–Lamb held that no decisive importance should be accorded to one factor, even if this factor is profits, which could be quite telling for the state of health of the domestic industry: “Profits are simply one of the relevant factors mentioned in Article 4.2(a) and to accord that factor decisive importance would be to disregard the other relevant factors. ...” The AB did acknowledge in the same report that “it will be a rare case, indeed, where the relevant factors as a whole indicate that there is a threat of serious injury, even though the ‘majority of firms in the industry’ is not facing declining profitability.”49 Consequently, although the statute establishes in principle no hierarchy at all between the eight factors, IAs will have a daunting task trying to establish that injury is present in the absence of declining profitability by the domestic industry. Note that, in contrast to the AD and SCM Agreement, price undercutting, price depression, and price suppression are not even mentioned among the relevant factors that must be reviewed [Article 4.2(a) of SG]. The Panel on Korea–Dairy explicitly rejected the argument that the requirement to conduct price analysis was implied by Article 2.1 of SG in order to establish that increased imports entered the country under such conditions as to cause serious injury (§§ 7.51–52). While no price analysis is legally required in order to establish injury, price effects may not be ignored altogether when discussing the causality requirement. The Panel on US–Wheat Gluten found that price may be a relevant factor that needs to be examined and may even be quite important in causation analysis as part of the conditions of competition (§ 8.109). 4.4.3.3 Other Factors Article 4.2(a) of SG requests IAs to evaluate “all relevant factors of an objective and quantifiable nature having a bearing on the situation of ... industry.” The same provision makes it clear that the eight factors mentioned above constitute an indicative and not an exhaustive list of factors indicating injury. The question is, what other factors should be evaluated? The associated question is whether IAs should be active looking for similar factors, or whether they should simply be asked to review factors (other than those mentioned in the SG Agreement) that parties to the investigation bring forward? Recall that in the AD and the SCM contexts, the AB has held that an IA must investigate factors (other than those mentioned in the two agreements) that were brought to its attention during the investigation process. In the SG context, the situation is different. The AB, in its report on US–Wheat Gluten, made it clear that an IA cannot remain passive and rely solely on the interested parties to raise a factor other than the eight listed factors. It is under the duty to look on its own initiative for information that might have an impact on its evaluation of injury (§§ 55–56):
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However, in our view, that does not mean that the competent authorities may limit their evaluation of “all relevant factors,” under Article 4.2(a) of the Agreement on Safeguards, to the factors which the interested parties have raised as relevant. The competent authorities must, in every case, carry out a full investigation to enable them to conduct a proper evaluation of all of the relevant factors expressly mentioned in Article 4.2(a) of the Agreement on Safeguards. Moreover, Article 4.2(a) requires the competent authorities—and not the interested parties—to evaluate fully the relevance, if any, of “other factors.” If the competent authorities consider that a particular “other factor” may be relevant to the situation of the domestic industry, under Article 4.2(a), their duties of investigation and evaluation preclude them from remaining passive in the face of possible short-comings in the evidence submitted, and views expressed, by the interested parties. In such cases, where the competent authorities do not have sufficient information before them to evaluate the possible relevance of such an “other factor,” they must investigate fully that “other factor,” so that they can fulfill their obligations of evaluation under Article 4.2(a). Thus, we disagree with the panel’s finding that the competent authorities need only examine “other factors” which were “clearly raised before them as relevant by the interested parties in the domestic investigation.” However, as is clear from the preceding paragraph of this Report, we also reject the European Communities’ argument that the competent authorities have an open-ended and unlimited duty to investigate all available facts that might possibly be relevant. (italics in the original)
In Argentina–Footwear (EC), the AB emphasized that, in addition to a technical examination regarding the impact of all the listed factors and any other relevant factors, an IA must also examine the overall position of the domestic industry (§ 139). We will return to this point and discuss it in more detail later in this chapter, when we discuss the standard of review. 4.4.3.4 Domestic Industry Producing the “Like” Product Injury must be borne by the (domestic) industry producing a product that is like, or directly competitive or substitutable to the product imported in increased quantities. In contrast to the AD and SCM Agreements, domestic industry can produce not strictly the like product, but also a product directly competitive with or substitutable for that imported in increased quantities. We saw nonetheless in the previous two chapters that the term “like product” has been interpreted rather widely in recent case law. The Panel on US–Steel Safeguards held that the product definition must be such that it allows for the possibility to conduct a meaningful causation analysis. In this case, the IA had relied on data that sometimes referred to a wider category than the product under investigation. The wider category was certain carbon flat rolled steel (CCFRS) products; sometimes, though, the IA had referred to a subpart of the CCFRS category (§ 10.358). On its own admittance, the IA stated that reliance on combined data could sometimes involve double-counting. This product definition led the panel to find that the US had acted inconsistently with its obligations to demonstrate causality under Article 4.2(b) of SG (§§ 10.416–417).
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While the AD and SCM Agreements contain a definition of the term “like product,” the SG Agreement does not. Article 4.1(c) of SG provides that, in determining injury, a domestic industry shall be understood to mean the producers as a whole of the “like or directly competitive products” operating within the territory of a WTO member, or those whose collective output of the like or directly competitive products constitutes a “major proportion” of the total domestic production of those products. The Panel on US–Lamb held that the choice of terms was not accidental (§ 7.117): This being said, it is clear on the face of the Safeguards Agreement that the product coverage of a safeguard investigation can potentially be broader than in an antidumping or countervail case, to the extent that “directly competitive” products are involved. In our view, this apparent additional latitude that exists under the Safeguards Agreement may be related to the basic purpose of the Safeguards Agreement and GATT Article XIX, namely to provide an effective safety valve for industries that are suffering or are threatened with serious injury caused by increased imports in the wake of trade liberalization. (italics in the original)
The Panel on Argentina–Footwear (EC) cautioned, though, that the inclusion of the term “directly competitive or substitutable products” is no license to perform unwarranted broad definitions of the term “like product,” because, in similar cases (§ 8.261)50 “the statistics for the industry and the imports as a whole will only show averages, and therefore will not be able to provide sufficiently specific information on the locus of competition in the market.” The AB discussed the issue of whether substitutability should be decided from the perspective of demand only or also from the perspective of supply in the context of a dispute regarding a safeguard adopted in accordance with the provisions of the Agreement on Textiles and Clothing (ATC). Although the agreement is now defunct (as we will see in chapter 9 of this volume), this ruling could be of interest in the SG context as well, since the conditions for imposing safeguards are quite similar in the SG and the ATC contexts. In US–Cotton Yarn, the AB explained that the term “domestic industry of the like or directly competitive product” should be interpreted in a product-oriented (as opposed to producer-oriented) manner. It thus expressed its preference for demand-side criteria and relegated (without excluding) the relevance of supply-side considerations (§ 86, § 94).51 The AB, in the same dispute, also went on to state that it was the capacity of products to compete in the same market that mattered (§ 96). Because of the qualifier “directly” before the term “competitive products,” the AB took the view that (§ 98) “a safeguard action will not extend to protecting a domestic industry that produces unlike products which have only a remote or tenuous competitive relationship with the imported product.” Recall our previous discussion in the SCM context, where we took the view that the AB had correctly held that supply-side considerations are warranted when defining the “like product” in the context of injury analysis. US–Cotton Yarn precedes timewise
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the cases discussed in the SCM context, so one could expect that this case law is by now obsolete, and panels in the SG context will follow the attitude adopted by panels in the SCM context. Consequently, one should expect likeness to be defined from the perspective of supply as well. The question has also arisen in case law whether the term “directly competitive or substitutable product” should be understood to cover cases where producers of input can be considered to be domestic industry suffering injury when only the final product is being imported in increased quantities. In this vein, the additional question was whether vertical integration between the domestic industry producing the input and the final product mattered. In US–Lamb, the AB responded negatively to both questions. In this case, the US had argued that producers of the input (live lambs) may, in certain circumstances, be considered part of the domestic industry producing the final product (lamb meat) being investigated. Accordingly, it had included in its safeguards investigation of imports of lamb meat not only the domestic producers of lamb meat (the breakers and packers), but also the growers and feeders of live lamb in the US. The IA had considered that this approach was justified (§ 89). The AB, like the panel before it (§ 7.118), in no unclear terms rejected this argument, concluding that it is not permitted to include input producers as part of the industry producing the like product under Article 4.1(c) of SG (§ 90). The AB held that, by expanding the scope of the domestic industry to include producers of other products (namely, live lambs), without having first established that live lambs and lamb meat were directly competitive or substitutable products, the US International Trade Commission (USITC) defined its domestic industry inconsistently with Article 4.1(c) of SG. It should have limited it only to packers and breakers of lamb meat (§§ 95–96). The only way for the IA to be in a position to show injury for input products when increased imports concerned the final product only would be to show that input and final products were directly competitive or substitutable goods. Domestic industry should cover domestic producers as a whole, or those whose collective output constitutes a “major proportion” of the total domestic product [Article 4.1(c) of SG]. Case law has not specified what exactly “major proportion” should amount to in terms of a number. On the other hand, it has dealt with the quality of data used. In US–Lamb, the AB held that the data used had to be sufficiently representative of the domestic industry so as to allow factually accurate determinations about that industry (§ 131). The AB added that, absent data to this effect, the findings risk being found inconsistent with the SG Agreement (§ 132). Recall that in EC–Fasteners, the AD case discussed in chapter 2 of this volume, 27 percent of the domestic market was considered a share that satisfied the “major proportion” criterion. This number might inspire future practice in the SG-context as well.
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4.4.4 Threat of Injury The SG Agreement contains the following definition of threat of serious injury [Article 4.1(b) of SG]: Threat of serious injury shall be understood to mean serious injury that is clearly imminent, in accordance with the provisions of paragraph 2. A determination of the existence of a threat of serious injury shall be based on facts and not merely on allegation, conjecture or remote possibility.
The AB on US–Lamb provided its understanding of the terms “injury” and “threat of injury” and the difference between them in the following terms (§ 125): Returning now to the term “threat of serious injury,” we note that this term is concerned with “serious injury” which has not yet occurred, but remains a future event whose actual materialization cannot, in fact, be assured with certainty. We note, too, that Article 4.1(b) builds on the definition of “serious injury” by providing that, in order to constitute a “threat,” the serious injury must be “clearly imminent.” The word “imminent” relates to the moment in time when the “threat” is likely to materialize. The use of this word implies that the anticipated “serious injury” must be on the very verge of occurring. Moreover, we see the word “clearly,” which qualifies the word “imminent,” as an indication that there must be a high degree of likelihood that the anticipated serious injury will materialize in the very near future. We also note that Article 4.1(b) provides that any determination of a threat of serious injury “shall be based on facts and not merely on allegation, conjecture or remote possibility.” To us, the word “clearly” relates also to the factual demonstration of the existence of the “threat.” Thus, the phrase “clearly imminent” indicates that, as a matter of fact, it must be manifest that the domestic industry is on the brink of suffering serious injury.
Consequently, the threat must be “clearly imminent,” in the words of the AB, and the domestic industry must be “on the brink of suffering serious injury.” This would mean that, absent safeguard action, serious injury is inevitable. This analysis should be based on facts, and not on conjecture (Ukraine–Passenger Cars, Panel report at § 7.232). 4.4.4.1 Forward-Looking Evaluation Recall the finding of the AB, in § 125 of its report on US–Lamb, cited previously. Since injury has not occurred at the time that the investigation occurs, the IA by definition will be performing a forward-looking analysis. In the words of the Panel on Ukraine–Passenger Cars (§ 7.305): ... the competent authorities not only have to perform an assessment of historical facts, but must also make fact-based projections concerning future developments affecting the domestic industry’s position.
4.4.4.2 Standard of Review Panels and the AB will ask whether a finding of threat of injury was warranted at the time when the IA reached it, and in light of the available facts. In this vein, the Panel on Argentina–Preserved Peaches found that an IA must demonstrate at least a “projection” that there is strong likelihood that injury will happen; otherwise, it will not have met the
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requirements of the SG Agreement. The capacity of imports to cause serious injury, which the authorities found to exist, was not enough in this panel’s view. Serious injury must not simply be the possible consequence of increased imports—it must be the likely consequence (§ 7.122). There is, of course, an unavoidable tension between requesting a futureoriented study (similar to that required for threat of injury to be determined) and, at the same time, obliging the IA to come up with hard data (hence the likelihood standard). An IA must provide adequate justification for its final findings. To do that, it should, in the AB’s view (US–Lamb, § 137), examine recent data, since “... data relating to the most recent past will provide competent authorities with an essential, and, usually, the most reliable, basis for a determination of a threat of serious injury.” As was emphasized by the AB, recent data should not be examined in isolation from the data for the entire period of investigation, but, rather, in context (§§ 136–138). 4.4.4.3 Injury and Threat of Injury Based on the Same Facts The AB, in its report on US–Line Pipe, addressed an appeal against a panel finding to the effect that a discrete finding of injury, threat of injury, or both was required when the same set of facts were before an IA. The panel had taken the view that the same set of facts could not simultaneously support a finding of injury and a finding of threat of injury. Adopting a textual interpretation, the AB reversed the panel in this respect and held that a discrete finding was not required. It took the view that the threat of injury was the outcome of serious injury (§§ 169–172). In its words (§ 169), “... serious injury is the realization of threat of injury.” In this view, only time intervenes between the threat of and the realization of serious injury. This, as a matter of logic, cannot be right. It cannot be that the same facts give rise simultaneously to injury and threat of injury, as the AB itself accepted when stating that time intervenes between threat and realization of injury. 4.4.5 The Causality Requirement A determination that increased imports caused, or threatened to cause, serious injury may be made only when an IA has demonstrated the existence of a causal link between the increased imports and serious injury. The relevance of the important body of WTO case law on this issue under the AD and SCM Agreements to the SG context has been explicitly acknowledged by the AB in its report on US–Line Pipe (§ 214). An IA must show that there is a genuine and substantial relationship between increased imports and injury suffered. To honor this requirement, an IA must: (a) review all relevant facts; (b) separate increased imports from other factors causing injury; (c) ensure that postseparation, increased imports constitute a cause of injury; (d) evaluate the record established in light of alternative explanations.
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If, having gone through all these steps, the IA holds the view that increased imports have caused injury, then it can legitimately move to the next stage and apply safeguards. In the opposite case, it must desist from doing so. 4.4.5.1 Genuine and Substantial Relationship The causality requirement is embedded in Article 4.2 of SG. This provision contains three subparagraphs, the third being of pure procedural nature requesting that IAs publish information explaining how they have observed causality. The first two subparagraphs exhaust the substantive requirements: the first, as we have seen above, requests that IAs examine the impact of at least eight factors. The second subparagraph, Article 4.2(b) of SG, includes the nonattribution requirement. Respect of the nonattribution requirement does not in and of itself automatically lead to the satisfaction of the requirement to show a genuine and substantial relationship between imports and injury. It could be the case that following this exercise, an IA has shown that imports have not caused injury at all. It is, nevertheless, the necessary first step. We will examine nonattribution later in this section. It is important to note for now though, that the AB has made clear that there is a logical/temporal sequence between the two sentences of Article 4.2 of SG, in the sense that one cannot reach the conclusion that serious injury (or threat of injury) has been caused by imports unless one has first complied with the nonattribution requirement. In US–Lamb, the AB pertinently ruled to this effect that (§ 180): the “causal link” between increased imports and serious injury can only be made after the effects of increased imports have been properly assessed, and this assessment, in turn, follows the separation of the effects caused by all the different causal factors.52
It is in its report on US–Wheat Gluten, that the AB first stated that a “genuine and substantial relationship” between cause and effect must exist after separation (§ 69): Article 4.2(b) presupposes, therefore, as a first step in the competent authorities’ examination of causation, that the injurious effects caused to the domestic industry by increased imports are distinguished from the injurious effects caused by other factors. The competent authorities can then, as a second step in their examination, attribute to increased imports, on the one hand, and, by implication, to other relevant factors, on the other hand, “injury” caused by all of these different factors, including increased imports. Through this two stage process, the competent authorities comply with Article 4.2(b) by ensuring that any injury to the domestic industry that was actually caused by factors other than increased imports is not “attributed” to increased imports and is, therefore, not treated as if it were injury caused by increased imports, when it is not. In this way, the competent authorities determine, as a final step, whether “the causal link” exists between increased imports and serious injury, and whether this causal link involves a genuine and substantial relationship of cause and effect between these two elements, as required by the Agreement on Safeguards. (italics in the original)
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Now the test, as described by the AB, was a two stage process. And yet, in US–Wheat Gluten, the panel added two more steps. The AB on US–Wheat Gluten summarized the panel’s approach in § 66: In essence, the Panel has read Article 4.2(b) of the Agreement on Safeguards as establishing that increased imports must make a particular contribution to causing the serious injury sustained by the domestic industry. The level of the contribution the Panel requires is that increased imports, looked at “alone,” “in and of themselves,” or “per se,” must be capable of causing injury that is “serious.” It seems to us that the Panel arrived at this interpretation through the following steps of reasoning: first, under the first sentence of Article 4.2(b), there must be a “causal link” between increased imports and serious injury; second, the non-”attribution” language of the last sentence of Article 4.2(b) means that the effects caused by increased imports must be distinguished from the effects caused by other factors; third, the effects caused by other factors must, therefore, be excluded totally from the determination of serious injury so as to ensure that these effects are not “attributed” to the increased imports; fourth, the effects caused by increased imports alone, excluding the effects caused by other factors, must, therefore, be capable of causing serious injury.
The AB rejected the panel’s approach, that is, the two additional steps in § 79: For these reasons, we agree with the first and second steps we identified in the Panel’s reasoning; however, we see no support in the text of the Agreement on Safeguards for the third and fourth steps of the panel’s reasoning. (italics in the original)
The AB held that the remaining two steps were relevant only with respect to the lawful application of safeguards, as we will see in what follows, and not as far as the satisfaction of the causality requirement was concerned. In the AB’s view, the existence of a causal link between increased imports and injury on the one hand, and the separation requirement (nonattribution) on the other, satisfied the causality requirement. In Argentina–Footwear (EC), the AB upheld this approach, which has now become consistent case law (§ 145). A couple of additional points underscoring the quality of causation analysis are worth mentioning here. First, the Panel on Argentina–Footwear (EC) held that, in addition to a trends/correlation analysis, a causation analysis required an examination of the conditions of competition between the imported products and the like or directly competitive products (§ 8.250). Second, the causality requirement does not imply that there must be a time-coincidence between increased imports and injury. The Panel on US–Steel Safeguards distinguished between instances where there is coincidence between increased imports and injury from instances where this has not been the case. The panel accepted, in this latter context, that there may be a time lag between the increase in imports and the manifestation of their effects on the domestic industry (§ 10.310). However, it took the view that the time lag cannot be excessively long, and the more competitive the market is, the sooner the effect will be observed (§ 10.312).53 It follows that IAs will establish the “genuine and substantial relationship” requirement between imports and injury when a causal relationship between the two exist after they have examined all
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relevant factors and have set aside the impact of factors other than imports on the health of the domestic industry.54 4.4.5.2 The Obligation to Review All Relevant Facts As stated earlier, an IA must examine all factors listed in Article 4.2(a) of GATT anyway. Case law has established that it cannot restrict itself to an examination of these factors only. The AB, in its report on US–Wheat Gluten, held that an IA cannot remain passive and simply rely on evidence submitted to it by interested parties. It must, on its own initiative, look for information that might have an impact on its evaluation of injury and the causal link between injury and increased imports (§§ 50ff.). Disagreeing with the panel in this respect, the AB held that an IA cannot limit itself to factors [other than those mentioned in Article 4.2(a) of GATT] raised by the parties (§ 56). It went so far as to find that an IA must “actively” seek factors extending beyond those enlisted in the SG Agreement that might have contributed to the deterioration of the domestic industry (§§ 53, 56): We turn, therefore, for context, to Article 3.1 of Agreement on Safeguards, which is entitled “Investigation.” Article 3.1 provides that “A Member may apply a safeguard measure only following an investigation by the competent authorities of that Member. ...” (emphasis added) The ordinary meaning of the word “investigation” suggests that the competent authorities should carry out a “systematic inquiry” or a “careful study” into the matter before them. The word, therefore, suggests a proper degree of activity on the part of the competent authorities because authorities charged with conducting an inquiry or a study—to use the treaty language, an “investigation”—must actively seek out pertinent information. ... However, in our view, that does not mean that the competent authorities may limit their evaluation of “all relevant factors,” under Article 4.2(a) of the Agreement on Safeguards, to the factors which the interested parties have raised as relevant. The competent authorities must, in every case, carry out a full investigation to enable them to conduct a proper evaluation of all of the relevant factors expressly mentioned in Article 4.2(a) of the Agreement on Safeguards. Moreover, Article 4.2(a) requires the competent authorities—and not the interested parties—to evaluate fully the relevance, if any, of “other factors.” If the competent authorities consider that a particular “other factor” may be relevant to the situation of the domestic industry, under Article 4.2(a), their duties of investigation and evaluation preclude them from remaining passive in the face of possible short- comings in the evidence submitted, and views expressed, by the interested parties. In such cases, where the competent authorities do not have sufficient information before them to evaluate the possible relevance of such an “other factor,” they must investigate fully that “other factor,” so that they can fulfill their obligations of evaluation under Article 4.2(a). In that respect, we note that the competent authorities’ “investigation” under Article 3.1 is not limited to the investigative steps mentioned in that provision, but must simply “include” these steps. Therefore, the competent authorities must undertake additional investigative steps, when the circumstances so require, in order to fulfill their obligation to evaluate all relevant factors. (italics in the original)
In an SG investigation, most of the facts should be in the jurisdiction that is imposing the measure. In principle, there is no need to require information from exporters since customs authorities should be in a position to provide information regarding the volume
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of imports. On the other hand, the domestic industry producing the like product has a strong incentive to conceal information regarding factors other than imports that might be causing injury. Under the circumstances, it is quite welcome that WTO panels and the AB have insisted that IAs should be proactive in assembling all relevant facts. What exactly the active IA standard entails will be evaluated on a case-by-case basis. Since, nevertheless, most of the information lies in its jurisdiction, one would expect to see IAs actively investigate the health of the domestic industry. 4.4.5.3 Nonattribution (Separation) IAs are under the obligation to separate the effects of increased imports from those caused by other sources of injury. In the real world, it is highly unlikely that it is only imports that have caused injury, and this legal requirement aims at avoiding mistakenly attributing to trade an injury caused by other factors. It is separation of causal from noncausal factors that also determines the maximum extent of permissible safeguards. It bears repetition that this feature is unique to the SG Agreement. Separation of effects takes place under all three agreements dealing with contingent protection. In the AD and SCM context, though, once separation has been conducted, the amount of duties will be linked to the amount of the dumping margin or the benefit received. This is because dumping and subsidization are considered unfair practices. In contrast, there is nothing unfair about increased imports. It is not volumes of trade that are being contracted in the GATT framework and so, unless a quota has been lawfully imposed, there is no maximum quantity of exports that must take place. In the SG context, separation of effects points to the volume of injury that can be lawfully addressed through safeguards. Separation needs to be explained as well. WTO adjudicating bodies have, in this vein, found that the US “substantial cause” standard falls short of meeting the requirements of the SG Agreement. The decision of 23 December 1977 (97–1077) by the US Court of Appeals for the Federal Circuit (CAFC) re: Gerald Metals Inc. described this standard in the following manner (pp. 9–10): ... the statute requires the injury to occur “by reason of ” the LTFV (less than fair value) imports. This language does not suggest that an importer of LTFV imports goods can escape countervailing duties by finding some tangential or minor cause unrelated to the LTFV goods that contributed to the harmful effects on domestic market prices. By the same token, this language does not suggest that the Government satisfies its burden of proof by showing that the LTFV goods themselves contributed only minimally or tangentially to the material harm. ... Hence, the statute requires adequate evidence to show that the harm occurred “by reason of” the LTFV imports, not by reason of a minimal or tangential contribution to material harm caused by LTFV goods.” (LTFV stands for “less than fair value”).
The problem with this standard lies neither in the fact that imports represent one of various causes for injury nor that they represent the only cause. It lies in the fact that, by adopting this standard, the process of nonattribution will not take place. The US IA will
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not separate imports from other causes of injury. It will not apportion a precise percentage of the injury to imports. It is sufficient that imports have contributed to injury without separating their effects from those of other causal factors. In this vein, in US–Lamb, the AB found that the US standard fell short of the requirements of the SG Agreement since it was impossible for WTO panels to understand whether and how the process of separation had taken place. As we will see, WTO law does not prejudge the methodology used in order to satisfy the nonattribution requirement. It does require, nonetheless, that the process be explained (§§ 184–186): By examining the relative causal importance of the different causal factors, the USITC clearly engaged in some kind of process to separate out, and identify, the effects of the different factors, including increased imports. Although an examination of the relative causal importance of the different causal factors may satisfy the requirements of United States law, such an examination does not, for that reason, satisfy the requirements of the Agreement on Safeguards. On the record before us in this case, a review of whether the United States complied with the non-attribution language in the second sentence of Article 4.2(b) can only be made in the light of the explanation given by the USITC for its conclusions on the relative causal importance of the increased imports, as distinguished from the injurious effects of the other causal factors. In that respect, we see nothing in the USITC Report to indicate how the USITC complied with the obligation found in the second sentence of Article 4.2(b) and, therefore, we see no basis for either the panel or us to assess the adequacy of the USITC process with respect to the “nonattribution” requirement of Article 4.2(b) of the Agreement on Safeguards. The USITC Report, on its face, does not explain the process by which the USITC separated the injurious effects of the different causal factors, nor does the USITC Report explain how the USITC ensured that the injurious effects of the other causal factors were not included in the assessment of the injury ascribed to increased imports. The USITC concluded only that each of four of the six “other factors” was, relatively, a less important cause of injury than increased imports. As Australia and New Zealand argue, and as the panel expressly found, in doing so, the USITC acknowledged implicitly that these factors were actually causing injury to the domestic industry at the same time. But, to be certain that the injury caused by these other factors, whatever its magnitude, was not attributed to increased imports, the USITC should also have assessed, to some extent, the injurious effects of these other factors. It did not do so. The USITC did not explain, in any way, what injurious effects these other factors had on the domestic industry. For instance, of the six “other factors” examined, the USITC focused most on the cessation of the payments under the National Wool Act of 1954 (the “Wool Act”) subsidy. The USITC recognized that the Wool Act subsidies represented an important contribution to the profits of the growers and feeders of live lambs. Yet the USITC” analysis of the injurious effects of this “factor” is confined largely to the statement that “the loss of Wool Act payments hurt lamb growers and feeders and caused some to withdraw from the industry.” (emphasis added) This explanation provides no insight into the nature and extent of the “hurt” caused to the domestic industry by this factor. The USITC stated also that “the effects of termination of the Wool Act payments can be expected to recede further with each passing month.” The USITC, thereby, acknowledged that the Wool Act will have on-going effects, but it did not elaborate on what these effects are likely to be nor how quickly they will disappear. In varying degree, the same is true as well for the remaining “other factors” examined. Thus, although the USITC acknowledged that these other factors were having some injurious effects, it did not explain what these
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effects were, nor how those injurious effects were separated from the threat of serious injury caused by increased imports. In the absence of any meaningful explanation of the nature and extent of the injurious effects of these six “other” factors, it is impossible to determine whether the USITC properly separated the injurious effects of these other factors from the injurious effects of the increased imports. It is, therefore, also impossible to determine whether injury caused by these other factors has been attributed to increased imports. In short, without knowing anything about the nature and extent of the injury caused by the six other factors, we cannot satisfy ourselves that the injury deemed by the USITC to have been caused by increased imports does not include injury which, in reality, was caused by these factors.55
Nonattribution raises the question of what methodology is appropriate in order to decide whether it is imports, among a dozen of other factors, that caused injury? In US–Lamb, the AB held (§ 181): We emphasize that the method and approach WTO Members choose to carry out in the process of separating the effects of the other causal factors is not specified by the Agreement on Safeguards. What the Agreement requires is simply that the obligation in Article 4.2 must be respected when a safeguard measure is applied. (italics in the original)
The methodology thus is not prejudged by the agreement.56 Yet it seems that recourse to econometric analysis is necessary here since this is the only field that provides a sophisticated methodology that allows the separation of effects caused by different factors. This could be done through regression simulation, or through decomposition. Regression simulation is a demanding method in terms of data. An IA asks whether the health of the domestic industry (dependent variable) has been affected by a series of factors (independent variable); and by changing the independent variable each time (increased imports, inadequate management, lack of investment, low productivity, change of fashion, etc.), it proceeds to investigate the cause while controlling for factors that may be influencing both variables simultaneously. Since in principle, many factors could be causing imports, an IA will not have accomplished much unless if it has investigated all of them. Different factors require different data, however, and this is why we suggested that this methodology is quite data-heavy, and demanding on IAs investigating the necessity for safeguard action.57 Decomposition focuses on quantities58 and is based on three basic components (curves), which define an open market: namely, domestic demand, domestic supply, and foreign supply (imports). Any equilibrium in this market is jointly determined by these three components, and this equilibrium can be disturbed by shifts in one or two of these components, or in all of them. It is useful to assume, first, that only one of the three components is shifting at a given time. In this case, the resulting equilibrium change is easy to derive. For instance, a shift in foreign supply (mirroring, say, more efficient foreign producers) reduces the domestic price in the importing country. In turn, this lower price increases domestic consumption and reduces domestic production, and these two changes generate
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larger imports. In this first scenario, injury has occurred (domestic production has decreased), and its cause is clearly the increased efficiency of foreign suppliers. Assume now an increase in domestic demand. If both domestic and foreign supply remain unchanged (once again, one component shifts at a given time), the domestic price increases, triggering an increase in imports and domestic production. This second scenario describes a prima facie no injury situation since domestic production increases, even though domestic petitioners may argue that they do not get all the benefits of the increased domestic demand since imports also increase. A third scenario consists of examining the case of decline in domestic demand, with now-unchanged domestic and foreign supply. A decline of this sort reduces domestic price (hence domestic production), and thus we are in an injury situation. In this case, though, it is not imports that are the source of injury because the decline of the domestic price also reduces foreign supply (imports). All these scenarios, with only one of the three market components shifting at a time, lead to relatively straightforward conclusions about the existence of injury (or not) and the causal relation between injury and imports. Reaching such clear assessments becomes much more complex when all three components are shifting simultaneously. Unfortunately, this is what often happens in the real world. In this situation, there is a need to isolate the impact of the various shifts and to have a quantitative breakdown of their relative importance. To achieve these goals, the decomposition approach establishes four relations (equations): the demand relation (domestic demand is a decreasing function of the price), the production relation (domestic supply is an increasing function of the price), the import relation (foreign supply is an increasing function of the price), and finally, the market should be cleared by stating that domestic demand is equal to the sum of domestic and foreign supply. Simple calculations based on these four relations allow us to express (decompose) any change in domestic supply, as the combined result of three independent changes (in demand, supply, and importation) weighted by the appropriate price elasticities of demand, supply, and importation (Irwin, 2003). A quantitative decomposition of the observed change in domestic production into three distinguishable changes (related to demand, importation, and production) provides an answer to the legal question of whether imports constitute a substantial cause of the observed injury or not: for instance, the fact that the import change is negative, and of at least the same magnitude as the production change, is evidence that imports may be a substantial cause of the domestic injury. This simple decomposition method has a crucial advantage from an operational point of view. It does not impose heavy requirements in terms of data. Data about the preshock and postshock market equilibria are provided by the investigation itself, and estimates of elasticities can be drawn from available sources.
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Having said that, this method has its limits. The most important one is that it does not show much more than can be seen from the quantity and price trends since the decomposition calculations are fundamentally based on the observed values of the prices and quantities. Another limit is that the decomposition approach uses elasticities, which are rarely specifically estimated for the case examined and, hence, represent some risk of error. 4.4.5.4 Postseparation Once effects have been separated following nonattribution analysis, increased imports must still be a cause of at least part of the injury; otherwise, no safeguards can be lawfully imposed. In US–Wheat Gluten, the AB rejected the argument that an IA must establish that increased imports alone were the cause of serious injury. It suffices that postseparation, increased imports are a (as opposed to “the”) cause of injury (§ 67): Although that contribution must be sufficiently clear as to establish the existence of “the causal link” required, the language in the first sentence of Article 4.2(b) does not suggest that increased imports be the sole cause of the serious injury, or that “other factors” causing injury must be excluded from the determination of serious injury. To the contrary, the language of Article 4.2(b), as a whole, suggests that “the causal link” between increased imports and serious injury may exist, even though other factors are also contributing, “at the same time,” to the situation of the domestic industry. (emphasis in the original)
This finding underscores our previous conclusion that there is nothing wrong with the substantial cause standard practiced by the US administration other than it does not require the separation of effects of the various causal factors. In fact, there is a paradox. The US standard is more demanding than the WTO standard. The latter requires that imports are “a” cause of injury, but not a “substantial” cause of injury. There is yet another issue though, and we will return to this question later in this chapter. If the US persuades itself that imports constitute a substantial cause of injury, it will counteract through safeguards all injury caused even if imports are one of the many causes for it. This is not lawful. 4.4.5.5 Evaluation in Light of Alternative Explanations In US–Lamb, the AB held that the causality requirement will not be satisfied unless the adequacy of the IA’s explanation and reasoning has been reexamined in light of other, plausible explanation of the same facts (§ 106): A panel must find, in particular, that an explanation is not reasoned, or is not adequate, if some alternative explanation of the facts is plausible, and if the competent authorities’ explanation does not seem adequate in the light of that alternative explanation. Thus, in making an “objective assessment” of a claim under Article 4.2(a), panels must be open to the possibility that the explanation given by the competent authorities is not reasoned or adequate.
This is, of course, an exercise that can only take place after an IA has developed its own theory of the case, that is, after it has separated effects of various factors and
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established that imports constitute one of the causes for injury. Panels will, thus, ask whether IAs have satisfied themselves with one plausible explanation, or, conversely, whether they have tried to evaluate the facts before them in light of other plausible (at least in principle) explanations. This obligation entails both a procedural and a substantive requirement. The Panel on Argentina–Preserved Peaches held that the failure of the Argentine IA to indicate that it had discussed alternative explanations at all led to the condemnation of its practices (§§ 7.104 ff., and especially 7.116–117). US–Wheat Gluten offers an appropriate illustration where the AB found that the IA had failed the substantive requirement imposed by this obligation. In this case, the AB found that the US had failed to respect Article 4.2(b) of SG by not properly accounting for the increased (US) industry capacity, as the data revealed that this factor may have played a very important role in the deteriorating state of the industry (§ 89). According to the AB, the US IA had not adequately evaluated the complexities of this issue—in particular, whether the increases in average capacity during the investigative period were causing injury to the domestic industry simultaneously with increased imports (§§ 90–91). More generally, evaluation of facts in light of alternative explanations will reduce the risk of findings being based on correlation. Correlation is not causality, but absence of correlation could be fatal to causality analysis. In Argentina–Footwear (EC), the AB referred with approval to the following statement by the panel establishing a negative presumption in case of absence of correlation (§ 144): While such a coincidence [between an increase in imports and a decline in the relevant injury factors] by itself cannot prove causation (because, inter alia, Article 3 requires an explanation—i.e., “findings and reasoned conclusions”), its absence would create serious doubts as to the existence of a causal link, and would require a very compelling analysis of why causation still is present.
The question to ask here is whether the obligation to examine the robustness of findings by comparing them to other, alternative explanations is a clear negation of the reasonableness standard, glimpses of which we saw in the previous two chapters. It is clear that panels cannot engage in a de novo review. It must be the case that alternative explanations are possible in light of the facts before the IA. It is less clear though whether by examining the plausibility of the explanation offered against the background of alternative explanations, IAs and eventually panels will be adhering to the reasonableness standard that we have discussed in the previous two chapters. In US–Wheat Gluten, the AB suggested that it would not tolerate just any reasonable interpretation if it could come up with a better one itself. Furthermore, the AB has time and again insisted on the fact that causation analysis in the SG and the AD contexts should be similar (US–Line Pipe, § 214; US–Hot-Rolled Steel, § 230). Under the circumstances, it is probably fair to conclude that the same standard should apply in principle across the
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three agreements, but occasional deviations (in favor of a more lenient approach toward IA in the realm of the AD Agreement) have occurred as well. 4.4.5.6 Failure to Meet the Causal Requirement The legal consequence in case the causality requirement has not been met is immediate: safeguards have been imposed in unlawful manner. A failure to provide a reasoned and adequate explanation demonstrating that a causal link existed between increased imports and serious injury was, for example, the basis for the panel finding in US–Steel Safeguards (§§ 10.418ff.) that the US order imposing safeguards on nine product categories was inconsistent with the SG Agreement. 4.5 Applying Safeguards If the IA finds that increased imports have caused injury, it has the right to apply safeguards to the extent necessary to counteract the injury caused. 4.5.1 Types of Safeguards 4.5.1.1 Provisional Safeguards Provisional measures can be imposed in the form of tariff increases in cases where delay would cause damage that is difficult to repair (Article 6 of SG). To this effect, a preliminary determination must be made to the effect that there is clear evidence that increased imports cause or threaten to cause serious injury. Provisional safeguards cannot be imposed for a period of more than 200 days. The period of application of provisional safeguard measures shall be counted as part of the period of application of the final measures. Unlike the AD and SCM Agreements, the SG Agreement does not contain any minimum period of time between initiation of the investigation and imposition of provisional measures. 4.5.1.2 Definitive Safeguards Definitive safeguards can be imposed to the extent necessary to counteract the injury suffered (Article 5 of SG). The duration of definitive safeguards is time-constrained, as we will see later. 4.5.2
Safeguards to the Extent Necessary
Article 5.1 of SG requires that WTO members “apply safeguard measures only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment.” In US–Line Pipe, the AB held that, by virtue of this provision, an IA, following separation of the effects caused by imports from those caused by other factors, can apply the safeguard only up to the level necessary to address the part of the injury caused by
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increased imports. Assuming, for example, that it can be shown that increased imports account for 20 percent of the total injury suffered, a WTO member can, by virtue of Article 5.1 of SG, impose safeguards to counteract the 20 percent and not the total amount of injury suffered. The facts in US–Line Pipe were as follows. When imposing safeguards, the USITC had identified six factors, other than increased imports, as possible causes contributing to serious injury. The USITC further found that one of the six factors (namely, declining demand in the oil and gas sector) had actually contributed to serious injury. However, since increased imports had a greater impact on injury than this factor had, the USITC, in application of the “substantial cause” standard discussed previously, imposed safeguards to counteract all the injury caused to the US domestic industry (US–Line Pipe, §§ 203, 207). This USITC determination was judged inconsistent with the US’s obligation under Article 5.1 of SG. In reaching this conclusion, the AB began by explaining that its prior rulings on the obligation to separate the effects of various factors simultaneously causing injury were pertinent only to address the issue of whether a right to impose a safeguard exists (§§ 242–243). The AB then went on to explain why, postseparation, a WTO member must apply safeguards only to the extent necessary to remedy the part of the injury caused by increased imports (§§ 249–50, 252, 257–8).59 The AB thus concluded that that the US had breached this obligation since its safeguards were meant to address the totality of the injury suffered, when increased imports accounted for only a part of it (§ 260). 4.5.3 The Duration of Safeguards: Dynamic Use Constraint Article 7.1 of SG reads: A Member shall apply safeguard measures only for such period of time as may be necessary to prevent or remedy serious injury and to facilitate adjustment. The period shall not exceed four years, unless it is extended under paragraph 2.
It can be extended for a maximum of four additional years if it has been determined that the safeguard measure continues to be necessary to prevent or remedy serious injury, there is evidence that the industry is adjusting, and the various relevant conditions mentioned in the SG Agreement (Articles 8–12) have been respected. Eight years is the maximum period for a safeguard measure (Article 7.3 of SG), but an exception is made for developing countries. A safeguard measure imposed by a developing country is allowed to stay in place for a maximum of ten years (Article 9.2 of SG). During this time, the measure must be progressively liberalized at regular intervals unless the measure has been imposed for a period not exceeding one year (Article 7.4 of SG).
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The obligation imposed in Article 7.4 of SG is particularly important in the context of the overall economy of the dynamic use constraint imposed through Article 7 of SG. IAs should prepare the transition to trade uninhibited by safeguards. Liberalization must occur at regular intervals. If the measure exceeds three years, the IA must review it after eighteen months and, if appropriate, withdraw it or increase the pace of liberalization. If the measure is renewed after an initial imposition, it cannot be more restrictive than it was during the initial imposition. The question has arisen whether the timetable for progressive liberalization must observe the transparency requirements of Article 12 of SG, namely whether it must be published and notified. Facing a question to this effect, the Panel on Ukraine– Passenger Cars decided that this was not necessary. In its view, Article 7.4 of SG imposed a substantive obligation. Interested parties could verify whether the obligation had been observed irrespective of publication/notification of the timetable for progressive liberalization (§§ 7.358ff.). The imposition of a safeguard measure must be followed by no imposition of safeguards in the same product market for an equal time period. This is the “dynamic use constraint”60 imposed by Article 7.5 of SG. If Home takes a safeguard action in the area of cars for eight years, it has to desist from any further safeguard action to protect its domestic industry of cars for the eight years following the expiration of the original safeguard measure. This period is halved for developing countries (Article 9.2 of SG). This grace period shall in any case not be shorter than two years, even if the measure itself was applied for a shorter period of time, except in the case of very short safeguard measures of less than 180 days, provided that the conditions in Article 7.6 of SG have been met. Bagwell and Staiger (2005) note that, because of the dynamic use constraint imposed in the SG Agreement, WTO members will have an incentive to strategically choose the sectors where they will take protective action. In practice, however, it could be the case that a WTO member sequences the imposition of safeguards by an imposition of AD duties in the same market, echoing thus the inimitable expression of Bhagwati, “law of constant protection.” 4.5.4 The Obligation to Compensate 4.5.4.1 Affected Parties, Substantial Interest Article 8 of SG provides that before imposing safeguard measures, WTO members must enter into negotiations with the “affected parties,” the object of which would be to compensate them for damage suffered as a result of the imposition of safeguards (Article 8.1 of SG). Assuming that there is no agreement within 30 days, the affected members can withdraw substantially equivalent concessions or other obligations unless the Council for Trade in Goods (CTG) disapproves.61 Withdrawal should occur no more than 90 days
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following imposition of the safeguard, and the CTG should be given at least 30 days to react (Article 8.2 of SG). The term “affected parties,” which appears in Article 8.1 of SG, is not defined any further in the SG Agreement. Article 12.3 of SG refers to consultations with those WTO members having a “substantial interest” in exporting the product concerned. The panel (§ 8.206) and the AB report (§ 146) on US–Wheat Gluten explicitly saw a link between these two provisions. The term “affected parties” covers, thus, the WTO members that have a substantial interest to export the product concerned to the WTO member imposing a safeguard. Consequently, only a subset of the WTO membership will be entitled to suspend concessions in case of disagreement as to the amount of compensation.62 4.5.4.2 Substantially Equivalent Level of Concessions The amount of compensation due is addressed in Article 8.1 of SG: A Member proposing to apply a safeguard measure or seeking an extension of a safeguard measure shall endeavour to maintain a substantially equivalent level of concessions and other obligations to that existing under GATT 1994 between it and the exporting Members which would be affected by such a measure.
Article 22.4 of DSU also employs the term “substantially equivalent level of concessions.” Standing case law in this area suggests that this term presupposes quantification of the damage done, and countermeasures will be authorized, only if the requested measures do not exceed the damage already inflicted.63 It is to be expected that a similar solution will be adopted in the SG context as well, in case litigation is pursued following disagreement as to the amount of compensation.64 When parties manage to arrive at a negotiated settlement, nothing in the SG Agreement requires absolute equivalence between the injury caused by safeguards and the amount of compensation paid.65 If no agreement is reached, then the “affected exporting Members” (a term that is not defined in the agreement, as stated previously) can withdraw substantially equivalent concessions (Article 8.2 of SG). In practice, concessions have been withdrawn when a WTO member felt that an illegality had been committed. Poland, for example, withdrew concessions against Slovakia because in its view, the latter had not held a public hearing, nor had it respected transparency requirements.66 Withdrawal has occurred for other reasons as well.67 4.5.4.3 No Duty to Compensate during the First Three Years The obligation to compensate can be avoided if a WTO member proposes a safeguard action (the maximum duration of which will not exceed three years) and if two conditions have been met (Article 8.3 of SG): the measure has been taken as a result of an absolute increase in imports, and the measure conforms with the provisions of the SG Agreement.
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The question, of course, is: Who determines whether the measure conforms with the provisions of the SG Agreement? One would expect that absent agreement between the interested parties, it should be the WTO adjudicating bodies that would decide this issue. In US–Steel Safeguards, the EU had first published a list of products on which additional duties were going to be levied as of the third birthday of the US safeguard measure, or the fifth day following the date of a decision by the WTO DSB that the measure was incompatible with the WTO Agreement, whichever comes earlier.68 In this case, the US repealed the steel safeguard shortly after the AB had issued its report, and even before the DSB had had a chance to adopt the report. The EU countermeasures announced were abandoned shortly thereafter. One might find it counterintuitive for safeguard measures to be imposed for a period longer than three years, given that after this period, compensation must be offered. Notifications of safeguard measures to the Safeguards Committee reveal that a large number of safeguard measures have been imposed for a period exceeding three years.69 4.5.5
Safeguarding against Whom?
4.5.5.1 Safeguards Must Be Nondiscriminatory Recall the previous discussion in this chapter regarding the nondiscriminatory character of safeguard measures. The question arises of whether, say, members of a preferential trade agreement (PTA) can exempt each other when imposing safeguards. The response is affirmative if they have respected the “parallelism” principle discussed later in this chapter; e.g., if they have set aside imports from PTA partners when deciding on the factors causing injury. 4.5.5.2 Quota Modulation Quota modulation is discussed in Article 5.2(b) of SG. This concept indicates the possibility of modulating the volume of imports from particular sources. As the term indicates, this instrument is available only when safeguards take the form of quotas.70 Article 5.1 of SG deals with safeguards in the form of QRs; it reads: [S]uch a measure shall not reduce the quantity of imports below the level of a recent period which shall be the average of imports in the last three representative years for which statistics are available, unless clear justification is given that a different level is necessary to prevent or remedy serious injury.
Assume that Home imports increased during this period from, say, 100 in year 1, to 150 in year 2, to 200 tons in year 3. In such a case, at least 150 tons should be allowed to enter the country after imposition of a safeguard.71 Restricting imports by imposing a QR that lowers the amount of imports to below the average of the last three representative years (in this example, anything below 150 tons) is possible if justification72 is given that a different level is necessary to prevent or remedy serious injury (Article
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5.1 of SG). The agreement does not specify what this level should be. Recall, however, that the same provision requests that safeguards be applied to the extent “necessary” to counteract injury. In cases of disagreement between the parties, panels will be asked to pronounce on the lesser level using “necessity” as the benchmark to define the appropriate level. If recourse to quota modulation is not made, then trade will be conducted respecting historical market shares (Article XIII of GATT): quotas will be imposed respecting the market share of exporters during a representative period.73 WTO members can depart from the obligation to respect historical market shares in their import market and target the relatively more efficient sources of supply (the “mavericks”) by allocating to them quotas that are less than the level reached in their historical market share. Thus, they can target those WTO members that have increased their market share more rapidly: this is what “quota modulation” under Article 5.2(b) of SG amounts to. Assume that exports from all sources to home have increased from 50 to 180 in three years. Assume further that exports from Foreign to Home increased from 10 to 120 from year 1 to year 3. Home can, when allocating say a quota of 50, “punish” Foreign and restrict it to much less than the approximately 67 percent that it enjoys in year 3 in Home’s market. Quota modulation can take place where a clear demonstration has been given to the Committee on Safeguards that the following are the case: • Imports from certain WTO members have increased in a disproportionate percentage with relation to the total increase of imports of the product concerned during the representative period. • The reasons for the departure from the historical patterns have been justified. • The conditions of departure are equitable to all suppliers of the product concerned. The duration of measures imposed in this case shall not extend beyond the initial period of four years. Moreover, “targeted” safeguard measures may be used only in the case of a finding of current serious injury, and not in the case of a mere threat of serious injury. The Committee on Safeguards must, as stated previously, be informed of cases where recourse to quota modulation has been made. 4.5.5.3 VERs As already explained previously, VERs are illegal in all forms. 4.5.6 Who Imposes Safeguards? 4.5.6.1 Individual WTO Members The working hypothesis of the SG Agreement is, in fact, that it is individual WTO members that use its provisions. WTO members often participate in PTAs and the question has arisen whether it is them or PTAs that should be imposing PTA-wide safeguards.
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4.5.6.2 Individual WTO Members, Members of a PTA Recall from our discussion in chapter 6, volume 1, that the difference between a customs union and a free trade area is that the former liberalizes trade not only between the constituent parts of the customs union but further adopts a common external trade policy as well. The question arises whether, when safeguards are imposed at the customs union (CU) level on behalf of a single member of the CU, restrictions on imports from CU partners will be imposed as well. In a similar vein, one may ask whether a constituent of a free trade association (FTA) must include or exclude other constituents of the same FTA when imposing safeguards. This question has been addressed in case law in instances involving safeguards imposed by Argentina, a member of Mercosur (a CU), and the US, a member of the North American Free Trade Association (NAFTA). Both Argentina and the US had included in their examination of increased imports goods originating in their CU/FTA partners, but then they excluded their preferential partners from the scope of their safeguards measures. In the AB’s view, their measures were inconsistent with the SG Agreement. A “parallelism” between the origin of imports examined and the origin of countries against which safeguards are imposed must exist whenever safeguards are imposed [AB, Argentina–Footwear (EC), §§ 112–13; AB, US–Wheat Gluten, § 96]. The AB summarized its case law in its report on US–Steel Safeguards in the following manner (§ 441): Thus, where, for purposes of applying a safeguard measure, a Member has conducted an investigation considering imports from all sources (that is, including any members of a free-trade area), that Member may not, subsequently, without any further analysis, exclude imports from free-trade area partners from the application of the resulting safeguard measure. As we stated in US–Line Pipe, if a Member were to do so, there would be a “gap” between, on the one hand, imports covered by the investigation and, on the other hand, imports falling within the scope of the safeguard measure. In clarifying the obligations of WTO Members under the “parallel” requirements of the first and second paragraphs of Article 2 of the Agreement on Safeguards, we explained in US–Line Pipe that such a “gap” can be justified under the Agreement on Safeguards only if the Member establishes “... “explicitly” that imports from sources covered by the measure satisf[y] the conditions for the application of a safeguard measure, as set out in Article 2.1 and elaborated in Article 4.2 of the Agreement on Safeguards.” (italics in the original)74
Recall that the last sentence of footnote 1 to the SG Agreement states: “Nothing in this Agreement prejudges the interpretation of the relationship between Article XIX and paragraph 8 of Article XXIV of GATT 1994.” The AB underscored that it did not want to prejudge the relationship between Article XXIV.8 and Article XIX of GATT. It stated in § 114 of its report on Argentina–Footwear (EC) to this effect: “... we wish to underscore that, as the issue is not raised in this appeal, we make no ruling on whether, as a general principle, a member of a customs union can exclude other members of that customs union from the application of a safeguard measure.”
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It seems, though, that case law has in fact prejudged the issue since safeguards do not figure among the measures that constituents of an FTA/CU can impose against each other (Article XXIV.8 of GATT). Hence, the AB has enlarged the list of measures that members of a PTA can impose against each other. 4.5.6.3 PTAs in the Name of a Constituent A CU75 may also impose safeguard measures, either as a single unit or on behalf of one of its constituents (AB, Argentina–Footwear (EC), § 108). When a CU imposes a measure on behalf of one of its constituents, footnote 1 specifies that all the requirements for the determination of serious injury or threat thereof shall be based on the conditions existing in that member, and the measure shall be limited to that member as well. 4.5.6.4 PTAs Imposing Safeguards as a Single Unit A CU (customs union)76 may also impose safeguard measures as a single unit (AB, Argentina–Footwear (EC), § 108). In fact, whenever the EU imposes safeguards, it does so on an EU-wide basis. 4.5.7 The Form of Safeguards There is no exhaustive or even indicative list of safeguard measures in the SG Agreement or GATT, and yet there are hints as to the type of measures envisaged. Article 5.1 of SG states that WTO members should choose measures most suitable for the achievement of their relevant objectives, but the same provision contemplates the obligations of a WTO member if a QR has been privileged. Article XIX of GATT, in a similar vein, provides that under certain circumstances, a WTO member may be free “to suspend the obligation in whole or in part or to withdraw or modify the concession.” Finally, Article 7 of SG provides that provisional safeguard measures should take the form of tariff increases. In principle, thus, WTO members are free to choose any measure they deem appropriate, be it a tariff, a QR, or even a tariff quota (TRQ). Based on the notifications by WTO members to the Safeguards Committee, it appears that ad valorem tariff increases are the most widely used safeguard; almost as popular are tariff quotas; specific tariff increases come third in the rankings, and QRs are a distant fourth.77 4.6 4.6.1
Procedural Requirements Safeguards Can Be Imposed Only Following an Investigation
The SG Agreement dedicates only one article which contains just two paragraphs (Article 3 of SG) for the whole investigation process. A number of issues that are discussed in a detailed manner in the AD- and SCM Agreements are not at all addressed in the SG
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Agreement. As a result, an IA has reasonably more discretion when conducting an investigation with a view to imposing safeguards than when aiming to impose AD duties or CVDs. It is quite remarkable that an agreement aiming at counteracting legal, so-called fair trade, has not attempted to discipline the discretion of IAs more. While start-up costs for initiating an investigation are quite low, safeguards have to be imposed on a solid basis, as we have already explained so far. The problem is that even flimsy requests might have a market effect. There is no institutional insurance policy against this risk in the context of the SG Agreement. 4.6.2
Initiating an Investigation
The SG Agreement is silent on the initiation phase and does not subject the decision to initiate an investigation to any procedural or substantive conditions. Unlike other contingent protection instruments, no distinction is drawn between self-initiated (ex officio) investigations and investigations upon the request of a private party. 4.6.3 The Request to Initiate There is no need to show any preliminary evidence of increased imports resulting from unforeseen developments, nor that imports might be causing injury to the domestic industry. It suffices that the IA has decided to initiate the process. The start-up costs, as mentioned previously, are quite low.78 4.6.4
Standing Requirements (Locus Standi)
Contrary to the AD and SCM Agreements, there are no standing requirements reflected in the SG Agreement. It could be the case, for example, that one economic operator, representing a minor proportion of the domestic industry, requests initiation of an investigation, but an investigation could still be launched, assuming that the IA agrees to it. The SG Agreement was thought of more as a weapon in the hands of WTO members than a weapon in the hands of private operators complaining about the fairness of foreign competition. 4.6.5 The Rights and Duties of IAs 4.6.5.1 The Right to Seek Information The SG Agreement does not address this issue at all. The AB in its report on US–Wheat Gluten held that IAs are endowed with the right to seek information from every source they deem appropriate (§§ 55–56).
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4.6.5.2 The Duty to Observe Due Process There is no express provision guaranteeing interested parties “access to the file,” apart from the very general need to provide reasonable public notice to all interested parties. The AB, in its report on US–Wheat Gluten, held that certain procedural aspects of the more detailed AD and CVD provisions could find their way into the SG Agreement, especially where the latter is silent (§§ 53–55). Similar case law initiatives seem warranted; otherwise, IAs might have an incentive to be in close cahoots with the domestic industry and use the absence of specific legal obligations to justify their attitude. The problem is that, absent case law, we will have to wait and see which provisions apply where, and even then, whether case law is consistent in this respect. 4.6.5.3 The Duty to Protect Confidential Information Article 3.2 of SG reproduces the corresponding provision in the AD and the SCM contexts. It is, thus, to be expected that case law under these two agreements regarding the treatment of confidential information will find application in the SG context as well. 4.6.5.4 The Duty to Observe Transparency A number of provisions in the SG Agreement address this issue. Publicity of Procedures An IA must conduct the investigation in accordance with procedures previously established and made public (Article 3.1 of SG). Article 3.1 of SG further requires that an IA provide public notice to all interested parties regarding the initiation of investigation, provide all such parties with the opportunity to present evidence and their views, and respond to the presentations of other parties. Publicity of the Decision to Initiate an Investigation By virtue of Article 12 of SG, the Safeguards Committee must be duly notified of decisions to initiate a safeguard investigation [Article 12.1(a) of SG]. In US–Wheat Gluten, the AB held that a delay of sixteen days to notify was not consistent with the requirements of the SG Agreement (§ 111). Similarly, the Panel on Korea–Dairy found that a delay of fourteen days for the limited notification of the initiation of an investigation was inconsistent with the SG Agreement (§ 7.134). Publishing of Conclusions Article 3.1 of SG reads: “The competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law.” The Panel on US–Steel Safeguards took the view that Article 3.1 of SG does not require that an IA send draft findings to interested parties, but the AB considered the absence of an explicit explanation of the pertinent issues of fact and law WTO-inconsistent (§ 10.64–65). The complainant (EU) had argued that the US had not fully justified how
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it had met the unforeseen developments requirement. On appeal, the AB took the view that, to comply with Article 3.1 of SG, a WTO member must set forth findings and reasoned conclusions on all pertinent issues of facts and law since this was the only basis (along with requirements under Article 4 of SG) upon which panels could base their findings (§ 299). The US had argued that the failure to explain a pertinent issue of fact or law in its order imposing safeguards should not amount to a panel finding that no investigation of this particular issue had been conducted at all. The AB disagreed, holding that a finding like this was appropriate in light of the absence of a reasoned explanation in conformity with Article 3.1 of SG. Notification of Decision to Impose Safeguards The Safeguards Committee must also be notified of decisions to impose provisional measures, impose or extend definitive measures, and impose all findings of injury or threat thereof caused by increased imports [Article 12.1(b) of SG and Article 12.1(c) of SG]. The duty to notify is accompanied by the obligation to do so immediately upon making such a finding or decision. The AB on US–Wheat Gluten held that the ordinary meaning of the term “immediately” implies a certain degree of urgency (§§ 105–106). Article 12.2 of SG explains the kind of information that should be included in notifications. A WTO member that is about to apply or extend a safeguard measure shall provide the Safeguards Committee with all pertinent information including, inter alia, evidence of injury, or threat thereof, as well as information on the proposed measure and its expected duration (Article 12.2 of SG). At the same time, it shall provide all interested WTO members with the possibility of engaging in consultations prior to the imposition of the safeguard measure (Article 12.3 of SG). The aim of these consultations is to allow affected WTO members to review the notified information, exchange views on the measure proposed, and reach an understanding on the ways to maintain a substantially equivalent level of concessions or adequate trade compensation (Article 12.3 of SG). The AB, in its report on Korea– Dairy, agreed with the view of the panel that the notification serves a transparency purpose (§ 111): We think that the notification serves essentially a transparency and information purpose. In ensuring transparency, Article 12 allows Members through the Committee on Safeguards to review the measures. Another purpose of the notification of the finding of serious injury and of the proposed measure is to inform Members of the circumstances of the case and the conclusions of the investigation together with the importing country’s particular intentions. This allows any interested Member to decide whether to request consultations with the importing country which may lead to modification of the proposed measure(s) and/or compensation.
Notifications under Article 12.2 of SG concerning findings of injury or threat thereof, as well as of the decision to take an action as a result, have to be made prior to the action
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and in sufficient time before its application to allow meaningful consultation. The AB, in its report on US–Line Pipe, confirmed that WTO members must provide interested parties with enough time to ensure that consultations will be meaningful. In the case at hand, the AB held that the US, by providing Korea with less than 20 days for consultation, violated its obligations under Article 12.3 of SG (§§ 107 and 111–13). The requirement of Article 12.2 of SG to provide the Safeguards Committee with all pertinent information on a number of matters has been considered to be different and less demanding than the requirement of Article 3.1 of SG to publish a report setting forth an IA’s findings and reasoned conclusions on all pertinent issues of fact and law (Panel on Korea–Dairy, § 7.125). According to the AB on Korea–Dairy, a notification that does not set forth the findings with regard to all the injury factors mentioned in the SG Agreement (namely, Article 4.2), does not include all pertinent information on serious injury (§ 109). In US–Wheat Gluten, the AB held that, with respect to notification concerning findings of injury caused by increased imports, a delay of 26 days was not consistent with the requirements of the SG Agreement either (§§ 112, 116). In both cases, the limited content of the notification was an important element in considering whether the notification could have been made sooner. On the other hand, with respect to notifications concerning a decision to apply or extend a safeguard, the AB held in the same report that the passage of five days between the date when a decision was taken and its notification was not in contravention of the SG Agreement (§ 129). The Panel on Korea— Dairy found that delays of forty days for communicating the injury finding, and twenty-four days for the decision to apply a measure, were inconsistent with Article 12.1 of SG (§§ 7.136, 7.145). The AB, in its report on US–Line Pipe, clarified that a violation of the duty to notify a proposed safeguard measure and provide adequate time for consultations to affected parties (under Article 12 of SG) ipso facto amounted to a violation of the obligation included in Article 8.1 of SG (§§ 116–119). 4.6.6 The Rights and Duties of Interested Parties 4.6.6.1 The Right to Access the File There is nothing explicit on this score in the SG Agreement. Recall, though, that the AB, in its report on US–Wheat Gluten, voiced its view that certain procedural aspects of the more detailed AD and CVD provisions could find their way into the SG Agreement, especially where the latter is silent (§§ 53–55). Access to the file is one of the issues where the AD and CVD provisions would be most relevant since, absent access to the file, interested parties might find it impossible to defend their interests before the IA.
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4.6.6.2 The Duty to Cooperate There is nothing explicit in the SG Agreement on this score either. It is true that because of the very nature of investigation, exporters will be requested sparingly, if at all, to provide information. There is no case law on this score at the moment of writing. 4.6.7
Consultations
WTO members must inform the Committee on Safeguards about the initiation of an investigation, findings of serious injury or threat thereof, and decisions to apply and extend safeguard measures (Article 12.1 of SG; Article 12.4 of SG with respect to provisional measures). Before applying or extending a safeguard measure, WTO members must offer WTO members with a “substantial interest” adequate opportunities to consult (Article 12.3 of SG). 4.6.8 The Length and Period of Investigation The agreement does not regulate the length or period of investigation. Practice suggests that the previous discussion in the AD/SCM context is roughly relevant here as well. Practice is the only guide, and it varies substantially. There are reported cases where the total length of investigation was three months (China–Maize), or even nine months (Indonesia–Dextrose Monohydrate).79 4.7 4.7.1
Special Safeguard Regime with Respect to China Four Types of Safeguards
The accession of China to the WTO introduced a special country-specific safeguards regime for imports of Chinese products only. Four types of safeguard measures may be imposed against products originating in China:80 1. A “normal” safeguard following the procedures established in the SG Agreement. In this case, the rules of the SG Agreement discussed previously apply. 2. A special China-specific transitional safeguard measure (a transitional safeguard). The provisions governing this transitional safeguard are set forth in China’s Accession Protocol81 and the Report of the Working Party on the Accession of China;82 3. A safeguard to counteract trade diversion resulting from the imposition of safeguards against Chinese products by another WTO member. 4. A textile safeguard measure specific to textile products from China (a textile safeguard). The rules governing textile safeguards are set forth in the Report of the Working Party on the Accession of China. 83
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WTO members are not allowed to impose simultaneously a textile and a transitional safeguard.84 A simultaneous application of an ordinary and a transitional safeguard is not explicitly outlawed: the EU notified the initiation of a double safeguard investigation on mandarins from China. In the end, only an ordinary safeguard was imposed, with a China-specific quota.85 4.7.2 Transitional Safeguard A transitional safeguard may be imposed in cases where products of Chinese origin are being imported into the territory of any WTO Member in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products.86
The conditions for lawful imposition are quite similar to those set forth in Article 2 of SG. Expiration Date The transitional period during which this regime was applicable was twelve years; that is, until 10 December 2013.87 It is, thus, of historical interest nowadays. Market Disruption China’s Accession Protocol privileges the use of the term “market disruption” instead of “serious injury” (§ 4): Market disruption shall exist whenever imports of an article, like or directly competitive with an article produced by the domestic industry, are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury to the domestic industry. In determining if market disruption exists, the affected WTO Member shall consider objective factors, including the volume of imports, the effect of imports on prices for like or directly competitive articles, and the effect of such imports on the domestic industry producing like or directly competitive products.
The AB in US–Tyres (China) held that the term “material injury,” appearing in § 4 of the Chinese Protocol of Accession, reflects a lower standard than the term “serious injury,” appearing in the SG Agreement, without specifying how much lower the standard was (§ 183). In the same case, the panel explained in detail the US standard, which in a nutshell required from Chinese imports to have contributed significantly to the injury of the US domestic industry (§ 7.150): To determine whether the Section 421 causation standard is inconsistent with the United States’ WTO obligations, we must establish what that causation standard actually means. It is well established that, when ascertaining the meaning of domestic legislation, a panel might refer to evidence of the consistent application of that law. In its defence, the United States has produced evidence to the effect that the “contributes significantly” definition is equivalent to the Protocol’s “significant
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cause” standard because of consistent USITC practice requiring the demonstration of a “direct and significant causal link” between the rapidly increasing imports and the market disruption. In particular, the United States refers to the following extract from the USITC Report in the Tyres case: The third statutory criterion for finding market disruption is whether the rapidly increasing imports are a significant cause of material injury or threat of material injury. The term “significant cause” is defined in section 421(c)(2) of the Trade Act of 1974 to mean “a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause.” The legislative history of section 406 describes the significant cause standard as follows: Under this standard, the imports subject to investigation need not be the leading or most important cause of injury or more important than (or even equal to) any other cause, so long as a direct and significant causal link exists. Thus, if the ITC finds that there are several causes of the material injury, it should seek to determine whether the imports subject to investigation are a significant contributing cause of the injury or are such a subordinate, subsidiary or unimportant cause as to eliminate a direct and significant causal relationship. (italics in the original)
Both the panel (§§ 7.160ff) and the AB (§§ 200ff.) found the US standard described here consistent with the US obligations in this respect. The AB, upholding the panel’s findings, held that the nonattribution language included in Article 4.2 of SG should find application here as well, the absence of specific language to this effect in the Chinese Protocol of Accession notwithstanding (§ 200). The term “are increasing” is notably different from the corresponding term appearing in the SG Agreement. Trends will not suffice to satisfy this criterion. The Panel on US– Tyres (China) found that imports must continue to be increasing at the moment that the investigation takes place, and the AB upheld this finding (§ 134): The use of the present continuous tense “are increasing” also suggests that imports follow an upward trend, in that they have increased in the past and continue to increase at present.
China appealed the panel finding that this requirement would be satisfied when imports have been increasing in the five-year period preceding the investigation. In China’s view, the investigation should focus only on the most recent period. The AB saw nothing in the Chinese Protocol of Accession (Article 16, § 1 and § 4) to support this argument.88 It consequently upheld the panel finding in this respect (§ 149). It follows that imports must be increasing when the investigation is being conducted, but the increase could be relative to the beginning of the investigation period. Moreover, there is no need for sharp, rapid increases, as the AB noted (§ 158). In fact, even if the rate of increase is dropping, the requirements for imposing a safeguard will be met so long as imports are increasing in absolute terms (§ 167). Duration A transitional safeguard may be imposed only for such a period of time as may be necessary to prevent or remedy market disruption, but no maximum time period is specified.89
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Similarly, the measure may be applied only to the extent necessary to prevent or remedy market disruption.90 The Report of the Working Party on the Accession of China adds in § 246(g) that, except for good cause, a grace period of one year has to be respected following the completion of a previous investigation. It appears that this rule does not prohibit the initiation of a new investigation at the time of expiration of the measure. Compensation A WTO member imposing a transitional safeguard will have to compensate China by allowing it to suspend an equivalent level of concessions. China is not entitled to exercise that right during the first two years of the measure, in cases where the measure was adopted following a finding of a relative increase in imports, and during the first three years in the case of a finding of an absolute increase in imports.91 Provisional Measures Provisional measures may be applied in critical circumstances, where delay would cause damage that would be difficult to repair. A preliminary determination of increased imports, market disruption, and a causal link is required to this effect. The maximum period of time for the application of provisional measures is 200 days.92 Procedural Requirements A consultation phase precedes the adoption of safeguard measures. It may lead to a bilateral agreement, and accordingly, China might agree to exercise self-restraint and take action to prevent or remedy the market disruption.93 If bilateral consultations do not lead to an agreement within 60 days, a WTO member may withdraw concessions or simply limit imports of the Chinese product in question. The Committee on Safeguards has to be notified of any request for consultations and of the decision to impose measures. Before taking action, a WTO member must conduct an investigation pursuant to procedures previously established and made available to the public.94 Due process rights, such as public notice, an adequate opportunity for interested parties to submit their views, and evidence (including that obtained through a public hearing), are respected. Moreover, the WTO member taking the measure must provide written notice setting forth the reasons for it, as well as its scope and duration.95 Standard of Review In US–Tyres (China), the AB, upholding the panel’s findings in this respect, held that the generic standard of review as expressed in the AB report on US–Lamb, found application in the context of the China specific safeguards as well (§§ 123–124).
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Safeguarding against Safeguards
In the case of significant trade diversion caused by the imposition of a transitional safeguard by a WTO member on a particular type of product originating in China, another WTO member may withdraw concessions or otherwise limit imports from China only to the extent necessary to prevent or remedy such diversions.96 The Report of the Working Party on China’s Accession clarifies in § 248 the criteria that would have to be examined in order to determine trade diversion caused by another WTO member’s transitional safeguard, inter alia: the increase in market share of imports from China, the nature or extent of the action taken or proposed, the increase in volume of imports from China due to the action taken, conditions of demand and supply in the importing WTO member for the products at issue, and the volume of exports from China to the WTO member imposing the original transitional safeguard. The safeguard has to be reviewed if the safeguard that gave rise to trade diversion has been modified. It must be terminated no more than 30 days following the expiration of the original transitional safeguard (§§ 249–250). There is no obligation to compensate. 4.7.4 Textiles Safeguard The Report of the Working Party on China’s Accession contains the rules governing this type of safeguard (§ 242). This regime remained applicable until 31 December 2008. The products covered (textiles and apparel) are essentially those that were previously covered by the now-defunct ATC. The textile safeguards mechanism was a two-stage process, combining a sort of VER by China with the possibility of imposing a safeguard in the case that China had not complied. In this case, a WTO member could request consultations from China if it believed that Chinese textile imports were threatening to impede the orderly development of trade. It would need to provide China with a detailed factual statement of reasons and justifications, supported by current data on the existence or threat of market disruption, and the extent to which products of Chinese origin have provoked the market disruption. Consultation should be held within 30 days, and a mutually satisfactory solution should be reached within 90 days following the request. Immediately following the request for consultation, China would be required to hold its shipments of the textile products in question toward the WTO member requesting consultations to a level no more than 7.5 percent (6 percent for wool product categories) above the amount entered during the first 12 months of the most recent 14 months preceding the month in which the request for consultations had been made. The request for consultations triggered, thus, a self-imposed restraint on exports. If the consultations did not lead to a solution after 90 days, the VER could be turned into a safeguard measure by the importing WTO member, limiting imports of the Chinese textile
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products in question to the same level (7.5 percent). This safeguard measure could stay in place for a maximum period of one year, but there were no rules prohibiting the reapplication of a new measure on the same products at the end of this period [§ 242(e), (f)]. No investigation was required, nor was there any obligation to notify any WTO body of these textile safeguards. 4.8
Special and Differential Treatment for Developing Countries
Safeguard measures cannot be applied against imports from developing countries if their share of imports does not exceed 3 percent of the total in the importing market, or 9 percent cumulatively—that is, where products originate in various developing countries (Article 9 of SG).97 In Dominican Republic–Safeguard Measures, the panel held that this obligation must observe nondiscrimination. The WTO member imposing safeguards must exclude from imposition all developing countries, as opposed to some of them, selectively. The decision by the Dominican Republic not to exclude goods originating in Thailand (allegedly because it had not exported to it at all in 2009) was inconsistent with this obligation since other WTO members that also had not exported to it during the same calendar year (e.g., Panama) had been excluded (§§ 7.398–402).98 4.9
Standard of Review
The SG Agreement does not contain a specific provision dealing with the standard of review that is applicable to cases coming under its aegis. Consequently, the generic standard of review included in Article 11 of DSU is applicable. The AB accepted as much in its report on US–Cotton Yarn (§ 74).99 In US–Lamb, the AB explained that in order to make an objective assessment of the matter before it, a panel must satisfy itself that an IA has evaluated all relevant facts before it and has provided an adequate and reasoned explanation for its overall findings (§§ 103–107). In US–Cotton Yarn, the AB added that panels cannot base their determination on evidence that did not exist when the investigation took place: if they do, they violate, ipso facto, Article 11 of DSU (§ 78). This is a natural consequence of the fact that, when faced with a decision by an IA (regardless of whether in the AD, the SCM, or the SG context), a panel must abstain from conducting a de novo review; that is, behave as if it were the IA and start the fact-finding process all over again. In US–Lamb, the AB also ruled that absence of de novo should not be confused with total deference. Panels must not defer to an IA’s findings; on the contrary, they must actively review the IA’s determinations (§§ 106–107). Case law, however, has not shed much light on the extent of duty to be active, beyond this generic urge to behave in this way.
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The Panel on US–Steel Safeguards drew a distinction between the standard of review to be applied by panels when evaluating the right to apply a safeguard measure and the standard to be applied when evaluating the application of the measure itself. In its view, in the latter case, a panel’s examination can be more intrusive than in the former (§§ 10.25–27): The Panel is of the view that the standard of review applicable in the present dispute must be seen in light of the distinction between the first and second enquiry that the panel must perform when assessing a Member’s compliance with the requirements of the Agreement on Safeguards and Article XIX of GATT 1994. When assessing a Member’s compliance with its obligations pursuant to Articles 2, 3 and 4 of the Agreement on Safeguards and Article XIX of GATT, the panel is not the initial fact finder. Rather, the role of the panel is to “review” determinations and demonstrations made and reported by an investigating authority. The situation is different in the context of the second enquiry when assessing whether the measures were applied only to the extent necessary to prevent the serious injury caused by increased imports. In that situation, it is before the panel, during the WTO dispute settlement process, that the importing Member is forced for the first time to respond to allegations relating to the level and extent of its safeguard measures. For us, this is clear from the following statement of the Appellate Body in US–Line Pipe: “[I]t is clear, therefore, that [...] Article 5.1, including the first sentence, does not oblige a Member to justify, at the time of application, that the safeguard measure at issue is applied ‘only to the extent necessary.’” Article 5.1 does not establish a general procedural obligation to demonstrate compliance with Article 5.1, first sentence, at the time a measure is applied. In that second enquiry, the panel is thus reviewing whether the measures “as applied” comply with the requirements of Articles 5, 7, 8 and 9 of the Agreement on Safeguards on the basis of the evidence and arguments put forward by the parties during the WTO dispute settlement process. (italics in the original)
4.10
Institutions
A Committee on Safeguards is established, and its tasks are described in Article 13 of SG. WTO members will notify this committee of their safeguard measures, and the latter can assist them with all matters regarding imposition of safeguards. 4.11
Concluding Remarks
Many scholars have studied the proliferation of AD duties and the reasons behind this phenomenon, and almost all support the view that this is a political economy–driven instrument aimed at providing the domestic industry with breathing space rather than responding to unfair trading. Prusa (2001, 2005) offered a very comprehensive look at this issue. Finger (1993) concluded that AD is best explained through political economy arguments, and the same is true for Bloningen and Prusa (2003). Finger and Nogues (2006) studied AD practices in seven Latin American countries (Argentina, Brazil, Chile,
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Colombia, Costa Rica, Mexico, and Peru). They concluded that, absent the “insurance policy” that AD provided them with, the countries examined would not have made the liberalization commitments that they made at either the multilateral or the preferential level; in other words, the countries examined viewed recourse to AD as a safeguard rather than as a response to an unfair practice. But this is what safeguards should be doing, not AD. So, the question naturally arises: Why did we end up with the overlap between the two instruments? There are many probable answers, but there is one obvious suspect: the absence of selectivity when imposing safeguards. The stringency of criteria imposed in the SG context, like the relative unworkability of the unforeseen developments requirement, might also have played a role. The analysis in this chapter supports the view that we are dealing with a highly complex agreement, which has become more complex following case law interventions. Indeed, pause for a moment and ask yourself what kind of analysis would satisfy the nonattribution requirement, or why we should spend time and effort outlawing VERs, only to partially reintroduce them through quota modulation. There is an urgent need to simplify the agreement, and there is nothing novel about this argument. Almost thirty years ago, Deardorff (1987, pp. 34–35) stated: My specific recommendation is that, once it has been decided that a domestic industry deserves some form of trade protection owing to its being injured by imports, the GATT should prescribe that the importing country institute an import quota, set at a level no less than some base-year level of imports prior to the injury. This quota should be implemented by issuing import licences in the amount of the quota and then allocating them to all exporting countries in the amounts of their base-year exports. The advantage of this policy within the context of this paper is that it is capable of preserving the levels of welfare of both consumers and producers in the importing country, and also of foreigners – even those in countries whose exports have not increased but who would be hurt by certain other policies such as a tariff. An additional advantage of this policy, beyond the context of the model given here, is that it automatically provides compensation to the country whose exports are restricted by the safeguard action. Compensation has always been a requirement of the GATT safeguard clause, but it has been difficult to achieve in practice since it was attempted through offsetting trade concessions. The value of these were always questionable, and in any case, they did not serve to compensate the private individuals who stood to lose from the action in the first place. Having recommended that these quotas be allocated to the exporting countries, one could go further and say that they should be allocated to the foreign exporting firms themselves. This has some appeal since it would ensure that the compensation just mentioned would reach those in the private sector who otherwise would be harmed by the policy. But I do not recommend that it be a formal requirement of the proposal since issues of income distribution within a country should best be left to the discretion of that country’s own government. Furthermore, a viable safeguard code should be able to deal with cases involving nonmarket economies, where a requirement to allocate to firms might make no sense. Therefore, I would only suggest that the code contain a presumption in favor of governments that receive these allocations, passing them in turn to their own exporting firms.
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Another feature of this proposal that I would insist on would be that, while these rights to import under a safeguard quota would be allocated to specific countries, they would be globally marketable and would not require that the imports actually come from the countries to which they were allocated. So only the allocation of the quotas, and thus the quota rents, would be country-specific: the quotas themselves would be global, and globally marketable. This feature would have the economic advantage of ensuring that imports from all sources would be subject to a single quota premium, thus encouraging imports from the least-cost source. In a changing world economy, it would not freeze production patterns across exporting countries, and would permit entry by new low-cost suppliers. It would also mean that the quota, in terms of its effect on prices, would be equivalent to a most-favored-nation (MFN) tariff. This might make it acceptable to those countries, like the United States and many least developed countries (LDCs), who have insisted on an MFN provision in any negotiated safeguard code. At the same time, the ability to allocate quotas to specific foreign countries may satisfy at least part of the desire for selectivity on the part of the European Community (EC).
It is probably high time that trade negotiators reflect on this and similar ideas that have been advanced.100 A new agreement that would combine the stringent procedural requirements in the AD Agreement and institutions like the dynamic use constraint would be a net improvement over the current situation, where AD duties follow safeguards and vice versa, in a never-ending sequence of responses to so-called fair and unfair trade.
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5.1 5.1.1
Technical Barriers to Trade
The Legal Discipline and Its Rationale The Legal Discipline
The Agreement on Technical Barriers to Trade (TBT) requests that WTO members follow relevant international standards when enacting “technical regulations,” “standards,” “conformity assessment,” or any combination, assuming that they are appropriate to use in order to reach the objectives pursued. If this is not the case, or if no relevant international standards exist, WTO members must ensure that their unilateral measures that qualify as “technical regulations,” “standards,” or “conformity assessment,” are applied in a nondiscriminatory manner, and are the least restrictive means to reach a legitimate objective. Technical regulations and standards are, roughly speaking, documents that lay down product and process characteristics aiming to pursue different societal values, such as consumer, environmental, or public health protection. A labeling requirement regarding the amount of tar and nicotine in traded cigarettes offers an appropriate illustration. The intensity, however, differs between the two instruments: whereas compliance with technical regulations is necessary for market access, compliance with standards is optional. The term “conformity assessment” refers to procedures established in order to measure whether products conform to established technical regulations/standards. The TBT Agreement was originally a Tokyo-round code that was binding only on its signatories, and it became a multilateral agreement binding all WTO membership as of 1 January 1995. 5.1.2
The Rationale for the Legal Discipline
The TBT Agreement addresses a subset of the measures coming under the purview of Article III of GATT. The question to ask in order to discern the rationale for the TBT Agreement is: Why was the discipline embedded in Article III of GATT deemed inadequate?
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Article III of GATT aimed to address the erosion of tariff commitments (in a wide sense, what we have termed an “antiprotectionist” clause), as we saw in chapter 7, volume 1. The GATT framers aimed to ensure that protection remained negotiable (and not the outcome of unilateral initiatives). To this effect, all that they agreed to was that domestic legislation would not discriminate between domestic and imported goods, and that it would be applied in an evenhanded manner. Commitments on nontariff barriers (NTBs) were a sort of supporting act to the center stage, occupied by commitments on tariffs. In a world where tariffs are fast approaching the zero level, concession erosion is much less of a concern. Regulations (e.g., NTBs) now segment markets. In Baldwin’s (1970) inimitable expression, the “snags” (NTBs) are more visible as the tariff swamp has been drained.1 Unsurprisingly, the focus switched to the disciplining of NTBs, and the TBT Agreement is the first successful negotiation to this effect (the SPS Agreement, which will be examined in the next chapter, being the second). The TBT Agreement does not simply request that the WTO membership apply laws etc. in a nondiscriminatory manner; it also requires that they take the first steps toward “rationalizing” their regulatory interventions. Why rationalize domestic policies? Through labeling, a WTO member might want to address an information asymmetry and preempt consumer behavior. Public health, environmental, and consumer protection provide the most frequent rationales for enacting legislation at the national level. These are areas the regulation of which has been heavily influenced by scientific progress, at least in some parts of the world. Alas, it has also been influenced by political economy; thus, under the guise of pursuing a legitimate objective, aim to provide domestic producers with an advantage in the market. The role for the TBT Agreement is to provide a test that will distinguish wheat from chaff. By rationalizing domestic policies in this way, market access for foreign goods will be facilitated and trading nations will avoid trade frictions and be in a position to profit from the efficiency gains resulting from this endeavor. The next question is: How should national policies be rationalized? In principle, WTO members must use international standards and base their interventions on the available science, whenever appropriate. International standardizing bodies provide a forum for trading nations and the private sector to debate the need to regulate and design the standard. It is expected that the emerging standards will be roughly based on a “genuine” need to regulate.2 It is, thus, unsurprising that international standards are considered “necessary” to achieve the stated ends (e.g., the option that least burdens international trade flows). By acknowledging their relevance in the WTO legal order, the TBT Agreement takes another step toward the “rationalization” of domestic policies. The requirement for “rationalization” does not stop here. What if international standards do not exist or are considered inappropriate to achieve social preferences? The TBT Agreement imposes a two-pronged discipline that WTO members must observe when their interventions are not based on international standards: ex ante, WTO members must reflect on the need to intervene or not (Article 2.2 of TBT requires that WTO members take into
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account “the risks non-fulfilment would create”); ex post (e.g., when they have decided in favor of intervention), they should always adopt the necessary—that is, the least restrictive—measure that would help them achieve their stated objective. The TBT Agreement, thus, imposes obligations on the substantive content of domestic policies, not merely on their application, as did GATT. There are limits, though, on the dent to the regulatory autonomy imposed by realpolitik type of concerns. WTO members remain free to decide when to intervene. There is no obligation to intervene, for example, simply because an international standard has been issued in a particular area. Thus, they can have different views on whether a distortion should be addressed or not. We observe, for example, countries with higher and countries with lower environmental standards. Disagreements, thus, might and do arise regarding the level of protection sought, but there is no WTO legal obligation to adopt a particular level of protection.3 Furthermore, the TBT Agreement stops short of requiring efficient (best) interventions.4 Best interventions might be too costly. We sum up this discussion by stating that the legal disciplines imposed by the TBT Agreement tilt the balance toward measures that do not represent a disproportionate cost on international trade. It does not go any further. Rationalization of domestic policies coming under the aegis of the TBT Agreement is intimately linked with regulatory cooperation. The TBT Agreement includes in this respect a mix of legally binding obligations (like the obligation to provide for inquiry points where national regulations will be explained), and a best endeavor to proceed to recognition, equivalence, and harmonization. One might, of course, ask the question of why confine the TBT Agreement to regulation of product and process characteristics, “labelling,” “packaging,” and similar measures? Why not extend its coverage to all measures coming under the purview of Article III of GATT? Is there something special about these measures? The short answer is no. Recall, nevertheless, that the current is not the first TBT Agreement, as briefly mentioned earlier. During the Tokyo round, the first TBT Agreement was successfully negotiated. It was part of the GATT “à la carte” approach followed during that round, and hence, it is binding only on its signatories. It was multilateralized during the Uruguay round as a result of the “single undertaking” approach followed at that time. A lot of the regulatory activity regarding trade in goods concerned (and still concerns) labeling and packaging, as well as measures regarding the production process and product characteristics. It was, thus, quite natural to start from the regulation of similar schemes. The EU and the US should be credited with its design. To some extent, they exported their own regulatory experience in this area to the world, although, as we shall see later in this chapter, there are notable differences between them.5 Eventually, the TBT Agreement (and the SPS Agreement discussed in the next chapter) might prove to be the “hothouse” for the regulation of domestic policies at large.
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Discussion
5.1.3.1 Why Standardize? Standards affect consumers’ behavior in various ways. Recourse to standardization could be the outcome of sometimes plausible (from a social welfare perspective), and sometimes implausible thinking. Let us start with an example from the latter category. Standards could represent the means to raise rivals’ costs and a powerful tool in the hands of dominant companies. They could be the outcome of pressure by important lobbies and add income to their pockets without necessarily promoting societal interests. Antitrust authorities routinely have to address similar phenomena. In the presence of “network externalities,” on the other hand (e.g., when the value of a good increases as the number of users grows), there is a good argument for standardizing production. In this case, switching costs are eliminated and diffusion of technology is promoted. Alternatively, take the scenario of asymmetric (imperfect) information, when producers (or the government) know more about the good than consumers do, in such a case, recourse to standards might deter socially unwelcome behavior.6 Viewed from the consumer’s perspective, the emerging picture is equally complex. Consumers have confidence in standardized goods, and for this reason alone, consumption might increase. They might create moral hazard, though, since consumers might be overconsuming “standardized” goods because of their faith in a certain company or a government intervention, when less consumption would have been socially optimal. Swinnen and Vandermoortele (2012) reviewed the literature on standards and concluded that it is impossible to conclude. Standards may act as barriers to trade, protectionist instruments, or neither. This is the case because standard setting often corresponds to a “genuine” need to regulate (as explained previously), but, alas, is not immune to political economy considerations; consequently, the risk for capture should not be underestimated.7 Very often, regulation addresses a wide societal concern only superficially (if at all). Examples abound. Büthe and Mattli (2011, p. 135) offered the following example of regulatory capture by domestic lobbies: A Japanese product standard ... adopted in 1986 by the Consumer Product Safety Association (CPSA) at the request of the nascent Japanese ski manufacturing industry, required that skis sold in Japan would have to comply with particular product design specifications in order to get a consumer safety seal. None of the major foreign manufacturers met the standard. The CPSA sought to justify the introduction of the ski standard by arguing that Japanese snow is “different” from snow in other (ski-exporting) countries. What snow did for the Japanese, something else might have done for others.
5.1.3.2 Standard Setting in the EU and US The EU and the US were the main forces behind the negotiation of the TBT Agreement during both the Tokyo and the Uruguay rounds.8 It is only normal that they entered nego-
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tiations having in mind their own regulatory experience in matters covered by the TBT Agreement. In the EU, standards are always consensual and voluntary, but there is a pyramid of institutions involved with government involvement in the background.9 The EU has more than 20,000 standards and over 400 “Workshop Agreements” (not a standard, but a standardization document) in place. The main standard-setting entities are three independent private bodies: Comité Européen de Normalisation (CEN), which prepares and adopts nonelectrotechnic standards, Comité Européen de Normalisation Électrotechnique (CENELEC), for electrotechnic standards, and European Telecommunications Standards Institute (ETSI), for telecommunications standards. CEN was founded in 1961. Today, it has 33 members (national standard-setting institutions) originating in the EU and the European Free Trade Association (EFTA). It focuses on worker safety, consumer information, protection of the environment,10 exploitation of research and development, and public procurement. CENELEC was established in 1973 following the merger of two institutions, CENELCOM and CENEL, and now counts 32 members from the EU and EFTA. CEN and CENELEC work in close cooperation with national standard-setting organizations, whereas ETSI, which was created in 1988, works directly with industry and has over 700 members from 62 different countries.11 CEN and CENELEC adopt standards defined as follows: ... document established by consensus and approved by a recognized body that provides for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.12
CEN/CENELEC follow the definition of “consensus” provided in ISO/IEC Guide 2; namely: ... general agreement, characterized by the absence of sustained opposition to substantial issues by any important part of the concerned interests and by a process that involves seeking to take into account the views of all parties concerned and to reconcile any conflicting arguments.
Final decisions will not be taken by unanimity but by qualifying majority, as provided for in the EU Treaties.13 All three institutions have established links with the international standard-setting community—CEN with the International Organization for Standardization (ISO) via the “Vienna Agreement”; CENELEC with the International Electrotechnical Commission (IEC) via the “Dresden Agreement”; and ETSI with the International Telecommunication Union (ITU). The Vienna and Dresden agreements try to avoid wasting time and resources: they favor decisions regarding the optimal level of intervention (e.g., whether an international standard should be incorporated) and whether action should be taken at the international instead of the EU level.
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It is industry that provides the bulk of financing necessary for the adoption of standards (93–95 percent of the total cost according to some estimations, the remaining part being borne by national governments, and to a lesser extent by the EU). Since 1 January 2013, with the adoption of EU Regulation 1025/2012, speed of adoption has improved, as has inclusiveness (e.g., who participates in the process). The US system is totally decentralized. With some exceptions (motor vehicles, medicines, or consumer product safety), operators are free to choose standards that suit them best. They are elaborated by private (sometimes for profit) standard-setting bodies with open membership that can include non-US persons/organizations. Unlike the EU, there is no established link between regulatory policy and standard-setting institutions. US agencies can select from available standards in the market those that best suit its regulatory policy and make their use mandatory, but standards are not prepared form the start to support specific regulatory requirements. In 1995, the US Congress adopted the “National Technology Transfer and Advancement Act.”14 Through this act, it instructed federal agencies to use, whenever warranted, standards prepared and adopted by private entities. The differences notwithstanding, this discussion shows that the private and public sector are often intertwined throughout the process of standard setting. Standards, both private and public, affect trade, but the TBT Agreement covers only the latter. It does not always distinguish between the two types of standards (public, private), and we will be returning to this question later in this chapter. 5.1.3.3 The Cost of Divergent Standards A US light truck manufacturer that sought to sell a model in Europe was required to develop 100 new parts, spend an additional $42 million in design and development costs, and undertake incremental testing of 33 vehicle systems “... all without any performance differences in terms of safety or emissions.”15 This is, of course, an extreme example, as often standards are divergent for more plausible reasons. Societies are not symmetrically risk averse, and sometimes they have different preferences. The quality and quantity of intervention is largely the outcome of endogenous factors (culture, religion, level of development, etc.). Standardization reduces the variety of goods sold domestically, but absent coordination at the international plane, increases costs for foreign producers. Business will be required to comply with different regulations in an export market than in the home market, and hence, will be facing adjustment costs that will reduce its competitiveness vis-à-vis suppliers in that home market. Thus, diverse standards can (and often do) undermine economies of scale for exportoriented companies and oblige exporters to bear costs in gathering information about regulation in export markets and eventually incur unnecessary adjustment costs (both of which they pass on to consumers).16
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Additional costs may also be imposed as a result of differing conformity assessment and testing procedures. These costs have negative implications for market access, trade, and economic growth. One example from EU-US trade in the automotive sector helps illustrate the economic rationale for regulatory cooperation. It has been argued that diversity between the two markets in standards and conformity testing requirements for automotive parts such as headlights, wiper blades, seatbelts, and crash standards persist despite any measurable differences in safety benefits. For instance, in order to market a domestically successful model in the other market, one manufacturer reportedly invested USD 40 million and utilized 100 unique additional parts to develop a model that would satisfy the requirements of the other market. However, the safety and emissions performance of this export model was identical to that of the domestic model. This example illustrates an instance of unnecessary regulatory diversity; the standards and testing procedures of the two markets could be better harmonized without compromising the objective of the measures, while saving exporters significant cost and permitting economies of scale, as well as promoting trade, market access and economic growth. Naturally, some diversity may be necessary between Members’ automotive standards, for instance in the cases of differences in geographic and climatic conditions. In such a case, regulatory cooperation can also help reduce costs of compliance by lowering information costs and reducing uncertainty.17 The divergent standards between the US and the EU in the automotive sector are not an issue, of course, only for the trade between them, but also for the trade in this product market between them and the rest of the world. Korean car producers have found it hard to adjust their production to two competing standards. In a PTA Korea signed with the US (Korea–US), the standard privileged (SAEJ 17725) required electric cars to be equipped with five plugs, whereas in EU–Korea, the standard privileged (VDE/IEC) required from producers to market cars with five plugs. Evidently, the US managed to push its own standard, whereas the EU did exactly the same. Assuming an agreement on this score between the EU and the US in the context of TTIP (Transatlantic Trade and Investment Partnership), Korea will be one of the beneficiaries. Perhaps the following statement by Gerald Ritterbusch, director of standards and regulations for the US firm Caterpillar before the Committee on Science of the US House of Representatives (quoted by Büthe and Mattli, 2011, p. 9) best captures the problems posed for international traders by unilateral standard setting: How do standards impact our ability to compete internationally? ... When we have domestic standards that are different from international standards, everybody loses. We lose domestically because we must build a product that is different from products we sell internationally. That raises ... costs, hurting American consumers ... causing for us unfavourable opportunities in foreign markets. What is needed is that our domestic standards experts aggressively participate in international standards developments to get domestic standards accepted ...
An OECD study18 identifies three categories of trade costs stemming from regulatory divergence that the international community should address and aim to reduce: information
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(obtaining information about regulations); specification (costs of complying with regulatory standards in the export market); and conformity assessment costs (relating to a demonstration of compliance with standards). Two approaches are used to measure the costs of compliance: the “macro approach,” where costs are measured by estimating the variations of standards across different countries; and the “micro approach,” where costs are measured by estimating the costs directly borne by businesses asked to meet divergent requirements. The former is used more widely, although it is difficult to totally isolate the impact of standards from other explanatory variables.19 There are dozens of measurements of costs stemming from different standards:20 according to the WTO World Trade Report (2009), one-third of global trade in goods (estimated in $15.8 trillion in 2008) was affected by standards that often differ across national jurisdictions. The same report estimates that harmonization of standards would be equivalent to worldwide tariff reductions of several percentage points.21 The costs for developing countries resulting from standardization (which typically takes place in the “North”) have been studied, and the academic debate on this score has produced conflicting evidence regarding the welfare implications for the “South” of “high” standards applied in the “North.”22 Before we discuss academic papers on this topic, let us mention here that developing countries typically believe that they are on the losing end when their exports are asked to comply with standards: ... developing countries have pointed out that packaging and labelling requirements created, in a number of cases, more acute problems to their trade than for the trade of other countries, as in many instances it was difficult for their traders to know the precise regulations. ... The existence of wide differences in regulations of different countries further acted as a barrier to their trade.23
There are numerous studies pointing to the costs for developing countries’ trade resulting from standard-setting activities in the “North.” To provide but two examples: Wilson and Otsuki (2004) reviewed the costs of standard setting for food safety in a wide range of developing countries that were requested to comply with them (see also Disdier, Fontagné, and Cadot, 2014). Otsuki et al. (2001), on the other hand, discussed particular product markets and found that when the EU decided in the late 1990s to harmonize “aflatoxin” standards across its member states, eight states (including some southern EU member states) tightened their national standards; and as a result, African exports to Europe of cereals, dried fruits, and nuts may have declined by as much as $670 million.24 Maertens and Swinnen (2009) came to the opposite conclusion. Their focus, nevertheless, was on global value chains, an issue not extensively discussed in the research already mentioned here. Their paper was the first to present quantitative empirical evidence on the impact of standards and trade (i.e., global value chains) on the incomes of households in developing countries, as well as on poverty. It was also the first paper to empirically
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document the importance of the labor-market effects of global value chains, and the first to challenge the indicators that were traditionally used to measure welfare effects of standards and trade (value chains). They showed that traditional indicators based on smallholder participation25 are imperfect at best, and probably misleading to boot, because the poorest may well benefit more through labor markets than from being smallholder producers, and because standards induce changes in the industrial organization of the supply chains, including technology and input transfers.26 5.1.3.4 International Cooperation to Reduce Costs In order to avoid rent-seeking behavior from domestic lobbies, a certain degree of cooperation might be warranted, either at international forums or through bilateral initiatives like the EU/US Trans-Atlantic Trade and Investment Partnership (TTIP). Cooperation can take many forms. At one end of the spectrum, regulatory cooperation could be informal, like the Transatlantic Business Dialogue (TABD), and we will be discussing similar forms later in this chapter. Cooperation could lead to (minimum or maximum) harmonization, unilateral or mutual recognition, regulatory equivalence, or a combination.27 The distinction between recognition and equivalence is this. Recognition is often accompanied by the possibility of blocking imports, if, for example, they run counter to some public-order concerns of the importing WTO member. In this case, there is the recognition that foreign regulation is equivalent to domestic only in principle—that is, unless the importing state can show that imported goods do not meet a specific public health standard, for example. When this is not the case, then we are in the presence of equivalence. Recognition requires a degree of “homogeneity” between participants and an appetite for “deep” integration. It is ill equipped to be a recipe for global deals. Harmonization (whether minimum or maximum, often referred to as “rigid”) is, of course, the bread and butter of global standard-setting institutions like the ISO.28 However, it is also present in arrangements among fewer players, in bilateral or regional deals. The European standard-setting organizations (SSOs), CEN, CENELEC, and ETSI, are prominent examples. They emerged as important players in standard-setting activities in recent years and have entered into cooperative agreements with the “global” institutions.29 Through harmonization, trade is facilitated, but there is a cost that should not be neglected. Gains from varieties (innovation) will unavoidably suffer.30 There is, thus, a great deal of discussion in economic theory regarding whether, and under what circumstances, harmonization (multilateral—e.g., through the adoption of international standards—as well as bilateral) is welfare enhancing. The answer is far from clear.31 Harmonization can serve different purposes. It reduces, for example, buyers’ information problems regarding the quality of purchased goods. Many would also argue that in the case of network externalities, enacting compatibility standards can have positive welfare implications.32 In this case, the argument could be raised that the market might reach this outcome anyway. Coordination problems, however, often arise, and they hinder market
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solutions to this effect. For these and many other reasons, hundreds of standards are being negotiated every day in various forums.33 Harmonization, of course, presupposes an agreement to intervene, which should not be taken for granted. There is a collective action problem that might hinder initiatives to regulate (and, eventually, harmonize, if warranted) as negotiators fighting climate change have witnessed. In the presence of global externalities, such as environmental pollution, some governments tend to underregulate (i.e., free riding).34 Trading partners that have more or less similar levels of protection in areas such as safety, health, environment, and consumer protection might find it in their interest to recognize each other’s standards either unilaterally or through a mutual recognition agreement (MRA). Ambitious schemes might provide for recognition of conformity assessment as well.35 Through recognition, states may reduce the influence of domestic lobbies. Admittedly, the incentive to influence for “customized” regulation will recede when standards adopted elsewhere by alien forces will have to be recognized as equivalent to those prepared at home. There are theoretical papers36 that seek to highlight various aspects of how trust could affect the incentive to recognize. Trust is necessary since the recognizing state cannot influence the shaping of the regime it accepts as equivalent. Trust, however, is hard to quantify, and recourse to proxies is necessary: language, geographic proximity, similarity across legal regimes, religion, etc.37 In practice, regulatory cooperation is being pursued at both the multilateral and the preferential levels.38 Preferential trade agreements (PTAs) increasingly include chapters on regulatory cooperation. As expected, there is a lot more activity and intensity at this level, especially when PTAs have been concluded between homogeneous players. The transatlantic partners, who are currently engaged in the TTIP negotiations, have a long history of regulatory cooperation: the Transatlantic Economic Partnership (1998); the EU/ US Positive Economic Agenda (2002); the EU/US Economic Initiative (2005); the Framework for Enhancing Transatlantic Economic Integration (2007). Next to all this, there is an informal business dialogue taking place, the TABD. The de facto business-to-business cooperation of the TABD has been consolidated in the Transatlantic Business Council (TABC). Ties have been developed between the civic societies in the framework of the Transatlantic Consumers Dialogue (TACD). And all this is happening while the TTIP has yet to see the light of day. There is a consensus that these initiatives, formal and informal, have led to few changes on the regulatory front on both sides of the Atlantic, but have largely contributed in reducing trade friction.39 The US and Canada have their own Canada-US Regulatory Cooperation Council (RCC). There is evidence that the RCC is quite active in discussing standards, but also in reducing or even eliminating friction resulting from regulatory divergence. New Zealand and Australia have entered into a wide mutual recognition agreement, the Trans-Tasman Mutual Recognition Agreement (TTMRA). As illustration, we mention a notable output of this initiative, the Food Standards Australia/New Zealand (FSANZ). It focuses on cooperation in the preparation of
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food starts early on (and not following adoption of national laws), and in measuring the trade impact of eventually adopted measures. It is acknowledged that it has largely contributed to the strengthening of economic relations between the two countries.40 Regulatory cooperation also exists between heterogeneous players. It is often more targeted, though. Negotiators discuss specific product categories and aim to come to solutions and build on prior success. A good example is the EU–China Regulatory Cooperation Framework. It is an initiative between government entities focusing on product safety. The Rapid Alert System for Nonfood Dangerous Products (RAPEX) is the mechanism instituted to investigate specific products (product categories). Up to 2010, 4,885 similar cases had been identified, and investigation was initiated in 1,678 cases.41 China signed its first MRA with New Zealand, but it has a very narrow scope, as it concerns electric and electronic equipment and components and works for the benefit of New Zealand producers. Before the signing, New Zealand exporters had to test compliance with electrical safety and electromagnetic compatibility regulatory requirements on Chinese soil. Uncertainty was, thus, looming since no one could ex ante (e.g., before exportation) assure that products were indeed compatible with Chinese standards. Following the signature of the MRA, New Zealand producers can affix the China Compulsory Certification (CCC) label on their goods before exportation from New Zealand. They can do so following accreditation and conformity assessment procedures carried out by New Zealand agencies formally accepted in China. One can easily see that uncertainty is eliminated in this way There are also initiatives with wider content (that is, that are not a priori limited to the examination of specific products) among heterogeneous players. EU has chapters on regulatory cooperation in the successor agreements to the Lomé Convention with many of its African ex colonies. However, they typically involve, as Horn, Mavroidis, and Sapir (2010) showed, best-endeavors clauses with no binding obligations included therein. There are in total close to 130 MRAs today.42 5.2
The Relationship with GATT
If the TBT Agreement had not been enacted, measures coming under its purview would have been scrutinized under Article III of GATT. In that case, should a panel entertaining a claim regarding, say, the consistency of a technical regulation with the WTO scrutinize the challenged measure under GATT or the TBT? It is imperative to determine which agreement takes precedence, for two reasons.43 First, the two agreements do not include the same legal test for consistency: Whereas all GATT requires is that measures are nondiscriminatory, measures must be also necessary in order to comply with the TBT Agreement. Second, the test for nondiscrimination is not identical across the two agreements. In particular, case law suggests that the term “less favorable treatment,” appearing in both agreements, should not be given its GATT meaning in the TBT Agreement.
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The practice of judicial economy, whereby panels will judge as much as necessary in order to settle the dispute (and thus risk reviewing the consistency of challenged measures with only GATT, assuming that they see no hierarchy between the two agreements) could also contribute to erroneous results. To be sure, there is a legislative solution to this issue, but it has not always been understood in the same way in WTO case law. The TBT is an Annex 1A agreement, and it relationship with GATT is addressed in the General Interpretative Note to Annex 1A (discussed in chapter 1, volume 1). This Note calls for panels to scrutinize challenged measures under the more specialized agreement, to the extent that a conflict between the specialized agreement and GATT exists. The emerging question, thus, is whether a conflict between GATT and the TBT exists. In EC–Asbestos, the AB, reversing the panel in this respect, concluded that a measure that revealed the characteristics of a technical regulation and thus simultaneously fell under the TBT and GATT should have been reviewed under the TBT Agreement, not under GATT as the panel had originally done (§§ 59ff., and especially §§ 80–81). The subsequent panel report on EC–Sardines contains an even more explicit reflection of this approach (§ 7.15): ... The AB suggests that where two agreements apply simultaneously, a panel should normally consider the more specific agreement before the more general agreement. Arguably, the TBT Agreement deals “specifically, and in detail” with technical regulations. If the AB’s statement in EC—Bananas III is a guide, it suggests that if the EC Regulation is a technical regulation, then the analysis under the TBT Agreement would precede any examination under GATT 1994.
On appeal, the AB did not reverse the order of analysis. Subsequent Panel reports [US– Tuna II (Mexico); US–Clove Cigarettes] have followed this order of analysis, and it is now commonplace that Panels will start reviewing claims under the TBT Agreement. It is also clear by now that this is no longer an issue of mere order of analysis. Panels view the TBT Agreement as a one-stop shop. Measures that are scrutinized under its purview will not be scrutinized under GATT as well. In chapter 9, volume 1, we saw that violations of the TBT Agreement cannot be “cured” by invoking Article XX of GATT. In what follows, we will see why this finding does not burden regulators unduly, since a review of the objective being sought will take place anyway, in the context of evaluating the consistency of a challenged measure with the TBT Agreement. 5.3 5.3.1
Coverage Instruments Covered
The TBT Agreement covers three measures: technical regulations, standards, and conformity assessment. Definitions for all three exist in the Annex to the TBT Agreement, and
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we will be discussing each one of them in detail later in this chapter. It suffices for now to state that the difference between technical regulations and standards is that whereas the former conditions market access upon satisfaction of the conditions embedded therein, products that do not conform to standards can still access export markets but cannot claim compliance with the standard imposed. “Conformity assessment” is the process whereby an entity can assess whether goods conform to the specifications of a technical regulation, an international standard, or both. There is an ongoing process of harmonization of technical regulations, standards, and conformity assessment. It takes place in institutions like the ISO, and the WTO has built bridges in order to recognize the relevance of the output of the ISO and other similar bodies. In fact, the WTO includes a clear preference for the use of international (harmonized) standards. The WTO regulates state behavior, and the TBT Agreement could be no exception to this very basic, quintessential indeed characteristic of the Agreement Establishing the WTO. Private standards, though, are issued not only by public bodies, but also by private operators. Indeed sometimes, individual companies manage to prepare and impose a standard in their relevant market. Was not the Microsoft Windows the software standard for some time at least? The question, thus, arises whether private standards should also come under the aegis of the TBT Agreement. We start with this question in what immediately follows. 5.3.2
Private Standards
On February 27, 2007, the delegation of Saint Vincent and Grenadines sent a communication to the SPS Committee for distribution to the WTO membership. It included a complaint to the effect that the EurepGAP (a common standard for farm management practices, now called GLOBALCAP) bananas requirements (i.e., requirements on pesticides used on bananas destined for sale in the EU market), a private standard practiced in EU member states, was causing several problems to its exporters who were called to face yet another NTB (or so the argument went). The missive stated:44 The SPS Agreement recognizes the role of the International Standard Setting Bodies (OIE, Codex Alimentarius and the IPPC) as the only authorities for establishing SPS standards. However, the proliferation of standards developed by private interest groups without any reference to the SPS Agreement or consultation with national authorities is a matter of concern and presents numerous challenges to small vulnerable economies. These standards are perceived as being in conflict with the letter and spirit of the SPS Agreement, veritable barriers to trade (which the very SPS Agreement discourages) and having the potential to cause confusion, inequity and lack of transparency. It is the position of St. Vincent and the Grenadines that some industry private standards do not conform to the provisions of the SPS Agreement. The following are some other factors which may be of relevance to the discussion:
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Studies have shown that private standards tend to marginalize small farmers (UNCTAD, 2006). In circumstances where more than 95 per cent of the farming community consists of small farmers, the result is increased rural poverty and social disruption. Another issue is related to the objectivity of the auditing system. In some cases different auditors have varied interpretations of the application of procedures. For example, in the Windward Islands the external auditors consider treated sleeves used in the banana industry as a pesticide and therefore require that these be stored under specific conditions. However, in the Dominican Republic sleeves are not considered to be pesticides and therefore there are no specific requirements for storage. (Lipper, 2007) The costs of compliance with these standards are high. It is costly to put in place the necessary infrastructure on the farms as well as at the industry level. It requires extensive training of farmers and extension personnel. (Fair Trade Unit, 2006; Ministry of Agriculture, Forestry and Fisheries, St. Vincent 2006). For example, in any given year the associated costs are as follows: Initial cost to farmers (over 3000 farmers): US$ 3,000,000 Human resource (monitoring): US$ 45,865.00 Training and material for farmers: US$ 5000.00 External Audit: US$ 8, 560.00 Total cost: US$ 3,059,425 Farming on slopes is a characteristic of many of our islands and are the only lands available to a vast majority of small farmers. In St. Vincent and the Grenadines, the arable land area is 7.2 km2, and more than 60% of this is sloping lands (St. Vincent Agricultural Census, 2000). Hence, there is a marked increase in the cost of production. In order to address some of the concerns raised above, the following could be considered: (a) Companies and corporations that institute these standards should make available a support facility for producers in small vulnerable economies. (b) Standards should be more flexible and take into consideration specific crops and country situations. (c) Producers should be involved as much as possible in the development of standards. (d) When standards are being developed, consideration should be given to compliance with the SPS Agreement and should involve the input of International Standard Setting Bodies.
The quoted passage above suggests that Saint Vincent and Grenadines was complaining about various issues: (a) Private standards were confusing, compliance with them was costly, and, as a result, especially developing countries found it hard to adjust; (b) Furthermore, private standards were routinely unveiled in developed countries markets, where they were prepared by the domestic industry without any input from exporters to this market. Point (c) holds the key in understanding the heart of the issue here: if private standards were disciplined by the WTO, then the risk of market segmentation would have been addressed (to an extent at least).
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Private standards “mushroom.” To provide one illustration, there are 251 interoperability standards in any given laptop. Furthermore, private standards are competing with each other. In the inimitable expression of Timmermans and Epstein (2010), “we live in a world full of standards, and yet not in a standardized world.” There is a competition for standards, which sometimes leads to convergence and sometimes not.45There are dozens of product markets regulated by more than one standard, and sometimes within the same geographic market. There are, of course, gains of innovation from “competition in standards” but there are substantial transaction costs as well. We will return to this point later in this chapter. For now, let us concentrate on a different issue: What is the risk if private standards were totally undisciplined by the TBT Agreement? Domestic competition law, consumer protection laws, or both could apply. For domestic antitrust laws to apply, demonstration of market power (by the operators participating in standard setting) is necessary. Different thresholds apply in different jurisdictions in order to establish market power, yet the requirement of such demonstration applies across the board. Even in the absence of market power, one could imagine domestic consumer protection laws to apply in case standards might mislead consumers about the properties of the goods certified. Domestic antitrust and consumer protection laws have contributed a lot toward disciplining abusive standard setting. There is one issue, though, that domestic laws cannot address: the participation of “outsiders” in their elaboration. As stated earlier, this is in our view the heart of the complaint that Saint Vincent and Grenadines lodged back in 2007. Thus, if private standards remained outside the realm of the TBT Agreement, Saint Vincent and Grenadines’ only hope would be that it violates domestic laws if action is taken. Action will not be taken because the interests of Saint Vincent and Grenadines had not been taken into account at the moment that the standard was elaborated. No inquiry points have to be established, the views of affected traders do not have to be solicited, etc. In other words, keeping private standards “private” means “insulating” them from the influence that foreign traders might exercise on their shaping.46 Is our assumption, that the TBT Agreement does not apply, safe? We will turn to this question later in this chapter, having first delved into national experiences in this respect. 5.3.2.1.1 Private Standards in the US Legal Order In 1995, the US Congress adopted the National Technology Transfer and Advancement Act. Through this piece of legislation, it instructed federal agencies to use, whenever warranted, standards prepared and adopted by private entities. Assuming the presence of market power, standards cannot be developed without antitrust exemptions. This means that there is government involvement every time that stan-
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dards are being developed by an entity or entities with sufficient market power to warrant an exemption from antitrust prosecution. In similar cases (e.g., when market power is present), standards would be “public,” not “private.” We explain why this is the case shortly, when we explain the GATT/WTO standard for attributing behavior to governments. 5.3.2.1.2 Private Standards in the EU Legal Order The EU model is different from that of the US. In practice, the EU Commission47 will issue standardization mandates, which, nevertheless, are not mandatory, as nothing obliges the EU standardizing bodies to accept the request.48 Compliance with standards is voluntary. Products that do not conform to standards can be marketed in the EU market. They might be denied market access in EU member states, but only if they run afoul of “essential requirements.” This term encompasses the hard-core EU public order, which might or might not have been reflected in the issued standards. Standards are not presumed to be lawful per se. They are justiciable, so they could be set aside if, for example, they do not comply with the EU provisions on the free movement of goods. The European Court of Justice (ECJ), the highest judicial entity in the EU, has recently recognized that standards prepared by private entities can run afoul of the provisions on free movement of goods, even if national governments have had no influence at all at their preparation. Here is how it works. In Fra.Bo (C-171/11), an Italian company complained because a German standard-setting institution (Deutsche Vereiningung des Gas- und Wasserfaches, or DVGW) had refused certification of its products. DVGW is a private entity. There was no requirement to certify goods at the DVGW. And yet, lack of certification would have had a considerable impact since DVGW-certified goods enjoyed a privileged status in the German market because of the reputation of DVGW. In a remarkable judgment, the ECJ decided that the EU legislation on free movement of goods had been violated as a result of the refusal by DVGW to certify Fra.Bo’s products (§ 32): Article 34 TFEU must be interpreted as meaning that it applies to standardization and certification activities of a private-law body, where the national legislation considers the products certified by that body to be compliant with national law and that has the effect of restricting the marketing of products which are not certified by that body.
This decision made it clear that private standards and certification procedures that have a certain influence in the market must comply with the EU law disciplines on free movement of goods. Why is this judgment so remarkable? It is remarkable simply because Article 34 of TFEU, like all disciplines on free movement of goods, binds EU member states, but not private parties. The behavior of private parties is constrained by EU antitrust law. The public-private standards divide was dealt a serious blow.
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The Origins of Private Standards
The development of private standards can be traced to 1928, when the Demeter Symbol (a symbol that only farm goods produced through good farming practices could carry, named after the Greek Goddess Demeter) was introduced in Germany to mark organic farming, and to 1946, where with the establishment of the British Soil Association, the UK developed standards for organic agriculture while trying to propagate similar initiatives. There was not much activity, though, during these early years. Fair trade initiatives appeared many years later, dominating the scene. The first of these was in 1988, when a Dutch nongovernmental organization (NGO), Max Havelaar (named after a fictional Dutch character who opposed exploitation of coffee pickers in Dutch colonies),49 introduced the idea of private standardization in an effort to reduce abuses by multinationals exploiting small farmers around the world. In 1997, an umbrella association called Fairtrade International was created with the aim of bringing under its ambit many national associations that had been established. A common Fair Trade Certification mark was launched in 2002 (FLO-CERT,50 an independent certification company, certified those interested in obtaining it). In 2012, Transfair USA split from the common umbrella to prepare its own label, Fair Trade USA, because it wanted to certify large plantations as well, something Fairtrade International was not prepared to do. It continued to accept Fair Trade Certification, though. Fair Trade required from those certified that a floor price be paid to farmers to cover the average cost of sustainable production and allow producers to enjoy a respectable wage. Based on data obtained from the International Coffee Organization (ICO), it would request that certified buyers pay this price when the world price falls below this threshold. A premium would be added, and this additional money would be invested in efforts to increase associativity. 5.3.4
Certification
Access to private standards is not free for all. Traders wishing to comply with private standards will need to certify their goods. Certification of goods is a process equivalent to conformity assessment as envisaged in the TBT Agreement. In essence, through certification, the conformity of goods with standards will be established. In practice,51 one distinguishes between three types of certification of private standards: first-party certification, a process where it is the standard-setter that certifies; second-party certification, which captures the process where standard setter and approval seeker certify together; and, finally, third-party certification, which entails the implication of an accredited independent party, usually nominated by the standard-setter.52
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Third-party certification is the most popular (60 percent), followed by second-party (30 percent) and first-party (10 percent). Certification is the price paid by everyone interested in getting into supply chains that request certified goods only.53 5.3.5
One International Standard, One Test, One Certificate
Things moved fast since the Max Havelaar standard. Marx (2011) reported over 400 existing labels/certification initiatives, and the number has continued to grow rapidly. Some emerge and die fast, though, and it is difficult to keep tabs on what is happening. There are different classifications of standards. The ISO, for example, distinguishes three categories of private standards, using their subject matter as the criterion for the distinction:54 • In the field of information and communication technology (ICT) • In the field of retail and agrifood industry • Standards relating to social and environmental aspects Marx (2011), inspired by the discussions in the SPS Committee,55 adopted a functional classification of private standards using the unit of standardization as the criterion. He distinguished between “individual schemes” (e.g., Tesco “Nature’s Choice”), “collective national schemes” (e.g., British Retail Consortium Global Standard Food), and “collective international schemes” (e.g., Global Food Safety Initiative).56 Abbott and Snidal (2009) followed a related criterion. They looked into the various actors (states, firms, and NGOs) that participate in elaborating standards and provided the following graphic representation of the standardization process with respect to private standards (see figure 5.1): The Abbott-Snidal pyramid shows that public-private standards can be quite artificial. Some of the emerging private standards receive the blessings of intergovernmental bodies, but many do not. The UN Global Compact offers an appropriate illustration of the former. It was adopted in 2000, following a UN initiative to this effect. Its purpose was to encourage businesses worldwide to adopt sustainable and socially responsible policies. A transparency requirement was added, whereby businesses would inform the UN about implementation of its policies. For the rest, nevertheless, competition in standards exist, and, as stated earlier, it sometimes has led to convergence, and sometimes not. It is a paradox that standards were meant to standardize, and yet because of their proliferation, they often achieve the opposite. The reasons for this proliferation of standards are manifold, and it is not the purpose of this discussion to get into this debate in a detailed manner. A few words are warranted, though. Turcotte et al. (2014) summarized the literature, and, adding their views to it, they pointed to three functions of standards: (i) they protect the reputation of industry from free riders; (ii) they generate information about the supply chain; and (iii) they help firms
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STATEs IFC IECA++
1 ECO
OECD EMAS
BM
UNGC
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ISO14 EQP
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Figure 5.1 Abbott and Snidal’s “Governance Triangle”
maintain their competitive position in the market. They then visited the world of private standards in three highly illustrative examples. They advanced three rationales (economic, institutional, and political) that aimed to explain convergence (or the absence of it). Collective action, market segmentation, and low market concentration (as measured in terms of the Herfindhal Index) rank among the most persuasive variables explaining lack of convergence. Explanation, nonetheless, does not amount to justification. The ISO has embarked on an initiative that it aptly calls “one international standard, one test, one certificate,” aiming to reduce transaction costs.57 The basic idea is to restore the confidence of consumers on the many standards that exist, to which they might not be accustomed. Loss of consumer confidence, of course, would amount to a dent in the important market, safety, social, or environmental effects that standards might have. To advance this agenda, the ISO Policy Development Committee on Conformity Assessment (ISO/CASCO) has developed a toolbox aimed at restoring consumer confidence in standards (ISO, 2010, at p.8). Although the ISO prepares conformity assessment standards but does not perform conformity assessment itself, it has established a forum, through its
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Strategic Alliance and Regulatory Group (STAR), for private and public organizations to participate in and discuss policy issues relating to conformity assessment. The aim of the ISO initiative is to establish links to the private standardizing community and transform some of them through the formal standardization process into international standards. This approach has worked well with respect to ICT standards, and we already have some examples: the Linux operating system and Adobe’s Portable Document Format (PDF) are now ISO standards.58 The ISO has been busy in the fields of retail and agrifood as well. Thanks to its cooperation with the Global Food Safety Initiative (GFSI), a consortium formed by various CEOs in the business to improve food safety systems, it has adopted the ISO 22000 series of standards on food safety management systems. In a similar vein, the ISO has adopted the ISO 26000 standard on social responsibility, as well as standards dealing with environmental management (ISO 14001/4), environmental labeling (ISO 14021/21/24/25), greenhouse gas measurement (ISO 14064/65), and others. In elaborating these standards, the ISO has been cooperating with private organizations engaged in subjects such as carbon footprint, ecolabeling, sustainable management of natural resources, fair trade practices, and social responsibility. The International Social and Environmental Accreditation and Labelling Alliance (ISEAL) is probably the most prominent of these.59 5.3.6
The Relevance of the TBT Agreement on Private Standards
Attribution of behavior to a WTO member is necessary; otherwise, the various obligations embedded in the covered agreements do not kick in. If preparation and implementation of private standards cannot be attributed to WTO members, then there is nothing that can be done about this from a WTO law perspective. St Vincent and Grenadines can only hope for an amendment to the current framework. To begin with, we will briefly reiterate the conditions for attributing behavior to a WTO member in the GATT context. We covered this issue in full in chapter 2, volume 1. The result of this discussion is good law in the TBT context as well. 5.3.6.1 GATT and Private Practices The GATT framers limited the ambit of GATT to state practices. Subsequently, in Japan– Semiconductors, the panel held that even activities not performed by a WTO member, but which can be attributed to it, should come under the ambit of GATT. Some private standards, though, are a far cry from all this, since they are elaborated by private entities simply in the hope to raise their rivals’ costs. Is WTO law germane to similar activities? The short answer is yes (but not often). GATT regulates response to a private activity (namely, dumping). In a more direct manner, in the context of the General Agreement on Trade in Services (GATS), WTO members have agreed to enforce obligations assumed
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upon private carriers owners of the network. It is not, thus, that the WTO has nothing to do with the treatment of private behavior; rather, the GATT/WTO obligations are imposed on WTO members, not on private agents. 5.3.6.2 The TBT Agreement and Private Practices Recall that by virtue of Article 4.1 of TBT, WTO members shall take such reasonable measures as may be available to them to ensure that local government and non-governmental standardizing bodies within their territories, as well as regional standardizing bodies of which they or one or more bodies within their territories are members, accept and comply with this Code of Good Practice. In addition, Members shall not take measures which have the effect of, directly or indirectly, requiring or encouraging such standardizing bodies to act in a manner inconsistent with the Code of Good Practice. The obligations of Members with respect to compliance of standardizing bodies with the provisions of the Code of Good Practice shall apply irrespective of whether or not a standardizing body has accepted the Code of Good Practice.
The term “nongovernmental standardizing bodies” is not defined in the agreement, but the term “nongovernmental body,” a wider term that plausibly encompasses it, is defined in § 8 of Annex 1 to the TBT Agreement as follows: “Body other than a central government body or a local government body, including a non-governmental body which has legal power to enforce a technical regulation.” One would imagine that the key element in this definition is the term “legal power.” Unless a government has conferred (transferred) legal power to a nongovernmental body, it incurs no obligation toward its actions. This would mean that, for instance, a standard operated by Microsoft on its own initiative that emerged as a business standard because of the dominance that Microsoft enjoys in the software market could be developed in total disrespect of the relevant TBT rules (Code of Good Practices). The better arguments are, thus, with the view that purely private standards are not germane to the TBT Agreement. What about the cases, though, where some government endorsement occurs? Should we go back to the test developed in Japan–Semiconductors and attribute to WTO members standards whose implementation is incentivized by governments? This seems to be the default solution, unless specific regulation occurs. Applying this test is far from simple. Assume, for instance, that a WTO member did not enforce its antitrust laws when facing a standard that raises rivals’ costs. Is that enough to find that it incentivized the private sector to adopt a standard? The same, more or less, could be said in cases where consumer protection laws are not enforced, as well as other examples. It follows that whereas purely private standards do not come under the purview of the TBT Agreement, defining a purely private standard could on occasion be a tough exercise. There should be no issue, of course, if the government endorses a private standard. In this case, regardless of the entity that initially elaborated it, endorsement should suffice to bring it under the disciplines of the TBT Agreement.
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5.3.6.3 TBT Committee Practice There is a lot of relevant TBT Committee practice in this context. WTO members have frequently raised concerns regarding private standards before the TBT Committee, as well as before the SPS Committee, as we will see in the next chapter. During the Fifth Triennial Review of the TBT Agreement, many WTO members expressed their concerns regarding the emergence of private standards and the ensuing obstacles to international trade, and the plea for effective compliance with the Code of Good Practice was iterated.60 In a similar vein, the Sixth Triennial Review of the TBT Agreement states the following:61 7. The Committee reiterates the importance of ensuring the effective application of the Code of Good Practice for the Preparation, Adoption and Application of Standards (Annex 3 of the TBT Agreement, hereafter the “Code of Good Practice”), and the importance of strengthening the implementation of Article 4 of the TBT Agreement. It is recalled that in the context of the Fifth Triennial Review, several Members raised concerns regarding “private standards” and the trade impact thereof, while other Members considered that the term lacked clarity and that its relevance to the implementation of the TBT Agreement had not been established. During the review period, the Committee reverted to this discussion. The Committee hereby reiterates the recommendations made at the Fifth Triennial Review and, in view of the need to further strengthen implementation of Article 4, agrees: (a) to exchange information and experiences on reasonable measures taken by Members to ensure that local government and non-governmental standardizing bodies involved in the development of standards within their territories, accept and comply with the Code of Good Practice.62 (italics in the original)
It stems from the quoted passage, thus, that the focus during the discussions before the TBT Committee has been on transparency. This is where things are at the moment. There are parallel discussions in the field of sanitary and phyto-sanitary (SPS) private standards, and they will be discussed in the next chapter. They support the view that there is nothing resembling a definitive conclusion among WTO members regarding the relevance of the WTO Agreement on private standards, with negotiations continuing. 5.3.6.4 A Very Preliminary Conclusion There is no firewall between private standards and the formal standardization process anymore—in fact, there is increasing osmosis. The pace of integration of private standards into the WTO can be accelerated since nothing, for example, stops WTO members from obliging private entities in their sovereignty to observe the Code of Good Practice. Until that happens, private standards will be in the twilight zone between relevance and irrelevance of the WTO regime when it comes to them. The willingness to discuss them before the WTO bodies points to the desire for a definitive solution. In this respect, the ISO has set the tone by formalizing standards with a certain impact on international trade, while continuing the dialogue with the private standards community on other issues as well. Our view is that the standard espoused by the Panel on Japan–Semiconductors should
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provide useful direction in addressing the question of under what conditions WTO members might be held liable for violating their obligations through the implementation of private standards.63 5.4 5.4.1
International Standards The Primacy of International Standards
Recourse to international standards is compulsory under Article 2.4 of TBT, under the following conditions:64 Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems.65
There is, thus, no obligation for WTO members to implement international standards anyway. They must observe them only if they unilaterally decide to intervene in an area covered by an international standard.66 International standards, or their relevant parts, must be used as the “basis” for the adoption of technical regulations (Article 2.4 of TBT). The term “basis” leaves some leeway to WTO members that implement international standards. The AB, in its report on EC– Sardines, imposed some limits on national discretion in this respect when it held that the term “basis” entails that a technical regulation should, at the very least, not contradict the relevant international standard (§ 248). The AB further pointed out that the term “relevant parts” of an international standard is not inconsequential. WTO members must base their measures on all, and not only some of, the parts of an international standard that are relevant to their endeavor (§ 250). By judging this way, the AB wanted to avoid that WTO members immunize their interventions from eventual challenges even when they have only selectively based their measures on international standards. As we will see in what follows, international standards are presumed to be necessary to achieve a legitimate objective. For WTO members to be in a position to claim this privilege, they must either have implemented international standards as such, or, at the very least, based their measures on all the relevant parts of an international standard. 5.4.2 Defining International Standards 5.4.2.1 Statutory (Lack of) Definition The term “international standard” is not defined in the TBT Agreement. Annex 1 states that international standards are being prepared by the “international standardization community,” without defining the coverage of this community. It is clear, though, that the
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definition of the term “international standard” depends on an a priori common understanding of the international standardizing community. In its annexes, the TBT Agreement makes references to the ISO, one of the main international standardizing bodies. ISO standards, thus, should benefit from a presumption that they are international standards in the TBT sense of the term.67 If a standard has been prepared in a different entity, then it will be up to panels to decide whether it can be considered as a TBT international standard. We will be discussing the relevant case law next. There have also been some notable initiatives in the TBT Committee aiming to identify explicitly the international standardization community, and we will be discussing them as well.68 5.4.2.2 The International Standardizing Community Few institutions are responsible for the majority of standards issued. Besides the International Accounting Standards Board (IASB), which deals with financial rulemaking, two institutions stand out: the ISO and the International Electrotechnical Commission (IEC), which jointly account for about 85 percent of all international product standards.69 The IEC and the ISO70 have become household names in the trade community thanks to Article 2.4 of TBT, which made recourse to international standards compulsory (at least in principle). They are neither purely governmental nor totally private entities, but in the words of Büthe and Mattli (2011, p. 5), they are best described as centrally coordinated global networks comprising hundreds of technical committees from all over the world and involving tens to thousands of experts representing industries and other groups in developing and regularly maintaining technical standards.
This is not, thus, a top-down initiative. It is, in principle at least, neutral experts that elaborate on standards in these two institutions, and governments do not dictate the rules (at least not ostensibly). This is not to suggest that standard-setting activities are totally insulated from lobbying pressure. Indeed, the political economy can often help explain choices regarding prioritization of activities (e.g., in which sector/product market standardsetting activities should concentrate first), even when the process itself is totally immune to lobby pressure. There is an increasing body of literature discussing the activities of the ISO/IEC focusing on the political economy of international standardization. The commonplace conclusion is that domestic standard-setting institutions will try to influence standard setting at the international level and promote national choices. Büthe and Mattli (2011) have argued that technical expertise is a necessary but not sufficient condition in the quest for preeminence in international standard-setting bodies. They argue (pp. 11ff.) that it is “timely information and effective representation of domestic interest that confer the critical advantage in these regulatory processes, determining who wins and who loses.” There is an empirically proven “first mover’s advantage,” in the sense that those proposing a particular standard first usually win the race.71
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The members of the ISO are “national standards bodies” (NSBs), that is the organization most representative of standardization in a given country.72 Whereas NSBs or SSOs (as they are often called) are typically nongovernment entities in developed countries that have been recognized by the government, they are typically government entities in developing countries. Through a series of committees, subcommittees, and working groups (currently over 3,500), the ISO will adopt standards first discussed and drafted by experts (such as technical experts). The aim of the whole process, however, is that standards reflect a “double level of consensus” between market players and between countries.73 The ISO, the IEC, and the ITU, an institution that specializes in setting standards in the telecom area, constitute the holy trinity of standard setters. The SPS Agreement, examined in the next chapter, has its own holy trinity of standard setters: the Codex Alimentarius of the Food and Agriculture Organization (FAO), the International Plant Protection Congress (IPPC), also overseen by the FAO, and the World Organization for Animal Health, or Organization Internationale des Epizooties (OIE), as it was formerly known under its French name. The ISO, together with the IEC and the ITU, have established the World Standards Cooperation (WSC) to coordinate policies and provide direction on converging technological standards.74 5.4.2.3 Practice A number of bodies are setting standards, and yet, only one, the ISO, is mentioned in the TBT Agreement. The question arises how panels have exercised their discretion to decide which body could be understood to belong to the international standardization community. There is existing practice. The panel and the AB accepted in EC–Sardines, that a standard adopted by the Codex Alimentarius Commission, a body not mentioned in the TBT Agreement (although mentioned in the SPS Agreement), relating to the species that can lawfully carry the name “sardine” was an international standard in the TBT sense of the term (§ 225). Panels have consistently underlined the fact that the agreement uses the term “body,” instead of “institution,” or “organization.” In US–Tuna II (Mexico), a chapter in the longstanding dispute between Mexico and the US, the question before the panel was whether the US could legitimately deviate from a standard issued by the Agreement on the International Dolphin Conservation Programme (AIDCP), an international agreement with fifteen members aiming to preserve dolphin life. (We discuss this case in more detail next.) To respond to this question, the panel had to decide whether the AIDCP could qualify as a member of the international standardization community. Following an appeal against the panel report, the AB held that a standard-setting institution may be (but does not have to be) an organization. It ruled that the use of the term “body” in lieu of “organization” in the TBT Agreement supported this view (§ 356). The salient feature of a standard-setting institution should be that it has “recognized activities of standardization” (§ 361). In its
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words (§ 362): “... WTO Members are aware, or have reasons to expect, that the international body in question is engaged in standardization activities.” Hence, a body that engages in standardization activities could, in principle, qualify as a body coming under the purview of Article 2.4 of TBT. This is quite an open-ended statement, though, and both the panel and the AB narrowed down by borrowing from a decision already adopted by the TBT Committee in 2000. The move by the AB to see legal effects in a decision by a lowly body in the WTO hierarchy (such as the TBT Committee) provoked negative reactions by some WTO members, which accused it of undoing the institutional balance struck between them. Before we turn to this question, though, which is interesting in itself, let us first describe briefly the content of the decision and how the AB saw legal effects in it. In 2000, the TBT Committee adopted a decision75 that included six principles that should be observed when international standards are elaborated, regardless of the entity that adopts them. § 1 of the decision reads: The following principles and procedures should be observed, when international standards, guides and recommendations (as mentioned under Articles 2, 5 and Annex 3 of the TBT Agreement for the preparation of mandatory technical regulations, conformity assessment procedures and voluntary standards) are elaborated, to ensure transparency, openness, impartiality and consensus, effectiveness and relevance, coherence, and to address the concerns of developing countries.
The decision specifies the six principles to some extent in the following paragraphs, but it still leaves room for interpretation. § 7, for example, which is entitled “Openness,” reads: Any interested member of the international standardizing body, including especially developing country members, with an interest in a specific standardization activity should be provided with meaningful opportunities to participate at all stages of standard development. It is noted that with respect to standardizing bodies within the territory of a WTO Member that have accepted the Code of Good Practice for the Preparation, Adoption and Application of Standards by Standardizing Bodies (Annex 3 of the TBT Agreement) participation in a particular international standardization activity takes place, wherever possible, through one delegation representing all standardizing bodies in the territory that have adopted, or expected to adopt, standards for the subject-matter to which the international standardization activity relates. This is illustrative of the importance of participation in the international standardizing process accommodating all relevant interests.
The rationale for adopting this decision is developed in § 20 of the cited document: In order for international standards to make a maximum contribution to the achievement of the trade facilitating objectives of the Agreement, it was important that all Members had the opportunity to participate in the elaboration and adoption of international standards. Adverse trade effects might arise from standards emanating from international bodies as defined in the Agreement which had no procedures for soliciting input from a wide range of interests. Bodies operating with open, impartial and transparent procedures, that afforded an opportunity for consensus among all interested parties in the territories of at least all Members, were seen as more likely to develop standards which were effective and relevant on a global basis and would thereby contribute to the goal of the Agree-
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ment to prevent unnecessary obstacles to trade. In order to improve the quality of international standards and to ensure the effective application of the Agreement, the Committee agreed that there was a need to develop principles concerning transparency, openness, impartiality and consensus, relevance and effectiveness, coherence and developing country interests that would clarify and strengthen the concept of international standards under the Agreement and contribute to the advancement of its objectives. In this regard, the Committee adopted a decision containing a set of principles it considered important for international standards development (Annex 4). These principles were seen as equally relevant to the preparation of international standards, guides and recommendations for conformity assessment procedures. The dissemination of such principles by Members and standardizing bodies in their territories would encourage the various international bodies to clarify and strengthen their rules and procedures on standards development, thus further contributing to the advancement of the objectives of the Agreement.
In Annex 4, which lists the six principles, “consensus” and “impartiality” are cited as corollaries, which imply that All relevant bodies of WTO Members should be provided with meaningful opportunities to contribute to the elaboration of an international standard so that the standard development process will not give privilege to, or favor the interests of, a particular supplier/s, country/ies or region/s.
The opening sentence of Annex 4 of WTO Document G/TBT/9, where the decision is included, leaves no doubt that the six principles must be observed cumulatively. Why was the decision necessary? For one, the legislative framework is quite openended. The TBT Agreement recognized the legal relevance of standards that were not defined anywhere. Should the WTO have blind faith in the standard-setting process of the ISO, the only body explicitly referred to in the TBT Agreement? The work by Büthe and Mattli (2011) discussed earlier in this chapter already strongly supports the conclusion that the ISO is not immune to lobbying pressure—the type of distortions that GATT and the TBT Agreement aim to redress. Moreover, what about other standard-setting institutions not referred to in the TBT Agreement? Panels can decide what an international standard is, and to do that, they must first decide whether a body is an international standard-setting institution. The decision provides them with some guidance to addressing this question. The legal relevance of the decision was discussed in US–Tuna II (Mexico). The AB held (§ 372) that the decision constituted “subsequent agreement” as this term is used in Article 31 of the Vienna Convention on the Law of Treaties (VCLT). The consequence of this statement is that from that moment onward, panels and the AB must ensure that a body satisfies the six guiding principles embedded in the decision; otherwise we are not in the presence of an international standard.76 The question then arises whether we should expect automaticity, in the sense that the output of a standard setting body should ipso facto qualify as ‘international standard’ in the sense of Article 2.4 of TBT. This cannot be for the ISO, for example also decides on its budget etc., so all its output cannot be assimilated to an international standard. Panels,
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it is expected, will defer to whatever a standard-setting body qualifies as a standard, limiting itself to a control whether the entity exhibits the six guiding principles. The term “standard” is defined, for example, in the ISO/IEC Guide as a “... document, established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines, or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.” This looks like a sensible understanding since, as the term “standard” itself denotes, the main characteristic of this type of measures must be repeated use. The question has also arisen in practice whether the process of adopting standards should matter at all. Originally, in EC–Sardines,77 the AB rejected an argument advanced by the EU that only standards adopted unanimously are international standards. At stake was a standard adopted by the Codex Alimentarius. Noting that the ISO/IEC Guide accepts only consensus-based standards as international standards,78 the AB went on to state that the deviation included in the Explanatory Note in Annex 1 of the TBT Agreement, according to which even standards that were adopted without consensus are recognized as international standards, must have been voluntary. It thus held that an international standard adopted without a unanimous vote can still qualify as a standard under Article 2.4 of the TBT Agreement (§ 225): ... the logical conclusion, in our view, is that the omission of a consensus requirement in the definition of a “standard” in Annex 1.2 of the TBT Agreement was a deliberate choice on the part of the drafters of the TBT Agreement, and that the last two phrases of the Explanatory note were included to give effect to this choice. Had the negotiators considered consensus to be necessary to satisfy the definition of “standard,” we believe they would have said so explicitly in the definition itself, as is the case in the ISO/IEC Guide. Indeed, there would, in our view, have been no point in the negotiators adding the last sentence of the Explanatory note. (italics in the original)
This is not an innocent finding, as the term “consensus” has a very special meaning in the ISO/IEC context: it means that when technical issues are being discussed, no party can block the consensus by invoking non-technical grounds. The AB did not confine its finding to this narrow understanding of consensus, and thus opened the door to all sorts of standards becoming relevant in the WTO.79 In US–Tuna II (Mexico), the AB accepted the legal relevance of the 2000 Decision of the TBT Committee, as discussed earlier. This means that from this moment onward, only standards adopted on consensus will be accepted as international standards, since consensus is one of the six guiding principles. In that sense, US–Tuna II (Mexico), a report that was issued ten years after EC–Sardines, contradicts prior case law. In the same report, the AB, inspired by the 2000 Decision of the TBT Committee, held that the AIDCP was not an international standard-setting body since it was not open to all WTO members. As a result, the AIDCP standard was not recognized as an international standard. Mexico had
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not proved to the satisfaction of the AB that invitations to those interested in participating would be granted automatically (§ 399).80 This ruling is as much sensible as it is problematic. One can, of course, legitimately ask the question: Why would WTO members have to accept standards adopted in bodies that they cannot access? “No taxation without representation,” as the old saying goes. For political reasons, though, the door of some standard-setting institutions is closed to the participation of Chinese Taipei (at China’s insistence). Would standards emanating from similar institutions be accepted as international standards in the sense of Article 2.4 of TBT? Are WTO panels prepared to go down this route?81 The 2000 Decision of the TBT Committee suggests that panels must insist on the openness of standard-setting institutions; otherwise, their output will not be recognized as an international standard. Now it is time to return to the question of institutional balance. The AB acknowledged the legal relevance of the 2000 Decision of the TBT Committee, which is a lowly body in the WTO hierarchy. The highest body is the Ministerial Conference, followed by the General Council, then the specific council (e.g., the Council for Trade in Goods/CTG), and then the various committees. It is the highest body that has the right to adopt amendments (Article IX of the Agreement Establishing the WTO). By characterizing the 2000 Decision as a “subsequent agreement,” the AB avoided a hurdle, since nowhere does the Agreement Establishing the WTO regulate which body can adopt similar acts. It is, of course, one thing to consider that a Ministerial Decision has the status of a “subsequent agreement” in the sense of Article 31 of VCLT, and a totally different issue to rule this way when dealing with a committee decision. Wijkström and McDaniels (2013) did not see anything wrong with it, whereas Mavroidis (2008) took the view that the forum must matter. By now, of course, this discussion is, following the AB report on US–Tuna II (Mexico), water under the bridge. And yet the AB decision in this respect did not go down well with the WTO membership (or, at the very least, part of it). In a subsequent meeting of the TBT Committee, at the insistence of India and China, the following sentence was included in a text discussing good regulatory practice (GRP): ... the list of possible steps and examples of mechanisms ... is not prescriptive, it neither adds to nor detracts from the existing rights and obligations of Members under the TBT Agreement, or any other WTO Agreement, nor does it constitute an authoritative interpretation thereof.82
Not everyone supported the need for this disclaimer. The EU argued that the text as it stood made it clear that it was only meant to provide guidance—no more than that.83 At the moment, it is difficult to predict how the next steps on this score will unfold. It seems that at least some WTO members will try to push for the kind of language that China and India introduced in the text concerning GRP. The AB might have provoked the opposite reaction to what it was looking for through its decision in US–Tuna II (Mexico).
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Litigating International Standards
5.4.3.1 Observing International Standards National measures that conform with international standards are presumed to be necessary, in the sense that they represent the least restrictive option to achieve the stated objective. A necessary measure that also observes the nondiscrimination principle will be judged TBT-consistent. The presumption of necessity when a measure conforms to an international standard is rebuttable (Article 2.5 of TBT). Notice the difference in language between Articles 2.4 and 2.5 of TBT: WTO members must use international standards as the basis for their interventions if they are relevant or appropriate to similar use, but can profit from the rebuttable presumption of necessity only of their measures are in accordance with international standards. The AB had a chance to interpret the two terms in the context of India–Agricultural Products, an SPS litigation discussed in the next chapter, stating that the latter is a higher standard of conformity with the international standard. It is to be expected that a similar construction should be applied in the TBT context as well. What if a WTO member deviates from an international standard because it thinks that it is irrelevant or inappropriate? For all practical purposes, this situation is similar to that in which no relevant or appropriate standard exists. As we explain in what immediately follows, the presence or absence of an international standard does not signal a change in the allocation in the burden of production of proof. The complainant prevails regardless of whether the defendant has observed or deviated from an international standard. However, conformity with international standards increases the burden of persuasion for the complainant, since it will have to rebut the presumption of necessity of the challenged measure 5.4.3.2 Deviating from International Standards WTO members will have to base their regulatory interventions on international standards only to the extent that the latter are relevant to the objective they are pursuing. They can still deviate from a relevant international standard if it is “ineffective” or “inappropriate” and, thus, cannot serve their stated purpose (Article 2.4 of TBT). EC–Sardines marks a case of deviation, where Peru had complained that the EU had unjustifiably deviated from an international standard. The dispute84 concerned the name under which certain species of fish could be marketed in the EU market. An EU council regulation85 set forth common marketing standards for preserved sardines, allowing only products conforming to the following four requirements to carry the name “sardine” commercially: • They should be covered by CN codes 1604 13 10 and ex 1604 20 50. • They should be prepared exclusively from fish of the species Sardina pilchardus Walbaum.
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• They should be prepackaged with appropriate covering medium in a hermetically sealed container. • They should be sterilized by an appropriate treatment. Sardina pilchardus Walbaum (Sardina pilchardus) is found mainly around the coasts of the eastern North Atlantic Ocean, in the Mediterranean Sea, and in the Black Sea; that is, the area where EU fishers normally ply their trade. In 1978, the Codex Alimentarius Commission of the FAO and the World Health Organization (WHO) adopted a worldwide standard for preserved sardines and sardine-type products, which regulates matters such as presentation, essential composition and quality factors, food additives, hygiene and handling, labeling, sampling, examination and analyses, defects, and lot acceptance. This standard (CODEX STAN 94–1981, Rev.1–1995) covers preserved sardines or sardine-type products prepared from 21 fish species, and among them Sardina pilchardus and Sardinops sagax. Section 6.1.1 of CODEX STAN 94–1981, Rev.1–1995 regulated the name that the 21 mentioned species could legitimately carry as follows: “sardines,” to be reserved exclusively for Sardina pilchardus (Walbaum); or “X sardines” of a country, a geographic area, the species, or the common name of the species in accordance with the law and custom of the country in which the product is sold, and the labeling must be done in a manner that does not mislead the consumer. Peru exported preserved products prepared from Sardinops sagax. This species is found mainly in the eastern Pacific Ocean along the coasts of Peru and Chile. Peru was prohibited, pursuant to the EU regulation, from exporting its product under the name “sardine,” and it feared that marketing its exports under a different name would adversely affect its interests. It thus requested the establishment of a WTO panel to examine the consistency of the EU regulation with the TBT disciplines. The proceedings were facilitated by the fact that there was no dispute among the parties that the EU had deviated from the international standard. The EU advanced two arguments. First, since the product coverage between the international standard and the EU technical regulation was not identical, the former was not relevant to the latter. The international standard covered the marketing of twenty-one fish species, while the EU technical regulation covered the marketing of only one of them. The AB rejected this argument. Since the EU technical regulation had legal implications for
Sardina Pilchardus
Figure 5.2 Sardina pilchardus; Sardinops sagax
Sardinops Sagax
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the marketing of the other twenty species covered by the international standard, the AB held that the international standard was relevant to the EU technical regulation (§§ 222ff.). This seems an eminently reasonable conclusion. If one were to accept the EU argument, circumvention of international standards would become a truism. Second, the EU argued that the international standard from which it had deviated was ineffective or inappropriate for the attainment of its objective in any case. The AB had to decide the meaning of the term “ineffective or inappropriate” (§ 285): ... we noted earlier the Panel’s view that the term “ineffective or inappropriate means” refers to two questions—the question of the effectiveness of the measure and the question of the appropriateness of the measure—and that these two questions, although closely related, are different in nature. The Panel pointed out that the term “ineffective” “refers to something which is not “having the function of accomplishing,” “having a result,” or “brought to bear,” whereas [the term] “inappropriate” refers to something which is not “specially suitable,” “proper,” or “fitting” “The Panel also stated that: “Thus, in the context of Article 2.4, an ineffective means is a means which does not have the function of accomplishing the legitimate objective pursued, whereas an inappropriate means is a means which is not specially suitable for the fulfilment of the legitimate objective pursued ... The question of effectiveness bears upon the results of the means employed, whereas the question of appropriateness relates more to the nature of the means employed.” We agree with the Panel’s interpretation. (italics in the original)
The AB had to respond to the question of who carries the burden of proof to show whether, in the case of deviation from an international standard, deviation was TBT-consistent. The AB, echoing the prior SPS case law on this score (EC– Hormones), reversed the panel in this respect, concluding that the burden stays with the complaining party to prove that the international standard is appropriate and effective (§ 282). The question, of course, arises of how the complainant can ever know whether the standard was ineffective or inappropriate for the defendant to reach its objective. After all, this could be a case of private information. In the AB’s view, though, the complainant is not placed at a disadvantage since it could easily acquire the necessary information regarding the EU standard through the various transparency obligations embedded in the TBT Agreement. Furthermore, the “enquiry points” that the TBT Agreement requires the WTO to establish in order to inform traders about national measures coming under the purview of the TBT Agreement (discussed later in this chapter) could be helpful as well (Article 10 of TBT). Even if this was not enough, though, the AB believed that Peru had become accustomed to the EU standard through the litigation process. This last point is highly debatable, of course, since the litigation process follows the decision to litigate. Curiously, though, although it reversed the panel, the AB still found in favor of Peru based on evidence that Peru had submitted before the panel where the allocation of burden of proof had been different (§ 290).
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Remarkably, the AB, a body that usually adopts literal interpretations, chose to pay lip service to the term “except” prominently featured in Article 2.4 of TBT. In its view, there was nothing exceptional about deviations from international standards, since this provision refers to two equally frequent or infrequent circumstances—namely, the presence or absence of international standards. Of course, this is not what the provision suggests. The term “except” was inserted because the framers wanted to underline the primacy of international standards. Horn and Weiler (2007) criticized the approach of the AB. They questioned whether, in light of the current allocation of the burden of proof, traders would have an incentive to be forthcoming when it came to providing information regarding their standards if they feared that they might be providing self-incriminating information. Arguably, they will have an incentive to be circumspect. The transparency record, though, as discussed later, is quite satisfactory. There is, of course, still an issue with the allocation of the burden of proof in EC–Sardines. Recall that Peru did not produce any argument beyond what it has already stated before the panel when it presumed that it was for the EU to justify its deviation. The transparency provisions certainly help inform potential complainants, but it is highly debatable whether they provide information regarding the reasons for deviating from international standards. Problems for complainants might, of course, be reduced if future case law reproduces the low burden of persuasion that we encounter in EC–Sardines.86 International standards can be a basis for adopting technical regulations, standards, or conformity assessment procedures for either of these issues. Technical regulations and standards can be adopted, of course, even when a deviation from an international standard has been decided or when there are no international standards on which national regulation could be based. Depending on the desired intensity of the intervention, WTO members will adopt a technical regulation if they want to exclude from their markets goods that do not conform to the specifications or a standard, if they want to simply incite consumers to purchase a particular type of good. An example of the former would be a regulation that cigarettes must comply with the specifications established in law (e.g., they must contain a certain threshold of nicotine). An example of the latter would be that cigarettes could be lawfully sold even if they do not comply with statutory specifications. From a pure market access perspective, the difference between the two is quite important since, when facing a technical regulation, products will be allowed to access the destination market only when they conform to it. From a legal perspective, the difference between the two is less dramatic since both instruments must comply with more or less the same legal requirements. The difference between the two seems quite straightforward when one reads the “Definitions” section in Annex 1 to the TBT Agreement. It has proved to be a thorny point in case law, as we detail in what follows.
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Technical Regulations
The definition of the key terms (“technical regulation,” “standard,” “conformity assessment”) was originally the product of work by a few GATT contracting parties during the Tokyo round (the signatories of the code), and subsequently the WTO members during the Uruguay round. They had before them, of course, definitions that had already been elaborated in other bodies, like the UN Economic Commission for Europe (UNECE).87 It was felt, though, that a lock, stock, and barrel approach was not recommended.88 Over time, definitions evolved, and there is discrepancy between the Tokyo- and the Uruguayround agreements in this respect. Alas, negotiators did not manage to clarify the content of all key terms employed in the TBT Agreement. To make matters worse, WTO panels and the AB contributed to the confusion. We detail all this in what immediately follows. 5.5.1
Defining Technical Regulations
The term “technical regulation” is defined in Annex 1, § 1 of the TBT Agreement as follows: Document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking, or labelling requirements as they apply to a product, process, or production method.
A technical regulation, thus, can either address the product characteristics or production process of goods, or deal simply with their terminology, packaging or labeling, or both. In § 67 of its report on EC–Asbestos, the AB provided its first comprehensive definition of the term. We discussed the facts of this case in chapter 7, volume 1. Recall that the EU had enacted legislation where a ban on sales of asbestos containing construction material had been imposed. The relevant EU law, thus, laid down a series of product characteristics that, if present in a good, would lead ipso facto to its noncommercialization inside the EU market: The heart of the definition of a “technical regulation” is that a “document” must “lay down”—that is, set forth, stipulate or provide—“product characteristics.” The word “characteristic” has a number of synonyms that are helpful in understanding the ordinary meaning of that word, in this context. Thus, the “characteristics” of a product include, in our view, any objectively definable “features,” “qualities,” “attributes,” or other “distinguishing mark” of a product. Such “characteristics” might relate, inter alia, to a product’s composition, size, shape, colour, texture, hardness, tensile strength, flammability, conductivity, density, or viscosity. In the definition of a “technical regulation” in Annex 1.1, the TBT Agreement itself gives certain examples of “product characteristics”—“terminology, symbols, packaging, marking, or labelling requirements.” These examples indicate that “product characteristics” include, not only features and qualities intrinsic to the product itself, but also related “characteristics,” such as the means of identification, the presentation, and the appearance of a product. In addition, according to the definition in Annex 1.1 of the TBT Agreement, a “technical
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regulation” may set forth the “applicable administrative provisions” for products which have certain “characteristics.” Further, we note that the definition of a “technical regulation” provides that such a regulation “may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements.” (italics added) The use here of the word “exclusively” and the disjunctive word “or” indicates that a “technical regulation” may be confined to laying down only one or a few “product characteristics.” (italics in the original except where indicated)
Product characteristics can thus be expressed either in positive (what traded goods must contain) or negative terms (what traded goods must not contain). In EC–Sardines, the AB added a few clarifications (§§ 175–176)89 and held that four elements constitute the quintessence of a technical regulation: • It must be a “document.” • It must apply to an identifiable group of products. • It must lay out product characteristics. • Compliance with it must be mandatory, in the sense that goods that do not meet the substantive content of it cannot circulate in the market. The first three points are fairly straightforward and have not given rise to much controversy in practice. It is the last point that, in principle, should be the dividing line between government-sponsored technical regulations, and private standards that has proved tough to pin down. It looks more and more like a line drawn in sand rather than engraved in stone, as we will explore in what follows.90 We begin with a discussion of the manner in which the less controversial terms have been understood in practice. 5.5.1.1 Document In § 185 of its report on US–Tuna II (Mexico), the AB paid particular attention to the term “document,” holding that the use of this term was intentional, as it could “cover a broad range of instruments or apply to a variety of measures.” Written form is thus required, and the choice of instrument is left to national discretion. 5.5.1.2 Identifiable Group of Products In EC–Sardines, the AB had the opportunity to clarify and settle prior case law on what “identifiable group of products” means. The scientific name of sardines harvested in Peru’s territorial waters is Sardinops sagax, whereas sardines harvested in the EU territorial waters belong to the species Sardina pilchardus. The challenged regulation explicitly concerned the marketing of preserved sardines, and held that only products originating in Sardina pilchardus could be marketed as preserved sardines. The EU argued, hence, that the panel had wrongly decided that Sardinops sagax was an identifiable group of products since the EU measure did not refer to this category at all. The AB rejected the EU claim. In its view, what mattered was whether the means of identifying a product was provided in the regulation. The system of the EU measure made it clear that Sardinops sagax was
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covered since the measure had been enforced against imports of this type of sardine, and the EU regulation itself referred explicitly to the marketing of “preserved sardines” before linking this term to products originating in Sardina pilchardus (§§ 180ff.)91 The AB, thus, confirmed that even products that are not explicitly referred to in a challenged measure can still be identifiable. To reach a conclusion about whether this is the case, panels will have to look into the challenged measure as a whole and see to what extent a conclusion to this effect can be reached. 5.5.1.3 Product Characteristics and PPMs Recall that the statutory definition of “technical regulation” is a document that reflects product characteristics or their related processes and production methods. One could, in principle, start with the premise that the terms “product characteristics” and “processes and production methods (PPMs)” must refer to two distinct types of measures; otherwise, why use two different terms? The AB accepted that much, but it did not go the final mile necessary to provide a workable definition. In EC–Seal Products, the challenged measure was an EU legislation banning sales of seal products in the EU market. Article 3 of the EU regulation read: “The placing on the market of seals products shall be allowed only where the seal products result from hunts traditionally conducted by Inuit and other indigenous communities and contribute to their subsistence.”92 The panel had characterized the law as a “technical regulation” based on the fact that a certification process had been established that aimed to ensure whether some “mixed” products indeed contained seal products.93 The panel drew its inspiration from the AB report on EC–Asbestos. In that case, the AB had stated that an EU ban that outlawed products containing asbestos but that allowed asbestos-containing products if certain safety requirements had been met, was a technical regulation.94 The panel saw a striking resemblance between the factual aspects in the two cases, since the “EU Seal Regime” also reflected a ban in principle, while allowing some seal products to be imported if they came under one of the three statutory conditions discussed previously. Following a lengthy passage dedicated to this discussion, the AB reversed the panel in this respect. It went on to state (§ 5.58): ... to the extent that the measure regulates the placing on the EU market of pure seal products, which is a part of the integral and essential aspects of the measure, it does not prescribe or impose any “characteristics” on the products themselves. To the extent the measure prohibits the placing on the EU market of seal-containing products, it could be seen as imposing certain “objective features, qualities or characteristics” on all products by providing that they may not contain seal. However, as stated above, we are not persuaded that this part of the Regulation constitutes the main feature of the measure at issue. Moreover, the EU Seal Regime’s prohibition of “mixed” products differs, to a considerable extent, from the prohibitive aspects of the French Decree under EC–Asbestos. More importantly, as noted by the Panel, the EU Seal Regime “consists of both prohibitive and permissive components and should be examined as such.” As we see it, when the prohibitive aspects
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of the EU Seal Regime are considered in the light of the IC and MRM exceptions, it becomes apparent that the measure is not concerned with banning the placing on the EU market of seal products as such. Instead, it establishes the conditions for placing seal products on the EU market based on criteria relating to the identity of the hunter or the type or purpose of the hunt from which the product is derived. We view this as the main feature of the measure. That being so, we do not consider that the measure as a whole lays down product characteristics. (italics in the original)
So, in contrast to the panel approach, the AB did not treat the terms “physical characteristics” and “their related processes and related production methods” as referring to the same factual situation. It first asked whether the exceptions could be considered physical characteristics. In the paragraph cited earlier, it responded in the negative. It then asked if they could be considered as PPMs. It did not respond since it felt it did not possess enough material to do so (§ 5.69), but it did call for a test that would aim to distinguish the “main” from the “ancillary” elements of the contested measure. In its view, only one element of the whole measure—that identified by the panel—was prone to characterizing the measure a “technical regulation.” This was not enough for the measure to come under the purview of the TBT Agreement.95 We submit that the AB could have gone the extra mile and settled the score. Physical characteristics must refer to production processes that have been incorporated into the final product. The facts in EC–Asbestos are a natural fit here: asbestos was present in the bricks marketed in Canada. PPMs, then, should cover processes of production that have not been incorporated in the final product. The facts in US–Tuna I (Mexico) seem appropriate here. The fishing method was not incorporated in the final good. 5.5.1.4 Mandatory Compliance Recall that Annex 1 to the TBT Agreement states that for a measure to be recognized as a technical regulation, compliance with it must be mandatory. In EC–Asbestos, the AB held that even when the words used are of a hortatory nature, we could still be in the presence of a technical regulation if the latter (§ 68) “has the effect of prescribing or imposing one or more ‘characteristics’—’features,’ ‘qualities,’ ‘attributes,’ or other ‘distinguishing mark’” (italics in the original). Deciding on the “effect” requires an investigation. In this vein, the Panel on US–COOL went on to examine whether a letter sent by US Secretary of Agriculture Thomas J. Vilsack that contained unambiguously hortatory language could still be considered as a technical regulation. Canada and Mexico had challenged a US measure imposing compulsory labeling indicating the origin of imported goods (bovine meat and pork).96 The US measure established four categories: category A, referring to beef wholly produced and slaughtered in the US; category D, covering beef produced and slaughtered abroad; and categories B and C, explained in § 7.697: We recall that meat falling within the scope of categories B and C is required to carry labels indicating “product of the US, Country X” (Label B) and “product of Country X, the US” (Label C). As
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described above in Section VII.C.1(b)(i), Label B refers to meat derived from animals born in Country X, and raised and slaughtered in the United States, whereas Label C refers to meat derived from animals imported for immediate slaughter (i.e., animals born and raised outside the United States). Labels B and C are therefore differentiated by the order of country names indicated on the label.
Secretary Vilsack issued a letter aiming at the implementation of the US statute, which in part read as follows (§ 7.123): I am suggesting ... that the industry voluntarily adopt the following practices to ensure that consumers are adequately informed about the source of food products: “... processors should voluntarily include information about what production steps occurred in each country when multiple countries appear on each label. ... Even if products [that are otherwise exempt] are subject to curing, smoking, broiling, grilling, or steaming, voluntary labeling would be appropriate.” (italics in the original)
The panel went ahead and examined whether, its language notwithstanding, this letter could be considered a “technical regulation.” It concluded in the negative since it found no empirical evidence suggesting that it operated as such (§§ 7.188ff.). In US–Tuna II (Mexico), this issue arose again. Tuna and dolphin, as discussed in chapter 9, volume 1, swim together in the eastern Pacific. Fishers caught tuna by setting on dolphins with purse seine nets. Alas, by doing so, they were accidentally taking the lives of the dolphins as well. The “dolphin-safe” label was roughly restricted to tuna fished without endangering the lives of dolphins. Traders could sell tuna that did not carry the label in the US market. Mexico protested, arguing among other things that the label conferred an advantage to those traders that could have access to it. The Mexican position was that, by restricting the use of the “dolphin-safe” label to only those fishers who used a specific harvesting technique, the US had enacted a technical regulation, not a standard. The panel agreed with Mexico. What mattered was that traders did not have unconditional access to the use of the label (§§ 7.100ff., especially 7.120 and 7.131). A separate opinion issued by one member of the panel stressed that what was relevant for the qualification of the measure as a technical regulation or standard was ultimately whether imports of tuna could (or could not) be lawfully traded in the US market without the label “dolphin-safe.” Evidence showed that Mexican traders that did not conform to the criteria established could sell their products in the US market anyway. They would have to market them in this case as “tuna,” not “dolphin-safe tuna.” Consequently, the measure at hand, in this view, was a standard (§§ 7.146ff.). The AB in §§ 172–199 endorsed the majority view, holding that the US measure was indeed a technical regulation. In the AB’s view, what mattered was that goods had to observe the statutory requirements (and had no discretion at all to this effect); otherwise, they could not legitimately be considered “dolphin-safe.” This view cannot be correct.97 The US intervened because it was unhappy with the market outcome (consumers treating tuna and dolphin-safe tuna as substitutes), and it
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wanted to veer consumers toward consumption of dolphin-safe tuna. It did not ban imports or sales of tuna. It simply conditioned access to this label (but not to the US market) to the prior satisfaction of a certain production process. Standards, as opposed to technical regulations, do not condition market access for a relevant product market upon the satisfaction of statutory requirements. They allow some products belonging to a relevant product market to be marketed as conforming to the standard imposed, without excluding from the market products that do not comply with the standard. Standards, thus, can and do have a market effect, but they do not exhibit the binary function of technical regulations: either products meet the statutory requirements and are granted market access, or they do not and stay out of the market as a result. Were the US to accept only dolphin-safe tuna in its market, then yes, we would have a technical regulation. By allowing dolphinsafe and dolphin-unsafe tuna into its market, the US is imposing no technical regulation, but a standard. The AB seems to have confused two separate issues: binding language regarding access to the tuna market, and binding language regarding access to the dolphin-safe tuna market. Consistency with standards requirements must be safeguarded, of course. Standards are denied their raison d’être if recourse to them is open even for products that fall short of meeting the established statutory requirements. Consumers will not be protected at all since, for example, products can carry the “dolphin-safe” label regardless of whether the tuna sold has been fished in a dolphin-friendly manner. Arguably, the objective pursued by the US was to inform consumers about the production process followed—a legitimate objective as per Article 2.2 of TBT. Opening up the use to the “dolphin-safe” label to all tuna marketed, regardless of the production process, would have led to misinforming consumers, and hence, the US would have never achieved its stated (and legitimate) objective. Worse, the US, had it followed the AB here, could have been violating US consumer protection laws as well. Imagine if fishers who had been killing a dolphin for every kilogram of tuna harvested still could market their goods in the US market as “dolphin-safe” tuna! Without a credible way to differentiate between more and less responsible production processes, a market for responsibly produced products might not exist at all. The AB turned a blind eye to this issue through its ruling. Under the circumstances, accepting the AB’s view would be tantamount to confusing the distinction between technical regulations and standards. One might finally wonder why did Mexico insist in its request to characterize the measure as technical regulation? To the extent that it is a central government standardizing body that has prepared the measure, it must observe the same substantive obligations as technical regulations do (e.g., it must be necessary to achieve the stated objective), and it must be applied in a nondiscriminatory manner as well. To the extent that it is another entity among those mentioned in the TBT Agreement that has prepared it, it is for the US to take all reasonable measures at its disposal to ensure compliance with the obligations described previously (Article 4 of TBT).
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5.5.1.5 Coverage of “Technical Regulation” Revisited98 The discussion thus far has focused on sticking points regarding the coverage of technical regulations: the distinction between physical characteristics and PPMs, and that between technical regulations on the one hand and standards on the other. We start this coverage with the former. The statutory definition of “technical regulation” (Annex 1, § 1) is included in two sentences. The second sentence does not necessarily repeat the elements of the first: the words “or deal exclusively with” make it clear that when a regulation refers to “terminology,” “symbols,” “marking,” “labelling,” or “packaging,” it does not have to refer to physical characteristics or PPMs. Consequently, any time WTO panels face, say, a “labelling” or “packaging” requirement, it first should review its consistency with the TBT Agreement, regardless of whether similar schemes refer to PPMs or not. In this vein, a labeling requirement to the effect that all cigarettes sold in Home should carry the message “Smoking kills” is a technical regulation, regardless of whether the labeling requirement is accompanied by an obligation to show the physical characteristics of cigarettes that explain why cigarettes constitute a health hazard. The first sentence of the statutory definition refers to “physical characteristics” and “PPMs.” Consequently, measures that refer to one of the two terms (or both) should come under the purview of the TBT Agreement, regardless of whether they take the form of labeling/packaging. Why the distinction? In § 5.69 of its report on EC–Seal Products, the AB did draw a distinction between the two terms, but as discussed previously, without explaining on what the distinction rests. Most likely, this distinction reflects the idea that the term “physical characteristics” extends to cover production processes that have been incorporated in the final product, whereas the term “PPMs” applies to processes that have not been incorporated into the final product. A regulation banning asbestos containing bricks would be considered as a measure regulating physical characteristics. A legislation banning the use of purse seine nets when fishing tuna would be considered a PPM, since the harvesting process will not be incorporated into the final product. The dividing line between technical regulations and standards has been discussed since the Tokyo round. In what immediately follows, we attempt to show that the distinction was much clearer in the negotiators’ minds than it has been expressed in legal texts.99 5.5.1.6 Return to the Good Old Days (Recommended) Annex 1 to the Tokyo-round TBT Agreement included the following definitions of terms used in its various provisions: 1. Technical specification A specification contained in a document which lays down characteristics of a product such as levels of quality, performance, safety, or dimensions. It may include, or deal exclusively with, terminology, symbols, testing and test methods, packaging, marking, or labeling requirements as they apply to a product.
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2. Technical regulation A technical specification, including the applicable administrative provisions, with which compliance is mandatory. 3. Standard A technical specification approved by a recognized standardizing body for repeated or continuous application, with which compliance is not mandatory. The term “technical specification” has been omitted from the current agreement, and this is probably the source of confusion that led to deplorable outcomes like the one in US–Tuna II (Mexico) mentioned previously. This term connects “technical regulations” to “standards,” in that it makes it clear that the two terms have overlapping subject matter. The difference is the “bindingness” of the language used. A society that feels strongly about a preference will adopt a technical regulation, whereas a society that does not will not. If the US wanted to totally exclude tuna fished in a particular way from its market, it would have adopted a technical regulation. It did not, and this is why its intervention should be regarded as a “standard.” It probably would be wise to link the two terms to “technical specifications” once again. The legislator could then make a clearer statement that, whereas both technical regulations and standards are technical specifications, the difference between them concerns only the category of goods for which market access will be granted. Technical regulations, as we have already stated, must adopt the least restrictive (necessary) measures to reach a legitimate objective, and they must be applied in a nondiscriminatory manner as well. The necessity of a measure can be evaluated only once the legitimate objective has been defined. Hence, we begin with a discussion of the term “legitimate objective.” 5.5.2
Legitimate Objective
WTO members are, in principle, free to decide on the objectives they want to pursue. They will then enact the measures (technical regulations) that can appropriately serve the stated objectives. The freedom of WTO members in this respect is not limitless; for example, WTO members cannot pursue regulatory policies that discriminate in favor of their domestic products. (We discussed the treatment of subsidies in chapter 3 of this volume.) GATT imposed two disciplines to ensure that this is the case: it disallowed discriminatory measures in Article III and did not include similar objectives in the exhaustive list of Article XX. The TBT Agreement adopts a similar strategy. A nondiscrimination obligation has been agreed upon (Article 2.1 of TBT, which will be discussed next), whereas the indicative list of legitimate objectives refers only to noneconomic objectives. The TBT includes an illustrative list of legitimate objectives: national security requirements, the prevention of deceptive practices, and protection of human health or safety, animal or plant life or health, or the environment (Article 2.2 of TBT).100 WTO members have, of course, the right to determine for themselves the legitimate policies they want to
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pursue and can privilege the attainment of regulatory objectives, which have not been reflected in the list. The list is of an indicative nature. It is worth mentioning here the following quote from p. 29 of the AB report on US–Gasoline: WTO Members have a large measure of autonomy to determine their own policies on the environment (including its relationship with trade), their environmental objectives and the environmental legislation they enact and implement. So far as concerns the WTO, that autonomy is circumscribed only by the need to respect the requirements of the General Agreement and the other covered agreements. (italics in the original)
Panels have adopted a deferential attitude (toward the regulating WTO member) when it comes to reviewing the legitimacy of the objective being pursued. In US–COOL, the panel specified that the regulating state must define its objectives and pursue them in a coherent (e.g., not self-contradictory) manner, while underscoring that WTO members remain exclusively responsible for defining the objectives pursued (§§ 7.611ff.). On appeal, the AB confirmed this approach in § 372. It added that panels can be inspired by the objectives included in other provisions when deciding whether the challenged objective is legitimate: With respect to the determination of the “legitimacy” of the objective, we note first that a panel’s finding that the objective is among those listed in Article 2.2 will end the inquiry into its legitimacy. If, however, the objective does not fall among those specifically listed, a panel must make a determination of legitimacy. It may be guided by considerations that we have set out above, including whether the identified objective is reflected in other provisions of the covered agreements.101
Perhaps the best testimony of judicial deference in this respect is the attitude of panels when confronting objectives that lend suspicion regarding their legitimacy. In US–Clove Cigarettes, the objective pursued by the US was the protection of public health. In the name of this objective, the US treated clove cigarettes different from menthol cigarettes. It allowed the marketing and sale of menthol cigarettes but disallowed sales of any other flavored cigarettes, including clove cigarettes, notwithstanding the presence of proof that the two classes of cigarettes were equally damaging (panel report, § 7.335).102 The panel and the AB found that the US measure was inconsistent with the TBT Agreement, but it did not find that the objective being sought was illegitimate. It is not uncommon for a challenged measure to pursue more than one objective, and it will not be judged WTO-inconsistent simply because it does so. In US–Tuna II (Mexico), for example, the US pursued two objectives: inform consumers about the manner in which tuna had been caught; and foster the protection of dolphins (§ 7.437). Of course, there might be issues regarding the legal evaluation of similar cases. Normally, it would be expected that one could hit one bird with one stone, but rarely (if ever) does that stone ever manage to hit two birds. In the example of dolphin-safe tuna, the two objectives pursued are easily satisfied simultaneously. By sensitizing consumers to the negative external effects when harvesting tuna, it could be the case that US consumers
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turn toward the consumption of dolphin-safe tuna. And if they do not, the US will continue to inform consumers in the hope that they will eventually change their behavior. If they do not, nothing stops the US from enacting a genuine technical regulation banning sales of “dolphin-unsafe” tuna and leaving it, in the case of challenge, to the WTO to decide on the necessity of a similar program. Take, however, the EC–Seal Products dispute, which was discussed briefly in chapter 9, volume 1, and earlier in this chapter. There, the EU was aiming at protecting animal welfare and the income of the Inuit community. What if there were an inherent conflict (as Canada indeed argued there was) between the two objectives? What if the Inuit community did not harvest seals using “humane” methods? The Panel on EC–Seal Products, for all practical purposes, ducked this issue, and the AB did not think that it was necessary to discuss it explicitly either. The issue is real, however, and eventually panels will have to confront it head on. 5.5.3
Necessity
WTO members must employ the necessary technical regulations to reach their legitimate objectives (Article 2.2 of TBT). In § 322 of its report on US–Tuna II (Mexico), the AB explained its understanding of the necessity requirement, echoing its standard approach on this score as evidenced in its case law under Article XX of GATT: [A]n assessment of whether a technical regulation is “more trade-restrictive than necessary” within the meaning of Article 2.2 of the TBT Agreement involves an evaluation of a number of factors. A panel should begin by considering factors that include: (i) the degree of contribution made by the measure to the legitimate objective at issue; (ii) the trade-restrictiveness of the measure; and (iii) the nature of the risks at issue and the gravity of consequences that would arise from non-fulfilment of the objective(s) pursued by the Member through the measure. In most cases, a comparison of the challenged measure and possible alternative measures should be undertaken. In particular, it may be relevant for the purpose of this comparison to consider whether the proposed alternative is less trade restrictive, whether it would make an equivalent contribution to the relevant legitimate objective, taking account of the risks non-fulfilment would create, and whether it is reasonably available. (footnote omitted; italics in the original)
The three legs of the test featured in the quoted excerpt require intense analysis by panels. They must bring into their inquiry elements that are hard to quantify, such as the risks from facing the counterfactual (e.g., what if no measure were enacted), or the reasonable availability of alternative measures. Case law has interpreted some of these concepts and addressed other issues as well, like the allocation of burden of proof. We examine all this in what follows. 5.5.3.1 Intervene When Necessary and Adopt Necessary Measures Only The TBT Agreement requests that WTO members ensure that technical regulations should not be enacted unless necessary and, if enacted, they should not be more trade restrictive
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than necessary to achieve the stated regulatory objective. The necessity requirement thus cuts two ways: first, the legislator invites an analysis of the risks in case no regulatory intervention takes place;103 second, if intervention is judged necessary, the chosen means must not be more restrictive than necessary to reach the stated legitimate objective.104 The second element is the classic necessity test, as we know it from GATT, whereas the first part is the TBT innovation. The two are distinct evaluations. The AB confirmed this in its report on US–Tuna II (Mexico), when it held in § 321: Article 2.2 of the TBT Agreement further stipulates that the risks non-fulfilment of the objective would create shall be taken into account, and that, in assessing such risks, relevant elements of consideration are “inter alia: available scientific and technical information, related processing technology or intended end-uses of products.” As we see it, the obligation to consider “the risks nonfulfilment would create” suggests that the comparison of the challenged measure with a possible alternative measure should be made in the light of the nature of the risks at issue and the gravity of the consequences that would arise from non-fulfilment of the legitimate objective. This suggests a further element of weighing and balancing in the determination of whether the trade-restrictiveness of a technical regulation is “necessary” or, alternatively, whether a possible alternative measure, which is less trade restrictive, would make an equivalent contribution to the relevant legitimate objective, taking account of the risks non-fulfilment would create, and would be reasonably available. (italics in the original, except for “further”)
Logically, there should be a sequence between the two steps in the sense that a WTO member should first evaluate the risks of nonfulfillment—that is, if the WTO member were to avoid acting. Available scientific and technical information could be useful in estimating the risks of nonfulfillment (Article 2.2 of TBT). The situation as it exists (that is, before intervention has been applied) is the counterfactual. The comparison, then, would be a situation as is, as opposed to a situation where a technical regulation has been enacted. The necessity of a measure, though, could be a function not only of decisions by the intervening WTO member, but by others as well. A measure aimed to address climate change, thus, would be designed differently if the sources of distortion are policies by one or by more WTO members. The quest is for the least restrictive option, regardless of the circumstances that gave rise to the adoption of a technical regulation. The culmination of this obligation is embedded in Article 2.3 of TBT, by virtue of which WTO members are obliged to set aside technical regulations where the circumstances that gave rise to their adoption no longer exist. 5.5.3.2 Measures Based on International Standards Are Presumed Necessary Interventions based on international standards are, by virtue of Article 2.5 of TBT, presumed necessary to achieve a legitimate objective.105 Recall the discussion earlier in this chapter, where we stated that in an SPS dispute (India–Agricultural Products), the AB held that the quintessential elements of an international standard must be present in a national measure for it to be judged necessary.
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5.5.3.3 Appropriate Level of Protection (ALOP) Regardless of whether a technical regulation has been based on an international standard, it is the privilege of the regulating WTO member to decide on the appropriate level of protection (ALOP). In US–Tuna II (Mexico), the panel underscored that the appropriate level of protection is the exclusive privilege of WTO members who are solely responsible to define it, panels being reduced to controlling the means employed to reach the objectives (§ 7.622). The definition of ALOP is the obligatory pathway toward measuring necessity. The degree of restrictiveness of a measure cannot be evaluated without a benchmark, and ALOP provides that benchmark, against which the trade restrictiveness of various options will be appreciated. 5.5.3.4 Necessity and Appropriateness For a measure to be necessary to reach an objective, it must be appropriate. It is a subset (or maybe even only one measure) among the many appropriate measures that will qualify as necessary. Necessity is the second step of analysis following an inquiry into the “appropriateness” of a measure to reach an objective. Unless appropriate, no measure can ever satisfy the necessity requirement. In this vein, in US–COOL, the panel found that the US measure was violating the necessity requirement since it had not clearly conveyed the message that it was supposed to convey in the first place through the technical regulation it enacted. Consumers could be confused regarding which step of production was undertaken in which country if different stages of production had taken place in different countries. In other words, because it was a disservice to the objective pursued, the panel was led to find that the US measure was unnecessary (§§ 7.684ff., and especially 7.697 and 7.708ff.). 5.5.3.5 Necessity and the Relative Importance of the Objective Sought Assuming that a measure has been judged appropriate, the second and final step of necessity evaluation by a panel would be to check whether the privileged measure represents the least restrictive option (that is, the least burdensome measure for international trade). Necessity has been likened to the virtual representation of foreign interests in national parliaments: if foreign traders had a seat at national parliaments, they could request the adoption of measures that have the least possible impact on international trade. The inquiry into the trade-restrictiveness of the privileged measure is the last step. WTO panels cannot set aside a necessary measure even if they can prove that the cost (say, on global welfare) largely outweighs the gains for the intervening WTO member. There is no full-proportionality test in WTO. The necessity analysis requires the construction of a counterfactual. The panel will have to evaluate whether another measure (other than the privileged measure) could achieve the stated ALOP. In doing that, it will have to construct a counterfactual (that is, ask the question of whether another measure could be as efficient as the chosen one in achieving
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the ALOP without imposing as significant a burden on international trade as the chosen measure has done). Intuitively, one might think that panels would have to have recourse to elaborate econometrics in order to decide similar issues. In practice, they do not, as we have already seen in chapter 9, volume 1. They end up with some sort of qualitative assessment, which is often borderline impressionistic. One cannot overstate the importance of properly constructing the counterfactual. Take the US–Tuna II (Mexico), for example. There, the panel held that the US had violated the necessity requirement by insisting on its “dolphin-safe” label and not allowing for the AIDCP standard to be marketed in the US as well. The AIDCP standard was judged less restrictive than the US standard. By not allowing it, the US had violated Article 2.2 of TBT (§§ 7.601ff.). The AB reversed the panel’s findings in this respect because the panel had made an improper comparison. The alternative measure, in the AB’s view, was not the AIDCP standard but a coexistence of the AIDCP standard and the US regulations (§§ 328ff.). Thus, both WTO members that had complied with the AIDCP standard and those that had not done so could have accessed the US market. Case law, as we saw in chapter 9, volume 1, has evolved since the GATT years toward a more deferential standard. In US–Section 337, a GATT panel ruled that the necessity of the measure would be proven if there was no measure that was equally efficient as but less restrictive than the one privileged by the regulating state. Nowadays, a significantly less restrictive but equally efficient option must be reasonably available to the regulating state; otherwise, no violation of the necessity requirement will be established.106 There is, thus, the benefit of the doubt working in favor of the regulating state. In this vein, in US–Tuna II (Mexico), the AB noted that the necessity requirement disallowed only unnecessary restrictions (§ 319): We recall that Article 2.2 does not prohibit measures that have any trade-restrictive effect. It refers to “unnecessary obstacles” to trade and thus allows for some trade-restrictiveness; more specifically, Article 2.2 stipulates that technical regulations shall not be “more trade-restrictive than necessary to fulfil a legitimate objective.” Article 2.2 is thus concerned with restrictions on international trade that exceed what is necessary to achieve the degree of contribution that a technical regulation makes to the achievement of a legitimate objective.
Recall also from the discussion in chapter 9, volume 1, that the intrusiveness of the standard of review will depend on the importance of the objective pursued. When protection of human health (an objective that figures prominently in the indicative list of Article 2.2 of TBT) is wanted, it is to be expected that the standard of review will be more deferential than when, say, consumer information is the sought-after objective. 5.5.3.6 Necessity and Consistency In US–COOL, the panel held that the fact that the requirement to demonstrate origin was imposed on only some of the products that could be characterized as directly competitive or substitutable (DCS), and not on all of them, did not make the measure unnecessary.
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That is, the consistency requirement, which we will be discussing in the next chapter as part of our analysis of the SPS Agreement, was not an integral part of the necessity test in the eyes of this panel (§§ 7.682–683). In interpreting the necessity requirement in the TBT context, the panel felt that it could legitimately be inspired by the case law interpretation of the same term in the GATT and SPS contexts (§§ 7.667ff.). Inspiration from the case law in the SPS context would help the panel better distinguish between “necessity” and “consistency,” since the two terms coexist in the SPS Agreement (not in the TBT Agreement), as we will see in the next chapter. The AB reversed the panel’s finding in this respect. It did not complete the analysis, though, since, in its view, it lacked the necessary factual information to do so. As a result, the AB did not make a finding regarding the necessary character (or lack of same) of the COOL measure (§§ 366ff.).107 5.5.3.7 Burden of Proof Because of the similarities between the TBT and the SPS agreements on this score, we discuss the topic of burden of proof in the next chapter. Our conclusions there apply mutatis mutandis here as well. Suffice to state here that the complainant must point not to a marginally but to a significantly less restrictive option in order for the regulating state to be found in violation of its obligations under Article 2.2 of TBT. It will be up to the defendant, then, to show that the less restrictive option was not reasonably available to it. If the defendant manages to do so, then the original complaint fails. In the opposite case, the complainant has obtained gain of cause. 5.5.4
Nondiscrimination
WTO members must not afford to imported goods less favorable treatment (LFT) than that which they afford to domestic like products (Article 2.1 of TBT). The AB has been inspired by the test for nondiscrimination applied in Article III.4 of GATT, but has not applied it lock, stock, and barrel in the TBT context.108 Nondiscrimination with respect to domestic instruments was, as you might recall from the discussion in chapter 1, volume 1, the insurance policy that negotiators were looking for in order to commit to tariff reductions. With tariffs to a large extent out of the way, the limits of nondiscrimination as a trade integration instrument become obvious. Nondiscrimination is binary: either a party meets the standards of the regulating market and access to its goods is granted, or it does not and consequently pays the price of market exclusion. Moreover, a terms of trade effect could be associated with nondiscrimination, as Staiger and Sykes (2011) and Saggi and Nese (2008), in separate papers, have shown. And often there is a combination of the two: there is empirical support to the effect that those who can affect terms of trade are also those with the “higher” (so to speak) regulatory standards.109 Economic operators established in large, lucrative markets will often enjoy an advantage over those exporting to their market, who will be asked to incur adjustment costs.110
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Sykes and Staiger (2011) warned that GATT does not do much to reduce the risk of excessive regulation (even if applied in a nondiscriminatory manner).111 The (in principle) compulsory recourse to international standards, as well as the necessity requirement, and the obligation to base interventions on science (when appropriate) provide some insurance against the fears about abuse expressed by Sykes and Staiger (2011).112 It is true, nonetheless, that neither the GATT nor the WTO framers entertained thoughts regarding efficient regulatory interventions. This is something that has occupied the minds of the TBT Committee, and later in this chapter, we will be discussing GRP. Nondiscrimination roughly corresponds to the idea that identical (or at the very least similar) transactions are treated in an identical or a similar manner. The importance of the regulatory objective pursued, since the TBT deals only with cases where some objective is pursued, cannot be overstated. Two goods might be like in all respects, and yet one has been produced with renewable energy, whereas the other was produced with nonrenewable energy. Should they have equal access to the label “produced with renewable energy”? This is the kind of issue that case law under nondiscrimination has had to address. In this endeavor, the term “like products,” and “less favorable treatment” are the key parameters. 5.5.4.1 Like Products Remarkably, only one genuine TBT dispute was adjudicated during the first fifteen years of WTO. And then there were a flurry of disputes, the first three of which were raised almost simultaneously. These three panels strived hard to reconcile their attitudes toward defining “like products” in disputes concerning the interpretation of Article 2.1 of TBT. Some paid attention to the objective sought, explicitly accepting that it permeates and informs the likeness analysis. US–Clove Cigarettes is an appropriate illustration. This case concerned a challenge by Indonesia against the US Family Smoking Prevention Tobacco Control Act of 2009. As described previously, Section 907 of the legislation prohibited the production or sale in the US of cigarettes containing certain additives, including clove, but continued to permit the production and sale of other flavored cigarettes, including cigarettes containing menthol. Indonesia alleged that Section 907 was inconsistent with Article 2.1 of TBT because clove and menthol cigarettes were like products. The panel stated (§§ 7.244, 247): As we have explained, we believe that such legitimate objective must permeate and inform our likeness analysis. In the weighing of these criteria, we have therefore carefully considered the relevance of those traits that are significant for the public health objective of Section 907(a)(1)(A), i.e., to reduce youth smoking. The measure at issue in this case plainly regulates cigarettes on the basis of a characteristic that clove cigarettes and menthol cigarettes have in common, which in the words of Section 907(a)(1) (A), is the shared characteristic that they “contain, as a constituent ... or additive, an artificial or natural flavor ... or an herb or spice ... that is a characterizing flavor.” In the context of this particular measure, which regulates tobacco products on the basis of this particular characteristic—which may
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be regarded as perhaps the defining feature of each type of product—we find it very difficult to see how clove cigarettes and menthol cigarettes would not be considered to be “like.” As discussed in our findings, we are aware that there are certain differences between clove cigarettes and menthol cigarettes. These differences may well lead to the conclusion that these two products are not “like” in the context of different measures. However, in the context of the measure at issue in this dispute, these differences are less significant, and less relevant. In other words, contrary to what the United States argues, those differences do not relate to the public health objective of the measure at issue and therefore, are not relevant to the like product analysis in this case. In our view, the similarities related to the public health objective of Section 907(a)(1)(A) are highly relevant to the like product analysis in the circumstances of this case.
In other cases, panels followed a likeness analysis à la GATT—that is, they would accept two goods as like if consumers treated them as like products. In US–Tuna II (Mexico), Mexico challenged a series of US measures [the US Code, Title 16, Section 1385, Dolphin Protection Consumer Information Act; the US Code of Federal Regulations, Title 50, Section 216.91, “Dolphin-safe labeling standards,” and Section 216.92, “Dolphin-safe requirements for tuna harvested in the Eastern Tropical Pacific Ocean by large purse seine vessels”; and the ruling by a US court in Earth Island Institute v. Hogarth, 494 F.3d 757 (9th Cir. 2007)]. In Mexico’s view, the measures at issue, which established the conditions for the use of a “dolphin-safe” label on tuna products and conditioned the access to the US Department of Commerce official “dolphin-safe” label upon bringing certain documentary evidence that varied depending on the area where tuna contained in the tuna product had been harvested and the fishing method by which it had been harvested, were inconsistent with Article 2.1 of TBT. The panel here had to pronounce on the likeness of two tuna products harvested in different geographic locations. It held (§§ 7.226): To the extent that Article 2.1 contributes to avoiding “unnecessary obstacles to trade” arising from undue discrimination with respect to technical regulations, it seeks to preserve the competitive opportunities of products originating in any Member, in relation to technical regulations. Thus, the term “like products” under Article 2.1 of the TBT Agreement may be similarly understood as relating to “the nature and extent of a competitive relationship between and among products.113
The AB eventually settled the score in favor of the latter approach. In US–Clove Cigarettes, it held that likeness is a function of the competitive relationship between two products in the market, which could be informed by regulatory concerns (e.g., health risks). It is consumers, nevertheless, that would decide whether two goods are like in the TBT sense of the term (§§ 110–120).114 In §§ 142–143, it added that likeness and the DCS relationship must exist at least in some parts of the market, but not necessarily throughout the market. This approach was followed in subsequent cases as well. In EC–Seal Products, Canada and Norway challenged the consistency of an EU measure (the “Seals regime”) with the TBT and GATT. Recall that the Seals regime banned in principle all seals products from
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the EU market unless they came under one of three statutory exceptions: the “IC hunts” exception, which covered seal products obtained from hunts conducted by Inuit and other indigenous communities; the “MRM hunts” exception, which covered seal products derived from hunts conducted for marine resource management purposes; and, finally, seal products imported for personal use by travelers reentering the EU market. Canada had claimed that seal products conforming to the three statutory exceptions and seals products nonconforming to them were like products in the eyes of consumers. The panel had no trouble accepting the Canadian claim (§§ 7.149ff.). Should consumers define likeness in the TBT context? Is the GATT approach “exportable” to the TBT Agreement as well? The AB responds “yes” to both questions, and yet these statements are not without their problems. Think of the counterfactual.115 In US–Tuna II (Mexico), for example, had the US not intervened and regulated the tuna market by distinguishing between tuna and dolphin-safe tuna, three scenarios could emerge, in principle: (a) Consumers would treat tuna and dolphin-safe as substitutes. (b) Consumers would never purchase tuna that is not dolphin-safe. (c) Some consumers would treat the two products as substitutes, and others would not. In scenario (b), there would be no reason for the US government to intervene. In this case, consumers would possess the information that the government had at its disposal and would agree with its preference to distinguish between the two goods. In scenarios (a) and (c), consumers would treat tuna and dolphin-safe tuna as substitutes.116 The government is obviously unhappy with this behavior and is intervening to correct it. This it can do, so long as a legitimate objective is being pursued, the measure is necessary to achieve the stated objective, and it is applied in a nondiscriminatory manner. If the “dolphin-safe” label is judged necessary to achieve the stated objective, then the question will be whether all products (no matter what their origin is) that conform to the requirements for access to the label can have access to it on nondiscriminatory terms. Likeness, in the mind of regulators, is informed by the regulatory objective pursued and is best understood as policy likeness, not market likeness. The fact that the TBT refers to the term “like products” (in Article 2.1) under the heading “Preparation, Adoption, and Application of Technical Regulations by Central Government Bodies” provides support for this point.117 A few more words about scenario (c): Recall that it is the AB that held that it suffices that two goods are like in the eyes of consumers in a segment of the market, as we saw in chapter 7, volume 1. The AB did not give any numbers, but we assume that it had in mind a reasonable size. This approach cannot be right. What if the segment of the market where tuna and dolphin-safe tuna are not treated as substitutes were that encompassing the informed segment of the society (say Manhattan), and the segment
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where they are treated as substitutes is the segment including only uninformed consumers (say, Palookaville)? What about the size of each market? In the absence of a quantitative threshold, we might simply be looking at the wrong sample when following the AB recipe to establish likeness.118 These questions remain unanswered in case law. 5.5.4.2 Less Favorable Treatment (LFT) In US–Clove Cigarettes, the panel made it clear that in order to show whether LFT had been afforded to imported goods, it was (§ 7.269) “... required to consider whether the detrimental effect(s) can be explained by factors or circumstances unrelated to the foreign origin of the product ...” (italics in the original)119 Consequently, the presence of detrimental impact is necessary for LFT to exist in the first place. The AB, though (in line with case law under Article III of GATT, as we saw in chapter 7, volume 1), does not require the quantification of trade effects. Qualitative assessments to this effect (e.g., submission of a plausible scenario to the effect that imported goods will suffer as a result of the enactment of the technical regulation) by and large suffice. The presence of a detrimental impact is a necessary but not sufficient condition for the complainant to carry its burden of proof with respect to LFT. It must also show that the impact is related to the foreign origin of the good. In the opposite case, such as if the impact is the result of a legitimate regulatory distinction (pursuance of a legitimate objective), there will be no violation of Article 2.1 of TBT. The AB upheld this view in §§ 175ff. of its report. The AB added in its report on US–Tuna II (Mexico) a very important clarification. It held that the impact must stem exclusively from the regulatory distinction; otherwise, detrimental impact will amount to LFT (§ 297). Now this looks like a very demanding test. The TBT Agreement, on the one hand, does not require efficient, first-best interventions, but on the other, it requires the absence of negative external effects from whatever interventions WTO members have privileged. This is simply untenable, and it should not come as a surprise at all that defendants (regulators) have routinely failed in defending their case under Article 2.1 of TBT—at least in the first few cases adjudicated before 2015. In US–COOL, the panel (§§ 7.349–350) first, and then the AB (§§ 271ff., and especially 349), both held that the LFT afforded to Mexican and Canadian products was not due exclusively to a legitimate regulatory distinction. This was the case because the information provided through the labeling requirement (indicating origin of goods) was confusing. Meat originating predominantly in Canada, or Mexico would still be marketed as say “Canada, US”, or “Mexico, US” origin, but this was not the case for all meat originating in Canada, or Mexico. There was some confusion in this respect. In US–COOL (Article 21.5–Canada, Mexico), the AB confirmed that this much continued to be the case, since some beef would be labeled as in part US origin when it had spent 68 percent of its life in Canada (§§ 5.38ff., and especially 5.62).
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In US–COOL (Article 21.5–Canada, Mexico), the AB added that panels can examine hypotheticals as well in order to evaluate whether trade effects stem exclusively from a regulatory distinction (§§ 5.16ff.). Therefore, the requirement to show that a trade impact is exclusively due to the regulatory distinction (otherwise Article 2.1 of TBT will be violated) seems well embedded in WTO case law. What if, though, the detrimental impact also results from other factors? Should the regulator pursuing a legitimate objective also be required to ensure ex ante that no detrimental impact will be caused by factors other than its pursuance of a legitimate objective? How can this be the case? What if, for example, in US–Tuna II (Mexico), some US consumers would buy US dolphin-safe tuna anyway (that is, regardless of the labeling requirement)? What if they were prepared to incur search costs to this effect—that is, in order to verify the process of production of tuna sold? Alternatively, what if some consumers were unwilling to purchase Mexican products because they disagreed with some of the Mexican government’s policies? This is a very high standard of proof that the AB might regret setting when it has to apply it in future case law. We will return to this question in the concluding remarks to this chapter.120 5.5.5 Performance Requirements Wherever feasible, technical regulations must be drafted in terms of performance requirements (Article 2.8 of TBT). Requiring from WTO members to draft their technical regulations in terms of performance requirements reduces the risk of interventions aiming to favor domestic production by imposing adjustment costs on international competition. Enacting a regulation stating that, say, fireproof doors must be produced following a specific process does not meet the test of Article 2.8 of TBT. Conversely, a regulation stating that fireproof doors should be able to resist for 15 minutes when exposed to fire (assuming a certain temperature measurement), regardless of their production process, would meet this test.121 The rationale for this provision is twofold. On the one hand, certain beggar-thy-neighbor policies will be thwarted since regulators will not be copying domestic production processes and turning them into law.122 On the other hand, by focusing on performance requirements, trading nations will be in a position to capture gains from innovation since traders will not have to follow the same production process in order to be able to sell. Recall, nevertheless, that this obligation is couched in the term “wherever appropriate,” which figures prominently in Article 2.8 of TBT. 5.5.6
Transparency
We will be discussing transparency in general terms later in this chapter, when we focus on the TBT Committee and the ensuing obligation that it is notified of all technical regula-
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tions, standards, and conformity assessment procedures. Except for cases of urgency, WTO members are required to respect transparency requirements when enacting technical regulations. Article 2.11 of TBT imposes a publication requirement for all technical regulations adopted. Articles 2.5 and 2.9 of TBT impose on WTO members an ex ante transparency obligation—namely, a duty to notify the WTO of their upcoming technical regulations and, upon request, provide a justification for them. Article 2.9 of TBT requests notifications of technical regulations that are not based on international standards if they have a significant effect on trade. In US–Clove Cigarettes, the panel, in an unappealed finding, left little room for discretion when it equated “significant effect” to anything that is not de minimis. In this case, the US had an embargo on clove cigarettes in place and submitted evidence suggested that Indonesia was exporting $15 million worth of cigarettes before the embargo was imposed. In the panel’s view, the embargo amounted to a “significant effect” (§ 7.530). Note that Article 2.9.2 of TBT requests that notifications take place at a stage that is early enough for amendments to still be possible.123 In the following discussion, we limit ourselves to two features of transparency regarding technical regulations: namely, the obligation to allow an interval between the adoption of a measure and its entry into force, as well as the obligation to provide inquiry points to familiarize traders with the new measures being adopted. 5.5.6.1 Reasonable Interval between Adoption and Entry into Force Article 2.12 of TBT requests that WTO members allow a “reasonable interval” between notification of their proposed technical regulation and its entry into force. The rationale for the interval is to ensure that vested interests have not decisively influenced the regulatory outcome. The hope is that because of the interval, there will still be time available to foreign interests to attempt to sensitize regulators on the trade impact of their actions. The interval has to be reasonable; it cannot drag on forever. In US–Clove Cigarettes, the panel found that a US decision to allow an interval of only three months was in violation of this provision (§§ 7.563 ff.). To reach this conclusion, the panel relied on a decision by the TBT Committee124 that incorporated § 5.2 of the Doha Ministerial Decision, which pertinently read in part: “... the phrase ‘reasonable interval’ shall be understood to mean normally a period of not less than 6 months, except when this would be ineffective in fulfilling the legitimate objectives pursued.” In this panel’s view, the Doha Ministerial Decision helped fill a gap in the original text and therefore should be taken into account. On appeal, the AB upheld this finding, stating that the Doha Ministerial Decision is a subsequent agreement in the sense of Article 31.3(a) of VCLT (§§ 241ff.). In § 290, it laid out the test for compliance with Article 2.12 of TBT. The complainant first must show that the interval between the adoption and entry into force of a technical regulation was less than the statutory six months prescribed by § 5.2 of the Doha Ministerial Decision. This is purely a factual demonstration, of course, and the burden will then
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shift to the regulator, who still has a chance to justify its shorter interval if it can show any of the following: • An urgent situation as reflected in Article 2.10 of TBT (e.g., an environment-, health-, safety-, or national security–related issue) has arisen. • The producers of other WTO members can adjust within a shorter period of time. • A period of more than six months would be ineffective for the regulating state and would not allow it to reach its objectives. The notification requirement is less burdensome with respect to technical regulations adopted at the local government level or by nongovernmental bodies (Article 3.2 of TBT), since no notification is required if the content is substantially the same as that of previous notifications of the central authority.125 5.5.6.2 Enquiry Points Article 10 of TBT obliges WTO members to establish enquiry points through which interested parties can request information about upcoming or already-in-force technical regulations. These are essentially one-stop shops where traders can inform themselves about the regulatory activity of a given WTO member. The contribution of one-stop shops toward familiarizing the trading community with domestic measures has been highlighted in various chapters of this volume. It provided the inspiration for the most modern WTO agreement, the Agreement on Trade Facilitation (ATF), and has been hailed as an important reason for the lack of transparency regarding measures coming under the ambit of the Agreement on Import Licensing.126 5.5.7
Recognition
Nondiscrimination, as we saw in the beginning of this chapter, is the lowest-intensity means of trade integration. It served its purpose of ensuring the value of tariff concessions during the GATT years, and it continues to exercise some amount of discipline on lawmaking in a tariff-free world. It requires from traders, though, to continuously adjust to the laws in their export markets that they do not decide. Since there is a lot of uncertainty regarding the design of future laws, trade flows might be affected. There are other instruments like harmonization, recognition, or both that can help promote trade between nations in a more meaningful manner. WTO members are free to recognize each other’s technical regulations as equivalent to their own (Article 2.7 of TBT). They are even encouraged to do so (Article 6.3 of TBT). Recognition could be unilateral, as it could also be bilateral or plurilateral. Two or more WTO members could sign an MRA.127 WTO members will provide recognition if they are satisfied that the level of protection in another WTO member is equivalent to their own (Article 6.1 of TBT). This provision
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deals only with recognition by central government bodies, and it mentions “equivalence,” not “equation.” Hence, what matters is not absolute identity between two procedures but whether, as a result of using either one, conformity has been achieved to the satisfaction of the recognizing WTO member. WTO members are encouraged to enter into consultations in order to achieve equivalence (Article 6.1.1 of TBT). Recognition must observe most-favored-nation (MFN) status. A WTO member that takes the view that it can comply with the requirements of one of the two (or more) WTO members participating in the recognition agreement can legitimately request that it benefit from its extension. Of course, it will have to assume the burden of proving equivalence between its own regulation and that of the recognition partners. It should not come as a surprise that there are few MRAs thus far,128 and that the ones that do exist are confined to more or less homogeneous contractual partners.129 Participants in similar schemes must show a considerable amount of trust in each other since they recognize ex ante legislation (the content of which they cannot necessarily influence in a decisive manner) as equivalent to their own. The TBT Committee, in its Fourth Triennial Review, discussed some of the many reasons why recognition agreements are being signed almost exclusively across like-minded countries, and it identified various reasons explaining why this has been the case so far: the similarity of concerns across many countries that share comparable development levels, as well as the opportunity cost of negotiating recognition agreements with heterogeneous players, emerge as key explanatory factors.130 Recently, the trend has been toward concluding “recognition plus,” sometimes referred to as “MRA+” agreements. This term denotes agreements that cover both technical requirements and conformity assessment procedures. Practice has shown that unless both are covered, implementation might be negatively affected because at the end of the day, it is conformity with the requirements that matters and guarantees market access. Conformity assessment can, of course, take place in the exporting market as well. Besides its costliness, the uncertainty about the eventual outcome of similar procedures emerges as the key reason in favor of signing MRA+ agreements.131 There are some examples to this effect, such as the 2004 EU/US agreement on marine safety equipment, the EU/US bilateral aviation safety agreement, and the EU/US agreement on organic products.132 The WTO must be notified of all recognition agreements (Article 10.7 of TBT). 5.6 5.6.1
Standards Defining Standards
The term “standard” is defined in Annex A to the TBT Agreement: Document approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory. It may also include or deal exclusively with terminology, symbols,
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packaging, marking or labeling requirements as they apply to a product, process or production method.
The ISO reflects a different definition, namely: A document, established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines, or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.133
There are some notable differences between the two definitions: the ISO insists on the process of adoption (consensus) and the level of ambition when setting standards. The WTO definition, on the other hand, is of a more procedural character. The natural question to ask is: Why should the TBT Agreement address measures that are not mandatory, compliance with which is not a precondition for market access? The answer is that standards do have market impact, and sometimes it is quite strong.134 The impact of standards depends on various factors, such as the type of good, the reputation of the standard-setting entity, and the level of education of consumers. One would intuitively expect more of an impact, for example, if it is credence goods that are being standardized, where consumers, even after consumption, might not be in a position to fully assess the quality of the good; it is less so if experience goods are standardized, where consumers will form an opinion after first consumption, and even less so if it is a search good, where consumers with few skills can form an opinion about the good even before consumption. Still, consumers’ choices will be affected even with respect to the latter if the standardizing body is, in their view, a trustworthy entity. Many producers of, say, toothbrushes would long for endorsement of their products by the American Dental Association. There is nowadays a variety of standards in various fields from toothbrushes to sustainable forest management.135 Standards can be businesswide, national, regional, and sometimes international.136 In a comprehensive study, Marx (2011) discussed the significant increase in recent years in standard setting, and showed that standards cover a sizeable part of world trade.137 5.6.2
Standard-Setting Bodies
Standards are set by SSOs at different levels of government (federal, local, etc.), and even by nongovernmental bodies. The discipline imposed on WTO members is to ensure compliance of all its standardizing bodies with the Code of Good Practice. Nonetheless, WTO members incur different obligations with respect to SSOs coming under their aegis. The criterion for differentiation is the intensity of governmental link. WTO members shall ensure compliance with the Code of Good Practice with respect to central government standardizing bodies. WTO members are only requested to take “available reasonable measures” only when it comes to ensuring compliance with the code by their “local gov-
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ernment-,” “non-governmental-,” and “regional standardizing bodies.”138 Article 4.1 of TBT says as much.139 5.6.3
Code of Good Practice
Compliance with the Code of Good Practice amounts ipso facto to compliance with the principles of the TBT Agreement (Article 4.2 of TBT). When enacting standards, WTO members must: • Respect MFN and NT (national treatment) (§D). • Respect the necessity requirement (§E). • Use international standards when appropriate (§F). • Further harmonization, and to this effect standardizing bodies, are encouraged to participate in the work of international standardizing bodies (§G). • Avoid duplication of the work done at the international level (§H). • Draft standards in terms of performance requirements, when feasible (§I). • Publish at least once every six months their work program (§J), and if requested, provide information about it (§P). • Ensure that their standardizing bodies join the ISONET—that is, the ISO information network (§K). • Must allow 60 days, if possible, to lapse between adoption and entry into force of the standard (§L). • Ensure that draft standards are made available to interested parties to comment upon (§M), and that comments received are, if appropriate, taken into account when drafting the final text (§N). • Ensure that all standards are published (§O). The code was decided during the Uruguay-round negotiations. No similar document had been included in the Tokyo-round TBT. §§D, E, and F establish parallelism with respect to obligations imposed on WTO members with respect to technical regulations and standards. Over 160 standardizing bodies have by now adopted the Code of Good Practice. 5.7 5.7.1
Conformity Assessment Defining Conformity Assessment
Conformity assessment is not defined,140 but conformity assessment procedures are defined in § 3 of Annex 1 to the TBT Agreement as follows:
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Any procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled. Explanatory note: Conformity assessment procedures include, inter alia, procedures for sampling, testing and inspection; evaluation, verification and assurance of conformity; registration, accreditation and approval as well as their combinations. (italics in the original).
Thus, through conformity assessment, we should understand the systematic examination of the capability of a product to meet specified requirements. 5.7.2
The Ambit of Conformity Assessment
Conformity assessment can be performed with respect to products (Home acknowledges that Foreign’s goods protect public health, as do its own), procedures (Home acknowledges that Foreign’s entities can assess conformity of goods with standards, as well as its own), or both. Conformity assessment that takes place in the exporting market can be costly for exporters, who might be requested to export goods in a state of uncertainty (pending assessment of their conformity by the entities of the importing state). Recognition (unilateral or mutual) of other’s standards and procedures, recourse to international standards, or both can help facilitate the flow of trade in this respect. The TBT actively acknowledges the power of similar cooperative efforts. The WTO, however, is not a technical body, and to ensure smooth operation, bridges with the entities where similar work is done had to be built. It is, to a large extent, the ISO and IEC that have detailed how cooperation in this area should occur. 5.7.2.1 Assessing Products Conformity assessment can be performed in relation to specific products or in relation to the activity of conformity assessment. Products will typically be tested in laboratories, inspected by inspection bodies, and certified by certification bodies. It is metrological and accreditation bodies that will review the activities performed by laboratories, inspection, and certification bodies. The ISO/IEC have developed a glossary of the various procedures in relation to the conformity assessment of products, as well as in relation to the activity of conformity assessment: the working groups of the ISO Committee on Conformity Assessment (CASCO)141 and the ISO/IEC Guide 2 (1991) are the two relevant documents. With respect to products, the ISO/IEC Guide 2 distinguishes among the following: • “Sampling”: The procedure whereby a sample of the whole that will form the subject matter of conformity assessment will be put together. Of course, the sample must reflect the properties of the whole; otherwise, one risks running into sample bias.
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• “Testing”: Determining technical characteristics of the product. This is an evaluation of conformity by measurement or analysis of one or more characteristics of a given product according to specified procedure. • “Inspection”: The conformity of the product with the relevant rules will be evaluated. The evaluation of conformity will take place through means other than testing; e.g., through visual check, etc. • “Evaluation of conformity”: This is a process intimately linked to inspection, but here, the examination of conformity is systematic, aiming to establish the extent to which a particular product meets the requested properties. • “Verification of conformity”: The relevant entity will be looking at the evidence, and the entity entrusted with verification will confirm conformity. • “Assurance of conformity”: This should be the last step or the consequence of verification of conformity and is usually a statement of confidence that a particular product meets the requested standards. • “Certification”: This is the formal assurance by a certification body that the product meets the requested standards. • “Supplier”s declaration of conformity”: This is the notorious “SDoC” document (Supplier’s Declaration of Conformity), where the supplier provides assurance that its products meet the requested standards. • “Approval”: This refers to the permission granted to a product to be marketed under the conditions imposed by the approving entity. • “Registration”: Through registration, a body indicates in a publicly available document that a product meets the requested standards. Conformity assessment for products, in principle, can be performed in one of three different ways: • By the producer itself (called “first-party assessment”) • By the purchaser or a conformity assessment body on its behalf (“second-party assessment”) • By a body independent from both the producer and the purchaser (“third-party assessment”) The incentives of each of the entities involved in assessing products are different, of course, and so is the ensuing market confidence in the procedures followed. Domestic laws can impose a particular type of conformity assessment that must be followed.
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5.7.2.2 Assessing Procedures The procedures in relation to the activity of conformity assessment as well are evaluated (as opposed to evaluating the final product only). Actually, this process could lead to substantial trade facilitation. Assume, for example, that Home accepts that the entities in Foreign assessing the conformity of a good with the relevant standard are performing their tasks to the satisfaction of Home’s standards. In this case, Home and Foreign could sign an agreement whereby conformity assessment operated by entities of the exporting state would be accepted without a need to redo the process in the importing state. This is roughly what MRA+, as referred to previously, yields. Recall that there is, in principle, no need to also harmonize each other’s standards. It could be the case that Home and Foreign continue to have divergent standards which they do not recognize as equivalent. In this scenario, Foreign will be performing two assessments: one for conformity of goods with its own standards, and the another for conformity of goods with Home’s standards. By recognizing the latter process, Home will be facilitating trade with Foreign, even though the two states continue to observe different standards that they have not recognized as equivalent. The ISO/IEC Guide 2 distinguishes between three different steps: • “Accreditation”: An entity that is entrusted with this function recognizes that another entity can carry tasks relating to conformity assessment. • “Registration”: An entity reflects in a publicly available document that (a product) or another entity meets specific requested standards. • “Metrology”: This term refers to the science of measurement. Some agreement on this issue between the recognizing and the recognized entity is necessary for recognition of the entities to be the case. This point deserves some additional explanation. In fact, all sorts of issues can affect conformity assessment and some are counterintuitive, like the expression say of weight in kilograms and pounds.142 This is why the Convention du Mètre established the Bureau International des Poids et des Mesures (International Bureau of Weights and Measures), an intergovernmental organization counting nowadays 55 members and 34 associate members, the mandate of which is to provide the basis for a single, coherent system of measurements throughout the world. The need for cooperation in this area has been acknowledged in the TBT Agreement, where there is a specific provision dealing with recognition (Article 9 of TBT). Beyond recognition, the TBT Agreement aims to contribute to increasing the quality of standards worldwide and also the technical capacity regarding conformity assessment procedures. The TBT Committee has organized a number of events aimed at developing technical capacity in this area, especially among those in need of expertise.143
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The TBT Agreement specifically refers to “accreditation” as a means to verify the competence of entities entrusted with conformity assessment in the exporting WTO member (Article 6.1.1). Assuming this can be achieved, then, transaction costs regarding conformity assessment will be substantially reduced. Accreditation bodies are working toward harmonizing international practices in this context.144 5.7.3
International Standards
WTO members must use relevant guides and recommendations issued by international standardizing bodies as the basis for the elaboration of their conformity assessment procedures (Article 5.4 of TBT). This obligation kicks in if positive assurance is required that products conform with technical regulations or standards and relevant guides or recommendations by international standardizing bodies exist. WTO members can deviate from this obligation if the guides or recommendations are “inappropriate.” The last sentence of Article 5.4 of TBT includes an indicative list of reasons for which international guides or recommendations might be “inappropriate”: Members shall ensure that central government bodies use them, or the relevant parts of them, as a basis for their conformity assessment procedures, except where, as duly explained upon request, such guides or recommendations or relevant parts are inappropriate for the Members concerned, for, inter alia, such reasons as: national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment; fundamental climatic or other geographical factors; fundamental technological or infrastructural problems. (italics in the original)
WTO members notifying another party of a conformity assessment procedure must indicate the objective sought, as well as the rationale for it (Articles 5.6.2 and 5.7.1 of TBT). Notifications could provide additional information as to what might be considered “inappropriate.”145 More generally, WTO members are encouraged to participate in the work of international bodies aiming at harmonizing conformity-assessment procedures (Article 5.5 of TBT). There are by now some agreements among accreditation bodies, or even individual laboratories, whereby networks of conformity assessment are established on which members can rely. For example, CB Test Certificates are issued by laboratories participating in the IECEE-CB Scheme (the IEC System for Conformity Assessment for Electrotechnical Equipment and Components), an agreement among IEC members that allows participating certification institutions to issue similar certificates confirming that electrical products are in conformity with IEC standards. A manufacturer possessing a CB Test Certificate can, with this document alone, obtain certification in all countries participating in the IECEE-CB Scheme.
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Certification is not the only area where similar agreements are concluded. Accreditation agreements are signed as well. The International Laboratory Accreditation Cooperation (ILAC) has developed a recognition agreement among its 65 members—the ILAC Arrangement, as it is commonly known. It is based on the results of evaluation by peers (“peer assessment”), and each signatory must ensure conformity with ISO/IEC 17011 and 17025. The ILAC Arrangement builds on existing regional arrangements, which are required to maintain the necessary confidence in accreditation bodies from their region.146 5.7.4
Unilateral Conformity Assessment
The results of conformity assessment performed elsewhere can be recognized unilaterally (Article 6.1 of TBT).147 Sure, Article 6.4 of TBT goes so far as to encourage WTO members to sign MRAs covering conformity assessment, and Article 9.2 of TBT explains the legal framework that must be respected in this context. Still, unilateral recognition of results is very much an option. The whole exercise can be greatly facilitated through the notorious SDoC, referred to previously. The SDoC at the very least identifies the supplier who makes the declaration, the relevant standard or technical regulation that its products meet, and, of course, the products covered. The SDoC is not mentioned in the TBT Agreement, but in the ISO/IEC Guide 2, it says: “13.5.1 Supplier’s declaration: procedure by which a supplier gives written assurance that a product, process or service conforms to specified requirements.” During the Third Triennial Review of the TBT Agreement, WTO members acknowledged the contribution that the wide use of SDoC could make. The point was also made that for SDoC to be effective, it would have to be accompanied at least by effective product liability laws and penalties for false or misleading declarations of conformity assessment by the supplier.148 During the same review, it was added in this discussion that the use of international standards could help make the SDoC more transparent and extend its use and usefulness.149 5.7.4.1 Nondiscrimination WTO members must respect both MFN and national treatment when designing their conformity assessment procedures. They cannot use them as a means to confer an advantage to domestic producers (or to one foreign source of supply): Article 5.1.1 of TBT makes this point clear. In this vein, fees to be paid for conformity assessment (which are usually borne by producers) must be the same for all foreign and domestic producers (Article 5.2.5 of TBT). 5.7.4.2 Necessity Conformity assessment must be not only nondiscriminatory, but also necessary to achieve the stated objective (Article 5.1.2 of TBT). The requirement established in this provision
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is violated when no conformity assessment procedures have been established. The Panel on EC–Seal Products ruled as much when it found that the EU had not enacted procedures that would allow imported goods to be assessed in order to establish whether they met the regulatory requirements adopted by the EU (§§ 7.539ff.). The established procedures must be expeditious (Article 5.2.1 of TBT), and the requested information should not exceed what is necessary for conformity assessment to be performed (Article 5.2.3 of TBT). 5.7.4.3 Confidentiality The agreement requests that WTO members respect confidential information provided in the way that it respects similar information supplied by domestic producers (Article 5.2.4 of TBT). 5.7.4.4 Transparency All procedures must be public (Article 5.8 of TBT). The TBT Agreement imposes two obligations which could be characterized as ex ante transparency: first, in case their procedures are not based on international standards, they must make them public promptly and notify the WTO as well (Article 5.6 of TBT); second, they must further, except for cases of urgency discussed in Article 5.7 of TBT, allow a reasonable interval between their adoption and entry into force (Article 5.9 of TBT). 5.7.4.5 Local and Nongovernmental Bodies Article 5 of TBT contains the basic obligations that must be assumed by “central government bodies.” There should be no dispute that WTO members are legally responsible for the activities of these bodies. Conformity assessment, though, is performed by other entities, which do not qualify as “central governmental bodies.” Absent disciplining of their activities and output, one would risk circumvention of the discipline imposed in Article 5 of TBT. To this effect, Articles 7 and 8 of TBT refer to the obligations imposed on WTO members with respect to “local government bodies” and “non-governmental bodies,” and essentially request that WTO members take all reasonable measures at their disposal to make sure that the obligations embedded in Article 5 of TBT will be observed. 5.8
Special and Differential Treatment for Developing Countries
The TBT Agreement contains provisions aimed at obliging developed WTO members to account for the relative difficulty of developing countries to set and abide by their standards. To this effect, developed WTO members must assist developing countries in the preparation of technical regulations, standards, and other controls (Article 11 of TBT). Further, they must take account of the special development, financial, and trade needs of develop-
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ing country members when enacting technical regulations, standards, and conformity assessment procedures, with a view to ensuring that they do not create unnecessary obstacles to the exports of developing countries (Article 12 of TBT). The latter provision explains that WTO members should not expect developing countries to base their own technical regulations or standards on international standards, if the latter are not necessarily conducive to their development needs. The provision of technical assistance, significant as it might be, is less important to developing countries. What matters most is to what extent they can cope with standards enacted by developed nations that correspond to their development level and might prove a bridge too far for developing countries aiming to cross the developed–developing countries divide and export to the Western world. Various contributions in Wilson and Abiola (2003), as well as Wilson and Otsuki (2004) have provided evidence that developing countries find it exceedingly difficult to penetrate the Organisation of Economic Cooperation and Development (OECD) markets in areas where standards (often high protection standards) are in place.150 Article 12 of TBT does not go any further than requesting that WTO members reflect on the necessity of a particular technical regulation/standard/conformity assessment when enacting a standard. The appropriate level of protection is the exclusive privilege of the regulating state. In US–Clove Cigarettes, the panel held that the fact that Indonesia had raised its concerns about adopting a technical regulation before the US authorities, and the fact that key officials in the US government had debated the concerns raised, were enough for the US to be deemed in compliance with its obligations under this provision, even though in the end it did not endorse any of them (§§ 7.644ff.). This seems like a fair conclusion. The whole WTO edifice is built around the idea that trade liberalization must not take precedence if it encroaches on social preferences. It would be turning this basic concept on its head for the article to request that developed WTO members renege on pursuing, say, public health or environmental policies in the name of adding to the export income of developing countries. The devil lies in the details, of course, and the picture is more complicated than the way it was explained earlier in this chapter, which admittedly painted with a broad brush. We will be returning to this discussion in the next chapter.151 At the end of the day, though, it seems reasonable to conclude that developing countries will have to content themselves with the disciplines already embedded in the TBT Agreement (which, if properly applied, can go a long way toward distinguishing wheat from chaff), plus a procedural requirement showing that regulators have pondered on the interests of developing countries. They cannot expect more.
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Institutional Issues The TBT Committee
A TBT Committee is established and entrusted with the responsibility of overseeing the operation of the TBT Agreement (i.e., Article 13). The TBT Committee152 is unique among WTO committees in some respects. Participation on the committee is often entrusted to technical experts (often with scientific expertise), not to typical trade delegates. In this respect, it resembles the SPS Committee (discussed in the next chapter). It, thus, has evolved over the years into a forum that brings the regulatory and the trade communities together. This is, in and of itself, an achievement the importance of which cannot be overstated. First, the discussions between regulators will help in the mimicking of better regulatory practices. Second, regulators do not necessarily think of the trade impact that their agreed interventions might have. And yet, as we have often stated previously in this book, it is impossible to think of measures that have no trade impact at all. The mandate of the TBT Committee extends to a variety of issues, and it has been quite successful both in advancing the law-making agenda and in settling disputes.153 In the context of the TBT Agreement, initiatives have been taken to reduce the problems posed on international trade as a result of regulatory diversity across WTO members. 5.9.1.1 Reviewing the Operation of the TBT Agreement The TBT Committee has been conducting annual reviews discussing the implementation of transparency provisions (notifications), technical assistance, and disputes involving the TBT Agreement (namely, Article 15.3). At the end of the first three years, and at the end of every following three-year period, it has been conducting a review with the aim of proposing any necessary adjustments to the TBT Agreement. These are the Triennial Reviews, with a view to (Article 15.4 of TBT) “recommending an adjustment of the rights and obligations of this Agreement where necessary to ensure mutual economic advantage and balance of rights and obligations, without prejudice to the provisions of Article 12.”154 At the end of every triennial review, the TBT Committee will issue a report where it will discuss both observed problems in practice and include a list of priorities for future action. In its Fourth Triennial Review of the Operation and Implementation of the TBT Agreement, for example, it issued a report155 that advanced the following priorities: • Good regulatory practice (in the sense that a decision whether there is need to regulate should always precede a decision to regulate) must be encouraged. • The use of SDoC should also be encouraged in order to avoid unnecessary costs with respect to conformity assessment. • Unilateral recognition of results of foreign conformity assessment (Article 6.1 of TBT) should also take place more frequently, if possible, as should participation of foreign
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conformity assessment bodies in domestic conformity assessment procedures (Article 6.4 of TBT). • Finally, the document supports the conclusion of MRAs and notes the conclusion of voluntary MRAs between domestic and foreign conformity assessment bodies (individual laboratories and certification and inspection bodies). Discussions on good regulatory practice continued in the Fifth Triennial Review,156 while discussions have been initiated regarding “regulatory cooperation” across WTO members, defined as follows: Regulatory cooperation between Members is, in essence, about reducing unnecessary regulatory diversity; it is also about limiting the costs associated with necessary regulatory diversity. Regulatory cooperation is premised on the notion that it is possible to remove unnecessary regulatory diversity without preventing Members from achieving their legitimate policy objectives. When fruitful, cooperation between Members—in various forms and configurations—can contribute to the reduction of unnecessary barriers to trade. (italics in the original)157
Regulatory cooperation prominently figures in the agenda of the TBT Committee. Some of it, of course, is already embedded in various TBT provisions, such as international standards, equivalence, and conformity assessment. And then there is widespread practice as well. At one end of the spectrum, there are unilateral efforts to promote a spirit of cooperation. And there is often a long history of initiatives in this respect. With the passage of the 1979 Trade Agreements Act, for example, the US vowed to reduce unnecessary obstacles to trade. More tuned toward cooperation are the recent twin initiatives of the Barack Obama administration. The first is Executive Order 13609 (2012), which requests that federal agencies address unnecessary differences in regulatory requirements between the US and its major trading partners. To this effect, Regulatory Work Plans have been put in place between the US on the one hand, and Canada and Mexico on the other. The second is Executive Order 13659 (2014), which calls for improvements in the data systems and the establishments of single windows where private business can familiarize itself with US regulation. This act calls for the introduction of single windows by the US trading partners, as well an effort to minimize costs from regulatory divergence across trading nations. Some regulatory cooperation already takes place at the regional level as well, such as the free trade area (FTA) between China and New Zealand or the regulatory cooperation schemes between Australia and New Zealand, and between the EU and the US.158 And then, there are also various international organizations and NGOs that keep regulatory cooperation high on their agendas. The aim of the discussions at the TBT Committee is to take stock of existing initiatives and discuss what needs to be done at the multilateral level.
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5.9.1.2 Promoting Transparency The WTO Secretariat has, in concert with WTO members, taken active steps to provide much-needed transparency with respect to measures coming under the purview of the TBT Agreement. We have seen in various parts of this chapter the many mechanisms that the TBT Agreement has put in place in order to ensure transparency: the reasonable interval between notification and entry into force, as well as the inquiry points where traders can learn about regulation, are two of the idiosyncratic features of the TBT Agreement that have greatly helped increase the level of transparency. Through these mechanisms, the TBT Agreement aims to promote not simply “fishbowl transparency,” but “reasoned transparency.” These terms come from Coglianese (2009), who defined them as follows (p. 537): The Obama Administration, as well as most of the organized groups and tech-savvy individuals that advocate open government, have emphasized what could be called fishbowl transparency. The aim is to expand the release of information that can document how government officials actually behave, such as by disclosing meetings held between White House staff and outside groups. But there is another type of transparency, reasoned transparency, that demands that government officials offer explicit explanations for their actions. Sound explanations will be based on application of normative principles to the facts and evidence accumulated by decision makers—and will show why other alternative courses of action were rejected.
The overall record of notifications of measures coming under the purview of the TBT Agreement is remarkable by any reasonable benchmark. Wolfe (2013) hailed it as the best record for transparency in the WTO. Notifications have hit record numbers: 389 in 1995 and 2,239 in 2014 (19,723 in total by the end of 2014). Developing countries accounted for 80 percent of all notifications during 2014, developed countries for 17 percent, and less developed countries (LDCs) for 3 percent (WTO Document G/TBT/36 of 23 February 2015). A number of factors have influenced the surge in the current number, of course. Importantly, the TBT Committee has also facilitated notification by establishing the Notification Submission System (NSS), which allows online notifications of national measures. We will return to this topic once again in chapter 12 of this volume, where we discuss transparency in the WTO in general.159 Yet another notable mechanism for increasing transparency has been the establishment of the TBT Information Management System (IMS),160 which allows users to obtain information about measures communicated to the TBT Committee, on conformity assessment procedures, enquiry points, and other factors. 5.9.1.3 Specific Trade Concerns (STCs) A number of disputes, or requests for additional transparency, which are aptly named “specific trade concerns (STCs),” are routinely submitted to the TBT Committee.161 The majority of STCs are requests for further clarification, followed by claims that the necessity requirement has not been complied with, transparency-related claims, the use of
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international standards, etc.162 Technical regulations are the instrument challenged most often, followed by conformity-assessment procedures. Some 460 STCs had been brought by the end of 2014. Roughly two-thirds of all STCs have been brought once or twice before the TBT Committee, a quarter of them have been brought three to five times, whereas 12 percent have been brought more than five times. Public health, environmental protection, and prevention of deceptive practices are the three stated objectives of the instruments most often challenged. A total of 39 percent of all measures challenged originate in the Asia-Pacific, a quarter in the EU, 16 percent in Latin America, 15 percent in North America, 11.4 percent in the Middle East, and 3 percent in Africa.163 The fact that only a handful of the submitted STCs have reached the panel stage is a testimony to the good work at the committee level, which has managed to resolve the majority of them.164 5.9.2
Technical Expert Groups
A panel adjudicating a dispute coming under the TBT Agreement may, at the request of a party or on its own initiative, establish an expert group to assist it on issues of a technical nature (Article 14.2 of TBT). Note that, contrary to what is the case under Article 13 of DSU, where panels only have the right to appoint experts, TBT experts also can be appointed at the request of the involved parties. Annex 2 to the TBT Agreement sets out in detail the procedure to be followed on this score: § 1 clarifies that the terms of the group will be drawn by the panel; § 2, that only persons with professional standing will participate in the group; § 3 that the group must observe due process; and § 6, that it must submit its report to the panel. The mandate of TBT experts is limited to questions of a technical nature. One would expect scientific expertise to be on occasion very much an issue in this context.165 So far, nevertheless, panels have not taken advantage of this opportunity. 5.10
Concluding Remarks
The TBT Agreement was the first detailed attempt to regulate a subset of instruments (policies) under the purview of Article III of GATT. The SPS Agreement followed. These two agreements were the first multilateral effort to regulate the quality of domestic interventions, the intuition being that in doing so, trade frictions would be reduced. Indeed, even a brief perusal of the list of objectives makes it clear to the reader that the TBT Agreement is a far cry from GATT: The accent now is on international standardization and avoiding unnecessary obstacles to international trade through the enactment of technical regulations, standards, and conformity assessment procedures. It is not about preserving the value of tariff concessions anymore. This is only normal, of course, since as the tariffs become gradually immaterial, it is regulation that segments markets.
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The best proof that trading nations care about trade effects of domestic regulation is embodied in the twin objectives that figure early in the Preamble to the TBT Agreement: international standards and necessity. Necessity is, of course, about thinking cosmopolitan when enacting local: It requires the imposition of measures with the lowest possible negative incidence on trade while pursuing social preferences at home. All international standards are presumed to be necessary. Over the years, new ways to measure trade restrictiveness have been developed and entered the realm of policy discussions.166 5.10.1
The Challenges Posed by the TBT Agreement
The TBT Agreement is proving to be the bridge between the WTO as we know it and the WTO of the future, WTO 2.0. It poses challenges for the overall institutional design of the WTO, the form of future trade integration, and last but not least, the design of dispute settlement adjudication. What has this chapter shown us that the TBT Agreement does? One way to describe the TBT Agreement is as follows: There is a continuum of regulatory cooperation. On one end, there are disciplines imposed on the unilateral expression of social preferences: nondiscrimination, necessity, and the obligation to inform trade partners about technical regulations, standards, and conformity assessment procedures at an early stage. With respect to similar measures, the TBT imposes legally binding obligations. On the other end, we observe regulatory cooperation, mutual recognition, and harmonization. Here, the intensity of obligations imposed varies. Whereas WTO members must base their interventions on relevant and appropriate international standards, there is no obligation to incorporate them in their national legal order. The obligation to observe them starts only after they have unilaterally decided to intervene in an area covered by similar instruments. Recognition can be unilateral, bilateral, and multilateral. Again, there is no obligation to recognize, but WTO members must only respect the MFN obligation if they do. And then there is regulatory cooperation—an area where the TBT Committee has been quite active. A lot of what has been described in this chapter is regulatory cooperation. In practice, though, most of it occurs between homogeneous players. Indeed, as we have repeated many times here, recognition occurs among like-minded players for good reason, since an innate characteristic of this form of integration is trust. Trust is necessary since through recognition, trading nations put their faith in the quality of the regulatory process of a foreign nation, the political economy of which, one can reasonably assume, they do not influence in a decisive manner. The challenge for the WTO is how to ensure its continuing relevance in addressing regulatory barriers that are better addressed within clubs of like-minded players. This is so because nondiscrimination offers no guarantee of market access: access is conditioned upon satisfying the standards in the exporting market. Furthermore, in a three country–one good scenario, nondiscrimination could be a considerable handicap if two of the countries
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enjoy a recognition agreement and the third can only request nondiscrimination. The burden for the outsider will be to demonstrate that its own regulation is equivalent to that of the recognizing partners. This is not an easy exercise, for the reasons explained in this chapter. How can it become easier? Transparency is the necessary first step. This is an area where the TBT Agreement can be proud of its record: notification at an early stage, a one-stop inquiry point, and STCs in the TBT Committee. These three mechanisms have contributed a lot to countries gaining a better understanding of each other’s preferences and policies. The wide participation of developing countries in raising STCs is proof in and of itself that this informal, hybrid system between transparency and dispute adjudication works. The TBT Committee has gone one step further. To maintain the umbilical cord connection to multilateralism, it is necessary that the worries and problems of laggards are addressed. This is what the recent initiative of GRP aims to address. It is a set of voluntary mechanisms heavily focusing on the technical assistance of those needing it in order to meet the challenges of implementing internationally agreed standards and enacting necessary legislation. It urges WTO members to confirm the need for intervention and to examine alternatives before deciding to intervene, and it strengthens their obligation to notify the WTO early enough when there is still time to receive comments.167 The focus of GRP is on addressing the quality of regulatory intervention through voluntary mechanisms that the WTO membership will adhere to only if it is persuaded that it is worth it. What else can be done? A lot. Regulatory cooperation is not the exclusive privilege of the WTO. A series of international organizations and NGOs have gained valuable experience working in this area. Besides the many PTAs that focus on this area, including the UNECE, the OECD, and the FAO, the World Economic Forum (WEF), and the International Centre for Trade and Sustainable Development (ICTSD) are prominent players. In a nutshell, the WTO should become a sort of information exchange mechanism where the regulatory and the trading community will meet, where international organizations and NGOs share their experiences with the WTO, and where the business community will have a chance to contribute its own input. The WTO should aspire to become an osmosis mechanism that will aim to multilateralize cooperation that in the short to medium run will unavoidably take place within clubs of like-minded countries, be it via PTAs or plurilateral agreements. In an era where global value chains gain a bigger share of international trade, regulatory cooperation gains in importance as well. The TBT Agreement has, alas, proved to be a challenge too far for panels. Anchored in the GATT view of disciplines on regulation, panels (and the AB) have not managed to rise to the challenge and provide a coherent framework for addressing complaints under the TBT Agreement. The key reason why this has been the case is, in one simple statement, their unwillingness (or inability) to ask these very basic questions: why the TBT Agreement? What is its rationale and raison d’être? We turn to these questions in the next discussion.
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For now, we conclude by stating that what the TBT Agreement does, and the TBT Committee practices is to bring together two communities that do not necessarily speak to each other on an everyday basis: the regulatory and the trade community. The TBT Agreement is the forum that will sensitize the former to the impact it has on the latter. It is true that some initiatives to this effect have been unilaterally implemented in the domestic scene. Coglianese (2009) discusses the efforts by the Obama Administration to perform ex ante (and sometimes ex post) evaluation of the trade impact of domestic regulatory measures. The TBT Committee is the platform to sensitize everyone to this kind of thinking. 5.10.2
A Test for Addressing Complaints under the TBT Agreement
5.10.2.1 Errors Galore Earlier in this chapter, we pointed to various serious misunderstandings of the key concepts of the TBT Agreement, beginning with the three panels that in 2011 reached irreconcilable interpretations of nondiscrimination. We further quoted verbatim the excerpt from the AB report regarding its understanding of nondiscrimination in US–COOL, only to make the point that the AB had confused nondiscrimination with necessity in this context. But these are not the only errors. Take the requirement, invented by the AB, that LFT must originate exclusively in the legitimate regulatory distinction; otherwise, Article 2.1 of TBT will be violated. What kind of evidence does the plaintiff need to bring forward in order to demonstrate, in a real-world situation, that the exclusive reason for trade effects is a regulation? Even if WTO members had agreed to adopt the best policies in order to achieve their legitimate objectives (an obligation that, as we have shown in this chapter, does not exist in the TBT Agreement), they would still find it hard to meet this standard. The concept of “best” trades off costs against benefits from a global scale, it does not look at borders (at least so long as no distributional constraint is imposed, which is the case for the whole of the WTO Agreement). For example, what if in the tuna disputes, the US provided evidence to the effect that some consumers would buy “dolphin-safe” tuna no matter what, or that some consumers would never buy Mexican tuna because they think that Mexico is purposefully sending migrant workers over the border? How would the standard adopted by the AB, to the effect that a measure is TBT-inconsistent when damage does not stem exclusively from a regulatory distinction, have been met in similar instances? Either the AB will have to backtrack on this requirement or it will have to interpret it in future case law in a very lenient (and one might add, at this stage, unpredictable) manner. This is, of course, not the only instance where the AB has approached the causality requirement in a haphazard manner. Take the US–COOL case again, and look at §§ 7.485ff. The AB suggests that it took into account two econometrics studies, the Informa and the Sumner reports, as well as a few affidavits. It also states that it cannot rely on the Sumner
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report, the only study that discusses attribution of additional costs to segregation of animals (§ 7.506). Neither the Informa study nor the affidavits discuss attribution. And yet, the AB found against the US on this score, claiming that the evidence before it persuaded it that the labeling scheme leads to segregation and additional costs for foreign goods. Which exact evidence persuaded the AB that this has indeed been the case? Problems do not stop here, alas. Following its condemnation in US–COOL, and US– Tuna II (Mexico), the US went back to the drawing board and devised corrective mechanisms in order to address the qualms by the WTO panels and the AB itself. On pp. 37, 67, 68, and 80 of the AB report on US–COOL (Article 21.5–Canada), there are four tables explaining the amended US measure. In short, it aimed to simplify the labels that indicate origin. For example, instead of the misleading “products of the US” designation, Label A would now read “Born, Raised, and Slaughtered in the US”; Label B, which used to read “Product of Canada, US,” would now read “Born in Canada, Raised and Slaughtered in the US,” whereas Label C would now read “Born and Raised in Canada, Slaughtered in the US.” Thus, the US provided a clear separation of the three stages of production (born, raised, and slaughtered). And yet, the US lost again since slaughterhouses would have to incur additional costs resulting from segregation (the causal effect of which had not been proven), which was necessary in order to indicate accurately the label of origin. One might wonder: Why wouldn’t slaughterhouses organize themselves and proceed with Label A slaughters say on Monday, Label B on Tuesday, and Label C on Wednesday? Why should the US be held liable for that? To state that, say, multiorigin beef recordkeeping requirements are higher than in the opposite case is no proof that discrimination has been afforded. The AB seems to suggest that the legitimate objective to request indication of origin can be put into question (and should not be pursued at all), simply because recordkeeping costs have risen. If it is used at all, it should be part of the necessity analysis (where the AB refused to rule in a definitive manner), and at any rate, it comes very close to interpreting the TBT Agreement as an instrument for deregulation, which is not at all the case. In a similar vein, the US revamped its “dolphin-safe” label. It adopted three types of conditions on use of the label: namely, conditions relating to fishing methods, to certifications, and to recordkeeping. With respect to fishing methods: the use of large-scale driftnets, a fish-harvesting method in which a driftnet is placed in water and allowed to drift with the currents and winds for the purpose of entangling fish in the webbing, was not eligible for the label. Furthermore, tuna harvested by setting on dolphins would not be eligible for the label either. Recall that this is the method where fishers “set on dolphins” by encircling them, since schools of tuna (invisible to the fishermen) often swim underneath dolphins (which are visible to fishers since they often swim above the surface). The AB had agreed that this method was particularly harmful to dolphins (§ 289). Other fishing techniques could have access to the label if certification could be provided to the effect that dolphins were not killed or injured in the gear deployments in which tuna were caught.168
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With respect to certifications: in addition to the certification that no dolphin was killed or seriously injured, a purse seine vessel may be labeled “dolphin safe” only upon certification by the captain that no purse seine net was intentionally deployed to encircle dolphins. Within the Eastern Tropic Pacific (ETP) captain’s certification should be accompanied by a statement to this effect from an observer from the AIDCP. No similar additional certification was required for purse seine vessels operating beyond the ETP. The US justification for that was that the measure was calibrated to the risk of killing or seriously injuring dolphins. The risk was much higher inside the ETP than outside. Recordkeeping requirements aimed at ensuring the segregation of tuna caught that could legitimately have access to the “dolphin-safe” label from tuna that could not do so. The US lost yet again. The panel was prepared to accept the US argument with respect to fishing methods, but not the other two types of conditions. A dissenting opinion, however, was expressed. One panelist did pay attention to the fact that the US measure was calibrated to the magnitude of the risk. That much, nonetheless, should be obvious to everybody. Individual WTO members are entrusted with the definition of their risk aversion and the setting of their appropriate level of protection. The measures adopted to serve this purpose must somehow be evaluated in light of the risk they address. If the panel thought that the risk was the same within as it was beyond the ETP, then it should simply have stated as much. It did not. Why were there so many errors? In our view, it is because panels and the AB have never so far asked the single most important question: why the TBT Agreement? Words are contextual by definition—they are not invariances. The term “like products” does not necessarily have the same meaning in GATT and in the TBT Agreement. Indeed, the same AB held as much when it understood the term to have differential meaning in Articles III.2 and III.4 of GATT. In what follows, we first explain why GATT and the TBT Agreement serve different purposes. It is against this background that we will propose our favorite test for compliance with the TBT Agreement. 5.10.2.2 GATT and TBT Are Not Like Products The AB has seen a difference between GATT and the TBT Agreement. It has stated repeatedly that Article 2.1 of TBT should not be likened to Article III.4 of GATT, since the TBT Agreement does not know of a general exceptions clause à la Article XX of GATT. This is why it has interpreted the term “less favorable treatment” differently in the TBT Agreement than it has in the context of disputes arising under Article III.4 of GATT. This is all it has done, though, and it has preferred to interpret the other term (“like product”) appearing in Article 2.1 of TBT as it is in GATT. This is not correct. What is worse, because of the extreme manner in which it has understood the term “less favorable treatment” (e.g., trade effects must exhaustively be attributed to the regulatory distinction), it has turned the TBT Agreement to its head.
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In the GATT regime, nondiscrimination with respect to domestic policies was meant to safeguard the value of tariff concessions. The policy rationale pursued was not an issue. The issue for Article III of GATT is that no unilateral protection, beyond what had been agreed through tariff negotiations, would be afforded to domestic producers. In the cases discussed in chapter 7, volume 1, like Japan–Alcoholic Beverages II and Italian– Agricultural Machinery, there was no policy rationale behind the tax differentiation. This is not to suggest that all tax differentiation occurring around the world totally lacked a policy rationale. The narrow point here is that Article III of GATT did not condition intervention on the pursuance of a policy objective. The opposite is the case in Article XX of GATT. There, assuming that an obligation has been violated, it can be justified only if it aims at achieving a regulatory objective. This is so because the GATT framers agreed that social preferences trump trade liberalization. However, in order to separate cases of genuine pursuance of an objective from the opposite cases, a test for compliance was agreed upon: the intensity of the relationship between means and ends varies, as some subparagraphs require that the means relate to the objective pursued, while others require that the means are necessary to achieve it. What is common across all subparagraphs, though, is that the quality of the regulation is addressed through the test embedded in Article XX of GATT. GATT does not require only nondiscriminatory application of any law, however it is decided (Article III of GATT). GATT requires the adoption of policies that are appropriate (or even necessary) to achieve the objective pursued. GATT requires, in other words, some sort of proof that the policies pursued genuinely aim to pursue an objective that the GATT framers agreed trumps tariff concessions. The rationale for the TBT Agreement is not the protection of tariff concessions (or, perhaps it is more accurate to state that it is not only the protection of tariff concessions). The TBT Agreement (especially the more recent version) was enacted at a moment in time when tariffs hit an all-time low. Its many instruments show clearly that what its framers had in mind was to address the quality of regulatory interventions in the area covered by the agreement. Necessity, international standards and harmonization, GRP provides evidence of the belief of the framers that by addressing the quality of regulation, trade friction would be reduced. Crucially, thus, unlike GATT, the working hypothesis in the TBT Agreement is that a regulation is in place. The whole idea is that a WTO member wants to protect a legitimate objective, and the question is whether its actions match its wishes. To this effect, the first action of the WTO member about to intervene is to think of the counterfactual: Would it be worse off by not intervening? Is an action necessary? No similar obligation exists in Article III of GATT, simply because the focus there is different. In light of all this, we believe that the sequence of analysis by panels and the AB should be the exact opposite of what they have been doing to date. Instead of reviewing consistency with Article 2.1 of TBT first, or even treating nondiscrimination as a parallel obliga-
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tion to the necessity requirement embedded in Article 2.2 of TBT, they should be starting analysis from the question whether the challenged measure meets the requirements embedded in Article 2.2 of TBT. The sequence of analysis makes a difference, for the reasons explained next. 5.10.2.3 TBT Is More Like Article XX and Less Like Article III of GATT In Mavroidis (2013a), we suggested that sequence matters and that panels dealing with TBT disputes should first ask whether the challenged measure (technical regulation or standard)169 is necessary for pursuing a legitimate objective before inquiring into its nondiscriminatory application. The first question to ask should be whether there was a need to regulate in the first place and, if so, whether the adopted measure is the least restrictive option to achieve a unilaterally defined objective. Necessity should not lead panels to perform a balancing test: in the absence of a clear legislative mandate, panels are ill equipped to rank social preferences, which should be decided at the state level. In this endeavor, panels can ask a variety of questions, such as whether recourse should be made to performance instead of product requirements (e.g., should the US insist that a tuna product is “dolphin-safe” only if fished through a particular fishing net, or even if fished with another, equally effective type of net?). They could ask whether a particular type of labeling should be privileged over another type, which had been tried elsewhere with similar results, etc. The key point here is that the judge should ask whether in light of the objective being pursued, the means constitute the least restrictive option that is reasonably available to the intervening WTO member.170 Of course, the analysis in this context would be greatly helped if recourse to an international standard had been made, for all international standards are presumed necessary by legislative fiat. The allocation of burden of proof here should be inspired by the AB report on US– Gambling. The complaining party could point to a measure less restrictive than the one privileged by the regulator, and then it should be up to the defendant to demonstrate why the suggested option was not reasonably available to it. If the response to these questions (Is regulation necessary? Is the measure the least restrictive option?) is negative, there is no need to move to the second step. In the opposite scenario, it is the nondiscriminatory application of a necessary measure with Article 2.1 of TBT that must be assessed. The first leg of this step will be the likeness issue. Likeness in the suggested approach should not be a matter of consumers’ preferences. It should be a matter of satisfying the necessary product characteristics or PPMs (e.g., the government preference, which has passed the hurdle of consistency with Article 2.2 of TBT). The question to ask should not be whether two goods (imported, domestic) are marketlike, but whether they are policylike. Indeed, unless a government disagreed with private preferences, it would not have intervened in the first place. To go back and ask consumers if products are like is like asking a question not of international trade, but rather of domestic constitutional order: does Home (or any WTO member) have the right to
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question consumers’ perceptions? Of course, it does. The benchmark on which it agreed to condition the legality of its actions by adhering to the WTO was the question of necessity of its actions and the nondiscriminatory application of its necessary interventions. Home has the sovereign right to disagree with the preferences of its citizens. If, say, Foreign’s goods are not like goods to Home’s—that is, if they do not meet Home’s regulatory requirements—then there is no need to move to the second step. If they are, though, then the rest of the test is easy to solve: if products are like, the same regulatory treatment should be afforded to them. This approach finds support in the context of the two provisions. Article 2.5 of TBT reads: “A Member preparing, adopting or applying a technical regulation which may have a significant effect on trade of other Members shall, upon the request of another Member, explain the justification for that technical regulation in terms of the provisions of paragraphs 2 to 4.” Paragraphs 2–4 refer to the necessity obligation (Article 2.2 of TBT), which is the obligation to rescind a measure if the circumstances giving rise to it have ceased to exist (Article 2.3 of TBT), and to the in-principle obligation to base regulatory interventions on existing international standards (Article 2.4 of TBT). This is not accidental. These three paragraphs reflect the innate characteristics of a technical regulation, conformity assessment, or both. The obligation not to discriminate concerns the application of measures, is included in Article 2.1 of TBT, and has been excluded from the obligation to justify embedded in Article 2.5 of TBT. The test advocated here is a total reversal of the existing test, and yet it does not represent something that the AB cannot relate to. It is reminiscent of the test that the AB itself developed in its case law under Article XX of GATT (US–Shrimp). It is Article 2.2 of TBT that is the locus to discuss the substantive consistency of a measure with the TBT [playing the role of a subparagraph of Article XX of GATT, say, Article XX(b)], whereas Article 2.1 of TBT emerges as the forum to discuss the consistency in the application of the challenged measure (à la the chapeau of Article XX of GATT). By changing the sequence, the AB will unavoidably focus on the quintessential question to ask in the context of a dispute coming under the aegis of the TBT Agreement (Is the measure necessary?), rather than digressing to issues that led it to treat the TBT Agreement as if government regulation had not happened. 5.10.2.4 Why Sequence Matters The natural question to ask is whether the two approaches (the one currently used by the AB, and the one proposed here) end up with the same result. No, is the short answer, and here is why. Understanding the two obligations (nondiscrimination and necessity) as parallel obligations can lead to the result that a measure could be judged nondiscriminatory even if it is totally unnecessary. Then the question at the compliance level of dispute adjudication
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would be how to modify the original measure in order to ensure that it respects the necessity requirement. What is the guarantee, though, that the new, less restrictive measure still observes nondiscrimination? None. We will now be in the presence of a new measure, and, as a result, we will have to run the test for nondiscrimination all over again. Panels, by dissociating nondiscrimination from necessity, have no benchmark when discussing nondiscirmination other than consumers’ preferences, which governments find unsatisfactory anyway and have adopted regulation to preempt them. Panels risk in other words finding that a TBT measure is nondiscriminatory and necessary, even if they have never asked whether the necessary (least restrictive option) has been applied in nondiscriminatory manner. This is so because in their view, the two obligations run in parallel. This is wrong. Nondiscrimination in the TBT context is intimately linked to the characteristics of the means chosen to achieve the stated ends. Otherwise, it is an empty shell. What matters is that WTO panels first ensure that the challenged measure does not represent an unnecessary burden to international trade. This is what the TBT Agreement is all about.
6
Sanitary and Phytosanitary Measures
6.1 The Legal Discipline and Its Rationale 6.1.1 The Legal Discipline Sanitary and phyto-sanitary (SPS) measures (that is, measures aiming to protect human, animal, and plant life or health from risks arising from pests, toxins, or additives) must, in principle, be based on science. WTO members need to run a risk assessment to this effect that will establish the probability that a certain risk will materialize given specific assumptions. Based on the outcome of this exercise, WTO members can then decide unilaterally on their appropriate level of protection (ALOP). Following this decision, they must adopt measures that are necessary (e.g., the least restrictive means) to achieve their stated objective, that are consistent (e.g., they must respond in similar manner to similar risks), and that apply in a nondiscriminatory manner. 6.1.2 The Rationale for the Legal Discipline Historically, the negotiating rationale for the Agreement on Sanitary and Phyto-sanitary Measures (SPS Agreement) involved an effort to avoid the circumvention of concessions on farm goods. Food safety covers a number of products coming under the purview of this agreement, and it was feared that, through regulatory intervention, WTO members would have been substituting fiscal subsidies (that they all agreed to limit or outlaw in the context of negotiations on the Agreement on Agriculture, as we will see in chapter 8 in this volume) with regulatory subsidies. The SPS Agreement was the insurance policy to avoid circumventions of obligations assumed under the Agreement on Agriculture (AG Agreement).1 It took negotiators many years to persuade the EU to dismantle its common agricultural policy (CAP). The last thing they would like to see is the reemergence of protectionism in a different form. The SPS Agreement does not exhaust its usefulness in acting as an insurance policy for commitments in the farm sector. For one, as we will see later in this chapter, its product
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coverage extends to goods that escape the ambit of the AG Agreement. The SPS Agreement provides a framework for rationalizing policies, as does the TBT Agreement that we examined in the previous chapter. Science-based measures, so the thinking goes, will be at the antipodes of measures that will be the outcome of pressure from domestic producers’ lobbies. To some extent the SPS Agreement reproduces legislative patterns in the realm of public health, food safety, and protection of the environment in some parts of the world, where regulators have been heavily influenced by scientific progress, and have integrated it in the law making process. The US Food and Drug Administration (FDA), and the European Food Safety Authority (EFSA) are notorious examples of this,2 as these entities provide regulators with technical advice regarding harms that foodstuff might carry. This is not the case everywhere though. Countries that pay little or no attention to risks identified by science might be exporting their faulty goods around the world, and propagating hazards. Health hazards can be multiplied through trade. Farm goods are typically goods of mass consumption, and health risks introduced in the importing WTO member through contaminated imported farm goods could become widespread as a result. Diseases can be carried by contaminated foodstuff; examples of this include meat produced from animals infected by the foot-and-mouth disease that affects cloven-hooved animals, or meat from cows infected by Creutzfeldt-Jacob disease, often referred to as “bovine spongiform encephalopathy (BSE),” the notorious “mad cow disease.” The risk of importing diseases is compounded by the often inadequately tested use of technologies aiming at producing efficiency gains in farm production. Research exists regarding goods produced through genetic modification, pesticides, additives, and irradiation. On occasion, it has been proven that similar production processes might have negative external effects on animal/human health, as well as the environment. To make matters worse, regulatory processes are not necessarily immune to political economy considerations. In the name of protecting public health, governments might be tempted to regulate so as to confer advantage to domestic producers. Recourse to scientific evidence can thus help distinguish wheat from chaff. It aims to allow the world community to reap efficiency gains while setting aside processes that are accompanied by substantial social cost. Recourse to scientific evidence has another property: It can serve as a sort of buffer against lobbying pressure. The opposite is also true, alas. Lobbyists might insist in turning their scientific achievements into regulation. The insurance policy against erratic use of scientific evidence is provided by the principle of consistency that we will be discussing in detail in what follows. In short, WTO members will have to adopt similar measures in the face of similar risks and not use scientific evidence à la carte. As we saw in the context of the discussion of the TBT Agreement in chapter 5, the GATT framework was judged inadequate to deal with similar issues. The obligation to apply nondiscriminatory measures falls short of requiring that in principle, decisions
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are made on a sound scientific basis, that the least restrictive measure is privileged, that governments behave consistently when dealing with similar concerns, or a combination. The advent of the SPS Agreement signaled the introduction of these obligations into WTO law. In sharp contrast with Article III of GATT, the SPS Agreement addresses the quality of regulatory interventions, not simply their application. Last but not least, we should note a constitutional dimension that explains the emergence of science-based regulation in some parts of the world, especially the US, Canada, the EU, and the other European countries. It is the transatlantic partners that largely contributed to the negotiation of the SPS Agreement. Historically, there have been some food scares round the world, and a few of them have occurred recently in Europe—foot-and-mouth disease, mad cow disease, and dioxine being the most prominent examples. The EU is, of course, a very responsible regulator by any reasonable benchmark. And yet, disaster struck there. Byrne (2014) correctly concluded that these and similar incidents led to a distrust of governments and their role in handling similar issues. The regulatory response was to involve scientific expertise in a more proactive manner in the regulatory process. Involving science in the regulatory process was thought to be the most appropriate means to counterbalance political economy considerations that governments might be tempted to follow. It was felt that governments were captured by producers’ lobbyists, and unless an “objective standard such as science entered the realm of the regulatory process, the incidents of inadequate health standards and the ensuing dangers for public health would multiply.”3 The example of biotechnology is a very appropriate illustration. Biotechnology has opened up numerous possibilities to farming. Incorporating genes from organisms or rearranging those that exist has increased the resistance of crops to, say, pests, and thus has increased the revenue of farmers. Some unfortunate incidents, on the other hand, have been attributed to the use of biotechnology. Biosafety developed as the counterbalancing unit that would address risks from biotechnology. It is defined in the Cartagena Protocol on Biosafety as “... the need to protect human health and the environment from the possible adverse effects of the products of modern biotechnology.” 6.1.3
Discussion
6.1.3.1 Link to Agriculture The SPS Agreement was negotiated for the first time during the Uruguay round. It was the Negotiating Group on Agriculture that established its terms of reference. Many of the measures originally regarded as SPS measures concerned (and continue to concern) farm goods. It was made clear early on that negotiators aimed to prevent the value of hard-fought tariff concessions on farm goods from being eviscerated through unilateral restrictive measures in the name of public health. The SPS Agreement would be the insurance policy
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to mitigate this risk. In this vein, there was instant agreement that international standards should be presumed consistent with Article XX(b) of GATT, as well as recognition that additional disciplines needed to be elaborated in order to effectively address unilateral behavior regarding responses to public and animal health and life.4 Following the lead of the transatlantic partners and the Nordic countries, negotiators managed to have a first, bracketed (as per the GATT custom) agreement quite early in the process.5 From then onward, a negotiation took place within a negotiating group dedicated to shaping the first SPS Agreement. The original link with the AG Agreement, though, had been established. 6.1.3.2 Science, Uncertainty, Ambiguity, Ignorance The SPS Agreement requests that WTO members, at least in principle, base their regulatory interventions on scientific risk assessment. Risk assessment leads to knowledge of the distribution of probabilities. There is certainty as to the probability that a risk might occur, say, 30 percent of the time if a certain action takes place, although uncertainty might legitimately persist regarding the precise time when it will occur. Based on similar assessments, and depending on whether they are risk neutral or risk averse, societies will decide whether to intervene at all, and if yes, what kind of intervention they will adopt. Science, alas, is not omnipresent. Rather, it is a social construct that exists and develops all the time. Science is universal, and, thus, provides a testable benchmark for measuring protectionist behavior. In fact, it is the most accurate benchmark we have. It is not infallible, though. Science has its limits. There is an opportunity cost in conducting scientific experiments, in the sense that investing in research on mesothelioma might mean that we do not invest in learning about the dangers associated with the use of mobile telephony. Moreover, the area of scientific research will be decided based on various factors, ranging from the seriousness of the issue involved and its impact on social welfare, to feasibility concerns (since science normally develops incrementally and not through “paradigm shifts,” the frequency of which has been grossly exaggerated in popular writings), to pure politics. Although the private sector usually participates in applied and not basic research (because of the substantial uncertainty associated with the latter), it could influence the areas where state-sponsored basic research takes place. Political economy might be equally important when deciding on risk management (or setting the “ALOP,” in SPS parlance). In the presence of a certain risk distribution, and assuming that a society is not risk neutral, lobbies can tilt government preferences toward intervention that would enable sales of their patented products in the most efficient manner. They could even convince a riskneutral government to suddenly become risk averse. Societies might want to take measures, even when there is uncertainty as to whether a risk might occur—that is, when a risk has been observed, but it is impossible to measure how often the adverse event will occur. Then, there could be ambiguity about the risk
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occurring at all, rather than mere uncertainty about the risk distribution. The first symptoms of mad cow disease date from the early twentieth century, but scientific knowledge about the disease came years later. Regulation could have taken place preventively, based on, say, unusual observations, but it did not. And then, there is another state to consider: ignorance. This could be the case, for example, when there is absolutely no information about what causes the observed phenomena. To better understand the relationship between these terms,6 a distinction is drawn between knowledge about likelihoods and knowledge about outcomes. The former is further distinguished between firm, shaky, and no basis for establishing probabilities. The latter consists of a continuum of outcomes, ranging from discrete to poorly defined. Depending on the combination between the various elements of the two variables, we can end up with a state of uncertainty, ambiguity, or ignorance. “Uncertainty” is the state where there is a continuum of outcomes, but we have no basis for establishing the probabilities they will occur. “Ambiguity” is the state where outcomes are poorly defined, but we have a firm (or, at the very least, some) basis for probabilities. Finally, “ignorance” is the state where we have no basis for probabilities and outcomes are poorly defined.7 The SPS Agreement does not explicitly refer to uncertainty, ambiguity, and ignorance. It provides that decisions must be based on scientific risk assessment, or on a need for precaution, when science is basically lacking. Should precaution, in WTO parlance, be confined to cases of ignorance, or should we understand precaution as an antidote to uncertainty and ambiguity as well? It seems sensible, for the reasons explained later in this chapter, to assume that the latter should be the case. The view of precaution as an antidote to uncertainty, ambiguity, and ignorance is very much in line with the idea that there is no firewall between science and no science, that science is an ever-evolving construct, and that regulatory responses might be warranted regardless of the degree of certainty about scientific evidence. Ultimately, regulation is the privilege of the politicians. In the very famous and oftquoted words of Churchill, “science should be on tap, not on top”: regulation should not be the hostage of scientific evolution; rather, it should be aided by it. The SPS negotiating record to which we referred previously, as well as the many provisions that we will be discussing later in this chapter, offer ample support for this thesis.8 6.1.3.3 Proxies to Detect Unlawful Behavior The SPS Agreement innovates, in comparison to Article III of GATT, since it incorporates a more elaborate test to detect whether a measure operates so as to afford protection to domestic production.9 The SPS Agreement includes a series of proxies, such as necessity, scientific evidence, consistency, and international standards, which will help distinguish beggar-thy-neighbor behavior from policies genuinely aiming at protecting legitimate objectives (such as preserving human and animal health and life and concern for the environment).
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The class of beggar-thy-neighbor policies outlawed by the SPS Agreement is wider than that outlawed by GATT. Let us assume that Home does not produce widgets but wants to exclude them from its market anyway because, in its view, they are associated with adverse health implications. A sales ban would never run afoul of Article III of GATT since there is no discrimination issue here. It might, however, be caught by the disciplines included in the SPS Agreement if the measure is not necessary to achieve the stated regulatory objective, if it is not based on scientific evidence, or if it is not consistently applied. 6.2 The Relationship with GATT and the Other Annex 1A Agreements 6.2.1 The Relationship with GATT The SPS Agreement is an Annex 1A Agreement. Its relationship with GATT is regulated in the General Interpretative Note that we discussed in chapter 1, volume 1. 6.2.2 The Relationship with the TBT Agreement The relationship between the TBT and SPS Agreements is regulated in Article 1.5 of TBT. This provision states that the SPS- takes precedence over the TBT Agreement.10 Consequently, a measure that simultaneously falls under GATT, the TBT Agreement, and the SPS Agreement first should be examined under the SPS. If the SPS is inapplicable, then the review should take place under the TBT (by virtue of the General Interpretative Note, which gives precedence to the TBT over GATT). As a last resort, if the TBT is inapplicable, the measure should be reviewed under GATT. It could also be the case that different aspects of the same regulation can come under different agreements. Take, for example, the case of genetically modified organisms (GMOs). Regulation of GMOs, in the sense of which GMOs can be lawfully sold in a given market, and under what conditions, is an issue that comes under the aegis of the SPS Agreement, whereas labeling requirements regarding GMOs would fall under the TBT Agreement.11 6.2.3 The Relationship with the AG Agreement The SPS Agreement does not make references to the AG Agreement, the evidence of a link throughout the negotiating record notwithstanding. The opposite, however, is the case: Article 14 of AG states that WTO members have agreed to give effect to the SPS Agreement. This provision aims to underscore the point that we have made previously, namely that concessions on farm products should not be undone through dubious regulatory measures. Annex 1 of the SPS Agreement, and especially footnote 4, clarifies that the coverage of the SPS Agreement is not limited to that of the AG Agreement.
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Coverage SPS Measures
According to Article 1.1 of SPS, the agreement applies to all SPS measures that affect international trade. Two questions arise, then: • What is an SPS measure? • When do SPS measures affect international trade? SPS measures are defined in Annex A of the SPS Agreement: Any measure applied: • to protect animal or plant life or health within the territory of the Member from risks arising from the entry, establishment or spread of pests, diseases, disease-carrying organisms or disease-causing organisms; • to protect human or animal life or health within the territory of the Member from risks arising from additives, contaminants, toxins or disease-causing organisms in foods, beverages or feedstuffs; • to protect human life or health within the territory of the Member from risks arising from diseases carried by animals, plants or products thereof, or from the entry, establishment or spread of pests; or
• to prevent or limit other damage within the territory of the Member from the entry, establishment or spread of pests. SPS measures include all relevant laws, decrees, regulations, requirements and procedures including, inter alia, end product criteria; processes and production methods; testing, inspection, certification and approval procedures; quarantine treatments, including relevant requirements associated with the transport of animals or plants, or with the materials necessary for their survival during transport; provisions on relevant statistical methods, sampling procedures, and methods of risk assessment; and packaging and labeling requirements directly related to food safety. It follows that it is measures aimed at addressing pests and diseases and dealing with risks arising from additives, contaminants, and toxins that come under the purview of the SPS Agreement. It is not thus that all pests and diseases can be addressed through SPS measures. The origin of the pest and/or disease is decisive when it comes to circumscribing the coverage of the SPS Agreement. SPS measures protect humans and animals from food-borne health risks, and humans, animals, and plants alike from pests and diseases.12 In Australia–Apples, the AB faced a challenge by New Zealand against an Australian measure aimed to protect apples from “fire blight and apple leaf-curling midge” (ALCM). It discussed at the outset whether the Australian measure was suitably understood as an SPS measure and held to this effect (§ 173):
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Whether a measure is “applied ... to protect” in the sense of Annex A(1)(a) must be ascertained not only from the objectives of the measure as expressed by the responding party, but also from the text and structure of the relevant measure, its surrounding regulatory context, and the way in which it is designed and applied. For any given measure to fall within the scope of Annex A(1)(a), scrutiny of such circumstances must reveal a clear and objective relationship between that measure and the specific purposes enumerated in Annex A(1)(a).
The objective (i.e., purpose), the text, and the structure of a measure are thus relevant considerations when deciding whether a measure comes under the aegis of the SPS Agreement. The Panel on EC–Approval and Marketing of Biotech Products13 added that the purpose of an SPS measure can be expressed in terms of a requirement, or of a procedure that should be followed (§ 7.149). In Australia–Apples, the AB underscored (§ 176) that the wide ambit of the measures covered by the SPS Agreement is evidenced by the terms “all relevant laws, decrees, regulations, requirements, and procedures” appearing in Annex A, § 1. Only measures attributable to a government can come under the purview of the SPS Agreement. WTO members are required to take reasonable measures to ensure that bodies other than governmental bodies will also observe the SPS Agreement (Article 13 of SPS).14 Unlike the TBT Agreement, no distinction exists between technical regulations and standards. All measures coming under the purview of the SPS Agreement are legally binding on their addressees in the sense that foreign products might be denied market access unless they meet the established requirements. Measures that come under the purview of the SPS Agreement must, besides their characteristics discussed previously, also affect international trade. It is very hard, if not impossible, to think of measures that do not at least indirectly or potentially affect international trade. This issue is rarely if ever raised before panels. An exception to this is the Panel on India–Agricultural Products. In this case, India had imposed a series of import prohibitions to protect its market from avian influenza (AI), also known as “bird flu.” Bird flu is described by the World Health Organization (WHO) as “an infectious viral disease often causing no apparent signs of illness,” and by the Organisation International des Epizooties (OIE) as a “highly contagious viral disease affecting several species of food-producing birds” (§ 7.149). Bird flu can infect humans. We will discuss the facts of this case in more detail later in this chapter, when we discuss the relevance of international standards to the SPS Agreement. Suffice to say at this point that one of the questions before the panel was whether the import ban imposed by India “affected international trade.” Confirming the wide understanding of the term in practice, the parties to the dispute and the panel agreed that this was indeed the case (§§ 7.155–158). Indeed, it could hardly be otherwise. The term “affect,” without any qualification appearing in Article 1.1 of SPS, leaves little room for doubt that the intent of the framers was to capture even cases that only indirectly or potentially have an impact on international trade.
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Private Standards
Recall from our discussion in the previous chapter that the issue of consistency of private standards with the WTO was raised for the first time before the SPS Committee in 2007. There are some differences between the TBT and the SPS regimes regarding their prima facie relevance to private standards, but the overall conclusion nevertheless remains the same. At this moment, the relevance of the SPS Agreement to private standards still needs to be clarified. The better arguments, nonetheless, lie with those who take the view that the WTO does not discipline private standards, as they are the expression of private, not state, behavior. The boundaries between the two are not always clear, though; hence the relevance of the issue. 6.3.2.1 The Relevance of the SPS Agreement to Private Standards Article 13 SPS of the SPS Agreement reads in part:15 Members shall take such reasonable measures as may be available to them to ensure that nongovernmental entities within their territories, as well as regional bodies in which relevant entities within their territories are members, comply with the relevant provisions of this Agreement.
The question arises whether reference to “non-governmental entities” covers private economic operators as well. The difference between this and the corresponding formulation embedded in the TBT Agreement is that the latter requests that nongovernmental entities have the “legal power” to enforce standards; otherwise, no responsibility for WTO members exists. This requirement is here, and the Annex to the SPS Agreement (Annex B) that contains the definitions of the key terms appearing in the agreement does not include interpretation of the term “non-governmental entities.” Is the omission voluntary? Or is it because the subject matter of the SPS Agreement led people to believe that similar tasks can be performed only by government bodies? Most likely, it is the latter, since it is societywide preferences that are being pursued. Still, the complaint lodged by Saint Vincent and Grenadines discussed in the previous chapter showed that one could legitimately cast doubt on whether this is indeed the case. Discussions in the context of the SPS Committee on this issue are evidence of disagreements across the membership as to what exactly comes under the current SPS mandate and what does not. 6.3.2.2
SPS Committee Practice
The SPS Committee spent considerable time and effort debating the issue of private standards following the complaint by Saint Vincent and Grenadines that we discussed in chapter 5.16 A Working Group on Private Standards was established,17 and three concrete
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steps were adopted: a questionnaire was sent to the membership; a compilation of replies was put together; and finally a document was issued with possible actions.18 The Working Party recommended in its report19 that certain actions should be undertaken in the realm of private standards. It called them “Possible Actions for the SPS Committee Regarding SPS-Related Private Standards.” At its March 2011 meeting, the committee adopted five actions put forward by the Working Party.20 Among those upheld is the issue to discuss a working definition of private standards without prejudging the scope of the SPS Agreement that we referred to earlier. Action 1 concerned the elaboration of a definition of “private standard.” Actions 2–5 concerned the promotion of information exchanges between the SPS Committee, the relevant international standard-setting organizations, WTO members, entities involved in SPS-related private standards,21 and the WTO Secretariat. Action 2 is about establishing an information exchange mechanism between the SPS Committee and the “Three Sisters,” as they are referred to in WTO parlance—that is, the OIE, the Codex Alimentarius, and the International Plant Protection Congress (IPPC)—the three standard-setting institutions explicitly referred to in the SPS Agreement. Action 3 provided that negotiations under the SPS Committee, and negotiations under different forums in the WTO on the issue of private standards should be linked in an effort to avoid duplication and inconsistencies as well. Action 4 concerned the discussion between WTO members and private standard-setting entities in their sovereignty. In this context, China had proposed (and some have implemented) that WTO members, in doing this, should attempt to have the private standardsetting institutions observe the Code of Good Practice, as well as the Six Principles that the TBT Committee had adopted. Like Action 2, Action 5 deals with the relationship between the SPS Committee and the “Three Sisters.” It recommends that the four institutions work together toward developing informative material regarding private standards. Actions 2 to 5 have not caused controversy, and negotiations across WTO members have been progressing quite well.22 Eventually, WTO members agreed to Action 6, whereby an information exchange mechanism regarding the operation of private standards would be established across WTO members. Six more actions were proposed on which, at the moment of writing, no consensus could be reached.23 Action 7 aims to establish some sort of permanent forum where private standards will be discussed. Action 8 is an invitation to WTO members to develop guidelines to implement Article 13 of SPS—that is, the very provision dealing with the implementation of the SPS Agreement. Action 9 aims to enhance transparency at the WTO level regarding private standards that are developed within the sovereignty of the WTO membership.
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Action 10 aims at developing a Code of Good Practice for private standards. Action 11 concerns the elaboration eventually of guidelines that will allow WTO members to liaise with entities involved in the preparation of private standards. Finally, Action 12 is about asking the question of relevance of the WTO Agreement on private standards. Action 1 has proved to be the most elusive among all the agreed actions. Discussions have focused on the development of the following working definition of “SPS-related private standards”: “SPS-related private standards are requirements related to food safety, animal or plant life or health developed [and] [and/or] applied by [entities other than governments] [non-governmental entities].”24 The bracketed terms reflect the disagreements across WTO members. Developed countries have held that private standards do not fall within the mandate of the SPS agreement, and hence would rather have no definition at all, or else have an innocuous definition that would not be perceived as acceptance that they come under the aegis of the WTO. Since WTO members had agreed to develop a working definition, though,25 they engaged in the conversation. However, they opposed the use of the term “non-governmental entities” for fear of encouraging the link with Article 13 of SPS. Most developing countries have taken the opposite view. The next proposed definition did not make much headway either: “An SPS-related private standard is a written requirement or a set of written requirements of a non-governmental entity which are related to food safety, animal or plant life or health, and for common or repeated use.”26 This is not very informative, although a couple of precisions were introduced. Private standards must be “written” documents that are meant to “standardize” practice. No agreement could be reached on this definition, though. Negotiators established an “Electronic Working Group,” led by China and New Zealand, which tried to develop a new definition. Their current suggested definition of an SPS-related private standard is: “A written requirement or condition, or a set of written requirements or conditions, related to food safety, or animal or plant life or health that may be used in commercial transactions and that is applied by a non-governmental entity that is not exercising governmental authority.”27 This definition has yet to be agreed upon by the WTO membership. We conclude this discussion in the same way that we did in the previous chapter. Depending on the involvement of “state authority,” private standards could be subjected to or escape the authority of the WTO SPS Agreement. At the moment of writing, though, this is very much an issue under negotiation. The WTO is searching for a horizontal solution regarding private standards that will apply to all agreements coming under the aegis of the WTO that deal with private standards.
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International Standards
As is the case in the TBT Agreement, one should not confuse private and international standards, even though the standard-setting organizations (SSOs) that issue international standards are not necessarily vested with public (i.e., state) authority. Although there are definitional issues regarding the precise ambit of the term “international standard,” there should be no doubt that what the SPS framers had in mind was standards issued by international SSOs, like the Food and Agriculture Organization (FAO). 6.4.1 Defining International Standards Like the TBT Agreement, the SPS Agreement does not contain a definition of “international standard.” It does refer explicitly to three standard-setting institutions, namely: • The Codex Alimentarius Commission (CAC),28 a joint venture of the FAO and the WHO, which issues standards regarding food additives, veterinary drug and pesticide residues, contaminants, methods of analysis and sampling, and codes and guidelines of hygienic practice • The World Animal Health Organization, previously known as OIE, its French name (Office international des epizooties), which issues standards regarding animal health and zoonoses (i.e., infectious animal diseases) • The International Plant Protection Convention (IPPC), which issues standards for plant health All three SSOs are explicitly mentioned in the body of Article 3.4 of SPS, and in Annex A, § 3 to the SPS Agreement. The list is of an indicative nature. Annex A, § 4 to the SPS Agreement reads: “For matters not covered by the above organizations, appropriate standards, guidelines and recommendations promulgated by other relevant international organizations open for membership to all Members, as identified by the Committee.” If the committee has not issued any decisions to this effect, panels have the power to identify institutions in this context, of course.28 WTO members have two possibilities before them. If the international standard meets what they deem to be an ALOP, they must base their intervention on it. If they do so, then they can profit from the fact that international standards are considered necessary to meet a stated objective. The eventual complainant would have a mountain to climb in order to demonstrate that the intervening member has violated its obligations under the SPS Agreement. WTO members can deviate from an international standard only in cases where they are seeking for a higher standard of protection than that embedded in the international standard. To this effect, Article 3 of the SPS, entitled “Harmonization,” deals with the
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relationship between SPS measures and international standards. It distinguishes three scenarios: • When a WTO member adopts an SPS measure that “conforms” to an international standard (Article 3.2 of SPS) • When the SPS measure adopted is “based on” an international standard (Article 3.1 of SPS) • When a WTO member decides to adopt a level of protection higher than that embedded in the international standard (Article 3.3 of SPS) The legal implications are different each time, and they were discussed in EC– Hormones, where the AB faced the following issue: The EU had banned the sale of hormone-treated beef (both domestic and imported) on the ground that it was dangerous to human health. In doing that, the EU had decided to deviate from an international standard. The AB had to address the extent to which the EU was required to shape its SPS measure in absolute conformity with the relevant international standard. It disagreed with the panel, which had held that absolute conformity was required (§ 177). In reaching this conclusion, the AB took the view that the intention of the parties was not to vest international standards with broad powers that would require absolute conformity between them, on the one hand, and national SPS measures, on the other (§ 165). The AB did not go any further on this score. This finding was peripheral to the overall judgment anyway, since the EU had not even used elements of the relevant standard. The relevant passage of the AB is quite important, though, and we will cite it in full here because it details the legal consequences of each of the three alternatives (§§ 170–172): Under Article 3.2 of the SPS Agreement, a Member may decide to promulgate an SPS measure that conforms to an international standard. Such a measure would embody the international standard completely and, for practical purposes, converts it into a municipal standard. Such a measure enjoys the benefit of a presumption (albeit a rebuttable one) that it is consistent with the relevant provisions of the SPS Agreement and of the GATT 1994. Under Article 3.1 of the SPS Agreement, a Member may choose to establish an SPS measure that is based on the existing relevant international standard, guideline or recommendation. Such a measure may adopt some, not necessarily all, of the elements of the international standard. The Member imposing this measure does not benefit from the presumption of consistency set up in Article 3.2; but, as earlier observed, the Member is not penalized by exemption of a complaining Member from the normal burden of showing a prima facie case of inconsistency with Article 3.1 or any other relevant Article of the SPS Agreement or of the GATT 1994. Under Article 3.3 of the SPS Agreement, a Member may decide to set for itself a level of protection different from that implicit in the international standard, and to implement or embody that level of protection in a measure not “based on” the international standard. The Member’s appropriate level of protection may be higher than that implied in the international standard. The right of a Member to determine its own appropriate level of sanitary protection is an important right.
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6.4.2 Measures That Conform to International Standards When an SPS measure conforms to an international standard, it benefits from the presumption of compliance with the SPS Agreement. There is a statutory presumption that international standards respect the necessity requirement (Article 3.2 of SPS).29 In EC–Hormones (US), the AB specified that the presumption of conformity established in Article 3.2 of SPS is rebuttable (§ 170). There has been no case so far, though, where a complainant has attempted to defeat this presumption. Indeed, the burden of proof should be quite demanding. The AB in EC–Hormones (US) had the opportunity to explain its understanding of the rationale for Article 3.1 of SPS (§ 177): ... In generalized terms, the object and purpose of Article 3 is to promote the harmonization of the SPS measures of Members on as wide a basis as possible, while recognizing and safeguarding, at the same time, the right and duty of Members to protect the life and health of their people. The ultimate goal of the harmonization of SPS measures is to prevent the use of such measures for arbitrary or unjustifiable discrimination between Members or as a disguised restriction on international trade, without preventing Members from adopting or enforcing measures which are both “necessary to protect” human life or health and “based on scientific principles,” and without requiring them to change their appropriate level of protection.
Before the enactment of the TBT and SPS agreements, standards did not have decisive value in GATT law. Lin (2014) perceptively argued that, endowing them with considerable legal effect could have an unwanted negative by-product. Standard-setting institutions could become more politicized. Indeed, WTO members, for one, would have more incentive to attempt to influence the process and adopt at the international level standards that reproduce their own perceptions of food safety. Recall from the discussion in the previous chapter that Büthe and Mattli (2011) reached similar conclusions when examining the standard-setting institutions that were relevant to the TBT Agreement.30 From a pure legal perspective, though, what matters is whether an entity is recognized as a standard-setting institution competent to elaborate and adopt international standards. 6.4.3 Measures Based on International Standards When it is “based on” an international standard (that is, when it embodies some of its elements, but not all), it does not benefit from the presumption of conformity with the SPS Agreement. The burden of proof stays with the complainant to make a prima facie31 case that Article 3.1 of SPS has been violated. The Panel on India–Agricultural Products held that the language used in Article 3.1 of SPS (“based on”) is less rigorous than that used in Article 3.2 of SPS (“conform”). Hence, in this panel’s view, failure to meet the threshold established in Article 3.1 would ipso facto lead to violation of Article 3.2 as well (§ 7.202). Recall from our brief discussion earlier in this chapter that India had adopted measures to address AI, or bird flu, an infectious viral disease that arises in birds, and particularly in wild water fowl. It can be
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transmitted to domestic poultry if live infected poultry is imported, and it can be transmitted to humans who work with live poultry infected in slaughterhouses. There is, nonetheless, no evidence of transmission if the infected meat has been previously cooked. Evidence of transmission of AI to humans is weak, but the potential is huge. The World Animal Health Organization has adopted nonbinding standards on this in a document called the “Terrestrial Code.” It distinguished three types: notifiable avian influenza (NAI), highly pathogenic notifiable avian influenza (HPNAI), and low pathogenicity notifiable avian influenza (LPNAI). If it is sufficiently deadly, then bird flu is considered HPNAI; if not, it is LPNAI. The Terrestrial Code does not allow any import bans on goods other than poultry, including wild birds. India had banned all imports and had banned sales of domestic poultry only within a radius of 10 km, counting from the area where domestic goods had been infected. We will return to this last point when we discuss Article 6 of SPS later in this chapter. For now, we are concerned with the US claim that the Indian measure was probably based on, but did not conform to, the international standard. In this case, the panel held that the Indian measure did not conform to the international standard since the standard was not envisioning an import ban on poultry in order to address AI (§ 7.239). In the panel’s view, the challenged SPS measure and the relevant international standard contradicted each other (§ 7.269), since India had imposed bans when no bans should be imposed in the first place (§ 7.272). The AB confirmed the panel’s findings in this respect (§§ 5.75ff.).32 6.4.4
Measures Deviating from International Standards
The third scenario is where a WTO member deviates from an international standard. Article 3.3 of SPS makes it clear that deviations from international standards are permissible. The conditions for deviating are stricter than in the TBT Agreement. WTO members can deviate from an international standard only if they choose a level of SPS protection higher than that provided by the international standard. One can imagine two scenarios. The first scenario is described in a footnote to Article 3.3 of SPS: For the purposes of paragraph 3 of Article 3, there is a scientific justification if, on the basis of an examination and evaluation of available scientific information in conformity with the relevant provisions of this Agreement, a Member determines that the relevant international standards, guidelines or recommendations are not sufficient to achieve its appropriate level of sanitary or phytosanitary protection.
For this purpose, a WTO member will need to perform a risk assessment in accordance with the provisions of the SPS Agreement that we discuss next. This question arose in EC–Hormones (US), and the AB confirmed this view (§§ 175 and 177).
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The second scenario is when a WTO member is not satisfied with the level of protection that an international standard promotes, but it has no scientific justification to back the higher level of protection that it seeks. In this case, its measure could be based on precaution, but then the WTO member would have to comply with Article 5.7 of SPS (discussed later in this chapter). This could be the end of the Hormones saga, the dispute between the EU and the US that we will be discussing in more detail later in this chapter. The EU has deviated from an international standard and could still invoke that it did so on precautionary grounds, since there is no science backing a higher level of protection than that embedded in the relevant international standard. The allocation of burden of proof in the case of deviation was discussed first by the Panel on EC–Hormones (US), which had found that the burden rested with the deviating party (the EU) to prove that its deviation from the relevant international standard was justified under the SPS Agreement (§§ 8.86ff). The AB disagreed, reversing this finding. In its view, WTO members that choose not to use an international standard should not be penalized for that decision (§ 102). Therefore, it held, it should be up to the complainant to establish that the regulating member could have attained its objectives by sticking to the international standard and that, consequently, no need for deviation was warranted (§§ 104 and 172). We have explained in the previous chapter why this allocation of the burden of proof is illogical, and our analysis there applies here as well. Assuming that the complainant has made a prima facie case, it will be up to the defendant to demonstrate that its measure does indeed conform with Articles 5.1 and 5.2 of SPS.33 In India–Agricultural Products, the question was which international standard was relevant in order to decide on the claim by the US. The Terrestrial Code, which aimed to address AI, was renewed every year. The question was whether the standard that formed the basis of the challenged measure (20th edition), the standard when the panel was established (21st edition), or the one in effect when the panel was deliberating (22nd edition) would be the relevant version. Yes, there is a “moving target” issue, as the panel noticed, since the challenged measure had been based on the 20th and not the 21st edition. The panel heeded the fact that the OIE was requesting that SPS measures be based on the latest available information (22nd edition), but ended up concluding that the 21st edition would provide the benchmark for evaluation (§§ 7.206ff., and especially 7.213). The panel took comfort in the fact that the parties to the dispute had agreed that the 21st edition reflected the standard that the panel should take into account (§ 7.206). This is not an unproblematic finding, though, since the new standard might contain information that India legitimately could not have taken into account. There was yet another interesting issue in India–Agricultural Products. The international standard (the OIE’s Terrestrial Code) covered a series of categories of products, but not live pigs and pathological material and biological products from birds. India had added these two product categories in the import ban that it imposed, and it still maintained that
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its measures were based on the Terrestrial Code. The panel held that since there was no international standard dealing with the two product categories, the consistency of India’s measures had to be evaluated using Article. 5.1, 5.2, and 5.6 of SPS as the benchmark, and not Article 3 (§ 7.227). Article 5 of SPS deals with the obligation to perform a scientific risk assessment that will provide the basis for adopting SPS measures. We turn to this discussion in what follows. 6.5
Unilateral Measures Must Be Based on Science
Regardless of whether a WTO member deviates from an international standard or whether it regulates an area where no relevant international standard exists, it must, in principle, base its measures on “scientific principles and ... not maintained without sufficient scientific evidence” (Article 2.2 of SPS). “Based on” science means that the regulating WTO member must run a scientific risk assessment to show that a certain risk materializes when certain conditions have been met (Article 5 of SPS). During the negotiations, the term “based on” was considered to be synonymous with the term “consistent with,” the former being preferred by the Cairns group and the latter by the US.34 The preeminence of scientific proof and the role it played during the negotiating process cannot be overstated. For some, it was the most efficient way to curb unnecessary trade obstacles, the very purpose of negotiating the SPS Agreement. We read, for example, in the proposal tabled by the Nordics: The objective of an SPS discipline should be to ensure that, consistent with well-established scientific evidence, where available, SPS measures are only applied to the extent necessary to protect human, animal or plant life or health, and that they are not applied in a manner that creates arbitrary, disguised or unjustifiable obstacles to international trade.35
Risk assessment is the process that will lead to the identification of risk. Based on the outcome, WTO members will pick their ALOP, and their measures will serve to attain the level of protection they seek. 6.5.1 Risk Assessment Based on Scientific Principles Three provisions deal with the obligation to “base” SPS measures on science: Articles. 2.2, 5.1, and 5.2 of SPS.36 While the first one reflects the general obligation to base measures on scientific principles, the other two explain how to do that through the conduct of a risk assessment. These provisions, according to the AB, aim to strike the appropriate balance between the interest to promote world trade and the interest to protect the life and health of humans (Australia–Salmon, § 177).37 In EC–Hormones (US), the AB held that this provision must be read in tandem with Article 5.1 of SPS, which provides for the obligation to ensure that SPS measures are based on risk assessment.38 In this case, the AB confirmed a finding by the panel to the effect that the EU had violated Article 5.1 of SPS. It went on to state that “under the
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circumstances, the necessity or propriety of proceedings to determine whether Article 2.2 of the SPS Agreement has also been violated is not at all clear to us” (§ 250). Then, in a subsequent case (Australia–Salmon), the AB explicitly acknowledged that Article 5.1 of SPS is lex specialis to Article 2.2 of SPS (§ 180): ... the Panel considered that Article 5.1 may be viewed as a specific application of the basic obligations contained in Article 2.2 of the SPS Agreement... We agree with this general consideration and would also stress that Articles 2.2 and 5.1 should constantly be read together. Article 2.2 informs Article 5.1: the elements that define the basic obligation set out in Article 2.2 impart meaning to Article 5.1. (italics in the original)
The AB added in the same report that a violation of either Article 5.1 or 5.2 of SPS amounted ipso facto to a violation of Article 2.2. The opposite, however, is not true, since the obligation of Article 2.2 of SPS was, in the AB’s view, more generic than that reflected in Articles 5.1, and 5.2 (§ 138).39 The AB confirmed this reading of the three provisions in India–Agricultural Products (§§ 5.12ff.). The question, of course, is: How can it be that a measure is based on scientific principles (Article 2.2 of SPS) without running a risk assessment (Articles 5.1, and 5.2)? Regardless of whether they run their own assessment or whether they refer to an assessment run by someone else, no measure can be based on scientific principles absent risk assessment. The AB has never explained itself on this score, and this finding should go down as yet another unintelligible finding by this body. The AB has described “risk assessment” as “a process characterized by the systematic, disciplined and objective enquiry and analysis, that is, a mode of studying and sorting out facts and opinions.”40 Scientific evidence will first need to point to a “risk,” its assessment being the second step toward meeting this obligation.41 Once the risk has been discovered and assessed, then WTO members are free, depending on their level of risk aversion, to choose their policies in this respect—that is, they can determine their own ALOP, which need not coincide with that of other WTO members. Societies are asymmetrically risk averse, and the WTO condones negative integration in this respect anyway. 6.5.1.1 Risk Must Be Identifiable The AB in EC–Hormones (US) explained that the risk must be identifiable, not a mere hypothetical possibility (§ 186): In one part of its Reports, the Panel opposes a requirement of an “identifiable risk” to the uncertainty that theoretically always remains since science can never provide absolute certainty that a given substance will not ever have adverse health effects. We agree with the Panel that this theoretical uncertainty is not the kind of risk which, under Article 5.1, is to be assessed. (italics in the original).
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The AB, in the immediately following paragraph of the same report, held that the risk envisaged in the SPS Agreement is not just a laboratory risk, but a real-life risk that takes into account behavioral factors42 (§ 187): It is essential to bear in mind that the risk that is to be evaluated in a risk assessment under Article 5.1 is not only risk ascertainable in a science laboratory operating under strictly controlled conditions, but also risk in human societies as they actually exist, in other words, the actual potential for adverse effects on human health in the real world where people live and work and die.43
Both statements, their problematic expression notwithstanding, point to the direction of the counterfactual—that is, an improbable (if not impossible) risk altogether—and this is probably what the AB aimed to caution against. Where to draw the line between probable and improbable risk is far from being crystal clear, of course, and it is a moving target anyway: by expanding the frontiers of knowledge, the scientific community alters the relationship between probable and improbable risk. 6.5.1.2 Two Types of Risk Assessment The term “risk assessment” is defined in Annex A § 4 to the SPS Agreement: Risk assessment—The evaluation of the likelihood of entry, establishment or spread of a pest or disease within the territory of an importing Member according to the sanitary or phytosanitary measures which might be applied, and of the associated potential biological and economic consequences; or the evaluation of the potential for adverse effects on human or animal health arising from the presence of additives, contaminants, toxins or disease-causing organisms in food, beverages or feedstuffs. (italics in the original)
There are, thus, two types of risk assessment.44 All risks arising from the presence of additives, contaminants, toxins, or disease-causing organisms in food, beverages, or animal feed, must be assessed and their potential effects on human or animal life evaluated (“Risk assessment I”). On the other hand, when pests or diseases are concerned, the SPS Agreement provides for assessment of the likelihood of a pest or disease entering, establishing, and spreading, and the associated potential biological and economic consequences (“Risk assessment II”). Whereas it is the “potential” effects that must be assessed in Risk assessment I, it is the “likelihood” of a pest entering a particular market that must be assessed in Risk assessment II. There are, thus, different evidentiary standards associated with the two types of risk assessment (potential and likelihood), the standard with respect to Risk assessment II being more demanding. In EC–Hormones (US), the AB confirmed this point (§§ 123, 183): Interpreting [paragraph 4 of Annex A of the SPS Agreement], the Panel elaborates risk assessment as a two-step process that “should (i) identify the adverse effects on human health (if any) arising from the presence of the hormones at issue when used as growth promoters in meat..., and (ii) if any such adverse effects exist, evaluate the potential or probability of occurrence of such effects.”
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... Although the utility of a two-step analysis may be debated, it does not appear to us to be substantially wrong. What needs to be pointed out at this stage is that the Panel’s use of “probability” as an alternative term for “potential” creates a significant concern. The ordinary meaning of “potential” relates to “possibility” and is different from the ordinary meaning of “probability.” “Probability” implies a higher degree or a threshold of potentiality or possibility. It thus appears that here the Panel introduces a quantitative dimension to the notion of risk. (italics in the original)
A more deferential standard of review is, thus, appropriate when the protection of public health is at stake. 6.5.1.3 The Content of Risk Assessment In Australia–Salmon, the AB explained the content of the duty to perform risk assessment in the following terms (§ 121): ... a risk assessment within the meaning of Article 5.1 must: identify the diseases whose entry, establishment or spread a Member wants to prevent within its territory, as well as the potential biological and economic consequences associated with the entry, establishment or spread of these diseases; evaluate the likelihood of entry, establishment or spread of these diseases, as well as the associated potential biological and economic consequences; and evaluate the likelihood of entry, establishment or spread of these diseases according to the SPS measures which might be applied. (italics in the original)
Risk assessment can encompass not only an assessment of the risk itself, but also an assessment of the risk in light of the potential that its order of magnitude might be affected because of human error or less than diligent behavior. In US–Suspended Concession, the AB faced the question whether errors while performing risk assessment should also be taken into account. The facts of this dispute are reproduced here in detail (§ 536): Before we proceed to examine the European Communities’ claims, we briefly summarize some of the relevant facts of this case. We note that Codex has adopted an international standard for estradiol-17/3, based on evaluations carried out by JECFA [the Joint FAO/WHO Expert Committee on Food Additives]. The European Communities asserts that it has determined a higher level of protection than that which would be achieved under Codex’s standard. According to the European Communities, its level of protection is “no (avoidable) risk, that is a level of protection that does not allow any unnecessary addition from exposure to genotoxic chemical substances that are intended to be added deliberately to food.” The European Communities also notes that it has performed a risk assessment for meat from cattle treated with estradiol-173 for growth-promotion purposes. This risk assessment consists of the 1999, 2000, and 2002 Opinions, as supported by 17 studies conducted between 1998 and 2001. The European Communities further explains that its SPS measure—that is, the import and marketing ban applied pursuant to Directive 2003/74/EC—was taken in the light of the higher level of protection that it determined for itself and is properly based on its risk assessment.
In its risk assessment, the EU had assessed not only the risk from growth hormones, but also the risk resulting from abuse or misuse in the administration of these hormones.
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This risk apparently exists every time “good veterinary practices” are not observed. The panel had summarily dismissed the relevance of a risk assessment to this effect (e.g., whether good veterinary practices had been observed when administering hormones). The AB, in total disagreement with the panel in this respect, reversed its findings. In its view, the risk originating in the administration of hormones naturally could be included in the risk assessment performed (§ 545ff., and especially §§ 553–555). This is a very sensible finding. There is absolutely no certainty that good veterinary practices are observed all the time, and the risk from nonobservance is, in principle at least, measurable as well. 6.5.1.4 The Methodology for Risk Assessment In Japan–Apples,45 the issue was whether the SPS Agreement prejudges the methodology that should be used in the context of risk assessment. Japan had chosen a particular methodology, and the complainants were challenging its consistency with the SPS Agreement since, in their view, it was effectively justifying the SPS measure that had been put in place. They reproached, thus, endogeneity, in the sense that the means was used to serve specific ends. The AB found that the SPS Agreement, in principle, does not impose a particular methodology that WTO members should use when they perform risk assessment (§ 204). In the same report, the AB, confirming prior case law on this issue, held that there are some questions that the methodology chosen must address. WTO members cannot carry out a risk assessment in a manner that precludes phytosanitary measures other than the one already in place from being considered. In this vein, the AB found that Japan had violated its obligations under the SPS Agreement by conducting risk assessment justifying the measure that it had in place, without inquiring into the possibility of other, potentially applicable, measures (§ 209). It could be, for example, that risk assessment points to the possibility of using less stringent (i.e., less onerous) trade measures. In other words, risk assessment that is tailor made to justify existing measures is not what WTO members are expected to do. For the purposes of conducting risk assessment, evidence gathering is the key. It should not be endogenous; e.g., WTO members should not be looking for evidence that fits preconceived ideas. Australia–Apples made it clear that while the choice of methodology was the privilege of WTO members, the robustness of methodology used would be checked and evaluated, of course. Australia–Apples concerned fire blight, as we have already discussed. Since the 1920s, when fire blight was first observed in New Zealand, Australia had closed down its market to New Zealand apples. New Zealand tried to reopen the Australian market, but its various initiatives failed. The last petition was lodged in 1999. In 2005, “Biosecurity Australia,” then a division of the Australia Quarantine and Inspection Services (AQIS), the competent branch of the Australian administration, issued a report and found that fire blight might be the result of imports from New Zealand. The approach was characterized
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by Australia as “semi-quantitative”: a quantitative assessment of likelihood of entry and establishment and spread of the disease was accompanied by a qualitative evaluation of consequences. The panel first and the AB subsequently (§§ 250ff.) found that Australia’s methodology was flawed since it had not evaluated the impact of various factors that could have affected the outcome, while overestimating the impact of the factors it had examined. Schropp (2011), commenting on this case, understood the AB findings to be akin to requesting from WTO members to test alternative hypotheses when conducting risk assessment. This is probably not far from the truth. It would probably be far-fetched to construe the standard of review employed in this case as akin to the standard applied when panels review disputes concerning the consistency of contingent protection with the multilateral rules. However, when the methodology used is not orthodox, as was the case here with the Australian semi-quantitative approach, then panels might legitimately worry about the robustness of findings. In similar cases, therefore, it should not be unreasonable to request some additional explanation in order to avoid endogenous findings à la Japan–Apples. In US–Suspended Concession, the AB held that if various factors contribute to a risk, there is no obligation to disentangle their effects (§ 562). It suffices that the risk against which protection is sought is a contributing factor. There are not many methodologies available that allow for disentangling the various explanatory variables. By acknowledging that no similar obligation existed, the AB opened up the possibility for WTO members to a wider choice of methodologies that they could use. Finally, the AB has explained, in its report on EC–Hormones (US), that a WTO member does not have to run its own risk assessment. It can base its measures on a risk assessment performed either by another WTO member or by an international organization (§ 190). This is a very sensible judgment since developing countries, which typically do not possess scientific expertise, can still enact SPS measures, borrowing from the expertise of those who possess it. 6.5.1.5 Minority Scientific Opinions Suffice In EC–Hormones (US), the AB held that SPS measures need not be based solely on the prevailing opinion in the relevant scientific field in order to satisfy the statutory requirements included in Articles 2.2 and 5.1 of SPS. SPS measures based on minority scientific opinions could be WTO consistent as well (§ 194). Minority opinions, nevertheless, must be “scientific.” The definition of “scientific opinion” is the subject matter of the following discussion. 6.5.1.6 Science, Not Junk Science The obligation to base risk assessment on science requires a common understanding of the term “science.” Ever since English philosopher and polymath William Whewell coined the term “scientists” in 1833 to describe the assembled investigators of the British Association for the Advancement of Science, the term has been prone to many
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misunderstandings. Disagreements about the ambit of the term have arisen and continue to arise in the literature, and in practice as well. The criterion adopted in the WTO, as in many other judicial instances, is that it is the payment of respect to the methodological requirements in a given field that helps distinguish “science” from “non-science.”46 In US–Suspended Concession,47 the AB held that evidence will be considered scientific if it respects the standards of the relevant scientific community (§ 591). In Australia– Apples, the AB held that this standard called for a two-step review by panels (§ 215): Thus, in its discussion of the standard of review that applies to a panel reviewing a risk assessment under Article 5.1 of the SPS Agreement, the Appellate Body identified two aspects of a panel’s scrutiny of a risk assessment, namely, scrutiny of the underlying scientific basis and scrutiny of the reasoning of the risk assessor based upon such underlying science. (italics in the original)
It went on to hold that the first step was particularly pertinent whenever regulation was based on minority scientific opinions (§ 221): We note that the first aspect, the panel’s review of the scientific basis of the risk assessment, may be particularly relevant in cases where the importing Member has relied on minority scientific opinions in conducting a risk assessment. In such cases, the question whether such opinions constitute “legitimate” science from respected and qualified sources according to the standards of the relevant scientific community may have greater prominence.
This finding comes very close to the “Daubert standard” established by the US Supreme Court.48 In Daubert,49 the Supreme Court embraced “reliability” as the primary criterion for admitting expert evidence. The Court collapsed two different concepts: the scientific standard of “reliability” (does the principle support what it aims to show?), and “validity” (does application of the principle produce consistent results?) into one legal standard of reliability—that is, “evidentiary reliability.”50 In the words of the Court, scientific knowledge exists if the following condition is met: “an inference or assertion must be derived by the scientific method.”51 In this way, the Daubert standard distinguishes between science and so-called junk science. Now, this definition is quite open-ended, and it does require expertise from the relevant field in order to ascertain whether a “scientific method” has indeed been employed. This is the case since panels are typically not composed of scientists. We will return to this issue later in this chapter. 6.5.1.7 Is There a Procedural Requirement to Demonstrate Risk Assessment? In EC–Hormones (US), the AB reversed a finding by the panel to the effect that Articles 2.2 and 5.1 of SPS impose a minimum procedural requirement, in the sense that a WTO member adopting an SPS measure must provide evidence that it did base its measure on scientific evidence at the time when the measures were originally adopted. In this case, the panel had found no evidence in the body of the EU regulation, or in its preamble, that the EU had indeed based its measure on science. Consequently, it held that
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it had violated its obligations under SPS. The AB disagreed (§§ 188–190). In its view, no similar obligation can be discerned in the SPS Agreement. The AB’s reasoning does pose some problems. It is true that a textual reading of the relevant provisions (Articles 2.2 and 5.1 of SPS) does not lead to the conclusion that they impose a similar requirement. And yet, from an evidentiary perspective, it is almost impossible for uninformed parties to discern the basis of an SPS measure unless some evidence has been provided.52 The agreement does impose, on the other hand, elaborate transparency obligations (discussed later in this chapter), and, as we will see in chapter 12 of this volume, this is one area where transparency has been observed—and quite remarkably. 6.5.1.8 The Standard of Review In its report on EC–Hormones (US),53 the AB explained that the term “based” suggests that there must be a rational connection between the science-based risk assessment and the SPS measure eventually adopted, in the sense that the former must reasonably support the latter (§ 193).54 The rational connection standard requires some sort of congruence between the risk assessment and the measure eventually adopted. If, for example, risk assessment shows a range of probabilities that a certain risk might occur, and WTO members want to address this risk, then their chosen ALOP must lie within the range. 6.5.2 ALOP 6.5.2.1 Definition Assuming the existence of risk, it is for WTO members to decide whether to intervene or not, depending on their risk aversion, and what level of protection to seek. WTO adjudicating bodies cannot prejudge the level of risk aversion that a given society unilaterally sets. The term “appropriate level of protection” is defined in Annex A to the SPS Agreement: Appropriate level of sanitary or phytosanitary protection—The level of protection deemed appropriate by the Member establishing a sanitary or phytosanitary measure to protect human, animal, or plant life or health within its territory. (italics in the original)
A note reads: “Many Members otherwise refer to this concept as the ‘acceptable level of risk.’” The two terms (“ALOP” and “acceptable level of risk”) are thus interchangeable in the SPS Agreement. 6.5.2.2 Wide Discretion to Define ALOP In the WTO era, the AB reaffirmed, in the most unambiguous terms, the wide discretion that WTO members enjoy when defining their ALOPs in its report on EC–Hormones (US) (§ 186):
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To the extent that the Panel purported to require a risk assessment to establish a minimum magnitude of risk, we must note that imposition of such a quantitative requirement finds no basis in the SPS Agreement. A panel is authorized only to determine whether a given SPS measure is “based on” risk assessment.55
In order to reach this finding, the AB went through a rather convoluted reasoning, dissociating the notion of “risk assessment” from that of “risk management.” The latter is often used to denote the level of risk that a given society is prepared to live with. Risk management naturally follows risk assessment in the sense that, assuming that it knows the distribution or probability that an event might occur, a given society will define the level of protection that it deems appropriate depending on its risk aversion. Risk management is, thus, a concept akin to ALOP. It is following this logic that the Panel on EC–Hormones (US) accepted the distinction between risk management and risk assessment. The AB, however, reverting to its textualist best, dismissed on formal grounds (lack of explicit reference to risk management in the SPS Agreement) the relevance of “risk management” altogether (§ 181). And yet, a few paragraphs later, as we discussed previously, the AB accepted (§ 186) that WTO members can unilaterally set their ALOPs, and panels cannot disturb that process.56 But doesn’t this paragraph effectively admit that risk management is the privilege of WTO members? We believe that it does. 6.5.2.3 Expressing the ALOP The choice of the level of protection logically precedes the choice of the instrument that will eventually be used. A WTO member first defines its ALOP and, based on this definition, it will choose the instrument to achieve the level that it wants. Nowhere, nonetheless, does the SPS Agreement require that WTO members express their chosen ALOP in a document. However, unless it is expressed in precise enough terms, the quest for the relationship between the measure chosen and the level of protection sought would be severely hindered. Consequently, a WTO adjudicating body, facing, say, a claim under Article 5.6 of SPS might find it impossible to carry out its task. In Australia–Salmon, the AB held that (§§ 200ff.) that the level of protection must be expressed in clear enough terms. In the same report, the AB explained that WTO members have no obligation to express their ALOPs in quantitative terms. Expressing ALOPs in qualitative terms, though, should not detract from their obligation to express it in precise terms. The AB held (§ 206) that an ALOP cannot be determined “with such vagueness or equivocation that the application of the relevant provisions of the SPS Agreement, such as Article 5.6, becomes impossible.” Precision is, thus, the key, regardless of whether the ALOP has been expressed in quantitative or qualitative terms. Chances are, nevertheless, that it is easier to achieve precision through some quantitative benchmark. In the words of the Panel on India–Agricultural Products (§ 7.562):
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Notwithstanding the fact that a Member’s ALOP or acceptable level of risk need not be expressed in quantitative terms, we consider that an ALOP or acceptable level of risk will express a certain threshold that denotes the position of the relevant Member in relation to the intensity, extent, or relative amount of protection or risk that the Member deems to be tolerable or suitable.
What if panels have failed to define their ALOP, or what if they have done so in imprecise terms? In Australia–Salmon, the AB held that if a WTO member fails to determine its ALOP (or when it does so with insufficient precision), panels might be in a position to fill the gap. A review of the SPS measure employed will help them to establish the ALOP (§ 207). In other words, neither the absence of a definition of the level of protection nor insufficient precision is fatal for the regulating state. The AB still cautioned panels “against substituting their own reasoning about the level of protection implied in a measure for the ALOP that is explicitly specified by the Member itself.”57 In India–Agricultural Products, India had published only a measure that amounted to an import prohibition, without also defining separately its ALOP. Based on the import prohibition and statements made during the hearing, the panel defined India’s ALOP as “very high or very conservative.” It reached this decision based on its view that an import ban was coming close to “zero risk,” although it did not believe that India had a “zero risk” policy in place (§§ 7.557, and especially 7.575).58“Very high or very conservative” is, of course, a rather imprecise definition. It is, on the other hand, the natural consequence of the possibility to express the ALOP in qualitative terms. Still, the panel proceeded to review the consistency of measures adopted by India with the SPS Agreement against this definition. The AB did not disturb this finding. This discussion might seem confusing, and indeed it is. As things stand, we can conclude that in principle, there is an obligation to define the ALOP in precise terms. Lack of (precise) expression is not fatal, though. Panels can step in and provide their own definition. When doing that, though, they should be simply deducing an expression of ALOP that is implicit in the challenged SPS measure. They should not provide their own judgment as to what the ALOP should be. Panels, thus, have very limited discretion in the course of this exercise. Their contribution should be akin to a procedural step that has not been taken, but that is the natural consequence of a thought process embedded in the SPS measure. The discretion of WTO members to set their ALOPs has been respected in all but one case: Japan–Apples.59 Japan had imposed a series of measures60 to ban the trade of apples originating in the US, fearing that some of them might suffer from “fire blight” (§§ 8.5ff). Fire blight affects apples, not human life. There was no evidence that apples infected with fire blight had been exported to Japan, although there was evidence of a shipment of infected apples to the separate customs territory of Taiwan, Penghu, Kinmen, and Matsu (Chinese Taipei).61 The apples shipped to Taiwan, Penghu, Kinmen, and Matsu had not been infected with fire blight, but rather by another disease (known as “codling moth”).
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Japan claimed that it possessed sufficient scientific evidence that risk did exist. The record showed that apples infected with fire blight had been exported to New Zealand in the early twentieth century, to the United Kingdom in the 1950s, and to Egypt a little later. Scientific evidence showed (with a considerable degree of confidence) that the disease had been transmitted because of the nature of the trade involved (trade in root stocks—that is, in apple trees, not in apples). The trade involved in the Japan–Apples dispute concerned apples, not apple trees. The expertise provided to the panel suggested that the risk of completing the pathway (and, thus, transmitting the disease) was negligible, but indeed real. The panel rejected the US argument that it was required to confine its review to mature, symptomless apples since only such apples were being exported to Japan. The panel held that the risk that immature, symptomatic apples would be exported to Japan (because of human error) should also be taken into account. In the experts’ view, however, even if this were the case, the risk would still be negligible because the disease could be transmitted only through birds flying from infected apples to uninfected apple trees. Relying on the guidance of the experts on this point, the panel explicitly accepted that there was negligible risk. It still went ahead, nevertheless, and found that there was no rational or objective relationship between the measure and the relevant scientific evidence. In light of the negligible risk identified on the basis of the scientific evidence and the nature of elements composing the measure, the panel concluded that the Japanese measure was clearly disproportionate (§§ 8.198–199). Note that the panel did not reach its finding in this respect based on Article 5.6 of SPS (which reflects the necessity requirement). It decided to exercise judicial economy in this respect. Rather, it held that the measure was inconsistent with Article 2.2 of SPS since there was no scientific evidence to support it, although it accepted that risk (albeit negligible) did exist. The AB endorsed the view that, in light of the negligible risk, the challenged measure was disproportionate (§§ 160 and 163ff.) and was, thus, in violation of Article 2.2 of SPS. This is a remarkable finding. Zero risk was accepted in EC–Hormones (US) and negligible risk (which certainly was higher than zero risk) was not accepted in Japan– Apples. This unfortunate AB report flies against the letter and the spirit of the SPS Agreement. Both the definition of ALOP discussed earlier, as well as the Preamble to the SPS Agreement, require panels to exercise a deferential standard of review “without requiring Members to change their appropriate level of protection of human, animal, or plant life or health,” as quoted earlier. The finding would have probably been acceptable had it been made within the context of an examination under the necessity requirement. This, alas, was not the case. In the words of Neven and Weiler (2006), the AB report on Japan–Apples is “one bad apple” indeed. This approach has not been adopted by subsequent panels.62
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Recognition
Risk assessment requires “measurement.” Measurement, however, is not a simple process. The yardstick used, the quality of equipment employed, and the scientific capacity of those performing the measurement will all affect the result. When a weight is measured, there are additional technical issues to resolve. The outcome of weighing depends on the longitude and the latitude where it takes place. There is, consequently, no guarantee that the importing market will accept measurement in the exporting market, even if it meets its own standards. Subjecting imports to additional measurement in the importing market is a cost borne by exporters. Moreover, the uncertainty associated with the final outcome of similar endeavors might in and of itself dissuade traders from exporting in the first place. Trade flows can be facilitated through recognition, with or without recognition agreements. Unilateral recognition or mutual recognition agreements (MRAs) can cover either the substantive aspect of standards used in different jurisdictions (i.e., Home acknowledges that Foreign’s regulation of GMOs is as good as its own), or conformity assessment (i.e., Home acknowledges that Foreign’s measurement of a risk is equivalent to its own, which is termed an “MRA+”), or both the substantive aspects of a standard as well as its conformity assessment. Recognition can, of course, involve more than two parties. The SPS Agreement encourages WTO members to sign recognition agreements. They must respect nondiscrimination when doing so (Article 4 of SPS). WTO members that are not parties to an MRA can request that the MRA be extended to them if they can establish that their regulatory framework is equivalent to those of the MRA partners. This is, of course, a very demanding exercise since they will have to establish, for all practical purposes, that they possess scientific expertise equivalent to that of the regulating state.63 An SPS Committee decision sheds some light on Article 4 of SPS,64 making it clear that: • Equivalence can be accepted for measures relating to a specific product or categories of products; hence, the coverage can be quite extensive. • A reliable communication channel must be established between the exporting (requesting equivalence) and the importing WTO member. The latter should provide information regarding its level of protection and justification of its SPS measures, and the former should cooperate in supplying information regarding its scientific capacity and the product-related infrastructure. Trade should not be interrupted only because a request for equivalence has been tabled. WTO members participate in the ongoing work of international institutions harmonizing standards, such as the Codex Alimentarius Commission, in equivalence-related work by the World Organization for Animal Health, and in the framework of the IPPC.
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Conformity Assessment
Article 8 of SPS reads: Members shall observe the provisions of Annex C in the operation of control, inspection and approval procedures, including national systems for approving the use of additives or for establishing tolerances for contaminants in foods, beverages or feedstuffs, and otherwise ensure that their procedures are not inconsistent with the provisions of this Agreement.
Although this provision is entitled “Control, Inspection, and Approval Procedures,” there is no doubt that it deals with conformity assessment, as does Annex C of the SPS Agreement. The latter reproduces almost verbatim the language in the corresponding provision included in the TBT Agreement, and, for this reason, our analysis there is relevant here as well. 6.6 6.6.1
Measures Based on Precaution Defining Precaution
Article 5.7 of SPS recognizes the right of WTO members to provisionally adopt SPS measures on the basis of “available pertinent information” in cases where “relevant scientific evidence is insufficient.” This provision does not explicitly refer to the “precautionary principle.” In EC–Hormones (US),65 the AB held that the absence of explicit reference notwithstanding, it was the precautionary principle that this provision aimed to capture (§§ 123–125).66 There are various definitions of “precaution.” The 1992 Rio Declaration on Environment and Development, one of the most frequently used texts on this score, states: “Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.”67 This definition, like Article 5.7 of SPS, focuses on the inadequate scientific evidence and the availability of pertinent information as the two pillars for having legitimate recourse to precautionary measures. Academic literature has provided other, more elaborate definitions that aim to shed additional light to the content of precaution. Quoting, for example, from Gonçalves (2013, p. 336), precaution should entail various elements, namely: (a) the duty to act in advance to protect the environment and public health when dealing with suspected risks (uncertain), especially if they are potentially serious or irreversible; (b) the demand for more and better scientific information for the assessment of hazards and risks; (c) the consideration of a broad set of options for action;
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(d) the analysis and assessment, as complete as possible, of costs and benefits of policy alternatives including the analysis of their distribution among the different actors; (e) the continuous monitoring and review of the adopted precautionary measures taking into account the development of information and of scientific knowledge.68
Many of the elements of this and similar definitions have a bearing on the understanding of the rationale and function of precautionary measures. The legal obligations imposed through the SPS Agreement are narrower, as described next. 6.6.2 The Legal Test for Consistency with Article 5.7 of SPS The AB, in its report on Japan–Agricultural Products II, established a four-prong test69 that must be met in its entirety for a measure to be deemed consistent with Article 5.7 of SPS (§ 89). It essentially based itself on the wording of this provision, clarifying only that the four requirements mentioned therein should be met cumulatively: Article 5.7 of the SPS Agreement sets out four requirements which must be met in order to adopt and maintain a provisional SPS measure. Pursuant to the first sentence of Article 5.7, a Member may provisionally adopt an SPS measure if this measure is: “imposed in respect of a situation where ‘relevant scientific information is insufficient’”; and adopted “on the basis of available pertinent information.” Pursuant to the second sentence of Article 5.7, such a provisional measure may not be maintained unless the Member which adopted the measure: “seek[s] to obtain the additional information necessary for a more objective assessment of risk”; and “review[s] the ... measure accordingly within a reasonable period of time.” These four requirements are clearly cumulative in nature and are equally important for the purpose of determining consistency with this provision. Whenever one of these four requirements is not met, the measure at issue is inconsistent with Article 5.7. (italics in the original)
The term “reasonable period of time” was discussed in the same report. The AB held that this term has to be interpreted on a case-by-case basis. In this particular case, four years of inaction by Japan subsequent to the adoption of a measure under Article 5.7 of SPS was deemed to be unreasonable (§ 93). In the same dispute, the AB held that the additional information sought during the reasonable period of time must be germane in conducting a risk assessment (§ 92). 6.6.3
Precaution and Science
The relationship between Article 5.7 of SPS, on the one hand, and Article 2.2 of SPS (the obligation to base measures on scientific evidence), on the other, was addressed by various AB reports, and not always in a consistent manner. In Japan–Agricultural Products II,70 the AB held (§ 80): Article 5.7 allows Members to adopt provisional SPS measures “[I]n cases where relevant scientific evidence is insufficient” and certain other requirements are fulfilled. Article 5.7 operates as a
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qualified exemption from the obligation under Article not to maintain SPS measures without sufficient scientific evidence. An overly broad and flexible interpretation of that obligation would render Article 5.7 meaningless. (italics in the original)
In Japan–Apples, the AB went one step further. In its view, if science is well settled on an issue, recourse to precaution is unwarranted. In a sense, the AB sees a firewall between scientific evidence and precaution (§ 184): The application of Article 5.7 is triggered not by the existence of scientific uncertainty, but rather by the insufficiency of scientific evidence. The text of Article 5.7 is clear: it refers to “cases where relevant scientific evidence is insufficient,” not to “scientific uncertainty. The two concepts are not interchangeable. Therefore, we are unable to endorse Japan’s approach of interpreting Article 5.7 through the prism of “scientific uncertainty.”71
It follows that in the early cases discussed by the AB, a measure could be based either on science or on Article 5.7 of SPS, and that recourse to the latter would be appropriate in cases of scientific insufficiency, but not of scientific uncertainty. Where precisely one should draw the line between these two concepts, of course, is a mystery to anyone (and unsolved by the AB at any rate).72 In US–Suspended Concession, the AB revisited its prior case law and distanced itself from it. In this case, an international standard for growth hormones existed, from which the EU had deviated in seeking higher protection. In doing so, the EU invoked the precautionary principle. The question arose whether invocation of precaution was lawful in the presence of a science-based international standard. Prior case law would have said no to this question. The AB held that there should be no firewall between science and precaution since science proceeds incrementally, and only rarely do we experience paradigm shifts (§ 703). A firewall could, in principle, exist only with respect to a very narrow set of circumstances: if a WTO member wants to intervene in circumstances corresponding precisely to the working hypothesis of a scientific experiment that has led to the formulation of a scientific proposition, and accepts that the level of protection established through this proposition corresponds to its own ALOP. It could very well be the case, though, as indeed was the case in this particular dispute, that the regulating state seeks a level of protection higher than that achieved by the international standard in place (§§ 627ff., and particularly § 697). One might be tempted to say that in similar circumstances there is no science from which a WTO member has deviated. One cannot exclude either, that a WTO member is in possession of scientific evidence casting doubt on the validity of a scientific proposition. In this and similar cases, if it still wants to regulate, it will be in position to do so invoking precaution. The ruling by the AB has opened the door to this possibility as well. The panel and AB dealt with one additional issue in this dispute: how much evidence is required to cast doubt on the appropriateness of an existing scientific proposition to
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provide the basis for measures aiming at different ALOPs? A scientific risk assessment will typically explain the risk distribution, and then it will be up to individual WTO members to decide first on their ALOP, and then on the appropriateness of the risk assessment to provide the basis for its own measure in light of the chosen ALOP. Distancing itself from a panel ruling to this effect, the AB held that there is no need to demonstrate a “critical mass of evidence” to support a measure based on Article 5.7 of SPS, when an international standard exists. In its words (§ 725): In concluding that it is “not convinced” that the ultra-sensitive assay study referred to by the European Communities “call[s] into question the fundamental precepts of previous knowledge” in relation to the effect of the five hormones on pre-pubertal children, the Panel applied an excessively high threshold in relation to the new scientific evidence which is required to render previously sufficient scientific evidence “insufficient” within the meaning of Article 5.7. Irrespective of whether the Panel was itself persuaded by the Klein study, the Panel erred to the extent that it considered that a paradigmatic shift in the scientific knowledge was required in order to render the scientific evidence relied by JECFA now “insufficient” within the meaning of Article 5.7. The “insufficiency” requirement in Article 5.7 does not imply that new scientific evidence must entirely displace the scientific evidence upon which an international standard relies. It suffices that new scientific developments call into question whether the body of scientific evidence still permits of a sufficiently objective assessment of risk.
6.6.4
Precaution, Nondiscrimination, Necessity, and Consistency
Case law so far has not addressed the question of whether precautionary measures must still observe the nondiscrimination obligation (Article 2.3 of SPS), the consistency requirement (Article 5.5 of SPS), and the necessity requirement (Article 5.6 of SPS). The text of Article 5.7 of SPS does not absolve WTO members from the obligation to observe the three obligations, but does not compel them to observe them either. Unfortunately, the travaux préparatoires do not shed enough light on this issue. Some of the negotiating history of this provision73 suggests that it was drafted to deal with emergency situations, such as an outbreak of disease. In similar circumstances, it would have been difficult to examine whether nondiscrimination and consistency had been observed. This is by now a moot point, though, as in its report on EC–Hormones (US), the AB extended Article 5.7 of SPS to cover precautionary measures, which do not necessarily have to be taken as a matter of urgency. Subsequently, the EU circulated a proposal inviting the WTO membership to think further about the content of the precautionary principle.74 In its view, measures based on precaution must be proportional to the chosen level of protection, nondiscriminatory in their application, and consistent with past practice (assuming, of course, that comparability across transactions has been established).75 The EU proposal echoed EU law. One of the leading cases in EU law in this area is Commission v Netherlands,76 where the Court outlawed a Dutch measure banning the
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marketing of foodstuffs to which nutrients had been added. The Court first made it clear that the proportionality requirement (adopting the least restrictive trade measure) should be observed in cases where the precautionary principle has been invoked as well (§ 46). It then moved on to provide its understanding that the precautionary principle should not be dissociated completely from scientific evidence. The court understands precaution to be one point along a continuum that might lead to scientific proof (Commission v Denmark, § 51): A proper application of the precautionary principle requires, in the first place, the identification of the potentially negative consequences for health of the proposed addition of nutrients, and, secondly, a comprehensive assessment of the risk for health based on the most reliable scientific data available and the most recent results of international research.
Where it proves to be impossible to determine with certainty the existence or extent of the alleged risk because of the insufficiency, inconclusiveness, or imprecision of the results of the conducted studies, but the likelihood of real harm to public health persists should the risk materialize, the precautionary principle justifies the adoption of restrictive measures (Commission v Denmark, §§ 52 and 53). 6.6.5
Is Precaution a “Carte Blanche”?
Few terms have provoked as intense discussions as the term “available pertinent information” (Article 5.7 of SPS). Does it condone action (regulatory intervention in the name of precaution) only when risk assessment has not provided responses, but where the scientific process is well under way? Or does it also condone action in cases of pure public anxiety? There should be no doubt that the former question should be responded in the affirmative, but how far down the road should we go toward the latter? This issue is hotly debated by scholars from different disciplines, and it is hard to come up with the “correct” response, assuming that there is one. For example, Slovic (2000), an eminent psychologist, stated: “Human beings have invented the concept of ‘risk’ to help them understand and cope with the dangers and uncertainties of life. Although these dangers are real, there is no such thing as ‘real risk’ or ‘objective risk.’” The so-called affect heuristic certainly simplifies our lives. Quoting from Kahneman (2011, p. 140): “... people who had received a message extolling the benefits of a technology also changed their beliefs about its risks. Although they had received no relevant evidence, the technology they now liked more than before was also perceived as less risky.”77 Sunstein (2003), and Kuran and Sunstein (1999) warned against excesses. They termed “availability cascade” a chain of events that might originate in the media and lead to public panic. Kuran and Sunstein (1999) discussed a couple of incidents where regulation was
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totally baseless and unfounded and might have also done public health a disservice. They criticized public intervention absent serious scrutiny of the legitimacy of public anxiety. Both views resonate, on occasion, with parts of the population and yet, prima facie, they seem irreconcilable. Kahneman (2011) took a seemingly conciliatory attitude here but de facto sided with Slovic when he stated (p. 144): I share Sunstein’s discomfort with the influence of irrational fears and availability cascades on public policy in the domain of risk. However, I also share Slovic’s belief that widespread fears, even if they are unreasonable, should not be ignored by policy makers. Rational or not, fear is painful and debilitating, and policy makers must endeavor to protect the public from fear, not only from real dangers.
This position is quite reasonable. And at any rate, as far as the trade effect of similar interventions is concerned, one should always keep in mind that there are some safety valves in the WTO, in the sense that precautionary measures must at the very least be nondiscriminatory and necessary (the difficulties in establishing discrimination being an issue). These are highly complicated issues, and probably the best response is to avoid false positives. A cautious attitude by WTO adjudicating bodies, thus, is highly recommended. 6.7
Measures Must Be Applied in a Nondiscriminatory Way
Two provisions include the obligation not to discriminate: namely, Articles 2.3 and 5.5 of SPS. The first provision calls for SPS measures that do not “arbitrarily or unjustifiably discriminate between Members where identical or similar conditions prevail.” The terms “like product” and “less favourable treatment” that we have encountered in numerous provisions regarding nondiscrimination are missing here. This provision is reminiscent of the chapeau of Article XX of GATT.78 It is, thus, a concept of nondiscrimination that is well known in the GATT legal order as well. The second provision embodies the obligation to be consistent when adopting SPS measures. Since consistency can have various benchmarks, it introduces a call to cooperate with the committee in order to adopt guidelines that will help the implementation of the provision. This is a novel concept of nondiscrimination that is unknown in the GATT legal order. 6.7.1 The Relationship between Articles 2.3 and 5.5 of SPS WTO case law (i.e., AB, EC–Hormones [US], §§ 212, 238) has established that this provision should be read together with Article 5.5 of SPS (the consistency requirement, discussed later in this chapter). In Australia–Salmon, the AB went one step further, explaining that a violation of Article 5.5 of SPS ipso facto entails a violation of Article 2.3 of SPS
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as well (§ 252). The opposite, nonetheless, is not true since Article 2.3 of SPS is a provision of a more generic character than Article 5.5 of SPS. The Panel on India–Agricultural Products ruled as much (§ 7.344). In what immediately follows, we will focus on an analysis of Article 2.3 of SPS; the discussion of Article 5.5 of SPS will come later in this chapter. Article 2.3 of SPS is divided into two parts: the first requires that WTO members avoid discriminating arbitrarily or unjustifiably between countries where the same conditions prevail; the second requires that WTO members avoid adopting measures that amount to a disguised restriction of trade. The Panel on Australia–Salmon (Article 21.5–Canada) held that three conditions must be cumulatively met in order for a violation of the first part of Article 2.3 of SPS to be established (§ 7.111): (a) The measure must discriminate between products originating in the territory of the regulating WTO member and products originating territories of other WTO members; (b) Discrimination must be arbitrary or unjustifiable; and (c) Identical or similar conditions must prevail in the territories of the members concerned. By virtue of Article 2.3 of SPS, second sentence, WTO members must make sure that their SPS measures do not constitute a “disguised restriction of trade.” 6.7.2 Where Identical or Similar Conditions Prevail In India–Agricultural Products, the US had complained that India was in violation of Article 2.3 of SPS on two grounds. First, because whereas a total ban on imports had been in place, the ban on domestic goods was only within a limited zone of 10 km, counting from the area where the infection occurred to the birds in question. Second, because whereas a total ban on imported goods was in place on account of the LPNAI variety of bird influenza , no similar scheme was in place for domestic goods, India not having even a surveillance scheme in place to detect LPNAI (§ 7.390). On these grounds, the panel found that India, with respect to the 10-km zone described here, was discriminating between countries where identical or similar conditions were prevailing (§ 7.411). Relying on evidence from the experts (§ 7.418), the panel also concluded that India was violating Article 2.3 of SPS with respect to its treatment of LPNAI (§ 7.424). The AB upheld the panel’s findings in this respect (§§ 5.245ff.). 6.7.3 Arbitrary or Unjustifiable Discrimination The Panel on India–Agricultural Products, having established that India was discriminating against imports as discussed previously, asked the question of whether discrimination
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was arbitrary or unjustifiable. The panel held that, in doing that, it could be inspired by the case law under the chapeau of Article XX of GATT (§§ 7.428–429). India had responded that, assuming discrimination, it was neither unjustifiable nor arbitrary. With respect to AI occurring at home, India argued that it knew where the epicenter was and could control the spread of the disease. Imports, nonetheless, could occur in the various ports of entry to the Indian market and spread without import ban (§ 7.431). The panel did not agree with India. It sanctioned its practices because India did not account for the possibility that countries with NAI could demonstrate that its exports presented no NAI-related risk (§§ 7.432ff., and especially 7.435). It is, thus, the lack of flexibility in the administration of its regime that led the panel to find against India in this respect.79 The AB upheld the panel’s findings in this respect (§§ 5.245ff.). 6.7.4
Disguised Restriction of Trade
In an obiter dictum, in Australia–Salmon, the AB had pointed to two indicators that help define whether we are in the presence of disguised restriction of trade: cases where no risk assessment at all had taken place (§ 166) and cases of arbitrary or unjustifiable discrimination (§§ 174–176). The Panel on India–Agricultural Product was the first to find that disguised restriction of trade had indeed occurred. To do that, it based itself on its findings that India had unjustifiably discriminated against imports, that its measures contradicted the recommendations of the relevant international standard, that India had not conducted a risk assessment (§ 7.477). The AB upheld the panel’s findings in this respect (§ 5.287). 6.7.5
Geographic Scope of SPS Measures
The SPS Agreement includes an idiosyncratic nondiscrimination clause: it calls for limiting SPS measures to areas within WTO members, if that much is required in order to address an actual risk, not a fictitious one. SPS measures, thus, need not be countrywide. It could be the case, for example, that a disease occurs in a region of a WTO member and does not spread elsewhere, either because it has been contained or for other reasons. There would be no point to imposing an import ban on all goods originating in that WTO member, those infected as well as those that remain uninfected. Indeed, the very purpose of adopting SPS measures in order to address hazards would be defeated if WTO members were allowed to impose them against goods that have not been infected. To this effect, Article 6 of SPS makes room for application of SPS measures to a substate geographic space. In paragraph 1, the basic concept that recognition of the characteristics of a specific area is embedded. This paragraph contains a nonexhaustive list of criteria that can be usefully employed in order to restrict SPS measures to specific areas: namely, the level of prevalence of specific diseases or pests, the existence of eradication or control
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programs, and appropriate criteria or guidelines that may be developed by the relevant international organizations. Article 6.2 of SPS requests that WTO members recognize three concepts: “pest-free area,” “disease-free area,” and “area of low pest or disease prevalence.” The three concepts are defined in Annex A to the SPS Agreement as follows: Pest- or disease-free area—An area, whether all of a country, part of a country, or all or parts of several countries, as identified by the competent authorities, in which a specific pest or disease does not occur. Note: A pest- or disease-free area may surround, be surrounded by, or be adjacent to an area—whether within part of a country or in a geographic region which includes parts of or all of several countries -in which a specific pest or disease is known to occur but is subject to regional control measures such as the establishment of protection, surveillance and buffer zones which will confine or eradicate the pest or disease in question. Area of low pest or disease prevalence—An area, whether all of a country, part of a country, or all or parts of several countries, as identified by the competent authorities, in which a specific pest or disease occurs at low levels and which is subject to effective surveillance, control or eradication measures.
Article 6.3 of SPS states that exporting members who claim that there are pest- or disease-free areas, or areas of low pest or disease prevalence within their sovereignty, will submit evidence to this effect. The AB on India–Agricultural Products has held that the basic obligation is embedded in Article 6.1 of SPS, whereas Articles 6.2 and 6.3 of SPS elaborate specific aspects of this basic obligation to define the geographic scope properly for the application of adopted SPS measures. The panel and the AB on India–Agricultural Products addressed a claim by India to the effect that, unless the exporter offers evidence that one of three circumstances mentioned in Article 6 of SPS is present, the WTO member imposing the SPS measure is under no obligation to adjust the geographic scope of its measures. This claim led the panel to discuss the relationship between the various paragraphs featured in Article 6 of SPS. The panel disagreed. In its view, Article 6.3 of SPS has a different scope from the first two paragraphs since it refers to a subset of the WTO membership only (namely, the “exporting WTO Members”). In other words, WTO members are to observe the obligations included in the first two paragraphs of Article 6 of SPS (§§ 7.674–678).80 The obligation to observe Articles 6.1 and 6.2 of SPS is, thus, independent from Article 6.3 of SPS. If the exporting WTO member is unhappy with the manner in which the delimitation of geographic scope has taken place, it can submit evidence to support its claim. The member imposing the SPS measure must proceed to a delimitation of the geographic scope, though. The AB upheld the panel’s findings in this respect (§§ 5.141ff., and especially 5.145, and 5.154).
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Burden of Proof
Recall that, in India–Agricultural Products, the US had argued that India was violating Article 2.3 of SPS because it had in place a total ban on imported goods on account of LPNAI, but no similar scheme was in place for domestic goods. In fact, the US claimed that India did not even have a surveillance scheme in place to detect LPNAI. In the panel’s view, once the US had shown that the Indian measure was discriminatory on its face, the burden of proof would shift to India to show that LPNAI was exotic in India, and hence, there was no need to take similar measures (§§ 7.437ff., and especially 7.442). The panel, relying yet again on its experts, held that absent a reliable detection system, it would be impossible for India to know whether LPNAI was indeed exotic. In the words of one of the panel-appointed experts, “absence of evidence is not evidence of absence” (§ 7.454). The AB upheld the panel’s findings in this respect (§ 5.287). 6.8
Measures Must Be Necessary
The necessity requirement is set out in the second sentence of Article 5.6 of SPS: Members shall ensure that such measures are not more trade-restrictive than required to achieve their appropriate level of sanitary or phytosanitary protection, taking into account technical and economic feasibility.
A footnote to Article 5.6 of SPS further specifies: “For purposes of paragraph 6 of Article 5, a measure is not more trade-restrictive than required unless there is another measure, reasonably available taking into account technical and economic feasibility, that achieves the appropriate level of sanitary or phytosanitary protection and is significantly less restrictive to trade.” This provision crystallizes GATT case law on the necessity requirement. In parallel with the TBT Agreement, international standards are presumed to be in conformity with the necessity requirement (Article 3.2 of SPS). In Australia–Salmon, the question was whether an Australian measure banning, on health grounds, imports of salmon not treated in a particular manner was consistent with various provisions of the SPS Agreement, and, inter alia, whether it was necessary in the sense of Article 5.6 of SPS.81 The AB provided the test that should be applied by WTO adjudicating bodies in order to establish a violation of Article 5.6 of SPS in the following terms (§ 194): We agree with the Panel that Article 5.6 and, in particular, the footnote to this provision, clearly provides a three-pronged test to establish a violation of Article 5.6. As already noted, the three elements of this test under Article 5.6 are that there is an SPS measure which “is reasonably available taking into account technical and economic feasibility; achieves the Member’s appropriate level of
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sanitary or phytosanitary protection; and is significantly less restrictive to trade than the SPS measure contested.”
These three elements are cumulative in the sense that, to establish consistency with Article 5.6, all of them have to be met. If any of these elements is not fulfilled, the measure in dispute would be inconsistent with Article 5.6.82 It follows that panels need to apply a three-prong test: (a) Decide whether the alternative offered is significantly less restrictive. (b) Decide whether it the alternative offered is reasonably available to the regulating WTO member. (c) Finally, decide whether it is equally efficient as the privileged option. Point (a) has to do with the standard of review, and we will return to it later in this chapter. The AB discussed point (c) in its report on Australia–Apples in the following terms (§ 344): ... a panel must identify both the level of protection that the importing Member has set as its appropriate level, and the level of protection that would be achieved by the alternative measure put forth by the complainant. Thereupon the panel will be able to make the requisite comparison between the level of protection that would be achieved by the alternative measure and the importing Member’s appropriate level of protection.
Point (b) requires an enquiry into the technical feasibility of the proposed alternative, as well as the capacity of the regulating WTO member to employ it without imposing undue hardship on itself. We discuss some of the relevant practice in what follows. The discussion in this respect is, of course, intimately linked to the discussion on ALOP earlier in this chapter.83 6.8.1
Burden of Proof
6.8.1.1 GATT, TBT/SPS: Same Principle, Different Application There is a marked difference concerning allocation of the burden of proof under GATT and under the TBT and SPS agreements. In GATT, “necessity” is not a general obligation, and it does not form an integral part of Article III of GATT. Hence, it is the defendant that first must make a prima facie case that it has complied with the necessity requirement, and then the burden shifts to the complainant to show that there is another, less restrictive measure that is equally efficient as the preferred option. If the complainant succeeds in doing that, then the burden shifts back to the defendant to show that the less restrictive but equally efficient measure was not reasonably available to it. In the TBT/SPS context, this is not the case. “Necessity” is a general obligation. It is, thus, the complainant’s duty to show that the privileged measure was not necessary by
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demonstrating that another, less restrictive but equally efficient measure was reasonably available to it. 6.8.1.2 Practice In India–Agricultural Products, the US had claimed that India, by imposing import bans on poultry and other goods in order to protect itself from the spread of bird flu, was violating Article 5.6 of SPS. In the US view, India had other equally efficient and less restrictive measures available to it. The US pointed to the measures recommended by the OIE, the standard-setting institution that had enacted the Terrestrial Code, the international standard aiming to curb the spread of bird flu (§ 7.526). Veterinary certificates proving the health of goods, “zoning,” and “compartmentalization,” so as to avoid punishing disease-free regions within a sovereignty, were recommended (§ 7.531). India argued that any option other than an import ban would be administratively burdensome. The panel disagreed with this argument since, in its view, that would render Article 5.6 of SPS void of content. Moreover, it had sufficient evidence showing that it was administratively possible for India to cope with additional imports that originate in diseasefree countries. Veterinary certificates would play exactly this role. The panel, thus, concluded that, by not using the less restrictive measures provided in the international standard that were available to India, the latter had violated Article 5.6 of SPS. It accepted that the burden of proof was on the US to point to a less restrictive action than the challenged measure, and for India to rebut that by demonstrating that the option in question was not reasonably available to it (§ 7.543). The AB upheld the panel’s finding in this respect (§ 5.243). 6.8.2
Judicial Review: Limited to Means; No Discussion of Ends
The judicial review, of course, is limited to an evaluation of the means that are employed to reach ends that cannot be questioned. It bears repeating that there is a logical link between the instrument chosen and the level of protection desired. Assuming that the level chosen is quite strict, a regulator might not have the luxury to select from a plethora of instruments in order to reach the targeted level.84 In Australia–Apples, the AB veered toward more deference in favor of the regulating WTO member. Measures that passed the conformity test did not have to be absolute least restrictive options, but reasonably available least restrictive options. That much we knew from GATT and General Agreement on Trade in Services (GATS) case law, of course. The AB added that, in parallel with case law under the TBT Agreement, regulating WTO members would lose the argument only if the complainant could point to another “significantly” less restrictive measure (as opposed to less restrictive) that was reasonably available to them (§ 363):
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Compliance with this requirement is tested through a comparison of the measure at issue to possible alternative measures. Such alternatives, however, are mere conceptual tools for the purpose of the Article 5.6 analysis. A demonstration that an alternative measure meets the relevant Member’s appropriate level of protection, is reasonably available, and is significantly less trade restrictive than the existing measure suffices to prove that the measure at issue is more trade restrictive than necessary. Yet this does not imply that the importing Member must adopt that alternative measure or that the alternative measure is the only option that would achieve the desired level of protection.
6.8.3 The Relationship between Articles 5.6 and 2.2 of SPS Article 2.2 of SPS reads: Members shall ensure that any sanitary or phytosanitary measure is applied only to the extent necessary to protect human, animal or plant life or health, is based on scientific principles and is not maintained without sufficient scientific evidence, except as provided for in paragraph 7 of Article 5.
The AB has held that this provision should be read together with Article 5.6 of SPS (Australia–Apples, § 339). In India–Agricultural Products, the panel held that a finding that Article 5.6 of SPS had been violated may lead to a presumption that the same measure is inconsistent with Article 2.2 of SPS. Since the US had proved its claim that Article 5.6 of SPS had been violated (by pointing to the alternatives existing in the OIE Terrestrial Code that India could have used but had not), and India gave no rebuttal, the AB found that India was in violation of its obligations under Article 2.2 of SPS (§§ 7.614–615, and 7.617). The AB upheld the panel’s finding in this respect (§ 5.243). 6.9
Consistency
Article 5.5 SPS reflects the consistency requirement as follows: [E]ach Member shall avoid arbitrary or unjustifiable distinctions in the levels it considers to be appropriate in different situations, if such distinctions result in discrimination or a disguised restriction on international trade.
Recall that the SPS Agreement was originally conceived as insurance against the erosion of commitments under the AG Agreement. The fear was that regulations on food safety would be erratically “excessive,” or “unwarranted,” and promoting food safety in name only, and negotiators sought a benchmark that would help them credibly distinguish wheat from chaff. Food safety, of course, addresses risks. And risks could “attack” various products, and enter the human body through their consumption. A genuine food safety measure would try to address that risk, not the risk that “travels” through one particular good. An illustration is warranted here.
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Assume that there are incidents of salmonella in Home. Salmonella can be caused by contaminated vegetables, eggs, chicken, milk, and cheese. These are not directly competitive or substitutable (DCS) goods, and yet salmonella can be caused by any one of them. Now what if Home produces a lot of cheese, but almost no vegetables? What would be the rationale for regulating only the vegetable market in this case? If the risk from salmonella is present in both goods, and if the risk is symmetric, why would Home be regulating only the vegetable market if it really cared about risks originating from salmonella? Allowing Home to regulate salmonella when it enters through vegetables would be tantamount to imposing a cost on foreign producers of vegetables. Home’s producers of cheese would not have to pay the same price. Home would be effectively reducing the amount of salmonella consumed by its citizens at the expense of foreign producers. Absence of the consistency requirement would have allowed this type of beggarthy-neighbor policies.85 Now, this example assumes that salmonella through vegetables and salmonella through cheese present us with a risk of similar magnitude. If not—if, say, the former is important (by any reasonable benchmark) and the latter is not—then a differentiated treatment might be appropriate. The rationale for the consistency requirement should be understood in this way: that the comparator is the risk against which policies have been introduced, or else the inclusion of this provision adds nothing to what was there before. If a policy were to address only cases where Home imposes a ban on salmonella-infected broccoli but not on salmonella-infected spinach (two DCS products), for example, then Foreign could successfully complain about it, arguing that Home’s policies were discriminatory. Viewed in this way, the consistency requirement disciplines regulatory behavior beyond the “classic” like/DCS products that were discussed in chapter 7, volume 1. The guidelines adopted by the membership, to which we refer later in this chapter, reproduce this view. 6.9.1 The Test for Compliance with the Consistency Requirement The AB held in EC–Hormones (US) that, for a violation of Article 5.5 of SPS to be established, a complaining party must satisfy a three-prong test. In self-explanatory terms, it laid down the test in the following manner (§§ 214–215): Close inspection of Article 5.5 indicates that a complaint of violation of this Article must show the presence of three distinct elements. The first element is that the Member imposing the measure complained of has adopted its own appropriate levels of sanitary protection against risks to human life or health in several different situations. The second element to be shown is that those levels of protection exhibit arbitrary or unjustifiable differences (“distinctions” in the language of Article 5.5) in their treatment of different situations. The last element requires that the arbitrary or unjustifiable differences result in discrimination or a disguised restriction of international trade. We understand
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the last element to be referring to the measure embodying or implementing a particular level of protection as resulting, in its application, in discrimination or a disguised restriction on international trade. We consider the above three elements of Article 5.5 to be cumulative in nature; all of them must be demonstrated to be present if violation of Article 5.5 is to be found. In particular, both the second and third elements must be found. The second element alone would not suffice. The third element must also be demonstrably present: the implementing measure must be shown to be applied in such a manner as to result in discrimination or a disguised restriction on international trade. The presence of the second element—the arbitrary or unjustifiable character of differences in levels of protection considered by a Member as appropriate in differing situations—may in practical effect operate as a “warning” signal that the implementing measure in its application might be a discriminatory measure or might be a restriction on international trade disguised as an SPS measure for the protection of human life or health. Nevertheless, the measure itself needs to be examined and appraised and, in the context of the differing levels of protection, shown to result in discrimination or a disguised restriction on international trade. (italics in the original)
6.9.2 The Guidelines on Consistency The complaining party, when arguing violation of Article 5.5 of SPS, needs to first establish comparability across situations. Continuing with the salmonella example, the key question here has to do with the extent of the consistency requirement. At one end of the spectrum, it should be confined to the relevant product market, the DCS category of goods (as defined in chapter 7, volume 1). At the other end, it should extend to cover all comparable risks, whether related to DCS goods or not. The WTO members adopted guidelines on 22 June 2000,86 which provide some clarification on the scope of the obligation assumed under Article 5.5 of SPS. WTO members must indicate the level of protection that they consider appropriate and if there is a difference between the level of protection under consideration and levels already determined by the regulating WTO member in different situations. WTO members must further compare the level of protection now being sought with that already considered in previous situations that contain sufficient “common elements” so as to render the two situations comparable.87 We read on p. 4 of the guidelines: “What a Member is comparing are the levels of protection against the risks posed. ...” This is hardly an illuminating passage by any reasonable yardstick. It does suggest, though, that the comparator should be the risk itself. It should not be the relative likeness of products. In §§ 217ff. of its report on EC–Hormones (US), a dispute preceding the issuance of the guidelines, the AB held that the EU had violated Article 5.5 of SPS by banning the sales of hormone-treated beef and not banning the sales of hormone-treated pork. The only element of comparability was that pork and beef are probably DCS goods in the EU market. In addition, the AB did not deem it necessary to examine whether the risks of consumption of hormone-treated beef were comparable to those presented by hormone-treated chicken. This is quite problematic since, assuming that risks are
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asymmetric, and in light of the fact that it is the EU prerogative to define its ALOP, it could very well have chosen to address one (the higher) and not the other (the lower).88 The AB explained in the same report that the letter and the spirit of Article 5.5 of SPS does not require WTO members to guarantee absolute uniformity across the various appropriate levels of protection that they pursue. In its view, Article 5.5 of SPS should be properly understood as a legal prohibition of arbitrary or unjustifiable discrimination (§ 213): The objective of Article 5.5 is formulated as the “achieving [of] consistency in the application of the concept of appropriate level of sanitary or phytosanitary protection. Clearly, the desired consistency is defined as a goal to be achieved in the future. ... Thus, we agree with the Panel’s view that the statement of that goal does not establish a legal obligation of consistency of appropriate levels of protection. We think, too, that the goal set is not absolute or perfect consistency, since governments establish their appropriate levels of protection frequently on an ad hoc basis and over time, as different risks present themselves at different times. It is only arbitrary or unjustifiable inconsistencies that are to be avoided. (italics in the original)
Subsequently, in Australia–Salmon, another case preceding the issuance of the guidelines, the AB offered another benchmark for comparability (§§ 146 and 152): The Panel was correct in stating that situations can be compared under Article 5.5 if these situations involve either a risk of entry, establishment or spread of the same or a similar disease, or a risk of the same or similar “associated potential biological and economic consequences.” We believe that for situations to be comparable under Article 5.5, it is sufficient for these situations to have in common a risk of entry, establishment or spread of one disease of concern. There is no need for these situations to have in common a risk of entry, establishment or spread of all diseases of concern. (italics in the original)
Therefore, in this case, it is the similarity of the disease or of the associated risk that provided the benchmark for deciding on whether the obligation included in Article 5.5 of SPS had been respected. In the same report, the AB introduced the term “warning signals,” which refers to elements or properties of particular SPS measures that could be relevant in establishing a violation of Article 5.5 of SPS. The quantity and quality of warning signals ultimately will prove to be the decisive factor in determining whether Article 5.5 of SPS has been violated. Substantial difference in the level of protection across two comparable situations (§ 164), violation of Article 5.1 of SPS (§ 166), or both could serve as warning signals.89 In cases that have followed the adoption of the guidelines, panels have applied the three-prong test developed by the AB in EC–Hormones (US) and the guidelines cumulatively. They have seen no contradiction in the two, since a reading of the test developed in EC–Hormones (US) allows for adopting the similarity of risk as a benchmark, regardless of whether it was misapplied in this case, as noted previously. Recall that the AB found in that case that the EU was in violation of its obligations by treating
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hormone-treated beef and hormone-treated chicken in different ways, without first establishing similarity across the two risks. In Australia–Apples (§§ 7.908ff.), as in US–Poultry (China) (§§ 7.236ff.), panels have asked whether the three prong-test (namely: Have WTO members applied their own level of protection to different situations? Is the difference arbitrary? Does it amount to a disguised restriction?) has been applied to similar risks, regardless of whether we were in the presence of substitutable goods or not. Horn and Mavroidis (2003) argued that the test for consistency should be confined within the DCS category of goods.90 After all, the SPS is part of a wider trade agreement called the Agreement Establishing the WTO, the purpose of which is to combat protectionism. A presumption that protectionism has been sought is much stronger when the test of Article 5.5 of SPS is confined within a relevant product market. Casting the net too wide has two important consequences. First, WTO panels and the AB become the arbiters of consistency in the formulation of national health policies; and, second, the risk of error increases. Restricting the test, for the purposes of Article 5.5 of SPS analysis, to an examination of national health and environmental policies within the relevant product market under consideration is consistent with various criteria, some of them explicitly and some of them implicitly mentioned in the guidelines. Comparability of the risk distribution is such an element, as is comparability of the disease (“similar disease,” in the guideline lingo). Horn and Mavroidis (2003) probably offered too narrow a coverage for the consistency requirement. Recall the previous discussion of the salmonella example. The rationale for the consistency requirement was probably the willingness to sanction beggar-thy-neighbor policies that did not necessarily involve DCS products. The guidelines leave ample room for constructing the SPS Agreement in this way. One word of caution seems appropriate, though. As we move away from the DCS category, the presumption of protectionism fades away. In similar cases, judges should feel confident regarding the comparability across transactions and persuade themselves that cost shifting takes place from the regulating to the affected state: elements such as those mentioned here (comparability of risk level, scientific evidence to this effect, etc.) could be useful input in similar exercises. The discussion earlier in this chapter has established that case law has not added much clarity on the scope of this obligation. We submit that the basic reason why this has been the case so far is that panels and the AB do not ask the quintessential question: why has this obligation been added to the WTO legal regime? The reason is as follows. WTO members that, say, consistently exhibit a low level of protection of public health in general, but introduce a very demanding level in one area, might legitimately provoke suspicions regarding the sincerity of this particular instance. Outliers do provoke suspicion. It might be the case that the demanding level is justifiable because it is calibrated to an unusually high risk that exists in that particular area. But on the other hand, it might be totally
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unjustified. A WTO panel should compare two elements when deciding on consistency: the comparability of the risks involved and the ALOP in each case. If the ALOP is roughly the same, then it should refrain from finding that Article 5.5 of SPS has been violated. In the opposite case, it should decide that the WTO member had not respected its obligation to behave consistently when addressing the risks covered by the SPS Agreement. 6.10 6.10.1
Special and Differential Treatment Parallel with the TBT Agreement
Article 10 of SPS contains the special and differential treatment provision of the agreement and essentially follows the TBT recipe in this respect. The Doha Ministerial Declaration calls for the passage of a certain period of time between the enactment of a measure and its entry into force. This is so that foreign producers can adjust to the new regulatory reality and not be caught off guard. 6.10.2
Standards and Trade Development Facility (STDF)
The previous chapter discussed the implications of “demanding” standards for developing countries.91 Almost every negotiating document referred to in this chapter includes a statement regarding the costs of “excessive” standardization for developing countries, as well as the need for technical capacity in order for them to be in a position to meet the regulatory demands of developed countries—the “Mecca” of standards. Disciplining recourse to SPS measures, as argued previously, is one way to reduce similar costs. International cooperation, explained later in this chapter, presents yet another means to this end. Problems nevertheless persist, and it is for this reason that the Standards and Trade Development Facility (STDF) was established. The STDF is a joint initiative by the WTO, FAO, World Bank, WHO, and OIE. Following an initial discussion in November 2001, it was passed in August 2002 and aims to provide developing countries with the technical capacity to improve the status of human, animal, and plant health in their sovereignty, to implement international standards, and to increase their chances of accessing export markets. The participants, the donors (a number of developed nations), developing countries’ experts, as well as officials of Codex Alimentarius and IPPC, choose their high-level representatives to the Policy Committee. This body gives guidance on what should be done in order to honor the mandate of the STDF, and a Working Party that meets twice a year and is serviced by the WTO Secretariat is the forum entrusted with the implementation of whatever has been decided. The value of the approved projects ranges between $250,000 and $1 million, and the idea is that projects are designed by both donors and beneficiaries (who meet part of the costs), and they are jointly accountable for any projects that are approved.92
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6.11 Transparency The SPS Agreement covers a very technical area where transparency is not only welcome, but very necessary. To this end, the SPS Agreement contains a specific provision (Article 7), and a more detailed Annex (Annex B), which include obligations regarding transparency. The overall record of notifications is quite satisfactory by any reasonable account, as the detailed work of Wolfe (2013) shows. Article 7 of SPS (which is further detailed in Annex B to the SPS Agreement) reads: Members shall notify changes in their sanitary or phytosanitary measures and shall provide information on their sanitary or phytosanitary measures in accordance with the provisions of Annex B.
The AB held, in its report on Japan–Agricultural Products II, that failure to prove a violation of Annex B results in the same failure with regard to Article 7 of SPS, and inconsistency with Annex B results in inconsistency with Article 7 of SPS as well (§§ 108ff.).93 § 1 of Annex B requires that all SPS measures be published. The AB held, in its report on Japan–Agricultural Products II, that the term “laws, decrees, or ordinances” (appearing in § 1 of Annex B) should be interpreted broadly. In its view, what matters is the objective sought through this provision—that is, to ensure that all SPS measures are published, regardless of their qualification under domestic law (§§ 105–106). By virtue of § 2, WTO members must allow an interval between publication and entry into force of an SPS measure so that traders will have sufficient time to adjust to the new reality. This requirement is relaxed in cases of urgency. In India–Agricultural Products, the panel found that India had violated its obligations under this provision by notifying the WTO of its measures three months after they had entered into force, thus eliminating, de facto, the obligation for an interval between publication and entry into force (§ 7.759). § 3 of the same annex further requires that WTO members introduce “enquiry points,” whereby interested parties can request and obtain information regarding the SPS measures. § 5 obliges WTO members to provide the WTO with detailed notifications of their SPS measures; however, the level of detail can be relaxed if SPS measures are meant to address an urgent situation (as per § 6). Notifications should take place at an early stage, when it is still possible to introduce amendments. In India–Agricultural Products, the panel found that India had violated its obligations under this provision by notifying the WTO of its measures three months after they had entered into force, eliminating the possibility of introducing amendments (§ 7.789). § 10 aims at easing transaction costs by requesting that WTO members provide for a “single window”; e.g., one authority that will be in charge of procedures regarding notification. The coverage of the transparency obligation is quite wide. The Panel on India– Agricultural Products noted that its scope extends to all “SPS regulations”; e.g., laws,
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decrees, and ordinances, but also other instruments that are applied generally and are similar in character to the instruments referred to in the illustrative list mentioned in Annex B (§ 7.738). Practice under both the SPS and the TBT agreements gives evidence of the increased awareness of the WTO membership regarding the value of transparency. The Secretariat, upon request, prepared a questionnaire (WTO Document G/SPS/GEN/1382 of 2 February 2015) aimed at providing information regarding the operation of the agreement, the issues that they face regarding lack of transparency, and other issues. More than 23 percent of all replies came from least developed countries (LDCs), and an additional 56 percent from developing countries. Developed countries accounted for 20 percent of all replies (WTO Document G/SPS/GEN/1402 of 20 March 2015). There is an ongoing effort to strengthen the disciplines on transparency, as discussion during the Fourth Review show (WTO Document G/SPS/W/278 of 26 May 2014). 6.12
Standard of Review94
The AB in EC–Hormones (US) held that WTO adjudicating bodies, when dealing with cases coming under the purview of the SPS Agreement, must apply the standard of review set out in Article 11 of Dispute Settlement Understanding (DSU) and are not required to follow any other particular standard of review (§§ 131ff.). Recall, nevertheless, that in EC–Asbestos and case law regarding the interpretation of Article XX of GATT, the AB has held that a more deferential standard is warranted if the objective is the protection of human health.95 One would expect a similar attitude toward at least those SPS measures that aim to protect public health.96 6.13
Institutional Issues
6.13.1 The SPS Committee Article 12 of SPS establishes an SPS Committee that provides a regular forum for consultations among WTO members and, in general, is in charge of the administration of the SPS Agreement. It aims to provide transparency regarding national SPS measures, provide clarifications of the SPS Agreement (like the Decision on Article 4 and the Guidelines regarding Article 5.5 of SPS), promote regulatory cooperation across WTO members and international harmonization, and, if possible, resolve disputes. In parallel with the TBT Agreement, it established an online forum providing detailed information regarding national measures.97 The SPS Notification Submission System (NSS) was recently launched, which enabled WTO members to fill out and submit notifications online. The online submission system was designed to ensure that notifications would become more complete and accurate. Since the WTO was set up 16 years ago,
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governments have shared with each other, in the context of the SPS Committee, information on over 10,000 SPS measures that they have implemented on food safety and animal and plant health.98 The committee can “sponsor technical consultation and study with the objective of increasing coordination and integration between international and national systems and approaches for approving the use of food additives or for establishing tolerances for contaminants in foods, beverages, or feedstuffs” (Article 12.2 of SPS). To this effect, the consulting parties can profit from the presence of a facilitator (usually, the chair of the SPS Committee) who will help them resolve their dispute. It has been used on three occasions (WTO Document G/SPS/GEN/781, at §§ 17, 18, and 19). The SPS Committee has adopted a decision that provides the procedural framework for consultations under Article 12.2 of SPS (WTO Document G/SPS/61 of 8 September 2014). 6.13.2
Specific Trade Concerns (STCs)
Paraphrasing Wolfe (2013), we can start this discussion by stating that adjudication is the slowest, most expensive way to resolve a conflict. The procedural vehicle necessary to facilitate consultations/negotiations between WTO members was supplied through the Working Procedures of the SPS Committee, which were adopted in March 1995 and provide in § 5: With respect to any matter which has been raised under the Agreement, the Chairperson may, at the request of the Members directly concerned, assist them in dealing with the matter in question. The Chairperson shall normally report to the Committee on the general outcome with respect to the matter in question.99
On the SPS side,100 unlike what we saw in the context of the TBT Agreement, settlements are officially reported. Specific trade concerns (STCs) are classified as “resolved,” “partially resolved,” or “not reported.” Members are encouraged to inform the committee when they have bilaterally resolved an STC that has previously been brought to the committee’s attention. STCs are considered resolved where the two parties involved report to the committee that the issue has been resolved. Horn et al. (2013) calculated the numbers (1995–2012) as follows: 28 percent of the 344 SPS STCs are reported as resolved.101 Another 5 percent are partially resolved. There is no report for 67 percent of the STCs. But even within this latter category, Horn et al. (2013) showed that trading partners prefer to continue negotiating within the SPS Committee: only a small percentage of STCs becomes a formal dispute in accordance with Article 1 of DSU. When a formal dispute is raised, panels almost unavoidably will have to face conflicting scientific expertise. Since SPS measures must be based on scientific evidence in principle, it is to be expected that scientific experts might be called upon to explain regulatory interventions before WTO adjudicating bodies. Supplying scientific expertise is a
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challenge for the institutional design. Panelists that are typically untrained in science will be called to pronounce on scientific disagreements. The treatment of expertise in this context becomes the key issue in resolving SPS disputes. 6.13.3 The Treatment of Expertise by Panels Since scientific disagreements are not uncommon, judges might be called to resolve similar disagreements.102 The question, of course, is how judges (who typically are not trained scientists) can do so. 6.13.3.1 Panels Have Discretion to Invite Experts Article 11.2 of SPS urges panels to have recourse to experts when dealing with SPS issues, stating in relevant part that they should seek advice from experts. This expression is in slight contrast to the formulation privileged in Article 13.2 of DSU, which reflects the generic provision regarding recourse to expertise: panels “may” consult. Although the wording of Article 11.2 of SPS suggests a slightly more imperative tone, it is, nonetheless, within the discretion of a panel to decide whether to have recourse to experts. If they do opt to consult experts, then panels must respect Article 11.2 of SPS: In a dispute under this Agreement involving scientific or technical issues, a panel should seek advice from experts chosen by the panel in consultation with the parties to the dispute. To this end, the panel may, when it deems it appropriate, establish an advisory technical experts group, or consult the relevant international organizations, at the request of either party to the dispute or on its own initiative.
In India–Agricultural Products, India complained that the panel had overstepped its mandate by consulting with experts on issues that were not, strictly speaking, within the four corners of the complaint that had been lodged. The AB saw nothing wrong with this. In its view, panels can have a liberal understanding of their mandate in this respect to the extent necessary to honor the terms of reference before them (§§ 5.89ff.). Panels have never, on their own initiative, established a technical experts group. When parties, though, do invite their own experts, then panels feel compelled to invite courtappointed experts, especially since they anticipate contradictory expertise. Court (panel) appointed experts are not at the service of parties to the dispute. They are appointed in order to help the panel distinguish between wheat from chaff. Since parties appoint their own scientific experts, and panelists are typically nonexperts, recourse to court-appointed experts is necessary, otherwise panels might not be in position to decide the case before them. Indeed, panels have routinely appointed experts in SPS adjudication, and paid particular attention to their opinions. 6.13.3.2 The Ambit of Supplied Expertise In Japan–Agricultural Products II, the question arose about whether an expert opinion extending beyond an argument103 advanced by one of the parties could still be legally
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relevant to the panel. More precisely, the US had claimed that Japan’s measures had violated the necessity requirement. In support of its claim, the US had argued that Japan could have used another measure that was less restrictive than the one that it actually used and still reach its stated objective. Experts confirmed the US point of view. In doing so, however, they pointed to an alternative measure, other than that advanced by the US, which, in their view, constituted an even less restrictive option.104 The panel accepted the claim by the US, holding that Japan had not complied with its obligations under Article 5.6 of SPS. The AB reversed this finding on the grounds that, in the absence of an argument by the US to this effect, the panel did not have the legal authority to find against Japan on an argument advanced only by the experts (§§ 125ff). The AB probably equated the expertise regarding sorption levels to a claim that had not been lawfully introduced by the US. In this case, even if the US had endorsed the supplied expertise, it would have run afoul of its obligations under Article 6.2 of DSU since the claim would have been introduced after the establishment of the panel.105 6.13.3.3 Selecting Court-Appointed Experts In practice, panels privilege experts affiliated with the institutions explicitly mentioned in the SPS Agreement (i.e., the OIE, IPCC, and CAC). In Australia–Salmon, the panel selected four experts after consultations with the OIE (§§ 6.1ff). In Japan–Agricultural Products II, the panel chose three experts after soliciting suggestions from the Secretariat of the IPCC (§§ 6.1ff). In EC–Hormones (US), the panel initially requested the parties to the dispute to name one expert each. It then named two experts (from a list prepared by the CAC and the International Agency for Research on Cancer) and one additional expert in the area of the carcinogenic effects of hormones (§§ 6.1ff). They, thus, privilege playing it safe by selecting experts from the institutions mentioned in the SPS Agreement. There is no doubt that the institutions mentioned in the SPS Agreement are renowned for their expertise; this is why they are mentioned. Opting for experts from unnamed institutions might open up panels to criticism regarding their choice to do so. 6.13.3.4 Self-Disclosure Obligations Panel-appointed experts must observe the Rules of Conduct for the Understanding on Rules and Procedures Governing the Settlement of Disputes.106 Annex 1B of this document leaves no room for doubt in this respect. To this effect, all experts must observe the “governing principle” of impartiality (Article III), and incur an obligation to sign a document (Annex 3) whereby they will include the required information (Article VI): Each covered person, as defined in Section IV:1 of these Rules of Conduct has a continuing duty to disclose the information described in Section VI:2 of these Rules which may include the following:
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(a) financial interests (e.g. investments, loans, shares, interests, other debts); business interests (e.g. directorship or other contractual interests); and property interests relevant to the dispute in question; (b) professional interests (e.g. a past or present relationship with private clients, or any interests the person may have in domestic or international proceedings, and their implications, where these involve issues similar to those addressed in the dispute in question); (c) other active interests (e.g. active participation in public interest groups or other organisations which may have a declared agenda relevant to the dispute in question); (d) considered statements of personal opinion on issues relevant to the dispute in question (e.g. publications, public statements); (e) employment or family interests (e.g. the possibility of any indirect advantage or any likelihood of pressure which could arise from their employer, business associates or immediate family members).
Self-disclosure of the abovementioned elements amounts to the institutional guarantee put in place in order to avoid conflict of interest.107 An elaborate procedure has also been provided that aims at resolving cases of conflict of interest within brief deadlines (Article VI.5–10). The ultimate sanction could be the exclusion of panel-appointed experts from testifying in a particular dispute. The system is geared toward preventing the participation of conflicted experts ex ante, but it is also made clear that information that becomes available at any stage of the process must be disclosed as well. Exclusion, thus, of experts can take place after initiation of the procedure. 6.13.3.5 Due Process Panels are under an obligation to consult with parties to a dispute before selecting courtappointed experts, but they do not need their agreement to this effect (Article 11.2 of SPS). Court-appointed experts must observe the disclosure obligations discussed here. These two instruments are part and parcel of due process when it comes to addressing the issue of supplying expertise to panels. The obligation to consult is, of course, a factual issue that should pose no evidentiary problems. Panels’ discretion to evaluate the content of disclosures is a different issue. There is no ex ante guarantee to the effect that its exercise of discretion will be accepted by the disputing parties. In fact, this is what happened in the Hormones disputes between the EU and the US. In EC–Hormones (US), the EU appealed the fact that one of the experts was a national of a third party and had ties with the pharmaceutical industry. The AB dismissed the EU argument, holding that panels have discretion to appoint experts, and underlined the fact that parties to the dispute had previously agreed on the procedures regarding the selection of experts (§ 148). In US–Suspended Concession, the follow-up to EC–Hormones, the same question arose again. This time, the EU objected to the appointment of two experts on the grounds that
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they had real or perceived conflicts of interest that should have disqualified them from assisting the panel, in particular, because (§§ 416–424): (a) They were both affiliated with JEFCA (Joint WHO/FAO Expert Committee on Food Additives), the institution that had elaborated the international standard that the EU had criticized and from which it had deviated; and (b) One of them had taken a position on the issue in the dispute, whereas the other had received research money from the pharmaceutical industry. The EU had raised both these points before the panel, and the panel had rejected the EU argument. The AB confirmed its prior case law to the effect that due process considerations should guide the selection of panelists (§ 436).108 It went on to confirm the panel’s rejection of the EU claims regarding point (b) (§ 455). The AB, however, overturned the panel with regard to plea (a). It found that the panel should not have selected the two experts because of their institutional affiliation with JEFCA (Joint Expert Committee for Food Additives), the standard of which the EU had been criticizing (§ 469). The AB went on to find that the panel had violated the EU’s due process rights, and in doing so, failed to perform an objective assessment of the matter before it, as it was required to do by Article 11 of DSU (§§ 481–482). It added that all subsequent findings by the panel could be invalidated because of this choice, but it still went on to examine them one by one (§ 484). It is hard to disagree with the AB. The panel should have appointed experts with some distance from the facts of the case or, at the very least, should have also appointed experts (assuming that they existed) that had disagreed with the JEFCA-sponsored standard. It is not unreasonable to hypothesize that those that participated in the preparation of the contested standard might be prone to defend their “brain child,” as opposed to reviewing it critically. The question, of course, arises whether the Rules of Conduct discussed in the previous subsection that had obviously been complied with, are still good law in light of the jurisprudential evolution, or, conversely, whether the AB implicitly criticized the panel’s (and everyone else’s) implementation of these rules.109 The AB, alas, did not clarify this point. 6.13.3.6 Legal Value of Opinions Expressed by Court-Appointed Experts Panels are not bound by the opinion of experts in the SPS context. They are free to decide on the expertise submitted, and even disregard it if they deem it appropriate. There are other instances in the WTO system where the expert’s opinion binds panels. Article 4.5 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) provides for the possibility to establish an expert group in order to decide whether a subsidy granted is prohibited in the SCM sense of the term. The opinion of the expert group is binding on the panel that sought it. Article 4.5 of the SCM states as much, in unambiguous terms. It is quite surprising, to say the least, that panels are required to follow expertise
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when it comes to deciding whether a scheme is an export subsidy (an issue that panels routinely address in their reports), and yet they are free to evaluate and possibly discard expertise on scientific issues. As things stand, WTO practice and case law reproduce the standard in civil law litigation. This is a convenient way to avoid addressing the real issue: Can nonexperts evaluate expertise? In the AB’s conception, panels should actively seek to establish the scientific basis of risk assessment. They are encouraged to use scientific expertise in forming their judgment, but at the end of the day, it is their judgment to make. What the AB distanced itself from is a passive attitude where panels simply side with the majority of opinions expressed. The question nevertheless, remains the same: How much more can they do? First, let us see what the AB expects panels to do. A panel does not even need to explicitly refer to all expertise received by experts to observe its duty to perform an objective assessment of the matter before it. In Australia–Apples, the AB pertinently held (§ 275): Regarding the Panel’s treatment of the evidence, we consider that its role as the trier of facts requires it to review and consider all the evidence that it receives from the parties or that it seeks pursuant to Article 13 of the DSU. Nonetheless, as the Appellate Body explained in EC–Hormones, a panel cannot be expected to refer to all the statements made by the experts it consulted. To reproduce every statement made by the experts in the report is neither a necessary nor a sufficient condition for a panel to perform its function in accordance with Article 11 of the DSU. Article 11 requires a panel, in its reasoning on a given issue, to weigh and balance all the relevant evidence, including testimony by the experts. A panel may reproduce the relevant statements by the experts, but still fail to make an objective assessment of the facts under Article 11 if it then fails to properly assess the significance of these statements in its reasoning, as the Appellate Body found in US/Canada— Continued Suspension. Conversely, a panel that does not expressly reproduce certain statements of its appointed experts may still act consistently with Article 11, especially when the panels reasoning reveals that it has nevertheless assessed the significance of these statements or that these statements are manifestly not relevant to the panels objective assessment of the facts and issues before it. (italics in the original)
In US–Suspended Concession, the AB explained the sequential steps that panels should take whenever they face a challenge against the legality of a risk assessment. It called for assistance that panels might want to receive from scientists in addressing purely scientific issues, but nothing beyond this (§ 598): Looking at the Panel’s analysis of whether the European Communities specifically assessed the risks arising from the consumption of meat from cattle treated with oestradiol-173, we note that a significant portion of the Panel’s reasoning consists of summaries of the responses of the experts. It is only after summarizing the experts’ responses that the Panel describes some of the issues discussed in the 1999 Opinion. Given the applicable standard of review and the role of the Panel that is determined by it, the Panel’s analysis should have proceeded differently. The Panel should have first looked at the European Communities’ risk assessment. It should then have determined whether the
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scientific basis relied upon in that risk assessment came from a respected and qualified source. The Panel should have sought assistance from the scientific experts in confirming that it had properly identified the scientific basis underlying the European Communities’ risk assessment or to determine whether that scientific basis originated in a respected and qualified source. The Panel should also have sought the experts’ assistance in determining whether the reasoning articulated by the European Communities on the basis of the scientific evidence is objective and coherent, so that the conclusions reached in the risk assessment sufficiently warrant the SPS measure. Instead, the Panel seems to have conducted a survey of the advice presented by the scientific experts and based its decisions on whether the majority of the experts, or the opinion that was most thoroughly reasoned or specific to the question at issue, agreed with the conclusion drawn in the European Communities’ risk assessment. This approach is not consistent with the applicable standard of review under the SPS Agreement. (italics in the original)
There is a clear and present danger of moral hazard with this approach. Experts, knowing that it is difficult for panels to test their expertise, might have an incentive to unduly influence, or even give misleading evidence to the panel. True, the adversarial system can take care of some of these issues, since the parties in a dispute are often playing a zerosum game. Still, the possibility of collusion cannot be outright excluded, just as the (more frequently encountered) possibility of making an error by siding with the wrong opinion of the court-appointed expert cannot be discarded either. Different legal orders have adopted different attitudes toward the value of expertise. The standard response in civil law systems is that courts are not bound by submitted expertise, which they have the discretion to evaluate. In a similar vein, some international courts have adopted the “ultimate issue rule”: the expert should never be the person left to make a final legal determination; that task remains a task that only the adjudicator must address.110 The question, of course, is whether judges have the technical capacity to do so. Some legal regimes have adopted a more deferential attitude toward expertise. Article 163 of the Portuguese Code of Criminal Procedure, for example, establishes a presumption in favor of expert evidence when requesting that judges who disagree with expert opinions justify the divergence. Courts have made it clear that this provision should be construed narrowly and be limited to scientific conclusions.111 The value of expertise has been discussed on numerous occasions in decisions by US courts. The US Ninth Circuit, for example, held on remand in the previously mentioned Daubert litigation that expert testimony should not merely be relevant, but it should “fit” the requirements of the litigation where it has been offered. The “fit requirement” is “higher than bare relevance,” but “lower than the standard of correctness.”112 Thus, courts will not be deprived of useful information, while ensuring that they will not be lost in useless, confusing details either. In this vein, Daubert requires a thorough analysis of the expert’s economic model, which should not be admitted if it does not apply to the specific facts of the case. “Relevant evidence” is defined in Rule 401 of the Federal Rules of
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Evidence (US) as “evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable.” Moreover, US courts routinely examine the qualifications of the experts.113 In Berlyn Inc. v. Gazette, for example, a district court excluded the testimony of an expert on the definition of the relevant market in question, for the simple reason that he was not an economist or an attorney (he was an experienced newspaper executive, but he had never published anything related to economics or antitrust): “general business experience unrelated to antitrust economics does not render a witness qualified to offer an opinion on complicated antitrust issues such as defining relevant markets.”114 Of course, for a similar attitude to be adopted in the WTO context as well, one would probably have to rethink the agency design (e.g., whether the system should continue to operate with “amateur” panelists). The heart of the issue is that there is an asymmetry of information between experts and judges, and there are limits to how much elaborate procedural requirements (e.g., increasing the pool of invited experts or the adversarial regime) can achieve in order to minimize the potential for error.115 Unsurprisingly, in practice, panels have been quite deferential toward court-appointed experts. There is no instance so far where panelists disagreed with the opinion expressed by experts they themselves had appointed. So far, panels in SPS cases have always adhered to the views expressed by court-appointed experts. Nonetheless, as you might recall from the discussion in chapter 2, volume 1, there is one case where the panel did not follow the opinion of experts. This was the case of the GATT Working Party that adjudicated the claim regarding the consistency of the import surcharge that the US had imposed in 1971 with the relevant GATT rules. In that case, you might recall, the members of the Working Party refused to accept the opinions expressed by the International Monetary Fund (IMF) experts to the effect that, under the circumstances, the US action should not be judged disproportionate. 6.14
Concluding Remarks
The SPS Agreement offers the most elaborate test for combatting beggar-thy-neighbor policies: the proxies included in the agreement (international standards, science, necessity, and consistency) can go a long way toward distinguishing between policies pursued for protectionist reasons and policies pursued for public motives. One might wonder why these proxies have not found their way into Article III of GATT and been applied to a wider set of cases.116 The SPS Committee has also managed to address many of the concerns of the trading community. Through its reviews, it adopted useful decisions (e.g., the 2000 Guidelines), and in the context of its management of STCs, it has managed to reduce trade friction. By serving as a “bottleneck” between a disagreement across trading nations and the submission of a formal dispute, the SPS Committee has contributed to better adjudica-
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tion of other disputes as well, since the WTO-fixed resources dedicated to dispute settlement will have to deal with fewer disputes. Collins-Williams and Wolfe (2010) have underscored the very satisfactory record of notifications in the SPS context. Horn et al. (2013) added that the composition of the committee must have played a role, since it is very often the case that technical experts arriving from national capitals that discuss the technical merits (or lack thereof) of specific regulatory interventions. The SPS Agreement is quite demanding on the adjudicators since they will have to deal with issues beyond their expertise (scientific evidence). Alas, errors have not been avoided. The best example is Japan–Apples, where the panel essentially threw into question the right of Japan to decide its level of protection. Our analysis in this chapter supports the view that the biggest challenge ahead lies with the institutional design of panels (and the AB). The WTO membership should rethink the manner in which scientific expertise should be supplied and evaluated. Most important, it should insist on supporting a deferential standard of review. False positives in this setting can be much costlier than false negatives. Outlawing a perfectly legitimate SPS measure can cause users of the system to lose their confidence in the multilateral regime. Living with an SPS-inconsistent measure, which promotes both, say, public health and industrial policy, is not the best solution, but it does not shake the foundations of trust in WTO adjudication either. Ideally, panels should be in a position to distinguish wheat from chaff. When in doubt, they should be guided by the error committed in Japan–Apples and avoid repeating it.
7
Trade-Related Investment Measures (TRIMs)
7.1 The Legal Discipline and Its Rationale 7.1.1 The Legal Discipline WTO members must notify the WTO of all their trade-related investment measures (TRIMs), that is, roughly speaking, industrial policy measures that aim to promote investment in domestic production. Promotion, for example, of trade of goods produced with domestic added value (local content) is a classic TRIM. The TRIMs Agreement contains an indicative list of similar measures. WTO members must further respect a standstill obligation during a transition period; that is, they cannot modify their TRIMs during that period so as to increase the size of the problem for their trading partners. At the end of the transition period, they must have eliminated all similar measures. The TRIMs Agreement entered into force on January 1, 1995, and is one of the agreements that were successfully concluded during the Uruguay round. 7.1.2 The Rationale for the Legal Discipline You may recall that in chapter 2, as well as in chapter 7 of volume 1, we encountered some TRIMs: in chapter 2, we saw that export performance criteria (such as measures that condition the volume of imports on prior satisfaction of export targets) were in violation of Article XI of GATT; in chapter 7, we discussed the inconsistency of local content requirements with Article III of GATT. The issue of TRIMs, therefore, is not a new one, and has been discussed already during the negotiation of GATT, where it was decided that GATT signatories should not be allowed to have recourse to similar measures. The TRIMs Agreement does not add to the obligations already assumed under GATT with respect to TRIMs. It merely facilitates proof of measures that had already been judged inconsistent with GATT in generic terms. An Illustrative List has been introduced in the Annex to the TRIMs Agreement, which comprises a series of measures falling into this category, but presented in more disaggregated terms than it has been the case under GATT. The measures appearing could,
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absent enactment of the TRIMs Agreement, have come under the purview of Articles III and XI of GATT. It would have been left to the discretion of panels and the AB to decide that similar measures come under the more generic categories included in Articles III, and XI of GATT. The TRIMs Agreement spares panels from the obligation to perform this step. The rationale for the TRIMs Agreement, consequently, echoes the rationale for Articles III, and XI of GATT, and aims at facilitating the identification of measures that qualify as TRIMs. 7.1.3
Discussion
7.1.3.1 Local Content, Export Performance The TRIMs Agreement outlaws two types of measures: local content and export performance requirements. Both types of measures can shift costs to foreigners, and this is why they have been outlawed. It is not the case, however, that recourse to similar measures is totally unjustified, as we will detail in what now follows. Graham and Krugman (1990) explained in simple terms their economic function and why they are what they termed “back door mercantilism.” Local content is the requirement for foreign investors to use a fixed percentage of domestic value. This is akin to imposing a tariff on imported goods plus providing domestic producers a subsidy. Export performance usually takes the form of targeted volumes or targeted value that must be exported. This is akin to an export subsidy. During the 1960s and 1970s, Japan and Korea pursued similar strategies in their quest for development. Special economic zones (SEZs), and export processing zones (EPZs) were (and continue to be) established, providing companies established therein with special tariff and tax privileges.1 TRIMs were thought to be a vehicle for development by some countries in their early stages of development. They continue to be used typically by developing countries (and only sporadically by developed nations). They were also viewed by some developing countries as the means to extract some compensation from multinational enterprises (MNEs).2 They took the view that promotion of local value added should go hand in hand with tax benefits for example, that MNEs enjoyed when moving to these markets. Developing countries, often influenced by the Singer-Prebisch thesis (discussed in chapter 5 of volume 1), have had ample recourse to TRIMs, and Abreu (1989), and Lara (2005) have provided evidence to this effect. The various writings and thinking of the so-called New International Economic Order (NIEO) was yet another impetus to this effect. The NIEO largely reproduces the SingerPrebisch thesis, only a few years later. Through this term, we understand the various proposals advanced by developing countries typically before the UNCTAD, concerning the improvement of terms of trade for developing countries, the increase in development assistance, and also the possibility for developing countries to have recourse to TRIMs types of measures. Some of these measures found their way in Part IV of GATT, as we
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saw in chapter 5 of volume 1. Some of them were translated into longer transitional periods for developing countries to meet their obligations, and some into relaxed obligations (relaxed, when compared to the burden that developed countries had to observe). TRIMs, which we discuss here, continued to be outlawed for both developed as well as developing countries. Recourse to local content, though, is not always senseless. For example, Graham and Krugman (1990) have pointed to many MNEs that have “screwdriver operations” abroad; e.g., they delocalize only assembly operations with no value added. MNEs, therefore, would profit from a tax haven, but would not contribute at all to the development of the host country. The response by developing countries has been the enactment of local content requirements so as to oblige them to use local value added.3 Through similar measures, host countries would participate in the production process and start to integrate into world trade. This was an early version of GVCs (global value chains) that we discussed in various chapters in volume 1. There are various country-specific studies that point to beneficial effects resulting from similar measures for host countries. Sutton (2004), to cite but one study, provided evidence that speaks volumes about local content requirements. China imposed similar requirements in the car industry sector, forcing foreign companies to cooperate with local suppliers, a factor that contributed to enhancing the quality levels of the Chinese car industry. Export performance requirements have been enacted in order to capitalize on economies of scale and profit from export-led industrialization.4 When coupled with export diversification, export performance requirements are even more profitable, since exporters reduce the uncertainty surrounding export income. The glorious reports that accompanied their early success, though, gave way to skepticism about the whole enterprise. In the long run, some of these policies have proved unsustainable. Similar strategies have, on the other hand, often resulted in reduction of world welfare as well.5 They typically shift costs to others, and this is what the negotiation of the Agreement on TRIMs aimed to address.6 7.1.3.2 Negotiating TRIMs TRIMs were thus used mainly by developing countries, and because of their cost-shifting properties, it was not long before they provoked the wrath of developed countries. It is the US that first submitted a proposal already in 1981 to the Consultative Group of Eighteen (CG18), aiming to address the nefarious effects caused by TRIMs that others (developing countries) had been using.7 The US could count on the support of the EU and Japan, which, by that time, had abandoned similar policies. Developing countries refused to give up on their sovereignty to impose TRIMs, arguing that TRIMs were lying outside the competence of GATT. The US pressed its position on two fronts. First, it widened its original proposal submitted in 1981 so as to include explicitly a number of TRIMs that should be abolished.8 Among the measures mentioned in the US proposal, we find local content and export
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performance requirements. It would be difficult for developing countries to insist on their position with respect to these two instruments, since GATT had already outlawed them (Articles III and XI, respectively). Second, it also brought a complaint (Canada–FIRA, discussed in chapter 7, volume 1), apparently in order to test the limits of the GATT coverage of investment and investmentrelated issues.9 In Canada–FIRA, the US managed a pyrrhic victory. The panel accepted that local content requirements violated Article III.4 of GATT. It held, though, that private investors’ protection lies outside the scope of GATT, and further, that the condition that foreign investors export an amount of their production did not run counter to Article XVII.1(b)10 (§ 5.18): As explained in paragraph 5.16 above, Article XVII:1(b) does not establish a separate obligation to allow enterprises to act in accordance with commercial considerations but merely defines the obligation of the enterprises, set out in sub-paragraph (a) of Article XVII:1, to “act in a manner consistent with the general principles of non-discriminatory treatment” prescribed in the General Agreement. Hence, before applying the commercial considerations criterion to the export undertakings, the Panel first had to determine whether Canada, in accepting investment proposals on the condition that the investor export a certain quantity or proportion of his production, acts inconsistently with any of the general principles of non-discriminatory treatment prescribed in the General Agreement. The Panel found that there is no provision in the General Agreement which forbids requirements to sell goods in foreign markets in preference to the domestic market. In particular, the General Agreement does not impose on contracting parties the obligation to prevent enterprises from dumping. Therefore, when allowing foreign investments on the condition that the investors export a certain amount or proportion of their production, Canada does not, in the view of the Panel, act inconsistently with any of the principles of non-discriminatory treatment prescribed by the General Agreement for governmental measures affecting exports by private traders. Article XVII:1(c) is for these reasons not applicable to the export undertakings at issue.
The US, thus, did not win big before the GATT panel, but it did not lose either. It pursued its ambition to bring at least some TRIMs under the aegis of GATT, and for this purpose, it was willing to compromise. Some more moderately ambitious developed nations like Japan and the EU, as well as some developing countries, sided with the US, reaching the following agreement in Punta del Este, where the Uruguay round was launched (1986): Following an examination of the operation of GATT Articles related to the trade restrictive and distorting effects of investment measures, negotiations should elaborate, as appropriate, further provisions that may be necessary to avoid such adverse effects on trade.
This expression had “narrow scope of negotiations” written all over it. This is what indeed happened, as we will see later in this chapter.
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7.2 The Relationship with GATT and the Other Annex 1A Agreements 7.2.1 The Relationship with GATT TRIMs is an Annex 1A agreement, and its relationship with GATT is addressed in the General Interpretative Note discussed in chapter 1, volume 1. In short, TRIMs, for all matters coming under its purview, should take precedence over GATT. There have been disagreements, nevertheless, in earlier case law as to which of the two (GATT or TRIMs) is the more specific agreement, and, consequently, which should come first in the order of analysis that panels have adopted. In Indonesia–Autos, the panel reflected the view that TRIMs is the more specific agreement (§ 14.63): “first examine[d] the claims under the TRIMs Agreement since the TRIMs Agreement is more specific than Article III:4 [of GATT] as far as the claims under consideration are concerned.” In Canada–Autos, though, while the panel accepted (§ 10.63) “that a claim should be examined first under the agreement which is the most specific with respect to that claim ...” it concluded that TRIMs could not be (§ 10.63) “properly characterized as being more specific than Article III:4 in respect of the claims raised by the complainants in the present case.” In the same vein, in India–Autos, the panel stated that, as a general matter, it might be difficult to characterize the TRIMs Agreement as necessarily more specific than the relevant GATT provisions (§ 7.157). The panel first analyzed, under GATT, the measures before it, partly because India, the responding party, had encouraged the panel to refrain from evaluating the consistency of the challenged measures with the relevant provisions of the TRIMs Agreement (§ 7.158). The order of analysis of the various claims presented should not affect the outcome, in principle, assuming that an examination of the various claims under the TRIMs will follow the review of the same claims under GATT. Nevertheless, as the panel itself implicitly recognized, the situation could be different if judicial economy had been exercised. In this case, the outcome of the dispute might be different had a panel examined the challenged measure under the more detailed agreement (TRIMs) as well (§§ 7.158–161).11 There has been a drastic change in the attitude of the WTO adjudicating bodies since the report on EC–Sardines. There, the Appellate Body (AB) made it abundantly clear that WTO adjudicating bodies should always start from the agreement regulating a matter in a more specific way. By privileging the Technical Barriers to Trade (TBT) Agreement over GATT (§ 204), and hinting that GATT is the default agreement, one should expect that panels now confronted with this issue will start their analysis from the claims under TRIMs. The question has also arisen in panel proceedings whether Article III.8 of GATT is germane to the various provisions of TRIMs. Recall that Article III.8 of GATT exempts
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subsidies and government procurement from the coverage of the obligation to accord national treatment to imported goods with respect to all domestic policies. The question thus has arisen whether subsidies linked to purchase of local content lie outside the scope of Article III of GATT because of Article III.8 of GATT. In Canada–Renewable Energy (which was discussed in chapter 7, volume 1, and chapter 3 in this volume), neither the panel nor the AB had any trouble reaching the conclusion that the Canadian measure was a local content requirement and, thus, violated Article 2.1 of TRIMs. The panel had found that the Canadian measure was indeed a local content requirement and, for this reason, was inconsistent with Article III.4 of GATT and Article 2.1 of TRIMs. Indeed, local content requirements of this type had been included in the Illustrative List of Annex in the TRIMs Agreement featured in Article 2.2 of TRIMs. The panel went on to explain that Article III.8 of GATT could serve as grounds to justify deviations from the obligations assumed under the TRIMs Agreement (§ 5.10 of the AB report): The Panel reasoned that “any government procurement transactions covered by the terms of Article III:8(a) of the GATT 1994 will be removed from the scope of the obligations set out in Article III, including Article III:4” and “where a particular TRIM involves the same kind of government procurement transactions described in Article III:8(a), it cannot be found to be inconsistent with the obligation in Article 2.1 of the TRIMs Agreement.
In § 5.33 of its report, the AB provided its explicit support for this understanding of the relationship between GATT and the TRIMs Agreement: For the reasons stated above, we consider that the Panel correctly rejected the European Union’s argument that Article III:8(a) of the GATT 1994 is not applicable to measures that fall within the scope of Article 2.2 of the TRIMs Agreement and the Illustrative List annexed thereto. Therefore, we uphold the Panel’s finding, in paragraph 7.121 of the Panel Reports, that “Paragraph 1(a) of the Illustrative List in the Annex to the TRIMs Agreement d[id] not obviate the need for [the Panel] to undertake an analysis of whether the challenged measures are outside of the scope of application of Article III:4 of the GATT 1994 by virtue of the operation of Article III:8(a) of the GATT 1994.”
It follows that governments can legitimately use TRIMs for government procurement purposes, provided, of course, that they have not adhered to the Government Procurement Agreement (GPA), discussed in chapter 10 in this volume. 7.2.2 The Relationship with the Other Annex 1A Agreements The relationship between two Annex 1A Agreements between them is more complicated. There is no law (like the General Interpretative Note) addressing it across the board, as in principle they were all thought to be lex specialis to GATT, and this is the only relationship that the General Interpretative Note aimed to address.12 This is an important issue, especially as far as the relationship between TRIMs and the Subsidies and Countervailing
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Measures (SCM) agreements is concerned, since both agreements contain disciplines on local content. So what should the benchmark be when deciding which agreement to give priority to? In Indonesia–Autos, the panel concluded that measures challenged under both TRIMs and SCM must be reviewed under both agreements. The panel examined whether there was conflict between the two agreements. It started by confirming that the General Interpretive Note did not apply to the relationship between TRIMs and SCM (§ 14.49). It used a narrow definition of the term “conflict” to decide that there was no general conflict between the SCM and the TRIMs agreements (§ 14.55). It thus went on to apply both agreements cumulatively to the transaction before it. In Canada–Autos, the panel followed the same logic, finding that there was no conflict between the two agreements since they did not impose mutually exclusive obligations.13 In Canada–Renewable Energy, the relationship between the TRIMs and the SCM agreements was put squarely before a WTO adjudicating body (this time the AB) once again. The AB held that there is no hierarchy between the two agreements, and that consequently, a panel can legitimately scrutinize claims challenging the consistency of a measure with the multilateral rules, starting its review from either. In § 5.7 of its report, it held that panels remained free to choose the order of analysis, but in similar cases, they could not exercise judicial economy since the remedies provided in the two agreements were drastically different. The SCM Agreement provides a specific remedy—namely, the obligation to withdraw immediately illegal subsidies (such as local content, as we will see in chapter 11 in this volume): Japan has emphasized the differences in the remedies foreseen under the SCM Agreement and the remedy foreseen in Article 19 of the DSU. The specific remedy provided under Article 4.7 of the SCM Agreement is an important consideration. In EC–Export Subsidies on Sugar, the remedy provided under Article 4.7 was the reason why the Appellate Body found that the panel had improperly exercised judicial economy when it failed to make findings under the SCM Agreement once it had found a violation of the Agreement on Agriculture. While the difference in remedy would be relevant to a decision as to whether or not there would be a need to address the claims under the SCM Agreement, having made findings under the GATT 1994 and the TRIMs Agreement, we do not see its relevance in this case for the question of which claim to address first. In any event, this was not a case in which the Panel exercised judicial economy; the Panel made findings under Article III:4 of the GATT 1994 and the TRIMs Agreement. (italics in the original)
A side remark here is warranted as well. Local content measures that do not involve the payment of subsidies should come under the purview of Article III.4 of GATT and the TRIMs Agreement, whereas local content measures that do involve the payment of subsidies will be subjected to the disciplines of the SCM Agreement. This is a much cleaner solution.
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7.3 Trade and Investment Before entering the discussion regarding the legal disciplines included in the TRIMs Agreement, it is probably appropriate to take a short detour into the relationship between trade and investment. Investment and trade could be complements14 or substitutes, of course.15 Their intimate relationship has led sovereign states to the negotiation of deals that cover both areas, in the context of preferential trade agreements (PTAs) and bilateral investment treaties (BITs). While the TRIMs Agreement has been the only successful attempt to bring investment measures under the aegis of GATT/WTO so far, more ambitious efforts to bring in investment disciplines within the multilateral trading system have seen the light of day in the past. 7.3.1
From ITO to GATT
The Havana Charter contained no comprehensive regulation of investment. Two provisions (Articles 11 and 12) were included in Chapter III, couched in hortatory language, and had a narrow scope. First, ITO members should reflect on avoiding double taxation as a means to promote international investment. Second, they should further reflect on the appropriateness of avoiding discrimination against foreign investors (the benchmark of comparison being domestic investors). Chapter III of the Havana Charter was entitled “Economic Development and Reconstruction.” The placement of investment-related provisions in this chapter denoted the overarching objective (e.g., development) that regulation of investment at the multilateral level should achieve. The ITO investment regime was thus not geared toward protecting property rights. Rather, it was thought of (in the ITO context, that is) as a tool to promote economic development. ITO members could reflect on the appropriateness of signing bilateral (or even multilateral) agreements protecting international investment, and the possibility of eventually signing a multilateral agreement was explicitly included. Until that happened, ITO members should strive to provide foreign investors with equitable treatment, the parameters of the treatment remaining unspecified. The nonadvent of the ITO16 led to the de facto irrelevance of these provisions. We say “de facto,” not “de jure,” because by virtue of Article XXIX of GATT, GATT contracting parties undertook to observe, pending the entry into force of the ITO, the general principles of Chapters I–VI of the Havana Charter to the fullest extent possible.17 7.3.2 The GATT Regime The relevance of GATT to investment-related measures was exhausted in Articles III.5 and XI of GATT—that is, local content and export performance requirements.18 The Panel on Canada–FIRA, discussed here, confirmed that this is all that GATT mattered about
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concerning domestic regulation of investment. Now why were these two measures included, and not two other ones? The historic record indicates that in the 1940s, there was very frequent use of these two types of investment measures.19 Some sporadic attempts to extend the coverage of GATT in this respect were not successful. The first genuine Trade and Investment negotiation takes place after the advent of the WTO. 7.3.3 The WTO Working Group on Trade and Investment 7.3.3.1 Chronicle of a Death Foretold The Uruguay round marked the extension of the multilateral trading rules to new areas, such as intellectual property and services. Attempts were also seriously undertaken to expand to two other areas: competition (antitrust) law and a comprehensive investment agreement. Shortly after the entry into force of the WTO agreements, including the TRIMs Agreement, a Working Group was established to discuss the relationship between trade and investment.20 Following an initial discussion at the Singapore Ministerial Conference (1996), WTO members agreed at the Doha Ministerial Conference (November 2001) to undertake negotiations on trade and investment beginning in 2003.21 The scope of these negotiations would be defined at a subsequent stage. Alas, this agreement was short-lived and did not manage to reach any significant conclusion.22 Only two years later, during the Cancun Mid-Term Review meeting (September 2003), which was supposed to signal that trading partners were halfway toward the successful conclusion of the Doha round, the WTO membership made the dramatic decision to stop the negotiations on trade and investment23 and abandon the project (at least for a while).24 The idea was that, by focusing on fewer new issues, the process would be speedier. A decision adopted by the WTO General Council on 1 August 2004 stated: Relationship between trade and investment, interaction between trade and competition policy and transparency in government procurement: the Council agrees that these issues, mentioned in the Doha Ministerial Declaration in paragraphs 20–22, 23–25, and 26, respectively, will not form part of the Work Programme set out in that Declaration and therefore no work toward negotiations on any of these issues will take place within the WTO during the Doha Round.25
There are many reasons that contributed to this outcome. It is not an exaggeration to state that the odds were against a successful conclusion even before the negotiation began. Various reasons contributed to this outcome, and some of them are discussed in what follows. Understanding the reasons that led to failure could help negotiators avoid a similar fate in the future as well. 7.3.3.2 Developing Countries Are Skeptical Developing countries were collectively hostile to the negotiation of WTO disciplines on investment, although not for the same reasons.26 Some of them (i.e., India, Indonesia, and
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Malaysia) were very strongly opposed to any negotiation on investment. They voiced their concerns to this effect, citing the negative impact that a similar agreement would have had on their sovereignty. They were afraid that collectively, they (capital-importing countries) would be in weaker positions than capital-exporting WTO members. Some of them would be willing to contract investment protection in bilateral treaties. Their view was that bilateral and regional approaches to investment liberalization allowed them more opportunity to express national policy priorities and have them accepted by their contractual partners. Multilateral rules were not equally responsive to their idiosyncratic needs. In their view, less than multilateral contractual arrangements could better adapt to their national specificities and idiosyncratic elements.27 Other developing countries (e.g., Brazil and Argentina) would have been willing to go along with investment negotiations in the WTO if this would have helped them elsewhere in the Doha round (especially with agriculture vis-à-vis the EU and Japan). The likelihood that this would happen (e.g., that investment could be used as a quid pro quo to extract concessions on other fronts, primarily agriculture) was questionable, of course. Few negotiators believed that a deal on investment would make it significantly easier for Japan and the EU to make concessions in areas of their interest. In fact, there was sometimes a suspicion that the EU, Japan, and Korea, with an important defensive interest in agriculture, were interested in investment not because they wanted to create positive linkages, but rather because they wanted to create negative linkages (i.e., that they would drop investment as the price for lowering ambitions in agriculture). These countries as well thus formed part of the group of countries that were negatively disposed toward an agreement on trade and investment. And every now and then, skepticism was voiced regarding the potential contribution that investment rules could (or would) have on the pattern of international investment flows. Many wondered whether a multilateral agreement would be the necessary price to pay to attract investment. For them, the flame could light up anyway for reasons other than the conclusion of an agreement, so why pay the price of the candle? These views were not shared by all developing countries. Some developing countries (e.g., Chile and Costa Rica) were advocates of investment rules in the WTO. They saw WTO as a better forum than bilateral and regional investment agreements to host an investment agreement. Not only were developing countries that were partisans of a WTO deal on this issue few in number, but they also were not the leaders in the group of developing countries. 7.3.3.3 Developed Countries Do Not Speak with One Voice Developed countries did not manage to present a unified position throughout the negotiation process. In fact, from the outset (i.e., the Singapore Ministerial Conference in 1996), there was tension between some EU member states, Japan, and Canada, on the one hand,
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and the US and some other EU member states28 on the other. The former preferred to negotiate on investment in the WTO, whereas the latter thought that that priority should be given to concluding a high-standard multilateral investment agreement in the Organisation of Economic Cooperation and Development (OECD). The latter group, in other words, feared that a “torn down” agreement—the inevitable result of a negotiation between countries with different priorities and “philosophies” regarding the role of investment and the legitimate ambit of its protection—was not welcome. They were not prepared to make an agreement at any cost. Keeping the agreement within the four corners of the OECD membership would guarantee an outcome worthy of the original aspirations. This tension dissipated in 1998–1999 after the collapse of the Multilateral Agreement on Investment (MAI)29 negotiations, but the US did not change its attitude and never became an enthusiastic supporter of investment negotiations in the WTO.30 7.3.3.4 End Game: Drop It Sornarajah (2004) has taken the view that the negotiating lines that divided developed countries from developing countries were hard to cross, and absent drastic change in the approach of developed countries, there was not much hope of securing a multilateral framework. This was the view of most developing countries. One should also bear in mind that the community of nongovernmental organizations (NGOs) was extremely hostile to the notion of investment negotiations in the WTO. Siding with voices to the effect that national sovereignty would be eviscerated through a similar deal, they called for a halt to any negotiation on this issue. Some governments, which were vulnerable to domestic pressure, changed their position repeatedly, moving from being staunch supporters of a deal to lukewarm followers of the views expressed by the NGO community and some developing countries. For all these reasons, and probably more, the WTO group came away empty-handed. Under the circumstances, this failure should not come as any surprise.31 7.3.4 Attempts outside the WTO: The MAI 7.3.4.1 An Ambitious Project The MAI would have removed barriers to investment, provided protection against expropriation and measures diminishing its value, and instituted a dispute settlement system. Negotiated at the OECD, the MAI was intended to be eventually exported to the WTO. In 1992, the OECD Investment Committee started its preparatory work.32 The mandate for the negotiations was to achieve a multilateral framework for investment, with high standards of investment liberalization and protection. Negotiators further aimed at providing an effective dispute settlement system that would be accessible to OECD and nonOECD members.
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The negotiations formally began in September 1995, continued until April 1998, and extended into the fall of 1998. The 29 OECD members, as well as the EU Commission, participated in the negotiations. Participation was not limited to OECD members. Anticipating its export to the WTO, eight non-OECD members participated as observers—namely, Argentina, Brazil, Chile, Estonia, Hong Kong, China, Latvia, Lithuania, and the Slovak Republic. Argentina and Brazil were two of the leaders of the developing countries at the WTO. China had already initiated its negotiation for accession to the WTO. Some other countries (non-OECD members) were informed on a regular basis about the status and substance of the negotiations. The negotiators felt the time was ripe for a global framework for investment, mainly because foreign direct investment (FDI) grew 14 times between 1973 and 1996 (progressing from $25 to $350 billion), significantly faster than the observed growth in international trade.33 7.3.4.2 Content The MAI was a very ambitious project. Unlike the regime envisaged by most bilateral investment treaties, the MAI purported to cover the preestablishment phase as well.34 Hence, the MAI included provisions on privatization, behavior of monopolies, and the temporary entry and stay of key personnel, such as investors, managers, and experts. It consisted of three pillars: namely, investment liberalization, investment protection, and dispute settlement. With respect to the first and the second pillars, the MAI enshrined the principle of nondiscrimination.35 The MAI signatories committed to treat foreign investors and their investments no less favorably than they treat their own—that is, they committed to national treatment (NT). They also agreed not to distinguish between investors and investments of other MAI parties—that is, they also committed to most favored nation (MFN). With respect to the third pillar, the MAI contained provisions on cross-border transfer of funds, fair and equitable treatment, and the standard of compensation in case of expropriation. The coverage of the MAI was quite broad. FDI, portfolio investment, and rights under contract formed part of its subject matter. 7.3.4.3 Failure Explained: No Taxation without Representation The MAI negotiations provoked a series of negative reactions, and the project was abandoned in late 1998. Why did MAI fail? If the MAI had been a treaty for OECD members only, then its fate probably would have been different. True, developed countries had divergences regarding what was to be disciplined and what exceptions should be agreed. Still, they managed to bridge many of them over the years. The decision to make a worldwide agreement out of MAI, and the ensuing hostility of developing countries to adhere to an instrument that they had not participated in negotiat-
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ing, provoked its collapse. “No taxation without representation,” as the famous saying goes. The MAI, after all, was supposed to discipline countries that had no say in its shaping, and this was unacceptable.36 It seems that OECD members did not learn much from history. A similar OECD initiative that was supposed to be exported to the WTO had failed in a similar manner: a 1987 study prepared by the OECD, entitled “Elements of a Conceptual Framework for Trade in Services,” was submitted for consideration to GATT. In this study, OECD members were making the case for expanding the GATT mandate at the time to cover trade in services as well. It was thwarted immediately by developing countries—but only because it was the OECD that had prepared the study. Consequently, they had had no opportunity to debate it and negotiate it. Negotiations should start from a clean slate, not from an OECD dictum, in their view. Or, “if you want me in on the landing, you better include me in the takeoff,” as the saying goes. Failure occurred for other reasons as well. It is questionable whether leveling the field is an incentive-compatible structure for them. They are typically capital-importing countries and, through regulatory concessions, they might better position themselves to attract foreign capital at the expense of other developing countries. Civil society also demonstrated an unambiguous opposition to the MAI. An unprecedented coalition of antiglobalization groups37 comprising over 600 NGOs from 70 countries were reportedly involved in opposing the MAI, fearing the negative impact of the MAI on a variety of issues, ranging from effects on unemployment to protection of the environment.38 The debate in civil society focused on several issues. First, it was argued that although investment creates jobs, foreign firms can exercise too much influence on, or even dominate, economic sectors, especially in developing countries, unless they are subjected to some controls. Developing countries nevertheless lacked the bargaining power to do so. Second, there were fears that investment liberalization could lead to an economic crisis when, in times of trouble, foreign investors pull their money out. Note, however, that empirical research has shown that the withdrawal of foreign investment is a problem only with portfolio investment, bank deposits, and loans, not with FDI. For example, during both the Mexican peso devaluation of 1994–1995 and the Asian economic crisis of 1997–1998, FDI was largely stable, and there was little capital flight.39 Third, investment liberalization was opposed because, as NGOs argued, multilateral companies would use FDI to exploit workers in low-wage countries with inadequate labor standards.40 Fourth, NGOs also argued that companies would invest in countries with low environmental standards, and use their influence to attack efforts in these countries to improve environmental standards.41 As evidence, they cited the impact of Chapter 11 of the North American Free Trade Agreement (NAFTA), which had been used by companies to recover damages when new, higher environmental standards had frustrated investment expectations.42 The informal coalition between developing countries and NGOs around the globe proved a formidable opposition that proponents of MAI could not defeat.
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7.3.4.4 A Glimmer of Hope Subsequent to the failure to enact the MAI, voices were heard arguing for a trimmeddown version of the ambitious MAI as a last hope for a multilateral agreement.43 It too failed. As things stand now, there is no comprehensive multilateral agreement on investment protection. There is only a sector-specific agreement, the Energy Charter Treaty,44 which liberalizes investment in the energy sector.45 There are also some multilateral initiatives dealing with particular aspects of investment protection, such as the World Bank Multilateral Investment Guarantee Agency (MIGA). At the same time, though, empirical research suggests that FDI policies are being liberalized quite rapidly, the absence of a multilateral agreement notwithstanding. According to a report published by the United Nations Conference on Trade and Development (UNCTAD),46 over 90 percent of changes in national regimes regulating FDI were of a liberalizing nature. Sauvé and Subramanian (2001) estimated that cross-border FDI activity increased in the 1990s by almost 60 percent. Investment, thus, is being liberalized at a fast pace, even in the absence of a multilateral umbrella.47 The MAI is dead now, but some of its provisions could be resurrected and eventually find their way into a new negotiation. In the meantime, investment protection nowadays takes place within BITs, regional schemes, and PTAs, such as NAFTA chapter 1148 or the EU.49 We turn to this issue in the next discussion. 7.3.5
Investment Protection in BITs and PTAs
There is abundant literature regarding BITs, and discussing it even summarily defeats the purposes of this volume.50 Inclusion of investment in PTAs, on the other hand, deserves particular mention. A recent study by Horn et al. (2010) showed that investment protection figures prominently among many PTAs signed by the two main hubs (the EU and the US), as well as a series of spokes. It is remarkable that many developing countries are eager to sign investment protection provisions with capital-exporting countries in the context of PTAs. Horn et al. (2010) showed that between 1992 and 2008, 12 out of 14 PTAs signed by the EU with a host of developing nations contained provisions relating to investment protection. Moreover, in 8 of these schemes, the language chosen was clearly binding, thus ensuring enforcement of property rights. The corresponding numbers for US arrangements during the same period were 11 of 14 and 11 (in other words, all of them). In another recent study, Kotschwar (2010) analysed investment provisions in 52 PTAs and concluded that it is flexibility that drives the inclusion of investment provision in PTAs. Moreover, recall the observation made earlier in this chapter: capital-importing countries would rather “cheat” (e.g., by offering additional concessions) and attract investment at the expense of other capital-importing countries than equate conditions of
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competition through the signing of a multilateral agreement embedding the nondiscrimination obligation. This is yet another area where PTAs emerge as the preferred forum of trade negotiators. 7.4 The TRIMs Agreement 7.4.1
Measures Coming under the Purview of TRIMs
The coverage of the TRIMs Agreement extends, for all practical purposes, to measures that would come anyway under the purview of either Article III or Article XI of GATT. The Illustrative List in the Annex of the TRIMs Agreement annexed to TRIMs provides the following examples of measures that are inconsistent with both these two provisions and the TRIMs Agreement: • Local content requirements • Export performance requirements • Trade balancing requirements • Foreign exchange balancing restrictions • Restrictions on an enterprise’s export or sale for export of products The content of the Illustrative List in the Annex of the TRIMs Agreement is inspired by the text of GATT, as well as by the relevant case law. So one might legitimately ask whether any value was added in concluding the TRIMs (besides crystallizing case law into a statute). There is added value. First, the TRIMs Agreement facilitates the work of WTO adjudicating bodies since it identifies specific types of TRIMs (other than local content that is explicitly included in the body of Article III of GATT) that are considered to be inconsistent with GATT Article III or Article XI. The Panel on India–Autos held that the Illustrative List of the Annex in the TRIMs Agreement provides “additional guidance as to the identification of certain measures considered to be inconsistent with Articles III:4 and XI:1 of GATT 1994 (§ 7.157).”51 Assuming that a challenged measure falls under the Illustrative List in the Annex of the TRIMs Agreement, it will ipso facto be judged to be WTO inconsistent. In addition, the judge will not have to decide the extent that it violates a specific provision.52 Second, the TRIMs agreement also provides extra transparency. Under GATT, WTO members have to ensure that the WTO is notified only of measures of general application, as per Article X of GATT. However, this article leaves substantial discretion to WTO members as to which measures the WTO should be notified of, although their exercise of discretion is justiciable. The TRIMs Agreement reduces the scope for discretion by
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obliging them to notify all TRIMs (regardless of whether they are considered general application). 7.4.1.1 Measures Coming under the Purview of Article III of GATT The following measures featured in the Illustrative List come under the purview of Article III of GATT: • Required purchase or use by an enterprise of products of domestic origin or from any domestic source • Requirements to the effect that an enterprise’s purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports In Indonesia–Autos, the panel ruled on the legality of an Indonesian automobile program that linked the tax benefits for cars assembled in Indonesia to local content requirements and linked customs duty benefits for imported components of cars manufactured in Indonesia to similar local content requirements. The panel found that these were indeed local content requirements that had a significant impact on investment in the automotive sector (§ 14.80), and that they were trade-related because they affected trade (§ 14.82). The panel also found that compliance with the requirements for the purchase and use of products of domestic origin was necessary to obtain the tax and customs duty benefits, and that these were advantages within the meaning of the Illustrative List in the Annex of the TRIMs Agreement (§§ 14.89–91). As a result, the panel ruled that the local content requirements imposed by Indonesia violated the TRIMs Agreement (§ 14.91). 7.4.1.2 Measures Coming under the Purview of Article XI of GATT Three categories of measures come under the purview of Article XI.1 of GATT: • The importation of products used in or related to local production, generally in an amount related to the volume or value of local production that it exports • The importation of products used in or related to local production by restricting access to foreign exchange to an amount related to the foreign exchange inflows attributable to the enterprise • The required exportation or sale for export by an enterprise of products All these measures are export-related performance requirements to varying degrees. The India–Autos litigation53 involved the review of an Indian trade-balancing measure. The import by domestic car manufacturers of parts and components necessary for the production of cars was conditioned on a certain free-on-board (FOB) value of exports of cars and components over the same period. If the statutory thresholds had not been met, no imports would occur. The legislation thus gave an incentive to Indian car manufacturers
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to export so that they could profit from cheap inputs. The panel addressed this measure in the following manner (§§ 7.277–278): [As of the date of the establishment of the trade-balancing condition,] there would necessarily have been a practical threshold to the amount of exports that each manufacturer could expect to make, which in turn would determine the amount of imports that could be made. This amounts to an import restriction. The degree of effective restriction which would result from this condition may vary from signatory [of a memorandum of understanding with the Indian government] to signatory depending on its own projections, its output, or specific market conditions, but a manufacturer is in no instance free to import, without commercial constraint, as many kits and components as it wishes without regard to its export opportunities and obligations. The Panel therefore finds that the trade balancing condition [,] ... by limiting the amount of imports through linking them to an export commitment, acts as a restriction on importation, contrary to the terms of Article XI:1.
Having found that the trade-balancing requirements violated Article XI.1 of GATT, the Panel on India–Autos invoked the principle of judicial economy and concluded that it was not necessary to analyze the measures under the TRIMs Agreement as well (§§ 7.323–4). Recall that this is one of the earlier cases where panels would start their review of challenged measures from GATT and not from the TRIMs Agreement. This panel, of course, could have eased its way to its ultimate finding if it had started its analysis from the TRIMs Agreement rather than GATT, especially since the trade-balancing condition figures prominently, as we have already seen in the Illustrative List of the Annex in the TRIMs Agreement. 7.4.2 The Obligations Assumed 7.4.2.1 Thou Shalt Not ... Article 2.1 of TRIMs prohibits WTO members from applying investment measures inconsistent with Article III or Article XI of GATT (including, of course, those featured in the Illustrative List in the Annex of the TRIMs Agreement). 7.4.2.2 Thou Shalt Not ... in the Foreseeable Future Article 5.2 of TRIMs provides three different transition periods during which WTO members, according to their level of development, must phase out WTO-inconsistent measures that the Council on Trade in Goods (CTG) has been notified of. Developed countries were required to eliminate their WTO-inconsistent measures by 1 January 1997. Developing country members were required to eliminate their WTO-inconsistent measures by 1 January 2000. Least developed countries (LDCs) were required to eliminate their WTO-inconsistent measures by 1 January 2002.54 The Hong Kong Ministerial Declaration (2005) provided an extension of the statutory deadlines:
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LDCs shall be allowed to maintain on a temporary basis existing measures that deviate from their obligations under the TRIMs Agreement. For this purpose, LDCs shall notify the Council for Trade in Goods (CTG) of such measures within two years, starting 30 days after the date of this declaration. LDCs will be allowed to maintain these existing measures until the end of a new transition period, lasting seven years. This transition period may be extended by the CTG under the existing procedures set out in the TRIMs Agreement, taking into account the individual financial, trade, and development needs of the Member in question.
LDCs shall also be allowed to introduce new measures that deviate from their obligations under the TRIMs Agreement. The CTG shall be notified of these new TRIMs no later than six months after their adoption. The CTG shall give positive consideration to such notifications, taking into account the individual financial, trade, and development needs of the member in question. The duration of these measures will not exceed five years, and they will be renewable subject to review and decision by the CTG. Any measures incompatible with the TRIMs Agreement and adopted under this decision shall be phased out by 2020. Article 5.1 of TRIMs subjects to prior notification all measures that can benefit from the transitional period established. New measures (e.g., measures introduced within 180 days before the entry into force of the agreement) shall not profit from the transitional period (Article 5.4 of TRIMs). During the transitional period, a WTO member cannot modify the terms of any WTOinconsistent measure (Article 5.4 of TRIMs). This is the standstill obligation imposed on WTO members with respect to all notified TRIMs. 7.4.2.3 Transparency Recall that, by virtue of Article 5.1 TRIMS, only measures that the WTO has been notified of can profit from the transitional periods established. The notification record probably leads to suspicions that not all WTO members took this obligation seriously. For example, among LDCs, only Uganda communicated its local content-type TRIMs.55 Some developing countries were unable to eliminate WTO-inconsistent measures during the transitional period, and they used the possibility provided in the TRIMs Agreement (Article 5.3) to request an extension of the deadline for compliance from the CTG.56 The WTO Secretariat must be notified of all publications in which TRIMs can be found, including those applied by regional and local governments and authorities within their territories (Article 6.2 of TRIMs). This transparency obligation covers both WTO-consistent and WTO-inconsistent measures. As Collins-Williams and Wolfe (2010) astutely observed, though, one cannot legitimately expect WTO members to supply selfincriminating information. There is, thus, room here for cross-notifications and for the TPRM to fill in the gaps.57
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531
De Facto TRIMs?
In Indonesia–Autos, the panel faced an argument by Indonesia that its measures should not be considered to be “local content requirements” since they were not mandatory anyway. The panel disagreed. In its view, for a measure to be characterized as TRIM, it was immaterial whether it was binding or not (§ 14.90): The wording of the Illustrative List makes it clear that a simple advantage conditional on the use of domestic goods is considered to be in violation of Article 2 of the TRIMs Agreement even if the local content requirement is not binding as such.
This finding has not been confirmed in subsequent case law, but if it is, then the scope of the agreement will ipso facto be enlarged. Probably what the panel had in mind was to sanction measures that, while they were hortatory on their face, they conferred a de facto advantage. Recall that, as we have seen in chapter 2, volume 1, the test for attributing behavior to a WTO member is whether the measure provides private agents with incentives to behave in a particular way. This panel did not make explicit reference to this test. Hopefully, it is just an involuntary omission. 7.4.4
Special and Differential Treatment
The TRIMs Agreement provides for special and differential treatment by making longer transitional periods available in order to eliminate notified TRIMs to developing countries and LDCs, as discussed earlier in this chapter. Following negotiations, it was agreed during the Hong Kong Ministerial Conference (2005) that additional measures were required to allow developing countries to better profit from their participation in the TRIMs Agreement. Annex F of the Hong Kong Ministerial Decision58 reflects these new measures. LDCs, as we saw previously, were allowed to maintain existing TRIMs until the end of a new transition period lasting for seven years. This transitional period can be extended by decision of the CTG, in principle, in light of the individual financial, trade, and development needs of the member in question. LDCs would have to notify the CTG within two years of their TRIMs, their notification duty starting on 17 January 2006. LDCs were further allowed to introduce new TRIMs; however, their duration should not exceed five years. New TRIMs could be renewed subject to review and decision by the CTG, assuming LDCs had notified it of new TRIMs within six months of their adoption. The quality of special and differential treatment, thus, is exhausted in measures that allow developing countries (more specifically LDCs) to deviate from obligations assumed under the TRIMs Agreement.
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Institutions
A Committee on Trade-Related Investment Measures (TRIMs Committee) is established by Article 7 of TRIMs. The main task of the TRIMs Committee is to monitor the operation and implementation of the TRIMs Agreement. It further provides a forum for consultations among WTO members on trade and investment issues.59 The TRIMs Committee reports annually to the CTG. 7.6
Review of the Agreement
Article 9 of TRIMs reads: Not later than five years after the date of entry into force of the WTO Agreement, the Council for Trade in Goods shall review the operation of this Agreement and, as appropriate, propose to the Ministerial Conference amendments to its text. In the course of this review, the Council for Trade in Goods shall consider whether the Agreement should be complemented with provisions on investment policy and competition policy.
The review process began in 1999 and is technically still continuing. There is no consensus on the need to amend the agreement. While developing countries are seeking greater flexibility to apply TRIMs for development purposes, developed countries generally would like to see the current balance of rights and obligations maintained. As a result, nothing much happened at the review stage other than failed attempts by developing countries to widen the list of (temporary) deviations from the agreement currently reflected in Article 4 of TRIMs.60 The process was suspended (with no formal decision to this effect) and has not resumed. 7.7
Concluding Remarks
The TRIMs Agreement has provided clarity with respect to the type of investment-related measures that come under the purview of the WTO. To a large extent, the agreement crystallized case law into law, facilitating the acceptability of the new rules by the trading partners. The measures covered are a far cry from a multilateral agreement on investment protection, and GATT case law has made this point clear beyond any doubt. The initiatives aiming to multilateralize investment protection, both inside and outside the WTO, have failed to produce any tangible results so far. This has happened for various reasons already discussed in this chapter. Hoekman and Saggi (2000), in a very thoughtful paper, explained why, instead of pursuing a multilateral agreement on investment, WTO members would be better served by focusing on strengthening the commitments under Mode 3 of the General Agreement on Trade in Services (GATS). Their argument can be summarized as follows:
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Absent international spillovers (e.g., in the presence of pure domestic externalities), there is no need for international cooperation. Trade openness can tame domestic oligopolistic markets anyway, and there is no evidence that investment incentives are effective in attracting FDI. A few years later, Baldwin, Evenett, and Low (2008) concluded the exact opposite. Blanchard (2013) joined her voice to theirs. She observed a shift from “horizontal” toward “vertical” investment, which is more “footloose” (e.g., industries will move in response to production costs) and, thus, sensitive to incentive subsidies. Voices arguing in favor of an agreement on investment have been gathering speed again. The TRIMs Agreement, by its very existence, has kept the discussion regarding the relationship between trade and investment alive.
8
Agreement on Agriculture
8.1 The Legal Discipline and Its Rationale 8.1.1 The Legal Discipline Trade in farm goods was not comprehensively subjected to the GATT disciplines, as we have seen in chapters 2 and 3, volume 1. Quantitative restrictions could be imposed on farm goods under the conditions embedded in Article XI.2 of GATT, and a number of trading nations had not offered tariff concessions on farm goods either. The purpose of the Agreement on Agriculture (AG) is to integrate farm trade into the mainstream disciplines governing trade in goods. To this effect, all protection in place before the Uruguay round, regardless of its form (e.g., guaranteed prices for goods, minimum prices paid to producers, etc.), must be transformed into tariff protection. The amount of subsidies paid is capped as well, and will be progressively reduced. The agreement recognizes that the disciplines that it includes do not signal the end of the road. There is a commitment (Article 20 of AG) to initiate new negotiations that aim to reform farm trade just before the end of the implementation period.1 New negotiations were actually initiated as per the schedule in January 2000. The General Council then decided to conduct those negotiations under the aegis of the Committee on Agriculture, meeting in “Special Sessions,” and the first meeting was held in March 2000. After the launch of the Doha round in 2001, the new negotiations were subsumed into the Doha package, as per the Doha Ministerial Declaration. The absence of any agreement so far means that (formally at least) the negotiations are still ongoing, although the prospects for concluding a new comprehensive agreement are remote. In the meantime, the Uruguay-round AG, which we are discussing here, will provide the framework for the liberalization of farm goods. 8.1.2 The Rationale for the Legal Discipline Farm and textile trade remained either partially (in the case of farm trade) or totally (textiles) outside the GATT disciplines until the end of the Uruguay round. The reasons
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for their exclusion from the coverage are idiosyncratic to each of them, but the end result is quite similar. For political economy reasons, the important markets of the North (i.e., the EU and US) remained essentially closed to imports of textile goods, whereas the EU market, as well as the markets of some other developed countries, remained closed to imports of farm goods as well. Farm and textile trade has been impeded over the years through high tariffs and various nontariff measures aiming to shield domestic production from foreign competition. The negative impact that similar policies have had on developing countries, which typically have a comparative advantage in the production of farm goods, was very substantial. Recall from our discussion in chapter 5, volume 1, that one of the main conclusions of the Haberler report was that developing countries could not adequately profit from their participation in GATT, because of the protectionist policies regarding the trade of farm and textiles goods that some developed countries had adopted. The Uruguay round was largely a quest to open up trade in these two sectors.2 At least, this was the priority as far as developing countries were concerned. Relatively speaking, the Uruguay-round agreements have achieved more in the context of textile trade, where all protection has taken the form of tariff protection, and quotas and other forms of import substitution have been eliminated. 8.1.3
Discussion
8.1.3.1 Farm Markets Are Volatile Weather conditions and other natural factors are the main reasons why farm output varies from year to year. Prices change as a result, and volatility increases (in the short run, at least). It is, thus, quite normal that we observe regulatory responses aiming to normalize conditions in the market. The question arises whether reaction will be coordinated or unilateral. Since changes in weather conditions are local phenomena, similar distortions could be addressed through international trade liberalization of farm goods. Alas, responses have been highly selfish, as we detail in what follows. Quite often, they have gone far beyond what is required to address distortions. Trading nations typically address distortions in the production of farm goods in a “selfish” manner. They try to stabilize domestic markets through various types of interventions, without resorting to coordinated action. Josling (2015) described it as a collective action problem, an issue to which we will come back later in this chapter. In essence, his argument is that the US, being the principal exporter of farm goods for many years, did try to address similar concerns by investing in the stockpiling of farm goods that it would sell to the market when warranted. The cost of similar operations is quite substantial, though, and free riders multiplied. The US incurred the totality of the investment, but not the totality of the profits. Eventually, the US dropped this policy, and no one picked it up. The WTO Agreement on Agriculture was supposed to provide the response to the collective action problem. An agreement on farm goods was made possible for the first time only in
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1995. Before that, trade in farm goods was largely undisciplined by the multilateral rules. Entrenched interests and other factors help explain why this has been the case. 8.1.3.2 The Political Economy of Farm Protection in the North For many, the amount of protection that farmers have received in some Northern markets might seem counterintuitive. The question would naturally arise: Why farmers, and not other professions? Farmers managed to get extraordinary protection, especially (but not exclusively) in the EU and the US. Dozens of studies show that a net economic loss for the economy was the result of the protection afforded to farmers, against which politicians in power did receive compensation in the form of political support by the farmers’ lobbies. To a large extent, the explanation lies in the “collective action” problem that Olson (1965) comprehensively analyzed, and the possibilities that organized lobbies have to advance their agenda in democracies. Farm subsidies in the North have led to remarkable misallocation of resources. There are hundreds of examples to this effect, and here is one. The cheapest way to produce sugar is by growing sugarcane, which requires a tropical climate. One would expect, thus, that countries with tropical climates would monopolize the sugar market, and yet the EU and the US (which are certainly nontropical regions of the world) are important producers and exporters of sugar. How can this be—especially given the fact that sugarcane grows in no EU territory, and only in a few square miles of US territory? The answer is subsidies paid to EU and US producers of sugar beets, a less efficient source of sugar than sugarcane. Why would EU/US taxpayers agree to subsidize domestic producers of sugar beets instead of simply consuming the less expensive imported sugar produced from sugarcane? Numerous studies have substantiated this point. Dixit (2014) offered in the clearest possible manner the following example, which could serve as explanation for hundreds of similar cases (pp. 89–90): As broad generalization, groups that are relatively small in size, and involve large stakes per member, are better organized than large groups with diffuse interests. US sugar import and price support policies give a dramatic example. These policies keep sugar prices high in the US, benefiting domestic sugar farmers and producers of sugar-substitutes like high-fructose corn syrup (HFCS). It has been estimated that in the mid-1980s the consumers’ loss was about $3.9 billion and the producers’ gain $2.8 billion, so the net loss to the US economy was $1.1 billion. But with a population of about 250 million at that time, the loss to each consumer was only about $15, not worth agitating or organizing over. The gain to sugar-beet farmers averaged $50,000 each, and the gain to sugarcane farmers averaged $500,000 each! Therefore they organized and lobbied in favour of the restrictive policies.
8.1.3.3 Farm Trade and Developing Countries Developing countries did not always consider farm trade a driver for development. Recall from chapter 5 the emergence of the Prebisch-Singer thesis, calling for import substitution and industrialization.3 The situation is quite different nowadays. Exports of farm goods
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originating in developing countries face increasingly lower duties. They face other barriers, of regulatory nature this time. Recall the link between the AG and the SPS agreements, to which we referred in chapter 6 in this volume. Meeting standards or science-based measures is perceived as some sort of quality control for farm goods, where competition does not take place only with respect to prices, but increasingly with respect to quality, reliability, and other criteria. Standards are, of course, not only state sponsored, but private as well, as we saw in chapters 5 and 6 in this volume. Global GAP (“GAP” stands for “Good Agricultural Practice”) has emerged as the preeminently used food safety standard for retailers, widely used around the globe (with its own conformity assessment procedures, etc.). All this might sound quite pessimistic as far as the interests of developing countries are concerned. Adoption of demanding public safety policies by Organisation of Economic Cooperation and Development (OECD) countries increases the cost of compliance for foodstuff produced in the developing world. Nevertheless, in today’s world, there is an ongoing discussion regarding the welfare implications for developing countries of the regulation of farm goods in the OECD countries. Recall the divergent positions presented by Wilson and Otsuki (2004) and Maertens and Swinnen (2009), discussed in chapter 5 in this volume. The rise of global value chains (GVCs), in which developing countries increasingly participate, has cast serious doubt on the pessimistic accounts of yesterday, since many developing countries have jumped on the bandwagon and integrate production chains that now channel goods to the OECD markets. 8.2 The Relationship with GATT and the Other Annex 1A Agreements 8.2.1 The Relationship with GATT The AG Agreement is an Annex 1A Agreement, and its relationship with GATT is addressed in the General Interpretative Note that we discussed in chapter 1, volume 1. Article 21.1 of AG makes recourse to the General Interpretative Note redundant, since it leaves no doubt that the AG provisions take precedence, and that GATT applies to farm trade only to the extent warranted: “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.”4 For example, take Article XI.2(a) of GATT and Article 12 of AG. The latter explicitly states that it imposes obligations when recourse to export restrictions is made in accordance with the former. In similar cases, the WTO member imposing the export restriction must take into account the interests of importing members regarding their food security.
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Occasionally, however, there is conflict between GATT and AG provisions. Article XI:2(c) of GATT and Article 4.2 of AG provide an appropriate illustration to this effect. Recall that the former covers import restrictions of any form, which are tolerated as exceptions to the general prohibition to impose quantitative restrictions (QRs). The latter requires that WTO members avoid recourse to a series of measures that could come under Article XI.2(c) of GATT. Obviously, there is conflict between the two provisions, and Article 4.2 of AG makes Article XI.2(c) of GATT moot (to the extent of the conflict, of course). WTO members must “tariffy” a series of measures included in a footnote to Article 4.2 of AG, which reads: These measures 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, whether or not the measures are maintained under country-specific derogations from the provisions of GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture-specific provisions of GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.
As a result, WTO members cannot have recourse to similar measures, and invoke Article XI.2(c) GATT to justify their actions. As we saw earlier, it is the AG Agreement that takes precedence over the GATT and not vice versa. There is conflict as well between the AG Agreement and the various “commodity agreements,” reference to which is made in Article XX GATT.5 The conflict exists because certain price-based measures in favor of producers that embedded in commodity agreements could run counter some disciplines included in the AG Agreement. This is not the case for all commodity agreements. The agreements on coffee, cocoa, olive oil, sugar focus on transparency, and do not include price-based measures. Moreover, Article XX(h) GATT also covers commodity agreements that escape the coverage of the AG Agreement, since some of them concern trade in minerals. It follows that the conflict between the provisions of the AG Agreement and Article XX(h) GATT is only partial. To the extent, however, that a commodity agreement deals with farm goods, and provides for price-based measures, they must observe the disciplines of the AG Agreement. Recall from our discussion in chapter 9, volume 1, that, in order for a measure to be covered by Article XX(h) of GATT (read in conjunction with its Interpretative Note), the intergovernmental commodity agreement in question must: (a) Conform to criteria submitted to the Contracting Parties and not disapproved by them; (b) Be itself submitted and not disapproved; or (c) Conform to the principles approved by the Economic and Social Council in its Resolution (ECOSOC) 30(IV) of 28 March 1947.
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The “principles” referred to in the ECOSOC Resolution reproduce those contained in Chapter VI of the Havana Charter. In light of the fact that no criteria for commodity agreements had ever been submitted to GATT, nor had any commodity agreements themselves been “submitted and not disapproved,” the “principles” contained in Chapter VI of the Havana Charter emerge as the de facto only multilateral trade rules that commodity agreements must observe. It is Article 60 of the Havana Charter entitled “General Principles Governing Commodity Agreements” that is of importance to our discussion here: 1. The Members shall observe the following principles in the conclusion and operation of all types of inter-governmental commodity agreements: (a) Such agreements shall be open to participation, initially by any Member on terms no less favourable than those accorded to any other country, and thereafter in accordance with such procedure and upon such terms as may be established in the agreement, subject to approval by the Organization. (b) Non-Members may be invited by the Organization to participate in such agreements and the provisions of subparagraph (a) applying to Members shall also apply to any non-Member so invited. (c) Under such agreements there shall be equitable treatment as between participating countries and non-participating Members, and the treatment accorded by participating countries to nonparticipating Members shall be no less favourable than that accorded to any non-participating non-Member, due consideration being given in each case to policies adopted by non-participants in relation to obligations assumed and advantages conferred under the agreement. (d) Such agreements shall include provision for adequate participation of countries substantially interested in the importation or consumption of the commodity as well as those substantially interested in its exportation or production. (e) Full publicity shall be given to any inter-governmental commodity agreement proposed or concluded, to the statements of considerations and objectives advanced by the proposing Members, to the nature and development of measures adopted to correct the underlying situation which gave rise to the agreement and, periodically, to the operation of the agreement. 2. The Members, including Members not parties to a particular commodity agreement, shall give favourable consideration to any recommendation made under the agreement for expanding consumption in the commodity in question.
On its face, this provision does not seem to conflict with Article 4.2 of AG. Its implementation nonetheless, and more specifically Articles 60.1(d) and 60.2, could include measures that run counter to Article 4.2 of AG. If this is the case, then similar measures should be judged inconsistent with the WTO rules, by virtue of Article 4.2 of AG. 8.2.2 The Relationship between the AG and the SCM Agreements As we saw in chapter 3 of this volume, export subsidies are illegal. Yet, as we discuss later in the chapter, export farm subsidies are not illegal per se; they will be tolerated so long as they respect the agreed caps. This raises the question what is the relationship between the SCM and the AG agreements? Article 21.1 of AG, which we quoted earlier, provides the answer: “The provisions of GATT 1994 and of other Multilateral
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Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the provisions of this Agreement.” So far so good, when it comes to discussing a case of direct “conflict” between a provision of the AG and a provision of the SCM Agreement. The issue, nevertheless, when discussing the relationship between the two agreements, is also whether conformity with the AG Agreement is a “one-stop shop” for trading nations, or, conversely, whether they are called to respect both sets of obligations, e.g., those included in the AG and those included in the SCM Agreement, cumulatively, when it is feasible to do so. We should note at the outset that the AG and the SCM agreements pursue different objectives, the similarities in their subject matter notwithstanding. The former aims at “capping” subsidization, whereas the latter, besides outlawing two forms of subsidization, aims at regulating remedial action by those affected by subsidies. The AG Agreement imposes disciplines on those providing subsidies. The SCM Agreement, on the other hand, provides disciplines both on those providing subsidies and on those affected by subsidies. There is, thus, only partial overlap regarding the disciplines imposed by the two agreements, and case law, to which we now turn, has had the opportunity to address this issue. Article 13 of AG clarifies that, provided that the subsidizing state has not behaved inconsistently with its obligations under the AG Agreement, the imposition of CVDs against farm goods will be impossible unless if it can be shown: (a) That the subsidy provided has caused injury; and (b) The WTO Member imposing CVDs has first exercised “due restraint.” The AG Agreement, therefore, implicitly accepts that some WTO members might still cause injury to other WTO members even when they limit the volume of subsidies they pay to their domestic producers to the amounts agreed through its disciplines. In this case, besides the requirement to show that (legal) subsidies have caused injury, affected WTO members must also demonstrate that they have exercised “due restraint.” Due restraint must be exercised regardless of whether countervailing duties (CVDs) are imposed against domestic or export subsidies. The Panel on Mexico–Olive Oil provides an appropriate illustration. Mexico had imposed CVDs against the EU under Article 13(b) of GATT. It was countervailing a domestic subsidy that had been bestowed on EU producers of olive oil. The panel had to address, inter alia, whether Mexico had respected its obligation to show “due restraint.” It defined the term “due restraint” as follows (§ 7.67): “... proper, regular and reasonable demonstration of self-control, caution, prudence, and reserve.” This is hardly a helpful definition. When discussing the specific claims of the EU, though, the panel did make some headway toward providing elements of what could constitute the duty to show “due restraint.” The EU had specifically argued that Mexico was in violation of its obligations in this respect because it had held no consultations with
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it prior to the investigation; it had not investigated sufficiently the claims during the time prior to the investigation; and it had transformed without any inquiry a claim of “material retardation” lodged by its domestic industry to a claim of “material injury” (§ 7.70). The panel disagreed on all counts. It found that there is no obligation to hold consultations prior to the investigation (§ 7.72); that, contrary to the EU assertion, Mexico had actively investigated the well-founded claims before initiation (§§ 7.73–76); and that, Mexico had also inquired into the true nature of the claim lodged (§§ 7.79–82). It dismissed the EU claim as a result. This report therefore suggests that the due-restraint requirement can be satisfied even when no consultations have been held prior to the imposition of duties between the affected and the subsidizing WTO member. It suffices that the WTO member imposing duties has inquired into whether the allegations made are well-founded, and respected the other statutory requirements. Consequently, compliance with the disciplines included in the AG Agreement does not immunize WTO members from imposition of duties under the SCM Agreement. This is the manner in which Article 13 of AG has been understood in Mexico– Olive Oil. The requirement to respect both the AG and SCM disciplines, when feasible, has been further reinforced in case law through the reports on Canada–Dairy, and US– Upland Cotton. In these two cases, the WTO panels and the AB were asked to pronounce on the obligation (or not) to respect the two agreements, in scenarios that did not involve the interpretation of Article 13 of AG. Article 13 of AG, as we have seen previously, explicitly discusses the relationship between the two agreements. The two reports effectively held that the requirement to respect the two agreements cumulatively exists in general, when feasible of course, even in the context of litigation outside the four corners of Article 13 of AG. We explain. The panel on Canada–Dairy faced the question whether the Canadian Special Milk Classes Scheme constituted a subsidy or not. The parties had disagreed over whether Canada had exceeded its commitments on exports of milk (assuming, of course, that the panel would characterize the scheme an export subsidy). More precisely, the question was whether consistency of a measure with the disciplines of the AG Agreement immunizes a WTO member from challenges under the SCM Agreement. To respond to the question asked, the panel had to first discuss the relationship between the AG and the SCM agreements (§§ 7.20ff.). It held that WTO members must observe both the AG and the SCM disciplines, since the former does not constitute a “safe harbour” for measures inconsistent with the SCM. This report is not very helpful. It did call for cumulative respect of both agreements, but it did not detail the specific steps to this effect. The Appellate Body (AB) fine tuned this finding in its report on US–Upland Cotton. In this case, the AB faced, inter alia, an appeal by the US concerning the panel’s findings on the consistency of the “Step 2 payments” with the AG and SCM agreements, a scheme discussed and explained in § 514 of the report:
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Under the program, marketing certificates or cash payments (collectively referred to by the Panel as “user marketing (Step 2) payments”) are issued to eligible domestic users and exporters of eligible upland cotton when certain market conditions exist such that United States cotton pricing benchmarks are exceeded. “Eligible upland cotton” is defined as “domestically produced baled upland cotton which bale is opened by an eligible domestic user ... or exported by an eligible exporter.” An “eligible domestic user” of upland cotton is defined under the regulations as: A person regularly engaged in the business of opening bales of eligible upland cotton for the purpose of manufacturing such cotton into cotton products in the United States (domestic user), who has entered into an agreement with CCC to participate in the upland cotton user marketing certificate program.
Brazil had not contested that the US had acted in compliance with its obligations under Article 6.3 of AG (which imposes a cap on total spending). Nevertheless, it contested the consistency of the US payments with the SCM Agreement, arguing that the payments amounted to local content subsidies and, for this reason, were inconsistent with Article 3.1(b) of SCM. The question squarely before the panel (and the AB) was, therefore, whether compliance with the AG Agreement sufficed to thwart challenges that AGcompliant measures could still violate another Annex 1A agreement, in this case, the SCM Agreement. Recall that article 21.1 of AG states that both the GATT, as well as the Annex 1A agreements will apply subject to the disciplines embedded in the SCM Agreement. The term “subject to” is hardly illuminating, but now the panel and the AB were presented with the opportunity to refine the conditions for application of Article 21.1 of AG. The AB agreed with the panel that Article 21.1 of AG applies in three situations (§ 532): where, for example, the domestic support provisions of the Agreement on Agriculture would prevail in the event that an explicit carve-out or exemption from the disciplines in Article 3.1(b) of the SCM Agreement existed in the text of the Agreement on Agriculture. Another situation would be where it would be impossible for a Member to comply with its domestic support obligations under the Agreement on Agriculture and the Article 3.1(b) prohibition simultaneously. Another situation might be where there is an explicit authorization in the text of the Agreement on Agriculture that would authorize a measure that, in the absence of such an express authorization, would be prohibited by Article 3.1(b) of the SCM Agreement. (italics in the original)
The AB took the view that the situation before it was different from all three described here, and then concluded (§ 550): In providing such domestic support, however, WTO Members must be mindful of their other WTO obligations, including the prohibition in Article 3.1(b) of the SCM Agreement on the provision of subsidies that are contingent on the use of domestic over imported goods. (italics in the original) Consequently, whenever it is possible for a WTO member to comply with both the AG and the SCM agreements simultaneously, it should do so. Note that the AB did not impose any conditions for cumulative respect of the two agreements other than the feasibility for doing so. Unless we are facing a case of genuine conflict (e.g., when two obligations cannot be simultaneously complied with and hence compliance with only the AG
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Agreement will be required), WTO members must always comply with both the AG and SCM Agreements. Compliance with both agreements was possible in this case, and, as a result, the AB outlawed the US Step 2 payments (§ 552).6 8.2.3 The Relationship between the AG and the SG Agreements Our analysis in the preceding subsection between the two Annex 1A agreements (AG, SCM) applies here as well. As we will see later in this chapter in more detail, the AG Agreement allows special safeguards that can be imposed without observing the requirements established in the SG Agreement. In EC–Bananas III, the AB noted that this is indeed the case, holding that the AG Agreement must take precedence here, since it is the agreement that regulates this issue in a more detailed manner. As a result, some safeguards on farm goods can legitimately be imposed, even though they might disrespect the requirements established in the SG Agreement. It suffices that they comply with the relevant requirements embedded in the AG Agreement (§ 157). 8.3 The Road to the AG Agreement The AG Agreement imposes disciplines on border measures (tariffs on farm goods), and allows an agreed amount of domestic and export subsidies that can lawfully be paid to domestic producers. To understand the “trichotomy” of disciplines imposed on farm goods (i.e., border measures, domestic support, and export subsidies), we need to look briefly at the history of farm trade. 8.3.1 The GATT Approach GATT did not, in principle, regulate goods by sector.7 Some GATT provisions, though, specifically addressed farm trade: Article XI.1 of GATT prohibits QRs, but Article XI.2 of GATT contains an exception for farm products.8 It was at the request of the US that this exception was incorporated, and, to a large extent, the provision corresponded to its own wishes. As the executive secretary of GATT once observed, though, Article XI.2 of GATT was “largely tailor-made to United States requirements [...] the tailors cut the cloth too fine.”9 It is, of course, difficult to know what exactly drove the US request to this effect. Generally, however, following the traumatic experience in World War II (WWII), many countries assigned themselves the objective of becoming self-sufficient in food production and adopted farm policies that could help them reach this objective.10 In a similar vein, Article XVI.3 of GATT regulated export subsidies for primary farm products. This provision aims at discouraging the subsidization of primary goods and allows subsidization only to the extent that the subsidizing GATT contracting party does
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not end up with more than an “equitable share of the world market.” Beyond these two provisions, there is no other GATT provision that dealt specifically with trade in agricultural goods. As we have seen in volume 1, the only permissible form of protection for goods was tariff protection, and tariff concessions have been routinely exchanged between trading nations. Tariff concessions on farm goods could, in principle, be exchanged during the GATT years in the context of the various trade rounds. This did not happen frequently, though, as the requests by developing countries often fell on deaf ears. So what is the emerging picture in light of all this? Few tariff concessions on farm goods were exchanged between trading nations, quotas could be imposed on farm goods (upon satisfaction of the criteria in Article XI.2 of GATT), and subsidies would be tolerated up to a point (Article XVI.3 of GATT). And then recall the 1955 US waiver that allowed it to subsidize its farm production that we saw in chapter 5, volume 1; the complaints by developing countries that WTO (developed) members were increasingly using regulatory protection by adopting disproportionate safety standards, that we saw in chapter 6 of this volume. Farm protectionism thus could (and did) take various forms. Regulation of farm trade was a thorn in GATT’s side, and it mitigated its otherwise large success to curb protectionism. Aart de Zeeuw (1997), the chair of the Uruguay-round Negotiating Group on Agriculture, summed it up perfectly by stating (pp. 471–472): In general, the GATT has been successful in the industrial sector; a series of negotiating rounds has led to such large cuts in tariffs that one can almost speak of real free trade. This is definitely not the case in the agricultural sector. Highly protectionist trade policies in agriculture were maintained or even developed thanks to exceptions to the GATT rules, such as the possibility of quantitative restrictions (article XI), and/or export subsidies (article XVI), the permission to continue existing trade policy measures (grandfather clause), the use of temporary exemptions (waivers), coupled with the use of protective instruments such as variable levies and voluntary export restraint agreements, which were not covered by the GATT rules. ... Why this difference, compared with industrial sector? The reason why many countries wanted to protect their agriculture was based on the reality that, in many agricultural regions, the farm population could not survive without protection. Without protection, substantial pauperization of rural areas could take place with all the negative consequences, both socially and with regard to nature and environment. In my opinion, we have to accept that no single country is willing to sacrifice agriculture on the altar of liberal trade.
He was definitely right on this one. Liberalization of farm trade emerged as a negotiation too far in the GATT era. GATT undeniably fared much better at dismantling protection in the realm of industrial than farm goods. The original GATT largely reflected the wishes of the transatlantic partners, but one should not neglect the impact that the WWII experience had in shaping ultraprecautionary farm policies aimed at self-sufficiency worldwide. Subsequent events at first exacerbated the rush to farm protectionism, mitigating it only in the 1970s.
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8.3.2 The US Waiver (1955) The US requested and obtained a waiver in 195511 in order to address a flood of imports of farm goods into its market. There is some history behind this request. The US Agricultural Adjustment Act of 1933 was conceived as the means to pay farmers subsidies to reduce production. The US had put in place a system of government assistance programs, which resulted in domestic prices being substantially higher than world prices. As a result, traders were tempted to import goods from abroad. And imports did indeed occur, in big numbers. The US then enacted legislation (Section 22 of the US Agricultural Adjustment Act of 1933), which provided for specific action to stop the flood of imports. The advent of GATT meant, among other things, that Section 22 would either have to be amended or abolished. However, the US was prepared to implement neither of the two options. Consequently, a waiver was necessary for it to avoid challenges of its practices by its trading partners. The waiver was of unlimited duration, but subject to annual review. Through this waiver, the US was essentially free to control imports (the waiver covered Articles II and XI of GATT). GATT, as we have seen, did not have much of a discipline on subsidies anyway, and while the waiver was in place, the US government went ahead and heavily subsidized its farm production.12 Following the US example, other GATT contracting parties also managed to keep their farm policies immune from legal challenges, either through waivers (Belgium and Luxembourg), or through special clauses in their protocol of accession (Switzerland). Besides QRs and high tariffs on imports, public policy in most developed countries included price and supply management tools, which are seen as appropriate and necessary to maintain the viability of rural and agrarian communities and ensure an adequate food supply. For some agricultural products (e.g., rice in Japan), imports were effectively nonexistent. The result was that many import farm markets became highly insulated from world competition. It is consumers, of course, who paid the price of market fragmentation, but as the classic analysis of Olson (1965) suggests, consumers have little influence in the shaping of national trade policies anyway. Recall the discussion in chapter 5, volume 1, about the Haberler report. The publication by Gottfried von Haberler, a well-known Harvard economist, concluded that one reason why the rate of exports of farm goods did not match that of industrial goods was farm protectionism.13 Well, this was very much the outcome of the various waivers and special clauses that governments of developed countries requested and obtained. And then their farm trade suffered an additional major setback because of the advent of the notorious common agricultural policy (CAP) of the EU, to which we now turn. 8.3.3 The CAP It would not be an exaggeration to state that the fate of the Uruguay round was intimately linked to farm talks. Liberalization of farm trade emerged as a round-breaking issue, and
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absence of agreement on this point was the main reason behind the failure to conclude the round in 1991 in Brussels. At the heart of the talks was the request by a group of farmexporting countries to dismantle the CAP. 8.3.3.1 Self-Sufficiency for Europe The EU originally gave itself the objective to become self-sufficient in farm goods.14 This was the paramount objective of the then newly established common agricultural policy (the notorious CAP). To do that, it would have to ensure that its producers would have enough incentive to invest in the EU farm market. To this effect, the EU used a system of variable levies to insulate the EU from the world market. These levies varied inversely with world prices, in the sense that the higher the world price, the lower the levy (and correspondingly, the lower the world price, the higher the levy).15 Variable levies would ensure that the price of imports was equated to that of domestic (EU) farm goods. The EU farm market, thus, became impenetrable: the term “Fortress Europe” is largely due to the segmentation of the EU farm market.16 EU producers could, so the argument goes, produce for Europe without fearing that they might be out of business as a result of foreign competition. As a result, Europe would not fall prey to foreign producers of farm goods. Alongside this scheme, the EU practiced a system of domestic subsidies (which gave producers the incentive to overproduce) and export subsidies since, otherwise, EU farm goods could not find buyers in world markets (where prices were consistently lower than EU prices).17 The intense subsidization provided EU producers with the incentive to increase their production (a consequence of which was the payment of export subsidies, since demand for farm goods is relatively inelastic, and storage costs can be quite substantial. Consequently, goods had to be “dumped” into the world market; otherwise, Europe would be facing “seas of milk and mountains of butter,” to quote the popular saying in the 1970s). The EU did not only become self-sufficient, it became a major farm producer as well. Some felt that subsidization has led it to acquire more than “equitable share of world trade.” Its policies defied even the very mild GATT disciplines on farm trade. The question for some trading nations was whether they should try to obtain from GATT panels what they could not have obtained at the table of negotiations. 8.3.3.2 Challenging the Consistency of CAP with the GATT Rules The consistency of variable levies (and other CAP features) with GATT was, at the very least, questionable. The CAP was instituted through the advent of the Treaty Establishing the European Economic Community (EEC), which entered into force on 1 January 1958. By that time, discussions among the GATT contracting parties on farm protectionism were gaining pace. The CAP exacerbated the feeling of dissatisfaction with the US waiver in some quarters. During the 19th session, for example, Committee II (discussing agricultural protection) issued a document calling for moderation of this protection, but which stopped
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short of making specific proposals.18 Developing countries must have realized that it would be hard to curb farm protectionism at the negotiating table. A challenge against the CAP was eventually launched by Uruguay in 1962. Uruguay launched a complaint against 15 GATT contracting parties,19 and challenged, inter alia, the consistency of variable import levies with the GATT rules. The EU could have rebuffed requests to establish a panel, of course, and this possibility in and of itself could have presented potential complainants with a disincentive to introduce complaints in the first place.20 It did not, though. The panel was ill served by a GATT text that contained a huge loophole for farm goods (Article XI.2 of GATT), as well as a series of discussions among the GATT contracting parties on the legality of variable import levies that had remained, alas, inconclusive. Unsurprisingly, thus, the panel’s deliberations did not lead anywhere (§ 17): The Panel was faced with a particular difficulty in considering the status of variable import levies or charges. It noted the discussion which took place at the nineteenth session of the CONTRACTING PARTIES on this subject during which it was pointed out that such measures raised serious questions which had not been resolved. In these circumstances the Panel has not considered it appropriate to examine the consistency or otherwise of these measures under the General Agreement.21
Consequently, the panel did not make any recommendations regarding the consistency of variable import levies with the GATT rules. It did, nonetheless, acknowledge their detrimental effect on the export interests of Uruguay. For example, the report in which the panel discusses the complaint against the Netherlands states (pp. 135–136): However, in respect of the variable import levies, the panel considers that, having regard to the nature of the measures and the interest which Uruguay has in the products in question, there are a priori grounds for assuming that those measures could have an adverse effect on Uruguayan exports. (italics in the original)
The US also eventually reacted in 1963. Becoming increasingly impatient with the CAP, it chose to attack the common organization of poultry within the EU to show its displeasure. Contrary to Uruguay, though, it did not opt for sweeping claims against the CAP. The US claim was that the EU had administered its poultry policy in such a way that it had caused the US a trade loss of $46 million. Because of the subject matter, this dispute became notorious as the “Chicken War.”22 A sweeping Uruguay complaint and a very targeted US claim were all that the EU had to face in terms of challenges against the CAP before the Tokyo round (1973–1979). At that time, the US made an attempt to negotiate liberalization of farm trade, only to see its attempt rebuffed by the EU’s unwillingness to engage in meaningful negotiation. At the end of the Tokyo round (1979), some negotiators, and especially the US, were left with a feeling of unfinished business. Significant steps had been taken toward addressing
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nontariff barriers (NTBs) through the advent of the Tokyo-round codes, but both farm and textile trade continued outside the GATT disciplines. A new round was envisaged only three years after the end of the Tokyo round at the 1982 Ministerial Conference. At around that time, there was a change in the attitude of trading partners toward the CAP. Because they probably anticipated the lack of progress at the negotiating table, or simply because they wanted to prejudge their outcome, they initiated disputes concerning the consistency of CAP with GATT. The US lodged a series of complaints in the 1980s attacking various aspects of the CAP. A lot was at stake in terms of volume of trade. The 1970s and the 1980s are the “glory days” of the CAP, when their part in the EU budget was consistently more than half its size. The US won many of its claims, but the GATT reports remained unadopted and, thus, were of limited legal value. The US, following its government-assisted programs, had become an important player in the world production of farm goods. Until the 1980s, however, it was a reluctant complainant, although it must have been relatively certain that it could make good arguments to pierce the veil of GATT incompleteness and successfully challenge several CAP institutions. Recall that for years, its only challenge against the CAP was the so-called Chicken War, where the trade involved was insignificant by any reasonable benchmark. It seems safe to assume, thus, that the US, when challenging the EU policies in the Chicken War dispute, wanted to win a symbolic victory rather than cause serious damage to the EU. Finger (1993a), Hudec (1998a), and Josling et al. (1996, p. 71ff.) have argued that the political importance of European integration and the central role that the CAP played in that process made the US, at least initially, reluctant to request the establishment of a GATT panel to challenge the legality of the CAP. Similar challenges, in the authors’ view as well, would have jeopardized the goal of European integration itself—something the US, for various reasons, could not afford to let happen. The unwillingness of the US to destabilize the European integration process, thus, probably explains why EU farm policy remained unchallenged for a long time. The likelihood that the EU integration process would be “unsettled” through challenges against the CAP gradually diminished as the years passed. The EU process was in fact being strengthened, as more and more European countries were requesting admittance to the union, while the prospect of a genuine Common Market was becoming a realistic option in the 1980s. The depth and width of common policies adopted over the years testified to the seriousness of the whole endeavor. At the same time, impatience with the lack of CAP reform was growing. The EU was by that time already 10 countries strong and about to complete its first so-called Southern enlargement. Spain and Portugal were, of course, both largely farm economies at that time, and the US might have legitimately feared that their integration in the EU would increase the impact of CAP worldwide.
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Moreover, CAP was associated with record numbers in the overall EU budget, as noted earlier in this chapter. The strengthening of the EU integration process, as well as the growing dissatisfaction of efficient farm producers worldwide who were seeing their products displaced by subsidized EU goods worldwide, led to the change in attitude toward the CAP. Thus, reform of the CAP was provoked in part by the challenges against it. However, it was largely for internal reasons that the EU reluctantly decided to negotiate the liberalization of farm trade in a comprehensive manner during the Uruguay round (1986–1994). 8.3.3.3 Reforming the CAP The CAP was, over the years, less and less tolerated by some EU member-states, which were being asked to pay the bill while profiting little from it. A clear “North–South” divide emerged inside Europe in this respect, with France leading the South, but the North increasing its power essentially because of the 1992 enlargement. The very high percentage of budgetary outlays that farm protection represented in the EU budget was becoming a growing issue during the sessions of the various Councils of Ministers at the EU level. Add to that the dissatisfaction of other EU lobbies, which were not prepared to lose their gains from trade in the name of EU farm protectionism. The EU had to offer something in return for requesting, for example, liberalization of market in services and protection of intellectual property rights worldwide.23 Moreover, doubts started emerging regarding the social character of the EU CAP. Notorious national acts like the Devedjian Report in France alerted EU taxpayers to the cost of farm protectionism In his report to the French Parliament,“Le libre échange, une chance pour la France” (774 Assemblée nationale, 1993), Patrick Devedjian, a member of parliament, submitted evidence to the effect that the EU CAP was not only costly but also socially unfair. An instrument that had been conceived as means to reach self-sufficiency while aiding the poorer segments of the society had become a means of enrichment for the already wealthy: 14 percent of farmers were absorbing 57 percent of the total EU subsidies, while 80 percent of export subsidies went straight into the pockets of seven multinationals. Research offered additional studies asking the question: Who benefited from these hefty sums? Messerlin (2001) contained ample empirical evidence to this effect, as did Baldwin (2005), who also showed why it was not small farmers who benefited (p. 3): The gigantic farms account for only 2 tenths of one percent of all EU farms; the average payment to these farms is €780,000 per year. The 1.5% biggest farms get 27% of the money; the paymentper-farm averaged over all farms in this group is €70,000 per year. The top 6% of the farms by size get half the money (53%); the payment-per-farm averaged over all farms in this group is €30,000 per year. The 52% smallest farms share only 4% of the CAP money among themselves; the paymentper-farm averaged over all farms in this group is €425 per year.
Nonfarm lobbies, thus, could point not only to the opportunity cost of farm protectionism, but also to the unfairness of the whole endeavor. For these, and probably for other
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reasons as well, Europe moved toward a reform of the CAP.24 The EU underwent significant changes in this respect as a result.25 As Messerlin (2001, pp. 95ff.) stated, although material change started only after the conclusion of the Uruguay round, the seeds of change were nevertheless sown during the multilateral trade negotiations. By the end of the round, the EU enlargement to Austria, Finland, and Sweden had been completed and the enlargement toward the ex-communist European countries (many of them important farming countries) was well on track. The 1992 enlargement contributed to the existing hostility toward the CAP, since none of the acceding countries was a predominantly farm-producing country. The accession of former communist countries in the EU sensitized many about the potential increasing cost of CAP, as the new members were essentially farm-producing countries that would be requesting CAP payments.26 The combination of these factors, and the increasing relevance of the factors mentioned previously, led to a rethinking of the CAP. First, the MacSharry reforms27 (1992–1994), which introduced direct payments to farmers to address price cuts in cereals and beef, were agreed upon: direct payments, in the form of income support per hectare and per head of livestock, at least partly replaced price guarantees for these products. These reforms opened the way to an agreement in the Uruguay round, as detailed later in this chapter. The reformation of CAP, though, did not stop at MacSharry reforms, as it did not stop at the end of the Uruguay round. The Berlin decisions (at the 1999 Berlin Council) ensured that the risk of overcompensation of EU farmers was reduced. Next, the CAP budget was stabilized in terms of absolute monetary amounts. The rollback of existing aid was not excluded, and a reduction of all direct subsidies by a maximum of 20 percent was called for. Following these decisions, Agenda 2000 was decided, and it included an extra 20 percent cut of the guaranteed prices for cereals, 30 percent for beef, and 15 percent for dairy products (without touching upon thorny issues such as sugar and olive oil). In Messerlin’s (2001) view: More important, the whole debate revealed increasingly stronger forces in favor of further reforms for domestic reasons—the need to reallocate scarce funds to other purposes than agriculture, the necessity of preparing for the accession of Central European countries (some of them having substantial capacities in agriculture in the long run) and last but not least consumers’ interests in getting cheaper products (...). In particular, the debate began to clarify the merits of “renationalizing” EC farm subsidies (co-financing, in EC parlance) in comparison with “modulating” (reducing) them. (italics in the original)
Then came the Fischler reform, named after Franz Fischler, the EU Commissioner for Agriculture in 2003, which introduced single payment schemes unrelated to current production; and finally, the 2008 CAP Health Check, which introduced further decoupling between payments and production.28 The passage to the EU-27 (and eventually to EU-28) signaled even less price support and even more payments unrelated to domestic production.
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The farm sector in the EU still has a way to go in moving from government support. The introduction of direct payments, though, has reduced the size of the problem the CAP posed to the international trade of farm goods, and paved the way towards a WTO agreement on farm trade. The Uruguay round agreement on Agriculture, to which we now turn, added additional impetus to the rationalization of the CAP. 8.3.4 The Uruguay-Round Negotiation We stated earlier in this chapter that the Uruguay round signaled the first successful attempt to regulate farm trade at the multilateral level in a comprehensive manner. Scattered initiatives, though, had already seen the light of day even before. The World Grains Agreement, for example, was a successful attempt to this effect. It endorsed minimum and maximum prices, compatible with the 1962 International Wheat Arrangement. In a similar vein, some of the commodity agreements that we discussed in chapter 9, volume 1, were agreements on farm trade that were meant to tilt the balance in favor of producers rather than in favor of consumers. The Uruguay-round negotiation was meant to move from the preexisting scattered regulation to a comprehensive regulation of farm trade. It was also meant to curb protectionism. Initially, the negotiations were going nowhere. Farm negotiations actually picked up after 1990. Until that moment, the proposals by the EU and the US were hard to reconcile with each other.29 The change in the EU policy discussed earlier largely facilitated the conclusion of the Uruguay round, since farm talks and the ensuing opening of the EU market became the “holy grail” of the multilateral talks.30 The EU was not alone, initially at least, in resisting the opening up of its farm market. Japan, and Korea were on the same side, resisting liberalization of farm trade as well. They wanted a progressive (but not total) and slow scaling down of border measures and subsidies, as well as less restricted forms of income support. A coalition of countries that export agricultural products, the so-called Cairns group,31 provided the stimulus to push for a comprehensive worldwide liberalization of agricultural trade. The US was the historic leader of the assault against the CAP, but it was no longer isolated in pursuing its aggressive policy toward the EU. The diverse membership of the Cairns group provided the “moral” legitimacy, in the eyes of neutral observers, for attacking the CAP. Although it is probably an overstatement to credit the Cairns group with the successful completion of the negotiations on agricultural trade, we have to acknowledge that it did play a decisive role in getting the item on the agenda, in making farm liberalization one of the priorities of the Uruguay round, and eventually in making it a roundbreaker, so to speak (in the sense that it became common knowledge that, absent some sort of an agreement on farm trade, the whole round risked being left in limbo).32 Developing countries viewed increased market access for their farm products as vitally important to their national interests. Several of them, such as Argentina, had indicated that if GATT
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participants could not agree to substantial agricultural trade reform, they would not agree to trade liberalization in other areas, such as services and intellectual property. Along with them, the US and the Cairns group were looking for fast, total phasing out of all border measures and would accept only limited income support to the extent that it would be uncoupled to products or means of production. At the Montreal Midterm Review (December 1988), “framework” (e.g., “in principle”) agreements were reached in 11 of the 16 negotiating groups. No agreement was reached on agriculture, textiles, import safeguards, or intellectual property. Several Latin American countries continued to refuse to agree to an overall agreement unless an agreement on agriculture was concluded. Following the Montreal failure to conclude a framework agreement, the chairman of the Negotiating Group, Aart de Zeeuw, tabled a paper in 1990 calling for separate commitments on border protection, internal support, and export competition. With respect to border protection, his paper envisaged “tariffication” of all existing border measures, which would be converted to tariff equivalents and be substantially and progressively reduced over a negotiated period of time. These tariff equivalents would be bound, while no less than the prevailing at the time access levels would be maintained. In case imports (at that time) were judged “insignificant,” a (higher) minimum level of access would be established and would be guaranteed as of 1991–1992. Safeguard provisions would enable recourse to tariff increases in case of import surges or world price movement, subject to certain conditions. Both internal support (domestic subsidies and similar interventions), as well as measures aiming to stimulate export competitiveness (export subsidies) would be reduced. The level of reduction would be higher than that for other forms of protection and support. Some export assistance, such as export credits, food aid, and concessional sales, would be permitted but would become subject to negotiated disciplines. Trading nations would make commitments to progressively lower aggregate budgetary outlays, per unit export assistance, the total quantity of a product for which export assistance might be provided, or some combination of such commitments. De Zeeuw’s paper was submitted before the Brussels Ministerial Conference, where the Uruguay round was supposed to be concluded, but it was rejected then and there (December 1990) in the Brussels meeting by EU and Japan.33 In fact, on 7 December 1990, the Uruguay-round negotiations (and not simply the farm talks) were suspended, thereby supporting the idea that farm trade negotiations had indeed emerged by that time as a round-breaker. It took additional behind-the-scenes negotiations organized by Arthur Dunkel, the Director-General (DG) of GATT, to revive a deal that many feared had hit a dead end. In January 1992, Dunkel tabled a paper inspired by and detailing the de Zeeuw proposals. The document, known as the “Dunkel draft,” called for reduction in tariffs and export subsidies of 36 percent, reduction of 24 percent in subsidized export volume, and 20 percent of trade distorting internal support.34 The Dunkel draft caught many delegations by surprise, and to an extent reduced their influence on the eventual outcome, because instead of negotiating issues between them,
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they were now forced to react to a “neutral” paper prepared by the GATT Secretariat. Alas, DG Dunkel did not stay at the helm of GATT long enough to see his courageous efforts bear fruition. Preeg (1995, pp. 140ff.) reports that France rejected the Dunkel draft. He cites (p. 140) Edith Cresson, then French Prime Minister, stating that the whole text was “without any regard for European interests, whether in agriculture or other fields.” Eventually, probably because of the dissatisfaction of some with the text, Dunkel left the helm of the GATT, and was replaced by the former EU Commissioner for Competition, Peter D. Sutherland. The decisive moment that paved the way towards the final agreement came in November 1992, when the EU and the US met at Blair House.35 Based on this session, the EU and the US made a deal in early 1993, which was a dilution of the numbers indicated in but not of the overall philosophy of the Dunkel draft (reduction of the initial support by 20 percent and reduction of export support by 21 percent). This meeting signaled the conclusion of the Blair House agreement, and the ensuing untying of the Gordian knot that had denied the conclusion of the Uruguay round.36 The AG Agreement was a milestone, in that farm goods would finally come under the purview of the multilateral rules. And yet, unlike, for example, what happened with the Agreement on Textiles and Clothing (ATC),37 the subjection of farm goods to the multilateral disciplines would not happen on a fixed schedule. Upon conclusion,38 negotiators clarified that this was the start of the liberalization process and that future negotiations would be needed to further liberalize agricultural trade. Article 20 of AG addresses this point: Recognizing that the long-term objective of substantial progressive reductions in support and protection resulting in fundamental reform is an ongoing process, Members agree that negotiations for continuing the process will be initiated one year before the end of the implementation period, taking into account: the experience to that date from implementing the reduction commitments; the effects of the reduction commitments on world trade in agriculture; non-trade concerns, special and differential treatment to developing country Members, and the objective to establish a fair and marketoriented agricultural trading system, and the other objectives and concerns mentioned in the preamble to this Agreement; and what further commitments are necessary to achieve the above mentioned long-term objectives.39
A framework agreement, yes, but what an important step it was in the quest for liberalizing trade in farm goods! Yeutter (1998, p. 73) summed it up perfectly when quoting Carole Brookins, a prominent agricultural economist: The Agreement was a remarkable achievement, bringing agricultural trade under the rules and disciplines of the GATT for the first time. No one should underestimate the value of full tariffication, nor the initial steps made toward eliminating export subsidies. In fact, the great tragedy for the agricultural sector and for the whole world economy is the nearly half century of time lost in getting this job started. If we had begun this process in 1947 when the GATT began its work in reducing
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industrial tariffs, we would have a 50-year “adjustment” period to transition down to full open markets in agriculture by 1997. And what a difference that would have made.
8.3.5 The Doha-Round Negotiation Negotiations on further liberalization continued during the Doha round. Negotiators made some headway toward agreement, and in 2006, they had agreed in principle on “Modalities” (that is, the formula that would be applied to calculate individual concessions submitted during the Uruguay round by the chairman of the negotiating group on Agriculture, Crawford Falconer) for further commitments. The text, however, was “bracketed” in various parts, a GATT/WTO habit indicating absence of agreement.40 During the July 2008 negotiations, the US indicated that it was not prepared to meet the demands of India and China regarding the Special Safeguard Mechanism (SSM). This facility was designed in order to allow developing countries to raise duties above the bound tariff level (the level that had been agreed before the Doha-round negotiations). India and China requested conditions for launching the SSM that the US had found to be not restrictive enough. Negotiations continued after the failure to conclude in July 2008, but, as subsequent texts demonstrate, some trading nations went back on their original commitments.41 At the moment of writing, an agreement looks unlikely. 8.3.6 The AG Agreement in a Nutshell The AG Agreement looks like a conundrum. What do the different titles included therein refer to? What do the different percentages mentioned in subparagraphs amount to? For this reason, we deem it necessary to provide an overview of the quintessential elements of the agreement before discussing in detail the specific obligations contracted therein. The commitments entered were based on a document that was adopted by the Uruguayround Negotiating Group on Market Access, the so-called Modalities for the Establishment of Specific Binding Commitments under the Reform Programme.42 The title “Reform Programme” was not accidental—it denoted the willingness of negotiators to do away with the practices of the past and eventually move farm products within the realm of tariff protection only; that is, the only permissible form of protection afforded on any other goods under the GATT regime. The “Reform Programme” largely followed (and enriched) the Dunkel draft, although the agreed amount of liberalization initially was less ambitious than that envisioned in the Dunkel draft. The Reform Programme was composed of three main pillars, and a few additional obligations of less importance. These pillars concerned the disciplining of border measures, the reduction of domestic support, and the reduction of volume and level of export subsidies.
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8.3.6.1 Border Measures (Market Access) The “Modalities,” in § 3, distinguished between farm products that were being subjected in 1993 to ordinary customs duties and those that were not. The reduction commitment imposed on the former would depend on whether the duty was bound or unbound. If they were bound, the bound level would apply; if they were unbound, then the applied duty in place on 1 September 1986 would apply. With respect to goods not subjected to ordinary customs duties, the situation was more complicated. WTO members had in place border measures of different design and of different restrictive effect on international trade. § 4 of the “Modalities” (and, later, Article 4 of AG) requested from WTO members to convert all nontariff border measures (such as import quotas or variable levies) into tariffs. This is the notorious “tariffication” process.43 As a result, tariffs should be the only form of protection of farm goods following the advent of the WTO, as WTO members would no longer be in a position to introduce new nontariff measures. The modalities of the conversion were specified in Annex 3 of the “Modalities”; § 2 of Annex 3 explained that the calculation of tariff equivalents (regardless of whether expressed in ad valorem or specific rates) should be made using the difference between internal (domestic) and external (world) prices using the data from 1986 to 1988. For most products, the tariff equivalents at the four-digit HS level would be used, and for some fruits and vegetables, it would be the six-digit HS level. A six-year implementation period was agreed upon, and WTO members undertook to reduce their overall tariff protection by 36 percent by the end of that period. WTO members retained some discretion as to the sectors that would suffer more or less tariff reductions. They had to guarantee, however, that a minimum 15 percent tariff reduction would be implemented for each product category. WTO members also agreed to allow foreign producers a minimum import access equivalent to at least 3 percent of their domestic consumption in 1986–1988 (to increase to 5 percent by the end of the implementation period) as a result of the reduction in border protection. This target was achieved through commitments expressed in tariff quotas (TRQs). 8.3.6.2 Domestic Support The situation before the Uruguay round was even more complicated with respect to domestic support. Trading nations had in place various support schemes, such as subsidies to producers and consumers, educational assistance, and supporting producer prices. As in the case of border measures where tariffs provided the common metric for agreeing on liberalization, a common metric had to be designed to measure the level of internal support in a homogeneous manner. The common denominator then would be used to measure and subsequently reduce domestic support.
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The Aggregate Measurement of Support (AMS)44 was devised to function as a common metric, and a base period for its calculation was agreed to as well (1986–1988).45 Developed members of the WTO were requested to reduce their aggregate support by 20 percent from the established baseline46 (Articles 1(a) and 6 of AG, and Annex 3 to the AG Agreement). WTO members enjoyed flexibility and could decide to decrease protection in one agricultural commodity while increasing it somewhere else, so long as they abided by the 20 percent aggregate reduction obligation. Note, though, Annex 3 § 10, which provides some extra flexibility for only some payments, provided that statutory requirements have been met: Non-exempt direct payments: non-exempt direct payments which are dependent on a price gap shall be calculated either using the gap between the fixed reference price and the applied administered price multiplied by the quantity of production eligible to receive the administered price, or using budgetary outlays.
It follows that in cases when farmers receive “direct payments” from the government based on guaranteed prices, two possibilities exist for the calculation of AMS that WTO members can legitimately have recourse to: it will be calculated either by looking at the difference between the actual and the 1986–1988 reference prices or by using budgetary outlays, which would obviously depend on the price that the government is guaranteeing and the price that farmers already obtain from the market. The question arises whether WTO members would be totally free to choose one of the two methods, switch to the other, or neither. The agreement imposes a requirement of “consistency” embedded in Article 1(a)ii of AG, which reads: 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 ...
Consequently, governments must stick to the methodology that they have chosen when assuming a commitment. The possibility to choose one of the two methodologies does not exist when farmers receive support not through direct payments, but rather through high prices in the market regulated by the government (that is what one refers to by the term “market price support”). In this case, AMS calculations will be solely based on price difference (using 1986–1988 reference prices) rather than budgetary outlays. Domestic support is divided into three categories (known as “boxes”): green, blue, and yellow (or amber). Each WTO member must notify the WTO of its programs that come under each of the three boxes. Although the agreement contains fairly detailed criteria for notification, disagreements might arise across members as to the designation of a particular national program.47
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The “green box” (Annex 2) includes programs that are either not at all or else minimally distorting, such as agricultural research, and these are exempted from reduction commitments. Green box measures are not considered trade distorting, and hence are totally exempted from disciplines imposed through the AG Agriculture. “Blue box” schemes include production-limiting support for either crop or livestock production, and they are not subject to reduction commitments so long as they meet the criteria of Article 6.5 of AG. These measures are, therefore, considered to be minimally distorting. Support to production is permitted, but subject to production limits. The “amber box” includes measures that do not come under the other two exempted categories: these are capped and must be reduced by 20 percent at the end of the implementation period. They are considered to be distorting measures, and this is why they are subjected to reduction commitments. The amber box is technically calculated as the Aggregate Measurement of Support (AMS). 8.3.6.3 Export Subsidies With respect to the export subsidy programs in place between 1986 and 1990, WTO members undertook product-specific (or group of product-specific) commitments, in the form of budgetary outlay reduction commitments and export quantity reduction commitments. WTO members agreed to reduce export subsidies over a six-year period by 21 percent in terms of the volume of products that receive subsidies, and 36 percent in terms of the cash value of these subsidies (Articles 8–10 of AG).48 WTO members further agreed to avoid introducing new export subsidy programs. As Article 6.4 of AG states: De minimis: WTO Members are allowed to use amber box subsidies up to 5 percent (10 percent for developing countries) of the total value of domestic agricultural production.
Further, WTO members have undertaken some other specific obligations (such as timelimited due restraint, export prohibition, transparency requirements, and obligations visà-vis net food-importing developing countries). 8.4
Product Coverage and Schedules of Concessions
Article 2 of AG states that the AG Agreement applies to all products included in Annex 1. This annex covers HS Chapters 1–24, except for fish and fish products, plus a number of other more detailed headings, which are not exhaustively mentioned in Annex 1. Primary commodities are always composed of agriculture, forestry and fishery sectors. The Agreement on Agriculture, though, covers only chapters 1 to 24 of the HS Convention—that is, only farm goods—and does not extend to cover forestry and fisheries. The narrow coverage was a pragmatic rather than a formal decision between the members. During the Tokyo round, a multilateral trade negotiations group called “Agriculture” had been established, which did not lead to any tangible outcome. It is clear, nonetheless, that
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for the purposes of this group, farm products were understood as the tariff lines appearing in chapters 1 to 24 of the HS Convention. Therefore, forestry and fisheries were excluded from the scope of negotiations, as GATT Document MTN/AG/7 of 28 July 1977 makes clear at p. 3. In fact, Norway made an explicit statement before the group to the effect that “fish, marine mammals and products thereof should ... not be regarded as agricultural products”(GATT Document MTN/AG/W/33 of 10 November 1977 at p. 1). In light of this practice, the Committee on Trade in Agriculture, which defined the scope for the Uruguay round negotiations on agriculture, unsurprisingly agreed that: Concerning the question of product coverage, it was noted that agricultural products have in the past been deemed to be the products falling within Chapters 1 to 24 inclusive of the CCCN, while individual contracting parties have been free to indicate differences between this definition and their own. This has proved to be a practical solution in the past, and could be applied also for the present exercise. (GATT Doc. AG/1 of 7 March 1983 at p. 2)
It was indeed applied, and the AG Agreement made this point explicit when stating that the Agreement covers all products appearing in chapters 1 to 24 of the HS Convention. Schedules of concessions by WTO members are based on the list of products mentioned in Annex 1 (that is, chapters 1 to 24 of the HS Convention), and form an integral part of the agreement (Article 21.2 of AG). The AB, in its report on EC–Export Subsidies on Sugar, held in this vein that WTO members’ schedules of concession have to adhere to the disciplines included in the AG Agreement (§§ 224–226). The facts of the case are reproduced in §§ 159–161: The export subsidy commitments made by the European Communities with respect to sugar, as specified in Section II, Part IV of the European Communities’ Schedule, are as follows: (i) the “base quantity level” (the average of the quantity of subsidized exports of sugar during the base period 1986–1990) was 1,612,000 tonnes, and this quantity level would be progressively reduced to 1,273,500 tonnes in the year 2000 as the “final quantity commitment level” for sugar; and (ii) the “base outlay level” (the average of the budgetary outlay on subsidized exports of sugar during the base period 1986–1990) was €779.9 million, and this budgetary outlay level would be progressively reduced to €499.1 million in the year 2000 as the “final [budgetary] outlay commitment level” for sugar. There is no dispute in this case regarding these figures pertaining to quantity and budgetary outlay commitment levels for sugar as specified in the European Communities’ Schedule. According to the European Communities, these export subsidy commitments are “further elaborated” in footnote 1 to the European Communities’ Schedule, which states: “Does not include exports of sugar of ACP and Indian origin on which the Community is not making any reduction commitments. The average of export in the period 1986 to 1990 amounted to 1,6 mio t.” At issue in this dispute is the meaning of footnote 1, its conformity with the European Communities’ obligations under the Agreement on Agriculture, and its implications for the European Communities’ export subsidy reduction commitments for sugar. (italics in the original)
The heart of the dispute was, thus, whether the footnote in the EU schedule should be understood as a commitment or not. The AB, repeating its findings in EC–Bananas III,
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held that footnote 1 of the EU schedule should not be regarded as a commitment, and the ruling upheld the panel’s findings. The reason for deciding in this way was that the footnote did not reflect both quantity and budgetary commitments, and it was, thus, inconsistent with provisions of the AG Agreement49 (§ 224): For all these reasons, we find that, even assuming that footnote 1 constitutes a “commitment” expressing a limitation on export subsidization of ACP/India equivalent sugar, footnote 1 does not contain both quantity and budgetary commitments and is, therefore, inconsistent with Article 3.3 of the Agreement on Agriculture. In addition, footnote 1 is inconsistent with Article 9.1 of the Agreement on Agriculture, because exports of ACP/India equivalent sugar are not subject to reduction commitments. As footnote 1 is inconsistent with the provisions of Articles 3.3 and 9.1, it follows that footnote 1 is also inconsistent with Article 8 of the agreement. (italics in the original)
This case law echoes the “Headnote” jurisprudence and the AB report on EC–Bananas III, which we discussed in chapter 3, volume 1. Our analysis there applies here as well. In short, commitments must be WTO-consistent, and if not, they cannot serve as grounds justifying deviations from WTO obligations. With this in mind, we now move to review the substantive provisions of the Agreement in detail. 8.5
Border Measures
The disciplining of border measures is the first of three main pillars of the architecture of the AG Agreement. Article 4.2 of AG is the key discipline, and requests that WTO members transform all border measures, that is measures affecting only imported goods, into tariffs.50 We have already seen that, prior to entry into force of the AG Agreement, some trading nations protected their markets through tariffs, and others through a multitude of schemes (variable import levies, minimum import prices, etc.). When tariff concessions are exchanged following the GATT mechanism for doing so, there is certainty regarding transaction costs as we have seen in chapter 3, volume 1. When this was not the case, though, uncertainty would reign regarding the level of the eventual imposition on imported farm goods. The impact of measures other than consolidated tariff protection was often hard to pin down, and negotiators felt that unless they were transformed into ordinary customs duties, trade liberalization of farm goods would remain elusive. Indeed, take the case of minimum import prices. Exporters would not know what the eventual imposition on their goods would be, since the level of the imposition would depend on the difference between the price of their exported goods (which they controlled, to some extent at least), and the price of competing goods originating in the importer’s market (which they could not control). The quest for the negotiators was to provide certainty regarding transaction costs. To this effect, they imposed a procedural obligation to convert all border measures applied before the advent of the AG Agreement to ordinary customs duties (tariffs). Once this
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process of tariffication was completed, WTO members would have to observe the tariff ceilings agreed, and eventually reduce its level following negotiations to this effect. 8.5.1
Goods Protected by Tariffs
Before the advent of the AG Agreement, a few countries protected their farm producers in the way they protected all other domestic producers—that is, through ordinary customs duties. During the Uruguay round, negotiators had to agree on the discipline to be imposed on this category as well. § 3 of the “Modalities for the Establishment of Specific Binding Commitments Under the Reform Programme” [the “Uruguay-round Modalities”]51 distinguished between reduction commitments regarding “bound”- and “applied” duties. Those who had bound their duty in a previous round would calculate their reduction commitments from that level. Those who had not, would calculate their reduction commitments from the level of the duty applied in 1986. A few words about the legal value of the “Uruguay-round Modalities” paper are warranted. This document, negotiated during the Uruguay round, was supposed to help trading nations complete their Schedules of Concessions. Three AB reports faced requests to decide on the legal relevance of this document, and none of them came with a straightforward response. In EC–Bananas III, the AB observed that the Uruguay-round Modalities had not been explicitly referenced in the Agreement on Agriculture, but it did not pronounce unambiguously on the legal irrelevance of the document (§ 157). In EC–Export Subsidies on Sugar, the AB held that it was not necessary to decide this issue, although it did add a finding to the effect that the Uruguay-round Modalities did not constitute a formal “agreement” among the WTO members. At the same time, nonetheless, the AB did proceed to an evaluation whether the Uruguay-round Modalities supported an argument that had been advanced by the EU, the defendant in this dispute (§ 199). Finally, in Canada–Dairy Products, the AB, without pronouncing at all on the legal relevance of the Uruguay-round Modalities, decided that the negotiating record supported a claim advanced by Canada (which we discuss later in this chapter in the coverage of “minimum access opportunities”) citing the Uruguay-round Modalities paper when doing so (§ 139). If the AB wanted to totally dismiss the relevance of this document, it had ample opportunity to do so. It did not. On the other hand, it is clear that it did not want to treat it as a “subsequent agreement,” in the way that the term was used in Article 31 of the Vienna Convention on the Law of Treaties (VCLT) either. Under the circumstances, it seems reasonable to conclude that the Uruguay-round Modalities should be understood as a supplementary means of interpretation, recourse to which is at the discretion of the adjudicating body.52 This document contains precious information, which does not contradict but very often elaborates on the disciplines embedded in the Agreement on Agriculture, and sometimes it covers areas that were not included in the agreement at all. This is most notably the case of “minimum access requirements,” discussed later in this chapter.
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Goods Protected by Other Measures: Tariffication
WTO members must express all their pre-Uruguay-round border farm protection exclusively in tariffs, by virtue of Article 4.2 of AG. This provision contains an illustrative list of measures that must be “tariffied.” The items included in the indicative list, as well as the negotiating intent, make it clear that WTO members should not be allowed to protect their farm market with border measures other than tariffs after the entry into force of the AG Agreement. We will be reverting to a discussion of the content of the indicative list in the next section. For now, suffice to state that Article 4.2 of AG reflects the notorious tariffication process, the purpose of which was to consolidate national protection, and establish a common denominator that would enable trading nations to negotiate (reciprocal) commitments. In Chile–Price Band, the AB concluded that Article 4.2 of AG (§ 200) “is ... the legal vehicle for requiring the conversion into ordinary customs duties of certain market access barriers affecting imports of agricultural products.” In fact, Article 4.2 of AG is violated if a measure featured in the list of Article 4.2 of AG has not been converted to an ordinary customs duty, regardless of whether the eventual tariff ceiling has been violated or not. Assume, for example, that a WTO member used to practice variable import levies, one of the measures that it must tariffy as per Article 4.2 of AG. It will be violating this provision, even if it has not altered the manner in which it calculates variable import levies, even if, when expressed in tariff terms, it imposes less of a duty after January 1, 1995. Case law has made this point crystal clear when dealing with the price band system disputes, as we will discover shortly. WTO members, thus, incur two distinct obligations with respect to border measures: an obligation to convert their border protection to tariffs and an obligation to respect the agreed tariff ceilings. The panel and the AB held as much in their reports on Chile–Price Band. This case concerned a Chilean measure, which operated as a buffer between domestic and international prices, aiming to ensure some margin of fluctuation between the two. Various countries (especially Latin American ones) practice “price band” systems, whose quintessential element is this: they aim to insulate domestic producers from world competition when world price falls below a certain threshold, a “reference price.” Two different terms are used to describe essentially the same thing: price band system (PBS), and price range system (PRS). The difference between the two is that, whereas PRS refers to price range in the abstract, PBS refers to the same issue on a transaction by transaction basis. Typically, when prices of imported goods are within the range (band), imports pay the applied duty; when prices fall below the range, then an additional duty will be requested; finally, if prices rise above the range (maximum price), then a duty rebate will occur. Two price band systems have been litigated in the WTO so far. The Chilean system, where the price band would be revised every two weeks, and the Peruvian regime, where
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the price band would be revised every week. Shorter revisions, as Saggi and Wu note, warrant skepticism, since the reason for the frequency might be that prices tend to fall below the range. In a similar vein, the Chilean price band system, the subject matter of the panel on Chile–Price Band, was divided into two parts: an ad valorem duty and a specific duty (the price band). In the words of the AB (§ 13): “(i) an ad valorem duty that reflects Chile’s applied Most-Favoured Nation (“MFN”) tariff rate; and (ii) a specific price band duty that is determined for each importation by comparing a reference price with the upper or lower threshold of a price band.” Chile imposed this price band system on edible vegetable oils, wheat, wheat flour, and sugar (AB report, § 12). Chile had bound its duties for these goods (31.5 percent ad valorem), and was applying a lower duty, 7 percent, at the time when the litigation occurred (AB report, § 14). Following an amendment of the original law, Chile’s price band system would never exceed the 31.5 percent cap, although Chile had candidly admitted before the panel that this had indeed been the case in previous years before the amendment had been adopted (AB report, § 10). The question before the panel was whether Chile had violated its obligations under Article 4.2 of AG by not tariffying its protection (e.g., by not converting the “specific price band duty” into an ad valorem duty), regardless of Chile’s assertion to the effect that the tariff ceiling agreed had never been violated. The panel first held that the obligation to tariffy includes, but is not limited to, QRs (§ 7.29), variable import levies, and minimum import prices. Measures that had a similar function had to be “tariffied” as well, and the Chilean “price band system” was one such measure (§§ 7.36, 7.41, 7.46, and 7.48–65). This finding was necessary, since price band systems are not featured as such in the indicative list of Article 4.2 of AG. The AB confirmed the panel’s finding in this respect, that is, the obligation to tariff covers not only the measures featured in the indicative list but also all other similar measures (§§ 246 ff., and especially 251 and 262). We will be discussing the content of the indicative list in more detail later. The key finding of the AB concerned the obligation to tariff irrespective of the level of duty imposed before and after the entry into force of the AG Agreement. The AB found that Chile could not maintain a measure that should have been converted into a tariff after the WTO Agreement had entered into force (§ 207). It, thus, requested from Chile to apply a tariff regime consonant with Article 4.2 of AG.53 In Peru–Agricultural Products, a subsequent case dealing with a Peruvian scheme, which exhibited many of the characteristics of the Chilean “price band,” the panel confirmed this view; that is, that the obligation to tariffy is independent of the obligation to respect the agreed tariff ceiling (§§ 7.291ff.). The AB confirmed this finding (§§ 5.70ff.). It is, therefore, standing case law that measures featured in the list of Article 4.2 of AG, as well as all other similar measures must be tariffied anyway.
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The panel and the AB dealing with this case faced an additional question, namely, whether Peru could still impose PBS, since its free trade area (FTA) with Guatemala allowed for this possibility. Guatemala was the complaining party in this dispute. The AB responded in the negative. It held that the FTA concluded between the parties to the dispute was irrelevant for the purposes of interpreting Article 4.2 of AG (§§ 5.91ff., and especially 5.104). Note, though, that PBS is not a standing feature of FTAs. The US-Peru FTA for example, also known as PETPA (Peru Trade Promotion Agreement), of 2009, contains no PBS. Hence, Peru can use PBS vis-à-vis one preferential partner (Guatemala) by virtue of the FTA signed with it, but not another (US). It cannot, of course, use PBS at all following the WTO AB decision to this effect. Saggi and Wu (2015) provide an in-depth analysis of this dispute, and price band systems in general. To them, this dispute represents a conundrum, since small economies typically do not trade much with each other. In the standard trade model, a small importing nation, which aims to maximize national welfare, should allow for maximum variability in its local price. The lower the world price relative to Peru’s autarkic price, the larger the gains from trade for Peru. A PBS (supported by fluctuating tariffs) reduces the extent to which the Peruvian domestic price differs from its autarkic price, and hence reduces the gains from trade for Peru. Why adopt a PBS then? Saggi and Wu (2015) note that producers make investments before knowing world price. If insurance markets are missing, and capital invested is specific and immobile, then PBS emerges as second best to ensure that agents will invest. Bagwell and Sykes (2007a), when discussing Chile–Price Band, had noted that if risk-averse producers are willing to sacrifice high price episodes in order to avoid low price episodes, then a PBS could be optimal from a domestic view point. From a cosmopolitan perspective, it would be optimal if domestic producers were more risk averse than exporters to the country imposing the PBS, and thus, shifting costs could be efficient. If, however, both domestic producers as well as exporters were risk averse, then Saggi and Wu (2015) correctly observe that PBS would only reduce welfare. The authors thus, establish a strong intellectual case (besides a legal one) to view PBS with suspicion, and support the finding of the AB to include measures other than those mentioned in the list of Article 4.2 of AG, but similar to them, among the measures that WTO members must tariffy. 8.5.2.1 The Indicative List of Items to Tariffy Footnote 1 (to Article 4.2 of AG) includes an indicative list of measures that come under the purview of this provision: These measures 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, whether or not the measures are maintained under country-specific derogations from the provisions
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of GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture-specific provisions of GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.
The wording of the footnote to Article 4.2 of AG, thus, makes it plain that the featured list is of an indicative nature, a point confirmed by the AB in its report on Chile–Price Band.54 One measure has been explicitly excluded—namely, ordinary customs duties. The AB on Peru–Agricultural Products confirmed that ordinary customs duties do not come under the indicative list of this provision (§ 5.73). There are six measures that are explicitly mentioned: quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, nontariff measures maintained through state-trading enterprises, and voluntary export restraints (VERs). The term “similar border measures” underscores the fact that measures that do not qualify as one of the six measures but do resemble them come under the purview of this provision and, consequently, must be “tariffied” as well. In theory, thus, items not mentioned in the list could also be the subject matter of the tariffication process. The measures included in the list, though, share some common characteristics, as the AB noted in Chile–Price Band (§ 227): Before looking at these categories of measures, we note that all of the border measures listed in footnote 1 have in common the object and effect of restricting the volumes, and distorting the prices, of imports of agricultural products in ways different from the ways that ordinary customs duties do. Moreover, all of these measures have in common also that they disconnect domestic prices from international price developments, and thus impede the transmission of world market prices to the domestic market. (italics in the original)
The terms “variable import levies” and “minimum import prices” have been defined in case law. This was necessary since the two terms are not defined in the AG Agreement, and an understanding is required in order to decide whether other, nonmentioned measures qualify as “similar measures” and must for this reason be tariffied as well. In Chile–Price Band, the AB held to this effect (§§ 236–237): The term “minimum import price” refers generally to the lowest price at which imports of a certain product may enter a Member’s domestic market. Here, too, no definition has been provided by the drafters of the Agreement on Agriculture. However, the Panel described “minimum import prices” as follows: ... [these] schemes generally operate in relation to the actual transaction value of the imports. If the price of an individual consignment is below a specified minimum import price, an additional charge is imposed corresponding to the difference. The Panel also said that minimum import prices “are generally not dissimilar from variable import levies in many respects, including in terms of their protective and stabilization effects, but that their mode of operation is generally less complicated.” The main difference between minimum import prices and variable import levies is, according to the Panel, that “variable import levies are generally based on the difference between the
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governmentally determined threshold and the lowest world market offer price for the product concerned, while minimum import price schemes generally operate in relation to the actual transaction value of the imports. (italics in the original)
In Chile–Price Band (Article 21.5–Argentina), the panel added (§ 7.30): In essence, a minimum import price is a measure which ensures that certain imported products will not enter a domestic market at a price lower than a certain threshold, normally by imposing an import duty assessed on the basis of the difference between such threshold and the transaction value of the imported goods.
This understanding of the term has been carried over into subsequent practice.55 8.5.2.2 Similar Border Measures As with all indicative lists, though, the question raised was what else should be included in the obligation assumed under Article 4.2 of AG. The AB on Chile–Price Band adopted a two-step process to decide whether a price band could qualify as a “similar border measure.” First, it provided its understanding of the measures featured in the list (e.g., variable import levies, minimum import prices etc.). If the measure examined was identical to those included in the list, then that would be the end of the investigation. If not, it would move to the second step of its analysis, going on to examine whether the challenged measure could qualify as “similar” to those that had been included in the list of the footnote to Article 4.2 of AG. In Peru–Agricultural Products, the panel referred to the key paragraph in the AB report on Chile–Price Band (§§ 7.303–305) and held that what mattered, besides formalistic resemblance, was whether the challenged measure was designed and functioned like a variable import levy and/or a minimum import price: In examining whether the measure at issue in Chile–Price Band System was a border measure similar to variable import levies or minimum import prices, the Appellate Body explained that what had to be determined was whether the measure, in its particular features, shared sufficient features with either of these two categories of prohibited measures to resemble, or be of the same nature or kind and thus be prohibited by Article 4.2. The Appellate Body concluded that, although there were some dissimilarities between the measure at issue and the features of minimum import prices and variable import levies, the way in which the measure was designed and the way it operated in its overall nature were sufficiently “similar” to the features of the two categories of prohibited measures to make the challenged measure a “similar border measure” within the meaning of footnote 1 to Article 4.2. The Appellate Body explained that it had reached its conclusion [o]n the basis of the particular configuration and interaction of all these specific features of [the measure at issue]. In assessing this measure, no one feature is determinative of whether a specific measure creates intransparent and unpredictable market access conditions. Nor does any particular feature of Chile’s price band system, on its own, have the effect of disconnecting Chile’s market from international price developments in a way that insulates Chile’s market from the transmission of international prices, and prevents enhanced market access for imports of certain agricultural products. Lastly, in examining whether a measure that is neither a “variable import levy” nor a “minimum import price” should nevertheless be considered a “similar border measure,” the context of footnote
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1 to the Agreement on Agriculture has to be borne in mind. As already mentioned, Article 4 of the Agreement prohibits border measures that do not constitute ordinary customs duties. Thus, in considering whether a measure is similar to a “variable import levy” or a “minimum import price,” this Panel finds it necessary also to examine whether the particular features of the measure, taking into account its structure and design as well as its effects, make it similar to the categories of measures prohibited by footnote 1 (in the present case, to a “variable import levy” or “minimum import price”) or to an ordinary customs duty. (italics in the original)
The AB confirmed this panel finding (§ 5.147). 8.5.3 Tariff Bindings Must Be Respected Following the tariffication process, WTO members will reflect their (tariff) commitments in their Schedules of Concessions. They are then bound not to exceed whatever commitments they have entered (Article 4.1 of AG). WTO members remained free to choose whether they would express their duties in ad valorem terms or whether they would opt for specific duties, mixed duties, or other options.56 The tariffication process resulted in high duties, “tariff peaks” in WTO parlance. Negotiations did manage to bring tariffied protection down, but not to levels comparable to the protection afforded to nonfarm goods. Compared to other goods, farm goods are disproportionately protected through specific duties, as table 8.1 indicates. Table 8.1 Specific and ad valorem duties on farm goods Members with non-ad valorem bindings accounting for less than 20% of all bound agricultural tariffs
Members with non-ad valorem bindings accounting for 20 to 50% of all bound agricultural tariffs
Members with non-ad valorem bindings accounting for more than 50% of all bound agricultural tariffs
Australia Brunei Darussalam Bulgaria Egypt India Israel Japan Korea Malaysia Mexico New Zealand Papua New Guinea Singapore Solomon Islands
Canada Cyprus EU Iceland Poland Slovenia Thailand US
Malta Norway Switzerland
Note: Bulgaria, Cyprus, Malta, Poland, and Slovenia have since joined the EU. Source: WTO Secretariat, Market Access Unfinished Business: Post-Uruguay-round Inventory (2001).
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Developed countries agreed to average tariff reductions of 36 percent (with a minimum of 15 percent per product) over a period of 6 years. Developing countries agreed to average tariff reductions of 24 percent (with a minimum of 10 percent) over a period of 10 years. Least developed countries (LDCs) were not required to undertake reduction commitments. 8.5.4
Exceptions
There are three exceptions to Article 4 of AG. First, a WTO member can adopt, in accordance with the procedures of Article 5 of AG, a provisional safeguard provision (called a “special safeguard mechanism”). It will, thus, keep provisionally in place a measure (safeguard) that it would have had to tariffy otherwise. Second, WTO members can continue to apply nontariff measures with respect to the so-called special treatment cases referred to in Annex 5; that is, they do not have to tariffy (provisionally again, as we will see later in this discussion) similar measures. The third exception concerns products considered “predominant staples,” as per Annex 5 of the agreement. 8.5.4.1 Special Safeguard Mechanism Article 5.4 of AG provides that a WTO member can levy a duty, beyond the “bound” level, until the end of the year in which the “binding” has been imposed, if both of the following are true: (a) The additional duty does not exceed one-third of the duty applied during the year when safeguard action is taken. (b) The volume of imports has exceeded a “trigger level” (calculated in accordance with Article 5.4 of AG). It can further impose an additional duty on a shipment if the price of the shipment concerned falls below a trigger price equal to the average 1986–1988 reference price calculated in CIF terms (with “CIF” standing for the cost, insurance, and freight unit value of the product concerned). Article 5.1 (b) of AG says as much.57 There is a procedural requirement that WTO members interested in availing themselves of this possibility must respect: they must denote in their schedule of concessions the products that will benefit from the special safeguard provision with the acronym “SSG.” So, contrary to what is the case for other goods, safeguards on farm goods may be imposed automatically if WTO members have ex ante reserved their right to take advantage of this possibility. A total of 39 WTO members have indicated that they will be using special safeguards on 6,156 products (see table 8.2).58 The duration of the possibility to impose a special safeguard clause is unclear. Article 5.9 of AG states that it will last as long as the reform process included in Article 20 of AG, the end of which is not specified anywhere.
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Table 8.2 WTO members using special safeguards Australia (10)
Indonesia (13)
Poland (144)
Barbados (37) Botswana (161) Bulgaria (21) Canada (150) Colombia (56) Costa Rica (87) Czech Republic (236) Ecuador (7) El Salvador (84) EU (539) Guatemala (107) Hungary (117) Iceland (462)
Israel (41) Japan (121) Korea (111) Malaysia (72) Mexico (293) Morocco (374) Namibia (166) New Zealand (4) Nicaragua (21) Norway (581) Panama (6) Philippines (118)
Romania (175) Slovak Republic (114) South Africa (166) Swaziland (166) Switzerland-Liechtenstein (961) Chinese Taipei (84) Thailand (52) Tunisia (32) United States (189) Uruguay (2) Venezuela (76)
Source: http://www.wto.org. Bulgaria, Czech Republic, Hungary, Poland, Romania, and the Slovak Republic have since joined the EU.
8.5.4.2 Special Treatment WTO members can justifiably deviate, on a provisional basis, from their obligation to tariffy their protection if they have successfully invoked the provision in Annex 5 on “special treatment.” WTO members can have recourse to special treatment only in order to protect their “designated products” (e.g., products that they have explicitly indicated they want to protect), and assuming that the following conditions have been cumulatively met: (a) Imports of the designated products comprised less than 3 percent of the domestic consumption during the agreed base period (1986–1988). (b) No export subsidies have been provided to the designated products since the beginning of the agreed base period. (c) Effective production-restricting measures are applied to the primary agricultural product. (d) Minimum access opportunities corresponding to 4 percent of the base period domestic consumption, and increasing by 0.8 percent per year for the remainder of the implementation period shall be afforded. (e) These products have been designated with the symbol ST–Annex 5 in Section I-B of Part I of a member’s schedule.59 Special treatment was thought as a measure that could be used during the implementation period. It can extend beyond the implementation period if negotiations to this effect have been concluded before its lapse (Annex 5, § 3). The applied protection must be tariffied and will be subjected to the reduction commitments provided in Annex 5, § 6.
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8.5.4.3 Predominant Staple Only developing countries can use the predominant staple provision. This regime largely reproduces the special treatment regime discussed previously, and the basic idea is this: developing countries can deviate from their obligation to tariffy protection for products constituting predominant staples in their so-called traditional diet. All but the obligation regarding “minimum access opportunities” are common to special treatment and predominant staples cases. With respect to minimum access opportunities, developing countries enjoy a bit more latitude. For example, they must allow imports up to 1 percent only using the base period for domestic consumption (defined in the annex) as a benchmark, and must increase it by only 2 percent after the fifth year (§ 7). They incur, however, the obligation to offer “appropriate market access opportunities” to other goods than predominant staples. The term “appropriate” leaves ample discretion to donors, of course. Normally, this possibility should be exercised within the first 10 years from the beginning of the implementation period. If, however, a WTO member wishes to extend protection even beyond the end of the 10th year, it can do so if successful negotiations have been undertaken to this effect and have been completed during this time period. It must further offer “additional and acceptable concessions” (Annex 5, §§ 8–10). The term “acceptable” does not condition the legality of concessions offered on prior approval by affected WTO members. Thus, it will be a matter for panels to decide when necessary. Korea and the Philippines have had recourse to Annex 5 in order to exempt rice, a predominant staple, from the obligation embedded in Article 4.2 of AG. 8.6
Domestic Support
The second main pillar of the AG Agreement concerns the disciplines on domestic support. The focus here shifts from instruments (policies) applied at the border to instruments applied within a sovereignty aiming to help farmers. Domestic subsidies represent the bulk of domestic support, but do not exhaust it. Through the various disciplines imposed on domestic support schemes, criteria have been imposed that aim at distinguishing between those policies that are considered minimally nondistorting, and those that are considered distorting. By sanctioning the latter and allowing the former, the framers laid down their preference to see that future interventions will at best only minimally distort international trade of agricultural goods. The distinction between the two categories is not easy, as we detail in what follows. The general discipline regarding domestic support is reflected in Article 6.3 of AG in the following terms: 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
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Current Total AMS does not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member’s Schedule.
By virtue of Article 1(h)(ii) of AG, “Current Total AMS” refers to “the level of support actually provided during any year of the implementation period and thereafter.” By virtue of Article 1(h)(i) of AG, “annual or final bound commitments” refers to the “maximum support permitted to be provided during any year of the implementation period or thereafter.” In other words, WTO members cannot provide a level of support beyond what is permitted and has been reflected in Part IV of their schedule.60 The key question, of course, concerns what “domestic support” is. The AG Agreement tends to adopt a very expansive view of the term in order to ensure that all government support will be accounted for. To the extent that it falls under one of the exceptions mentioned previously, it should be reflected as such. To the extent that this is not the case, then it should be part of the AMS calculation. Various provisions support the “expansive” understanding of government support. First, Article 7.2(a) of AG, which reads: 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)
Second, Article 6 of AG, which, along with Annex 3, constitutes the two bases for the calculation of AMS, reads in § 1: 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. (emphasis added)
Third, Annex 3, § 7, contains a “pass through” provision, whereby even subsidies to processors, as opposed to subsidies to producers of basic agricultural products, must be accounted for in the calculation of AMS if benefits pass through from the former to the latter. Fourth, the AG Agreement also establishes an anticircumvention rule. Article 6 of AG (and Annex 3), on the one hand, lays down all the commitments that WTO members must respect when having recourse to “domestic support” schemes. This is where we find the reference to the AMS, the basic metric for calculating reduction commitments entered by WTO members. Article 7 of AG, on the other hand, acts as an anticircumvention device. It requests that WTO members ensure that their programs regarding domestic support that
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do not respect the disciplines embedded in Article 6 of AG are in conformity with Annex 2 (and thus, lawfully exempted from calculation in the AMS). The agreement shows some tolerance for domestic support that does not meet the requirements of Annex 2. If no “Current Total AMS” commitments have been entered, then the de minimis threshold reflected in Article 6.4 of AG applies. WTO members can still provide support if it does not extend beyond the de minimis thresholds established in Article 6.4 of AG. The WTO members with Current Total AMS commitments are Argentina, Australia, Brazil, Canada, Chinese Taipei, Colombia, Costa Rica, EU, the Former Yugoslavian Republic of Macedonia (FYROM), Iceland, Israel, Japan, Jordan, Korea, Liechtenstein, Mexico, Moldova, Montenegro, Morocco, New Zealand, Norway, Papua New Guinea, Russia, Saudi Arabia, South Africa, Switzerland, Tajikistan, Thailand, Tunisia, Ukraine, United States, Venezuela, and Vietnam. 8.6.1 Aggregate Measurement of Support (AMS) The AMS was negotiated to serve as the common metric to express all domestic support (Article 1 of AG). WTO members were requested to calculate their Total AMS61 [Article 1(h) of AG], which is the sum of all product-specific AMSes. WTO members would be allowed to raise product-specific AMS and still be within the bounds of their contractual obligations, provided that their Total AMS had been reduced by the agreed amount (20 percent) by the end of the implementation period. This flexibility was the breathing space that many negotiators requested in order to “ease” their way toward meeting the 20 percent commitment. The AMS was based on the Producer Subsidy Equivalent (PSE), an index of domestic farm protection elaborated by the OECD. In 1982, the OECD Ministerial Council decided62 that farm policies should be reformed, and it called for integrating farm trade into the multilateral (GATT) disciplines. Farm protection was quite asymmetrical across OECD members; worse, it was polymorphous. OECD members were, consequently, in search of a common metric that would allow them to compare apples to apples when measuring the extent of farm protectionism. This is where and why the PSE was born. The subsidy-equivalent of a given policy instrument is the payment per unit of output that a government would have to give to domestic producers in order to generate the same impact on production as, say, an import tariff.63 The OECD used the PSE, initially defined as “the payment that would be required to compensate farmers for the loss of income resulting from the removal of a given policy measure.”64 Since the original definition did not control for problems arising at the implementation stage, the PSE was redefined in 1990 as follows: The annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the
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farm-gate level, arising from policy measures that support agriculture, regardless of their nature, objectives or impact on farm production or income.”65 The OECD common metric was eventually renamed the Producer Support Estimate, (which allowed it to keep the acronym PSE). 8.6.2
Payments Excluded from the Calculation of AMS
In principle, everything that is not excluded must be included in the calculation of AMS. It is, thus, warranted to start from payments that are excluded from the calculation of AMS. Annex 3 includes four categories of payments that are excluded from the calculation of AMS: payments relating to development needs available to developing countries only (Article 6.2 of AG), de minimis payments (Article 6.4 of AG), direct payments for production-limiting programs (blue box) (Article 6.5 of AG), and green-box payments (Annex 2). 8.6.2.1 Development Subsidies This exemption is available only for developing countries. Three types of payments are excluded from the calculation of AMS, and qualify as development subsidies: (a) Investment subsidies that are generally available (b) Agricultural input subsidies, which are generally available to low-income or resourcepoor producers (c) Support to encourage diversification away from growing illicit narcotic crops66 Orden et al. (2011a) cited evidence of the wide use of this possibility. India, for example, has included in this category subsidies for fertilizer, electricity, and irrigation. 8.6.2.2 De minimis Payments The basic idea here is to make exclusions from the calculation of AMS payments, which, because of their size, are not expected to seriously hamper farm trade. Both developed and developing countries can profit from this exemption. The agreement distinguishes between product-specific and nonproduct-specific support in this respect. With respect to the former, payments below 5 percent of the relevant WTO member’s total value of production of a “basic agricultural product” during the relevant year67 are exempted. Article 1(b) of AG defines “basic agricultural product” as “the product as close as practicable to the point of first sale as specified in a Member’s Schedule and in related supporting material.” With respect to nonproduct-specific support, WTO members can exempt from the calculation of AMS payments up to 5 percent of the value of their total farm production. Article 6.4(b) of AG makes it clear that the figures are adjusted to 10 percent (for both categories) for developing countries.
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8.6.2.3 Direct Payments for Production-Limiting Programs (Blue Box) Article 6.5 of AG identifies three situations where a WTO member can legitimately exempt direct payments under production-limiting programs from the calculation of its AMS: (a) Payments that are based on fixed area and yields (b) Payments that are made on 85 percent or less of the base level of production (c) Payments that are made on a fixed number of head (exclusively for livestock) Few WTO members have had recourse to similar programs, most notably the EU, Japan and Norway. 8.6.2.4 Green Box This is the largest category of exemptions. Annex 2 exempts from the calculation of AMS 12 measures of support funded through a government program, which does not have the effect of price support.68 The rationale for the exclusion of 12 government services included in Annex 2 is that they have no, or minimal, trade-distorting effects.69 Annex 2 in § 1 mentions the criteria that similar payments must meet in order to qualify as measures exempted from the calculation of the AMS: Domestic support measures for which exemption from the reduction commitments is claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on production. Accordingly, all measures for which exemption is claimed shall conform to the following basic criteria: (a) the support in question shall be provided through a publicly-funded government programme (including government revenue foregone) not involving transfers from consumers; and, (b) the support in question shall not have the effect of providing price support to producers;
The 12 measures excluded from the calculation of the AMS come under the following headings: General Services: Payments relating to research, pest and disease control, inspection (health, safety, standardization), marketing, infrastructure, are covered. Direct payments to producers are not covered. During the Bali Ministerial Conference (December 2013), WTO Members agreed to add an indicative list of general services that were legally relevant to all but particularly to developing countries. The Decision70 mentions the following services: land rehabilitation; soil conservation and resource management; drought management and flood control; rural employment programmes; issuance of property titles; and farmer settlement programmes. Food Security: For payments to be excluded under this heading, the volume and accumulation of stocks must be predetermined. There is no definition of the term “food security” in the WTO legal order. The FAO (Food and Agriculture Organization), an institution that deals predominantly with food security, has its definition for this term:
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... a situation that exists when all people, at all times, have physical, social, and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life.71
Availability of foods, access to it, utilization of food, and stability are, thus, the key elements in this definition.72 The volatility of farm prices, an oft-repeated phenomenon, which was referred to earlier, is the main risk of putting food security into question. The measures that nations typically adopt are distinguished into ex ante and ex post: the former include insurance schemes, and the latter are social protection schemes such as loans to affected farmers:73 Food Aid: Direct provisions to those concerned are excluded from the calculation of the AMS, it they are part of a food aid-programme (e.g. supply of food with no consideration paid by the beneficiary). Annex 4, § 4 of the “Uruguay round Modalities” makes it clear that this provision covers domestic food aid, and does not have to take the form of direct provision of food. What matters is that those in need will receive the necessary help, irrespective of whether the latter takes the form of direct provision of food, or monetary means that will allow them to purchase food: Expenditures (or revenue foregone) in relation to the provision of domestic food aid to sections of the population in need. Eligibility to receive the food aid shall be subject to clearly-defined criteria related to nutritional objectives. Such aid shall be in the form of direct provision of food to those concerned or the provision of means to allow eligible recipients to buy food either at market or at subsidized prices. Food purchases by the government shall be made at current market prices and the financing and administration of the aid shall be transparent.
Direct Payments: Payments directed to farmers cannot be exempted unless if they meet the general criteria (government funded; not, or minimally, trade-distorting), as well as the criteria included under the various headings dealing with specific categories of direct payments that follow. An example is appropriate here: while a pest control service can be provided under the heading “General Services,” a direct payment to compensate the producer for animals culled to control pests comes under the “Direct Payments” heading. Consequently, the cost of supplying the service to the farmer comes under the heading “General Services,” whereas the direct payment to producers would come under the “Direct Payments” heading. Decoupled Income Payments: This form of payment deserves particular attention in light of the considerable practice in this context. Under this term, we understand payments that do not relate to production, factors of production, or prices, that is, payments that do not provide producers with the incentive to produce more in order to win more. Payments, simply put, are not made in function of the volume of production.74 Eligibility for similar payments can be established on clear criteria, such as income, status as producer or landowner, production level, etc.
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Theoretically, a completely decoupled income should have no trade spillovers beyond national borders (although, admittedly, this is a far-fetched example since some effects always exist). Some payments, however, are not totally decoupled, and it is often tough to decide what should and what should not be considered decoupled. The AB, in its report on US–Upland Cotton,75 provided some clarifications regarding the disciplines imposed on decoupled income payments. The report reflects a brief but very informative presentation of the legal framework applicable to decoupled income payments, as reflected in Annex 2 (§ 325): Paragraph 6 of Annex 2, entitled “[d]ecoupled income support,” seeks to decouple or delink direct payments to producers from various aspects of their production decisions and thus aims at neutrality in this regard. Subparagraph (b) decouples the payments from production; subparagraph (c) decouples payments from prices; and subparagraph (d) decouples payments from factors of production. Subparagraph (e) completes the process by making it clear that no production shall be required in order to receive such payments. Decoupling of payments from production under paragraph 6(b) can only be ensured if the payments are not related to, or based upon, either a positive requirement to produce certain crops or a negative requirement not to produce certain crops or a combination of both positive and negative requirements on production of crops.
The AB was called upon to review the panel’s finding that the US “production flexibility contract payments” were inconsistent with Annex 2, § 6(b). It described the contentious US measure as follows (§ 311): The production flexibility contract program dispensed with the requirement that producers continue to plant upland cotton in order to receive payments; instead, payments would generally be made regardless of what the producer chose to grow, and whether or not the producer chose to produce anything at all. However, there were limits to this planting flexibility. Specifically, payments were reduced or eliminated if fruits and vegetables (other than lentils, mung beans, and dry peas) were planted on upland cotton base acres, subject to certain other exceptions.
The AB formulated the issue before it in the following manner (§ 312): The question before us in this appeal thus concerns a measure with a partial exclusion combining planting flexibility and payments with the reduction or elimination of the payments when the excluded crops are produced, while providing payments even when no crops are produced at all.
The panel had originally found that the US measure could not qualify as a decoupled income payment in the sense that the term is used in Annex 2, § 6(b). The AB upheld the panel’s findings in this respect for the following reasons (§ 329): We agree with the Panel that a partial exclusion of some crops from payments has the potential to channel production towards the production of crops that remain eligible for payments. In contrast to a total production ban, the channelling of production that may follow from a partial exclusion of some crops from payments will have positive production effects as regards crops eligible for payments. The extent of this will depend on the scope of the exclusion. We note in this regard that the Panel found, as a matter of fact, that planting flexibility limitations at issue in this case “significantly
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constrain production choices available to PFC and DP payment recipients and effectively eliminate a significant proportion of them.” The fact that farmers may continue to receive payments if they produce nothing at all does not detract from this assessment because, according to the Panel, it is not the option preferred by the “overwhelming majority” of farmers, who continue to produce some type of permitted crop. In the light of these findings by the Panel, we are unable to agree with the United States’ argument that the planting flexibility limitations only negatively affect the production of crops that are excluded.
Note that the US had not required production of any kind in order to make the challenged payments. §§ 329–331 support the impression that the decision to produce was a private decision by US farmers. It seems that the AB was led to this conclusion in light of the extent of the partial exclusion. The US scheme required that producers not produce fruits and vegetables, but it did not impose an absolute ban on the production of all farm goods. Because, in its view, the exclusion was not “substantial,” the AB was led to believe that: because the opportunity for farmers to receive payments for producing crops, while less or no such payments are made to farmers who produce excluded crops, provides an incentive to switch from producing excluding crops to producing eligible for payments. (§ 331)
In the AB’s view, hence, these payments were not “sufficiently” decoupled. Recall that the test, as described in Annex 2, § 1, should be whether the scheme has no, or minimally distorting, effects. It seems that this test should require some market analysis, at the very least; otherwise, how could the presence of distorting effects be demonstrated? Under the circumstances, it is quite surprising that the AB was persuaded by the argument (and jumped to the conclusion) that partial exclusion by definition leads to production. As rational individuals, farmers might have chosen not to produce at all if, through the decoupled income payments received, they could have higher returns by, for example, investing the sums received in other areas. Or, what if US producers had found it more profitable to make cash deposits in a bank because of the interest associated with them? They would produce more only if, in their view, this was a rational decision. Alas, as things stand, we will never know what pushed US producers to produce or what kind of distortions the US payments provoked. Thus, we take issue with the standard of review applied by the AB in this particular dispute. Income Safety Net: These payments aim at compensating farmers for losses of income. They can legitimately be excluded from the calculation of AMS, if the loss corresponds to at least 30 percent of the income (made during a reference period), and provided that the compensation does not exceed 70 percent of the income lost. Annex 2 includes detailed categories of payments that come under this heading. Natural Disasters: These are payments aiming to compensate farmers for natural disasters (including disease outbreaks, pest manifestations, nuclear accidents, and war). Assuming that production loss is at least 30 percent of the production during a reference period,
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and provided that the compensation aims to cover losses only, such payments can legitimately be excluded from the calculation of the AMS. Producer Retirement: Similar payments are legitimately exempted if they are conditioned upon the total and permanent retirement of the beneficiaries. Resource Retirement: These payments are legitimately exempted, provided that the land will be set aside for three years at least. They are also known as “set aside” subsidies/ programs. Investment Aids: These payments can be exempted if farmers suffer from objectively demonstrated structural disadvantages, which are not based on the type/volume of production, are not related to prices, and provided that they take place only as long as necessary to overcome the mentioned disadvantages. Environmental Programs: These concern payments aiming to achieve an environmental objective, and are exempted to the extent that they are limited to the cost of compliance with the government program.76 Regional Assistance: These payments are exempted, if they are generally available to all producers in a disadvantaged region, and are limited to the costs that the producer must undertake because of the location of its production. Green box schemes have been increasing over the years, but not in all countries. Brazil and Japan, for example, report no increase in this respect. Orden et al. (2011b, pp. 408ff.) calculate that they represent 20 percent of the value of production in the EU and the US (2008), and 40 percent for the same period in Brazil, China, and India. Developing countries have not made much use of this facility. It is probably the case that the limits imposed on the areas in which they are most interested (such as extension services, research, soil conservation, and pest and disease control) make recourse to similar expenditures unattractive to them.77 We have now concluded our discussion regarding lawful exemptions from the calculation of AMS. To avoid any misunderstandings as to the exhaustive character of programs featured in Annex 2 and discussed previously, Article 7.2 of AG makes it clear that any program that does not satisfy the criteria specified in Annex 2 must be included in the calculation of the total AMS. Article 7.1 of AG finally asks WTO members to ensure that their measures that are initially characterized as “green box” continue to satisfy the criteria for exclusion from AMS in the future as well. The fact, though, that a WTO member has included a particular measure in the “green box” category does not per se immunize it from challenges before a WTO panel. WTO members can legitimately disagree as to the appropriateness of inclusion of specific measures under specific headings. In this case, it will be for the complainant to demonstrate that a measure has been unlawfully included in the green box area, arguing that it does not meet the requirements of Annex 2. This allocation of burden of proof is a direct consequence of the fact that these measures are exemptions from the coverage of AMS, not legal exceptions to it.
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Calculating the AMS78
It is Annex 3 of the AG Agreement that explains in detail the various components of the calculation. Since support can be either product- or nonproduct-specific, two AMS are kept: one for the former and one for the latter (Annex 3, § 1). Product-specific support is distinguished into “market price support,” “non-exempt direct payments,” and “any other subsidy not exempted from the reduction commitment,” referred to as “other non-exempt policies” (Annex 3, § 1). Product-specific AMS shall be expressed in terms of monetary value (Annex 3, § 6). Recall that the basic idea is to ensure that the Current Total AMS does not extend the commitments made with respect to domestic support. The commitment is a reduction of 20 percent of domestic support, as calculated during the reference period—the “base period,” as per the language of the AG Agreement (Annex 3, § 5 and § 11), which is the period between 1986 and 1988. Now why 1986–1988? The idea was that the average of these three years would be taken into account, since most of the negotiations on farm trade liberalization, except for some difficult “political” issues, were completed between 1986 and 1990, and anyway there would have been no change in the base figure outcome had three years from that period other than those chosen been used as the benchmark. Of course, the situation changed dramatically around the mid-1990s, when food prices increased and subsidy amounts were much below the base number when the implementation period started. Domestic support (product and non-product specific) is expressed in terms of “Total AMS.” Total AMS, which covers all support granted during the base period, is termed “Base Total AMS.” “Annual and Final Commitment Levels” reflect the 20 percent reduction that WTO members (with the exceptions already mentioned) have agreed to observe. WTO members must ensure that their “Current Total AMS” (that is, the amount of support that they pay each year of the implementation period) does not exceed their “Annual and Final Commitment Levels” that they have agreed to observe and have included in Part IV of their Schedule of Concessions. Article 6.1 of AG reads in this respect: “The commitments are expressed in terms of Total Aggregate Measurement of Support and ‘Annual and Final Bound Commitment Levels.’” The Total AMS is defined in Article 1(h) AG in the following manner: “Total Aggregate Measurement of Support” and “Total AMS” mean the sum of all domestic support provided in favour of agricultural producers, calculated as the sum of all aggregate measurements of support for basic agricultural products, all non-product-specific aggregate measurements of support and all equivalent measurements of support for agricultural products, and which is: (i) with respect to support provided during the base period (i.e. the “Base Total AMS”) and the maximum support permitted to be provided during any year of the implementation period or thereafter (i.e. the “Annual and Final Bound Commitment Levels”), as specified in Part IV of a Member’s Schedule; and
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(ii) with respect to the level of support actually provided during any year of the implementation period and thereafter (i.e. the “Current Total AMS”), 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 ...
The final bound commitment level is, of course, the reduction by 20 percent of the support expressed in AMS terms. The annual bound commitment level refers to the reductions that must be made every year until the final year when the target needs to have been reached (i.e., 2001). Originally, the idea was that six equal annual reductions would take place until the final implementation year. In order to avoid the confusion over the precise amount of each reduction, WTO members decided that schedules should fully reflect the reduction (and the corresponding outcome) for each implementation year until the final year. Some tariff schedules did not observe this rule, and sometimes omissions led to confusion, despite the fact that in most similar cases, a note had been added in the schedule indicating that the total reduction commitment would be implemented through equal annual reductions. This is something that has been corrected now in the protocols of accession for new WTO members. The AG Agreement requests that WTO members calculate their support for “base agricultural products.” This term is defined in Article 1b of AG as follows: “basic agricultural product” in relation to domestic support commitments is defined as the product as close as practicable to the point of first sale as specified in a Member’s Schedule and in the related supporting material;
Recall, nonetheless, that, by virtue of Annex 3, § 7, support must be included in the AMS calculation even if it is granted to agricultural processors. In this case, it must be shown that similar support benefits producers of the basic agricultural products. Support that is calculated for AMS purposes is distinguished into “market price support,” “non-exempt direct payments,” and “other non-exempt policies” (Annex 3, § 1). To this effect, both budgetary outlays, and revenue foregone must be taken into account (Annex 3, § 2). Further, it is irrelevant if support is granted at the national or subnational level (Annex 3, § 3). Payments, levies, or both paid by producers, of course, can legitimately be taken into account and be deducted from the calculation of the AMS (Annex 3, § 4). “Market price support” is defined in Annex 3, § 8 as follows: [M]arket 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. Budgetary payments made to maintain this gap, such as buying-in or storage costs, shall not be included in the AMS.
The “fixed external reference price” is defined in Annex 3, § 9 as follows: 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
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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.
Consequently, market price support is the difference between the “administered price” and the “fixed external reference price”; the latter is defined, but the former is not. Since the AMS is calculated “in accordance with Annex 3,” and “taking into account” the constituent data and methodology for measuring support, it was felt that the latter could be used to decide on the level of the administered price. The methodologies acquire legal status since they are inscribed in the Schedules of Concession. In Korea–Various Measures on Beef, the question arose whether Korea had respected its commitments when calculating the AMS. Korea had based its calculation of its AMS on data from 1989 to 1991. Its practice was challenged because, so the complainants argued, it should have used the statutory base period (that is, 1986–1988). Korea argued before the panel and the AB that it was authorized to use the base period that it did since calculation of the AMS, as per Article 1 of AG, should be done in accordance with Annex 3, but also taking into account the constituent data methodology. The two methods were equivalent in the eyes of Korea. The panel and the AB disagreed. In particular, the latter noted that the term “in accordance with” preceding the term “Annex 3” in Article 1 of AG made it clear that the disciplines of Annex 3 have priority. All WTO members had to do was to “take into account” the constituent data methodology, a lesser standard than “in accordance with,” in the eyes of the AB at least (§ 112). In this case, the issue did not even arise since Korea had no administered price in place, and, as a result, there was no constituent data methodology in place either. The latter exists only in order to serve the calculation of the administered price—no administered price, no constituent data methodology, in other words (§ 113). Consequently, in the AB’s view, Korea should have used data from the statutory base period. The same method (difference between administered price and fixed external reference price) is used for the calculation of nonexempt direct payments (Annex 3, § 10). For the calculation of similar payments, WTO members can choose to use budgetary outlays instead (Annex 3, § 10), and this will always be the case for similar payments that are based on factors other than price (Annex 3, § 12). Nonexempt direct payments are direct payments to farm producers that do not come under the scope of Article 6.5 of AG. Finally, for other “non-exempt measures,” a catchall provision was inserted to ensure that no support that does not come under one of the statutory exemptions will escape the net of the AMS. The calculation can be based either on budgetary outlays, or, whenever this is not appropriate, on “the gap between the price of the subsidized good or service and a representative market price for a similar good or service” (Annex 3, § 13).
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The outcome of the calculation will be multiplied by the quantities sold in order to calculate the product-specific AMS. WTO members should take into account the first sale, if possible (Annex 3, § 7). An illustration may be helpful in this context. In the EU, a system of minimum import prices was in place for beef and cereals. These prices depended on various factors, such as tariff protection, production controls, the EU intervention price (a price decided by the EU ministers for agriculture normally on a yearly basis, which corresponds to the applied administered price as indicated in § 8 of Annex 3), and export subsidies. The system of minimum import prices aimed at restricting supply to the domestic (EU) market, thus keeping domestic prices higher than the world price. The AMS calculation for beef and cereals was estimated to be the value of support for the volume of production multiplied by the difference between the EU intervention price and the world price for the base period between 1986 and 1988. Assuming, for example, that the intervention price for wheat is €200 per ton, the world price is €100 per ton, and the total wheat production in the EU is 1 million tons, the EU AMS for wheat is €100 million. Developed countries have agreed to reduce their total AMS by 20 percent by the end of a 6-year period; developing countries have agreed to reduce their total AMS by 13.3 percent by the end of a 10-year period; LDCs must bind their AMS support level (if applicable), but were not required to make any reduction commitments. Since the new negotiations have not been concluded, and the end of the implementation period was in 2001, all WTO members have to observe (as of now) is the final bound commitment level. The situation could change again if WTO members agree on a new AG Agreement in the future. 8.6.4
Equivalent Measurement of Support (EMS)
When the calculation of AMS is impracticable, support to producers will be calculated through recourse to the Equivalent Measurement of Support (EMS), which is defined in Article 1(d) of AG: “Equivalent Measurement of Support” means the annual level of support, expressed in monetary terms, provided to producers of a basic agricultural product through the application of one or more measures, the calculation of which in accordance with the AMS methodology is impracticable, other than support provided under programmes that qualify as exempt from reduction under Annex 2 to this Agreement, and 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 4 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.
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Recourse to EMS was made in only a very limited number of cases. In some instances, this was so because the 1986–1988 fixed external reference price for the supported product was not available in the constituent data and methodology (that is, in the supporting tables, the so-called AGST Tables, included for reference in Part VI of each member’s Schedule of Concessions). One explanation offered was that, during that particular reference period, some products had not been traded. Under the circumstances, no external reference price was recorded. In similar instances, the notifying member used a proxy approach (e.g., the EMS) in order to evaluate the level of support granted to the product for notification purposes. Argentina, for example, used EMS for the calculation of its support on tobacco.79 Annex 4 explains the calculation of EMS. In parallel with the AMS, product-specific EMS will be derived from a multiplication of the applied administered price by the quantities eligible for budgetary outlays and will be calculated as close as possible to the first point of sale. Nonexempt direct payments will be calculated in the same manner as with AMS. 8.7
Export Subsidies
The commitments on export subsidies constitute the third and final main pillar of the AG Agreement. Recall from the discussion in chapter 3 in this volume, that the original GATT contained no provisions on export subsidies for farm goods. In the 1955 Review Session, Article XVI.3 of GATT was agreed upon, and it sanctioned export subsidies that led to the subsidizing country obtaining more than an equitable share of the world market, but stopped short of outlawing export subsidies. The situation changed, of course, with the entry into force of the SCM Agreement and the outright ban on export subsidies. The AG Agreement constitutes an exception to this ban. It provides for a transitional arrangement for some export subsidies, namely, export farm subsidies, to stay in place and progressively be phased out. 8.7.1
Defining Export Subsidies
The term “export subsidy” is defined in Article 1(e) of AG as follows: “export subsidies refers to subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement.” Article 9.1 of AG contains an Illustrative List of export subsidies: (a) the provision by governments or their agencies of direct subsidies, including payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to a cooperative or other association of such producers, or to a marketing board, contingent on export performance;
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(b) the sale or disposal for export by governments or their agencies of non-commercial stocks of agricultural products at a price lower than the comparable price charged for the like product to buyers in the domestic market; (c) payments on the export of an agricultural product that are financed by virtue of governmental action, whether or not a charge on the public account is involved, including payments that are financed from the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the exported product is derived; (d) the provision of subsidies to reduce the costs of marketing exports of agricultural products (other than widely available export promotion and advisory services) including handling, upgrading and other processing costs, and the costs of international transport and freight; (e) internal transport and freight charges on export shipments, provided or mandated by governments, on terms more favourable than for domestic shipments; (f) subsidies on agricultural products contingent on their incorporation in exported products.
The existence of this list greatly facilitates the work of the interpreters, who are now armed with various examples of export subsidies that they can draw from. Issues, of course, might (and did) arise regarding the degree of government involvement necessary for a scheme to be attributed to a WTO member—an issue that has not been addressed in the provision cited earlier. Issues might also arise, and indeed did, because of the divergent terminology used in this provision: the terms “payments,” “sale,” and “disposal,” but also the term “subsidies,” are all part and parcel of the Illustrative List. EC–Export Subsidies on Sugar80 emerges as the leading case in this context, largely because of the idiosyncratic facts of this case. The AB clarified in its report its understanding of the terms “payments”, “financed”, and “by virtue of governmental action” that appear in Article 9.1(c) of AG, and has followed its interpretations of the three terms in subsequent case law as well. The facts of EC–Export Subsidies on Sugar are reflected in § 2 of the report (and reproduced briefly in §§ 230ff.), and could be usefully summed up as follows: (a) the EU organization of its sugar market distinguishes between three categories, A, B, and C sugar; (b) the production of sugar beet in the A and B categories is regulated. The overall supply is capped, and to this effect a production is imposed, and the price for A and B sugar beet is also fixed in the EU regulation; (c) C sugar beet is out of quota. EU producers are allowed to produce as much as they wish but they must export all sugar produced. The EU regime imposes financial penalties in case C sugar is diverted into the EU domestic market; (d) A, B and C sugar constitutes a single line of production, since beet producers do not distinguish between the three when producing it. A series of sugar producers complained that the EU regime constituted an export subsidy, a contention that the EU refuted. Of interest to our discussion here is the C sugar
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regime, because it is in this context that the panel and AB findings matter for the interpretation of the three terms that we have signaled above. Regarding the understanding of the term “payments,” the panel and the AB report followed an interpretation of the term that the AB had already reached in a previous report, namely, in its report on Canada–Dairy. The question in that dispute was whether provisions of milk by a Canadian government agency at discounted prices qualified as “payment” under Articles 9.1(a) and 9.1(c) of AG. Now recall there is a linguistic difference between the two paragraphs: the former refers to “provision ... of direct subsidies, including payments in kind,” whereas the latter, to “payments.” Overturning the panel in this respect, the AB had held that “payments” in Article 9 of AG should not be assimilated to “subsidies” in the SCM sense of the term (§ 87). Implicitly, it accepted that “payments” in the AG sense of the term should be viewed as “financial contribution” in the SCM sense of the term. Hence, there is no need to inquire whether a benefit has been conferred for a measure to qualify as “payment” under Article 9 of AG (§ 91). Having established the substantive difference between the terms “subsidy” and “payment,” the AB held that provision of milk at discounted prices could qualify as both a “payment in kind” [Article 9.1(a) of AG], and a payment as per Article 9.1(c) of AG. This is so, because in the AB’s view, a “payment” is a transfer of economic resources, which do not have to be necessarily expressed in monetary terms (§§ 107–109). The AB on EC–Export Subsidies on Sugar confirmed this understanding of the term “payment” almost verbatim (§§ 251ff.). The key issue in EC–-Export Subsidies on Sugar was whether, the absence of payments to C sugar beet producers notwithstanding, the EU could still be held to export subsidize C sugar in light of the close connection between A, B, and C sugar. The AB provided that in similar cases where no direct payments had been made, the standard of review should be more demanding. It underlined to this effect, that a nexus must exist between government involvement and the measure used (§ 237): Thus, even if government does not fund the payments itself, it must play a sufficiently important part in the process by which a private party funds “payments,” such that the requisite nexus exists between “governmental action” and the “financing.” The alleged link must be examined on a caseby-case basis, taking account of the particular character of the governmental action at issue and its relationship to the payments made.
It then applied these ideas to the facts of the case before it and upheld the panel’s finding that the EU regime should be considered an export subsidy in the sense of Article 9.1(c) of AG. The reasoning of the AB follows verbatim almost the reasoning of the panel. The AB effectively adopted a “likelihood” standard to find that a subsidy had been bestowed—a rather extraordinary statement by the usually cautious AB. In its view, the evidence before it suggested that the EU was providing its producers of C sugar with export subsidies. These producers were producing A, B, and C sugar in the same
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production line; they were receiving generous payments when producing in quota A and B sugar; they had to export C sugar, otherwise they would be facing financial penalties; under the circumstances, the AB d=found that there was strong likelihood that C sugar producers would be using money received from production of A and B sugar to crosssubsidize sales of C sugar; the practice was attributable to the EU because it is the nature of the common organization of market put into place by the EU authorities that would provoke this outcome (§§ 238ff.). 8.7.2
Commitments on Export Subsidies
Article 3.3 of AG reads: Subject to the provisions of paragraphs 2(b) and 4 of Article 9, a Member shall not provide export subsidies listed in paragraph 1 of Article 9 in respect of the agricultural products or groups of products specified in Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity commitment levels specified therein and shall not provide such subsidies in respect of any agricultural product not specified in that Section of its Schedule.
This provision should be read together with Article 8 of AG, to wit: Each Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in that Member’s Schedule.
Under Article 3.3 of AG, WTO members have accepted disciplines with respect to both “scheduled goods” (that is, goods that they have included in their schedules of concessions) and “unscheduled goods” (that is, goods that they have not included in their schedules of concessions). All commitments are product-specific. 8.7.2.1 Commitments on Budgetary Outlays According to Article 9.2(b)(iii) of AG, at the end of the implementation period, WTO members should have reduced their export subsidies by 36 percent compared to the base levels, which represent the average of export subsidies granted between 1986 and 1990. Developing countries are required to make more modest reductions: they should ensure that at the end of the implementation period, their export subsidies have been reduced by 24 percent compared to the same benchmark. No reduction commitments have been imposed on LDCs. WTO members have been requested to include in their Schedule of Concessions the annual level of reduction (the maximum level of subsidies allocated), as per Article 2(a) (i) of AG. There is some built-in flexibility, and WTO members can subsidize above and beyond the agreed level, between the second and the fifth year of the implementation period, if two conditions have been met: first, they do not jeopardize the final objective (reduction by 36 percent or 24 percent depending on the status of WTO member as “developed” or “developing”), and second, the amount of additional subsidies does not exceed
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3 percent of the amount paid during the base period (the average between 1986 and 1990). Articles 2(b)(i), and 2(b)(iii) of AG state as much. 8.7.2.2 Commitments on Quantities The commitments on quantities “parallel” the commitments on the amounts paid on export subsidies. These commitments are important for one more reason: the agreement establishes, as we will see later in this chapter, that exports in excess of the committed amounts are subsidized. The presumption is, of course, rebuttable. It is a presumption all the same, though, and WTO members that want to rebut it will carry the associated burden of proof. The final objective is to reduce the volume of subsidized exports by 21 percent by the end of the implementation period, whereas developing countries are required to reduce it by 14 percent during the same time [Article 2(b)(iv) of AG]. No reduction commitments have been imposed on LDCs. Further, WTO members must reflect in their Schedules of Concessions the maximum quantity of subsidized goods that they can export on an annual basis, as per Article 2(a) (ii) of AG. Between the second and the fifth year of the implementation period, WTO members can export subsidized goods above their annual commitment as reflected in their schedule, if they do not jeopardize the final objective, and the quantities exported are not larger than 1.75 percent of the average during the base period [Articles 2(b)(ii) and 2(b) (iii) of AG]. 8.7.2.3 Scheduled Goods The AB held, in its report on US-FSC (§§ 151–152), that the nature of commitments assumed with respect to scheduled goods is some sort of limited authorization, which will instantly turn into a prohibition when the thresholds established in the relevant schedule of concessions have been met. 8.7.2.4 Unscheduled Goods With respect to unscheduled goods, WTO members cannot provide any export subsidy.81 8.7.3 Anticircumvention Article 10.1 of AG reflects a general prohibition to the effect that export subsidies, which have not been listed in Article 9.1 of AG, are used so as to circumvent commitments made. In the following paragraphs, Article 10 of AG addresses three distinct situations. First, it calls for a work program on export credits, which we discuss later in this chapter (Article 10.2 of AG). Second, it establishes a rebuttable presumption that exports of goods on which commitments have been entered beyond the “capped” quantities are subsidized. Article 10.3 of AG regulates the allocation of burden of proof in cases where a WTO member claims that its exports exceeding its commitments have not been subsidized, and we refer to the case law on this issue later in this chapter. Finally, Article 10.4 of AG
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requests a dissociation of food aid from commercial transactions. The idea here is that, under the guise of food aid, exporters could “tie” the purchase of their goods in commercial terms. 8.7.3.1 Export Credits Article 10.2 of AG reads: Members undertake to work toward the development of internationally agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export credits, export credit guarantees or insurance programmes only in conformity therewith.
In US–Upland Cotton, the AB had to decide on the relationship between the general prohibition of circumvention (Article 10.1 of AG), and the more specific provision regarding export credits (and guarantees) included in Article 10.2 of AG. The US and Brazil had presented divergent arguments regarding the interpretation of this provision before the panel and the AB. The US contended that, in light of the wording of Article 10.2 of AG, export credit guarantees were “carved out” from the discipline included in Article 10.1 of AG. Brazil claimed that this should not be the case. The three-member division of the AB deciding the dispute could not agree on this issue. The majority sided with Brazil and held that, until disciplines had been elaborated, export credit guarantees must observe the existing discipline included in Article 10.1 of AG (§§ 607ff., and especially 616 and 626–627). Effectively, in the majority’s view, subsidized export credits could not be granted as of 1 January 1995. One member of the AB expressed a different opinion. In its view, Article 10.2 of AG should be regarded as a carve-out from the obligation included in Article 10.1 of AG. Until disciplines had been worked out, WTO members incurred no obligation with respect to export credits, export credit guarantees, and insurance programs (§§ 631–641). The best arguments lie, in our view, with the minority opinion. Both the wording (“undertake to work toward the development of ... disciplines”) and the negotiating history82 of this provision suggest that export credit guarantees were not meant to be covered by the outright ban embedded in Article 10.1 of AG. If the negotiating intent was to bring export credits under the purview of Article 10.1 of AG anyway, why would negotiators spend negotiating effort on introducing Article 10.2 of AG, where they denote that they will establish disciplines on export credits, and similar schemes? Alas, this is by now water under the bridge. 8.7.3.2 Excess Exports Recall that commitments are imposed both on the level of subsidization and on the level of quantities of subsidized goods exported. WTO members exporting beyond the committed quantity must establish that the “excess exports” have not benefited from export subsidies. The rationale for this provision is that, absent subsidies, a WTO member would
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not be in position to export at all (Article 10.3 of AG). A presumption is established, thus, that exports benefit from subsidies. The AB has consistently held (Canada–Dairy, § 75; US–Upland Cotton, § 645) that all the complaining party needs to establish is the quantitative part of its claim; i.e., that the subsidizing state has exported quantities beyond its export quantity-reduction commitments. The burden of proof will then shift to the exporting state to demonstrate that its exports have not benefited from subsidies. In US–Upland Cotton, the AB distanced itself from the panel’s findings in this respect, holding that Article 10.3 of AG does not apply to unscheduled goods (§ 652): We disagree with the panel’s view that Article 10.3 applies to unscheduled products. Under the panel’s approach, the only thing a complainant would have to do to meet its burden of proof when bringing a claim against an unscheduled product is to demonstrate that the respondent has exported that product. Once that has been established, the respondent would have to demonstrate that it has not provided an export subsidy. This seems to us an extreme result. In effect, it would mean that any export of an unscheduled product is presumed to be subsidized. In our view, the presumption of subsidization when exported quantities exceed the reduction commitments makes sense in respect of a scheduled product because, by including it in its schedule, a WTO Member is reserving for itself the right to apply export subsidies to that product, within the limits in its schedule. In the case of unscheduled products, however, such a presumption appears inappropriate. Export subsidies for both unscheduled agricultural products and industrial products are completely prohibited under the Agreement on Agriculture and under the SCM Agreement, respectively. The panel’s interpretation implies that the burden of proof with regard to the same issue would apply differently, however, under each Agreement: it would be on the respondent under the Agreement on Agriculture, while it would be on the complainant under the SCM Agreement. (italics in the original)
There is nothing much to add to this. It seems only fair that goods that have not been scheduled cannot be presumed to have received subsidies. The parallel that the AB drew with the SCM Agreement is, thus, convincing. 8.7.3.3 Food Aid Article 10.4 of AG deals with international food aid. It provides that aid must not be tied to commercial exports of farm products and must be carried out in accordance with international standards [namely, the “Principles of Surplus Disposal and Consultative Obligations,” including, where appropriate, the system of Usual Marketing Requirements (UMRs) established by the Food Agricultural Organization (FAO)]. It is the FAO Consultative Subcommittee for Surplus Disposal (CSSD) that prepared the principles for surplus disposal to which Article 10.4 of AG refers, and the basic function of which is summarized as follows: The FAO Principles of Surplus Disposal and Guiding Lines endorsed by FAO Council in 1954, seek to assure that food and other agricultural commodities which are exported on concessional terms result in additional consumption for the recipient country and do not displace normal commercial imports; and similarly, that domestic production is not discouraged or otherwise adversely affected.
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While the Principles are not a binding instrument, they represent a commitment by signatory countries.83
A UMR is: “A specified agreement by the recipient country to maintain a normal level of commercial imports in addition to any imports of the same commodity specified in the concessional transaction. The establishment of a UMR is considered a useful technique in ensuring additional consumption.”84 If these commitments have been respected, then aid will not be considered an export subsidy. The purpose of adding these commitments is, thus, to ensure that WTO members will not be circumventing their obligations under Article 10.1 of AG under the guise of food aid. The AB stated as much in its report on US–Upland Cotton (§§ 616, 619): Article 10.4 provides disciplines to prevent WTO Members from circumventing their export subsidy commitments through food aid transactions. ... We are unable to subscribe to the United States’ arguments because we do not see Article 10.4 as excluding international food aid from the scope of Article 10.1. International food aid is covered by the second clause of Article 10.1 to the extent that it is a “non-commercial transaction.” Article 10.4 provides specific disciplines that may be relied on to determine whether international food aid is being “used to circumvent” a WTO Member’s export subsidy commitments. There is no contradiction in the Panel’s approach to Article 10.2 and its approach to Article 10.4. The measures in Article 10.2 and the transactions in Article 10.4 are both covered within the scope of Article 10.1. As Brazil submits, “Article 10.4 provides an example of specific disciplines that have been agreed upon for a particular type of measure and that complement the general export subsidy rules” but, like Article 10.2, it does not “establish any exceptions for the measures that [it] covers.” WTO Members are free to grant as much food aid as they wish, provided that they do so consistently with Articles 10.1 and 10.4. Thus, Article 10.4 does not support the United States’ reading of Article 10.2.
One might wonder whether this provision is targeted to the issue it wants to address, or whether it is akin to “throwing the baby out with the bathwater.” True, there could be an issue when exporters tie supply of aid to purchase of goods under commercial conditions. But isn’t the overall cost much lower for countries in actual need to import food anyway? Note that there is a separate provision for net food importers, which we will discuss later in this chapter. The requirement for untied food aid makes sense when read in conjunction with the obligation to respect the FAO Principles for Surplus Disposal. Viewed in this way, it is only when food aid does not replace commercial imports that it can be legitimately supplied. Tied aid would severely undercut this principle. Finally, food aid must be provided in accordance with the Food Aid Convention of 1986 (Article 10.4(c) of AG). This convention, which was renewed in 1999, aims at addressing food security concerns, an issue to which we will return later in this discussion. It was signed at a point in time when the world stocks of grains fell to dramatically low levels. Article IV, to which Article 10.4 of AG explicitly refers, provides a list of goods that can
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be shipped without running the risk of prosecution under the WTO, as well as their quantities. 8.7.3.4 Standard of Review Referring to prior case law, the AB held in US–Upland Cotton that not only actual, but also threat of, circumvention might suffice for a violation of Article 10 of AG. Nevertheless, the mere possibility that circumvention might occur at some point in the future as a result of government behavior does not fall within the meaning of threat of circumvention. The AB held that a likelihood standard that an event might occur must be complied with (§§ 704, 710, and 713). 8.7.4
Export Competition
The disciplines on subsidies (with the caveats imposed by the FAO Conventions cited earlier) aim to address the “fairness” of export competition, but “export competition” is not effectively addressed only through the disciplining of export subsidies. We have noted in various places in this volume that this is an area where the WTO disciplines are weak. It is only recently that the multilateral trading system has started taking its first steps in this context. The 2005 Hong Kong Ministerial Declaration called for the elimination of all forms of export competition by 2013. The target was not achieved. The Bali Ministerial Declaration includes a Declaration on Export Competition, which in part reads (§ 2): ... we therefore reaffirm our commitment, as an outcome of the negotiations, to the parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect, as set out in the 2005 Hong Kong Ministerial Declaration. We regret that it has not been possible to achieve this objective in 2013 as envisaged in that Declaration.
To this effect, they decided to pursue “dedicated discussions” in the Committee on Agriculture to examine developments regarding export competition on an annual basis (§ 11). The examination would take place based on a questionnaire that the WTO Secretariat would put together (§ 12). An annex to the Declaration explains the content of information that the Secretariat would be looking for (e.g., description of program, its total value etc.). There are serious doubts surrounding the success of this initiative. Through the questionnaire, the WTO Secretariat will be essentially asking WTO members to provide self-incriminating information.85 This is definitely not an incentive-compatible structure for them, and we discuss this issue more in chapter 12 of this volume. 8.7.5
Export Subsidies Revisited
Prices of farm goods have risen substantially as of 2007, and projections are that they will remain quite high in the years to come.86 We will return to this issue later in this chapter. High prices, of course, reduce the need to pay export subsidies, and so do internal policy
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reforms that undo the segmentation of the domestic from the international market. Some WTO members (and especially the EU) have substantially revised their attitude in this respect in recent years. Tangermann (2015) looked into official WTO documents and concluded that the actual use of export subsidies has declined a lot, especially since 2010. Of the 18 WTO members that agreed on a nonzero export subsidy commitment during the Uruguay round, 10 have not used export subsidies since 2001. Three of the remaining countries (Canada, Norway, and Switzerland) have continued to make wide use thereof. The US has made only marginal use of export subsidies initially, according to its own notifications, and no use at all since 2010. The EU stopped using subsidies as of 2013. It made the additional commitment in the context of its policy framework (2014–2020) to stop export subsidizing altogether except for exceptional circumstances that might justify similar recourse. 8.8
Minimum Access Requirements
This obligation is of historical interest and has been reflected only in the Uruguay-round Modalities document, and not in the text of the AG Agreement. The basic idea is this: penetration of foreign markets was unlikely during the implementation period since, as shown earlier, the tariffication process resulted in so-called tariff peaks for many farm goods. In order to ensure some market integration, WTO members would be required to allow for some import penetration during the implementation period, which, of course, has by now lapsed. To this effect, two instruments were devised: minimum and current access opportunities. We discuss them in what immediately follows. 8.8.1
Minimum Access Opportunities
§ 5 of the Uruguay-round Modalities reads: Ordinary customs duties, including those resulting from tariffication, shall be reduced, over the six-year period commencing in the year 1995, on a simple average basis by 36 percent with a minimum rate of reduction of 15 percent for each tariff line. Where there are no significant imports, minimum access opportunities shall be established. They shall represent in the first year of the implementation period not less than 3 percent of corresponding domestic consumption in the base period 1986-88 and shall be expanded to reach 5 percent of that base figure by the end of the implementation period.
It is not coincidental that the requirement for “minimum access opportunities” follows the amount of tariff cuts. The sequence is explained by the legitimate expectation that the agreed cuts occasionally would be a far cry from effective market access. § 7 requires that the increase in market access opportunities takes place in equal installments. Annex 3, § 14, requested that WTO members implement minimum access opportunities through a
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TRQ, whereby the low tariff level (“in quota”) would observe MFN. The tariff would be set for goods at the four-digit level, and, where appropriate, at a more detailed level (Annex 3, § 15). 8.8.2
Current Access Opportunities
§ 6 of the Uruguay-round Modalities reads: “Current access opportunities, which during the base period are in excess of the minimum access opportunities as defined in paragraph 5 above, shall be maintained and increased over the implementation period.” To this effect, WTO members would calculate the average of market access for specific products during the base period (1986–1988) and ensure that imports during the implementation period would not fall below that level (Annex 3, § 11). If a QR or a VER were in place, then the benchmark would be the volume of goods permitted to be imported, rather than those that had been effectively traded (Annex 3, § 12). Conversely, the volume goods effectively imported would constitute the benchmark for current access opportunities if imported goods were subjected to nonautomatic import licensing (Annex 3, § 13). In Canada–Dairy, the AB (§§ 125ff.) had to face a claim by the US regarding an inscription in the Canadian schedule whereby a TRQ had been established for fluid milk. Canada imposed an in-rate quota of 17.5 percent for the first 64,500 tons to be imported, and an out-of-quota rate of initially 283.8 percent (which would eventually decline to 241 percent). The AB held that, the absence of agreement during the negotiations notwithstanding, the unilateral statement by Canada could be meaningfully understood only as a current access opportunity, not a minimum access opportunity (that would have to be increased, as discussed previously). The AB did not get into great lengths to explain why this was the case, but it did base its ruling on the negotiating history and mentioned the Uruguayround Modalities in support of its understanding of the Canadian accession in this way (§ 139). 8.9
Due Restraint (Peace Clause)
During the implementation period, WTO members have agreed that compliance with the obligations imposed under the green box, the blue box, and Articles 8–10 of AG would mean ipso facto compliance with the WTO. Hence, no CVDs can be imposed against similar measures (unless, as discussed previously, if due restraint has been shown on top of the SCM requirements for lawful imposition of CVDs), nor can nonviolation complaints (NVCs) be raised against them (Article 13 of AG).87 The content of “due restraint” is not further detailed in the agreement. One would intuitively suspect that some consideration of the effects of the prescribed action (which we discuss in detail next) must have been exercised before recourse to similar action was
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taken. Anyway, it is all of historical interest at this moment, for the peace clause provision (Article 13 of AG) was a time-bound exception to Article 21 of AG. It expired at the end of the implementation period.88 The obligation to show “due restraint” is distinguished into three separate sections with respect to measures concerning domestic support, which follow the conditions of Article 6 of AG, and with respect to direct payments, which abide by the discipline imposed through Article 6.5 of AG. First, no CVDs could be imposed during the implementation period unless due restraint has been shown; second, no action under Article XVI of GATT or Articles 5 and 6 of AG could be taken if the overall support granted is less than that granted during the marketing year 1992; third, no NVC could be imposed if the overall support granted is less than that granted during the marketing year 1992. With respect to export subsidies now, no CVDs could be imposed unless not only injury had been demonstrated, but also due restraint had been exercised. No action under Article XVI of GATT and Articles 3, 5, and 6 of SCM could be done unless due restraint had been exercised. 8.10
Public Stockholding for Food-Security Purposes
Food security is addressed in various places in the AG Agreement. The preamble already calls for awareness that the “Reform Programme” agreed might have a negative impact on food security. To this effect, the Uruguay-round Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed Countries and Net Food-Importing Developing Countries was adopted, paying particular attention to food security–related issues for developing countries, although in principle, food security can be an issue for developed countries as well. In a similar vein, Article 12.1(a) requests that WTO members adopt export restrictions to reflect on their impact on food security. Food security is also one of the bases justifying “special treatment,” as discussed earlier. And, last but not least, it occupies a special place in the green box. It is in this context that food security became an important topic during the Doha round. This led to a new legislative act, absent which the whole endeavor of multilateral negotiations could have been at peril. 8.10.1
India in Bali
At the insistence of India,89 WTO members agreed to adopt a decision during the Bali Ministerial Conference (December 2013), whereby they committed to finding a permanent solution to public stockholding for food-security purposes. In the meantime, they also agreed that90
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until a permanent solution is found, and provided that the conditions set out below are met, Members shall refrain from challenging through the WTO Dispute Settlement Mechanism, compliance of a developing Member with its obligations under Articles 6.3 and 7.2(b) of the Agreement on Agriculture (AoA) in relation to support provided for traditional staple food crops in pursuance of public stockholding programmes for food security purposes existing as of the date of this Decision, that are consistent with the criteria of paragraph 3, footnote 5, and footnote 5&6 of Annex 2 to the AoA when the developing Member complies with the terms of this Decision.
A footnote defines the term “traditional staple food crops” as follows: “primary agricultural products that are predominant staples in the traditional diet of a developing Member.” As a result, developing countries can subsidize beyond the levels committed [AMS: Article 6.3 of AG; de minimis: Article 7.2(b) of AG] in order to increase the level of stockpiling of predominant staples in their traditional diet, but without being allowed to unleash stockpiled foodstuff onto the world market; otherwise, the whole purpose for allowing this exception (food security) would be defeated. 8.10.2
India Was Serious ...
Agriculture sustains millions of subsistence farmers. Their interests must be secured. Food security is essential for over four billion people of the world. For India, food security is non-negotiable. Need of public stock-holding of foodgrains to ensure food security must be respected. Dated WTO rules need to be corrected.
So said Anand Sharma, India’s trade minister, at the Bali Conference, where the aforementioned text was adopted.91 The Bali decision was an interim solution, and not much of one. All it ensured was that no disputes will be formally launched against developing countries if the latter had violated some of their commitments with respect to stockpiling. Stockpiling, as covered earlier, is regulated in Annex 2 (green box). India, like other developing countries, can, under Annex 2, purchase from domestic producers for stockpiling purposes at the prevailing market price. A green box has no limit. The conditions set therein, nevertheless, must be respected. One fundamental condition is that food is stocked under market conditions (and not at guaranteed prices). If stockpiling occurs at administered or guaranteed prices, then price support has to be qualified as AMS, and it must respect the statutory limits (either the numbers in the schedule or the de minimis provisions). Amber box disciplines, thus, come into play. India (and others) could go ahead and subsidize, to the extent there was room left in its amber box. Thus, India can add to its existing stocks to the extent that it does so at market prices. It can also purchase at guaranteed/administered prices to the extent that it respects its AMS commitments. Obviously, this much was not enough in the eyes of the Indian delegation.
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The commitment that India wished to secure was to be in a position to purchase at administered and guaranteed prices beyond its AMS commitments, without risking litigation against it. This is what the Bali Declaration amounted to, and a commitment was added to look for a “permanent” solution by 2017. In July 2014, India felt that no progress had been achieved. In a demonstration of how serious it was about this issue, it blocked adoption of the TFA, the only “substantive” agreement that had been agreed during the Bali Conference. A resolution of the issue was possible only at the end of November 2014.92 8.10.3 What Prompted This Action? Besides the treatment of export subsidies, WTO members did not pay particular attention to other export-oriented measures that segment markets. True, the AB saw a binding legal discipline in Article 10.2 of AG when there was none and, thus, brought export credits under the ambit of Article 10.1 of AG. It, thus, enlarged the realm of export-oriented commitments. Still, other policies, such as export quotas, export taxes, or both, remain outside the scope of Article 10 of AG. Now, is this a problem? From a purely legal perspective, there is not much one can do against similar measures. Export taxes, if not bound through negotiations, can be imposed at whatever level, and the only discipline WTO members must respect is MFN. Export quotas violate Article XI of GATT. Article XI.2(a) of GATT, nevertheless, allows export restrictions in cases of critical shortages of products. This condition will almost always be met in times of food crisis. How much of a problem is it in practice? And why was not it addressed in the Uruguay round? Food crises do not happen every day. Following the one observed in 1970, the world community experienced similar issues only in 2007. Two rounds of negotiation were successfully concluded in between. It was probably felt that there was no need to do much during the Tokyo round, since Article XI.2(a) of GATT was in place anyway. Moreover, trading nations could always have recourse to intervention schemes and finance stockpiling. During the Uruguay round, it was agreed, as we saw earlier, that stockpiling for food security purposes would be part of the green box. The volume and accumulation of stocks should be at predetermined levels. If WTO members want to accumulate stocks beyond that level, they can do so if they purchase at market prices. If not, they must include payments in their amber box, even if stockpiling for food-security purposes remains the rationale for payments. Negotiators during the Uruguay round focused on domestic support and export subsidies. They did not add much to preexisting disciplines on export measures other than export subsidies. Article 12 of AG is not much of an addition to Article XI.2(a) of AG: all
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it does is request of those imposing an export prohibition to give due consideration to the interests of those affected, while incurring the obligation to notify the WTO of their measure. As we will see in chapter 12, the latter obligation amounts to almost nothing in practice, whereas the former requires nothing more than a few moments before formally announcing a decision that had already been made. It is against this legal background that prices of farm goods started rising dramatically again in 2007. Trading nations did not look for coordinated response to the crisis for the reasons already mentioned. They had had recourse to export quotas in order to insulate their market and ensure steady supply of farm goods to their own consumers. Liapis (2013), for example, examines a sample of 16 countries and concluded that 13 of them had banned exports of at least one product between 2007 and 2011; 9 had imposed export taxes, and 8 of them introduced export quotas.93 Consequently, trading nations addressed food crises through unilateral measures, shifting costs to the rest of the world. The collective action problem (which has been referred to a few times already), emerged again. The AG Agreement has failed to change the incentives in this respect.94 India’s request should be viewed against this background. Regardless of the merits of the particular Indian claim,95 there is an issue anyway, since the agreement does not contain any safeguards for unforeseen developments (such as a food crisis), nor does it establish a coordinated action program. 8.10.4
Food Crises at Large
The crisis of 2007 is not identical to that of 1970. Prices fell originally, and then they rose again in 2010. Tangermann (2015) cited abundant evidence supporting the view that high prices will remain high, and their averages for 2014–2024 are projected to be higher than those prevailing on average in the 1996–2006 period by 15–35 percent. Food crises occur for various reasons: droughts in grain-producing nations, rising oil prices (which have a negative impact on the cost of fertilizers, transport, and other elements), low stocks of commodities, and excessive use of biofuels, to name a few. The WTO is, of course, not administratively capable of addressing this issue. All it can do is address recourse to trade measures in order to face food crises. Empirical evidence that we have cited earlier suggests that in the long run, output, wages and prices adjust, but in the short run, problems emerge, especially for developing countries with inadequate reserves. Governments, however, are very familiar with Keynes’s famous saying, “In the long run, we are all dead.” They want fast action. The FAO has introduced various initiatives aimed at providing a collaborative solution. Its Committee on Food Security (CFS) is tasked with the adoption of a global approach to food security. The CFS has evolved over the years. Originally conceived in 1974 as an FAO members-only club, it has opened its doors since 2009 to non-FAO members (but UN members), and to the civic society as well. Since 2000 as well, the High-Level Panel
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of Experts on Food Security and Nutrition (HLPE) saw the light of day. It is entrusted with the task of bringing scientific solutions into the picture and providing nations with a robust basis on which policy recommendations will be based. This is where the work of FAO stops and the work of the WTO starts. As we saw earlier, the trading community has yet to come up with a collective response to food crises. The current disciplines are ill equipped to curb unilateralism and do not even take the first step toward addressing the collective action problem in this context. This is one of the challenges for the negotiators in the years to come. 8.11
Special and Differential Treatment
There is one provision in the AG Agreement that specifically deals with special and differential treatment (Article 15 of AG). It is not the only one, though. There are scattered provisions throughout the agreement dealing with issues of particular interest to developing countries. Indeed, Article 15.1 of AG recognizes as much when referring to the various special and differential provisions in the agreement. We have also seen that they are required to make more moderate commitments than are developed countries. Food security is a concern for everyone, of course, but this analysis here points to provisions of particular concern to developing countries. In what follows, we concentrate on three more issues: the impact of export restrictions on developing countries, the provision on net food-importing developing countries, and finally, the “cotton initiative,” an instrument aiming to address concerns by a group of cotton-producing African countries that have been plagued by subsidies in this context. 8.11.1
Implementation Period for Developing Countries
Developing countries enjoy a longer implementation period to pursue the “Reform Programme.” They should implement their commitments (Reform Programme) in 10 and not in 6 years, as per Article 15.2 of AG. LDCs are not required to undertake reduction commitments. 8.11.2
Export Restrictions and Prohibitions
Recall that under Article XI.2(a) of GATT, WTO members can adopt export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other essential products, provided that they have respected the statutory requirements to this effect. 96 When recourse to similar measures is made, the WTO member adopting them must notify the Committee on Agriculture [Article 12.1(b) of AG]. They also incur a substantive obligation. They must ensure that they have considered the effects of
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their actions on the importing WTO members’ food security [Article 12.1(a) of AG]. Developing countries do not have to observe any of these obligations, unless they are net food exporters of the specific foodstuff concerned (Article 12.2 of AG). Since developing countries, in principle, do not have to observe the obligations embedded in Article 12 of AG, this provision qualifies as special and differential treatment. 8.11.3
Net Food-Importing Developing Countries
The commitments under the agreement, and the export commitments in particular, might have a negative impact on net food-importing developing countries since they will not be in a position to procure farm goods on favorable (i.e., subsidized) terms. Two provisions aim at addressing the situation, which are discussed next. First, as stated earlier, Article 12 of AG requests that WTO members that have had lawful recourse to export restrictions pay due consideration to importing members’ food security. To this effect [Article XI.2(a) of GATT], WTO members restricting exports must notify the Committee on Agriculture of similar measures and consult, if requested, with those negatively affected. Net food-importing developing countries are in all likelihood concerned primarily in this context. Second, Article 16 of AG requires that developed countries take action in accordance with the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed and Net Food-Importing Developing Countries. This decision aims to ensure that LDCs and net food-importing developing countries will not be negatively affected by the commitments undertaken as a result of the successful conclusion of the Uruguay round and the advent of the “Reform Programme.” More specifically, it calls for various actions, namely: (a) A review of the level of food aid established periodically by the Committee on Food Aid under the Food Aid Convention (b) The initiation of negotiations in order to establish a level of food aid commitment sufficient to meet the needs of net food-importing developing countries (c) The adoption of guidelines to ensure that increasing proportions of basic foodstuffs will be provided as a grant (d) An agreement by developed countries to help increase, through technical advice, the productivity in net food-importing developing countries97 The Committee on Agriculture has established a list of countries that will benefit from similar initiatives. It comprises all LDCs, plus 19 developing countries: Barbados, Botswana, Cuba, Côte d’Ivoire, Dominican Republic, Egypt, Honduras, Jamaica, Kenya, Mauritius, Morocco, Pakistan, Peru, Saint Lucia, Senegal, Sri Lanka, Trinidad and Tobago, Tunisia, and Venezuela. The list has been updated since, and there are now 31 countries
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on this list. The 12 new developing countries are Antigua and Barbuda, Dominica, El Salvador, Gabon, Grenada, Jordan, Maldives, Mongolia, Namibia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, and Swaziland.98 8.11.4
Remaining Provisions
The Uruguay-round Modalities reflect some additional provisions that qualify as “special and differential” treatment. § 14 allows, but does not oblige, developing countries to offer ceilings with respect to their unbound duties; § 17 reflects a best endeavor to the effect that during the “Reform Programme,” WTO members should strive to offer products originating in developing countries better market access opportunities than those resulting from strict adherence to the legal obligations assumed. Finally, as per § 18, various categories of subsidies could be lawfully exempted from the AMS calculation for developing countries, namely, investment subsidies that are generally available, support for the purpose of diversifying production, and subsidies to low-income producers. 8.11.5 The Cotton Initiative 8.11.5.1 What Is the Initiative All About? Four WTO members [namely, Benin, Burkina Faso, Chad, and Mali (known as the “Cotton-4”)] tabled in the name of Blaise Compaoré, the president of Burkina Faso, a proposal in 2003 to the WTO General Council, arguing that LDCs had been suffering from the payment of cotton subsidies by some developed WTO members.99 The four countries that submitted the proposal, as well as Togo, argued that they were most concerned by the issue. Cotton represents a very important commodity for these West and Central African (WCA) countries. It accounts for 5–10 percent of their gross domestic product (GDP) and 30 percent of their total export earnings. More than 10 million people in that area depend directly on cotton production, many of them indirectly. The WCA countries claimed that, whereas they took a series of measures to streamline their national cotton production, they were hurt by subsidies paid by the US, China, and the EU to their producers. Citing data from the International Cotton Advisory Committee (ICAC), an entity representing cotton-producing countries established already in 1939, they claimed that close to $6 billion was paid in subsidies by China, the EU, and the US in 2001–2002 alone, half of which was given by the US to its producers.100 They simply could not compete with that. Given the very high dependence of these poor African economies on cotton exports, it was agreed that cotton was a special issue.101 The WTO General Council decision of 1 August 2004 (reflecting the so-called July package) contained a specific reference to this issue and called for action:
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the General Council reaffirms the importance of the Sectoral Initiative on Cotton and takes note of the parameters set out in Annex A within which the trade-related aspects of this issue will be pursued in the agriculture negotiations. The General Council also attaches importance to the development aspects of the Cotton Initiative and wishes to stress the complementarity between the trade and development aspects. The Council takes note of the recent Workshop on Cotton in Cotonou on 23–24 March 2004 organized by the WTO Secretariat, and other bilateral and multilateral efforts to make progress on the development assistance aspects and instructs the Secretariat to continue to work with the development community and to provide the Council with periodic reports on relevant developments.
Members should work on related issues of development multilaterally with the international financial institutions and continue their bilateral programs, and all developed countries are urged to participate. In this regard, the General Council instructs the DG to consult with the relevant international organizations, including the Bretton Woods Institutions, the FAO, and the International Trade Centre (ITC) to direct effectively existing programs and any additional resources toward development of the economies where cotton has vital importance.102 8.11.5.2 The Measures Envisaged The Cotton Sub-Committee was established on 19 November 2004, with a mandate to focus on cotton as a specific issue in the wider negotiations on the liberalization of trade in farm goods.103 WTO members, as well as countries that have observer status in the WTO, were welcome to participate. This organ operates in close cooperation with the WTO General Council, the Trade Negotiations Committee (TNC), and the Ministerial Conference. The Cotton-4 requested action on two fronts. Its first concern was the elimination of subsidies as early as possible. Recall, however, from the discussion earlier in this chapter that that subsidies can be paid within agreed limits. They are supposed to be eliminated even further, assuming the Doha-round negotiations prove successful. What the Cotton-4, thus, requested, was some kind of “early harvest”; e.g., elimination of subsidies on cotton even before the Doha round had been concluded. Second, they requested that, while awaiting the elimination of subsidies, some compensation should be paid to them. The focus of the Sub-Committee was accordingly twofold: to decide on development aid for cotton and to conduct negotiations on limiting subsidies, since, as stated earlier, many developing countries suffered from subsidies on cotton granted by developed WTO members. The discussions in this forum are formally delinked from progress in the Doha round, although, as stated earlier, the umbilical cord is not totally cut since the Sub-Committee operates in cooperation with the TNC.104
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8.11.5.3 The Situation Now (Far from Xanadu) How much have we achieved since 2004, then? Nothing much, is the short response. Already the July package contained the resolve of trading nations to implement the measures proposed (that is, address cotton subsidies while providing development assistance to LDCs).105 The negotiation that would lead to the eventual elimination of subsidies would be addressed through the “Modalities” paper submitted to this effect by Crawford Falconer, the Chairman of the Negotiating Group on Agriculture.106 Negotiations on this score are currently ongoing, if not deadlocked altogether. Recall that the second leg of reforms concerned compensation for cotton-producing LDCs as they awaited the elimination of subsidies. To this effect, the DG of the WTO adopted the Director General’s Framework Mechanism for Cotton. It is in this context that development assistance is decided in a forum where donors, the WTO Secretariat, the OECD Development Assistance Committee (DAC), and 36 cotton-producing African countries participate. The overall amount approaches $500 million, much to the chagrin of the African countries, which were expecting a more generous gift.107 During the Bali Ministerial Conference (December 2013), the WTO members adopted a decision whereby they agreed to add transparency in the area of trade in cotton.108 To this effect, they agreed to dedicate two meetings of the Committee on Agriculture each year to discussing the three pillars of the cotton initiative—namely, market access, domestic support, and export competition.109 This is where things stand at the moment. It is hoped that an agreement on export subsidies can be reached at the Nairobi Ministerial Conference (December 2015), as there is growing consensus to this effect (WTO Document TN/AG/ GEN/34/Rev.2). 8.12 Transparency WTO members undertake to promptly notify the Committee on Agriculture of all matters of interest to the “Reform Programme” (Article 18 of AG). Brink (2011, p. 37) reflected the common view in this respect, arguing that notifications of measures regarding commitments and, more generally, farm-protecting measures have been inadequate. Recall that with respect to subsidies characterized as green box, for example, WTO members must ensure that their measures remain within the parameters of Annex 2 during their lifetime. Absent transparency regarding eventual changes, it is impossible to monitor effectively the respect of this obligation at the multilateral level. Information costs when trying to detect the specifics of similar measures might be quite high. It is the combination of lack of transparency and high information costs that probably explains the low volume of disputes in Brink’s view: there have been two genuine farm trade disputes reported before 2007, and only a handful since.
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Although notifications of measures are judged inadequate, there is widespread agreement in the literature that the established carve-outs have greatly contributed toward the objectives sought; that is, that WTO members, by and large, have met the commitments entered by signing the AG Agreement.110 8.13
Institutional Issues
The Committee on Agriculture has been established and is responsible for the administration of the AG Agreement. All WTO members, as well as observers to the WTO, participate therein. It meets four times a year, but additional special sessions can be arranged. This committee has been overseeing the reform program; that is, the implementation of commitments undertaken during the Uruguay round. 8.14
Concluding Remarks
De Zeeuw (1997), the chairman of the Uruguay-round negotiating group on Agriculture, writing about the impact that the agreement would have on international trade, stated (p. 474–475): Will the agreement really lead to a fair and market-oriented international trading system? My answer is: over the long term, yes; over the short term in a limited fashion. ... I think it is correct to conclude that, in most cases, the tariff reduction of 36 percent on average and 15 percent as a minimum will not lead to many more import opportunities ... My conclusion is that the most important aspect of the Agreement is that countries will be forced to make at least a start with a fundamental change in their agricultural policies.
His point, with which we concur, is that a decisive step was taken to bring farm trade within the disciplines of GATT. They planted a tree, and the fruits of trade liberalization would grow at a later stage, in the next round of trade negotiations. Negotiators produced a complex, yet functional agreement. Tariffication of measures that had disparate effects (and for this reason alone must have proved an impediment toward establishing reciprocity) should be their towering achievement and the basis for the whole edifice. Inspired by practice, they managed to put together impressive indicative lists detailing the content of the various disciplines agreed, thus facilitating the role of adjudicators. At the end of the Uruguay round, the WTO Secretariat prepared a study where the results of the Uruguay round were reported.111 Tables 8.3 and 8.4 are based on information included in this study. Table 8.3 presents the average bound duty on farm goods in selected WTO members and the percentage of all tariff lines that are considered tariff peaks. There is nothing like a standard definition of this term, but according to this study, bound tariffs beyond 15 percent are considered tariff peaks. Table 8.4 reflects the tariff peaks in the EU
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Table 8.3 Level of bound duties on farm products
Brazil EU India Switzerland US
Average bound rate (%)
Percentage of tariff peaks
35.2 20 101 46.9 9
96 33.9 99.4 16.5 2.6
Table 8.4 EU and US tariff peaks
EU US
15–25%
25–50%
50–100%
< 100%
10.8% 3.4%
8.9% 1.6%
4.1% 0.3%
0.8% 0.5%
and US and presents information regarding the number of tariff lines that are subjected to bound duties between 15 and 25 percent, 25–50 percent, 50–100 percent, and more than 100 percent. Intervention in the farm sector has been justified on various grounds, some of which have been discussed earlier.112 Some of the grounds offered for intervention, like the quest for self-sufficiency, are hard to justify in a world where farm production exists everywhere in the world and the chances for cartelized practices are negligible if not totally nonexistent. Other claims are more meritorious, such as social policies to address price volatility and the link with environmental protection. The validity of these claims depends on various issues. Wealthy farmers in the North, for example, would suffer less from price volatility than their counterparts in the developing world. The social safety net, in other words, can absorb part (if not all) of the shock. On the other hand, it is not for the WTO to decide on the extent and the depth of national safety nets either. Some authors, like Gilbert (2006), have gone one step further. He checked the historical record of price volatility of farm commodities and concluded that the emerging picture is not as straightforward as it often appears in the research literature. True, there are cases where volatility can be established (even high volatility), but the time span of the observation might have a lot to do with the conclusions. He does stress, however, that vulnerability for producers of weak economies is not necessarily a function of volatility. In his view, there should be less talk about volatility and more about the fact that some countries have not managed to move to production of other more remunerative activities. This type of argument, though, leads to a wider discussion regarding economic policy, which escapes the narrow framework of a trade agreement.
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Then there is the argument that farm production is multifunctional and, hence, any negotiation should control for this characteristic. But if the objective is to protect the environment, then subsidies should be decoupled and normally come under the blue box. During the Doha-round negotiations, some of these arguments resurfaced, but no changes to the current framework have been agreed upon.113 Except for targeted changes, like in the realm of food security, the overall structure of the AG Agreement has not been threatened with substantial reformulation. It is quite clear by now that it will not undergo changes in the immediate future, and, consequently, that farm trade will continue to be liberalized along the lines of the “Reform Programme” agreed in 1994.
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9.1 9.1.1
Agreement on Textiles and Clothing
The Legal Discipline and Its Rationale The Legal Discipline
Trade in textiles is now governed by the disciplines discussed in chapters 2–9, volume 1. As a result, the only permissible protection for textile products is through tariffs. This, however, has not always been the case. Textile trade remained for many years outside the disciplines of GATT. For years, a system of national quotas segmented markets actually for almost four decades. The Agreement on Textiles and Clothing (ATC) was negotiated to be the vehicle that would bring textile and apparel products under the disciplines of GATT through a transitional mechanism. 9.1.2
The Rationale for the Legal Discipline
The efficient textiles producers had requested from early on in the Uruguay round to put an end to the prior regime, the notorious Multifiber Arrangement (MFA), whereby their exports of textiles would be subjected to import quotas. The MFA was an arrangement concluded outside the four corners of the GATT, and in blatant violation of its most basic principles. We will discuss later its legal relationship to the GATT, and the reasons why its consistency with the multilateral trading rules was not formally challenged. It was typically the markets of the North Western Hemisphere (the “North” as the area is colloquially referred to) that were imposing import quotas. For various reasons (delocalization of enterprises, links between textiles and intellectual property, pressure in the North from the intellectual property and services lobbies, consumers’ reactions in the North, and probably many more), it was agreed in the Uruguay round to put an end to the MFA through ATC. The end to the quota system that had been in place for dozens of years could not, for obvious political economy reasons, take place with immediate effect. The ATC is a transitional arrangement that was deemed necessary in order to provide importing nations with the necessary breathing room to address shocks in their
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markets. The ATC thus functioned as a safeguard, a mechanism that would provide Northern markets with the necessary breathing space to ease adjustments. 9.1.3
Discussion
9.1.3.1 Estimating the Welfare Implications of MFA The MFA was a costly instrument from a national welfare perspective. Consumers were deprived of cheap goods and forced to purchase domestic, expensive substitutes. Sure, producers won, but their total gains were dwarfed by the huge negative impact that restrictions have had on consumer welfare. Cline’s (1987, p. 15) estimation of the costs for the US were: Total consumer cost of protection amount to $7.6 billion annually in apparel and $2.8 billion in textiles. Total protection preserves 214,200 direct jobs in apparel and 20,700 jobs in textiles ... The consumer cost per job saved is approximately $82,000 in apparel and $135,000 in textiles.
Many more similar studies saw the light of day. De Melo and Tarr (1992), for example, estimated that the US could have enjoyed a welfare gain of between $7–15 billion by removing all textiles and apparel quotas. Kathuria et al. (2003) discussed welfare implications for exporters (especially India). India did capture monopoly rents as a result of the passage of the MFA. Gains from export rents, though, were offset by reductions in export volumes for India and efficiency losses (for those restricting textile imports in their markets) resulting from the inability to put resources to their best use.1 The economic evidence and the ensuing case against the MFA, thus, is overwhelming. Wolf et al. (1984, p. 136) captured it best: The MFA is a monument to diplomatic compromise, political appeasement and bureaucratic obfuscation. A defense can hardly be made in economic terms.
9.1.3.2 From Manchester to Delhi: Changing Production Patterns The MFA was a request by the textile industry in the North, which was fast losing the textile market to more competitive producers in the South. First, the Southeast Asian countries, and then Bangladesh, Egypt, India, and Pakistan became the dominant forces in the market. Accra, Cairo, and Delhi became the modern Manchester. The Lancashire city had become famous for its mills and its textile production in the nineteenth century. Its ascent to glory was helped by cheap inputs thanks to the imperial preferences that Britain enjoyed at that time all around its Commonwealth partners. Textile production remained largely labor intensive. The argument for acquiring the necessary machinery to move to mass production gained pace in developing countries, and delocalization of some producers who saw new market opportunities helped as well. The Northern markets could adjust or simply protect their producers by insulating them from foreign competition. They chose the latter, a pattern that reminds us of the history of farm trade that we discussed in the previous chapter.
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We will be covering this point in more detail in what follows, when we present the modern history of textiles trade. 9.2
The Relationship with GATT
The ATC is an Annex 1A agreement, and its relationship with GATT is addressed in the General Interpretative Note discussed in chapter 1. This is, of course, a nonissue since the ATC has accomplished its tasks and is now defunct. 9.3 9.3.1
The Road to the ATC Before the MFA
In the years before the advent of the WTO, trade in textiles took place outside the GATT disciplines, as we briefly mentioned earlier. A separate, textile-specific agreement (MFA) was in place, which regulated international trade in textiles and clothing. Textile and clothing quotas were negotiated bilaterally and governed by the rules of this arrangement, the notorious MFA.2 The MFA was signed in 1974 between some developed3 and 31 developing countries. It essentially imposed a worldwide system of bilateral quotas. The advent of the MFA does not signal the beginning of protectionism in textile trade, though. In fact, since 1961, international trade in textiles and clothing had been virtually excluded from the normal rules and disciplines of GATT. It was governed by a system of discriminatory restrictions, which deviated from the basic GATT principles. This system had been first incorporated in the so-called Short-Term Cotton Arrangement (STA), concluded in 1961 and lasting only one year, followed by a Long-Term Arrangement (LTA), which was in force from 1962 to 1973. The MFA is the successor arrangement to the LTA.4 9.3.2
Why the MFA?
Bagchi (2001) attributed the advent of the MFA to an alliance that Richard Nixon, then a candidate for the US presidency, struck with the US textile lobby. He quoted (p. 73) the following 1968 speech by candidate Nixon: As President, my policy will be ... to assure prompt action to effectively administer the existing Long-Term Cotton Textile Agreement. Also, I will promptly take the steps necessary to extend the concept of international trade agreement to all other textile articles involving wool, manmade fibers and blends.
He definitely delivered on his electoral promise. The MFA continued until the WTO Agreements came into effect on 1 January 1995, although, initially, it had been conceived
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as a four-year arrangement. It was renewed after the first four years, and the same thing kept happening. MFA I was in force from 1974 to 1978, MFA II, from 1978 to 1982, etc. MFA IV was supposed to lapse by early 1991. The impossibility to conclude the Uruguay round by that time (1991) led trading partners to renew the MFA once more, to ensure a timewise coincidence between the end of the MFA and the advent of the WTO. There should be, thus, little doubt as to who requested the original MFA, as well as its renewals. Not that the US was the only trading nation interested in closing down its textile market. It soon found eager imitators in the EU and elsewhere. Concerns in various developed countries over rising imports mounted, lobbies’ pressure mounted as well, and various Organisation of Economic Cooperation and Development (OECD) countries moved with alacrity to the negotiating table in order to negotiate a settlement that would effectively insulate their domestic textile producers from international competition.5 What they cared about was not the high-end consumer goods, or “branded” textile goods protected by intellectual property rights, but the production of basic inputs to these goods, as well as some basic textile and apparel goods. All this, of course, occurs before the advent of global value chains (GVCs) that have changed the nature of international trade in this area. Developed countries possessed sufficient bargaining power to enforce an outcome that matched their wishes. 9.3.3
The MFA Regime
Article 1 of MFA states: To achieve the expansion of trade, the reduction of barriers to such trade and the progressive liberalization of world trade in textile products, while at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects in individual markets and on individual lines of production of both importing and exporting countries.
The world was, thus, divided into textile-exporting (usually developing) and textileimporting (usually developed) countries, and it was agreed that the former would be exporting a certain amount of textiles and clothing products to the latter. The arrangement could be summarily described as follows. A Textiles Surveillance Body (TSB) was established (Article 11), composed of a chairman and eight members (an equal number of delegates from textile-importing and textile-exporting countries). Participants were textile experts from countries participating in the arrangement and, consequently, one could legitimately raise doubts as to their impartiality when administering the MFA.6 The expectation probably was that by appointing equal numbers of delegates from countries with divergent interests, useful and legitimate (e.g., representative) compromises could be reached. The TSB received notifications of all existing quantitative restrictions (QRs), which, if they were not communicated, were deemed contrary to the arrangement (Article 2). Notified QRs had to be eliminated unless, through bilateral negotiations (and agreements),
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parties had agreed to limit trade to avoid the risk of market disruption, as defined in Annex A of the arrangement (sharp increase of imported products offered at prices substantially below those of comparable domestic goods). Agreements had to include “base levels” and “growth rates.” The former referred to the actual state of trade at a given point in time; the latter captured the growth from the baseline level to whatever level had been agreed between the parties. It was through similar bilateral agreements that a quota system was imposed on textile trade. Participants agreed to refrain from introducing new restrictions unless such action could be justified through recourse to Article 3; that is, if imports caused market disruption. There was, nonetheless, no need for injury determination in order to determine whether market disruption existed. Contrary to the standard GATT safeguard clause, restrictions could be placed in the presence of differences across domestic prices and prices of imported goods, regardless of whether the domestic industry was injured at all, never mind the reasons for injury.7 A best-endeavors clause was included, to the effect that the interests of developing countries should be taken into account when administering the various restrictions (Article 6).8 It could not, and effectively did not, lead to much, though, since it was precisely the interests of the developing countries that were targeted by the MFA. Textiles were (and are to considerable extent) a labor-intensive industry where countries with low labor costs have a comparative advantage. Disputes regarding the operation of the arrangement would be brought before the TSB. Participants were free to subsequently take their dispute further and request the establishment of a GATT panel. In this case, however, the panel would have to take into account the conclusions of the TSB (Article 11.10). The TSB would report to the Textiles Committee. The Textiles Committee was established, and all participants in the arrangement had a representative therein. It would receive an annual report from the TSB and oversee the operation of the MFA. After MFA had entered into force (1 January 1974), some gradual liberalization of textile trade occurred. Estimates based on 1990 data indicate that close to 11 percent of world trade in textiles and 35 percent of world trade in clothing were covered by the MFA. On 1 November 1994, the MFA counted 39 participants, 8 of which should be described as “importers.” Of these Austria, Canada, the EU, Finland, Norway, and the US continued to apply restrictions, while Japan and Switzerland dropped them in the meantime.9 The MFA was a worldwide cartel, where consumers’ interests were not represented at all.10 9.3.4
MFA and GATT
The Arrangement Regarding International Trade in Textiles (the official title of the MFA) was adopted and published in the BISD (Basic Instruments and Selected Documents) Series (21S/3). The MFA was, on its face, inconsistent with various GATT rules (including
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Articles I, XI, XIX, of GATT, since, in practice, the quotas were country-specific). The inconsistency, however, was offset by the fact that it benefited from a de facto waiver.11 What do we mean by “de facto waiver”? The consistency per se of the MFA with GATT was never brought squarely before a panel. Sure, there was some (albeit scarce) litigation on MFA-related issues, but trading nations refrained from questioning the legality of the MFA per se. Incentives to do so were lacking for the most part, essentially for the reasons already mentioned in chapter 2, volume 1: exporters would accommodate themselves within a comfortable second-best, whereby they would enjoy secure market access for quantities agreed, while they would also be raising export prices, and one cannot outright exclude that they might have obtained other unobservable “perks.”12 9.4
ATC
The MFA was eventually replaced in 1995 by the ATC,13 which was signed along with the other Uruguay-round agreements and replaced the MFA. It was, as explained in more detail later in this chapter, a transitional agreement aimed at the elimination of existing quotas and the introduction of trade in textiles and clothing into the GATT disciplines. Its basic objective, thus, was to integrate textile trade into the multilateral disciplines. During the Uruguay round, in the Trade Negotiating Committee (TNC) meeting of April 1989, a decision was made to this effect. It relevantly read in § 2:14 Substantive negotiations will begin in April 1989 in order to reach agreement within the time-frame of the Uruguay Round on modalities for the integration of this sector into GATT, in accordance with the negotiating objective; ... such modalities for the process of integration into GATT on the basis of strengthened GATT rules and disciplines should inter alia cover the phasing out of restrictions under the Multifibre Arrangement.
9.4.1
The Objective Sought
The objective sought through the enactment of the ATC was to undo the restrictions imposed by the MFA. Article 1.1 of ATC captures this point: “This Agreement sets out provisions to be applied by Members during a transition period for the integration of the textiles and clothing sector into GATT 1994.” The Panel on US–Underwear stated, in a similar vein (§ 7.19): the overall purpose of the ATC is to integrate the textiles and clothing sector into GATT 1994. Article 1 of the ATC makes this point clear. To this effect, the ATC requires notification of all existing quantitative restrictions (Article 2 of the ATC) and provides that they will have to be terminated by the year 2004 (Article 9 of the ATC). The ATC allows adoption of new restrictions in addition to those notified under Article 2 of the ATC for products not yet integrated into GATT 1994 pursuant to Article 2.6 to 2.8 of the ATC only exceptionally and in accordance with the relevant provisions of the ATC or in accordance with the relevant provisions of GATT 1994.15
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The ATC imposes two main obligations: (a) To integrate textiles trade into the multilateral rules within a predefined calendar (b) To avoid introducing any new restrictions, unless by respecting the strict conditions embedded in Article 6 of ATC Besides these two obligations, the ATC includes anticircumvention provisions and assigns to the Textiles Monitoring Body (TMB), the role of which we explain later in this chapter, the responsibility to administer the agreement. 9.4.2
Product Coverage
Article 1.7 of ATC explains that the product coverage of the ATC is elaborated in the annex to the agreement. The annex includes the relevant HS (Harmonized System) classifications at the six-digit level (Chapters 51–63, and some products in Chapters 30–49 and 64–96), and also states a list of products on which no transitional safeguard can be imposed. 9.4.3
Notification of Restrictions
WTO members agreed to notify the newly established TMB of their quotas and abolish them within 10 years—that is, by 1 January 2005. After that date, it is only through tariffs that textile goods are protected.16 The restrictions notified were assumed to correspond to the totality of existing restrictions: Article 2.4 of ATC made clear that WTO members could not enter any new restrictions unless they were in conformity with the multilateral rules (essentially, by invoking the safeguard mechanism included in Article 6 of ATC, which we discuss later in this chapter).17 The Panel on Turkey–Textiles explicitly acknowledged this understanding of the integration process (§§ 9.68–69). In this vein, it held that, since Turkey had notified no restrictions, it could not introduce any new ones unless they were in conformity with the ATC. This panel accepted that new restrictions could also be introduced if they were in conformity with GATT provisions, such as Article XXIV (§ 9.78). 9.4.4
Progressive Integration
The integration process is explained in Article 2 of ATC. WTO members must integrate the products listed in the annex into the rules of GATT over a 10-year period. Integration into GATT will be carried out progressively in three periods, the objective being that all covered products must have been integrated into the GATT rules at the end of the 10-year period.18 The first period began on 1 January 1995, with the integration of products representing not less than 16 percent of members’ total 1990 imports (of all products included in the product coverage appearing in the annex). The second period began on 1 January 1998,
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and WTO members undertook the obligation to integrate a further 17 percent of the same total. The third period started on 1 January 2002, and a further 18 percent of the same total was integrated. On 1 January 2005, all remaining products (amounting to 49 percent of the same total) were integrated, and as a result, the ATC ceased to exist.19 WTO members enjoyed substantial discretion with respect to the products that they would be integrating in each of the three periods. 9.4.5
Special Transitional Safeguard Mechanism
9.4.5.1 Conditions for Lawful Imposition Article 6 of ATC protects a WTO member against surges in imports during the transitional period from products that had not yet been integrated into GATT and that were not already under quota, if, as a result of a surge, its domestic industry producing the like product had been damaged. A WTO member wishing to invoke this provision had to determine that total imports of a specific product were causing serious damage, or actual threat thereof, to its domestic industry, and decide to which individual members this serious damage could be attributed. The interested WTO member would then have to seek consultations with the exporting members. Safeguard measures could be applied on a selective, country-by-country basis, regardless of whether an agreement had been reached (between the importing and the exporting members) within a 60-day consultation process. The quota imposed could not be lower than the actual level of imports for the exporting country during a recent reference period (12 months). Safeguard measures could remain in place for up to three years. If, however, a safeguard measure was in place for over a year, the growth rate should be at least 6 percent. WTO members were required to notify the TMB if they wished to retain the right to use the special transitional safeguard mechanism (Article 6.1 of ATC). A total of 55 WTO members chose to retain this right, and most of them provided lists of products for integration. But 9 WTO members (namely, Australia, Brunei Darussalam, Chile, Cuba, Hong Kong, Iceland, Macau, New Zealand, and Singapore) decided not to maintain the right to use the special transitional safeguard mechanism. The special safeguard was invoked on 24 occasions in 1995 (all of them by the US); 8 times in 1996 (7 times by Brazil and 1 time by the US); twice in 1997 (both times by the US); and 10 times in 1998 (9 times by Colombia and 1 time by the US). 9.4.5.2 The Rationale The purpose of the special transitional safeguard mechanism was explained by the Panel on US–Underwear (§§ 7.23–24): The overall purpose of Article 6 of the ATC is to give Members the possibility to adopt new restrictions on products not already integrated into GATT 1994 pursuant to Article 2.6 to 2.8 of the ATC
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and not under existing restrictions; i.e., not notified under Article 2.1 of the ATC. Article 6 of the ATC, in our view, establishes a three-step approach which has to be followed for a new restriction to be imposed.
This provision, thus, covers only “new” restrictions (not those preexisting the negotiation of the agreement), and is aimed to provide some flexibility, which might prove necessary when integrating products into the WTO disciplines. 9.4.5.3 Injury, Threat of Injury Safeguard measures could be invoked because an import surge had caused or threatened to cause injury (damage). The Panel on US–Underwear explained that the two notions were distinct, and that consequently, separate analysis was required in order to demonstrate damage or threat of damage. The facts of the case were as follows. On 27 March 1995, the US had requested consultations with Costa Rica on trade in cotton and manmade fiber underwear under Article 6.7 of ATC. At the same time, the US provided Costa Rica with a Statement of Serious Damage dated March 1995 (known as the “March Statement”), on the basis of which it had proposed the introduction of a restraint on imports of underwear from Costa Rica. Notice of the request for consultations, the proposed restraint, and the proposed restraint level was published in the US Federal Register on 21 April 1995. Consultations were held, but the US and Costa Rica failed to negotiate a mutually acceptable settlement. The US subsequently invoked Article 6.10 of ATC and introduced a transitional safeguard measure with respect to cotton and manmade fiber underwear imports from Costa Rica on 23 June 1995. The measure was supposed, by its terms, to be valid for a period of 12 months, effective from 27 March 1995 (i.e., the date of the request for consultations). The TMB found that the US had failed to demonstrate serious damage to its domestic industry. It did not reach consensus on the existence of an actual threat of serious damage, though, and similarly (because of lack of consensus), the TMB also failed to make public its findings on the effective date of application of the US restraint. Accordingly, the TMB recommended that the US and Costa Rica hold further consultations with a view to resolving the matter. In the absence of settlement, the parties reverted to the TMB, which confirmed its earlier findings and considered its review of the matter complete. Although further consultations took place between the US and Costa Rica in November 1995, no agreement was reached. In December 1995, Costa Rica invoked the dispute settlement provisions. One of the questions before the panel was whether a separate analysis was required for a finding of damage or threat of damage. The panel rejected the US argument that no separate analysis was required (§ 7.55).20 It further rejected the US argument that it had acted consistently with its obligations under the ATC when it established that damage had indeed occurred. In its view, the US analysis suffered from serious weaknesses since it was predicated on a review of the situation of
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“only one or two companies of indeterminate size or market share out of an industry consisting of 395 establishments.” (§ 7.45) The panel refrained from making a finding on this point of law. It found that the factors listed in Article 6.3 of ATC did not provide sufficient and exclusive guidance, and therefore it was not in a position to conclude that the US had failed to demonstrate serious damage or actual threat thereof. 9.4.5.4 Domestic Industry Producing the Like Product Damage or threat of damage has to be suffered by the domestic industry producing the “like and/or directly competitive product” (Article 6.2 of ATC). The interpretation of the term “like and/or directly competitive product” was discussed in the panel and AB reports on US—Cotton Yarn. On 24 December 1998, the US filed a request for bilateral consultations with Pakistan, pursuant to Article 6.7 of ATC, on its proposed safeguard measure. The US attached to this request its “Report of Investigation and Statement of Serious Damage or Actual Threat Thereof: Combed Cotton Yarn for Sale: Category 301” (December 1998), known as the “Market Statement,” which formed the basis for the proposed safeguard measure. The Market Statement set out the results of the investigation of the conditions prevailing in the US market for yarn. It defined the domestic industry and concluded that increased imports had caused serious damage, as well as actual threat, to the domestic industry, and that this damage and threat were attributable to Pakistan. The US held bilateral consultations with Pakistan in February 1999, which did not result in a mutually agreed solution. Subsequently, the US imposed the transitional safeguard measure at issue in this dispute in the form of a QR on Category 301 imports of yarn from Pakistan. The safeguard measure was made effective for one year as of 17 March 1999, and it was extended twice, each time for another year, effective 17 March 2000 and 17 March 2001, respectively. The TMB reviewed the matter, pursuant to Articles 6.10 and 8.10 of ATC, in April and June 1999. The TMB concluded on both occasions that the US had not demonstrated successfully that yarn was being imported into its territory in such increased quantities as to cause serious damage, or actual threat thereof, to its domestic industry producing the like and/or directly competitive product. Accordingly, the TMB recommended that the safeguard measure introduced by the US on imports of yarn from Pakistan be rescinded. On 6 August 1999, the US informed the TMB that it believed its action was justified under the provisions of Article 6 of ATC, and it would maintain the safeguard measure. The US and Pakistan held a further round of consultations in November 1999 but failed to reach a mutually agreed solution. On 3 April 2000, Pakistan requested the establishment of a panel. One of the questions before the panel was whether captive consumption should be excluded from the definition of the industry producing the like product, as the US had argued. The AB rejected the US argument, while explaining at the same time its understanding of the like product analysis (§§ 99–101):
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We will now examine whether, in this case, yarn produced by the vertically integrated fabric producers of the United States for their own captive consumption is directly competitive with the imported yarn for the purposes of Article 6.2 of the ATC. The United States argues that such yarn is not directly competitive because it is not offered for sale on the market except when the captive production is “out of balance,” and even then only in de minimis quantities. In addition, vertically integrated fabric producers are not dependent on the merchant market for meeting any of their requirements of yarn except to a de minimis extent. In the United States’ view, these factors are clearly reflected in the very low and stable rate of yarn sold or purchased by vertically integrated fabric producers to or from the merchant market over the last several years. We are unable to subscribe to this static view, which makes the competitive relationship between yarn sold on the merchant market and yarn used for internal consumption by vertically integrated producers dependent on what they choose to do at a particular point in time. If the competitive relationship between the two products is properly considered, it will be clear that they are “directly competitive” within the meaning of that term in Article 6.2. (italics in the original)
9.4.5.5 Attribution to a Source of Supply The attribution of damage to a particular country (Article 6.4 of ATC) is the last step for lawful imposition of transitional safeguard under the ATC: it requires an assessment that an import surge caused injury to the domestic industry producing the like product. The AB held as much in its report on US–Cotton Yarn (§§ 112–15). Total damage (or threat thereof) must be attributed proportionately to the exporting WTO member; that is, in accordance with the damage caused by its exports to a given (importing) market (AB, US–Cotton Yarn, § 119). The AB acknowledged that the attribution analysis could be done in various ways. Article 6.4 of ATC provided some information concerning the elements (levels of imports, market share, prices, etc.) that had to be taken into account in the context of this analysis. For the rest, case law added that the investigating authority of the importing state must perform a comparative analysis, whereby it would compare the effects of imports from various sources (AB, US–Cotton Yarn, §§ 122–123). The requirement to perform comparative analysis was echoed by the Panel on US– Underwear (§ 7.49). 9.4.5.6 The Requirement to Hold Consultations The WTO member proposing to take safeguard action had to request consultations with the affected members, informing them of the results of its investigation (Article 6.7 of ATC). The request for consultations (as well as all relevant factual information regarding the investigation process) had to be communicated to the chair of the TMB. If parties reached an agreement, they had to communicate it to the TMB (Article 6.8 of ATC), and details of the agreement had to be communicated to the TMB (Article 6.9 of ATC). Even in the absence of an agreement, though, a WTO member could go ahead and apply a safeguard (Article 6.10 of ATC). In this case, either the importing or the affected members could refer the matter to the TMB and request that it review the matter. The TMB
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should promptly examine the matter and make appropriate recommendations to the members concerned (Article 6.11 of ATC). 9.4.5.7 Retroactive Application Article 6.10 of ATC allowed WTO members to impose safeguards within 30 days following the 60-day consultation period. Article 3.5(i) of MFA states that the restraint could be instituted “for the twelve-month period beginning on the day when the request was received by the participating exporting country or countries.” In US–Underwear, the question arose whether the importing state could impose safeguards at that stage retroactively. Costa Rica argued that the US had retroactively applied restrictions in violation of Article 6.10 of ATC. Restrictions had been introduced on 23 June 1995 for a period of 12 months starting on 27 March 1995, which was the date of the request for consultations under Article 6.7 of ATC. Thus, the question before the panel (and the AB) was whether the ATC should be interpreted as prohibiting a practice that was explicitly recognized under the MFA, and if so, what should be the appropriate date from which the restraint period is to be calculated under the ATC. The AB held that WTO members should not be imposing safeguards in a retroactive manner (p. 14): we believe that, in the absence of an express authorization in Article 6.10, ATC, to backdate the effectivity of a safeguard restraint measure, a presumption arises from the very text of Article 6.10 that such a measure may be applied only prospectively.
9.4.6
Administering Restrictions during the Transitional Period
The ATC entrusted exporting WTO members with the responsibility to administer the restrictions during the transition period. Any changes in practices, rules, or procedures were subject to consultations, with a view to reaching mutually acceptable solutions (Article 4 of ATC). 9.4.7
Anticircumvention
Article 5 of ATC contained the rules and procedures concerning circumvention of the quotas through transshipment, rerouting, false declaration of origin, or falsification of official documents. WTO members should establish the necessary legal provisions, administrative procedures, or both to address and take action against circumvention. When sufficient evidence was available, possible recourse might have included the denial of entry of goods. 9.4.8
Institutions
The TMB was the successor to the TSB. It was composed of delegates from both exporting and importing countries and had the power to recommend ways to end disputes brought to its attention (Articles 8.8–10 of the ATC).21
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The TMB was established to supervise the implementation of the ATC and to examine all measures taken under it to ensure that they were in conformity with the rules. It was a quasi-judicial, standing body consisting of a chairman and 10 members, discharging their function on an ad personam basis and making all decisions by consensus. Participation in the TMB was a function of criteria similar to those guiding participation in the TSB: (a) Representativeness of the WTO membership (b) Proportionate participation of textiles-importing as well as of textiles-exporting WTO members The TMB would be notified of all restrictions and requested to pronounce on their consistency with the ATC. The question arose whether in practice, panels were bound by the TMB recommendations or whether they were free to decide the issue themselves. In its report on Turkey—Textiles, the panel held that some deference to the TMB was appropriate, but it underlined that the TMB recommendations were not binding (§§ 9.85): We consider, based on the interpretation by the Appellate Body in Guatemala—Cement with regard to the relationship between the DSU and the Antidumping Agreement, that the provisions of the ATC (providing jurisdiction to the TMB to examine measures applied pursuant to the ATC) and the provisions of the DSU (providing jurisdiction for panels to interpret any covered agreement, including the ATC) may both apply together. Therefore even if the TMB has jurisdiction to determine what constitutes a “new” measure in the sense of the ATC and whether a violation of the ATC has taken place, we remain convinced that a panel is entitled to interpret the ATC to the extent necessary to ascertain whether Turkey benefits from a defence to India’s claims under Articles XI and XIII of GATT based on the provisions of the ATC. (italics in the original)
Article 9 of ATC underscores the transitional character of the TMB, which has also ceased to exist as of 1 January 2005. 9.5
Concluding Remarks
At the end of the Uruguay round, tariff protection replaced the previously existing quotas.22 Compared to other goods, textiles’ tariffs can be characterized as peaks. Table 9.1 is based on information extracted from the 2001 WTO study referred to earlier in this chapter. Table 9.1 EU and US average and maximum bound tariffs on textiles
EU US
Average
Maximum
6.5% 7.9%
12% 40%
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Table 9.2 Bound and applied duties on textiles (2006)
China EU Pakistan India US
Bound (average)
Applied (average)
9.7% 6.6% 23.3% 31.4% 7.9%
9.7% 6.6% 16.4% 20.2% 7.9%
Source: The World Tariff Profiles 2006: the WTO, Geneva.
The transitional period lapsed in 2005, and the ATC no longer exists. WTO members are in the process of negotiating lower tariff protection in the Doha round.23 The average bound and applied tariffs for all textile products in 2006 for China, the EU, Pakistan, India, and the US are shown in table 9.2. According to the 2007 World Trade Report (WTO: Geneva), the volume share of world textile exports for the EU fell from 35.6 percent in 2000 to 32.6 percent in 2006, but the EU continued to be the world’s largest textile exporter. The numbers for China were 4.6 percent (1980), 6.9 percent (1990), 10.2 percent (2000), and 22.3 percent (2006). The numbers for the US were 6.8 percent (1980), 4.8 percent (1990), 6.9 percent (2000), and 5.8 percent (2006). The numbers for India were 2.4 percent (1980), 2.1 percent (1990), 3.8 percent (2000), and 4.3 percent (2006). Finally, the numbers for Pakistan for the same period were 1.6 percent, 2.6 percent, 2.9 percent, and 3.4 percent. On the import side, the numbers for the EU were 32.9 percent (2000) and 30.7 percent (2006), its enlargement from 15 to 25, 27, and finally 28 countries during that period notwithstanding. The numbers for the US were 4.2 percent (1980), 6.2 percent (1990), 9.5 percent (2000), and 10.2 percent (2006). For the same period, the numbers for China were 1.9 percent, 4.9 percent, 7.6 percent, and 7.1 percent; and for India, 0.1 percent, 0.2 percent, 0.3 percent, and 0.9 percent. World trade in textiles is thus changing drastically, with China becoming a major force. Note that China joined the WTO only in 2001, so its rise happened over a relatively short period of time.24 Textile trade has now been fully integrated into the multilateral disciplines, and those affected by the rise in Chinese export trade can have recourse to contingent protection only.
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10.1
Government Procurement
The Legal Discipline and Its Rationale
10.1.1 The Legal Discipline The signatories to the Agreement on Government Procurement (GPA Agreement) commit that, when purchasing goods for their own government consumption, they will do so on nondiscriminatory basis from suppliers originating in other signatories of the GPA Agreement. The agreement, thus, covers transactions where governments buy without the intention to resell. It is one of the two plurilateral agreements currently in force. The term “plurilateral agreements” refers to contractual arrangements that bind only their signatories, and not the entire WTO membership. 10.1.2
The Rationale for the Legal Discipline
Government procurement was excluded from GATT by virtue of Article III.8 of GATT.1 As we explain in more detail later in this chapter, a number of governments that wanted to use government procurement as industrial policy, and thus confer advantages to domestic producers with respect to purchases for government use, were unwilling to open their procurement market to foreign suppliers. They were persuaded to do so for two basic reasons: first, the gains from liberalization of this market are quite sizeable, and we will be reviewing the data to this effect in what follows; and second, through liberalization of their procurement market, they would be managing in a more efficient manner their own public resources. They anticipated gains both on the export and on the import side. The GPA is the outcome of efforts by a few like-minded countries that wanted to reintroduce national treatment (nondiscrimination) in this area, and, to this effect, had already negotiated and signed an agreement during the Tokyo round.
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Discussion
10.1.3.1 Gains from Liberalization Although the importance of the government procurement market tends to be overstated sometimes,2 it is far from negligible, as various contributions in Hoekman and Mavroidis (1997) have demonstrated.3 A 2001 study by the Organisation of Economic Cooperation and Development (OECD)4 shows that, on average, the size of the government procurement market (besides defense-related spending and compensation to employees) for all OECD members is roughly 7.57 percent of their national incomes.5 The WTO webpage calculates it at $1.6 trillion for 2008. In a similar vein, Anderson et al. (2011c) have estimated that the accession of the five BRIC countries (i.e., Brazil, China, India, Russia, and South Africa) to the GPA would, by itself, add $233–596 billion annually to the current value of the government procurement market.6 The BRICs do not participate in the GPA, although China entered a commitment in its Protocol of Accession to negotiate its adherence. It is not an exaggeration to state that the anticipation of China’s accession dominates the discourse about the GPA, since it is expected to have a transformative effect in light of the sheer size of the Chinese procurement market.7 10.1.3.2 Why Plurilateral? In light of the gains from trade liberalization and its potential beneficial effect on governance, one might legitimately ask why trading nations did not unilaterally open up their government procurement markets. Why was an agreement needed, and, furthermore, why did only a few WTO members sign it? Well, what was the case back in the 1940s is very much the case nowadays as well: few were willing to open up their government procurement market, which they viewed as the natural domain for industrial policy, even if, in consideration, they were offered the carrot of competing in foreign government procurement markets themselves. For many developing countries especially, opening up their government procurement markets meant reducing the market share of their domestic firms competing in these markets for the benefit of foreign multinationals. There is some evidence that this is true, as we will describe in what follows. Similar arguments, however, neglect the fact that gains from liberalization also stem from cheap imports. Alas, this is not the way many governments think, especially nowadays in times of crisis. On the other hand, those who had decided to go ahead with the negotiation of the agreement were unwilling to extend the fruits of their negotiating efforts to the WTO members that were not prepared to commit in similar terms. Reciprocity of market access commitments was an important consideration in the negotiations.8 10.1.3.3 “Revised” GPA The first GPA was a Tokyo-round Code, and the second GPA did not change that aspect, as it was a plurilateral agreement that was signed, and it entered into force on 1 January
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1995. Negotiations on a “revised” GPA started along with the other negotiations of the Doha round, but were delinked from the Doha-round package and were not part of the single-undertaking approach. Rather, negotiations were undertaken pursuant to a separate mandate that was built into the agreement when it was adopted in 1994, and they have been proceeding on an independent track.9 Negotiators managed to agree on a new text in 2006,10 which did not, however, enter into force immediately, since, at that time, a mutually satisfactory conclusion in the coverage negotiations had not been agreed to as well.11 On 6 April 2014, following lengthy negotiations, the new GPA entered into force.12 It is often referred to as the “Revised GPA” in literature and WTO-speak, and we will be discussing the disciplines imposed through this instrument in what follows. Two-thirds of the signatories had to accept the Protocol of Amendment for the entry into force of the new agreement. This condition was met when Israel signed the Protocol of Amendment on 7 March 2014. The new text,13 to which we will be referring throughout this chapter, follows the same approach as before: “With respect to the revised GPA text, it is based on the same principles as the existing Agreement but has been extensively streamlined and re-written to make it easier to implement.”14 The Revised GPA resulted in parties agreeing to add almost 500 new procuring entities to the coverage of the agreement and submit them to its disciplines. This is not the last revision, as new negotiations will start in 2017. 10.1.3.4 UNCITRAL Model Law Government procurement is not regulated only by the WTO. There are dozens of national statutes to this effect, and even nations that have not adhered to the GPA or even to the WTO itself regulate this market. Of interest to this study is the United Nations Commission on International Trade Law (UNCITRAL) statute (officially called “Model Law”). It is the only other multilateral arrangement, and in fact counts more members than the GPA. There is an ongoing discussion regarding the expansion of the GPA membership, and the UNCITRAL Model Law could provide some inspiration to this effect. In 2011, the United Nations Commission on International Trade Law (UNCITRAL) adopted its “Model Law” on public procurement. UNCITRAL, created in 1966, and now counts 110 members. Its mandate is different from that of the WTO, since it is concerned with harmonization of laws. In the context of public procurement, it aims to standardize the key principles and the procedures used to operationalize them. It is a nonbinding instrument that, to the extent its signatories find it persuasive, will implement in their domestic laws.15 The Model Law on Public Procurement shares a number of the features that appear in the Revised GPA, and every now and then in a more detailed manner. The key points of the 2011 Model Law are the accent on the fight against corruption, nondiscrimination, and transparency, as well as the urge to foster competition through the participation of additional suppliers in the procurement markets promoting their efficient administration. Although WTO members parties to the GPA do not have to observe the
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Model Law, many of them do in a de facto sense when it comes to explaining in more detail obligations assumed under the GPA. 10.1.3.5 Procurement by WTO Members That Have Not Joined the GPA WTO members that have not joined the GPA do participate in liberalization initiatives in this area. We will be discussing later in this chapter the experience in the preferential trade agreement (PTA) context in more detail, since they increasingly include procurement chapters and are signed between parties and nonparties to the GPA. At this point, we would like to underscore that PTAs have de facto become an instrument for exporting some of the disciplines embedded in the GPA to nonparties. Take the case of Mexico, for example, a nonparty to the GPA. Mexico has signed the North American Free Trade Agreement (NAFTA) and PTAs with the EU, as well as the European Free Trade Association (EFTA). All of its preferential partners are parties to the GPA. NAFTA, EFTA–Mexico, and EU– Mexico all contain a chapter on government procurement, which more or less reflects the disciplines of the GPA. As a result, Mexico, when procuring for its own consumption, has to follow nondiscrimination vis-à-vis its PTA partners and adopt fair and transparent procedures through which its procurement practices will be channeled. As PTAs proliferate, the relevance of GPA (or GPA-type) disciplines is enhanced. WTO members that have not adhered to the GPA are not necessarily totally free when procuring for their own consumption. They have to abide by constitutional constraints, and sometimes by nondiscrimination as well. The UNCITRAL Model Law has exercised some noticeable influence on many of them, the 2012 Public Procurement Bill of India being a good example to this effect. 10.2
The Relationship with GATT
We already explained in chapter 7 why government procurement is an exception from the obligation to accord national treatment to imported goods. We can now discuss the merits of the approach followed in Canada–Renewable Energy. The claim was that Canada was violating its obligations under the GPA since it was procuring renewable energy produced by solar panels made exclusively in Canada, acting thus in a discriminatory manner. The Appellate Body (AB) rejected the claim. The reasoning of the AB, as we saw in chapter 7, volume 1, was that Canada would be procuring renewable energy, whereas discrimination occurred with respect to solar panels. Since the two products (renewable energy and solar panels) are not “like goods,” the AB held that the exception in Article III.8 of GATT did not apply, and the Canadian scheme should not be scrutinized under the disciplines of the GPA. Is this approach sensible, though? Isn’t the AB interpreting the coverage of the GPA too narrowly? As we will see in more detail later in this chapter, the term “measure” is defined in Article I of GPA as follows: “measure means any law, regulation, procedure,
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administrative guidance or practice, or any action of a procuring entity relating to a covered procurement” (italics added). The italicized term has been consistently interpreted in case law as denoting wide coverage, so why be parsimonious this time? The danger of circumventing the obligations under the GPA is looming ahead if similar constructions are repeated in the future. We are not advocating a sweeping applicability of the GPA. It is, nevertheless, remarkable that in a case like this, where procurement by definition leads to privileging domestic goods, has not been subsumed to the disciplines of the GPA.16 The twin question is whether government procurement also constitutes an exception from the obligation to observe MFN. Intuitively, one would respond in the affirmative since otherwise, why negotiate the agreement in the first place (if free riders were to profit anyway)? The GPA was not negotiated as a critical mass agreement, after all. And yet, this issue has arisen because of the absence of a paragraph equivalent to Article III.8 of GATT in the body of Article I of GATT.17 The Panel on EC–Commercial Vessels put an end to this discussion by pronouncing in unambiguous terms against the relevance of most-favored nation (MFN) status to the GPA. Looking into the negotiating history, it concluded that, with respect to government procurement, WTO members aimed to introduce a caveat from both the MFN and the national treatment obligation (§§7.85–87): In support of its reading of “all matters referred to in paragraphs 2 and 4 of Article III,” Korea argues that this phrase was inserted during the Geneva Session of the ITO Preparatory Committee in 1947 in order to extend the grant of MFN treatment to all matters dealt with in those paragraphs regardless of whether national treatment is provided for in respect of such matters. We note in this respect that during that session of the ITO Preparatory Committee the United States made a proposal to amend the text of what was then draft Article 14 (general most-favoured-nation treatment) of the ITO Charter by replacing the phrase “with respect to all matters in regard to which national treatment is provided for in Article 15” (national treatment) with “with respect to all matters referred to in paragraphs 1,2,3, and 4 of Article 15.” ... At the time the United States made this proposal, paragraph 5 of Article 15, which eventually became paragraph 8 of Article 18 of the Havana Charter and of Article III of the GATT, provided that the national treatment obligations would not apply to government procurement. ... Therefore, we fail to see how this ... can support the position taken by Korea in this dispute that a measure expressly removed from the scope of the national treatment obligation in Article III can nevertheless be among the “matters referred to in paragraphs 2 and 4 of Article III.” It is noteworthy in this regard that in a discussion on draft Article 18.8(a) of the Havana Charter corresponding to Article III:8(a), it was observed at a meeting in February 1948 that: “... the Sub-Committee had considered that the language of paragraph 8 would except from the scope of Article 18 [national treatment] and hence from Article 16 [MFN treatment], laws, regulations and requirements governing purchases effected for governmental purposes where resale was only incidental. ...” This clearly suggests that negotiators understood that the reference to government procurement in Article 18.8(a) would also apply in the context of the MFN clause (Article 16).
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Thus the relevant drafting history that we are aware of shows that the exclusion of government procurement from the national treatment article would also apply to the MFN clause. (emphasis in the original)
Finally, the relationship between state trading enterprises (STEs) and government procurement should pose no problem either. Blank and Marceau (1997) examined the negotiating record and subsequent practice, concluding that there is a clear distinguishing line between the two instruments: the first implicated governments that purchase with the intention to resell, whereas the latter covers only transactions where governments purchase goods for their own consumption (that is, with no intention to resell). 10.3
Government Procurement: A Multifaceted Instrument
We provided some data earlier in this chapter regarding the gains from liberalization of the procurement market. But the gains from participation in the GPA are not limited to gains from trade liberalization. Anderson (2007) correctly held that work on public procurement in the WTO—particularly, the Agreement on Government Procurement— is consistent with, and reinforces, the objectives of national reforms aimed at promoting competition, transparency and enhanced value for money in national procurement regimes. In this regard, the contribution of the GPA should not be seen solely in terms of facilitating international market access; the Agreement can also make an important contribution to good governance.18
To realize similar gains, governments must part company with their occasionally natural tendency to use this instrument as industrial policy. It is by taming similar instincts and opening up to foreign competition that they will realize gains beyond trade liberalization. 10.3.1
Procurement and Industrial Policy
10.3.1.1 A Worldwide Phenomenon Why, in light of the gains discussed earlier, did countries not liberalize unilaterally before the advent of the GPA? Stedman (2012) offered a great historical account pointing to the prevalence in the late 1940s of the Keynesian idea that an increase in national income due to a rise in government expenditure was greater, the smaller the share of goods produced outside the country. This type of thinking had no geographic boundaries. A number of countries adopted (and, indeed, continue to adopt) similar policies reserving their government procurement market to local producers. It is remarkable that even today, even a deep-integration initiative like the EU cannot tame the will of governments to restrict the government procurement market to local suppliers only. Messerlin’s study (2001) of the EU market shows that in the wake of the great expansion of the EU from 15 to 25, its government procurement market was largely seg-
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Table 10.1 Government procurement in EU countries (EU-15) Country Austria Belgium–Luxembourg United Kingdom Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden EU-15
€ (billion) 17.6 8.8 97.3 9.8 8.8 85.9 179.8 4.9 3.0 56.4 16.6 6.3 29.5 22.7 547.4
Source: Messerlin (2001).
mented, with national champions dominating national markets. The government procurement market of each of them was quite substantial, as table 10.1 shows. The gains from liberalization, thus, looked substantial. And yet the author reports that most liberal EU members still bought two-thirds local added value. 10.3.1.2 Buy American In his last day in office, President Herbert Hoover signed the Buy American Act.19 Its pro-US business character was evident in various provisions: it applied to all federal procurements and included formal margins of preference in favor of domestic suppliers; it required that “substantially all” purchases be US-made.20 It included separate provisions for supply and construction contracts,21 and it applied to all direct purchases by the federal government worth more than $3,000. The Buy America Act is not a distinct statute anymore, but the name that a series of domestic content restrictions are usually called. Buy American Act–type legislation has mushroomed, it is quasi omnipresent in US government procurement. Through these restrictions, for example, the US Department of Transportation will make grants available to states and nonfederal government entities for projects relating to transportation.22 The act allows five exceptions, one of which is the possibility for the US president to waive the “substantially all” requirement with respect to purchases of goods originating in countries with which the US has agreed to liberalize the procurement market (like the WTO). We discuss this aspect in more detail later in this chapter, since strict adherence to the Buy American Act would mean ipso facto that the US would never be in compliance with its obligations under the GPA.
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President Hoover was the one who signed the act, but actually President Franklin D. Roosevelt is more intimately associated with it because of the wide use of government expenditure in order to reignite the US economy during his presidency. His New Deal policies were aimed to act as a stimulus for the US economy—the necessary push that would kick-start growth once again after the Great Depression of 1929. Government expenditure and investment, even at the expense of increased public debt, would fill the void in demand left by the decline in private spending. In this vein, public works played an important role. Through this form of government intervention, the New Deal aimed to redress the situation caused by the Great Depression that caused the US record unemployment numbers and many other nefarious effects. Institutions financed by government spending, like the Works Progress Administration (WPA), and the Tennessee Valley Authority (TVA), became monuments of New Deal policies in the field of government procurement that served as one of the wheels to favor US business and reignite the engine of the US economy.23 As of the 1950s, the US economy grew in record numbers, but the Buy American Act was not repealed. Industrial policy through this instrument remained a policy option even in times of growth. And when crisis struck again, Buy American Act–type legislation proliferated. The American Recovery and Reinvestment Act (ARRA) was enacted in response to the financial crisis that hit the US in 2008. An unprecedented amount of money (closing on $1 trillion) was made available to jump-start a moribund US economy. Section 1605 of ARRA is a “Little Buy American Act.” A very high percentage of US value added requirement is precondition for direct government purchases, as well as for indirect purchases by nonfederal entities receiving these funds. It literally forbids the use of funds for the construction or repair of public buildings unless the iron, steel, and manufactured goods used are of US origin. Procurement, thus, has to be “substantially US origin.” The insistence of the US to enforce “Buy American” has provoked a lot of acrimony by its GPA partners. The issue of consistency of the former with the latter instrument has been raised time and again before the GPA Committee. It is not difficult to understand why there is an issue here, since the whole idea of GPA was that governments purchase without discriminating depending on the origin of the product. Yukins (2015) concluded that most concerns have been raised regarding procurement at the subfederal (e.g., state and city) level. This is no consolation, though. Hufbauer (2015) calculated the annual US state-level procurement market (using official figures) to be around $1 trillion. It thus dwarfs the federal-level market, which stands around $600 billion. The US president, using the powers bestowed upon him or her through the Trade Agreements Act (TAA) of 1979, has waived the discriminatory purchasing requirements with respect to goods covered by the GPA. In a similar vein, the ARRA contains a provision that explicitly states that it will be applied in a manner consistent with US obligations under international agreements. A clause has been included called Section 605(d)—a “savings clause,” so to speak—which aims to ensure that the US GPA commitments will be
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respected anyway. Because of this provision, there was no need for a waiver under the TAA since this provision makes it clear that it will not be applied in a manner inconsistent with the obligations that the US has assumed under the GPA.24 Nevertheless, pronouncements and actual enforcement might not coincide, as the numerous discussions before the GPA Committee testify. Under Article XXII.4 of GPA, parties to the agreement must ensure that all laws, regulations, and administrative procedures, as well as rules, procedures and practices applied by procuring entities, are in conformity with the GPA. If there is some reason for hope, it comes from a recent General Accountability Office (GAO) report, which states that the need to respect the WTO GPA commitments was the main reason why the disbursement of ARRA money did not occur fast on occasion. The relevant passage from GAO (2010) states: Buy American requirements. Five federal agencies—the Departments of Commerce, Education, Homeland Security, and Housing and Urban Development, as well as the Environmental Protection Agency—told us that Buy American provisions had affected their ability, or their grantees’ ability, to select or start some Recovery Act projects. For example, a project within Homeland Security’s Electronic Baggage Screening Program was slowed as officials awaited a Buy American waiver, which became necessary when the contractor learned that U.S.-made components would have hindered the integration of an airport’s security systems. At the local level, officials from the Chicago Housing Authority (CHA) reported that the only security cameras that are compatible with the existing CHA system and City of Chicago police systems are not made in the United States. CHA worked with Housing and Urban Development officials to determine how to seek a waiver for this particular project. Officials from 2 states and 1 local entity also said that Buy American requirements affected their ability to select and start projects. (italics added)25
10.3.2
Procurement and Competition Policy
Liberalization of the procurement market is akin to competition advocacy, in the sense that through liberalization, one promotes competition (“rivalry”) among suppliers. This could be a tough task indeed for most states, and for some states in particular, as Wood (1997) perceptively noted (p. 262): States will always be subject to interest group pressures and public policy temptations to deviate from market principles, and nothing but good judgment and the desire to live up to international commitments keeps them from giving in. in fact, favoritism can occur on grounds other than nationality: government agencies may be tempted to favor political cronies, family members of influential officials, or companies willing to provide reciprocal benefits, to name a few possibilities.
Antitrust can be helpful beyond the shared feature of competition advocacy. The main objective of the GPA is to ensure market access for signatories. To this effect, procuring entities must select the most advantageous offer among all bids submitted by suppliers entitled to participate in a procurement. Other things being equal, the less costly offer often comes close to meeting this objective. Wood (1997, pp. 263ff.) mentioned how the Department of Justice, one of the two federal antitrust authorities in the US, helped bring prices
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down in cases concerning defense procurement. In support of this, she cited the AlliantAerojet case, where the only two producers of cluster bombs had established a joint venture and won the procurement for the US Department of Defense. There was no objection by the US Department of Defense, but the US Department of Justice found that the establishment of the joint venture violated US antitrust laws. It entered a consent decree with the two companies whereby they agreed to reduce the price of the contract by $12million. There are numerous examples pointing to the complementarity between procurement and antitrust authorities. As we will see later in this chapter, there are cases (for example, when dealing with collusive bids) where the involvement of competition authorities could be crucial in guaranteeing the desired outcome. 10.3.3
Procurement and the Fight against Corruption
The preamble of the GPA explicitly refers to the fight against corruption. To this effect, it singles out the United Nations Convention Against Corruption (UNCAC) and recognizes its provisions as providing a benchmark for the fight against corruption. Although the preamble is of only limited value, of course, it still denotes the desire to construe the GPA in line with UNCAC. UNCAC aims at preventing corruption, so it includes various mechanisms to this effect, including criminalizing corrupt behavior. There are 173 parties to this convention: the 170 UN members plus the Cook Islands, the EU, and Palestine. It is not the only multilateral agreement against corruption: the OECD Anti-Bribery Convention and the Inter-American Convention Against Corruption are other notable examples to this effect. Article 9 of UNCAC is of particular importance to the GPA. It is entitled “Public Procurement and Management of Public Finances.” It calls for transparency ex ante, in the sense that clear criteria regarding the upcoming procurement should be established, as well as ex post, by stressing the need for accountability of the procuring entities. Beyond the preamble, two provisions of the GPA are directly linked to the fight against corruption: Article IV.4(c) requests that procuring entities prevent corrupt practices when conducting procurement.26 The term “corrupt practices” is not defined in the body of the GPA. WTO panels that might be called to deal with the interpretation of Article IV.4(c) of GPA could arguably be inspired by the list of corrupt practices included in UNCAC. After all, the preamble of the GPA explicitly refers to UNCAC, so recourse to it could be justified as akin to recourse to a contextual element.27 There was an initiative to strengthen the commitments against corruption within the GPA—that is, to add to the acknowledgment provided in the preamble. The WTO Working Group on Transparency in Procurement28 did not manage to result in any agreement on negotiating disciplines in this area. Uncertainty as to what the implications of the rules would be, not only for the wider “good governance” agenda but also in terms of market access, did not help the members of the Working Group reach a conclusion.
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The Scope of the GPA
The scope of the GPA is defined by its membership, the entities, and measures that it covers. Only a few WTO members have agreed to join the GPA and observe its disciplines with respect to the agreed-upon definition of “procurement” when their government entities that have been specifically mentioned in the GPA purchase goods for their own use. 10.4.1
Plurilateral Agreement
Recall from the discussion in chapter 1 of volume 1, that plurilateral agreements constitute an exception to the “single-undertaking” approach agreed during the Uruguay round. The GPA entered into force as one of the four plurilateral agreements. 10.4.2
Membership
10.4.2.1 Acceding to the GPA The provisions of each specific plurilateral agreement govern accession to and participation in it (Article XII.3 of the Agreement Establishing the WTO). Article XXII.2 of GPA reserves the right to participate in the GPA to WTO members only. The modalities of the accession procedures are reflected in a WTO document prepared to this effect.29 A Working Party will be established where all signatories will participate and discuss the terms of accession for the acceding country. At the end of negotiations, a final report will be submitted to the GPA Committee,30 which will decide by consensus on the request for accession. 10.4.2.2 Current Membership The following WTO members are signatories to the GPA: Armenia;31 Canada; Chinese Taipei;32 the EU;33 Hong Kong, China; Iceland; Israel; Japan; Korea; Liechtenstein; Montenegro; the Netherlands with respect to Aruba; New Zealand; Norway; Singapore; Switzerland; Ukraine; and the US. The GPA is, thus, dominated by developed countries. 10.4.3
Entities Covered
The GPA imposes disciplines only with respect to the procuring entities covered. A “procuring entity” is defined in the “Definitions” provision of Article I of GPA, as “[a]n entity covered under a Party’s Annex 1, 2, or 3 to Appendix I.”34 Appendix 1, which forms an integral part of the GPA, by virtue of Article XXII.15 of GPA, is divided into five Annexes and reflects the commitments of each GPA signatory with respect to the following: (a) Central government entities (Annex 1) (b) Subcentral government entities (Annex 2)
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(c) All other entities that procure in accordance with the provisions of this agreement (Annex 3)35 (d) Entities procuring services (Annex 4) (e) Entities procuring construction services (Annex 5) Consequently, the first limitation in the coverage of the GPA is that not all government entities come under its purview, but only those for which WTO member parties to the agreement have agreed to enter commitments.36 The GPA covers entities procuring both goods and services, albeit the latter only in a limited manner.37 A parallel process aiming to liberalize procurement in the services markets is under way, but it has not yet led to a fruitful conclusion. Under Article XIII.1 of the General Agreement on Trade in Services (GATS), procurement of services is subject neither to MFN (Article I of GATS), nor to specific commitments (Articles XVI and XVII of GATS). Article XIII.2 of GATS explains that multilateral negotiations should take place within two years after the entry into force of the Agreement Establishing the WTO, with the aim of liberalizing the government procurement market for services. In March 1995, the GATS Rules Working Party was established, and it has been in place ever since. According to the Guidelines and Procedures for the Negotiations on Trade in Services (established in WTO Document S/L/93), WTO members should complete negotiations under Article XIII of GATS before negotiating specific commitments. The mandate was reaffirmed in the Hong Kong Ministerial Declaration (2005).38 The EU has taken the initiative and proposed the elements of an agreement.39 So far, however, negotiations have been inconclusive; as a result, the only commitments on services are those that have been included in the GPA.40 10.4.4
Measures Covered
Article II.1 of GPA extends the coverage of the agreement to measures regarding covered procurement, regardless of whether procurement has been conducted by electronic means. “Measure” is also defined, as we saw earlier, in Article I of GPA as “any law, regulation procedure, administrative guidance or practice, or any action of a procuring entity relating to a covered procurement.” (italics added) The italicized words make it clear that the intent of the negotiators was to cover all measures by “procuring entities” that qualify as “covered procurement[s].” Article II.2 of GPA defines “covered procurement” as procurement for government purposes (that is, not with a view to commercial sale or resale) of goods and services, which has been included in the offers reflected in Appendix I, regardless of the contractual means used to this effect. The intent of the procurement, therefore, holds the key: it must be done for governmental purposes, not for sale or resale.
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The third and final limitation concerns the value of contracts. Here, the GPA, reflecting prior experience, contains an elaborate set of disciplines. The starting point is the threshold values in a party’s annexes to Appendix I. The value that we care about is that of the procurement at the time of publication of a notice to participate in a tender [Article II.(2c) of GPA]. Threshold values are typically not very high, since many small and medium enterprises (SMEs) routinely participate in tenders.41 In fact, as we will see later in this chapter, the Revised GPA contains a Work Programme for SMEs. Articles II.6–8 of GPA reflect, based on experience, anticircumvention rules that aim to ensure that parties to the GPA will not subdivide contracts in order to avoid the bite of the disciplines. Article II.6(a) of GPA captures this point to perfection when stating that contracts cannot be subdivided into “smaller” contracts, nor can a valuation method be chosen so as to exclude a contract from the discipline of the GPA. This provision was deemed necessary because the GPA does not provide one valuation method to be used by all GPA signatories at all times. Rather, it provides criteria to be used when establishing the valuation method. As a result, some discretion is left to the signatories, and this provision should be understood as safeguard against abuses. In a similar vein, it is the estimated maximum value of the procurement over its entire duration that must be ascertained [Article 6.II(b) of GPA]. The basic obligation is further detailed in a series of rules depending on the type of contract that has been used. When recourse is made to “recurring contracts”—that is, when it is required to award more than one contract or when the contract is awarded in separate parts—it is still the estimated maximum total value that must be calculated. Calculation can be based either in the values of the first 12 months (if the contract exceeds 12 months in duration), or the value of contracts involving similar types of goods or services that will be awarded during the 12 months following the initial contract (Article II.7 of GPA). Special calculation rules are provided for procurement by lease, rental, or hire for which the total price has not been specified. In similar cases, the GPA distinguishes between fixed-term contracts and contracts concluded for an indefinite period. It is the maximum value that applies in the former type of contract, whereas it is the value of monthly installments multiplied by 48 that applies to the latter type of contract [Article II.8(a), (b) of GPA].42 A GATT panel dealt with a dispute regarding the “value of the contract.” In EEC–VAT and Threshold, the US had questioned the EU practice of excluding value added tax (VAT) from the value of contracts. This dispute concerned, of course, the Tokyo-round GPA. Since the report was adopted, it retains legal significance, as explained in chapter 1, volume 1. The US argument was that by deducting the VAT, a number of contracts would fall below the threshold value of 150,000 special drawing rights (SDR). SDRs are an international reserve asset created by the International Monetary Fund (IMF), and its value corresponds to roughly one US dollar. The GPA expresses the statutory threshold values in
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SDRs. The panel was facing a legislative gap since nothing in the GPA definitively addressed this issue. It held that the value must represent the “full cost” to the procuring entity, and for this reason, VAT should be included (§22). It found support for this view in the fact that practice by and large conformed to its finding (§23), and it was not swayed by the fact that practice in some EU states pointed in the opposite direction (§25). 10.4.5
Modification of Commitments
Parties to the GPA can modify their concessions, assuming that they have followed the procedures to this effect that have been included in the GPA (Article XIX). The rationale for this provision echoes that for Article XXVIII of GATT.43 10.4.5.1 The Meaning of “Modification” Recall from the discussion in chapter 3 of this volume that GATT distinguishes between “rectifications” and “modifications.” Whereas the first term captures so-called innocent changes in a schedule of concessions (that is, those that do not affect the balance of rights and obligations), the latter aims to address actions that do modify the agreed balance of rights and obligations. Through a “rectification,” for example, a party to the GPA might want to provide the new name of a procuring entity, while through a “modification,” it might want to reduce the value of commitments to which it has previously agreed. There is sometimes a fine line between “rectification” and “modification,” and GPA signatories might have the incentive to mischaracterize their actions, and present them always as rectifications. To this effect, the GPA states that both actions come under the ambit of Article XIX.1. The duty imposed on WTO members is to notify the GPA Committee of any “modification,” regardless of whether it affects the balance of rights and obligations. The content of the notification will vary, though, depending on its rationale: if the modification occurs because government control over the entity has been eliminated, evidence of elimination must be provided [Article XIX.1(a) of GPA]; if modification occurs for any other reason, then the likely consequences of the change must be spelled out [Article XIX.1(b) of GPA]. 10.4.5.2 Procedure The agreement distinguishes between two scenarios. In the first, parties affected by the GPA have raised no objections. Objections must be in writing and should be sent to the committee within 45 days from the date of notification of modification.44 If the statutory deadline has passed and no objection has been submitted, then the modification becomes effective [Articles XIX.2, XIX.5(a) of GPA]. If an objection has been communicated within the statutory deadline, then the very complicated regime established by the GPA kicks in. If objections have been raised and withdrawn, then the modification will become effective after the last withdrawal [Article XIX.5(b) of GPA].
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It could, of course, be the case that multiple parties object, but for the sake of simplicity, we will assume that there is one modifying party and one objecting party. When an objection has been submitted, the GPA Committee adopts three separate measures. First, it organizes “arbitration procedures” aiming to facilitate the resolution of objections [Article XIX.8(a) of GPA]; second, it adopts indicative criteria that can help demonstrate that there is no government control of an entity if similar grounds have been advanced as a rationale for modification [Article XIX.8(b) of GPA]; and finally, it will develop criteria that will determine the level of “compensatory adjustment” to be offered by the modifying party, as well as the level of “substantially equivalent coverage” that an objecting party may withdraw [Article XIX.8(c) of GPA]. The criteria established by the GPA are relevant if recourse to arbitration procedures is made, as well as during the bilateral consultations that precede the arbitration procedures. The modifying and the objecting parties, thus, will first try to resolve their dispute through consultations—in fact, they have to do so as per the language in Article XIX.3 of GPA. They will have to ensure that the resolution of the objection will be based on the criteria adopted by the GPA Committee. If consultations cause the modifying party to revise its modification, it will notify the committee of a “revised modification” [Article XIX.4 of GPA]. As stated earlier, the modification (revised or not) will become effective within 45 days from its notification if no objection has been submitted, or from the moment the last objection has been withdrawn [Articles XIX.5(a) and (b) of GPA]. The GPA allows modification even if no agreement has been reached. In line with Article XXVIII of GATT, it privileges “contractual flexibility” while allowing affected parties to react to unilateral modifications to which they have not agreed. To this effect, the modification will become effective if 150 days have passed since its notification and the modifying party has notified the GPA of its intention to implement it [Article XIX.5(c) of GPA]. In this case, the affected parties can withdraw “substantially equivalent coverage” if they have respected the criteria adopted by the committee, and they have also notified the committee of their intention to do so 30 days before the withdrawal takes place (Article XIX.6 of GPA). The countermeasures consisting in substantially equivalent coverage are, as per the explicit language of Article XIX.6 of GPA, directed only at the modifying party. This solution is affected by the decision (or not) to invoke the arbitration procedure. Recall that the committee will establish arbitration procedures any time an objection is raised. The availability of arbitration procedures, though, should not be equated with recourse to them. In fact, it is up to the modifying party, the objecting party, or both to invoke them. If not, then there is a presumption that the objection to the modification is baseless. To this effect, and contrary to the solution advanced earlier [Article XIX.5(c) of GPA], the modification will become effective 130 days from its notification, while the objecting party may not withdraw coverage [Article XIX.7(a) of GPA]. On the other hand, if recourse to arbitration procedures has been made, no modification can take place before the completion of arbitration procedures [Article XIX.7(b) of GPA]. Moreover, the modi-
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fying party must comply with the results of the arbitration procedures [Article XIX.7(b) (iii) of GPA]. If not, then the objecting party can withdraw substantially equivalent coverage, provided that it has respected the outcome of the arbitration procedures [Article XIX.7(b)(iv) of GPA]. The procedures established in the GPA are complicated, but they are a net improvement compared to the procedures established in Article XXVIII of GATT. Two issues that Article XXVIII of GATT does not explicitly address, as we saw in chapter 3, volume 1, are addressed in the corresponding provision of the GPA: countermeasures are imposed only against the party modifying the concession, and in case of disagreement, the clock stops (lis pendens) and arbitration procedures are initiated. These procedures are in line with the solution in the GATS Agreement (Article XXI), and at variance with the corresponding procedures in GATT that were reviewed in chapter 3, volume 1. 10.4.6 Exemptions from Coverage Article II.3 of GPA creates a presumption to the effect that certain measures are excluded from the disciplines of the GPA unless the opposite has been indicated in a party’s offer. Acquisition of land, loans, equity infusions, procurement by fiscal agencies related to public debt, public employment contracts, procurement for the purposes of providing development aid, procedures related to stationing of troops, and some related transactions are, in principle, excluded from the disciplines of the GPA. 10.5 10.5.1
The Obligations Assumed Nondiscrimination
Article IV of GPA imposes a two-pronged obligation on parties to the GPA. First, their treatment of their own domestic procuring entities with respect to any measure covered by the agreement becomes the benchmark for the treatment they must accord to any other party (and its procuring entities) to the GPA. Similar treatment must be accorded immediately and unconditionally (Article IV.1 of GPA). Second, it will not treat locally established suppliers differently depending on the degree of foreign affiliation or ownership (Article IV.2 of GPA). So it is not only procurement supplied on a cross-border basis, but also procurement supplied by locally established operators, by virtue of GATS or bilateral investment treaty (BIT) commitments, that must observe the disciplines of Article IV of GPA. This provision is quite meaningful in practice, since, as a result of the ongoing liberalization of investment, the establishment of foreign subsidiaries in various sovereignties has proliferated at the speed of light. Article IV.7 of GPA clarifies that the nondiscrimination obligation does not apply to customs duties or charges, their method of levying, and other import regulations and formalities affecting trade in services. This clarification is necessary in order to leave no
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doubt that imported goods will have to pay the import duty that has been agreed through negotiations or because of participation of a subset of the GPA membership in a PTA, or even because a developing country that has adhered to the GPA profits from more favorable customs treatment.45 10.5.2 Reciprocity Article XXII.7 of GPA explicitly mentions “reciprocity” as the basis for any future negotiation aiming to extend the scope and coverage of the current GPA: Not later than the end of three years from the date of entry into force of the Protocol Amending the Agreement on Government Procurement, adopted on 30 March 2012, and periodically thereafter, the Parties shall undertake further negotiations, with a view to improving this Agreement, progressively reducing and eliminating discriminatory measures, and achieving the greatest possible extension of its coverage among all Parties on the basis of mutual reciprocity, taking into consideration the needs of developing countries. (italics added)
There is, of course, tension (prima facie at least) between nondiscrimination and reciprocity. Tension, however, disappears if we understand the former as a legal principle governing the contractual life of the agreement and the latter as the quintessential element of the negotiation that gave rise to the agreement. It is probably the case that the end product is the outcome of a series of bilateral agreements and not a GPA membership-wide negotiation. Once commitments have been entered, though, procurement takes place with respect to the nondiscrimination principle. 10.5.3
Government Procurement in PTAs
The GPA does not contain an exception for procurement conducted between PTA partners. Increasingly, nevertheless, government procurement figures among the issues discussed in PTAs.46 For years, EFTA used to be the only PTA with a procurement chapter,47 but this is not the case anymore. This is quite intuitive since procurement is one of these areas that have not been fully liberalized at the multilateral level, and there is substantial scope for according preferences bilaterally.48 A number of bilateral and regional agreements are being negotiated that cover procurement: the Central American Free Trade Agreement (CAFTA) is an example for the US, while the EU African, Caribbean, and Pacific (ACP) negotiations and the European Neighborhood Policy (ENP) are examples on the EU side. Megaregionals as well, such as the Canada–European Union Trade Agreement (CETA), Trans-Atlantic Trade and Investment Partnership (TTIP), and Trans-Pacific Partnership (TPP) contain chapters on government procurement. Anderson et al. (2011b) estimated that 59 percent of all PTAs do not contain a chapter on government procurement; 16 percent of them have one or only a few provisions in this respect; and, finally, 25 percent include a full chapter on the liberalization of procurement
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markets. This latter category is subdivided into three categories, and this is the main interest of the Anderson et al. study: 29 percent of the participants are not parties to the GPA; 53 percent of these PTAs are between a party and a nonparty to the GPA; and only 18 percent of them are exclusively between parties to the GPA. Hence, procurement markets are being substantially liberalized outside the confines of the GPA. It is quite legitimate to expect that the GPA model of liberalization will exercise some influence, since a sizeable proportion of all PTAs have been agreed between parties- and nonparties to the GPA, and contain procurement chapters. It is only normal that parties to the GPA will be thinking of their preexisting commitments under the GPA when contracting PTAs in the same area. In fact, Anderson et al. (2011b) confirmed that this is empirically speaking the case. Both policy and legal issues arise: why should procurement be liberalized within PTAs, and not within the GPA? On the other hand, since there is no exception for PTAs embedded in the GPA, do PTA partners have to extend the outcome of their negotiations automatically and unconditionally to all GPA parties? We take each question in turn next. Why does procurement liberalization occur in PTAs and not in WTO? Ueno (2013) examined 47 PTAs with provisions on government procurement. The main conclusion of this study is that it is in the realm of services that procurement commitments in PTAs go further than in the WTO context. This is not a paradox, since there are gains from liberalization, and liberalization has hit a dead end in the GATS context, it is only normal that those who wish to go further faster do so on a preferential basis. This study, of course, predates the negotiation of CETA, TPP, and TTIP, instruments that will, upon their conclusion, provide further support to the main conclusions. Ueno (2013) also pointed to another issue that is of utmost interest to the eventual expansion of the membership of the current GPA: non-GPA parties have achieved a level of liberalization of their procurement market that is comparable to that of parties to the GPA. Why would they not simply join the GPA, then? One possible reason is that the overall regulatory package offered through a PTA is more attractive to them. When it comes to developing countries participating in PTAs, there are arguments for linking procurement reform to aid, perhaps using them as both a commitment device for policy reforms and aid and as a monitoring mechanism. Monitoring could comprise what donors do to support needed institutional improvements in developing countries and what governments of these countries do in terms of taking action and implementation of reforms. Whatever the reasons—and there is no reason why they should be the same across the various PTAs—opening up the government procurement market on a preferential basis could be, as Anderson et al. (2011b) concluded in their study on this score, a test for those wishing to join the WTO GPA. And then, there is a legal issue. PTAs include commitments beyond those included in the GPA.49 The question arises whether preferences accorded to PTA partners must be automatically and unconditionally extended to all GPA partners as well (Article IV of GPA). The better arguments lie with a negative response to this question, although no
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official sanctioning of this position has taken place as yet. Article IV describes “covered procurement,” which was defined earlier. Commitments in PTAs that reflect measures beyond the GPA scope do not come under its purview. 10.5.4
Electronic Procurement
Procurement can be conducted through electronic means, and, when this is the case, procuring entities must ensure that they use generally available and interoperable information technology (IT) and systems. The purpose of this provision is to ensure that suppliers are not excluded because of the idiosyncratic IT system that has been chosen (Article IV.3 of GPA). As noted earlier, the UNCITRAL Model Law contains a great deal of detail regarding “electronic procurement,” a form that can enhance transparency in the process, and most important, make the latter faster. The clauses on electronic procurement that have been included in the Model Law reflected proposals by developed countries, especially the EU. It could thus provide some guidance to the more recent parties to the GPA (particularly developing countries) interested in procuring through electronic means. 10.5.5
Rules of Origin
Recall that in the absence of multilateral disciplines, each WTO member is free to unilaterally define the origin of goods, but it must apply its definition in a nondiscriminatory way. The GPA requests from WTO members to avoid the use different rules of origin for procurement purposes (Article IV.5). When the Harmonization Work Programme (HWP) on Rules of Origin has been finalized,50 parties to the GPA will have to incorporate it and amend Article IV.5 GOA accordingly (Article XXII.9 of GPA). Their definition of origin for goods and services applies to procurement as well. 10.5.6
Offsets
In order to ensure the fairness of the whole process, procuring entities cannot seek or control for offsets that may be offered by suppliers (Article IV.6 of GPA). “Offset” is defined in Article I of GPA as follows: any condition or undertaking that encourages local development or improves a Party’s balance-ofpayments accounts, such as the use of domestic content, the licensing of technology, investment, counter-trade, and similar action or requirement.
It follows that what the legislator aimed to capture through this term is elements, which are not necessary to the submission of an offer, but which could tempt the procuring entity to award a contract to the supplier providing them. This does not mean that offsets are not being used. As we saw earlier, “Buy American” laws in fact contain a number of clauses that qualify as offsets, which are not applied to parties to the GPA if the “WTO waiver”
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is respected. In general terms, parties to the GPA interested in contracting offsets in their procurement would have to invoke one of the exceptions to this effect, as we discuss later in this chapter. In a similar vein, we will also discuss later that Israel included in its schedule of commitments an exception that would allow it to use offsets. 10.5.7
Technical Specifications
Trading nations often use “technical specifications” in the context of procurement, a term defined in Article I of GPA as a tendering requirement that do the following: • Lays down the characteristics of goods or services to be procured, including quality, performance, safety and dimensions, and the processes and methods for their production or provision • Addresses terminology, symbols, packaging, marking, or labeling requirements, as they apply to a good or service When having recourse to them, parties to the GPA must ensure that they do not create unnecessary obstacles to trade (Article X.1 of GPA). How will this be achieved? The GPA requests that its parties use international standards and performance requirements when warranted. The proliferation of international standards in trade in goods is well documented, as we saw in chapters 5 and 6 of this volume. Recourse to international standards facilitates trade, since transaction costs in this respect could have been much higher had absolute regulatory diversity prevailed. Unsurprisingly, thus, the GPA requires from its parties to base their technical specifications on international standards when warranted [Article X.2(b) of GPA]. It also requires that they use performance (as opposed to process) requirements [Article X.2(a) of GPA]. This is so, since, as we saw when discussing US–Shrimp in chapter 9, volume 1, process requirements might be akin to “creeping” protectionism since the regulating state might be exporting its own technology this way.51 10.5.8
Exceptions
Article III.1 of GPA reflects the “national security” exception, which is inspired by the corresponding provision in GATT (i.e., Article XXI). It is drafted much more narrowly since it can be used in order to protect essential security interests, but only to the extent that they relate to “the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defence purposes.” There is not even a general carve-out for national defense. In fact, several parties have made commitments with respect to nonsensitive material used by national defense ministries and departments. Georgopoulos (2004) discussed extensively the “national defence” exception to obligations assumed under the GPA. His work refers to the Uruguay round, not the Revised GPA,
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but his analysis is still relevant since this clause has not changed in substance. He effectively adopts (pp. 26ff.) an “intent” criterion52—that is, when there is disagreement between parties to the GPA or ambiguity regarding the coverage, the question to ask should be what is the purpose of procurement in any specific instance? To the extent that the intent is national defense, he argues that procurement of this sort should come under Article III.1 of GPA. In his account, even “dual use” goods (e.g., goods that could serve a defense or civil purpose) would qualify as defense procurement (and, thus, come under Article III.1 of GPA) if the intent of the procuring entity was to protect national defense. This view, which is quite plausible, has gained acceptance.53 As with any intent analysis, though, it will require sophisticated analysis by panels (in case of a dispute), and recourse to suitable proxies in order to detect whether the procuring entity actually meant to procure it for national defense purposes or simply to circumvent existing obligations under the GPA. It is to be expected that in similar cases, panels called to adjudicate disputes will adopt a deferential standard of review, as the discussion in chapter 9, volume 1, evidences. Article III.2 of GPA reproduces in part the list of “general exceptions” included in Article XX of GATT.54 The “chapeau” of Article III.2 of GPA is almost identical to that of Article XX. The list reflects only three of the grounds included in the GATT list, and there is a requirement that measures are “necessary” to protect them (for public morals; order; safety; protection of human, animal, or plant life or health; or protection of intellectual property). There is a paragraph that is idiosyncratic to the GPA: Article III.2(d) allows parties to the GPA to deviate from their obligations if their measures relate to “goods or services of persons with disabilities, philanthropic institutions or prison labour.” WTO members remain, thus, free to procure from similar institutions unconstrained by obligations assumed under the GPA. Besides statutory exceptions, members of the GPA can contractually agree to other exceptions as well. The schedules of concessions under the GPA often contain general notes, at the end of which members might provide for a number of additional exceptions, including from the obligation not to discriminate. This practice has developed in the absence of language in the GPA providing similar arrangements. Israel, for example, entered a General Note in its schedule to reduce by 1 January 2005 its offsets to 20 percent of the value of the contract. During the debate in the GPA Committee, following inconclusive discussions on the legal basis of General Notes, it was agreed that Israel should refer to Article XXIV.6 of GPA. This provision corresponds to Article XIX of the Revised GPA that is now in force.55 10.6
Procurement Methods
The GPA contains a list of procurement methods (open, selective, and limited tendering) that a procuring entity might use. These are not meant to serve as strict procedures from
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which no deviation is allowed. They rather refer to “umbrella” categories that could encompass variations of their quintessential theme. The key in distinguishing between the three statutory umbrella categories is the number of suppliers that can lawfully participate in a given procurement. The modalities for participation can be (and are) shaped in different ways in practice, as we will see later in this chapter. It does happen quite often that different terminology is used to describe basically the same methodology, and, to this effect, we will be referring to the terminology used by the EU and the US when practicing “competitive negotiations” later in this chapter. For example, whereas anyone can participate in open tendering, only a few suppliers can participate in selective tendering. Within selective tendering, though, parties to the GPA can employ “competitive negotiations” or “competitive dialogue” in an effort to elicit the best possible deal. Practice shows numerous variations, however, and we will be referring to them in what follows. In order to avoid confusion, we refer to open, selective, and limited procurement as “umbrella categories included in the GPA,” and to national practices as “variations not included in the GPA.” When varying the statutory procurement methods, GPA signatories must observe the obligations that we have discussed earlier. When, for example, the EU initiates a “competitive dialogue,” it must make sure that it has adhered to nondiscrimination; it cannot invite a few suppliers only, using national origin as the criterion for selection. Through the methods, the GPA aims to establish a framework that will allow the procuring entity to pick the most advantageous offer while guaranteeing the rights of suppliers to participate in a fair process where they will not be discriminated because of their origin. It is very difficult to ensure that the choice will be based on quantifiable elements only, as some qualitative evaluation inevitably creeps into the process. How can one put in precise numbers the cost of educating officials of a ministry in a new software system that might look more promising than the one currently in use, but which requires some time for training? On the other hand, it is expected that procuring entities have better information regarding the commercial viability of domestic rather than foreign forms. This is simply meant to state that the quest for “optimal” procurement is far from simple. The GPA aims to address the most obvious obstacles to this objective. Transparency can play a key role here, of course, but for the purposes of this discussion, we are interested more in procuring information associated with search costs rather than being transparent in a passive manner. For the rest, the hope of the framers must have been that the spirit of competition and anticorruption advocacy that permeates the GPA will influence the attitude of those entrusted with the day-to-day implementation of the agreement. 10.6.1
Common Elements to All Methods
Recall that a procuring entity must observe all the obligations assumed (nondiscrimination, offsets, etc.) that we have discussed already, regardless of the procurement method chosen.
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10.6.1.1 Conditions for Participation In principle, anyone can submit an offer to a procuring entity and participate in a procurement effort. Indeed, Article I of GPA defines “supplier” in the widest possible terms as “a person or group of persons that provides or could provide goods or services.” There is a trade-off, nevertheless, between increased participation and efficient administration of a procedure, since “suppliers” could submit highly speculative offers. Procuring entities might be losing precious time rejecting inappropriate bids, and, as we will see later in this chapter, time does matter in the GPA context since statutory deadlines can be quite demanding. A procuring entity can for this reason establish conditions for participation. On the other hand, discretion when establishing conditions can be abused. To avoid this, the GPA recognizes the right to establish conditions for participation but subjects it to the satisfaction of specific obligations that must be met. First, when establishing conditions for participation, a procuring entity must limit itself to whatever is necessary to ensure that a supplier has the legal and financial capacity, as well as the commercial and technical ability, to undertake the procurement for which it bids (Article VIII.1 of GPA). A procuring entity will, based exclusively on these criteria, evaluate the capacity of a supplier to participate (Article VIII.3 of GPA). Although it may require demonstration of prior relevant experience, it cannot impose a winning record in prior procurements organized by a party to the GPA as a condition for participation (Article VIII.2 of GPA). A procuring entity can always exclude a supplier for one of the reasons mentioned in Article VIII.4 of GPA (i.e., bankruptcy, false declarations, deficiencies in the performance of prior contracts, final judgments condemning the supplier for serious crimes, professional misconduct, and failure to pay taxes). 10.6.1.2 Supplier Registration System In order to help them with the qualification of potential suppliers, procuring entities can keep a “supplier registration system.” The purpose of this system is to have a list of qualified suppliers, information about which will be obtained upon filing request to this effect to them (Article IX.1 of GPA). Procuring entities should avoid using the system, though, as a means of creating unnecessary obstacles to trade (Article IX.3 of GPA). This provision should be understood as requiring only information that is connected to the procurement, not unrelated to it. Parties may further keep a “multi-use list” of suppliers, a sort of a sui generis registry. “Multi-use list” is defined in Article I as “a list of suppliers that a procuring entity has determined satisfy the conditions for participation in that list, and that the procuring entity intends to use more than once.” So, this list comprises “repeat players” who might gain an advantage only from participating in that list. The conditions for participation in the list must, thus, be safeguarded so that abuses with respect to both admissions and rejections do not occur. In an effort to ensure that this is indeed the case, the GPA imposes a series of conditions
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both ex ante (regulating conditions for admission) and ex post (explaining decisions to accept/reject): • Ex ante: The list must be published annually and, if the publication is electronic, it must made available continuously (Article IX.7 of GPA). The notice inviting requests for registration must include conditions for participation in the list, as well as a series of formalities, such as identification of the supplier, description of the goods/services to be procured, etc. (Article IX.8 of GPA). • Ex post: Suppliers that have not been included in the list and still wish to participate in a procurement can submit a request to this effect. The procuring entity cannot reject similar requests simply because the requesting supplier is not on the list, unless, due to the complexity of the procurement and the lack of administrative capacity to process the request in timely manner, it cannot do so (Article IX.11 of GPA). Suppliers whose requests to participate in the list have been rejected, or that have been evicted from the list, can ask for the reasons behind the decision. In this case, the procuring entity must explain promptly why this has been the case (Article IX.15 of GPA). 10.6.1.3 Deadlines Article XI includes a series of deadlines that must be respected, which are functions of the method of procurement that has been privileged (e.g., selective, open, or limited tendering, or a method that does not appear in the GPA), of the type of the contract privileged (e.g., simple one-time, or recurring), and of course, the urgency of the situation and the wider needs of the procuring entity. The GPA aims to strike a balance, safeguarding both the interests of the procuring entity and the interests of suppliers. To this effect, all deadlines imposed by a procuring entity and imposed on suppliers must be a function of three considerations: first, the complexity of procurement; second, the extent of subcontracting anticipated; and finally, the time that is necessary for transmitting tenders, provided that electronic means have not been used, of course (Article XI.1 of GPA). 10.6.1.4 Notice of Intended Procurement The process starts with the “notice of intended procurement” issued by a procuring entity (Article VII of GPA). It is simply impossible to overstate the importance of this document, which provides the benchmark for judging both the consistency of the process with the GPA and the target that suppliers must strive to meet. It is through this document that procuring entities will inform suppliers about the parameters of the imminent procurement. The notice must reflect all elements referred to in Article VII.2 of GPA; that is: • The nature and quantity of the procurement, as well as an estimate of timing • Whether the procedure is open or selective, or whether it will involve negotiation • The date for starting delivery • Address and deadline for submission
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• Address of the entity awarding the contract • Economic and technical requirements • The amount and terms of payment • Whether offers concern purchase, lease, or other elements A summary of the notice of initiation must be published in one of the official languages of the WTO, indicating the subject matter of procurement, the final date for submission of tenders, and the address where documents relating to the procurement can be requested (Article VII.3 of GPA). The procuring entity will make available to parties “tender documentation” (Article X.7 of GPA)—that is, all information necessary to the suppliers in order to prepare their proposals. This includes information about technical specifications (if applicable), as well as the criteria under which the contract will be awarded. 10.6.2
Umbrella Categories Included in the GPA
The GPA mentions three methods that parties to the GPA can have recourse to when organizing procurement (namely, open, selective, and limited tendering). The GPA also mentions “negotiation” and “electronic auctions,” but these are not independent methods for procuring goods, as open, selective, and limited tendering are, but rather a variant that can be used in tandem with one of the three aforementioned methods. Negotiations between the procuring entity and suppliers can be conducted either because ex ante, in the notice of intended procurement, the procuring entity has expressed its desire to do so; or ex post, following evaluation, no supplier meets the terms (Article XII.1 of GPA). When recourse to negotiations is made, the criteria for eliminating suppliers must be consonant with those reflected in the notice of intended procurement (Article XII.2 of GPA). “Electronic auction” is defined in Article I of GPA as follows: an iterative process that involves the use of electronic means for the presentation by suppliers of either new prices, or new values for quantifiable non-price elements of the tender related to the evaluation criteria, or both, resulting in a ranking or re-ranking of tenders.
When a procuring entity wants to use this process, it must respect the conditions included in Article XIV of GPA; namely, provide suppliers with the automatic evaluation method (including the formula used to this effect) used for the ranking, the results, and any other relevant information. 10.6.2.1 Open Tendering “Open tendering” is defined in Article I of GPA. It is the mode (type) of procurement whereby any interested party may submit a bid. Statistically, it is the least used method since it is quite costly for procuring entities to process dozens of bids, and probably inefficient as well since many “hopeless” bidders might be eager to participate, thus increasing
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the cost of the process. It is, on the other hand, the least “suspect” mode since there is no preselection of suppliers by the procuring entity, and therefore no reason to believe that the process has been manipulated at this stage. 10.6.2.2 Selective Tendering “Selective tendering” is defined in Article I of GPA as “a procurement method whereby only qualified suppliers are invited by the procuring entity to submit a tender.” The term “qualified supplier” is also defined in the same provision as “a supplier that a procuring entity recognizes as having satisfied the conditions for participation.” The conditions for participation are set by the procuring entity, of course. To ensure that selection is done in a fair manner, the GPA includes a series of safeguards, some of which have already been discussed in this chapter. The “supplier registration system” is the place where all “qualified suppliers” appear, as we saw earlier. When recourse to selective tendering is made, all qualified suppliers have, in principle, the right to participate, unless the procuring entity has stated in the notice of intended procurement that it will limit the number of participants and the criteria for doing so (Article IX.5 of GPA). 10.6.2.3 Limited Tendering “Limited tendering” is defined in Article I of GPA as follows: “a procurement method whereby the procuring entity contacts a supplier or suppliers of its choice.” When opting for limited tendering, a procuring entity can bypass the obligations for transparency regarding the notice of intended procurement, the obligation to select from the supplier registration system, the obligations regarding the issuance of technical specifications, the statutory deadlines that must be respected (all of which were discussed earlier), and the obligations regarding the treatment of tenders and the award of contracts (which will be discussed later in this chapter). The potential for abuse here is, of course, substantial, and this is why the GPA has narrowed down the potential application of this method of procurement to a very limited set of circumstances. Limited tendering can occur only provided that the requirements of tender documentation have not been “substantially modified’56 when one of the following circumstances has occurred: • Either no suppliers satisfy the conditions for participation, no tenders have been submitted at all, the submitted tenders do not conform to the requirements, or submitted tenders are “collusive” in the sense that there is reason to believe that suppliers have not independently submitted their bids and the procuring entity might be called to pay extra-competitive prices.57 • When because of reasons that are inherent in the procured goods or service, only a particular supplier can qualify for the procurement and there is no reasonable alternative [Article XIII.1(b) of GPA]. This can be the case because the requirement is for a work of art, protection of patents, or other exclusive rights, or because competition is absent for technical reasons.
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• Limited tendering is also possible in the case of “additional deliveries.” This can be the case when the original supplier has to deliver additional goods and services, and it is uneconomical or impossible for technical reasons to change suppliers (Article XIII.1(c) of GPA). • Because of extreme urgency brought by “unforeseeable events,’58 the goods cannot be obtained either through open or selective tendering [Article XIII.1(d) of GPA]. • Limited tendering is also permissible when goods are purchased in a commodity market [Article XIII.1(e) of GPA]. • A prototype or “original development” is purchased. None of these purchases are on a commercial scale since the whole idea, when purchasing “original development” of a prototype, is to ensure that there is commercial viability in the production of the good or service [Article XIII.1(f) of GPA]. One cannot exclude, of course, the possibility that the operator producing the prototype/original development will participate in the eventual procurement and might have an advantage because of its participation in the limited tendering. • Limited tendering is also possible when purchases are made in “exceptionally advantageous conditions,” such as bankruptcy or liquidation of economic operators [Article XIII.1(g) of GPA]. The presumption here is that price is the predominant criterion for purchases, and because of the context, the price is so low that no alternative supplier can match it. • The contract is awarded to the winner of a “design contest,” provided that transparency requirements have been observed and an independent jury has selected the winner [Article XIII.1(h) of GPA]. 10.6.3 Variations Not Included in the GPA We stated earlier in this chapter that the list of methods included in the GPA is indicative. Practice has shown the use of a number of methods besides the three methods reflected in the GPA. In what follows, we discuss briefly methods that have been used with increasing frequency. 10.6.3.1 Competitive Procedures with Negotiation and/or Competitive Dialogue Both EU and US law provide for “competitive procedures,” where a limited number of suppliers participate. The EU regime is explained in Articles 29, 30, and 65 of the relevant law.59 In short, the EU procuring authority will publish a notice of intended procurement, so transparency ex ante will be served. It will, then, select three producers based on preestablished criteria that have been included in the notice (Article 65.2). The three selected producers will enter a negotiation phase with the EU procuring entity, and the latter will select the winner from the short list of three. Proponents of the regime will argue that there
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is no strain on nondiscrimination, since the three participating entities will be selected on the basis of “objective” criteria that apply on a nondiscriminatory basis. The EU directive does explicitly state in the aforementioned provisions that equality of treatment will be safeguarded. It seems to be, prima facie at least, a riskier method,60 in that (at least in principle) the criteria could be drafted in such a manner so as to favor particular suppliers, or it could be quite open-ended and, thus, allow substantial discretion in the procuring entity.61 Nevertheless, the same risk applies to open tendering as well, where technical specifications can similarly be drawn up in a way that narrows down the choice to only the preferred supplier. If the procuring entities abide by their obligations of nondiscrimination and have adopted fair procedures to channel their practices through, then the gains from this method of procuring can be substantial. There is now empirical evidence that it is likelier that efficient producers will participate when this method is privileged than when one of the three methods included in the GPA is used without variation. To this effect, there is evidence that competitive negotiations have led, at least in the EU, to more cross-border procurement (e.g., contracts will be awarded to operators that are not established in the sovereignty of the procuring entity), than do the three GPA methods.62 Its use has been increasing in both sides of the Atlantic. In the US, Part 15 of the Federal Acquisition Regulation (FAR) provides the possibility of conducting “competitive negotiations.” Yukins (2015) reported that when procuring “complex goods,” such as information technology, or weapons systems, US procuring entities will routinely opt for “competitive negotiations” instead of “sealed bidding.” 10.6.3.2 Restrictive Procedures The EU follows this procedure, which reproduces elements of the competitive negotiations/ competitive dialogue, but differs in some respects. Following the call for expression of interest, a limited number of economic operators will be invited to participate in the second phase of the process. Whereas the number is a minimum of three when recourse to competitive negotiations/competitive dialogue is made, the number is five when recourse to restrictive procedures is privileged. Furthermore, when recourse to restrictive procedures is made, the public authority organizing the procurement will not enter into negotiations at all with any of the invited participants. The opposite is the case when recourse to competitive negotiations/competitive dialogue is privileged. Differences are explained by the nature of the contract at stake. Recourse to competitive negotiations/competitive dialogue is preferred when complications arise, either because of the technological issues involved, or because of economic/ legal difficulties that are anticipated. 10.6.3.3 BOT or BOOT Build-Operate-Transfer (BOT) or Build-Own-Operate-Transfer (BOOT) is not a procurement method, but another variation that usually applies when, for example, a bridge or a
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highway is being procured. The winner of a bid is entitled to operate the project for some time and therefore recover expenses for constructing the project. Those using the project could be requested to pay a fixed amount of money for using it. A percentage of money received could be diverted for a specified period to the constructor. Parties to the GPA can, of course, include in their list of concessions an indication whether and where they will be using BOT or BOOT when engaging in procuring activities. Therefore, for example, a company bidding for a toll ring system (as in the case of Trondheim, discussed later in the chapter) could be entitled to operate the system for a limited amount of time, at the end of which property will return to the procuring entity/ government. 10.6.4
Awarding the Contract
The GPA, for good reason, allows procuring entities substantial discretion when it comes to awarding the contract. It must award it to the bidder offering the lowest price only when price is the sole criterion for awarding the contract [Article XV.5(b) of GPA].63 Even then, though, a procuring entity can legitimately refuse to award the contract if an award does not lie in the public interest or if it has deemed that the supplier is not capable of fulfilling the terms of the contract (Article XV.5 of GPA). Price, nonetheless, might not be the sole criterion for awarding the contract. Indeed, it often is not. When price is not the sole criterion, then procuring entities must award the tender to the supplier that has submitted “the most advantageous tender” [Article XV.5(a) of GPA]. The term “most advantageous tender,” of course, leaves ample discretion to the procuring entity to choose the winner. So what are the institutional safeguards that discretion will not be abused? Well, to an extent, ex ante transparency (the information included in the notice of intended procurement) reduces the potential for abuse. Strikingly, though, there is no obligation imposed on procuring entities to include the rationale for the award of the contract in their decision.64 Article XVI.2 of GPA obliges procuring entities to publish, within 72 days from the date the award was granted, information regarding the identity of the successful supplier and the method used and the goods and services procured, but not the rationale for picking the winner. Article XVI.1 of GPA explains that only upon request, will the procuring entity provide unsuccessful bidders with the rationale for its decision. Of course, information revealed upon request can, if deemed unsatisfactory, provide input to a dispute launched under the WTO rules, as we will see later in this chapter. 10.7
Transparency
Transparency emerges as a key provision in the GPA. The whole text is full of transparencyrelated obligations. This is not paradoxical. Absent transparency, even discovery of ille-
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galities committed might come too late. A substantial amount of procurement is about one-off transactions, and, unless there is transparency about the intended procurement, affected parties might find out what happened at a time when it will be considered probably disproportional to go back and undo it all. Indeed, the Trondheim litigation, which provided the spark to enact the “challenge procedures” that we discuss later in this chapter, was all about lack of transparency with respect to the notice of intended procurement. In this case, Norway had illegally procured the construction of a toll ring system from a domestic company, but by the time litigation was initiated, the toll ring system had already been in place. Litigation was slow, because Norway had not announced the intended procurement. The question in this and similar cases is: What should the appropriate remedy be? And then, there is the question of identifying “affected parties,” to which we will come back later in this chapter. Absent transparency, how can anyone establish with certainty the counterfactual, and decide which supplier would have won the bid had transparency been observed? Transparency, in the government procurement context, can be a perfect substitute for dispute adjudication. Realizing its importance, WTO members have adopted initiatives to increase transparency in the GPA context. A Working Group on Transparency in Government Procurement was established in 1996 and produced some interesting work regarding transparency in this context (for example, the scope of procurement and the various procurement methods).65 This group has been inactive following the decision taken in Cancun (2003). Negotiations on a new GPA nonetheless, continued, and the Revised GPA is evidence of the resolve of parties to the GPA to increase transparency. The explicit link to the fight against corruption is very much in line with this overarching objective. No provision captures this point better than Article IV.4 of GPA: A procuring entity shall conduct covered procurement in a transparent and impartial manner that: (a) is consistent with this Agreement, using methods such as open tendering, selective tendering and limited tendering; (b) avoid conflicts of interest; and (c) prevents corrupt practices.
The GPA framers included mechanisms that increase transparency both ex ante and ex post. These concepts are explained next. 10.7.1
Ex Ante
There are two types of obligations regarding transparency ex ante, of generic and specific importance. The former is captured in Article VI of GPA, which requests that parties to the GPA provide information about the procurement methods they use and the relevant laws and practice. This is particularly important since, as stated earlier, parties to the GPA might be using procurement methods other than the three methods that have been explicitly
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included in the GPA. Although any method used must respect the various obligations embedded in the GPA, knowledge about the methods used is necessary in order to understand whether the GPA obligations have been observed. Parties to the GPA must also observe transparency with respect to the specific procurement that they perform each time. It is in this context that the obligations regarding the content of the notice of intended procurement, the tender documentation, the technical specifications, the supplier registration system, and other elements that we have discussed already should be appreciated. 10.7.2
Ex Post
We saw that procuring entities must publish their awards and, upon request, explain the rationale for their decisions. Parties to the GPA incur three important additional obligations in this context. Upon request, they must provide information that the procurement has been conducted fairly and impartially (Article XVII.1 of GPA). They must keep the record of specific procurements for three years after their award (Article XVI.3 of GPA), and they must notify the committee of statistics regarding awarded contracts in any given year. To this effect, they cannot delay notifications by more than two years; that is, in 2015, they will have to notify contracts awarded in 2013 (Article XVI.4 of GPA).66 Armed with similar information, suppliers can better understand what procuring entities are after and revise their strategy, so they can succeed the next time they bid. 10.7.3
Transparency, Every Step of the Way
The GPA regime on transparency is quite comprehensive (on paper, at least), since to a large extent, it rests on the good will of the parties to the GPA to notify. A procurement can sometimes be pure “private information,” as efforts to detect what is going on for smaller projects might be (relatively speaking) too costly. There are no reliable statistics regarding the record of notifications so far, since all we know is what has been notified— we do not know much about procurements that have passed the GPA notification procedures by stealth. It is not difficult to imagine why governments might want to behave in a nontransparent manner in the procurement context.67 It is in this light that we should revisit the rationale for combining transparency ex ante with transparency ex post. The purpose of these obligations is to ensure that procuring entities will not abuse their power. As noted, though, for good reason, a substantial amount of discretion is left with the procuring entities even when they have complied with the demanding obligations regarding transparency ex ante. Unless some obligations ex post have been included, it will be impossible to evaluate how discretion has been exercised. There is no comprehensive study regarding the transparency record in the GPA. In fact, it is premature to establish one at this stage since the Revised GPA has only entered into
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force in 2014. Past experience would suggest that there is a general “uneasiness” across the parties to the GPA in this regard; otherwise, why spend so much time negotiating the new disciplines? The importance of transparency cannot be overstated. Absent knowledge regarding procurements, the whole system crumbles, since panels might find it disproportional to request from a party to the GPA to undo, say, a highway built by a local supplier in total disregard of the GPA provisions. Enforcement of the GPA is, thus, intimately linked to transparency. As we discuss in more detail in chapter 12 of this volume, the incentives to be transparent might be occasionally missing. After all, past and recent experience that we have referred to earlier in this discussion suggests that entrusting procurement to national champions is rewarding for governments, especially during times of crisis. There is, thus, a role for the “common agent” (i.e., the WTO) to step in and fill in the missing information. There is room even in the Revised GPA to move into this direction and assign to the WTO Secretariat a more active role in putting together information regarding procurement across the GPA signatories. There are, of course, some obvious limits to the transparency obligation, and one of them is the treatment of confidential information. It is often the case in practice that confidential business information has been provided to the procuring entity during the process, and procuring entities must respect that and protect information that qualifies as confidential (Article XVII.2, 3 of GPA). 10.8
Special and Differential Treatment
A major feature of the Revised GPA has been the impetus to increase participation by developing countries. Parties to the GPA have been disappointed that originally (that is, before the accession of Armenia, the Chinese Taipei, and Montenegro), no developing country had acceded to the GPA. Their disappointment was even more so since, in their view, developing countries could win a lot from their participation, not only in terms of exporting to foreign markets, but also in terms of streamlining government regulation at home. The feeling in developing countries is that there is not much they can win commercially by participating in the procurement market, which is typically dominated by few suppliers. This feeling is not totally baseless.68 On the other hand, developing countries might believe that there is not enough in the GPA that will allow them to thwart cartel-like policies by dominant suppliers bidding for contracts in their own market. Many developing countries still lack antitrust laws, and many that do are novices in this area. Mattoo (1997), borrowing from theoretical work in this area, identified the absence of price preferences as one of the reasons why developing countries might legitimately want to abstain from joining the GPA: absent a scheme to this effect, bidding companies might have an incentive to collude in the absence of meaningful competition from local companies.
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A Carrot to Increase Participation
Under the Revised GPA, parties to the GPA undertook a serious effort to increase participation by developing countries. Article V.1 of GPA makes it clear that “special and differential treatment” will be accorded to developing countries and least developed countries (LDCs) negotiating not only accession to, but also implementation of, the GPA. Particular attention is paid to new WTO members, as the possibility to accede to the GPA is discussed every time accession to the WTO is being considered. A series of developing countries are currently in formal negotiations to join the GPA: Albania, China, Georgia, Jordan, the Kyrgyz Republic, Moldova, Oman, and Panama. A further five WTO members have provisions in their respective Protocols of Accession to the WTO regarding accession to the GPA: Croatia,69 the Former Yugoslav Republic of Macedonia, Mongolia, and Saudi Arabia.70 A total of 20 WTO members have observer status on the GPA Committee: Argentina, Australia, Bahrain, Cameroon, Chile, China, Colombia, Croatia, Georgia, Jordan, the Kyrgyz Republic, Moldova, Mongolia, New Zealand, Oman, Panama, Saudi Arabia, Sri Lanka, and Turkey. Observer status is sometimes the antechamber before participation, and yet this has not been the case so far in the context of the GPA. Four intergovernmental organizations also have observer status: the International Monetary Fund (IMF), International Trade Centre (ITC), OECD, and UNCTAD. The reasons why developing countries have been reluctant to join the GPA are not necessarily the same across WTO members. Wang (2011), for example, went so far as to suggest lack of political momentum in China in favor of accession to the WTO in light of the difficulty in measuring the pros and the cons, the commitment to join in the Chinese Protocol of Accession notwithstanding. Chakravarthy and Dawar (2011) argued that political economy explains India’s reluctance. On the other hand, countries like Albania that have stayed away from the GPA discipline but aspire to become EU members will have to accept the “community acquis”—that is, the body of law that all countries requesting accession to the EU must incorporate into their domestic law, and abide by the EU (and eventually the WTO) procurement disciplines. And so the process goes on, and each time, the rationale changes but the outcome is the same: developing countries are, in general, reluctant to join.71 This does not mean that they do not have sizeable procurement markets of their own or that they run them in total disrespect of the principles embedded in the GPA. Indeed, as we noted earlier, some of them have de facto endorsed nondiscrimination and the fight against corruption, but still refuse to submit themselves to the legal disciplines of the GPA. There are some sizeable markets out there that remain undisciplined by the GPA at this time, the BRIC countries being the most prominent. From the perspective of world trade, much is to be gained from their accession to the GPA. But the BRICS, like many others, will need to be persuaded about the gains they can make from participation. This has yet
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to happen, although the Revised GPA has taken some concrete steps in order to encourage participation of developing countries, as we discuss next. 10.8.2
Substantive Law
Article V is the central obligation regarding the status of developing countries, but not the only one. It comprises a series of heterogeneous obligations aiming to ease accession to and implementation of the GPA by developing countries. Upon accession to the GPA, parties will provide developing countries with the most favorable coverage (Article V.2 of GPA). This does not mean much per se, but it does provide developing countries with a legal basis to request openings in areas of interest to them. More to the point, Article V.3 of GPA allows developing countries to adopt a series of “transitional measures” aiming to facilitate their lives within the GPA: price preferences, offsets, phased in addition of specific entities, and higher thresholds. None of these measures is available to developed countries. Transitional measures have been also included in Article V.4 of GPA, the accent this time being in delaying the implementation of obligations that appear in the body of the GPA other than the obligation not to discriminate. And finally, the committee has the power to extend even more the agreed-upon transitional periods after the accession of a developing country to the GPA (Article V.6 of GPA). The accent, thus, has been placed on introducing flexibility in favor of developing countries through some longer transitional periods, as well as some mechanisms (like price preferences) that could improve the situation for developing countries within the GPA. 10.9
Enforcing the GPA
Article XVIII.1 of GPA reflects the obligation to establish a forum to entertain disputes between private parties and the procuring entities concerned. This might seem an oddity (prima facie at least), since the WTO is typically a government-to-government contract where private parties have no standing. Typically, private parties must solicit the help of their government through instruments referred to as “diplomatic protection.” Therefore, it will be governments that will appear before the WTO to represent the interests of their citizens. So what is so different about government procurement that requires an acknowledgment of a right to sue for private parties? The rationale behind this provision has to do with the general feeling of uneasiness that surrounded the remedy recommended in the Trondheim dispute (Norway–Trondheim Roll Ring) in the GATT years, and the resolve to ensure that effective remedies against violations would be provided for in the WTO GPA. An adequate summary of the facts of the case can be found in §4.1 of the report:
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The basic facts of the case before the Panel are that in March 1991 the Norwegian Public Roads Administration awarded a contract relating to electronic toll collection equipment for a toll system around the city of Trondheim to a Norwegian company, Micro Design, after single tendering the procurement with that company. The central point of difference between the two parties to the dispute was whether, in single tendering the procurement, Norway had met the requirements of Article V:16 (e) of the Agreement. Norway maintained that the single tendering of the contract was justifiable under these provisions, since the contract was for research and development and the part of the contract which it considered was covered by the Agreement was for the procurement of prototypes which had been developed in the course of and for that research and development contract. Furthermore, Norway contended that it had complied with the requirements in the headnote to Article V:16. The United States maintained that Article V:16(e) was not applicable since, in its view, the objective of the contract was not research and development but the procurement of toll collection equipment. Moreover, the United States disputed that research and/or development had been required to produce these products, that the products could justifiably be characterised as prototypes and that Norway had met the requirements in the headnote to Article V:16.
The US had complained that Norway, by not publishing the tender document, had violated its obligations under the GPA, and hence, for this reason alone, had wrongfully awarded the contract to the Norwegian company. 10.9.1
Trondheim: Who Lost What?
It was a rather obvious violation of the GPA, and the panel had no problem establishing that Norway had indeed violated its obligations under the GPA (§§4.14ff.). But then came the question of what the consequence for Norway should be. In what way should it be requested to bring its measures into compliance? The US had requested that it be allowed to negotiate compensation with Norway based on lost opportunities. A similar remedy did not exist as such in the agreement. One thing was clear, though: it would be next to impossible to calculate precise compensation since, in the absence of transparency regarding the tender, any company by any GPA signatory could have won the tender in principle.72 The panel, against this background, decided to do nothing else except request that Norway promise that it would never commit a similar sin and left it there73 (§§4.26ff): In the light of the above, the Panel did not consider that it would be appropriate for it to recommend that Norway negotiate a mutually satisfactory solution with the United States that took into account the lost opportunities of United States companies in the procurement or that, in the event that such a negotiation did not yield a mutually satisfactory result, the Committee be prepared to authorise the United States to withdraw benefits under the Agreement from Norway with respect to opportunities to bid of equal value to the Trondheim contract. The Panel had recognised, however, that nothing prevented the United States from pursuing these matters further in the Committee or from seeking to negotiate with Norway a mutually satisfactory solution provided that it was consistent with the provisions of this and other GATT agreements. ... On the basis of the findings set out above, the Panel concluded that Norway had not complied with its obligations under the Agreement on Government Procurement in its conduct of the procurement of toll collection equipment for the city of Trondheim in that the single tendering of this
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procurement could not be justified under Article V:16(e) or under other provisions of the Agreement. The Panel recommends that the Committee request Norway to take the measures necessary to ensure that the entities listed in the Norwegian Annex to the Agreement conduct government procurement in accordance with the above findings. (italics in the original)
Now this remedy was not much consolation for the US, but what else could be done? Recall that, in principle at least, a number of companies originating in any GPA signatory could have won the contract. As a result, it would have been almost impossible to identify the eventual winner (had the contract been awarded in a GPA-consistent manner). Consequently, it would have been almost impossible to quantify the extent of damages (opportunity cost) suffered by each potential participant in the tendering procedure. Mavroidis (1993) advanced the argument that in similar cases, a fine (in some kind of lump-sum payment) should be paid by the author of the illegal act: depending on the sums involved, a system of fines could disincentivize potential violators from committing similar illegalities. This position was predicated on the idea that since compensation for losses would be tough to calculate in similar cases, the aim of sanctions should be to minimize the risk of similar behavior in the future as well. Similar schemes, however, do not fly in the “pragmatic” WTO world, which has de facto settled for prospective remedies when a violation has been committed.74 10.9.2
The Challenge Procedures
Against this background, and probably out of fear that a system of fines might find sympathetic voices in agreements beyond the GPA, it is not surprising that GPA signatories settled for a different solution.75 The GPA framers attempted to reduce the potential for similar illegalities by adopting the GPA “challenge procedures” (Article XVIII.1 of GPA). They are meant to provide the following: timely, effective, transparent and non-discriminatory administrative or judicial review procedure through which a supplier may challenge (a) a breach of the Agreement; or (b) where the supplier does not have a right to challenge directly a breach of the Agreement under the domestic law of a Party, a failure to comply with a Party’s measures implementing this Agreement.
Private parties would have, through these procedures, direct access to the national fora established to adjudicate GPA-related disputes.76 Private parties must exercise their rights within relatively short deadlines [no less than 10 days from the time when the basis of the complaint is known or reasonably should be known, according to Article XVIII.3 of GPA]. Complaints will be launched before “an impartial administrative or judicial authority”
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(Article XVIII.4 of GPA). If it is not “an impartial administrative or judicial authority” that is hearing the complaint, then an appeal procedure will be provided as well (Article XVIII.5 of GPA). Article XVIII.7 GPA regulates the remedies that should be recommended if a challenge procedure has been successfully invoked. Challenge procedures shall provide for: (a) rapid interim measures to preserve the supplier’s opportunity to participate in the procurement. Such interim measures may result in suspension of the procurement process. The Procedures may provide that overriding adverse consequences for the interests concerned, including the public interest, may be taken into account when deciding whether such measures should be applied. Just cause for not acting shall be provided in writing; and (b) where a review body has determined that there has been a breach or a failure as referred to in paragraph 1, corrective action or compensation for the loss or damages suffered, which may be limited to either the costs for the preparation of the tender or the costs relating to the challenge, or both Although the GPA does not set a limit for the completion of the procedures, it does request (Article XVIII.1 of GPA) that “the challenge procedure shall normally be completed in a timely fashion.”77 So, the idea is to act fast and suspend the process before the damage is done rather than move into the hazy sphere of calculating damages or introducing fines. The GPA challenge procedures leave substantial discretion to signatories to flesh out the various steps involved.78 In this respect, WTO members might find it useful to be inspired by the UNCITRAL Model Law, which discusses in substantial detail various elements mentioned briefly in Article XVIII of GPA, such as the remedy of suspension and review of the decision.79 Think of the Trondheim incident, for example. Had challenge procedures been enacted already during the Tokyo round, and assuming information about the construction of the toll ring system, the US company could have acted much before the damage was done and request a suspension of the procurement process.80 Challenge procedures are a major innovation and were regarded by some as an example of adjudication in other areas of WTO law as well. Hoekman and Mavroidis (2000) advanced a series of arguments explaining why, through similar procedures, WTO becomes a policy-relevant instrument, since domestic authorities will have to take it into account when deciding similar issues. It is a “direct effect” in the EU law sense of the term, since private parties will be invoking violations of WTO law before domestic (national) courts. As such, there is the risk that WTO law might be interpreted in different ways across different jurisdictions, and to this effect, there might be a need to “harmonize” diverging interpretations. So far, this remains a theoretical risk, as there is no evidence of diverging practice.81
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First Review by the Procuring Entity: What For?
The Revised GPA contains an innovation. In Article XVIII.2 of GPA, it provides a conciliation procedure between private parties affected by a procurement decision and the corresponding procuring entity. At this stage, it is almost impossible to decide on its usefulness, as it has been in place less than a year at this time. One could still cast legitimate doubt on its marginal usefulness since it does not seem to add much to the challenged procedures. 10.9.4
Dispute Adjudication
Article XX of GPA makes it clear that, in principle, the Dispute Settlement Understanding (DSU) is applicable for disputes arising in the GPA context as well. Interestingly, Article XX.3 of GPA does not allow cross-retaliation. A GPA signatory suspending concessions following nonimplementation of rulings in the context of GATT, GATS, or Trade-Related Aspects of Intellectual Property Rights (TRIPs) cannot retaliate by withdrawing concessions under the GPA; by the same token, a WTO member winning a GPA dispute cannot withdraw benefits under GATT, GATS, or TRIPs against the recalcitrant state. Disputes under the GPA are, thus, self-contained. Only a handful of cases have found their way before the WTO dispute settlement system. In Japan–Procurement of a Navigation Satellite, the EU had requested consultations, arguing that tender specifications by a Japanese entity contravened various GPA rules. The Japanese Ministry of Transportation, an entity covered by the GPA, wanted to purchase a satellite, and the technical specifications issued to this effect explicitly referred to a US system used for air traffic management. During consultations, an arrangement was reached between the complainant and the defendant whereby the latter agreed to establish a cooperative arrangement between the ministry and an EU agency, guaranteeing the interoperability of the European and the US systems.82 In US–Massachusetts State Law Prohibiting Contracts with Firms Doing Business with or in Myanmar, the EU and Japan challenged the consistency of a US state law prohibiting covered entities from awarding contracts to companies originating in states doing business with Myanmar. This measure had been designed to ban companies doing business with a regime, which, in the eyes of the Massachusetts government, was in violation of the most fundamental human rights. Following unsuccessful consultations, a panel was established at the request of the complainants. Shortly thereafter, a US court set aside the law. The panel was suspended, and since no party to the dispute requested, within a year, that it be reconvened, its authority under Article 12.12 of DSU lapsed.83 In Korea–Procurement, the US claimed that Korea had not respected its obligations under the GPA when constructing the Inchon International Airport. Following unsuccessful consultations, the dispute was submitted to a panel, which ruled that the Korean procuring
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entity was not covered by the GPA disciplines. No appeal against the panel report was launched. It is difficult to ascertain why there have been so very few disputes, and even more difficult to quantify the impact that challenge procedures have had. Arguably, the looming threat of stopping the process early on could provide the procuring entities with enough incentive to behave in a manner that conformed to the GPA. Assuming that transparency obligations have been respected (so that there are no information asymmetries), then the threat could be quite credible.84 An official WTO document states: The importance of the GPA was seen clearly in the framing of the American Recovery and Reinvestment Act of 2009 (i.e. the U.S. “stimulus legislation”). The U.S. legislation (Pub. Law 111-5, enacted by Congress and signed into law in February of 2009) introduced two new “Buy American” requirements, one relating to the procurement of iron, steel, and manufactured goods for construction and related projects concerning public buildings and works (section 1605 of the legislation), and the other involving the procurement of specified items of clothing or equipment for the Department of Homeland Security (section 604). In both cases, the stimulus legislation addresses the potential conflict with the WTO Agreement on Government Procurement (GPA) and other U.S. international trade commitments by including a further provision stipulating that: “This section shall be applied in a manner consistent with United States obligations under international agreements” (section 604(k) and section 1605(d) of the legislation). Subsequently, a notification by the United States to the WTO Committee on Government Procurement (GPA/98 of 24 April 2009) provided details of interim implementing measures relating to the two requirements. These measures have been an important topic of discussion in the Committee during the year. (italics in the original)85
10.10
The Work Programmes
One of the innovations of the Revised GPA has been the adoption of five “Work Programmes” aiming to facilitate the implementation of the GPA (Article XXII.6–10). The parties to the GPA have agreed to review five issues, which are quite prevalent in procurement practice, and eventually elaborate specific rules aiming to address concerns in this realm: the treatment of SMEs, the collection and dissemination of statistical data, the treatment of sustainable procurement, exclusions and restrictions in the Annexes by parties of the GPA, and safety standards.86 This is, of course, an ambitious project, and one should not expect results any time soon. Take the case of SMEs, for example. There is widespread use of preference in favor of SMEs, sometimes for reasons of so-called social justice, and quite often because of pure protectionist concerns. A key issue here will be the definition of SMEs, since definitions are functions of the size of the market, the market share of participants, and all other sorts of legal, economic, and cultural factors. Unless an agreement on this issue has been reached, though, it is difficult to imagine how parties to the GPA can go further and discipline action in favor of SMEs. And, of course, one can legitimately question the wisdom of adding SMEs into the Work Programme. Does anyone help SMEs
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by guaranteeing them a public market, which, as experience shows, is always short-lived in light of the mounting costs? The hope is, though, that through the discussions in the Work Programme, trading nations will become fully aware of the stakes in similar processes. 10.11
Institutional Issues
A GPA Committee has been established, wherein each signatory is represented (Article XXI of GPA). This body discusses all issues coming under the purview of the GPA, as well as accessions and withdrawals from the GPA, and publishes an annual report. 10.12
Concluding Remarks
The Revised GPA is a more coherent, more ambitious agreement than its two predecessors. It aims, through the liberalization of procurement markets, to promote a “competition advocacy” within the WTO and combat the natural tendencies of elected administrations and bureaucracies to favor the local suppliers, and of course wider corruption as well. How much of a success has it been so far? It is definitely premature to make a definitive judgment of an agreement that has been in force for less than a year. The framers of the GPA do face an uphill battle, though—that much is certain. We provided evidence from Messerlin (2001) regarding the EU market, we referred to the “Buy American” policies in the US, and we also noted that big markets (such as those of the BRIC countries) continue to refuse to adhere to the GPA, although they are all opening their markets on a bilateral basis. Rickard and Kono (2014), using original data, concluded that GPA and PTAs only marginally reduce governments’ propensity to “buy national.” There are important gains to be had from accession to the GPA, as discussed in this chapter. There are also gains from liberalization of the procurement market, and we have cited numerous studies that prove this point. We are in the presence of all these gains, and yet we are not realizing them. So, what are we doing wrong? What kind of improvement is needed for the GPA to realize its huge potential? Why cannot the GPA attract new parties? Some would argue that it is quite inflexible in addressing legitimate social concerns, which might be perceived as discriminatory. How can, for example, “Black Economic Empowerment” (BEE) legislation, passed by South Africa in 2001 to help racial groups that had consistently been disadvantaged during the apartheid years, fit within the GPA? Absent some accommodation to this effect, it will be difficult for South Africa at this stage to even start contemplating accession. And what do about Chinese state-owned enterprises (SOEs)? Should they come under “one size fits all,” or should some flexibility in the coverage be tolerated, at least in the short run?
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Alas, responses to these questions are hard to come by. It is probably the case that the GPA touches the inner chords of governance more than any other agreement coming under the aegis of the WTO. At a time of crisis, even advanced democracies like the US tend to turn inward, as the proliferation of “Buy American” legislation shows. What is requested from parties is that they forget their natural instincts. Against this background, the accent should probably be even more on transparency—on understanding the rationale for particular behaviors. The GPA could profit from introducing specific trade concerns à la the Technical Barriers to Trade (TBT) and Sanitary and Phyto-sanitary Measures (SPS) agreements, and start a meaningful review of domestic practices at the WTO level.
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The Civil Aviation Agreement
11.1 The Legal Discipline and Its Rationale
11.1.1 The Legal Discipline The Agreement on Civil Aircraft (CV) imposes two types of disciplines on WTO Members with respect to products coming under its aegis: they must ensure that they eliminate all duties on products covered, and they must further ensure the respect of the disciplines included in the SCM Agreement. The CV Agreement is a plurilateral agreement and, consequently, binds only its signatories. The current agreement is the successor to the Tokyo round Agreement on Civil Aviation. 11.1.2 The Rationale for the Legal Discipline Civil aviation is a market with considerable barriers to entry where very few participate. The two types of disciplines described above are interlinked. Absent a discipline regarding subsidization, the value of tariff commitments could of course, be eviscerated. Subsidies on the other hand, have been pouring, sometimes for good- and sometimes for bad reasons, into the aviation sector, and, although their magnitude might differ across jurisdictions, the fact that they have been routinely paid is not in doubt. Subsidies paid are detrimental to the foreign producers but, as stated earlier, few of them exist anyway. Consumers rejoice because they can profit from subsidy wars: prices fall, and newer, safer, technologically advanced products come faster to the market than they would without subsidies. The preamble captures this point almost perfectly when it strikes a balance between criticism of subsidies and recognition of their beneficial effects: Seeking to eliminate adverse effects on trade in civil aircraft resulting from governmental support in civil aircraft development, production, and marketing while recognizing that such governmental support, of itself, would not be deemed a distortion of trade; Desiring that their civil aircraft activities operate on a commercially competitive basis, and recognizing that government–industry relationships differ widely among them; (italics in the original)
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Discussion
11.1.3.1 Industrial Policy and Effects on Trade We read in the preamble to the agreement: Desiring to encourage the continued technological development of the aeronautical industry on a world-wide basis; Desiring to provide fair and equal competitive opportunities for their civil aircraft activities and for their producers to participate in the expansion of the world civil aircraft market; Being mindful of the importance in the civil aircraft sector of their overall mutual economic and trade interests; Recognizing that many Signatories view the aircraft sector as a particularly important component of economic and industrial policy (italics in the original)
It is quite apparent that the Agreement acknowledges both the beneficial- as well as the harmful effects of subsidies in the aviation sector. By doing that however, the Agreement gave itself a tightrope on which it is called to walk. One could argue that subsides for aircraft production reduce the price of newer aircraft, and therefore encourage adoption of better, newer technology (more efficient engines, designs, etc.) sooner than otherwise; e.g., if no subsidies had been paid. This could of course, be simply a transitory thing, in the sense that subsidies will increase the stock of existing aircraft that can be resold and compete with newer aircraft. Therefore, this could be a one-time effect of shifting future purchases to the present. There might be just as much innovation without subsidies but, absent subsidies, aircraft prices will be higher, so fewer people could afford to fly. On the other hand, subsidies harm foreign producers of the “like” good. The question is where to draw the line in light of the above. Some of these subsidies were originally, of course exempted from prosecution until 2000. Research and development (R&D) subsidies formed an integral part of Article 8 SCM, as we saw in chapter 3. The SCM Agreement thus, did make room for some (in part) “beneficial” subsidies. We explain below that the SCM Agreement applies in tandem with the Agreement on Civil Aviation, when relevant, to matters addressed by the latter. This is of course, not the case anymore, since Article 8 SCM is by now defunct. 11.1.3.2 Duopolies There are two duopolies in the construction of civil aircrafts: Boeing and Airbus for large jets, and Embraer and Bombardier for regional jets. The frontiers between the two categories of jets are not set in stone: in antitrust analysis, one usually distinguishes the various market segments by controlling for the number of passengers that an aircraft can accommodate, as well as the number of hours that it can fly nonstop (short-, medium-, and long-haul). There is thus, an overlap between large and regional jets in the medium-haul market. Producers of both sets of airplanes have been locked into subsidies wars over the years, and have had a number of disputes between them that have been adjudicated before the WTO.1
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Three out of four producers (i.e., Canada, EU, and US), by signing the CV Agreement, agreed to eliminate duties on aircraft and to discipline subsidies in this area. The fourth, Brazil, is obligated to respect the disciplines on subsidies (since the SCM Agreement is a multilateral agreement), but not the disciplines of the CV Agreement with respect to the elimination of customs duties. The disciplines on subsidies during the GATT-era were less binding than the current disciplines. The EU and US signed an agreement in 1992 that went further than the CV Agreement. 11.1.3.3 US-EU 1992 Agreement on Civil Aviation In 1992, the US and the EU signed an agreement that imposed a “ceiling” on the amounts of subsidies that each one of them could use to advance their industrial policy goals.2 It banned production subsidies and limited development subsidies (e.g., subsidies aimed at developing new aircraft models, to 33 percent of the total cost), and also included provisions on repayment of loans. It read in relevant parts (Articles 3–7): ARTICLE 3 Production Support As of entry into force of this Agreement, Parties shall not grant direct government support other than what has already been—firmly committed for the production of large civil aircraft. This prohibition shall apply both to existing and to future programmes. ARTICLE 4 Development Support 4.1. Governments shall provide support for the development of a new large civil aircraft programme only where a critical project appraisal, based on conservative assumptions, has established that there is a reasonable expectation of recoupment, within 17 years from the date of first disbursement of such support, of all costs as defined in Article 6(2) of the Aircraft Agreement, including repayment of government supports on the terms and conditions specified below. 4.2. As of entry into force of this Agreement, direct government support committed by a party for the development of a new large civil aircraft programme or derivative shall not exceed: (a) 25 per cent of that programme’s total development cost as estimated at the time of commitment (or of actual development costs, whichever is lower); royalty payments on this tranche shall be set at the time of commitment of the development support so as to repay this support at an interest rate no less than the cost of borrowing to the government within no more than 17 years from first disbursement, plus (b) 8 per cent of that programme’s total development cost as estimated at the time of commitment (or of actual development costs, whichever is lower); royalty payments on this tranche shall be set at, the time of commitment of the development support so as to repay such support at an interest rate no less than the cost of borrowing to the government plus 1 per cent within no more than 17 years from first disbursement. These calculations shall be made on the basis of the forecast of aircraft deliveries in the critical project appraisal. 4.3. Royalty payments per aircraft shall be calculated at the time of commitment of the development support to be repaid on the following basis:
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(a) 20 per cent of aggregate payments calculated in accordance with Article 4.2. above are payable on the basis of the delivery of a number of aircraft corresponding to 40 per cent of forecast deliveries; (b) 70 per cent of aggregate payments calculated, in accordance with Article 4.2. above are payable on the basis of the delivery of a number of aircraft corresponding to 85 per cent of forecast deliveries. ARTICLE 5 Indirect Government Support 5.1. Parties shall take such action as is necessary to ensure that indirect government support neither confers unfair advantage upon manufacturers of large civil aircraft benefiting from such support nor leads to distortions in international trade in large civil aircraft. 5.2. As of entry into force of the Agreement, identifiable benefits to the development or production of any of the products covered by this Agreement, net of recoupment, derived from indirect support shall not exceed in any one year: (a) 3 per cent of the annual commercial turnover of the civil aircraft industry in the Party concerned for the products covered by this Agreement, or (b) 4 per cent of the annual commercial turnover of any one firm in the Party concerned for the products covered by this Agreement 5.3. Benefits from indirect support shall be deemed to arise when there is an identifiable reduction in costs of large civil aircraft resulting from government-funded research and development in the aeronautical area performed after the entry into force of this Agreement. Where it can be demonstrated that the results of research and development have been made available on a non-discriminatory basis to large civil aircraft manufacturers of the Parties, benefits deriving from such technologies shall be excluded from the calculation in Article 5.2. However, identifiable benefits may result when large civil aircraft manufacturers are responsible for, or have early access to, the conduct or results of such research. If a Party has reason to believe that other indirect supports provided by a government are resulting in identifiable reductions in the costs of large civil aircraft, the Parties shall consult with a view towards quantifying such reductions and including them in the calculation described above. Benefits from indirect support resulting from the technology obtained through governmentfunded research and development or through other government programmed shall normally be calculated in terms of the reduction in the cost of research and development and in the reduction in the cost of the production equipment or production process technology. ARTICLE 6 General Purpose Loans The Parties shall assume no liability for specific loans that aircraft manufacturers make or make available, through direct loans, guarantees, or otherwise, to airlines, other than through official export credit financing consistent with the Large Aircraft Sector Understanding of the OECD Understanding on Official Export Financing. ARTICLE 7 Equity Infusions Equity infusions are excluded from the scope of this Agreement. Equity infusions will not, however, be provided in such a manner as to undermine the disciplines in the Agreement.
The Agreement contained a provision (Article 12) that called for exporting its disciplines to the CV Agreement:
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The Parties shall propose jointly to other signatories of the Aircraft Agreement referred to in Article 1 that disciplines along the lines of those laid down in the present Agreement and the interpretative note given in Annex I be incorporated into the Aircraft Agreement. The Parties shall also propose that the improved dispute settlement provisions agreed in the Uruguay Round be used to resolve any dispute arising out of the implementation of the new Aircraft Agreement. The Parties shall make their utmost efforts to ensure that these or similar disciplines are incorporated into the Aircraft Agreement or adopted by key signatories at the earliest possible date, and also to expand the coverage of the disciplines provided by this Agreement to all of the products covered in the Aircraft Agreement. If multilateralisation has not been achieved in one year, the Parties shall review the question of the continued application of this bilateral Agreement.
On 6 October 2004, the US denounced the agreement, arguing that the EU had not been respecting its commitments. The development of the Airbus A-380 was the last straw, and the US took the view that the 1992 Agreement meant nothing in practice anymore. Shortly thereafter, it introduced a complaint against the EU. The EU responded soon after with its own counterclaim. These are the notorious Airbus/Boeing disputes that we discussed in chapter 3 of this volume.3 11.1.3.4 Who Is Hurting Who? Irwin and Pavcnik (2004) have examined international competition in the commercial aircraft industry (Airbus/Boeing). Their results suggest that the aircraft prices increased by about 3 percent after the 1992 US–E.U. agreement: this price hike is consistent with a 7.5 percent increase in firms’ marginal costs after the subsidy cuts. The authors went one step further and simulated the impact of the (then-future) entry of the Airbus A-380 super-jumbo aircraft on the demand for other wide-bodied aircraft (notably the Boeing 747). They found that the A-380 could reduce the market share of the 747 by up to 14 percent in the long-range wide-body market segment (depending upon the discounts offered on the A-380), but that it would reduce the market for Airbus’s existing wide-bodies by an even greater margin. Their paper shows that the Airbus subsidies were displacing more Airbuses than Boeings from the market. Now, this is of course, part of the story. The other part is that older Airbus models “subsidized” the newer generation of Airbus. The European industry “learned” by experimenting, and experimenting was possible thanks to generous subsidization by the EU Member states. By producing better Airbus models, the EU industry gained a market share at the expense of Boeing. 11.2 The Relationship with the GATT and Annex 1A Agreements 11.2.1 The Relationship with the GATT The CV Agreement is an Annex 1A Agreement, and its relationship with the GATT is addressed in the General Interpretative Note that we discussed in chapter 1, volume 1.
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11.2.2 The Relationship with the SCM Agreement Article 6.1 CV states that the SCM Agreement applies to trade in civil aircraft. The question of precedence is not resolved in the text. In fact, there is no need to do so since there is no contradiction between the two agreements. In practice, all disputes regarding trade in civil aircraft have been submitted under both the CV as well as the SCM Agreement. 11.2.3 The Relationship with the TBT Agreement Article 3 CV states that the provisions of the TBT Agreement apply to trade in civil aircraft: however, the question of precedence is not addressed in the text of this provision. One would expect that the order of analysis by Panels would be such that precedence would be given to the CV Agreement since, relatively speaking, it is the more specific one. The TBT Agreement though, is the later Agreement (since de facto the CV Agreement was not renegotiated during the Uruguay round), and it contains the most sophisticated and detailed disciplines regarding subsidies. As a result, it is probably safe to entertain legal claims under both agreements. Recent practice (reviewed in chapter 3) suggests that WTO members have argued their cases that came under the purview of both agreements exclusively under the SCM Agreement. 11.3
Membership
The following are the current members of the CV Agreement: Albania, Canada, the European Union (and the following 20 EU Member States are also signatories in their own right: Austria, Belgium, Bulgaria, Denmark, Estonia, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Romania, Spain, Sweden, and the United Kingdom), Egypt, Georgia, Japan, Macau (China), Norway, Switzerland, Chinese Taipei, and the US. Important producers like Brazil are only observers, not signatories. China, a hopeful producer, is also an observer to the agreement. 11.4
Product Coverage
11.4.1 The Original Regime The product coverage is addressed in Article 1 CV. All civil aircraft; all civil aircraft engines and their parts and components; all other parts, components, and subassemblies of civil aircraft, as well as all ground-flight simulators; and their parts and components come under the aegis of the CV Agreement whether used as original or replacement equip-
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ment in the manufacture, repair, maintenance, rebuilding, modification or conversion of civil aircraft. The term “civil aircraft” covers aircraft other than military aircraft.4 11.4.2 The Protocol Amending the CA Agreement In 2001, the signatories adopted a “Protocol Amending the Annex to the Agreement on Trade Civil Aircraft.”5 It includes an annex entitled “Product Coverage,” which reads as follows: 1. The product coverage is defined in Article 1 of the Agreement on Trade in Civil Aircraft. 2. Signatories agree that products covered by the descriptions listed below and properly classified under the Harmonized System headings and subheadings shown alongside shall be accorded dutyfree or duty-exempt treatment, if such products are for use in civil aircraft or ground flying trainers* and for incorporation therein, in the course of their manufacture, repair, maintenance, rebuilding, modification or conversion. 3. These products shall not include: an incomplete or unfinished product, unless it has the essential character of a complete or finished part, component, sub-assembly or item of equipment of a civil aircraft or ground flying trainer*, (e.g., an article which has a civil aircraft manufacturer’s part number), materials in any form (e.g., sheets, plates, profile shapes, strips, bars, pipes, tubes or other shapes) unless they have been cut to size or shape and/or shaped for incorporation in a civil aircraft or a ground flying trainer* (e.g., an article which has a civil aircraft manufacturer’s part number), raw materials and consumable goods. 4. For the purpose of this Annex, “Ex” has been included to indicate that the product description referred to does not exhaust the entire range of products within the Harmonized System headings and subheadings listed below. * For the purpose of Article 1.1 of this Agreement “ground flight simulators” are to be regarded as ground flying trainers as provided for under 8805.29 of the Harmonized System.
11.5
Elimination of Customs Duties
Signatories to the CV Agreement have convened to eliminate customs duties with respect to products coming under the aegis of the agreement (Article 2.1.2 CV). They have further adopted an “Agreed interpretation” of Article 2.1.2 CV clarifying the scope of this provision: Article 2.1.2 of the Agreement on Trade in Civil Aircraft, which provides for the elimination of “all customs duties and other charges of any kind levied on repairs on civil aircraft,” applies only to repairs of complete civil aircraft and those civil aircraft products which are classified for customs purposes under their respective tariff headings listed in the Annex to the Aircraft Agreement.6
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On 8 March 1983, the Committee on Trade in Civil Aircraft agreed that every signatory would bind its duties on repairs according to Article 2.1.3 CV. The following text should be considered as a common guideline for binding or duties on repairs: Duty free or duty exempt treatment is provided for all repairs on civil aircraft in accordance with Article 2.1.2 of the Agreement on Trade in Civil Aircraft (the term “repairs” includes maintenance, rebuilding, modification, and conversion).7
11.6
Disciplines on Subsidies
As stated previously, the SCM disciplines apply to trade in civil aircraft. The CV Agreement contains an idiosyncratic clause (Article 6.1 CV): They also shall take into account the special factors which apply in the aircraft sector, in particular the widespread governmental support in this area, their international economic interests, and the desire of producers of all Signatories to participate in the expansion of the world civil aircraft market.
This provision has never been interpreted in practice. 11.7 11.7.1
Other Obligations Quantitative Restrictions
Article 5 CV reaffirms Article XI GATT: QRs are not to be allowed. 11.7.2
Import Licensing
Article 5 CV allows for import licensing to the extent that the conditions embedded in the ILA have been respected. 11.7.3
Procurement
Article 4.2 CV reads: Signatories shall not require airlines, aircraft manufacturers, or other entities engaged in the purchase of civil aircraft, nor exert unreasonable pressure on them, to procure civil aircraft from any particular source, which would create discrimination against suppliers from any Signatory.
Article 4.4 CV adds: Signatories agree to avoid attaching inducements of any kind to the sale or purchase of civil aircraft from any particular source which would create discrimination against suppliers from any Signatory.
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To cap it all, Article 4.3 CV reflects a national treatment–type of clause. This clause is of particular importance to state airlines, since they will not be in a position to favor domestic producers when purchasing aircrafts. 11.8
Institutions
A Committee on Trade in Civil Aircraft is established (Article 8 CV). It is responsible for administering the day-to-day operation of the agreement, and every signatory has a seat. 11.9
Concluding Remarks
The CV Agreement has reduced relevance, especially nowadays: the combination of Article II GATT with the advent of the SCM Agreement is the reason why. Initiatives like the 1992 Agreement between the EU and the US could have increased its importance. Alas, this was a one-off incident, which did not manage to last the test of time.
12
12.1 12.1.1
Transparency
The Legal Discipline and Its Rationale The Legal Discipline
Transparency is a WTO “mode,” a buzzword that is repeated ad nauseam. A WTO Secretariat document1 (hereinafter referred to as the “Overview Document”) identifies 176 different obligations to notify the WTO of national measures affecting trade. This number has increased since then as a result of the transparency obligations included in the Agreement on Trade Facilitation. It all started with Article X of GATT, and a number of transparency obligations have been modeled after it. Article X of GATT imposes three obligations: first, all laws and administrative and judicial decisions of general application affecting trade must be published (Article X.1 of GATT); second, state acts covered by this discipline will not be enforced before their publication if they represent a new or more burdensome requirement on imports (Article X.2 of GATT); third, these state acts must be administered in a “uniform, reasonable, and impartial” manner, and a (national) forum must be provided where claims regarding the administration of customs laws can be adjudicated (Article X.3 of GATT).2 In the spirit of Article X of GATT, it is individual WTO Members that must reveal information about their trade policies. The Trade Policy Review Mechanism (TPRM), which was concluded during the Uruguay round, represents a remarkable shift: no longer would trading nations have the exclusive initiative to provide information about their policies, but the WTO institution would be empowered to examine on its own account the trade policies adopted by each and every WTO Member. Since then, the WTO Secretariat has expanded its activities in this area and moved to require transparency for a wider set of policies affecting international trade.3 Also, and in order to complete the picture, the possibility for cross-notifications has been explicitly introduced in many WTO agreements, as we have seen in previous chapters of this volume. The legal discipline regarding “transparency” has thus been evolving since the inception of the GATT, both with respect
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to its scope, as well as with respect to the entity that would take the initiative to serve transparency. We will try to see how all this has played out in practice in what follows. 12.1.2
The Rationale for the Legal Discipline
The various negotiating documents reveal substantial divergence across participants regarding the extent of the original transparency obligation.4 The quality of the democratic dialogue at home, as well as participation in international schemes that predated the GATT and that had dealt with transparency-related issues, rank high among the factors that influenced national positions. There were proposals, for example, inspired by the practices of international agencies, and even a proposal to simply absorb the Brussels Tariff Bureau, an organization that ensured transparency with respect to measures affecting customs clearance, by those that had participated in similar endeavors that were not met with enthusiasm by those with no similar experience.5 And then, a number of participants remained silent as to the eventual discipline. Article 21 of the London Draft was supposed to reflect the transparency-obligation: absence of agreement led the negotiators to a decision to renegotiate this item at a later stage.6 To be fair, no GATT negotiator wanted lack of transparency to negatively affect the value of tariff concessions. They just could not agree on the extent of the obligation’s transparency. In New York, it is the US delegation that took the initiative and tabled a comprehensive proposal, which contained elements that eventually became part and parcel of Article X of GATT.7 They thus managed to reach an agreement to make public important documents affecting trade so as to ensure that trade (and trade concessions) would not be negatively affected by lack of transparency.8 Article X of GATT restricts the obligation of transparency to “general-application” measures only. What exactly does “general application” mean? In the words of Wolfe (2013, p. 2): “As with a painting or a photograph, what we choose to include within the frame, and how it is portrayed, depends on what we think is important.” Some panels have provided clarifications, but differences of view regarding what “general application” is do persist, and sometimes are quite legitimate. 12.1.3
Discussion
12.1.3.1 Transparency, a Commodity The work of several Nobel Prize–winning economists (George A. Akerloff, Joseph Stiglitz, Michael Spence, and Oliver E. Williamson) has sensitized us to the fact that information should be treated like all other scarce commodities. It is costly and not equally accessible across the board. Transparency obligations aim to equalize conditions of procuring information across all trading nations (assuming fair play by all, of course). In the case of international trade, where (almost) all government intervention affects the trade outcome in one way or the other, the quest for equalizing access to information is also a quest for
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efficient access to information. It does not help traders much to know that information is available, if they do not also know where it is available. It is precisely this latter dimension that has provoked the discussion and implementation of “one-stop shops” and “single windows,” as we saw in the previous chapters of this volume.9 Transparency obligations subsidize those who cannot, or cannot easily, procure information—those for whom spending on similar issues is associated with a high opportunity cost.10 Even though some processing of the acquired information will be necessary, in a world with uneven spending power, those with the means to spend could profit from a lack of transparency since they would be favored in a scenario where they could spend to buy information, whereas others cannot.11 12.1.3.2 Beyond Trade Concerns Transparency helps WTO Members to learn about each other and avoid costs, but it also helps citizens of the notifying state. The WTO obligation on transparency fills a gap, especially for countries with low democratic sensitivity and few or no domestic laws mandating transparency. Transparency reverts thus, not only to an “international” dimension (it allows access to information to all, especially to poor, developing countries, for which procurement of information is costly), but to a “national” dimension as well (since it fills the gap left by deficient domestic laws in this respect). Wolfe (2013) pointed to yet another feature of transparency when observing that transparency might assist regulatory mimicking and help WTO Members emulate more efficient regulatory examples.12 This is especially the case in the context of “elaborate” transparency obligations, like those embedded in the SPS- and the TBT Agreements, where, through the establishment of “inquiry points” and the introduction of “specific trade concerns” (a hybrid mechanism between transparency and dispute settlement), trading nations can educate themselves about the rationale and objectives of regulatory interventions. In this context, it is useful to distinguish between “fishbowl” and “reasoned” transparency, a distinction that Cary Coglianese should be credited with. We read in Cognlianese (2009) at p. 537: The Obama Administration, as well as most of the organized groups and tech-savvy individuals that advocate open government, have emphasized what could be called fishbowl transparency. The aim is to expand the release of information that can document how government officials actually behave, such as by disclosing meetings held between White House staff and outside groups. But there is another type of transparency, reasoned transparency, that demands that government officials offer explicit explanations for their actions. Sound explanations will be based on application of normative principles to the facts and evidence accumulated by decision makers—and will show why other alternative courses of action were rejected.
By explaining the reasons behind domestic measures, trading nations can help each other understand better what drives domestic regulation, the main segmentation factor of world markets today. Ultimately, through this exercise, the trade and the regulatory com-
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munity can be brought around the same table in an effort to better understand what keeps markets apart, whether it is legitimate concerns or pure political expediency. 12.1.3.3 What Influences Transparency? There are various factors influencing transparency and many of them have to do with reasons endogenous to the particular WTO Member. Worse, the WTO can do absolutely nothing about them. The WTO for example, has no business deciding the quality of democratic dialogue in a WTO Member. Transparency can also be affected by the content of notification itself. A government typically looks good when it adopts a measure against the ozone layer, but not so good when it favors one segment of society (and in extreme cases, one particular economic operator) over another, since (at least in a democratic society) the popularity of a measure increases when it provides and safeguards public goods, and decreases when it cherrypicks beneficiaries. In the case of subsidy notifications, providing information is selfincriminating since similar information amounts to acknowledging that a benefit has been provided only to some of its citizens (and thus might infuriate the rest of them), and that a violation of the WTO has been committed (and thus infuriate the WTO Membership as well). Similar notifications might lead to imposition of CVDs, as we saw in chapter 3 of this volume. The incentives to notify, therefore, might be affected by the “nature” of notification (innocuous, as opposed to self-incriminating notification). It is not surprising thus, that cross-notifications (e.g., notifications by those affected by lack of transparency) of subsidies flourish, although those possessing information might be facing a collective action problem and might prefer to act unilaterally (and negotiate a “deal” with the subsidizing WTO Member). But even if incentives to notify are present, some WTO Members, due to lack of capacity (especially when facing high administrative costs), might notify the WTO in a suboptimal manner. Enter the discussion of technical assistance and capacity building for those who need it. Finally, the design of notification in and of itself might influence the quantum of notified information. Take the example of notifications under TBT/SPS and under ILA, both of which contain provisions providing transparency. Quoting from Articles 10.1 and 10.10 TBT: Each Member shall ensure that an enquiry point exists which is able to answer all reasonable enquiries from other Members and interested parties in other Members as well as to provide the relevant documents regarding ... Members shall designate a single central government authority that is responsible for the implementation on the national level of the provisions concerning notification procedures under this Agreement except those included in Annex 3.13
So, through the TBT regime, WTO Members reduce notification costs for domestic producers at home through the central government’s established authority (the “one-stop
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shop”), while providing an information service to all interested parties. There are no corresponding provisions in the ILA, for example. As a result, absent an ILA “one-stop shop,” it is quite costly for WTO Members to gather information regarding import licensing, and the natural consequence is suboptimal notifications; on the other hand, traders and consumers will know little, if anything, about the quotas in place.14 12.1.3.4 Transparency and Enforcement of Obligations Transparency and dispute adjudication could be seen as both complements and substitutes. Better information could lead to better understanding of national policies, and thus decrease in the number of disputes. Sometimes information is not simply a necessary but also a sufficient condition for enforcing obligations: by throwing light on a problem, it may disappear: Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of the disinfectants; electric light, the most efficient policeman.15
On the other hand, access to information might provoke disputes, since absent information, it would be impossible to do so anyway. Horn, Mavroidis, and Sapir. (2010) showed that developing countries typically join in consultations and litigate their disputes. It could of course be the case that they are simply waiting in order to ally themselves with a WTO Member with substantial bargaining power and litigate “in tandem.” It could also be the case though, that their behavior is simply the natural outcome of their lack of knowledge about trade barriers abroad. In fact, there are good reasons to believe that the latter is the case since they join in consultations regardless of whether they complain against developed or developing countries. And then, as we saw in chapters 5 and 6, there are institutions that act as a “halfway house” between transparency and dispute settlement. Specific trade concerns (STCs) have led to increased knowledge about regulation in the realm of the SPS- and the TBT- Agreements, and they exhibit an element of “dispute.” By initiating STCs though, WTO Members have managed to reduce the number of “formal” disputes under the SPS- and the TBT Agreements before WTO adjudicating bodies. Recall from our discussion in the previous chapter that transparency plays a crucial role in a legal regime where remedies are de facto prospective. The sooner one knows about actions, the better armed it will be to address them in time. Belated knowledge, as in the case of the Trondheim litigation that we discussed in the previous chapter, can even lead to an impossibility to quantify the damage, and, thus, an impossibility to address the illegality committed. It is quite difficult to disentangle cause and effect between transparency and a dispute settlement and provide a robust conclusion about which way causality works, and it probably does work both ways.
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12.1.3.5 The Record of Transparency in the WTO Collins-Williams and Wolfe (2010), and Bacchetta, Richtering and Santana (2012) have conducted, in separate papers, an extensive research of notifications in various WTO committees, and their analysis shows that, with notable exceptions such as the TBT and SPS committees, the record of notifications to the WTO is not a cause for celebration. In fact, occasionally (notifications to the SCM Committee), the record raises legitimate concerns.16 A WTO Secretariat document17 reflects similar conclusions: only 15 WTO Members have submitted notifications under the ILA (§§ 153ff.); only 56 WTO Members have submitted their responses to questions regarding the function of the CV Agreement (§§ 155ff.); but, on the other hand, we are now beyond 10,000 notifications in the SPS context.18 12.2
Article X of GATT
Publication of laws (and other acts) of general application is one of the three distinct obligations embedded in Article X of GATT. 12.2.1
Laws and Other Acts of General Application
12.2.1.1 Defining Laws of General Application The term “general application” qualifies the laws that have to be published, and it is hardly a self-interpreting term. The Panel on US–Underwear held that a safeguard imposed by the US on imports of cotton was a measure of general application. The relevant criterion, in the panel’s view, was that the measure applied to an, in principle, “unidentified” number of economic operators and not to “specific shipments,” since all goods coming under the aegis of the safeguard measure throughout its duration, would be subjected to the imposed safeguard. § 7.65 states: The mere fact that the restraint at issue was an administrative order does not prevent us from concluding that the restraint was a measure of general application. Nor does the fact that it was a country-specific measure exclude the possibility of it being a measure of general application. If, for instance, the restraint was addressed to a specific company or applied to a specific shipment, it would not have qualified as a measure of general application. However, to the extent that the restraint affects an unidentified number of economic operators, including domestic and foreign producers, we find it to be a measure of general application.
On appeal, the AB upheld this finding (p. 21). It thus endorsed its application to an “unidentified” number of economic operators (transactions) as the relevant criterion to decide whether a measure is of “general application” or not. In a similar vein, in Thailand– Cigarettes (Philippines), the AB confirmed the panel’s finding to the effect that providing a guarantee in order to release goods through customs was a measure covered by Article X of GATT (§§ 215–216). In EC–Poultry, the AB was asked to review an appeal against
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a panel finding to the effect that import licenses issued by the EU to specific companies interested in importing poultry products, and import licenses applied to specific shipments (poultry products) to the EU were not measures of general application; and, for this reason, they should not come under the aegis of Article X of GATT. The AB upheld the panel’s findings in this respect in the following terms (§ 113): We agree with the Panel that “conversely, licences issued to a specific company or applied to a specific shipment cannot be considered to be a measure ‘of general application’” within the meaning of Article X.19
The form that a measure coming under the purview of this discipline (Article X of GATT) must revert to is a separate issue. Article X of GATT mentions only four categories of measures: laws, regulations, judicial decisions, and administrative rulings. Only state acts can come under the purview of this provision, and this is what the four terms denote. Both the first and the second term provide evidence of the legislative will to place the accent on “general application” rather than on the form of the instrument that exhibits this property. Indeed, various domestic acts could come under the term “regulation.” The terms “judicial decisions” and “administrative rulings” though might be prone to confusion, as they might concern individual transactions. Still, the better arguments lie with an obligation to publish similar acts as well, as they might have a de jure, or at the very least a de facto, precedential value, and thus guide traders as to the meaning of specific laws and regulations. Case law has gone one step further, enlarging the scope of measures coming under the purview of this provision. The Panel on Dominican Republic–Importation and Sale of Cigarettes had to address the question whether measures other than those explicitly mentioned in the body of Article X of GATT that might eventually be incorporated into one of the four measures mentioned earlier should also be equated to measures covered by the discipline embedded in Article X of GATT. The Central Bank of the defendant (Dominican Republic) was publishing “price surveys” for imported cigarettes. Price surveys hardly qualify as laws or regulations (they regulate nothing), never mind judicial decisions or administrative rulings. In the panel’s view, these surveys constituted an essential input to the final determination of the duty imposed on imported cigarettes, but they were just an input, not a final measure of general application (e.g., duties). In contrast, the measure into which they were incorporated (a customs duty on cigarettes) was a measure of general application. In the panel’s view, because price surveys functioned as an input to a measure of general application, they too should come under Article X.1 of GATT (§§ 7.404–408). In US–COOL, the panel held that a letter by US Secretary of Agriculture Thomas J. Vilsack (quoted in § 7.123 of the panel report), providing details regarding the implementation of a US statute regarding the origin of goods,20 also qualifies as a measure covered by Article X of GATT (§ 7.840). This was a letter by the secretary that had not gone through the US constitutional process for adoption, and was not an administrative ruling
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either, since it served as the explanation of a statute. In its view, what mattered for coverage purposes was that this measure was intimately linked to a measure of general application (and that it would thus apply to an unidentified number of transactions). In EC–IT Products, the panel was presented with a claim to the effect that a “CNEN” should be considered as a measure covered by this provision. A CNEN is an Explanatory Note to an EU Council Regulation.21 It held that a measure does not have to be binding to be covered by Article X of GATT. It suffices that it is “authoritative.” In its view, CNENs were authoritative because they were issued by the commission and were meant to help the EU Member States achieve uniformity with the EU Council Regulation (§§ 7.1023ff., and especially §7.1027). This extension is not unproblematic: What if member states of the EU are not only free to disregard “authoritative” guidance by the EU institutions, but they do disregard it in practice? Would it suffice that they are “authoritative” in a panel’s view? And what is the guarantee that panels will have the same views on what “authoritative” is? The case law cited here provides, at any rate, strong support to the view that not only does one of the four measures of general application explicitly included in Article X of GATT come under its aegis. The question is what else? Case law suggests that also measures that are intimately linked to one of four types of measures come under the aegis of this GATT provision and this, irrespective of their form, or “bindingness.” The problem is that this opening to nonmentioned measures without providing any criteria for their inclusiveness in the coverage of Article X of GATT can lead to inconsistencies that are hard to reconcile between panel reports. 12.2.1.2 The Rationale: Due Process The AB, in its report on US–Underwear, understood the transparency obligation embedded in Article X.1 of GATT as a due process obligation (p. 21).22 Laws of general application, because they cover an (in principle) unidentified number of commercial transactions, are of significant value to traders who trade cross-border. Through publication, their interests will be protected, in the sense they will not be facing “opaque” nontariff barriers (NTBs) to which maybe domestic traders are most likely better accustomed. On the other hand, it is to be expected that transaction-specific regulations will be communicated to interested parties anyway; hence, a transparency-obligation regarding this type of measures would not add much to existing transparency, anyway. 12.2.1.3 Prompt Publication The GATT does not impose a statutory limit that must be respected in all cases. Consequently, claims regarding violation of the obligation to promptly publish will be examined on a case-by-case basis. In EC–IT Products, the panel found that the EU had violated its obligations by publishing documents 10 months after they had been made effective (§ 7.1076).
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A Halt to (Unpleasant) Surprises
Article X.2 of GATT reads: No measure of general application taken by any contracting party effecting an advance in a rate of duty or other charge on imports under an established and uniform practice, or imposing a new or more burdensome requirement, restriction or prohibition on imports, or on the transfer of payments therefor, shall be enforced before such measure has been officially published.
This provision imposes heterogeneous obligations, which, nevertheless, share one common element: they constitute a change in comparison to what used to be the case before, either because an advance in a rate of duty is required, or because a new or more burdensome requirement has been imposed. The general rule is that similar requirements cannot be enforced if they have not been published first. The rationale for this provision has been eloquently explained in the AB report on US–Countervailing and Antidumping Measures (China), which stated in § 4.65: By requiring that certain measures of general application are published promptly and that they are not enforced before their publication, Articles X:1 and X:2 are meant to ensure that traders are made aware of measures that may have an impact on them, so that they have time to become acquainted with, and to adapt to, the new measures. These provisions thus create expectations among traders that they will not have to face measures that they could not be aware of because such measures were published late or because they were not yet published.23
Traders’ expectations regarding the treatment they will receive in export markets will thus be protected through the transparency guaranteed by adhering to this discipline, since adherence to the discipline provides traders with sufficient time to adjust to the new reality. The provision covers two instances: one specific—the advance rate of duty, and one generic—the avoidance of new or more burdensome requirements. We take them in turn in what follows. 12.2.2.1 Advance in a Rate of Duty The Panel on US–Countervailing and Antidumping Measures (China) was called to interpret the terms “effecting an advance in a rate of duty” appearing in Article X.2 of GATT. It held that this term should be understood as an increase in the rate of duty compared to a prior rate (§ 7.155). The AB did not disturb this finding (§§ 4.69ff.). The AB differed with the panel when it comes to defining the “comparator” that should be used in order to ascertain whether an advance in a rate of duty had indeed been effected (and/or whether a new or more burdensome requirement had been imposed). The panel compared the situation before it with the previously established practice. The AB disagreed. In its view, practice alone could not serve as a baseline (benchmark) for comparison (§ 4.92). In its view, practice should be one of the elements to be taken into consideration, but analysis should not be exclusively limited to practice. Panels should start their analysis
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with the text of the previously published law, and of course look into practice regarding this law. Panels would sometimes have to limit their analysis to practice, if, for example, no law had been previously published. But they should not ignore previously published laws (§§ 4.105ff., and especially §4.108). The AB thus reversed the panel in this respect, but in the absence of adequate information, it could not complete the analysis (§ 4.120). 12.2.2.2 New or More Burdensome Requirement The AB, in its report on US–Countervailing and Antidumping Measures (China), noted that Article X.2 of GATT refers to “new, or more burdensome requirements,” emphasizing the term “or” appearing in this provision. Because this term had been inserted, the term “new” should not necessarily lead to the conclusion that the more recent requirement is more burdensome than the preexisting one (the term “or” appearing between “new” and “more burdensome” supports this reading). What matters, is that either a new or a more burdensome requirement had been published before it had been enforced (§§ 4.88ff.).24 12.2.3
Uniform, Reasonable, and Impartial Administration of Laws
12.2.3.1 Three Distinct Obligations The Panel on Argentina–Hides and Leather confirmed the intuitive reading of this provision, namely, that the obligation to administer laws in a uniform, reasonable, and impartial manner included three distinct requirements that would have to be interpreted separately (§ 11.86). The natural conclusion emerging from this finding is that WTO Members must satisfy all three separate requirements to be consistent with their obligations under the GATT. 12.2.3.2 Minimum Standards In US–Shrimp, the AB had to address claims by a host of trading nations regarding the certification procedures practiced by the US. Recall that, as we saw in chapter 9, volume I, certification regarding the (accidental) rate of sea turtle mortality was required by the US authorities for shrimps to be lawfully imported in the US market. The claim by the complainants was that nontransparent, internal governmental procedures applied by the competent officials in the US Office of Marine Conservation, the US Department of State, and the US National Marine Fisheries Service throughout the certification processes under Section 609. The fact that companies whose applications had been denied had received neither formal notice of denial, nor the reasons for denial, as well as the fact that there was no formal legal procedure for review of, or appeal against, a denial of an application were all measures inconsistent with Article X.3 of GATT. The question before the AB was whether or not the terms “uniform, reasonable, and impartial administration of laws” should have the same meaning across national jurisdictions. The AB found that Article X of GATT should be understood as imposing “minimum transparency requirements,” implying that WTO Members must respect its letter and spirit anyway, while being free to go beyond the established standards, provided of course that their actions are otherwise GATT-consistent (§§ 182–183):
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The provisions of Article X:3 of the GATT 1994 bear upon this matter. In our view, Section 609 falls within the “laws, regulations, judicial decisions and administrative rulings of general application” described in Article X:1. Inasmuch as there are due process requirements generally for measures that are otherwise imposed in compliance with WTO obligations, it is only reasonable that rigorous compliance with the fundamental requirements of due process should be required in the application and administration of a measure which purports to be an exception to the treaty obligations of the Member imposing the measure and which effectively results in a suspension pro hac vice of the treaty rights of other Members. It is also clear to us that Article X:3 of the GATT 1994 establishes certain minimum standards for transparency and procedural fairness in the administration of trade regulations which, in our view, are not met here. The non-transparent and ex parte nature of the internal governmental procedures applied by the competent officials in the Office of Marine Conservation, the Department of State, and the United States National Marine Fisheries Service throughout the certification processes under Section 609, as well as the fact that countries whose applications are denied do not receive formal notice of such denial, nor of the reasons for the denial, and the fact, too, that there is no formal legal procedure for review of, or appeal from, a denial of an application, are all contrary to the spirit, if not the letter, of Article X:3 of the GATT 1994. (italics in the original)
Nontransparent and ex parte procedures, as well as absence of service of formal notice indicating the reasons for rejecting a request (of certification, in this case), and absence of formal review/appeal against the decision rejecting the request, are requirements that any WTO Member must respect anyway in order to be deemed in compliance with its GATT obligations in this respect. 12.2.3.3 Laws and Their Clarifications Are Covered The question has arisen whether the term “laws” appearing in Article X.3 of GATT should have the same meaning as in Article X.1 of GATT. Unsurprisingly, WTO case law has responded in the affirmative to this question. In US–COOL, the panel faced the question whether it was only laws or, conversely, whether instruments explaining laws were covered as well. It held that (§ 7.840): “The act of providing guidance on the meaning of specific requirements under a measure, for instance by publishing ‘frequently asked questions,’ is an act of administering such measure within the meaning of Article X:3(a).” This is an important finding since this document—“frequently asked questions”—is an instrument that many administrations use, and informality could have led the panel to decide against the claim that it should come under the aegis of Article X of GATT. It seems nonetheless, that the panel came to this conclusion because, through this instrument, an administration explains its own views on matters of interest to traders that are applicable to an unidentified number of transactions. 12.2.3.4 Uniform The Panel on Argentina–Hides and Leather discussed the consistency of an Argentine measure allowing for the presence of representatives of the Argentine producers of leather products during customs clearance of hides with the multilateral rules. Recall25 that Argentina had enacted Resolution 2235/96, which made it possible for representatives of the
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Argentine tanning industry (the Association of Industrial Producers of Leather, Leather Manufactures and Related Products, or ADICMA) to be present during customs-clearing procedures concerning exports of bovine hides. In the view of the EU, the presence of ADICMA representatives amounted to a de facto export restriction prohibited by Article XI of GATT (since ADICMA representatives would have had an interest in keeping bovine hides in the Argentine market and would, thus, have had an incentive to affect the total volume of exports). The bulk of the complaint by the EU focused on the inconsistency of the Argentine practice with Article XI of GATT, whereas its claim under Article X of GATT focused only on the administration of Resolution 2235/96. More specifically, the EU had claimed that, in administering Resolution 2235/96 in an unreasonable, impartial, and nonuniform manner, Argentina was violating its obligations under Article X.3 of GATT. We quote the EU claim as reproduced in the AB report (§ 11.58): The European Communities argues that the presence of “partial and interested” representatives of the tanning industry makes an impartial application of the relevant customs rules impossible. The European Communities also considers that it is not “reasonable” within the meaning of Article X:3(a) that the interested industry is informed of all attempts at exports by those from whom they wish to obtain the exclusive right to purchase hides. The European Communities argued that the Argentinean administration of its laws also was not “uniform.” According to the European Communities it was improper for Argentina to construct a special set of procedures for administering its export laws for only one type of product. Other products are subject to export duties or are eligible for export “refunds.” In light of this, hides should not be singled out.
The EU had in this way claimed that the Argentine measure was not uniformly administered, and thus in contradiction with Article X.3 of GATT. The GATT provision was violated as a result, in the EU’s view, because the Argentine measure was applied to bovine hides only, not to other products. The Panel dismissed this claim. In its view, what mattered when reviewing the consistency of the challenged measure with Article X.3 of GATT was whether it provided traders with predictability as to future transactions (§§ 11.83–85): It is obvious from these uses of the terms that it is meant that Customs laws should not vary, that every exporter and importer should be able to expect treatment of the same kind, in the same manner both over time and in different places and with respect to other persons. Uniform administration requires that Members ensure that their laws are applied consistently and predictably and is not limited, for instance, to ensuring equal treatment with respect to WTO Members. That would be a substantive violation properly addressed under Article I. This is a requirement of uniform administration of Customs laws and procedures between individual shippers and even with respect to the same person at different times and different places. We take the view that this provision should not be read as a broad antidiscrimination provision. We do not think this provision should be interpreted to require all products be treated identically. That would be reading far too much into this paragraph, which focuses on the day-to-day application of customs laws, rules, and regulations. There are many variations in products that might require differential treatment, and we do not think this provision should be read as a general invitation for a panel to make such distinctions.
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In our view, there is no evidence that Argentina applied Resolution 2235 in a nonuniform manner with respect to hides. All hides exports are uniformly subject to the possibility of ADICMA representatives being present. Indeed, the European Community’s complaints are about Resolution 2235’s application across the board. The difficulties of Argentina’s administration of its customs laws pursuant to Resolution 2235 are adequately dealt with under the other provisions of Article X:3(a).
It follows that uniformity should not be confused with nondiscriminatory (consistent) treatment across products. Rather, uniformity should be achieved within the scope defined by national laws. In other words, Article X.3 of GATT did not impose a requirement of consistency to enact similar laws for goods that could qualify as “directly competitive or substitutable.” It simply requests from WTO Members, once they have defined the scope of their laws, to administer them in a uniform manner. The Panel on EC–Selected Customs Matters held that the obligation for uniformity covers geographic uniformity as well. It held that the EU, by subjecting identical products within its sovereignty to different customs treatment, was in violation of Article X of GATT (§§ 7.135 ff.).26 In a similar vein, the same panel found that differential customs administration of liquid crystal display (LCD) monitors within the EU was tantamount to a violation of Article X of GATT (§ 7.305).27 In this panel’s view, “uniformity” should not be confused with “identity.” Some differentiation might be appropriate, and the degree of uniformity should be determined on a case-by-case basis. The “narrower” the challenge (that is, the more specific the aspects of the administrative action complained about), the higher the degree of uniformity required (and, consequently, the lower the burden for the complainant to make a prima facie case). With respect to tariff classification of LCD monitors with a digital video interface, the situation was as follows: Video monitors were classified under tariff heading 8528 and were subjected to a 14 percent import duty in the EU market, whereas computer monitors were classified under tariff heading 8471 and paid 0 percent import duty. The Netherlands classified LCD monitors under tariff heading 8528, whereas other EU Member States classified them under 8471. As a result, there was a discrepancy as to the import duty that LCD monitors exported to the EU market were subjected to, depending on whether the destination was the Netherlands or another EU Member State. The panel had originally found that this discrepancy amounted to nonuniform application and, consequently, ran afoul of Article X.3(a) of GATT, and the EU appealed this finding. It did not contest that divergence indeed existed across the various EU Member States. It did argue, however, that it had taken action since 2004 to address this phenomenon (§ 246, AB report). It submitted that the adoption of EC Regulation 2171/2005, combined with the withdrawal of the Dutch measure (classifying LCD monitors under 8528), were two measures that amply demonstrated that it had addressed the discrepancy, and it regretted that the panel did not take either into account. The panel had refused to take this evidence into account because it had been submitted belatedly—that is, after the interim review stage. The EU believed that the panel’s handling
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of this evidence was DSU-inconsistent since the submitted evidence related directly to the interim report that had been circulated to the parties to the dispute (§ 248, AB report). In addition, in the eyes of the EU, the panel had violated its duty under Article 11 of DSU to make an objective assessment, since it had taken into account actions (the classification of LCD monitors by the Dutch authorities) that postdated its establishment (§ 249, AB report). The AB was, thus, confronted with two issues. First, could the panel have relied on evidence that follows its establishment? And second, was the panel’s decision not to take into account the evidence submitted by the EU at the interim review stage correct? The AB responded affirmatively to the first question. In its view, the panel could legitimately rely on data that follows its establishment, in order to understand how a measure was being administered (§ 254, AB report). The absence of uniform administration can be established using data that comes after the establishment of the panel. The AB responded affirmatively to the second question as well. In prior case law, the AB had established that evidence submitted for the first time at the interim review stage should legitimately be rejected. The AB was thus, confirming prior case law in this respect (§ 259, AB report). 12.2.3.5 Reasonable In Dominican Republic–Importation and Sale of Cigarettes, the panel found that not only positive actions, but also omissions can come under scrutiny in the context of the review regarding the consistency of a specific law, regulation etc. within Article X.3 of GATT (§ 7.379). Honduras had challenged the practice of the Dominican Republic of avoiding the calculation of the imposition of a tax on imported cigarettes based on one of the three methods reflected in Dominican law (§ 7.387). Instead, the Dominican Republic, by its own admission, had been calculating the amount of imposition based on variables other than those published in the relevant generally applicable law. The omission constituted, in the panel’s view, an unreasonable administration of its laws (§ 7.388). The Panel on Argentina–Hides and Leather addressed a claim by the EU to the effect that the Argentine measure was in breach of Article X.3 of GATT, since it provided representatives of ADICMA with the possibility of access to confidential business information, since they could learn the names of the exporters and their pricing schemes. In the panel’s view, similar information could then be used to confer an advantage on the Argentine tanning industry when negotiating with the upstream segment of this market. To reach its conclusion, the panel first turned to the objective of the challenged Argentine law (§§ 11.90): In considering this requirement, we first turn to the stated objective for Resolution 2235 offered by Argentina. Argentina stated that it required assistance in the classification of bovine hides when exported in order to ensure there were no mistakes or fraud regarding the proper payment of export duties and awarding of export “refunds.” While a manifestly WTO-inconsistent measure cannot be
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justified by assertions of good intentions, we consider it reasonable in this instance to accept for purposes of analysis the proffered explanation in light of all the facts of the dispute.
It subsequently concluded that an administration of laws that allowed for this possibility to occur was unreasonable and, thus, in contradiction with Article X of GATT since it allowed for the dissemination of business confidential information, which could be used to the commercial advantage of the Argentine producers of leather goods (§§ 11.92–94): To provide some specific examples, ADICMA representatives should not be able to see the pricing information of the suppliers to ADICMA’s members. This is information which ADICMA members could use to their commercial advantage in negotiations with the frigoríficos. We should note in this regard that Argentina bases its export duties on prices of hides quoted in the United States. Thus, even if we were to consider it reasonable for the tanners to be involved in the export clearance process, there would be no reason whatever for them to see the prices as these would be irrelevant to the assessment of export duties. We also see no need for them to be made aware of the destination or quantities involved as these data are irrelevant to the tasks ADICMA representatives are involved in. We think it is particularly important for the reasonable administration of Argentina’s export laws that the tanners not be provided the name of exporters. Argentina claims that this is no longer possible. However, as it was part of the European Communities’ claims and was unarguably possible as recently as May of 1999 that such written information was supplied to ADICMA, we consider it necessary to specifically find that it is unreasonable for such information to be provided to ADICMA or its members. However, this question goes beyond just supply of the name in writing. Argentina has stressed in its arguments under all three conditions of Article X:3(a) that the process is balanced because the exporters may be present during the Customs process. However, it necessarily follows that exercising this right would reveal the identity of the exporter. While it could be argued that the exporter could send a representative or agent and may thereby conceal his identity, imposing such a burden with respect to an exporter’s own products would be unreasonable. Therefore, we must conclude that a process aimed at assuring the proper classification of products, but which inherently contains the possibility of revealing confidential business information, is an unreasonable manner of administering the laws, regulations and rules identified in Article X:1 and therefore is inconsistent with Article X:3(a). (italics in the original)
It thus linked the administration of laws once again with the due process requirement that permeates Article X of GATT and defines its nature. The requirement for reasonable administration was understood in this case as a requirement not to confer a commercial advantage on domestic producers (that is, as contravening the due process obligation), which requires the authorities of WTO Members to adopt an even-handed approach (toward domestic and imported goods) when dealing with measures coming under the aegis of Article X of GATT. 12.2.3.6 Impartial The basic question that arises about the term “impartial” is: What should the administration of laws be impartial from? The panel on EC–Selected Customs Matters held that the requirement for impartiality meant that the reviewing agency (tribunal) should be independent from the agency whose acts were being challenged (§ 7. 519). Impartiality can
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of course, have other “comparators” as well. When linked to the due process obligation, “impartiality” should be understood as a requirement to avoid administering laws, and measures of general application in a manner that will provide domestic goods with an advantage. In Argentina–Hides and Leather, the EU had argued that the Argentine measure was not being administered in an impartial manner, since there was absolutely no legitimate reason why ADICMA representatives should be present during customs clearance of bovine hides. Moreover, information obtained by their mere presence could potentially be used to their own advantage. The panel upheld this claim, since it agreed that the mere possibility that the Argentine industry present in customs clearance could use confidential information to its own advantage amounted ipso facto to violation of the impartial administration requirement embedded in Article X of GATT (§§ 11.99–102): The only private parties that have a contractual legal interest in the product and transaction are the exporter (and his agent) and the foreign buyer. The government also has a relevant legal interest in the transaction based on the sovereign right to regulate and tax exports. In contrast with this, the ADICMA representatives have, outside of the measure in question itself, no legal relationship with either the products or the sales contract. ADICMA, in fact, represents an adverse commercial interest in that the exports are not in its members” interests as such exports potentially drive up the costs of hides. Furthermore, ADICMA members are competitors of the foreign buyers of the hides. Much as we are concerned in general about the presence of private parties with conflicting commercial interests in the Customs process, in our view the requirement of impartial administration in this dispute is not a matter of mere presence of ADICMA representatives in such processes. It all depends on what that person is permitted to do. In our view, the answer to this question is related directly to the question of access to information as part of the product classification process as discussed in the previous Section. Our concern here is focused on the need for safeguards to prevent the inappropriate flow of one private person’s confidential information to another as a result of the administration of the Customs laws, in this case the implementing Resolution 2235. Whenever a party with a contrary commercial interest, but no relevant legal interest, is allowed to participate in an export transaction such as this, there is an inherent danger that the Customs laws, regulations and rules will be applied in a partial manner so as to permit persons with adverse commercial interests to obtain confidential information to which they have no right. While this situation could be remedied by adequate safeguards, we do not consider that such safeguards presently are in place. Therefore, Resolution 2235 cannot be considered an impartial administration of the Customs laws, regulations and rules described in Article X:1 and, thus, is inconsistent with Article X:3(a) of the GATT 1994.
A very demanding standard was thus established and WTO Members, following this case law, will have to ensure adherence to it. The mere likelihood of conferring an advantage to domestic goods sufficed in the eyes of the AB to find that the Argentine decree was administered in a partial manner. 12.2.4
The Obligation to Maintain Independent Tribunals
WTO Members must, by virtue of Article X.3(b) of GATT, establish judicial, arbitral, and administrative tribunals (or procedures) that will be independent from the agency whose acts they will be reviewing.28
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The Panel on EC–Selected Customs Matters underscored this requirement for impartiality of tribunals (§ 7. 519) when dealing with the question of whether a decision should govern the practice of all agencies entrusted with administrative enforcement throughout the territory of the WTO Member concerned. The panel held that reading Article X.3(b) of GATT in this way was unwarranted. It based its finding on its understanding that tribunals mentioned in Article X.3(b) of GATT were in all likelihood first-instance tribunals, and requiring similar effect of their decisions could raise public order–type concerns. In the panel’s view, it was only normal that in national-jurisdiction courts that are assigned specific territorial scopes, contradictory judgments could arise.29 The US appealed this finding. The US had recourse to predominantly textual arguments. In its view, the panel had not paid sufficient attention to the term “agencies” appearing in Article X.3(b) of GATT, which, unless understood to cover all administrative agencies throughout the territory of a WTO Member, could not guarantee uniform application of laws as required by this provision. The AB upheld the panel’s finding to the effect that the tribunals envisaged in the first sentence of this provision are first-instance tribunals (§ 294). Based on textual and contextual arguments (first-instance courts do not extend their jurisdiction throughout the territory of a WTO Member), it sided with the panel (§§ 298–299). The AB then went on to find that the obligation in this provision was limited to firstinstance courts, not administrative agencies as the US had argued, upholding the panel’s findings on this score in the following terms (§ 303): For these reasons, we are of the view that Article X:3(b) of the GATT 1994 requires a WTO Member to establish and maintain independent mechanisms for prompt review and correction of administrative action in the area of customs administration. However, neither text nor context nor the object and purpose of this Article require that the decisions emanating from such first instance review must govern the practice of all agencies entrusted with administrative enforcement throughout the territory of a particular WTO Member. (italics in the original)
12.2.5
Standard of Review
WTO adjudicating bodies must, by virtue of Article 11 of DSU, make an “objective assessment” of the factual record before them. Case law has clarified that, with respect to disputes coming under the purview of Article X of GATT, this duty will entail that they are satisfied that a violation has occurred in cases where there is a likely impact on the competitive situation across domestic and foreign products, due to unreasonableness, lack of uniformity, partiality in the administration of a law, or a combination. In Argentina–Hides and Leather, one of the questions before the panel was whether the EU, in order to observe its burden of proof, had to show actual effects (trade damage) as a result of the unlawful administration of the contested legislation. The panel dismissed this thesis. In its view, it sufficed that the EU demonstrated the likelihood that the interests of traders could have been negatively affected as a result of the administration of laws, and no actual trade damage had to be shown (§ 11.77):
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Thus, it can be seen that Article X:3(a) requires an examination of the real effect that a measure might have on traders operating in the commercial world. This, of course, does not require a showing of trade damage, as that is generally not a requirement with respect to violations of the GATT 1994. But it can involve an examination of whether there is a possible impact on the competitive situation due to alleged partiality, unreasonableness or lack of uniformity in the application of customs rules, regulations, decisions, etc.30 Panels will not be questioning the substantive consistency of a law with the multilateral rules. Rather, their review should be confined to the consistency in the administration of laws in accordance with the obligations included in Article X of GATT. Article X of GATT thus, is not concerned with the substantive consistency of a particular act with the GATT rules, since this is the subject matter of other GATT provisions. Article X of GATT is concerned only with the administration of laws. The AB held as much in its report on EC–Bananas III (§ 200): The context of Article X:3(a) within Article X, which is entitled “Publication and Administration of Trade Regulations,” and a reading of the other paragraphs of Article X, make it clear that Article X applies to the administration of laws, regulations, decisions and rulings. To the extent that the laws, regulations, decisions and rulings themselves are discriminatory, they can be examined for their consistency with the relevant provisions of the GATT 1994.
The AB reached a similar conclusion in EC–Poultry. The AB entertained a claim by Brazil to the effect that an EU measure relating to imports of frozen poultry did not allow Brazilian traders to know ex ante whether a particular shipment would be subjected to the rules governing in-quota trade or to rules relating to out-of-quota trade. Brazil maintained that this was a violation of Article X of GATT. The AB held that this claim concerned the substantive consistency of the EU measure at hand with the pertinent GATT rules and that this part of the claim lay outside the coverage of Article X of GATT. It stated in § 115: Thus, to the extent that Brazil’s appeal relates to the substantive content of the EC rules themselves, and not to their publication or administration, that appeal falls outside the scope of Article X of the GATT 1994. The WTO-consistency of such substantive content must be determined by reference to provisions of the covered agreements other than Article X of the GATT 1994.31
The Panel on Argentina–Hides and Leather reached a similar conclusion (§§ 11.60): The context of Article X:3(a) within Article X, which is entitled “Publication and Administration of Trade Regulations,” and a reading of the other paragraphs of Article X, make it clear that Article X applies to the administration of laws, regulations, decisions, and rulings. To the extent that the laws, regulations, decisions, and rulings themselves are discriminatory, they can be examined for their consistency with the relevant provisions of the GATT 1994.
In EC–Selected Customs Matters, the AB added a welcome clarification to all this. The substantive content of the instrument that regulates the administration of a measure can be challenged. It is the substantive content of instruments being administered that cannot be challenged (§§ 200–201):
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The statements of the Appellate Body in EC–Bananas III and EC–Poultry do not exclude, however, the possibility of challenging under Article X:3(a) the substantive content of a legal instrument that regulates the administration of a legal instrument of the kind described in Article X:1. Under Article X:3(a), a distinction must be made between the legal instrument being administered and the legal instrument that regulates the application or implementation of that instrument. While the substantive content of the legal instrument being administered is not challengeable under Article X:3(a), we see no reason why a legal instrument that regulates the application or implementation of that instrument cannot be examined under Article X:3(a) if it is alleged to lead to a lack of uniform, impartial, or reasonable administration of that legal instrument. This distinction has of course implications with respect to the type of evidence that the complainant must submit to support a claim of a violation of Article X:3(a) GATT. If a WTO Member challenges, under Article X:3(a) GATT, the substantive content of a legal instrument that regulates the administration of a legal instrument of the kind described in Article X:1, it will have to prove that this instrument necessarily leads to a lack of uniform, impartial, or reasonable administration. It is not sufficient for the complainant merely to cite the provisions of that legal instrument. The complainant must discharge the burden of substantiating how and why those provisions necessarily lead to impermissible administration of the legal instrument of the kind described in Article X:1.
This might be a laudable clarification, but, by insisting in treating the procedural and substantive aspects of the law as hermetically sealed “boxes” miles apart from each other, WTO panels may end up with a problematic interpretation. For instance, the manner in which a law is administered should pay due regard to its substantive nature. In essence, it is surely impractical to strike down administrative procedures without at least inquiring into the rationale behind the law in question. This is not meant to support the thesis that a WTO panel, when entertaining a complaint that Article X of GATT has been violated, should take the liberty of pronouncing on the substantive consistency of a law with another GATT provision. Nevertheless, an inquiry into the rationale of the law might occasionally prove a useful stepping stone toward constructing its findings with respect to the consistency of the challenged measure with Article X of GATT. This is probably what the panel members had in mind when performing the distinction mentioned previously. Case law has also dealt with the question of “burden of persuasion”; that is, the quantity and quality of information necessary to absolve the burden of proof under Article X of GATT. The AB, in its report on US–OCTG Sunset Reviews, confirmed that some explanation is necessary for a claim to succeed and that a mere submission of data, which could be interpreted in more than one way, was not sufficient. Argentina had argued that the US had not been administering its sunset reviews of antidumping duties in a reasonable manner, bolstered by the statistic that the domestic industry recorded 223 wins in 223 cases; that is, there was no case where the exporters prevailed (§ 218). The AB refused to accept the Argentine claim in this respect since, in its view, for a claim under Article X.3 of GATT to be successful, solid evidence was required. Mere statistical evidence, which could be interpreted in various ways, did not suffice (§§ 217–219): Argentina should have also demonstrated that the outcome was due to unreasonable, nonuniform, or partial administration of laws.
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The Trade Policy Review Mechanism (TPRM)
The Trade Policy Review Mechanism (TPRM) was established in 1989 on a provisional basis, and it became a permanent feature of the multilateral trading system pursuant to Annex 3 of the WTO Agreement. The WTO Agreement required in 1999 that the operation of the TPRM was to be evaluated by the Trade Policy Review Body (TPRB), the WTO entity administering the TPRM. The evaluation concluded that the TPRM functioned effectively, and as a consequence, the TPRM has become a permanent feature of the WTO legal edifice.32 12.3.1
The Objectives
In accordance with Annex 3 of the WTO Agreement, the objectives of the TPRM are: to contribute to improved adherence by all Members to rules, disciplines and commitments made under the Multilateral Trade Agreements and, where applicable, the Plurilateral Trade Agreements, and hence to the smoother functioning of the multilateral trading system, by achieving greater transparency in, and understanding of, the trade policies and practices of Members.
To this effect, the WTO Secretariat, which is entrusted with the responsibility to prepare the reports, is required to periodically review the trade policies and practices of all WTO Members. A special unit of the WTO Secretariat, called the Trade Policy Review Mechanism Division, is entrusted with the preparation of TPR reports. Over the years, the special unit has had more and more recourse to in-house expertise. Members of other specialized divisions of the WTO have been participating in the drafting of reports, which thus have been enriched.33 Occasionally, the WTO Secretariat reports are prepared with the help of outside consultants (this has been the case for the reviews of the Maldives, Niger, Senegal, and the Southern African Customs Union). The WTO Secretariat’s reports are written in close consultation with the authorities of the Member under review. Since the WTO Secretariat does not have the authority to interpret the covered agreements, a TPRM report on the trade policies and practices of a Member does not provide an assessment as to the legal consistency of particular policies with the multilateral agreements; it is a mere exercise in transparency. A WTO document34 reflecting the record of the TPRM as of mid-2003 concluded that while each review highlights the specific issues and measures concerning the individual Member, certain common themes emerged during the course of the reviews conducted in the period January– July 2003. These included: transparency in policy-making and implementation; economic environment and trade liberalization; implementation of the WTO Agreements; regional trade agreements and their relationship with the multilateral trading system; tariff issues, including peaks, escalation, preferences, rationalization and the difference between applied and bound rates; customs clearance procedures; import and export restrictions and licensing procedures; the use of contingency measures
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such as antidumping and countervailing duties; technical and sanitary measures and market access; standards and their equivalence with international norms; intellectual property rights legislation and enforcement; government procurement policies and practices; state involvement in the economy and privatization programmes; trade-related competition and investment policy issues; incentive measures such as subsidies and tax forgone; sectoral trade-policy issues, particularly liberalization in agriculture and certain services sectors; GATS commitments; special and differential treatment, including market access and implementation, particularly for customs valuation, TRIPS and TRIMs; small-island and small land-locked Members; and technical assistance in implementing the WTO Agreements and the experience with the Integrated Framework.
12.3.2
The Record
By the end of 2011, 338 reviews had been conducted, covering 141 of 159 Members and representing some 89 percent of world trade and 96 percent of the trade of Members.35 All but three WTO Members (namely, Cuba, Guinea Bissau, and Myanmar) had been reviewed by February 2012.36 Not all WTO Members are reviewed with similar frequency. The periodicity of the reviews depends on the relative weight that WTO Members have in world trade. Annex 3 of the WTO Agreement, where the decision to establish the TPRM has been included, pertinently reads at item C: The trade policies and practices of all Members shall be subject to periodic review. The impact of individual Members on the functioning of the multilateral trading system, defined in terms of their share of world trade in a recent representative period, will be the determining factor in deciding on the frequency of reviews. The first four trading entities so identified (counting the European Communities as one) shall be subject to review every two years. The next 16 shall be reviewed every four years. Other Members shall be reviewed every six years, except that a longer period may be fixed for least-developed country Members.
This feature of the TPRM has been criticized by many in the literature, the crux of the argument being that it is LDCs and developing countries in general that should be reviewed more frequently, rather than the other way around. Hoekman and Mavroidis (2000) have argued that, after all, one of the aims of the TPRM is to make the WTO a policy-relevant option for domestic legislature and the need in this respect is far greater among LDCs and developing countries. Over the years, TPRM has become more responsive to this type of argument, and indeed, 29 out of 32 LDCs have by now been reviewed. Alas, the frequency of reviews remains an issue.37 12.3.3
Is the TPRM Really Useful?
The TPRM has provided some transparency—that much is clear. The question that scholars ask is whether the candle was worth the flame. An operation has been set up, and a WTO division is dedicated to preparing the reports periodically. But what is the added value?
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Or, to put it in different terms, how much would we have missed if there had been no TPRM in place? Ghosh (2010) has argued against the usefulness of the TPRM from a developing countries perspective. In his view, the TPRM does not provide the kind of information that developing countries would be interested in; thus, its usefulness in this respect is limited and should not be exaggerated. This is a valid point, in the sense that reports are not tailormade to correspond to the needs of developing countries, which might need to undertake additional effort in order to familiarize themselves with policy options taken by their trading partners that affect them most. Information provided is too generic on occasion, and information about actual practice is scarce. Zahrnt (2009) would like to see reports that discuss the costs of protectionism. Otherwise, their contribution toward shaping domestic policies will be limited, if not altogether irrelevant. Quantifying the costs of protectionism would definitely help improve the quality of domestic dialogue regarding the type of trade policies that should be pursued. This type of criticism has had some impact, and some adjustments have already taken place to address this type of concerns, as we detail later. Indeed, the most recent initiatives of the WTO Secretariat, as we will see in what immediately follows, are veered toward this objective. We noted previously that Hoekman and Mavroidis (2000) questioned the periodicity in reviewing WTO Members. It would make more sense (in their view at least) for developing countries to be reviewed more frequently for two reasons: first, because information about the big players is quite available anyway for both WTO and non-WTO reasons; and second, because many developing countries essentially live in the shadow of the WTO, caught unawares by various disciplines that could greatly improve their current status and put them firmly on the development track. Were the TPRM to veer developing countries toward the benefits of adopting WTO-conforming policies, then it should expose them to the costs of noncompliance more often, and more forcefully. 12.4 12.4.1
Into the Great Wide Open: Transparency Unlimited Transparency Obligations in the WTO
Of the 176 distinct obligations that WTO Members (that, as previously noted, have increased since the adoption of the Agreement on Trade Facilitation) must observe when notifying information to the WTO, 42 are recurring obligations (e.g., semiannual, annual, biannual, or triennial) and are reproduced in table 12.1.
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Table 12.1 Obligations to notify the WTO Regular Development Government Procurement Intellectual Property Services Trade in Goods Agriculture Market Access Rules Technical Barriers to Trade TRIMs General Balance of Payments RTAs TPRM Total
Ad hoc
Total
3 3 3
7 8 23 11
7 11 26 14
8 9 7 1 1
7 27 34 13 2
15 36 41 14 3
1 6 0 42
1 0 1 134
2 6 1 176
Source: Overview Document, WTO: Geneva, 21 November 2011 at p. 51.
12.4.2
Three Generations of Transparency Provisions
Wolfe (2013), echoing terminology adopted in the “Overview Document,” identified “three generations” of transparency-related obligations. Originally (that is, in the GATT era), there were obligations to publish trade-related information and notify the GATT of measures coming under its purview. These are the first-generation transparency provisions. This is where Article X of GATT finds its place. During the Tokyo round, the right to request information became a legal possibility (second-generation transparency provisions). To this effect, the Understanding Regarding Notification, Consultation, Dispute Settlement, and Surveillance mentions (§ 3): Contracting parties which have reasons to believe that such trade measures have been adopted by another contracting party may seek information on such measures bilaterally, from the contracting party concerned.
During the Uruguay round, the third-generation transparency provisions were agreed upon and came into effect. In this realm, the right to request information was strengthened, mainly by agreeing to cross-notifications whereby, for example, Home would notify the WTO of Foreign subsidies that Foreign had failed to include in its own separate notification, and the role of the WTO Secretariat was upgraded significantly.38 For example, recently the US cross-notified the WTO of dozens of (alleged) Chinese and Indian subsidy schemes about which China and India had failed to notify the WTO. With respect to Chinese schemes, the US notified the WTO of 42 “green technology” schemes, 92 export subsidies, and 52 other schemes belonging to various categories.39 It further notified the
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WTO of 23 Indian schemes.40 Most of the activity regarding cross-notifications is in the subsidies context, as should be expected in light of the corresponding disincentives to notify. This is not however, where innovations ended. The WTO Secretariat was endowed with a new, enlarged mandate to look for information and make it available on a WTOwide basis. We turn to this issue in what now follows. 12.4.3
The WTO: International Watchdog?
British philosophical reformer Jeremy Bentham is associated with utilitarianism, but his ever-inquisitive mind was active in many other areas as well. In a visit to his brother at the end of the eighteenth century, he was struck by the design of an edifice. He tried to reproduce it upon his return home, and Panopticon was born. “Panopticon” owes its name to Panoptes, a figure in Greek mythology, a giant with 100 eyes, the prototype watchman. Bentham’s idea was to design a prison where inmates would be watched without being in a position to tell whether or not it was happening. Because of this lack of information, the idea was that inmates would act as if they were being watched at all times, and they would thus be consistently controlling their own behavior. The WTO is nowhere near being a modern-day Panopticon, as described in what follows. It has not managed to design a system where every one of its Members will be fully transparent in the eyes of the rest of the Membership. True, the WTO Secretariat saw an increase in its powers to become an international watchdog, monitoring transparency obligations but also unearthing information itself and making it public. Sometimes acting on a clear mandate provided by its Members (TPRM, Working Group on Notifications of Obligations and Procedures) and sometimes adopting a proactive attitude, the shaky legal basis for it notwithstanding, the WTO Secretariat has emerged as a central component in the quest for transparency. It is also true that the WTO system is gradually becoming a two-way street: the incentive for transparency stems both in national capitals and in Geneva. However, it is more—substantially more—the former than the latter. Steps have been taken in the right direction, but additional steps are needed all the same, as we detail in what follows. We signaled previously why Members of the WTO might be unwilling to be transparent, at least with respect to some of the measures they adopt, and why crossnotification is not the definitive antidote to missing incentives. Action by the common agent, the WTO Secretariat, seems quite warranted in this context. But action by the WTO Secretariat is costly. It requires a substantial investment in terms of human resources and time. In addition, the WTO Secretariat must be impervious to pleas or threats to “mind its own business.” And, finally, do not forget that remedies for violating the obligation to be transparent are not even coming close to dissuading offenders from repeating reproachable behavior. The de facto system of prospective remedies that WTO panels have introduced
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in case law effectively amounts to an obligation to notify ex post facto. In what follows, we focus solely on the “empowerment” of the Secretariat to provide transparency, when it is missing, and its recent efforts in this context. 12.4.3.1 The March toward Transparency Already in the 1980s, there were voices arguing for a more proactive attitude in order to enhance the level of transparency at the time. For instance, the Leutwiler report first underscored that transparency could be key in mobilizing domestic constituencies in favor of trade liberalization.41 In a similar vein, the former GATT director-general (DG), Olivier Long, suggested in a report that transparency obligations had to be rethought since the efficiency of the multilateral edifice relied very much on the robustness of the information that it received.42 The TPRM, discussed earlier in this chapter, was established during the Uruguay round. It provided the WTO Secretariat with a clear mandate to monitor and report on trade policies by all WTO Members. A Decision on Notification Procedures was adopted during the Uruguay round that underlined the general obligation to notify, assigned to the Council for Trade in Goods (CTG) the authority to monitor notifications, provided in its annex an indicative list of notifiable measures, and established the Central Registry of Notifications (CRN), with the following mandate: A central registry of notifications shall be established under the responsibility of the Secretariat. While Members will continue to follow existing notification procedures, the Secretariat shall ensure that the central registry records such elements of the information provided on the measure by the Member concerned as its purpose, its trade coverage, and the requirement under which it has been notified. The central registry shall cross-reference its records of notifications by Member and obligation. The central registry shall inform each Member annually of the regular notification obligations to which that Member will be expected to respond in the course of the following year. The central registry shall draw the attention of individual Members to regular notification requirements which remain unfulfilled. Information in the central registry regarding individual notifications shall be made available on request to any Member entitled to receive the notification concerned.
The Working Party on Notifications Obligations and Procedures was established in order to streamline the various transparency obligations. Its final report is a clear statement on where the WTO stood on this issue following the many agreements signed during the Uruguay round.43 This report contained an annex (Annex III), which reflected the type of information that should be included in notifications by WTO Members, an issue to which we shall return next, as well as a mandate to review at the multilateral level the consistency of notified information. This was not the end of the road. Following lengthy negotiations, the Integrated Database (IDB) was established in 1997 through a decision by the General Council, which
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requested that WTO Members disseminate information relevant to tariffs and import trade.44 Following practices judged as unsatisfactory, the WTO Members adopted a decision in 2009 that enabled the WTO Secretariat to gather information on its own initiative on the issues covered by the original decisions.45 The most recent initiative in the ongoing strengthening of the WTO Secretariat powers in this respect came with the discussions on the 2008 financial crisis and the role of the WTO in this context. Beginning with a generous interpretation of the TPRM-mandate that requires all WTO Members to report significant changes in their trade policies, the WTO Secretariat has been preparing short monitoring reports (originally, that was in the middle of the 2008 financial crisis,46 quarterly, and later biannually) covering new trade policy measures under the DG’s signature for the TPRB to discuss in periodic informal meetings. This monitoring exercise has been partly subsumed into the DG’s Annual Overview Report;47 for the rest, it has been a stand-alone exercise. The members of the G-20 liked the idea and asked the WTO Secretariat to prepare biannual reports covering measures adopted by the G-20 countries. The question for the G-20 countries was whether nations would have had recourse to protectionism as a response to the financial crisis. Thus, the G-20, at their 2 April 2009 meeting, called on the WTO to adopt monitoring mechanisms regarding trade measures. There was no official WTO reaction to this effect, other than a communication by a group of 13 WTO Members that included a plea to avoid recourse to protectionist measures in response to the financial crisis, as well as a “call to the DG to continue to monitor and report publicly on our adherence to these undertakings on a quarterly basis.”48 This proved enough for the DG to instruct the WTO Secretariat to embark on the exercise and start reporting periodically on dozens of trade barriers. The Overview Document also cites § G of the TPRM as an appropriate legal basis (perhaps even the only one) justifying the involvement of the WTO: G. Overview of Developments in the International Trading Environment An annual overview of developments in the international trading environment which are having an impact on the multilateral trading system shall also be undertaken by the TPRB. The overview is to be assisted by an annual report by the Director-General setting out major activities of the WTO and highlighting significant policy issues affecting the trading system.
The WTO Secretariat, along with the OECD and UNCTAD secretariats, have prepared regular reports on G-20 trade and investment measures adopted during the crisis ever since.49 The decision of 17 December 2011 regarding TPRM that was adopted during the Ministerial Conference held in Geneva provided the safe legal basis needed to continue reporting on this score. It reads in part: We therefore invite the Director-General to continue presenting his trade monitoring reports on a regular basis, and ask the TPRB to consider these monitoring reports in addition to its meeting to undertake the Annual Overview of Developments in the International Trading Environment.50
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ASEAN countries soon followed the example set by G-20, and the WTO Secretariat obliged again.51 12.4.3.2 Crisis-Related Reports and Beyond As of 2012, the monitoring reports have abandoned their focus on crises, in the sense that prima facie protectionist measures are included without asking the question of whether they have been adopted as a means of addressing the crisis in question. In many pronouncements, the link to a crisis is made by officials aiming to explain recourse to protectionism. Similar declarations are not totally implausible. As various chapters of this volume have shown, the typical reaction to crisis is a recourse to protectionism, through subsidies, favoritism of domestic firms in government procurement, and other measures. It is not easy however, absent a “smoking gun,” to attribute various measures to the crisis. Accounts regarding protectionist measures are not drawn by the WTO Secretariat only, but by NGOs, national administrations, and private initiatives as well. Leaving the accounts by the WTO Secretariat aside for the time being, accounts, especially by NGOs and private initiatives, are more eager to avoid a type II error (i.e., a false negative) than a type I error (i.e., a false positive). That is, they would rather be overinclusive than underinclusive. The WTO Secretariat has been the recipient of cross-notifications, notifications from a host of NGOs (such as the Global Trade Alert, for example) and other sources of measures affecting trade.52 In practice, it will not include information in the reports it issues without some filtering. The reviewed WTO Member will be asked to verify information obtained from third parties. In cases of acquiescence, the information will be included in the report as “verified” information. On the other hand, if it is refuted, it will be omitted even if the Secretariat has reasons to disbelieve the accuracy of the provided response. If the reviewed state remains idle (but does not refute the veracity of the supplied information), the information will be included in the report, albeit classified as “non-verified.” Further, the WTO Secretariat has started issuing a series of documents concerning the manner in which WTO Members had been complying with their obligations to notify the WTO in accordance with the substantive content of Annex III to the TPRM. It is issuing G/L/223 documents, where it “names and shames” the WTO Members that had been neglecting their notification obligations. Entitled “Updating of the Listing of Notification Obligations and the Compliance Therewith as Set Out in Annex III of the Report of the Working Group on Notification Obligation and Procedures,” documents in these series have been reflecting the manner in which WTO Members have been complying over the years with their obligation to notify under the various agreements that come under the aegis of the WTO.53 12.4.3.3 Ball in the Geneva Camp There is, thus, an arsenal of legal instruments in place aimed at increasing transparency, and the move toward increasing the role of the common agent (the WTO Secretariat) is the implicit response to the failure to submit notifications by WTO Members. There is
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only so much that a Secretariat can do, though. It too faces search costs, and its powers of naming and shaming are limited. It is true, however, that there is a lot more information available in both absolute and relative terms than there ever was before. There are, of course, still cases where information is scarce (recall the previous discussion regarding notifications under the AG and SCM Agreements). But some decisive steps have been taken toward addressing missing information, and the gradual change from WTO Members being exclusively competent to notify the GATT/WTO to increasing the powers of the disinterested (in domestic politicaleconomy matters) agent, the WTO Secretariat, surely has a lot to do with it. At this stage, it is difficult to predict how this initiative will shape up in the future. It was clearly linked to the financial crisis, and one would expect that were the crisis to be eventually addressed, the mandate will lapse. And yet, the argument for a common agent is quite strong in the transparency context, where, as stated before, the incentives to notify might often be missing. Assigning competence to the WTO Secretariat avoids the problems with notifying and strengthening the transparency obligations posed by the missing incentives.54 The extent that the WTO will rise to the challenge will largely depend on the “administrative investment”; that is, the time and effort that the WTO will invest in this endeavor. There are of course, many other sensitive issues that will need to be addressed, since every time the WTO Secretariat will be revealing information that had not been previously disclosed voluntarily by one of its Members, it will be entering a minefield. This is an area where the WTO Secretariat can further strengthen its ties to other international organizations and provide a united front in the quest for transparency. Justice Louis Brandeis has been quoted for many reasons justifiably so. Many authors and commentators have quoted the following saying by Justice Brandeis55: Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.
Our analysis so far supports the view, that he might have overstated the “efficiency” of transparency, but he did not overstate the case for it.
Notes
Chapter 1 1. Economists refer to “trade costs” to capture all costs except for marginal cost of production associated with getting goods from a producer to a consumer. They include costs of transport, information, customs clearance, legal and regulatory matters, and enforcement, as well as local distribution costs. See Anderson and van Wincoop (2004) for a survey of the literature. Samuelson (1954) provided a theoretical model to discuss these costs, the “iceberg model” (originally designed only for transportation costs), to show how inefficient trade procedures increase the price level from that charged by the producer to that paid by consumers. The term iceberg’ model captures his insight to show the losses like the iceberg mass that melts away as icebergs move in the ocean. 2. GATT Document L/6064 of 31 October 1986. 3. GATT Document LIC/11 of 2 March 1987. 4. Note that the agreement is about import and not export licenses, which are not covered by the ILA. We discuss the legal benchmark to evaluate the consistency of export licenses with the GATT/WTO later in this chapter. 5. GATT Document MTN.GNG/NG8/W/16 of 16 November 1987. 6. GATT Document MTN.GNG/NG8/W/16 of 16 November 1987. The preamble to the Uruguay-round ILA reproduces the spirit of this point. 7. GATT Document MTN.GNG/NG8/W/53 of 27 September 1989. Markel (1993, pp. 1105–1115) hailed this proposal as the lynchpin in the negotiations. 8. GATT Document MTN.GNG/NG8/W/27 of 4 March 1988. 9. GATT Document MTN.GNG/NG8/W/20 of 7 December 1987. 10. GATT Document MTN.GNG/NG8/17 of 16 November 1987. 11. The interpreter would also have to give precedence to the ILA over GATT in order to examine the challenged scheme under the ILA, of course. Since, nevertheless, this is what happens when claims are presented under, say, the TBT, the SPS, or any other Annex 1A agreement and GATT, and these claims are routinely examined under the Annex 1A Agreement first, it is only reasonable to expect that a similar solution would apply when claims under both the ILA and GATT are submitted. 12. In practice, import licenses are imposed for a variety of reasons, and usually when a QR is in place. Licenses are imposed for rent-seeking reasons, for political-economy reasons, or even because of a belief in a particular economic model: Douglas (1987, pp. 164ff), in his formidable book, described how the belief that
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balance-of-payments (BoP) problems were the main constraint for economic growth led successive New Zealand governments to impose dozens of license schemes and eventually to become known as “Fortress New Zealand.” 13. See, for example, the US reaction in GATT Document MTN.GNG/NG8/29 of 6 May 1988. 14. GATT Document MTN.GNG/NG8/83/Add.1 of 23 July 1990. This document reflected the view expressed here and provided the basis for Article 2.1 of ILA as we now know it. 15. For an example of this, see the notification by Malaysia in WTO Document G/LIC/N/3/MYS/5 of 26 January 2010. 16. This text had been prepared by the negotiating Working Group 4 of the Committee on Trade in Industrial Products (CTIP), GATT Document MTN/NTM/W/73 of 17 November 1986. 17. GATT Document MTN/NTM/W/213 of 21 December 1978, at p. 6. 18. We do not pretend that these two criteria, in and of themselves, solve all issues related to the distinction between automatic and nonautomatic licensing. Indeed, trading nations are often puzzled and find it hard to decide what is what, as New Zealand’s legitimate worries show (GATT Document LIC/W/35 of 31 March 1987). Ultimately, adjudicating bodies will have to exercise some discretion here. When doing so, they should always, as a threshold issue, decide first whether they are in the presence of import licensing. Then, the two criteria and some of the preparatory work mentioned, whenever relevant, could be of assistance in deciding whether one or the other form of licensing is present. 19. There was some litigation on licensing issues even before the Tokyo-round agreement was enacted. In 1978, for example, a GATT panel was requested to review the consistency of the licensing scheme practiced by the EU on some farm goods, including tomatoes. In EEC—Minimum Import Prices, the panel qualified as “automatic licensing” a scheme whereby, for the issuance of a certificate to import goods, traders would have to pay a guarantee (“security”). The panel reached this conclusion based on the fact that the scheme was consonant with prevailing practice at the time. Similar schemes would hardly qualify as automatic nowadays. 20. Various economics papers, both theoretical as well as empirical dealt with auctioning of import licenses. Empirical evidence available at the time suggested that value for rents associated with import licenses could be large. In a seminal piece, Krueger (1974) distinguished between competitive and noncompetitive import licensing regimes. In the former all interested in obtaining a license would participate to obtain the right to import, whereas in the latter the same right would be restricted to a few. Krueger shows that governments have a dilemma when choosing between the two systems: if they opt for competitive systems, the resulting welfare losses will be greater than in the opposite case. This is so, because, besides all costs associated with a noncompetitive regime (the tariff equivalent), they will be incurring an additional cost, the cost resulting from rent-seeking activities, that she measures in the paper. Noncompetitive (e.g., restricting access to licenses to only a few companies) is the relatively speaking preferable approach, but if governments go down the road, they might be accused of favoritism. From a legal perspective, both regimes would qualify as nonautomatic licensing, since not all applicants will be granted a license to import. 21. Collins-Williams and Wolfe (2010) discuss this point in detail. 22. WTO Document G/LIC/N/3/KOR/2 of 15 April 1998. 23. WTO Document G/LIC/N/3/USA/9 of 25 September 2012. 24. WTO Document G/LIC/N/3/MAC/15 of 19 October 2012 by Macao, China; G/LIC/N/3/AUS/2 of 4 July 2002 by Australia. 25. WTO Document G/LIC/N/3/CUB/3 of 20 January 2009. 26. WTO Document G/LIC/N/3/ALB/6 of 5 November 2012 by Albania; G/LIC/N/3/HKG/11 of 5 October 2007 by Hong Kong, China.
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27. WTO Document G/LIC/N/3/NZL/2 of 17 October 2012. 28. A tariff quota was in place, and its legality was not an issue before the panel. 29. WTO Document WT/MIN(13)/W/11 of 6 December 2013. 30. It is the Committee on Agriculture that must be notified about “fill rates.” We discuss its role in chapter 16, where we discuss in detail the WTO Agreement on Agriculture. 31. As we will see in chapters 13 and 14, this form of resolving disputes is well known in the TBT and SPS agreements, where it is referred to as “specific trade concerns.” The idea is that, through transparency, WTO members manage to resolve disputes before a committee instead of raising a formal dispute in accordance with the DSU procedures. The successful experience in this context persuaded negotiators to export this mechanism to the Agreement on Agriculture as well. 32. WTO Document G/LIC/3 of 7 November 1995. 33. WTO Document G/LIC/3. 34. By October 2011, 100 members had notified their laws and procedures; see WTO Document G/L/968 of 26 October 2011. 35. Unlike, in this respect, the TBT and SPS agreements, which contain similar provisions; see the relevant discussion in chapter 20 of this volume. 36. WTO Document G/LIC/22 of 2 August 2011. 37. See the Chinese notification along these lines; WTO Document G/LIC/23 of 21 October 2011. We discuss this document in more detail in chapter 20. 38. GATT Document CP.3/SR.22. 39. GATT Activities in 1978, May 1979, The GATT: Geneva. 40. The Tokyo Round of Multilateral Trade Negotiations, Report by the Director-General of the GATT, April 1979, The GATT: Geneva, at pp. 98ff. 41. GATT Document MTN/FR/W/20/Rev. 2 of 30 March 1979. 42. See also GATT Document L/4885 of 23 November 1979 at pp. 21ff, which contains a detailed discussion of the various GATT provisions dealing with export restrictions. 43. GATT Document CG.18/W/43 of 10 October 1980. 44. GATT Document BISD 29S/9. 45. GATT Document MTN.GNG/NG2/W/40 of 8 August 1989. 46. The EU proposal to this effect is reflected in GATT Document MTN.GNG/NG8/W/17 of 16 November 1987. 47. See also the discussion in chapter 2 of this volume regarding the legal standard for violating Article XI of GATT. During the Doha round of negotiations, Japan tabled a proposal entitled “Protocol on Transparency in Export Licensing to the GATT 1994” (TN/MA/W/15/Add.4/Rev.7) and the EU a proposal to discipline export restrictions (TN/MA/W/101). At the time of writing, the Doha negotiations were in a stalemate. During the Doha round, a proposal has been tabled by various WTO members (including Chile, Japan, Ukraine, and the US), where “export licensing” is defined as any administrative procedure involving submission of an application as a prior condition for exportation. It requests WTO members to notify all existing procedures, as well as the list of products involved, description of measures, duration of export licensing, etc.; see WTO Document TN/ MA/W/15/Add. 4/Rev. 7 of 23 November 2010.
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48. The preamble also contains language acknowledging the special needs of developing countries. 49. The WTO Documents G/LIC/Q and G/LIC/M series are a precious source of information on issues relating to import licensing. 50. E/PC/T/C.II/50 of 15 November 1946. 51. During the New York Conference, for example, the US delegation proposed that the “actual value” of a merchandise import become the benchmark for tariff-valuation purposes [which is now § 2(a) of Article VII of GATT]; GATT Document E/PC/T/C.6/22 of 30 January 1947, at p. 2. 52. In the GATT panel on US–Vitamin B12, the ASP is defined as follows in footnote 1 to the report (GATT Document BISD 29S/110): “Under the ASP system competitive products imported were valued for customs purposes at the wholesale price of a competitive US product rather than at the invoice price of the imported product,” 19 USC § 1401a (1976). Vitamins (like vitamin B12), some chemicals, rubber footwear, and some shellfish were included in the list. See also Tariff and Trade Proposals: Hearings Before the House Committee on Ways and Means, 91st Cong., 2nd Sess. 645 (1970), Statement of Ambassador Carl J. Gilbert, Special Representative for Trade Negotiations. 53. See the relevant discussion in Graham (1979). 54. Rosenow and O’Shea (2010) provide a complete account of this agreement, its function, and its history. 55. Markel (1993, pp. 1120ff) offers a comprehensive account of the Uruguay round negotiation. 56. India advanced various proposals to this effect, going so far as to suggest reversal of the burden of proof when reasonable doubts existed that underinvoicing had indeed occurred. We will return to this last point later in this chapter; also see GATT Document MTN.GNG/NG8/W/9 of 30 September 1987. 57. GATT Document MTN.GNG/NG8/W/57 of 22 November 1989. 58. If they do reject the presented value, they should provide parties with a right to appeal the decision to reject the presented value (Article 11 of CVA). 59. See also § 7.237 of the panel report. A customs authority would, under Article 16 of CVA, be required to provide the reason for rejecting the transaction value, as well as the basis for the alternative valuation determination. 60. Interpretative Note of Article 1 of CVA. 61. This provision was very much the request of India during the negotiations, as we saw earlier. India insisted that the burden of proof should shift when customs authorities were presented with unreliable information regarding the value of imported goods. The question that was heavily debated during the negotiations was under what conditions the shift would occur. The current text suggests that this could happen every time the customs authorities have “reasonable doubts” regarding the valuation, even after additional information has been provided. This does not seem to be a very demanding test, and one should expect that customs authorities could easily meet it. The saving grace for affected traders is Article 11 of CVA, which reads: 1. The legislation of each Member shall provide in regard to a determination of customs value for the right of appeal, without penalty, by the importer or any other person liable for the payment of the duty. 2. An initial right of appeal without penalty may be to an authority within the customs administration or to an independent body, but the legislation of each Member shall provide for the right of appeal without penalty to a judicial authority. 3. Notice of the decision on appeal shall be given to the appellant and the reasons for such decision shall be provided in writing. The appellant shall also be informed of any rights of further appeal.
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62. This is an oddity in WTO lawmaking; it is probably the very technical nature of this agreement that explains the basic rationale and architecture of the CVA given in a few paragraphs preceding the preamble. Otherwise, the risk of getting lost in the technical details was probably too high. 63. The Note to Article 1 of CVA featured in Annex II reads in this respect: 1. The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller. 2. Activities undertaken by the buyer on the buyer’s own account, other than those for which an adjustment is provided in Article 8, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the customs value. 3. The customs value shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods: (a) charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment; (b) the cost of transport after importation; (c) duties and taxes of the country of importation. As stated earlier, Article 1 of CVA refers to other permissible and impermissible deductions as well (e.g., transport postimportation) cannot be taken into account. Moreover, the exchange rate at the time of importation or exportation must be used where appropriate, as per Article 9 of CVA. 64. The Note to Article 2 of CVA explains that goods are identical when they are at the same commercial level and in substantially same quantities. The Note to Article 3 of CVA is the corresponding provision for similar goods. 65. The Interpretative Note to the CVA requests customs authorities to use information prepared in a manner consistent with Generally Accepted Accounting Principles (GAAP). GAAP was defined in paragraph 1 of the note. 66. Indeed, the situation would probably have been different if there had been one World Customs Authority to perform customs valuation for goods being shipped across national borders. National customs authorities are part of the domestic political economy, and the WTO legislator did not wish to close his or her eyes to this fact. 67. See also Annex III to the CVA at § 2. 68. Rosenow and O’Shea (2010) concurred, at p. 126. 69. By virtue of Article 16 of CVA, economic operators can request and obtain an explanation regarding the valuation method that has been used for valuing their goods. 70. Decision of 14 November 2001, WTO Document WT/MIN(01)/17 of 20 November 2001 at § 8.3. This matter has been discussed in the committee since early 2000. However, as of this writing, discussions have not concluded, partly because the same subject was introduced in the Trade Facilitation negotiation which, in the view of some members, was the more appropriate forum for addressing this issue. In this connection, see also WTO Document G/VAL/49, which provides a report of the Trade Negotiations Committee on the outstanding implementation issues. 71. India, which was a signatory to the Tokyo-round Customs Valuation Code, views itself as still being covered by this reservation. This view is not shared by others. This situation explains why the Annual Review documents from 1998 to 2009 prepared by the Secretariat for the purpose of assisting the committee with carrying out the review under Article 23 of CVA remain unadopted; they do not list India as being covered by this reservation. 72. WTO Documents G/VAL/M/21 and G/VAL/W/82/Rev.1.
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73. See, for example, the response (VAL/W/54) of the Technical Committee to the terms of reference sent by the Committee on Customs Valuation in connection with its work on paragraph 8.3 of the Ministerial Declaration (WT/MIN(01)/17). 74. Its tasks are laid out in detail in Annex II of the CVA. 75. The PSI Agreement, as we will see later in this chapter, imposes obligations both on the “user member” and the exporting country, the “exporter member,” according to the terminology used throughout the agreement. 76. Low (1995) explains in detail the rationale behind its enactment, as well as its basic institutions. 77. GATT Document MTN.GNG/NG2/W/10 of 8 June 1989. 78. GATT Document MTN.GNG/NG2/W/6 of 21 March 1988. 79. It was not only WTO members that proposed negotiations to this effect. The ICC Committee on Regulations and Procedures in International Trade, the IFIA, and the UN Economic Commission for Europe’s Working Party on Facilitation of International Trade Procedures, three institutions that focus because of their mandate on international trade, had also submitted proposals to this effect; see GATT Document MTN.GNG/NG2/W/11 of 20 April 1988. Edozier (1993) recounted the most important negotiating positions advanced on pp. 738ff. 80. Edozier (1993), at p. 739. 81. GATT Document MTN.GNG/NG2/W/11 of 20 April 1988, and Addendum 1 of 19 October 1989. 82. In an unofficial paper, the WCO (then the CCC) claimed that recourse to PSI entities was made upon recommendations by the World Bank, which was anxious to see developing countries increase their (customs) income; see CCC, Policy Commission, 30th Session, T5–329 C6–12 of 3 November 1993. 83. GATT Document VAL/W/43 of 11 May 1987. Edozier (1993) reached the same conclusion (see pp. 740ff). 84. GATT Documents MTN.GNG/NG2/16 of 13 March 1990 and MTN.GNG/NG2/13 of 20 November 1989. 85. GATT Document MTN.GNG/W/45 of 23 October 1989. 86. GATT Document MTN.GNG/NG2/W/53 of 23 January 1990. 87. GATT Document MTN.GNG/NG2/W/60 of 19 March 1990. Switzerland was probably conflicted, since it was, on the one hand, an exporter to many developing countries, but, on the other, it was the home of SGS, a leading PSI agency. Its proposal followed the lead of the EU and the US, and in part only reproduced the elements advanced; see GATT Document MTn.GNG/NG2/W/62 of 23 March 1990. 88. GATT Document MTN.GNG/RM/W/1 of 6 June 1991. 89. Note that a similar issue arose in the context of the negotiation on telecommunications, where the Telecommunications Reference Paper (TRP) was determined to serve as a vehicle for the imposition of disciplines on private operators. 90. It is, of course, debatable whether the PSI Agreement addresses the concerns of developing countries, which, for their own reasons, left the negotiators very happy. It does, of course, address the concerns of exporters who saw, as we discussed earlier, the role and influence of PSI entities curbed. Developing countries’ customs authorities did not improve as a result, though. Thirty-odd years later, the ATF aimed to do that. We will return to this discussion later in this chapter. 91. There are, of course, other means that one could have used in order to achieve these objectives. In a comprehensive study, Low (1995) examined many of the alternative proposals: namely, the so-called Norwegian proposal, destination inspections, the application of minimum import prices, and the use of price databases. The Norwegian proposal, which requires cooperation across national jurisdictions in an effort to replicate the Agreement, was discarded for good reason, since it was judged to be incompatible with the incentives of the
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exporting country (assuming of course that exporter and importer were not “repeat players,” and thus retained the incentive to act cooperatively). Destination inspection largely reproduces the existing customs valuation regime, and therefore suffers from the same weaknesses. Minimum import prices are refuted in light of the many other distortions they generate. Valuation data sets could be useful as a transparency mechanism, but not as a substitute for PSI. Low concluded that a clear role exists for PSI, especially in countries with weak administration. 92. As we will see later in this chapter, the exporter member incurs no obligation to cooperate, but rather merely an obligation to not discriminate (Article 3.1). Consequently, it could be, in principle, noncooperative on an MFN basis. 93. The Independent Entity was established by a decision of the WTO General Council adopted on 13 December 1995; see WTO Document W/T/L/125 Rev 1 of 9 February 1996. 94. WTO Document G/PSI/IE/1/Rev. 1. 95. The parties could agree that their dispute should be adjudicated by the “independent trade expert,” acting as “sole arbitrator.” 96. At the time of writing, two such decisions had been issued (WTO Documents G/PSI/IE/R/1 and 2). 97. WTO Document G/L/300 at § 9. 98. For example, see WTO Document G/PSI/N/1, Addendum 15 of 27 June 2011. 99. WTO Document TN/TF/W/46 of 4 June 2005. 100. See, for example, the communication by Angola and Egypt; WTO Document TN/TF/W/186 of 8 February 2013. 101. The ATF is reproduced in WTO Document WT/L/931 of 15 July 2014. 102. WTO Document TN/TF/W/108 of 6 June 2006. 103. It is probably no coincidence that the discussions on trade facilitation is coinciding with the emergence of global value chains (GVCs): to the limited extent that the voices of the business community reach the halls of the WTO, trade facilitation in its current or more expanded form is one step toward allowing GVCs to flourish. 104. There is no unanimity on this score, though, as voices have been raised to the effect that gains from trade facilitation have been overblown, and insistence on negotiating on this score might divert the attention of developing countries from interventions with a higher rate of return, a view that Capaldo (2013) first expressed. Hoekman (2015) discussed the major critical views. 105. WTO Document G/C/W/67 of 11 November 1996. 106. WTO Document WT/MIN(96)DEC of 18 December 1996. 107. Neufeld (2014), who served as representative of the WTO Secretariat at the negotiations, mentions Chile, Colombia, Costa Rica, Korea, Paraguay, and Singapore as the only developing countries supporting the initiative. There are good reasons to believe that the last two are de facto not developing countries, and increasingly good reasons why the same should hold for Chile. We are thus left with only three genuine developing countries supporting this initiative. Eventually, Morocco and Mexico (an OECD member) joined in; see Neufeld (2014), at p.4. 108. WTO Document WT/L/579 of 2 August 2004. 109. Bangladesh, Botswana, Cuba, Egypt, India, Indonesia, Jamaica, Kenya, Malaysia, Mauritius, Namibia, Nepal, Nigeria, the Philippines, Rwanda, Tanzania, Trinidad and Tobago, Uganda, Venezuela, Zambia, and
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Zimbabwe participated in this group. Neufeld (2014, p. 4) mentioned that the “Colorado group” took its name from its usual meeting point, the US Trade Representative (USTR) office in Geneva, where the room featured a picture of Colorado on the wall. 110. Neufeld (2014, pp. 11–12) also mentions that the Draft Agreement for the ATF moved from a pick of 2,200 brackets around 2010 to only 70 or so brackets just before the Bali Ministerial Conference (2013) where the text was agreed. “Brackets” refer in WTO parlance to “bracketed text”; that is, to text that has not been definitively agreed on. 111. WTO Documents G/C/W/132 and 133. 112. WTO Document WT/MIN(01)DEC/1 of 20 November 2001. 113. The decision was adopted by the General Council on 1 August 1994; WTO Document WT/L/579, 2 August 2004, Annex D § 1. 114. Neufeld (2014, p. 4) mentions that the inclusion of this issue was very much the initiative of Paraguay, a landlocked country that supported the negotiation of the agreement from the first day. Paraguay, thus, enjoyed a “first mover’s advantage” in defining the scope of the ATF. 115. See, for example, WTO Document TN/TF/W/165/Rev. 10 of 25 July 2011, which reflects the status of negotiations in summer 2011. We will be referring to this document as the “Draft Agreement,” and, whenever we refer to the negotiation of the ATF throughout this chapter, we will be referring to provisions included in this document. 116. In practice, nevertheless, this was not much of a boost, as the agreement was concluded twelve years after launching the Doha round. 117. WTO Trade Facilitation Agreement, A Business Guide for Developing Countries, International Trade Centre, Geneva, 2013, at p. 1 (hereinafter referred to as “the ITC Business Guide”). 118. WTO Document G/C/W/80 Rev. 1 of 22 September 2000. 119. SITPRO was a British nongovernmental organization (NGO) that was dissolved in 2011, and its tasks were assumed at that time by the UK Department for Business, Innovations, and Skills. 120. The agreement as it stands resembles the twelve trade facilitation indicators developed by the OECD; see Moïse, Orliac, and Minor (2011). 121. A number of the institutions that we encounter in the ATF have been copied from the corresponding provisions in PTAs. Neufeld (2014) offers a very concise overview of trade facilitation provisions in PTAs. She concludes that the four areas most frequently covered in PTAs are: exchange of customs-related information; simplification of formalities and procedures; customs cooperation; and, publication of information. At the antipodes, the least frequently institutions are: customs brokers; post clearance audits; single window; and pre-shipment inspection. Since, as we saw in volume 1, chapter 6, many PTAs do not have dispute settlement procedures, one can legitimately doubt the level of implementation of similar provisions at the PTA level. 122. UN Layout Key, Guidelines for Application, United Nations: Geneva and New York, 2002. 123. For a detailed description, see the ITC Business Guide, at p. 2. 124. There are reported efforts of establishing cross-border single windows to facilitate trade flows even more. Jurisdictional issues prove to be a formidable obstacle, though; see Shah and Srivastava (2013). 125. Although its legal value is reduced by virtue of Article 32 of VCLT, the Draft Agreement can be of assistance to the interpreter and the practitioner since it contains important information regarding the spirit of the negotiation.
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126. See the relevant discussion regarding the understanding of these two terms in chapter 5 of this volume. 127. Anticipating this, some PSI entities engaged in technical capacity building. Probably similar efforts were too little, too late. 128. ITC Business Guide, p. 19. 129. We discuss this case in chapter 20. For this reason (inconsistency), according to the ITC Business Guide (pp. 9ff.), this is one area where substantial gains are expected (the other being the streamlining of procedures). 130. The International Convention for the Simplification and Harmonization of Customs Procedures (also known as the “Kyoto Convention”) was adopted by the WCO and entered into force in 2006. Its footprint is everywhere in the ATF. For example, the appeal procedures of the ATF were modeled after chapter 10 of the Kyoto Convention. 131. There is an issue here. Articles 2(h), 3(f), and Annex II.3(d) of the Agreement on Rules of Origin (ROO) state that advance rulings should be issued within 150 days. Should we understand “reasonable” as being within a maximum of 150 days? This issue is open. 132. Ferrantino (2014) believes that there are significant gains to be made by using “advance rulings” in order to clarify tariff classifications. 133. The term “risk management” was rejected by the AB in its report on EC—Hormones, on the grounds that it had not been explicitly included in the SPS Agreement. In chapter 14, where we discuss this report in detail, we criticize this ruling since it is at odds with one of the cornerstones of the SPS Agreement—namely, that WTO members are free to choose their appropriate level of protection. Anyway, as we discuss in that chapter, this is probably only semantics since the AB did not reject the idea that WTO members are the ones to decide on their level of risk aversion. 134. In the EU, they are called “authorized economic operators,” and history of compliance is the key criterion for acceding to this category. The WCO has adopted an international standard to his effect, the SAFE Framework of Standards to Secure and Facilitate Global Trade; see WCO, SAFE Framework of Standards to Secure and Facilitate Global Trade, Brussels, June 2012. 135. ITC Business Guide, pp. 15ff. 136. Neufeld (2014, p. 8) shared this view, at least partially. 137. One can thus speculate that developing countries and LDCs have a strong incentive in classifying everything under Category B and opting for lengthy transitional periods: they will, thus, incite negotiations with donors to reclassify under Category C and receive cash flows to this effect. 138. This decision was adopted by the General Council on 1 August 1994; WTO Document WT/L/579, 2 August 2004, Annex D § 1. 139. §§ 5–6 further reinforce this point. 140. WTO Document TN/TF/1 of 16 November 2004; WTO Document TN/TF/2 of 15 July 2005. Section II of the Agreement was fortified following negotiations to include a series of specific measures aiming to ensure that the interests of developing countries will be taken into account; see WTO Document TN/TF/W/165/Rev. 15 of 27 March 2013. The level of development is, of course, a highly abstract benchmark to use, and de facto has led to no commitments by LDCs in the areas where it has been used so far. One can only wonder whether this is wise, since LDCs, as many studies show, could substantially profit from trade facilitation. 141. The statement is available at www.wto.org. The 2015 World Trade Report estimates an upper bound cost of $4 billion for the LDCs to implement the ATF. It underlines the importance of the endeavor since for some LDCs taxes at the border represent 45% of government revenues. .
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142. WT/PCTF/W/28 of 28 November 2014. 143. We discuss this topic in detail in chapter 20. 144. See, for example, the 2013 report at www.intracen.org, the official webpage of the ITC. 145. Earlier empirical literature is detailed in Maskus, Otsuki, and Wilson (2001). 146. In a similar vein, Fink, Matto, and Neagu (2002a and 2002b) have shown the impact of anticompetitive practices on port and transport services and telecommunications services. 147. Grainger (2015) reported that a lot remains to be done at the WTO level regarding the effective participation of the business community and the representation of its concerns. He suggested that the WTO should be inspired by the approach adopted in both UN/CEFACT and the WCO Private Sector Consultative Group, both of which favor enhanced participation of the business community, and pointed to the advantages regarding the quality of implementation if similar steps are taken at the WTO level as well. This is, of course, a solid view, since after all, it is the private sector that has the information, pays the cost of, and has the consequent incentive to effectively address delays in customs clearance. 148. Hoekman and Nicita (2011) pointed to larger gains if the talks extend to other items as well. In general, there are two ways to measure trade costs such as those addressed by the ATF. A direct measurement would entail collection of data on customs costs, on transportation and other similar charges. An indirect measurement, as the name suggests, would infer the amount of costs by comparing price differences across borders. Both methods have their weaknesses. The indirect method is an approximation, and inevitably a few items might slip through the cracks. The direct method is very demanding. Customs clearance-related costs might suffer from the differences in productivity across national customs, transportation costs about all modes of transport might be difficult to obtain, to provide but two examples. In practice, its limitations notwithstanding, it is the ‘indirect’ method that is most frequently used in practice. Novy (2011) for example, has estimated that trade costs (corresponding mainly to distance, quotas, freight costs) to trade between the US and Germany would correspond to a 70 percent ad valorem tariff. He ran the same simulation using a US-Canada transaction and the number was 25 percent. The ATF can, in principle, address at least some of these costs. The 2015 WTO World Trade Report estimates gains from the ATF in the range between 9 and 23 per cent (World Trade Report 2015, the WTO: Geneva, Switzerland). Moïsé (2013) and Rippel (2011). Suominen (2014) have explained how technology will increase gains even more and identified five areas that will contribute to this effect: world trade will move from business to business (B2B) to business to consumer (B2C) and consumer to consumer (C2C); threedimensional (3D) printing; global data integration that will help anticipate customer whims; hyperconnectivity (through faster planes and trains); the emergence of global currency (Bitcoin, a virtual currency, is already in place). We should note here the very helpful Logistical Performance Index, a benchmarking tool prepared by the World Bank that helps countries identify the challenges and opportunities they face in terms of trade logistics, and further includes suggestions that will help them improve their performance in this area. 149. The list of countries with laws that implemented the PSI Agreement has been reproduced in WTO Documents G/PSI/N/1/Rev. 1 of 11 October 2012, and G/PSI/N/1/Rev. 1/Addendum 1 of 6 May 2013.
Chapter 2 1. One could prima facie make the point that importing states need not bother with an AD investigation regarding goods, the tariffs of which have not been bound. They could simply go ahead and raise the level of duties instead. Raising unbound duties instead of imposing AD duties may not be an option since the tariff increase would have to apply on a most favored nation (MFN) basis, when the importer would rather punish one source (e.g., because it might want to avoid alienating other trading partners). It could, further, be the case that a law needs to be formally amended for a tariff change to occur, even in cases where the practiced tariff is not bound. In such a case, an AD procedure could be less costly. Bown (2010) showed that a number of WTO members
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imposed AD duties on imports from China before 2001 (that is, before the Chinese accession to the WTO), at a time when they could simply have raised their import duties. 2. Irwin et al. (2008) mentioned that this sentence was added at a late stage of the negotiation of GATT, following a proposal by the Cuban delegation to this effect. 3. Note that dumping is not considered illegal, probably because it is private practice, and GATT can pronounce on the illegality of state practices only. On the origins of unfairness in international trade and the evolution of its coverage, see the excellent work by Beviglia-Zampetti (2006). 4. WTO adjudicating bodies have consistently held that antidumping is governed not only by the WTO AD Agreement, but also by Article VI of GATT (see, for example, the AB report on US–1916 Act). It is difficult to confirm that this approach is in line with the negotiating intent. One might have legitimately thought that the WTO AD Agreement, being later in time, had superseded Article VI of GATT. Be that as it may, the consequence of the current construction of the regulatory framework applicable to AD is twofold: first, dumping is recognized as an “unfair” practice, a practice to be condemned when it causes injury (there is no statement regarding its unfairness in the context of the WTO AD Agreement); second, the obligations of IAs when examining dumping practices originating in nonmarket economies (NMEs), an issue discussed later in this chapter, are mentioned in Article VI of GATT, but not in the WTO AD Agreement. Czako et al. (2003), Mavroidis et al. (2008), Messerlin (1990), Palmeter (1995), Stewart and Dwyer (2010) provided extensive discussions about the negotiating record and objectives of the WTO AD Agreement. 5. E/PC/T/33, at p. 34 (Article 39.3 of the London Draft). 6. Preliminary Draft Charter for the International Trade Organizations of the United Nations, Department of State, December 1946, Publication 2728, Commercial Policy Series 98, at p. 8 (Article 17). 7. E/PC/T/C.II/48 of November 11, 1946, at pp. 1ff. 8. Id., at p. 16. 9. E/PC/T/C.6/55, at pp. 16ff. 10. E/PC/T/103, at pp. 7ff. 11. Irwin et al. (2008). 12. Jackson (1969), at pp. 408ff. 13. For grounds to be invoked on the basis of Article XX of GATT, another contingency must occur as well: the WTO member invoking, say, public health as grounds for restricting trade cannot afford protection to domestic production when doing so. Measures adopted, nevertheless, do not aim to protect national producers. As we saw in Chapter 9 of volume 1, WTO members incur an obligation not to discriminate between domestic and foreign producers by virtue of the chapeau of Article XX of GATT. 14. Bhagwati (1988) stated that AD duties have been taking the place of tariffs and called this the “law of constant protection.” Using data put together by Laird and Yeats (1990), Mansfield and Busch (1995) reached the conclusion that AD duties and tariffs are substitutes, in the sense that what some trading nations give with one hand in terms of tariff concessions, they take with the other by imposing AD duties. Ray (1981) pointed to evidence to the contrary. Tables 2.1 and 2.2 provide evidence of the use of AD duties. 15. The injury to competition standard would require trading nations to evaluate the economywide effects of dumping, not simply the welfare implications to producers producing goods substitutable for the dumped goods. 16. This provision would suggest that, in principle, one should not use the three contingent protection instruments interchangeably. Dumping should be counteracted through AD and not, say, through safeguards or countervailing duties.
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17. Its official acronym is CDSOA (Continued Dumping and Subsidy Offset Act). 18. The heart of the issue here was whether Byrd Amendment payments to the injured US industry would disincentivize exporters to the US market, which would stop dumping as a result. Horn and Mavroidis (2005a) have voiced their criticism of the manner in which the AB has handled the interpretation of Article 18.1 of AD, and they pointed out that it is equally plausible that, as a result of Byrd Amendment payments, exporters continue to dump—and possibly more aggressively so. Consequently, the AB seems to have punished a statute that might (or might not) disincentivize exporters to continue dumping. This decision, consequently, expands considerably the coverage of Article 18.1 of AD. Where one draws the line is a question of future jurisprudential experience. Bhagwati and Mavroidis (2004) added their voices to this criticism, arguing that the problem with the US law is double-dipping (AD duties are in place, and a subsidy is being paid as well), and that this is where the AB should concentrate its analysis. 19. For a more recent confirmation, see the panel report on US–Countervailing and Antidumping Measures (China), at § 7.351. Prusa and Vermulst (2013) approved this outcome but noted that, by limiting its findings to measurement issues, it has not hermetically shut the door to double-dipping. Pauwelyn (2013) disagreed, noting that the AB exercised judicial activism since there is no support for this finding in the text of the AD Agreement. 20. For confirmation, see the panel report on US–Countervailing and Antidumping Measures (China), at §§ 7.345ff., and its conclusions reflected in § 7.351 and § 7.396. 21. Recall that it is Article VI of GATT, not the AD Agreement, that condemns dumping for being “unfair.” We discussed the relationship between the AD Agreement and Article XX of GATT in chapter 9, volume 1. 22. The AB, in its report on US–Hot-Rolled Steel, confirmed that sales outside the ordinary course of trade must be excluded by the IA from the calculation of NV (§ 139). 23. See footnotes 4 and 5 to Article 2.2.1 of AD. In the course of the ongoing negotiations of the Doha round, it has been argued that the test as currently set forth in Article 2.2.1 of AD has some important negative implications for those industries whose pricing is especially sensitive to shifts in supply and demand, as well as for agricultural and other commodity sectors whose producers are typically “price takers.” Owing to the price volatility, the result of the current test would be higher NVs reflecting higher price levels that would not normally be sustainable in the market, thus not reflecting market realities. It has been proposed to consider as sales outside the ordinary course of trade, only those the weighted-average selling prices of which are below the weighted-average total cost, regardless of the quantities of transactions that may have been individually priced below cost; see WTO Documents TN/RL/GEN/95 and TN/RL/GEN/9, which call for a repeal of the current 20 percent test. 24. Prusa and Vermulst (2010) discussed this concept as it has been interpreted across cases in WTO case law. 25. The AD Agreement does not specify whether the sufficient volume test relates to all domestic sales by an investigated exporter or only to those sales by the exporter, which are made in the ordinary course of trade. It has been argued that the purpose of the test is to determine whether the domestic market is sufficiently large to enable domestic sales to serve as a legitimate measure of NV, and all sales, even those outside the ordinary course of trade, should be taken into account in making this benchmark determination; see WTO Document TN/RL/GEN/9, where the Friends of Antidumping Negotiations (FANs) have attempted a clarification on this score. 26. In a highly entertaining journalistic account, Macy (2014, pp. 346ff.) described how surrogate countries can change over time. 27. There are examples in practice of dubious consistency with the rules: the EU, for example, used Swedish data for years (when Sweden was not an EU member) when investigating allegedly dumped imports from Ukraine.
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28. Article 2.2.1.1 of AD: the term “on the basis of,” which is reflected in this provision, arguably leaves some room for discretion. The Panel on Egypt–Steel Rebar emphasized that only those costs recorded in the books in accordance with generally accepted accounting principles (GAAP) and that reasonably reflect the costs associated with the production and sale of the product under consideration are to be included in the cost calculation (§ 7.393). In the same vein, the Panel on US–Softwood Lumber V underscored the fact that these provisions are not absolute and apply only to the extent that the statutory conditions for their application have been met (§ 7.237). When departing, though (that is, when deciding not to use the books of the investigated company), an IA must set forth the reasons for doing so (Panel on China–Broiler Products, at § 7.164). 29. “GAAP” refers to the standard framework of guidelines for financial accounting used in any given jurisdiction. They are also known as “accounting standards” or “standard accounting practice.” Many countries already use or are progressively converging on a common denominator—namely, the International Financial Reporting Standards (IFRS) that were established and maintained by the International Accounting Standards Board (IASB). 30. In this panel’s view (§ 6.96), if one of these methods is properly applied, the results are by definition reasonable, as required by Article 2.2 of AD. The same panel held that the three methods are on an equal footing (§ 6.66). Textually, this is a correct understanding of the agreement, although moving away from using actual data supplied by the exporter carried the inherent danger of moving to arbitrary benchmarks. Irrespective of methodology chosen though, constructed NV must be based on actual data. The AB joint reports on China-HPSSST (EU), and China-HP-SSST (Japan) have made this point clear in paragraph 5.43. 31. It did note, however, that sticking to a narrower definition makes the methodology used fully consistent with the objectives of the agreement (§ 7.113). 32. The Panel on EC–Bed Linen (Article 21.5–India) held that the “weighting” can be performed on the average volume or value basis (§ 6.81). Accordingly, the use of data from one exporter only is not permitted; see the AB report on EC–Bed Linen, at § 76. See, on this score, Grossman and Sykes (2007a). 33. This panel concluded that it was not unreasonable for the US IA to allocate part of a large settlement amount relating to claims concerning hardwood to the production and sale of softwood lumber, as this settlement was a cost borne by the company as a whole. IAs retain important discretion in this respect. In Korea–Certain Paper, the panel agreed that the IA could have done a better job and use data from other sources as well, but it found nothing wrong with the course of action adopted by the Korean IA since its discretion was not prejudged one way or the other by the agreement (§§ 7.99ff.). 34. Horn and Mavroidis (2005b) discussed this report. 35. An IA cannot use “speculative” data when calculating SG&A. In China–HP-SSST, the panel found that China had violated its obligations when it used data that pertained to cost of production multiplied by certain coefficients, which were the planned internal rates used by the investigated company in preparing price/cost allocations for orders. The panel held as much even though the IA had requested the company to explain this issue, and the latter had failed to do so. In the panel’s view, an unbiased IA could not simply assume the “corrective potential” of coefficients without any evidence to this effect (§§ 7.64ff., and especially 7.66). 36. In the Doha round of negotiations currently under way, the question of how to deal with affiliated parties in determining NV and EP has been the subject of some interesting proposals. In the case of Brazil and Chinese Taipei, the FANs have, as a group as well as individually, submitted proposals intended to clarify and restrict the meaning of the term “related or affiliated party” based on the control criterion. Practically, the FANs’ proposal defines “affiliated parties” as being similar to those that are consolidated into a single financial statement, into which a responding party would also be consolidated in accordance with the accounting standards in many countries. In their view, this would avoid many of the problems relating to the provision of information discussed earlier. The proposals also suggest changes to the text of the AD Agreement, inter alia, introducing an objective test for determining whether the sales, even when made to related parties, are actually unreliable, and eliminating
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the possibility of replacing unreliable sales to related parties with downstream sales; see WTO Documents TN/ RL/GEN/19, 67, 82. 37. In US–Hot-Rolled Steel, the AB, reversing the panel in this respect, agreed with the US that, in an NV determination, similar use of such downstream sales may be done for constructing the NV (§§ 154ff.). This finding is, of course, at odds with the text of the AD Agreement (contra legem), which unambiguously provides other alternatives, and not for this one. Still, following this report, NV can now also be constructed by using sales to the first unaffiliated party. 38. See the text leading to, as well as the footnote 73 of, the panel report. 39. For example, the fact that a trading company handles domestic or exports sales of an investigate product does not in and of itself mean that there is a difference that affects price comparability and that an adjustment has to be made; the Panel on Korea—Certain Paper decided as much (§ 7.147): it rejected the need for an adjustment, as it was not convinced that there were sales-related services rendered by the trading company with respect to domestic sales of the exporters’ products in the domestic market that were not rendered in the exporters’ export sales to the importing country. 40. For confirmation, see the AB report on EC–Fasteners (China), at § 527. With respect to a request to make adjustments for differences in packaging costs of the product when sold domestically compared to when exported, the panel, in its report on EC–Tube or Pipe Fittings, considered that no documentary evidence had been supplied by the Brazilian producer in spite of a clear request by the IA to provide such evidence. In such circumstances, the panel took the view that there was no obligation on the IA to establish the need for an adjustment through on-site verification, as argued by Brazil (§ 7.192). 41. Think of the following: Hansen and Prusa (1996) showed that, assuming constant market share, the probability of a positive dumping finding is higher with a larger number of exporters. This is what they termed “superadditivity.” Gupta and Panagariya (2006) provided a theoretical explanation for superadditivity: the larger the number of exporters involved, the higher the risk of free-riding (producers will free-ride on other producers’ recourse to legal experts, etc., and hence defense against dumping charges will not be optimal). It is doubtful if, as a matter of principle, Article 2.4 of AD should make room for this type of consideration as well, and a negative answer is probably warranted here, the influence of superadditivity on dumping margins notwithstanding. 42. The method to perform due allowances should not be confused with the statutory methodologies to compare NV to EP (and thus decide on the dumping margin), a point discussed in the next subsection. 43. The AB, in US–Hot-Rolled Steel, upheld this point in § 178 of its report. 44. Argentina–Ceramic Tiles, at § 6.113, panel report. 45. This issue arose when Brazil argued that, to account for the influences that devaluation might have had when calculating the dumping margin, a particular method had to be privileged by the European IA. The AB rejected all arguments to this effect, arguing that nothing in the AD Agreement privileges one methodology over the other when a particular set of facts is present (§ 76). 46. The Panel on US–Stainless Steel (Mexico) dealt with a US practice called “multiple averages.” The US administration would compare various WAs between them. The panel held that, when recourse to “multiple averages” is made, differences in timing may be considered to give rise to a comparability problem only if two elements exist: a change in prices and differences in the relative weights by volume within the POI of sales in the home market compared to the export market (§ 6.123). 47. This could be the case, for instance, when seasonal goods are traded. 48. See, on this score, Janow and Staiger (2007) and Grossman and Sykes (2007a). The Panel on Argentina– Poultry Antidumping Duties faced the following issue: two Brazilian companies had reported to the Argentine authorities all relevant documents concerning their domestic sales. The Argentine authorities compared the WA
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of a sample of these transactions with the WA of all EPs. The panel held that this was inconsistent with Article 2.4.2 of AD since “a weighted average normal value” is a WA of all domestic sales, other than those that may be disregarded pursuant to Article 2.2.1 of AD (§§ 7.272ff.). 49. Originally, both the EU and US IAs had frequent recourse to zeroing. Eventually, the EU IA abandoned it, but others continued with zeroing. For a concise history of the zeroing case law, see the Panel on US–Orange Juice, §§ 7.89–136. 50. We discuss “investigation period” later in this chapter. For now, it suffices to state that this term refers to the period for which an IA will review transactions in order to establish the dumping margin. 51. US–Zeroing (EC), and US–Softwood Lumber V. See Bown and Sykes (2008); Broude and Moore (2013); Prusa and Vermulst (2009, 2011, 2013); Inama and Vermulst (2010); Crowley and Howse (2010); Crowley and Palmeter (2009); Hoekman and Wauters (2011); Saggi and Wu (2013); and Huerta Goldman (2013). 52. The reasoning in US–Softwood Lumber V, and US–Softwood Lumber V (Article 21.5–Canada) is not the same, although the former deals with a WA-WA and the latter with a T-T method. 53. US–Zeroing (Japan); US–Stainless Steel (Mexico). 54. Mitchell and Prusa (2015) offer a comment on this case, explaining why it is déjà vu all over again. 55. A few WTO members have abandoned zeroing ever since—quite notably, including the EU. 56. The negotiating history of the AD Agreement is inconclusive. Clearly, some delegations favored an official acknowledgment to the effect that zeroing was a permissible practice. Equally clearly, a number of delegations were opposed to this practice; see Stewart, Merkel, and Kerwin (1993). 57. The US, the last bastion of zeroing, have initiated a procedure to repeal zeroing; see Federal Register, vol. 75, no. 248, at pp. 81,533ff., 28 December 2010; see also Federal Register, vol. 77, no. 30, at pp. 8,101ff., 14 February 2012. 58. See Ahn and Messerlin (2014) on this score. 59. At this writing two disputes on this score were still pending, namely, US–Washing Machines (Korea), and US–Antidumping Methodologies (China). In the issue of targeted dumping, see the pertinent comments by Durling (2015). 60. During the Doha round negotiations, the Chairman of the negotiating group on antidumping, Guillermo Valles Galmes, introduced a document where he re-introduced zeroing explicitly and as consideration tightened the screws of sunset reviews hoping that a deal along these lines could be done (WTO Document TN/RL/W/213 of 30 November 2007). A few years later, he introduced another document where no provision for zeroing was made, and no tightening the screws of sunset reviews was proposed either (WTO Document TN/RL/W/254 of 21 November 2011). This made negotiators rethink the merits of the first paper, but in the overall doom and gloom surrounding the Doha round it was all forgotten. 61. In the same vein, see the Panel on EU–Footwear (China), at §§ 7.88ff. 62. There is only a limited insurance policy against this risk, in the sense that nonsampled exporters can request individual investigations (within the confines of feasibility, of course). 63. In theory, it could very well be the case that offshoots of the same company (say, Chrysler, Germany and Chrysler, UK), adopt divergent pricing policies when exporting to Japan. It would be erroneous in similar cases (and indeed, it would defeat the very purpose of the AD Agreement) to calculate one dumping margin for the two Chrysler companies simply because they belong to the same group, even though they have adopted divergent pricing policies. The panel did not adequately explain itself on this score. 64. Review Working Party II on Tariffs, Schedules, and Customs Administration, Article VI, Proposal by the Czechoslovak Delegation, Revision W.9/86/Rev. 1, p. 1. Note that the country was an Eastern bloc country when
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the proposal was made, probably in order to shun something more radical. The first NME case was the 1960 US investigation concerning “Bicycles from Czechoslovakia,” 25 Federal Register (1960), at p. 6,657. 65. In EC–Fasteners (China), the EU had chosen India as the “surrogate” country. Bown and Mavroidis (2013) examined the publicly available trade data and concluded that India had both an extremely small share of the EU import market (relative to China and Chinese Taipei); the EU could have picked Chinese Taipei but did not. India had relatively higher unit values than EU imports from both China and Chinese Taipei and, to the extent that higher unit values in the EU import market corresponded to higher costs and higher prices for domestic sales at home, which would make India an attractive candidate (in the eyes of the EU) for an analog country. The EU, further, chose to request information from only two Indian firms, only one of which, Pooja Forge, provided information that the EU deemed adequate to use to construct the NV for all the Chinese firms in the dumping margin calculation. From a statistical perspective, the result of this process is that the information of only one Indian firm was used to construct the NV for more than 110 Chinese exporting firms. For statistical reasons alone, Bown and Mavroidis (2013) concluded that it was highly remote that this one Indian firm represented the average Chinese exporting firm (or even the Chinese firm producing the average exported product) from the universe of Chinese exporting firms ultimately confronted with the AD duty. 66. WTO Document WT/L/432, at § 15. 67. WTO Document WT/ACC/CHN/49, at § 151. 68. Those WTO members that do not have an established practice in this respect should make best efforts to ensure that their methodology for determining price comparability is along similar lines. 69. In the meantime, China has concluded market economy status (MES) agreements with 97 countries, the object of which is to secure that all these countries resign themselves to the possibility of treating China as an NME before 2016; see Shambaugh (2013), at pp. 100 and 160ff. The WTO has not been notified of similar arrangements. 70. “Material retardation” should not be confused with “infant industry”: it exists when an industry was about to be established, but its establishment was materially retarded because of dumped imports. Once the industry has been established, it cannot be retarded anymore. The Panel on Korea—Resins found that Korea had not shown that dumping had led to material retardation because of the discrepancy between the time frame of indicators of material retardation, and the time frame for consideration of volume of price and effects of imports under investigation (§ 297). A proposal has been tabled in the Doha round to clarify the term “material retardation” along these lines; see WTO Document TN/RL/GEN/122. 71. Knetter and Prusa (2003) noted that of 800 cases investigated in the period 1980–1998, the US Department of Commerce (DOC), in charge of establishing the dumping margin, issued a negative dumping decision in only 28 cases (3.5 percent of the total); on the other hand, the US International Trade Commission (USITC), which was in charge of establishing injury, made negative injury decisions in 37.5 percent of all cases submitted to it during the same period. If DOC kicks off the process and the USITC is not implicated until dumping margins have been established, it is relatively unclear whether duties will be imposed at the end of the process; the opposite is true when USITC moved first. 72. In Thailand–H-Beams, the AB stated that it considered Article 3.1 of AD as an overarching provision that informed the more detailed obligations in the succeeding paragraphs of Article 3 of AD (§ 106). 73. Panel analysis usually lumps the two together without asking questions regarding market power. 74. Initially, the injury test in AD has been exclusively based on a “trend” approach; that is, on descriptive explanations of the evolutions of the key variables in the AD case; namely, the transaction prices for sales of the relevant imports and domestic products and the time series on imports, with a review of the individual transactions in case of alleged lost sales (Morkre and Kruth 1989; Prusa and Sharp 2001). Such trend analyses are necessary and useful, but they have a serious weakness: they are highly sensitive to subjective interpretation. One way to improve injury determination relies on modeling the market of a product (Boltuck 1991; Francois
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and Hall 1993). Such user-friendly models are based on prespecified forms of domestic supply, foreign (import) supply, and domestic demand. They take the form of spreadsheets requiring analysts to fill up a few cells defining the initial situation [domestic and foreign sales, appropriate (constant) price elasticities, and so on] before letting the model run. The main limits of this approach are being confined to the market of the product in question (it is a partial equilibrium model, even if there are more sophisticated versions) and being heavily dependent on initial data (price elasticities in particular). An alternative method consists of developing an econometric model of simultaneous relations (equations) of supply and demand. From the demand side, the price of the product under investigation may be stated as a function of several exogenous variables: examples include the domestically produced quantity, the price of the imported product from countries under investigation as well as for countries not included in the investigation, and the quantities produced of goods derived from the product under investigation (for instance, of autos built from the investigated cold-rolled steel). From the supply side, the price of the product under investigation may be stated as a function of several exogenous variables, such as the domestically produced quantity (again), the available production capacity, and the prices of the various materials important for producing the product under investigation. Well-oiled econometric techniques allow estimating the coefficients of each of the chosen exogenous variables and checking whether the corresponding calculated (predicted) price fits well the observed evolution of the price. If this is the case, the coefficients of each of the exogenous variables give a sense of their relative impact on the price of the product investigated. In particular, the coefficient of the exogenous variable “imports” gives a sense of whether imports have played a key role in the observed decline of the product price or not (that is, in the observed injury). The econometric approach offers a more encompassing analysis than the model approach to the extent that it is based on a wider range of information (it is not just limited to the market if the product is under investigation—it also can include a wide range of variables, adapted to each case, from markets of related products). The negative aspects of the econometric approach are that the model may be misspecified (for instance, a critical exogenous variable is not taken into consideration, or not in an appropriate manner) and that it may require a lot of data. Because all the methods have strengths and weaknesses, the best approach is to see these frameworks as complementary, rather than substitutable, and to use the most appropriate ones for each case. 75. Price undercutting, suppression, and depression must be significant (Article 3.2 of AD), but there are no statutory quantitative criteria to this effect. 76. See the discussion of this case in Davey and Sapir (2010); see also Grossman and Sykes (2011). 77. Article 4.1 of AD adds: “except that: (i) when producers are related to the exporters or importers or are themselves importers of the allegedly dumped product, the term ‘domestic industry’ may be interpreted as referring to the rest of the producers.” 78. The AD Agreement does not know about the category of DCS products that was covered in chapter 7, volume 1. Prima facie, this would mean that injury analysis will be facilitated for the IA since the impact of dumped imports will, other things equal, be greater, the narrower the class of products that come into the equation. 79. Similarly, if the product scope is broadened (to avoid easy product shifting) but some of the widened scope is not produced domestically, then injury analysis might become problematic. 80. See the panel reports on EC–Salmon (Norway), at §§ 7.13–76, and US–Softwood Lumber V, at §§ 7.139–58. 81. It has been proposed in the course of the Doha-round negotiations, which are still continuing, to change this language and require that the domestic producers in question represent more than 50 percent of total domestic output; see WTO Documents TN/RL/GEN/27, and TN/RL/GEN/62. 82. See also the AB report on US–Cotton Yarn, at §§ 100–101. 83. A proposal has been put forward to limit the discretion of the IA to exclude domestic producers from the injury determination where the total import value is relatively low compared to its sales, or where the imports in question relate to a few models of the like product and were made to fill the gaps in its range of products; see WTO Document TN/RL/GEN/62.
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84. See, e.g., Egypt–Steel Rebar, at § 7.36; EC–Bed Linen, at § 6.159; Mexico–Corn Syrup, at § 7.128; and EC–Tube or Pipe Fittings, at § 7.304. 85. See the AB report on Thailand–H-Beams, at § 125. 86. In other words, not each and every injury factor must be indicative of injury, and it is thus not necessary that all factors show negative trends (Article 3.4 of AD, last sentence); see the Panel on EC–Bed Linen (Article 21.5–India), at § 6.213. 87. Note, however, that in previous cases, panels expressed the view that the consideration of the factors in Article 3.4 of AD must be apparent in the determination, so as to enable the panel to assess whether the IA acted in accordance with Article 3.4 of AD at the time of the investigation; see the panel reports on Guatemala–Cement II (§ 8.283) and EC–Bed Linen (§ 6.162). It is in Egypt–Steel Rebar that the panel first emphasized the importance of the written record even outside the final determination (§ 7.49): if there is no such written record, whether in the disclosure documents, in the published determination, or in other internal documents, explaining how certain factors have been interpreted or appreciated by an IA during the course of the investigation, there is no basis on which a member can rebut a prima facie case that its evaluation under Article 3.4 of AD was inadequate or did not take place at all. In particular, without a written record of the analytical process undertaken by the IA, a panel would be forced to embark on a post hoc speculation about the thought process by which an IA arrived at its ultimate conclusions as to the impact of the dumped imports on the domestic industry. A speculative exercise by a panel is something that the special standard of review in Article 17.6 of AD is intended to prevent. 88. Later in this chapter, we will discuss the obligation of an IA to look for factors other than those mentioned in the body of Article 3.4 of AD, and examine their impact in the context of our discussion on the causality requirement. 89. In a similar vein, the Panel on EC–Tube or Pipe Fittings rejected a number of Brazilian arguments that blurred the boundaries between Articles 3.4 and 3.5 of AD, the forum for causation analysis (§ 7.335). 90. To provide an illustration, suppose that from year 2 to year 3 in the investigation period, production and sales dropped, whereas stocks went up significantly. In the same period, the domestic industry lost significant market share, and, while the domestic industry’s exports went up during the investigation period, this was not enough to stop the big market share loss. Wages also dropped significantly, and the domestic industry fired a certain number of employees. Overall, this shows a declining industry because of dumped imports. 91. See also the Panel on EU–Footwear (China), at §§ 7.404ff. 92. This panel did not identify any other criteria. See also the Panel on EC–Salmon, at §§ 7.125ff. 93. The AD Agreement uses the term “should” in the context of the factors listed in Article 3.7 of AD. Consequently, the Panel on US–Softwood Lumber VI took the view that, unlike the situation under Article 3.4 of AD, consideration of each of the factors listed in Article 3.7 of AD is not mandatory. According to this panel, whether a violation of Article 3.7 of AD exists would depend on the particular facts of the case, in light of the totality of the factors considered and the explanations given (§ 7.68). 94. In the same report, the AB held that any conclusion that there is greater likelihood that a panel will uphold a threat of injury determination rather than a determination of current material injury, when those determinations rest on the same level of evidence, would be erroneous (§ 110). 95. The Panel on China–X Ray Equipment put it eloquently when it stated that whereas Article 3.4 of AD is about examining injury factors, Article 3.5 of AD is about attributing injury to dumping and ensuring that the nonattribution obligation has been observed (§ 7.265). 96. Case law has confirmed that this list is of an indicative character; see Panel on EC–Tube or Pipe Fittings, at § 7.359; It also has clarified that a factor is known as soon as it has been raised by a party; see Panel on EC–Tube or Pipe Fittings, at § 7.359. In its report on EC–Tube or Pipe Fittings, the AB added that it is irrelevant
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if an interested party has raised a factor at one stage of the investigation only, and not consistently throughout the investigation. What matters is whether a factor was raised (§ 178). 97. Note, nonetheless, that in US–Wheat Gluten, a safeguard case, the AB suggested that an IA cannot remain passive and rely only on evidence produced by the parties to the dispute. Whereas the Safeguard (SG) Agreement requests from an IA to evaluate all relevant factors, the AD Agreement imposes a requirement to examine known factors only. 98. Implicitly, the agreement requests economic and not statistical significance; on the difference between the two terms, see McCloskey and Ziliak (1996). Panels have accepted the “break the causal link” methodology (whereby an IA will examine whether certain factors have broken the causal link between dumped imports and injury suffered) as adequate to deal with the obligation to “separate and distinguish” the injurious effects of dumped imports from the injurious effects of other known factors, see the panel report on China–HP-SSST at §7.200. 99. In this vein, see also the Panel on EC–Tube or Pipe Fittings, at § 7.366. One can legitimately cast doubt whether classic legal analysis can be of help here: legal analysis asks the question whether dumped imports are a sufficient cause (causa adequata) or whether, absent dumped imports, there would be no injury (conditio sine qua non). The former test involves some value judgment; the latter is reminiscent of the but-for approach used in economics, but is limited to asking the question whether there was a break in the causality chain without possessing a methodology of how to do it. Economists would proceed to establish causality, either through direct estimation or through establishing the counterfactual (but-for approach). The most common method used for direct estimation purposes is regression analysis, where one estimates the relationship between a dependent and a series of independent (explanatory) variables: the intuition behind the counterfactual (but-for) approach is the close association being made between a cause of an event and a sine qua non condition of its occurrence. Here, a cause is the condition “but for” which the effect would not have occurred. The key issue here is how to construct the counterfactual. Economists either use trend analysis, where it is assumed that today’s world is a continuation of yesterday’s world, or empirical models. They will use econometric models, which use statistical techniques to test their validity, and calibration models (simulation), which take them for granted. Their differences, nevertheless, discuss subsidies in cotton through these lenses [see Greene (1993), Kelly (1988), Irwin (2003): for illustrations, see Sapir and Trachtman (2008)]. Grossman (1986) used multivariate analysis to analyze the causes of injury in the US steel industry. One lesson from Grossman’s study is that we really need to know if there is a third variable that causes the observed variables. The question arises whether that is the case from a legal perspective as well. In other words, is there a legal statutory requirement to treat imports as endogenous? Consider the following example: suppose that we know bad union contracts are weakening the steel industry and as a result, the unions make the domestic industry unprofitable and inefficient; the contracts make it hard for the firms to upgrade their technology (perhaps because they cannot lay off workers) and also result in “import pull,” where consumers turn to foreign countries for more technologically advanced steel. As a result, policy makers see both negative profits and higher imports. By themselves, imports are not sufficient to cause injury, but, absent imports, the industry might seek out a small profit. Does the law require the IAs to consider that imports are endogenous? The correct response seems to be negative, as we shall see in what immediately follows. In contingent protection, economists will often have recourse to “Granger-causality,” whereby they will test whether one variable consistently precedes another. This method requires many observations of both the dependent and the independent variables; otherwise, it might not be statistically reliable. It could thus be used in the context of AD, where many transactions are usually observed, but not in the context of subsidization. So, instead of asking if A caused B, we try to show that if A had not occurred, B would not have occurred either. 100. On EC AD practice in this respect, see Vermulst (1996). 101. Panels have rejected arguments that the analysis is to take place at a particular level of trade (Egypt– Steel Rebar, § 7.73), on a quarterly basis (Thailand–H-Beams, § 7.168), or over a particular period of time (Guatemala–Cement II, § 8.266). More specifically, with regard to the price effect analysis, the Panel on EC–Tube or Pipe Fittings rejected the suggestion that an IA must base its price-undercutting analysis on a methodology
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that offsets undercutting prices with overcutting prices, and calculate one single margin of undercutting based on an examination of every transaction involving the product concerned and the like product. According to the panel, to do this would have the result of requiring from the IA to conclude that no price undercutting existed when, in fact, there might be a considerable number of sales at prices that might have had an adverse effect on the domestic industry (§ 7.276). This would not have been in line with the purpose of the price-undercutting analysis (§ 7.277). 102. In China–X Ray Equipment, the panel found (§ 7.183), that the simple listing of dumping margins does not suffice for China to be deemed to have examined the impact of the magnitude of dumping margins in injury analysis. In China–HP-SSST, the panel found that China had violated its obligations under Article 3.5 of AD by not accounting for the fact that the market share of the investigated companies had dropped during the POI, while the market share of domestic companies had increased during approximately the same time. 103. Although the AB, in this report, dealt with claims under the SG Agreement, its findings are relevant for claims made under the AD Agreement, in light of the similarity of the subject matter. 104. We will see in the next chapter of this volume that, in the SCM context, WTO members can act against injury suffered from subsidization in third (e.g., neither in their own nor in the subsidizers’) markets. 105. This is the case unless, for example, they are vertically integrated with producers of the input that they use. 106. Hoekman and Mavroidis (1996a) discussed this EU practice in detail. 107. C-358/89, Judgment of the Court of 11 June 1992, ECJ Reports I-3843ff. 108. This case was a harbinger of antidumping disputes that deal with value chains. The interests of EU industries (and member states) have become quite antithetical when a request is submitted to impose duties on inputs to final products. EU companies limited to value-added operations often find themselves entangled in battles against EU producers of the “dumped” inputs; see Dunoff and Moore (2014). 109. Howse and Neven (2007b) discussed this report in detail. 110. Price undertakings operate like a voluntary export restraint (VER): by raising prices, exporters will limit the volume of exports, other things being equal. 111. On EU practice on this score, see Vermulst and Waer (1997), and Van Bael and Bellis (2011). Yilmaz (2013) edited a volume where he examines relevant practice of 17 WTO members, developed and developing, and has included a chapter on practice by members with insufficient domestic judicial review. In 2013, a proposal was tabled to remove the option for a lesser duty rule from the EU legislative arsenal; see Vermulst and Sud (2013). A proposal has been tabled in the Doha round in favor of mandatory application of the lesser duty rule; see WTO Document TN/RL/ GEN/99 of 3 March 2006. The US issued a negative reaction; see WTO Document TN/RL/GEN/58. The lesser duty rule is unambiguously a trade advantage, and to this effect, it must respect MFN. 112. See for the AB description of this system in its report on US–Zeroing (EC), § 109. Bagwell and Mavroidis (2007) discussed the US system. 113. This is not to be confused with provisional duties under Article 7 of AD. 114. This is not to be confused with administrative reviews or changed circumstances reviews under Article 11 of AD (discussed later in this chapter). 115. Although the level of dumping might vary, there is no requirement to conduct a new injury analysis unless there is a specific request to this effect. The fear of eventual higher definitive duties thus imposes a pricing discipline on exporters to the US market. 116. Bloningen and Park (2004) have argued that the expected pattern of AD duty recalculations over time crucially depends on the foreign firm’s ex ante expectations of possible outcomes of AD policy enforcement.
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Their empirical analysis confirms the role of ex ante expectations in explaining observed patterns of AD recalculations; see also the criticism in Kelly (2010). 117. A proposal has been made during the Doha round to do away with this request requirement, making it mandatory for the authorities to refund any excessive duties collected. Linked to this is the proposed amendment of Article 9.3 of AD that introduces a requirement to establish, upon request, the margin of dumping based upon NVs contemporaneous with the export transactions; see WTO Document TN/RL/GEN/131. 118. The retroactive application is actually only a partial retroactivity: if the definitive AD duty is higher than the provisional duty paid, the difference shall not be collected, but if the definitive duty is lower, the difference shall be reimbursed (Article 10.3 of AD). In the case of a determination of threat of injury without the additional demonstration of the preventive effect of the measure, the provisional duties paid shall be refunded and any bonds released in an expeditious manner (Article 10.4 of AD). It goes without saying that should a negative final determination be made, any cash deposits made during the period of provisional measures shall be refunded and any bonds released (Article 10.5 of AD). 119. As per Article 7.3 of AD, provisional measures may be applied as of 60 days following initiation. 120. The rationale for this provision is to address cases where exporters quickly dump their exports after the initiation of an investigation and stop exporting thereafter. 121. There are essentially two reasons why the law of one price does not hold. The trivial reason is that products may not be identical, either because they are differentiated or because differences in the services offered by competing firms might lead them to charge different prices for the same product. But even if products are truly homogeneous, price dispersion is likely to be the rule rather than the exception to the law of one price. As Stigler (1961) argued 50 years ago, price dispersion is related to the existence of imperfect information and search costs of consumers. Product differentiation and imperfect information imply that firms might be able to exert some degree of market power, and hence to price-discriminate. Moreover, different firms can be expected to face different circumstances and to have different capabilities that result in different costs and therefore different prices—unless they operate under perfect competition, in which case prices have to be the same for all firms, and the different costs simply translate into different profits. The AD Agreement actually recognizes in two places that firms that produce the same product in the same country do not necessarily behave identically. The first acknowledgment of this comes in Article 5 of AD on AD initiations and investigations, where the agreement states that applications to national authorities by the domestic industry in the importing country for AD measures must contain a complete description of the allegedly dumped product, the names of the country or countries of origin of the export in question, the identity of each known exporter or foreign producer, and a list of known persons importing the product in question. Furthermore, Article 6.10 of AD, about evidence in AD investigations, states: “The authorities shall, as a rule, determine an individual margin of dumping for each known exporter or producer concerned of the product under investigation.” In other words, the agreement makes it clear that each “known exporter or foreign producer” must be identified and that the national authorities must determine individual dumping margins for each of them. There is no question of lumping them all together and assuming that they behave identically. 122. We are not dealing with a sampling scenario here. We assume that there is a small number of exporters that can be individually investigated. 123. US–Shrimp II (Viet Nam), at §§ 7.216ff. Any exporter can, under Article 6.10.2 of AD, submit evidence and request that the IA apply an individually calculated duty on its exports, if practicable. An IA can refuse to do so for reasons of lacking administrative capacity to calculate individual margins. Recall that nonsampled exporters must be named individually unless if it is impracticable to do so (Article 9.2 of AD). 124. We discuss recourse to the best information available later in this chapter. Suffice to say here that, when facing uncooperative behavior on behalf of exporters, an IA can, assuming that certain statutory conditions have been met, disregard submitted evidence and make its own assessment regarding the dumping margin.
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125. The absence of a definition of the term “related,” which appears in Article 9.5 of AD, poses problems and may lead to independent new exporters with some degree of relationship to old exporters being denied the right to an individual duty calculation. 126. § 7.266 of the panel report and § 323 of the AB report. 127. This is one reason why allowing the imposition of a high duty to be applied prior to the request for review is really unfair to the new exporter. 128. See Vermulst and Waer (1997). 129. Panel on US–DRAMS, at § 6.28. 130. See Francois and Palmeter (2008). 131. In the same case, the panel rejected a claim by Brazil to the effect that the determination could not have been made on the basis of positive evidence, as the data from before the devaluation were not informative about the situation that prevailed at the time that the duties were imposed (§ 7.106). 132. A similar critique has been expressed by various authors; see Grossman and Wauters (2008), as well as Bown and Wauters (2008). 133. Grossman and Mavroidis (2007b) discussed in detail and underscored the consequences of automaticity in this respect. This dispute dealt with claims under the SCM Agreement, the “sunset” provisions of which are identical to those included in the AD Agreement. 134. Stewart et al. (1993) discussed this point and the quid pro quos involved. 135. See also the Panel on US–Shrimp II (Viet Nam), at §§ 7.305ff. 136. Grossman and Wauters (2008) concurred, offering other reasons to support this conclusion. 137. This term refers to all companies investigated. 138. In the same report, the AB, upholding the panel’s findings, held in § 205, that an IA that uses a methodology premised on unsubstantiated assumptions does not conduct an examination based on positive evidence. Therefore, the use of unsubstantiated assumptions in and of itself does not satisfy the positive evidence-standard. The AB went on to explain that an assumption is not properly substantiated when the IA does not explain why it would be appropriate to use it in the analysis. 139. See the AB report on US–Carbon Steel, at § 88. 140. See the AB reports on US–Corrosion-Resistant Steel Sunset Review, at §§ 106–107, US–Carbon Steel, at § 87, and US–OCTG Sunset Reviews, at § 359. 141. The AB reached a similar conclusion in the CVD context in its report on US–Carbon Steel (§§ 81–4). 142. See also the Panel on US–OCTG Sunset Reviews, at § 7.303. 143. The same findings are reported in the Panel on EU–Footwear (China), at §§ 7.330ff. Note, however, that the opposite is true in EU law: in Euroalliages, T-188/99 (2001), the tribunal found that the standards applicable in the original investigation are applicable at the sunset stage as well; in C-422/02, Europe Chemi Com (2005), the Court confirmed the tribunal’s case law, invoking the EU interest as justification for its decision. 144. Also see the Panel on US–Antidumping Measures on OCTG, at § 7.117. In this case, the panel went on to examine whether the US International Trade Commission (USITC) determination of the likely volume of dumped imports, their likely price effects, and their likely impact was that of an unbiased and objective IA (§§ 7.122–43). 145. See also the Panel on US–Corrosion-Resistant Steel Sunset Review, at § 7.102.
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146. See also the Panel on US–Antidumping Measures on OCTG, at §§ 7.147–51. 147. WTO members are not, however, obliged to calculate margins. The AB ruling is conditional; e.g., it applies only if, the absence of obligation to this effect notwithstanding, an IA goes ahead and calculates dumping margins. 148. Bown and Wauters (2008) critically discussed this case. 149. This case concerned a sunset review of CVDs that have identical function to AD duties. 150. See the analysis of Howse and Staiger (2007) on this score. 151. Depending on availability of information, an IA will pick the exporter practicing the highest dumping margin. This scenario can also happen in the US retrospective system, where the identity of the reviewed exporter need not be the same during the preliminary and the definitive calculation of duties; see the US legislation to this effect in Federal Register, Vol. 78, Issue 213, November 4, 2013, pp. 65,963–65,970. 152. When Mandelson was Trade Commissioner, the EU has adopted a practice whereby duties will be imposed for periods considerable shorter than the statutory five years. Dordi (2010) discussed prominent EU cases where duties have been imposed for two years, following the advent of new legislation [e.g., Council Regulation (EC) 1472/2006 of 5 October 2006, imposing a definitive AD duty and collecting the provisional duty imposed on imports of certain footwear with uppers of leather originating in the People’s Republic of China and Vietnam (2006) OJ L275/1], and cases where, following a sunset review, duties have been reimposed for two years only [Council Regulation (EC) 1583/2006 of 23 October 2006, imposing a definitive AD duty on imports of ethanolamines originating in the United States (2006) OJ L294/2]. In recent years, the EU has changed its policy again and often adopts measures that last five years and are reviewed. 153. On this score, see also Palmeter (1995). To evaluate the loss to exporters hit by petitions to open an AD investigation, one will need to factor in trade deflection as well. The term “trade deflection” refers to the situation where exporters facing the potential for reduced volumes of exports because of the imposition of AD duties will look into switching their exports to other markets. If switching costs to other markets are low, then the damage can of course be reduced. Empirical evidence on the level of switching costs is mixed. Bown and Crowley (2015) offer two contradictory examples to this effect. Japan exports were deflected to the EU, when US imposed AD duties against them (2007), but the same did not happen in the case for Chinese exports when the US imposed AD duties (2010). 154. The agreement does not explicitly require individual producers’ support and appears to allow the authority to consider as sufficient the support expressed by a producers’ association on behalf of its members. Support expressed by associations is usually considered as equivalent to support expressed by all producers represented by this association, even though the association perhaps only supported the application following a small majority vote. It has, therefore, been suggested that the agreement be clarified in this respect by requiring that the standing determination be based on the positions expressed by individual domestic producers, and that representation by trade associations should not be counted collectively when such determinations are being made; see WTO Documents TN/RL/GEN/23; TN/RL/GEN/69. 155. Concentration is measured in various ways. “Four-firm concentration” (CR4) “six-firm concentration” (CR6), or even “eight-firm concentration” (CR8) consists of adding the market shares of the four, six, or eight largest firms in a market. If the sum is less than 50 percent, then the industry is typically considered to be lowconcentration, and if over 80 percent, then it is considered a high-concentration industry. The Herfindahl Index, also called the “Herfindahl–Hirschman Index (HHI)” after Orris C. Herfindahl and Albert O. Hirschman, the two economists that conceptualized it, pays more attention to larger firms. It adds the squares of firms’ market size, and again a metric is devised, above which the industry is considered concentrated. It can go up to 10,000. If the concentration index is below 1,500, then the market is considered competitive; when it is up to 2,500, it is considered moderately competitive, and from 2,500 onwards it is considered concentrated to highly concentrated, and a legitimate worry for antitrust authorities (that will factor in, other considerations as well, and most importantly the importance of barriers to entry in the given market). Because larger firms are more of a threat to rivalry in a given market, this is the index that competition authorities routinely use.
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156. The panel noted en passant that Article 5.4 of AD had been introduced in response to the controversial US practice of presuming that an application was made by or on behalf of the domestic industry, unless a major proportion of the domestic industry had expressed active opposition to the petition. 157. See Palmeter (1995). 158. The AB did not address this argument, satisfying itself that based on the evidence submitted, the number of successful petitions had not been “inflated” anyway (§ 292). Horn and Mavroidis (2005a) critically discussed this finding. 159. The Panel on US–Softwood Lumber V rejected the argument that the “reasonably available” language included in Article 5.2 of AD was there to toughen the obligation to provide evidence in the application, since it believed that the opposite was the case (§ 7.54). 160. Staiger and Wolak (1994) also find that the mere filing of a complaint aiming to open up an AD investigation can significantly reduce trade flows during the POI, even though no duties are in place during this period. Their explanation rests on legitimate expectations of exporters as to the outcome of the investigation. 161. The timing of the filing might have some effect on the chances of succeeding: Feinberg (2005) and Knetter and Prusa (2003) have discussed how business-cycle effects might affect the chance of prevailing when filing for antidumping duties. Feinberg (2005), using financial health of the domestic industry as proxy for (lack of) injury, showed why, in a booming market, it will be hard to demonstrate that injury has occurred as a result of dumping. 162. It is noteworthy that the few cases in which panels have called for revocation of the AD measures following a successful challenge of such measures before the WTO have all involved disputes in which the determination of initiation under Article 5.3 of AD was considered flawed. It appears that panels are of the view that in cases of a flawed initiation, there can be no justification for maintaining AD measures that were based on an investigation that should not even have taken place. This has certainly added to the bite of Article 5 of AD. See, for example, the panel reports on Guatemala–Cement II, at § 9.6; Argentina–Poultry, at §§ 8.6–7; and Mexico–Steel Pipes and Tubes, at §§ 8.9–13. 163. See, for example, the Panel on Guatemala–Cement II, at § 8.35. 164. Ibid. 165. Ibid., at § 8.36. 166. The Panel on US—Softwood Lumber V is an outlier in this respect since it seems to be of the view that the complexity of the case lowers the evidentiary threshold for initiation (§ 7.95). This panel appeared to give an IA the benefit of the doubt in complex cases, even where the complexity was largely self-imposed by the applicants, as in this case. Tension regarding the standard of review exists between the deferential approach of the Panel on US—Softwood Lumber V and the rather demanding approach of panels in all other cases discussed previously. 167. Had it been qualified as such, the addressee could have invoked violation of Article 6.1.1 of AD. 168. Although the agreement does not prescribe the conduct that must be followed in case of objections by the firm or the government in question, it appears that the best information available can be used (Article 6.8 of AD) if a company objects; it is not clear how to treat government objections, and there is a lack of relevant practice in this respect. 169. The Panel on EC–Tube or Pipe Fittings understood verification as an essentially documentary exercise that could be supplemented by an actual on-site visit (§§ 7.191–192). See also the Panel on Argentina–Ceramic Tiles, at footnote 65; and the Panel on Egypt–Steel Rebar, at §§ 7.326–327. 170. Howse and Neven (2007c) discussed these requirements in detail.
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171. Note, in this vein, that the Panel on EC–Salmon (Norway) held that recourse to the facts available could not be justified solely on the basis that information provided at the time of the on-the-spot verification was not verifiable (§ 7.360). 172. This panel dealt with a dispute under the SCM Agreement, which knows of a provision equivalent to Article 6.8 of AD. 173. As the Panel on Korea–Certain Paper noted, however, Article 6.4 of AD cannot be interpreted as denying an interested party access to its own confidential information, used, for example, in the calculation of a constructed NV (§ 7.201). In this sense, disclosure under Article 6.4 of AD differs clearly from the public notice requirements under Article 12 of AD, which do not allow the disclosure of any confidential information (§ 7.208). 174. In China–X Ray Equipment, the panel, quoting § 113 of the AB report on US—Lamb, held that the fact that a private party had not raised a claim during the investigation did not preclude the EU from raising it before a panel in a WTO litigation (§ 7.40). 175. See the Panel on Korea–Certain Paper, at § 7.199. 176. See the Panel on Guatemala–Cement II, at § 8.133. 177. On past case law regarding the good cause requirement, see Mavroidis et al. (2008). 178. See the Panel on Guatemala–Cement II, at §§ 8.219–20; the AB report on EC–Fasteners at §§ 537–539; and the Panel on Korea–Certain Paper, at § 7.335. The Korea–Certain Paper panel did add that, in its view, while some showing of good cause is necessary for both categories of confidential information, the degree of that requirement may, however, depend on the type of information concerned (§ 7.335). The Panel on Mexico–Steel Pipes and Tubes agreed with such conclusions and added that (§ 7.378): “a showing of ‘good cause’ for information that is ‘by nature confidential’ may consist of establishing that the information fits into the Article 6.5 (chapeau) description of such information: ‘for example, because its disclosure would be of significant competitive advantage to a competitor or because its disclosure would have a significantly adverse effect upon a person supplying the information or upon a person from whom that person acquired the information.’” 179. In China–Broiler Products, the panel found that China had violated its obligations under Article 6.5.1 of AD (and Article 12.4.1 of SCM, the corresponding provision in the SCM Agreement) when issuing a nonconfidential summary to the effect that the petitioner’s share and yield was between 50 and 100 percent of the market. This could not allow a “reasonable understanding” since the list of products and data concerning the yield had been transmitted in confidence and was not revealed to interested parties (§ 7.55). 180. See the Panel on Guatemala–Cement II, at § 8.213. The Panel on China–Autos (US) based its decision on the possibility to request an exemption from this obligation to support its understanding of the obligation to provide a nonconfidential summary akin to providing whatever is necessary for traders to have a meaningful opportunity to defend their interests (§§ 7.24ff., and especially 7.27). 181. The agreement does not explain in detail how the process works, other than the generic rule embedded in Article 4 of DSU. Usually, a request to a panel will be made to adopt special procedures to protect confidential information. In the Airbus/Boeing litigation discussed in the next chapter, a request for protection of highly sensitive business information (HSBI) was placed: all information was placed in one computer locked in one room at the WTO headquarters, the universal serial bus (USB) key entries of which had been sealed and no entry of a key was possible. Parties to the dispute, and third parties as well, could check the information followed by a camera: only the legal counsel of companies could get into the room (because legal counsels are subjected to their bar’s ethical rules). The members of the WTO Secretariat in this case could check the information without being followed by a camera. 182. See the Panel on Argentina–Poultry Antidumping Duties, at § 7.225.
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183. See the Panel on Guatemala–Cement II, at §§ 8.229–230. The same is true with respect to Articles 6.1 and 6.2 of AD. 184. There are numerous instances of claims under Article 6.9 of AD. The following cases provide characteristic illustrations. In Argentina–Poultry Antidumping Duties (§ 7.224), certain EP and NV data, which had been supplied by one of the parties but had not been used by the IA, were not considered by the panel to be essential facts that should have been disclosed to the interested party. Note, nonetheless, that the Panel on Argentina– Ceramic Tiles held that exporters should have been informed of the fact that their information, as submitted, was not going to be used for the final determination (§ 6.129). The Panel on Guatemala–Cement II rejected Mexico’s claim that the Guatemalan IA had violated Article 6.9 of AD by changing its injury determination during the course of the investigation from a preliminary determination of threat of material injury to a final determination of actual material injury without informing Cruz Azul, the Mexican producer, of that change (§§ 8.238–239). In China–Broiler Products, the panel held that the IA was under the duty to disclose the formula that it had applied in calculating dumping margins, since knowledge of this issue was as important as the disclosed data of domestic and export sales transactions (§§ 7.89–93). In China–Autos (US), the panel dealt with the allocation of the burden of proof. The US was not in possession of disclosures that had been made to private parties during the investigation process. It was in possession, though, of a disclosure that had been made to it; and from that, it had inferred that disclosures to exporters had fallen short of the requirements of Article 6.9 of AD. The panel held that the US had done enough to establish a prima facie case, and the burden had this shifted to China to rebut this presumption (§§ 7.72ff., and especially 7.77). 185. Reduction in export income means less taxable income. 186. If no request has been tabled, then interested parties will get informed about the proceedings through the various communications that the IA must make in light of the transparency obligations that it incurs anyway. We discuss transparency later in this chapter. 187. This case dealt with the application of Article 12.7 of SCM; that is, the corresponding provision in the SCM Agreement. 188. In China–Broiler Products, the panel held that an IA always has the duty to explain which available facts it used to reach a conclusion: it found that, in this case, China had violated Article 6.8 of AD since it had failed to explain which data supported its decision to impose an all other’s rate of 105.4 percent (§ 7.313). 189. WTO members must make sure that they are in one of these three scenarios before taking recourse in BIA. In US–Hot-Rolled Steel, the AB warned IAs against confusing willful lack of cooperation, which could allow an IA to use adverse inferences, with cases of genuine difficulty in procuring the requested information (§§ 99–100). Therefore, the AB concludes (§ 104): “if the investigating authorities fail to ‘take due account’ of genuine ‘difficulties’ experienced by interested parties, and made known to the investigating authorities, they cannot ... fault the interested parties concerned for a lack of cooperation.” 190. The risk of similar behavior should not be exaggerated, though. Exporters will have to factor in the negative impact the conduct of an investigation has had on the flow of exports. 191. The Panel on EC–Salmon (Norway) added that merely because information was not provided at the time of the on-the-spot verification does not imply that such information is not verifiable (§ 7.360). 192. One should not confuse unnecessary information, with information that IAs can legitimately disregard. Less than ideal information cannot be disregarded if the party providing it has acted to the best of its ability (Annex II, § 5 of AD): “Even though the information provided may not be ideal in all respects, this should not justify the authorities from disregarding it, provided the interested party has acted to the best of its ability.” See, on this score, the AB report on US–Hot-Rolled Steel, at § 81. This does not mean though, that, because IAs cannot disregard similar information, they must ipso facto treat it as if it were necessary for the outcome of the investigation. The Panel on Egypt–Steel Rebar held that (§ 7.242) “... an interested party’s level of effort to submit certain information does not necessarily have anything to do with the substantive quality of the informa-
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tion submitted and thus the fact of acting to the best of one’s ability by itself does not preclude the investigating authority from resorting to facts available in respect of the requested information.” 193. Case law is not very clear on this score, and different attitudes have emerged in practice. The Panel on Argentina–Ceramic Tiles, for example, did not address this issue head on; rather, it linked it to the duty of an IA to specify the information requested (§ 6.66). 194. See the Panel on US–Steel Plate § 7.60. 195. Case law has been quite strict when it comes to interpreting this requirement, but there are some inconsistencies: in Korea–Certain Paper, though, the panel relaxed its understanding of the duty to show special circumspection (§ 7.94). 196. WTO Document G/ADP/6, adopted by the ADP Committee on 5 May 2000. On its legal value, see Mavroidis (2008). 197. A similar view has been expressed in the Panel on Guatemala–Cement II, at § 8.266. 198. On the one hand, it is commendable that the AB uses secondary law, since it shows deference toward the will of the principals, the WTO members. On the other hand, however, this attitude is not problem-free. WTO members might prefer to abstain from regulating specific issues if they feel that if their decisions at the committee level have legal consequences. According to the Agreement Establishing the WTO, the Ministerial Conference and the General Council have the right to adopt interpretations of the various agreements (Article IX.2). In Chapter 13 of this volume, we will discuss the consequences of an AB decision to see “legal effects” in a decision by the Technical Barriers to Trade (TBT) Committee, and the hostile reaction that it provoked among some members of this committee. 199. See also the Panel on US–Steel Plate, at §§ 7.114ff. 200. Practice shows that this is the typical case: Panels see no contradiction between the two standards. For example, the Panel on US–Corrosion-Resistant Steel Sunset Review held that the standard of review applicable in the context of sunset reviews would require it to apply both Article 11 of DSU and Article 17.6 of AD to the factual and legal issues before it (§§ 7.4–5). 201. See Palmeter (1995); Stewart et al. (1993). 202. Stewart et al. (1993) point to dozens of negotiating documents supporting this proposition. Croley and Jackson (1995) argue that the standard was inspired by the notorious “Chevron” jurisprudence in US, where, to support deregulation efforts, the Supreme Court introduced a deferential (toward the executive) standard of review. IAs would play the role of the US executive in their argument. Mavroidis (2009) discussed this point in more detail. 203. Case law has not applied the same standard uniformly: Howse and Neven (2007b) and Howse and Neven (2007c) discussed Mexico–Corn Syrup and Argentina–Ceramic Tiles and concluded that the two panels did not apply an internally coherent standard of review in the two cases. 204. Not all definitions of de novo are usually informative; see, for example, the Panel on EC–Tube or Pipe Fittings, at § 7.6. 205. Horn and Mavroidis (2005b) found this distinction useful but pointed to evidentiary problems that might arise in this context. 206. Janow and Staiger (2007) discussed this issue in detail and raised critical remarks regarding the internal consistency of WTO case law. 207. The Panel on US–Steel Plate considered that an affidavit based on data that were before the IA at the time of the investigation was acceptable, as it did not constitute new information (§ 7.13): “What the affidavits do is
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present the information submitted in a different manner than originally submitted, and adjust and sort it in various ways.” 208. On GATT practice in this context, see Petersmann (1993) and Mavroidis (1993, 2000a). 209. WTO Document G/ADP/M/7 of 2 October 1996, at pp.7–8. 210. WTO Document G/ADP/M/19 of 25 February 2002, at p. 10. 211. §§ 80–84 of WTO Document G/ADP/M/16 of 20 September 2000 reflect how the committee accepted the recommendation of the Working Group on Implementation regarding POI. 212. Technically, however, since AD is a border instrument and NT covers only domestic instruments, it would be difficult to sustain such an argument before a WTO adjudicating body. Still, trade liberalization is meant to be an extension of the relevant geographic market (in the antitrust sense of the term): by removing tariff barriers and nontariff barriers (NTBs), conditions of competition become more homogeneous across national jurisdictions. 213. This issue is even more pertinent nowadays in light of the rise of offshoring and outsourcing. Increasingly, it is the case that, say, EU companies request imposition of AD duties against inputs of EU goods (since many EU companies, established in the EU, outsource part of their production abroad). In October 2006, for example, the EU imposed AD duties of 16.5 percent and 10 percent on certain leather shoes imported into the EU market. Although many EU companies produce leather footwear inside the EU, a significant number of EU companies had outsourced the production of footwear to third countries while keeping other parts of their operations in the EU. Some EU companies that produce leather shoes in the third countries were subjected to AD duties. Such incidents have caused concern in Brussels, to the point that the trade commissioner issued a green paper asking whether the EU IA should somehow take into account the interests of companies that have retained significant operations and employment in Europe, even though they have moved some part of their production outside the EU market. See pp. 6 and 7 in “Commission of the European Communities, Global Europe, Europe’s Trade Defense Instruments in a Changing Global Economy, A Green Paper for Public Consultation,” Brussels, 6 December 2006, COM (2006). 214. Viner (1922), at p. 193. 215. INDUSTRIES PRESERVATION, V Austl. C. Acts 19 (1906). 216. 213 US 347 (1909). 217. Ex parte Blain, LR 12 Ch. Div. 522 at 528. 218. Hoekman and Mavroidis (1996a). 219. Irwin et al. (2008). See the discussion earlier in this chapter regarding the Cuban proposal to this effect. 220. GATT Document TN.64/NTB/W/20 of 5 May 1967. 221. In 1954, injury analysis in the US was entrusted to the Tariff Commission (later named the ITC), whereas the US Treasury focused on the dumping investigation (US Public Law 90–63). Similar arrangements were made in the context of the EU. Institutional arrangements influence the outcome of investigations in the sense that if injury has been established first, the political pressure to attribute it to dumping might become irresistible. 222. See, inter alia, Croome (1995), Liang (2011), Paemen and Bentsch (1995), Pregg (1995), and Stewart et al. (1993). 223. There are differences between these schemes, but essentially, they cover cases where an exporter makes changes in its supply chain to avoid payment of AD duties; for a more extensive discussion, see Liang (2011). 224. Some of the early cases sound like true “wartime” stories. In Sweden–AD Duties (1955), a GATT panel was facing the following facts: Sweden was asking all exporters to pay AD duties every time their invoice price
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was below an arbitrary, fixed price (§ 2). Traders would be refunded only if no dumping had been established during an investigation that postdated the imposition of duties. 225. See Hovenkamp (2011, pp. 2ff.). 226. See Kovacic (2010) for an excellent discussion of the manner in which price discrimination is treated in antitrust and trade statutes. 227. C-62/86, AKZO Chemie BV v Commission (1991) ECR I-3359 (3 July 1991); Case T-83/91, Tetrapak International SA v Commission (1995) ECR II-762 (CFI); and Case C-333/94P, [1996] ECRI-5951. 228. In 2009, the EU Commission issued a communication regarding exclusionary conduct by dominant undertakings (2009/C/45/02 OJ C45/7 of 24 February 2009). There, in §§ 63ff., it adopted a different standard on predation. First, it now uses average avoidable cost (AAC) and not average variable cost (AVC) as the benchmark to evaluate if predation has occurred. “AAC” refers to the average of avoidable costs. In most cases, AAC and AVC will be the same since it is variable costs that can typically be avoided. So, there is not much of a change so far. Most important, nonetheless, the commission, beyond pricing below AAC, will examine whether “the allegedly predatory conduct led in the short term to revenues lower than could have been expected from a reasonable alternative conduct, that is to say, whether the dominant undertaking incurred a loss that it could have avoided” (§ 65). In short, the new standard argues for an inquiry into the “sacrifice” (lower prices), the ensuing exclusionary effects, and the harm to consumers. In that, the new test is different from that applied in AKZO. It is still unclear whether the communication will exert a major influence in the shaping of EU case law. Only future practice will respond to this question. 229. Brooke Group Ltd. v Brown & Williamson Tobacco Corp., 509 US 209 (1993). See the analysis of the case in Hovenkamp (2011), at pp. 370ff. 230. A predator’s strategy can be further complicated, depending on the facts of the case: if, for example, the other companies are small compared to the predator, they can try to convince the demand side of the market (the consumers) to help them survive to the first phase of the predator’s dumping. They have a good argument: namely, that if the predator wins, consumers will pay the eventual monopoly price. 231. The US test is more reasonable since it avoids punishing unsuccessful predatory pricing: in such cases, consumers will profit from lower prices, as the predator will not be in a position to recoup the original investment. 232. This section borrows from Mavroidis et al. (2008). The welfare implications of AD are well documented in economics literature, and there is no need to reinvent the wheel here. The reader could check, inter alia, Boltuck and Litan (1991), Finger (1993), Messerlin (2001), and Prusa (2001, 2005). 233. Admittedly, things can be much more complicated. But developing this line of thought for argument’s sake will allow us to understand how much of a concern price discrimination really is. Like product definitions are, in the overwhelming majority of cases, quite narrow in AD proceedings. More on this last issue will be discussed later in this chapter. 234. Li and Maskus (2006) discussed the cost of such policies. 235. A similar pattern was described by Goldberg and Verboven (2005), who discussed the cars’ price differentiation across EU member states and the manner in which the EU Commission addressed it. 236. Along these lines, see the arguments advanced by Bown et al. (2004), Finger (1993), Hoekman and Mavroidis (1996a), Messerlin (2001), Petersmann (1993), and Prusa (2001, 2005). 237. Messerlin (2001) asked the question of what the outcome of AD investigations would have been if the investigating authorities had employed an antitrust-type standard. His analysis was specific to the EU. The period of his investigation was from 1980 to 1997, during which he examined 461 cases of initiation of investigation for which adequate information exists. To answer this question, he proposed a five-screen test. The first of these
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screens assesses the capacity of the foreign firms involved in AD cases to behave as predators. He proposed a screen that eliminates from investigation all foreign companies with forecasted aggregate market share of 40 percent or less. He thus screened out 311 out of 461 cases. The second screen identifies 14 additional cases for which a negative outcome (no injury) resulted from the investigation. The third screen requires the elimination of all cases where four or more countries were involved. The rationale for this screen, as explained by the author (p. 358), is that “if four or more countries are involved in simultaneous antidumping actions on the same product, the possibility of joint predatory behavior seems rather low.” A total of 75 more cases are thus screened out. The fourth screen eliminates all cases where eight or more economic operators are involved (for the same reason as with the third screen, the possibility for predatory behavior where eight or more companies are involved is quite low). Another 17 cases were screened out. The remaining 44 cases (i.e., less than 10 percent of the original total) were subjected to a test whereby the author examined the market share of the economic operators involved, the HHI, or both, and concluded (having eliminated cases where either companies have small market share or, in application of the HHI, no reasonable competition authority would have intervened) that only 12 cases were worth investigating—that is, less than 2 percent of the original total. 238. It is probably true that, in practice, AD has been used as a surrogate for safeguard measures. This was not, however, its intended use: indeed, the AB has insisted time and again on the distinction between fair and unfair trade, upon which, in its view, the differentiated legal requirements in the two agreements are predicated. Consequently, it is not that it is irrational to use AD as a safeguard; rather, it is contra legem.. 239. See chapter 4 in this volume. 240. See Horlick (1993); Messerlin (2001); and Moore (2002 and 2004). 241. Mitchell and Prusa (2015) provide additional evidence suggesting that, in their view, China has engaged in tit for tat through AD actions. In the case discussed here, Nuctech emulated the development strategy of Smith. Governments are prime consumers of scanners. They are used in ports (where they scan trucks), in airports (where they scan merchandise and humans), etc. EU signed the Government Procurement Agreement (GPA; discussed in chapter 18), whereas China has not. Smith, nonetheless, became a dominant company by winning EU government contracts. Nuctech did the same by winning similar contracts in China, while being relatively more unconstrained than Smith, precisely because China did not have to respect the disciplines embedded in the GPA when awarding contracts. Therefore, it was through a form of strategic trade policy where the domestic market is shielded to domestic producers that Nuctech (and previously Smith) won their market shares. We return to this point in the next chapter.
Chapter 3 1. McDonough (1993) extensively discusses the negotiating record. 2. There is a high burden of proof associated with NVCs, since the complainant must show that it could not have legitimately expected an action by the defendant that eviscerated the value of a tariff concession. It is probably correct to establish a high burden here, in order to avoid type I errors. Domestic subsidies often pursue social preferences and by outlawing them, panels might be committing grave mistakes. 3. This provision largely reproduces Article 25 of the Suggested Charter. 4. It should be noted that the obligation to abolish export subsidies would not kick in immediately, but rather within three years from the entry into force of the ITO. 5. Export subsidies were the subsidies where payment was contingent upon the exportation of subsidized goods. All other subsidies were “domestic.” The early documents did not provide an elaborate definition of the term “subsidy.” E/PC/T/33, at p. 16. Originally, US delegate Harry Hawkins was quoted as stating that “direct subsidies to domestic producers were usually not harmful to trade, and should in most cases be permitted. Export
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subsidies, on the other hand, were harmful to trade and should be abandoned, except under agreed circumstances and rules” UN Document E/PC/T/C.II/3, at p. 3. 6. E/PC/T/C.6/W/21 and 23, and E/PC/T/C.6/23. Recall that the United States was not a wholehearted advocate of the bifurcated approach. In Brown’s (1950, p. 119) account, they accepted the idea until the multilateral effort was given fair trial. 7. E/PC/T/C.6/W.69, at pp. 5ff., and E/PC/T/C.6/W.81, at pp. 11ff. The US delegation, though, did not want to go any further than a discipline that would request from trading nations to strive that, through subsidization, they do not obtain an unreasonable share of world trade. The GATT text follows almost verbatim a Canadian proposal that retained elements of the original US proposal. Paradoxically, the disciplining of subsidies provoked the US decision to seek a waiver for its farm subsidies; see Brown (1950, pp. 118ff.). 8. E/PC/T/C.6/85. 9. E/PC/T/124, at pp. 4ff. 10. Committee Reports Havana (CRH), at pp. 106ff. 11. W.9/220. 12. W.9/20. Denmark expressed support for a ban on export subsidies, whereas the UK and US delegates argued in favor of an “in principle only” ban, with some exceptions explicitly permitted; W.9/102 of 15 December 1954, W.9/103 of 15 December 1954, and W.9/104 of 16 December 1954. The most extreme position against subsidies was advocated by Australia, which went so far as to request a ban not only on export subsidies, but on domestic subsidies as well, W.9/67, of December 6, 1954. 13. SR.9/23 and SR.9/24, of 22 December 1954. Timewise, these negotiations almost coincide with the emergence of the developing countries’ requests for special and differential treatment in GATT, as we saw in chapter 5. 14. See SR.9/17, at p. 11; W.9/67, of December 6, 1954; Documents L/334 and L/334 Add. 1 (Section B) reflect the final compromise. 15. The waiver concerned the US Agricultural Adjustment Act, in fact, for Section 22 of this Act; see SR.9/33 of 7 February 1955, and also Brown (1950, op. cit.). 16. In one of the early cases (France–Wheat Exports, 1958), a GATT panel found that French subsidized exports of wheat flour had displaced Australian exports from Malaya, Ceylon, and Indonesia (§ 1). It held that France had obtained more than an equitable share of the world market (since, in its view, this term covered the world markets as opposed to individual markets, § 15), because in 1954, following subsidies, France had a larger share of the world market than any year since 1934 (§ 17); and French prices of wheat flour were lower than that of its competitors (§ 18). 17. MTN/NTM/W/26 of 28 October 1975, at pp. 6–7. 18. McDonough (1993) provides a comprehensive account of the negotiation. 19. Compare Croome (1995), Horlick and Clarke (1994), Hufbauer (1990), McDonough (1993), Paemen and Bentsch (1995), Wouters and Coppens (2010). 20. The airlines (1978), trucking (1980), railroads (late 1970s and 1980), telecommunications (1977 and, as mentioned, 1982), cable television (late 1970s and 1984), brokerage (1975), banking (1980 and 1982), petroleum (1979), and natural gas (1978) industries were sequentially liberalized. 21. GATT Document MDF/10, of 21 May 1985. 22. D’Andrea Tyson (1992). The 1980s are marked by the rise of writings on strategic trade theory that heavily influenced some of the advisors in the Clinton administration. The term “strategic trade theory” refers to the
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policy that trading nations might privilege in order to affect the outcome of strategic interactions between firms in an oligopoly. It rests on the intuition that trade policies can raise the level of domestic welfare by shifting profits from foreign to domestic firms: to this effect, subsidies might have a crucial role to play (in the form of export and R&D subsidies to get first mover’s advantage, etc.). 23. More recently, in 2009, the US administration has had massive recourse to subsidization yet again. The notorious “stimulus package” was conceived as the appropriate response to the financial crisis. The EU followed suit, and we will be returning to this discussion later in this chapter. 24. Bagwell and Mavroidis (2010). 25. See on this score, Bagwell and Mavroidis (2010). 26. Brou and Ruta (2011) have argued that, relative to an agreement that only commits a government to free trade by disciplining tariffs, a government is better off under an agreement that also imposes rules on subsidies so that it can credibly avoid the policy substitution problem (where it will be using subsidies instead of tariffs, etc.). This is sensible but does not totally respond to the issue raised by Bagwell and Staiger: by disciplining both instruments, trading nations might have even less of an incentive to liberalize since they can use neither of them. With the notable exception of predatory subsidization, economists generally caution against far-reaching disciplines on subsidies. 27. Brander and Spencer (1985) argued that there is a role for trade agreements here since, by (credibly) agreeing to stop subsidizing, Home and Foreign will abstain from misallocating resources because of the fear that the competitor might subsidize. Economists distinguish between sunrise subsidies (with first mover and scale economy advantages), and sunset subsidies (which ease exit from the market). 28. It ignores the potential for retaliation since Foreign, in our example, could countersubsidize its own local producer. It is for this reason that Brander and Spencer (1985) conceived that the role of trade agreements could be the means to end a potential subsidies war. Subsidies could also “lure” inefficient firms in specific markets. Internationalized investment might in and of itself impose a halt on similar behavior, since political economy will operate in different manner in this scenario. Finally, if a subsidy causes foreign firms to sell more output than otherwise, the optimal response of competitors in the importing country may be to reduce the volume of their own sales. But this will spell a loss of monopoly profits for the domestic firms, which will offset and perhaps outweigh the net benefit. Thus, the effect of a subsidy on aggregate welfare in another member country is a priori ambiguous. 29. Grossman and Helpman (2001). 30. Krugman (1983); D’Andrea Tyson (1992). 31. Coppens (2014), and Sykes (2005) extensively discuss the economic rationale for the SCM Agreement. 32. In the same vein, the Agreement on Agriculture that will be discussed in chapter 8 of this volume contains a provision allowing for farm subsidies to remain unanswered if they are oriented toward net food-importing countries, which cannot afford to pay the world price for the good at hand. 33. Janow and Staiger (2003 and 2007) reach similar conclusions when discussing the reports on Canada–Dairy, and US–Export Restraints. 34. Of course, it is not true that a subsidy always enhances aggregate welfare in all member countries. 35. Although, as we will see in more detail later in this chapter, the agreement recognizes the possibility of serious prejudice to the interests of another member that may arise due to the displacement of exports of a like product to the market of the subsidizing member or to a third-country market, it does not allow serious prejudice to exporting interests to be a basis for countervailing action. Rather, the agreement calls for consultations between the member that is granting or maintaining a subsidy and the complaining member, followed by a panel review in the event that consultations do not result in a mutually agreed solution. Only after a report by a panel or AB
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has been adopted, in which it is determined that a subsidy has resulted in adverse effects to the interests of another member and the subsidizing member has failed to take appropriate steps to remove the adverse effects of the subsidy, may the complaining member take such countermeasures as have been authorized by the DSB (see Articles 7.8 and 7.9 of the SCM Agreement). 36. Goetz et al. (1986) and Diamond (1989) consider the rationale for CVD laws and conclude that these laws are best understood as a means to protect an entitlement of domestic producers to be immune to the harmful effects of foreign subsidies rather than as a means to promote global economic efficiency. Our understanding of the SCM Agreement is quite similar. We do believe, nonetheless, that an alternative injury test that looked for harm to aggregate welfare would better serve the objective of promoting international efficiency than the test required in the SCM Agreement as it now stands. 37. See Grossman and Helpman (1995), and (2001). 38. Article 12.9 of SCM specifies that domestic producers of a like product must be invited by an IA to offer their views about an alleged subsidy and proposed countervailing measures, whereas the authority has discretion to decide whether to allow consumers of the subsidized good to do so. 39. It bears emphasizing here that in nonperfect competition markets, subsidies granted by governments to monopolies may not necessarily benefit consumers wherever they may be, as the beneficiary-monopolist may use the subsidy (perversely and rationally at the same time) to maximize its profit by setting the price somewhere between the market price and the reservation price (i.e., monopoly price). Ostensibly, even when there are few industries competing on the world stage, these firms may still have incentives to price their products above the market price without entering into any tacit or explicit agreement. 40. This is the case in the absence of any other distortion and if—and this is a big if—such a subsidy will reduce welfare in the two countries combined. The foreign country may lose or gain; the domestic economy may also lose or gain. It all depends on their strategic interaction. 41. Recall that the AD Agreement contains no corresponding provision that would have allowed WTO members to address injury suffered from dumped exports to third markets. 42. Moreover, a CVD investigation is a complicated time- and resource-consuming enterprise. Since a CVD investigation concerns the subsidization practice of another government and not a private company’s practice, as is the case in AD, it may prove to be particularly difficult and delicate. Moreover, the result of the investigation may at best be the imposition of a CVD. While a duty may offset the effects of the subsidy, it does not imply that the product in question is no longer subsidized. The imposition of a CVD may protect the domestic industry at home, but possibly at the expense of the domestic industry’s export performance, as the subsidized products move to other markets. Because of this likely trade-diverting effect (of CVDs), the problem may not be solved, but simply moved to another market in which the domestic industry was also present and will also feel the effects of the subsidies. Still, CVDs are widely practiced. 43. The TDM Regulation is described in detail in § 7.43 of the panel report. 44. The spirit of this panel report seems to suggest, without directly saying so, that a measure runs afoul of Article 32.1 of SCM not simply because counteracting subsidization is an ancillary by-product, but because it is its main thrust. This panel thus distanced itself from the AB ruling on Byrd payments, where the potential disbursement of CVDs to US economic operators sufficed for the measure to be judged WTO inconsistent. 45. Casier et al. (2013) provided a useful survey to this effect. See also the excellent analysis of Rubini (2010), who juxtaposed the definition of subsidy in the WTO to that in a “deeper integration” regime aiming to establish a common market (the EU) instead of simply liberalizing trade, and drew conclusions about the definition from the objectives pursued in the two integration processes. 46. GATT Document BISD 10S/209, § 23. 47. GATT Document BISD 9S/192, § 12.
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48. The negotiating history of Article 1 of SCM is described in §§ 8.64–74 of the panel report on US–Export Restraints. See, on this score, Janow and Staiger (2003). Article 1 of SCM calls for a comparison with a counterfactual, and aims to establish whether a benefit has been conferred as a result of government intervention. Article 14 of SCM is entrusted with the calculation of benefit. Why do we equate the anti-subsidy counterfactual with “benefit”? Well, this is the case simply because the SCM Agreement does not ban government intervention altogether, only that that results in conferring a benefit. 49. A third category, the so-called nonactionable subsidies, had been originally included in the SCM Agreement on a provisional basis: the WTO membership failed to agree on transforming this category into a permanent feature of the SCM Agreement and, as a result, this category is by now extinct. 50. The Panel on US–Export Restraints (§ 8.69) underscored this point. 51. See the excellent analysis of this case in Wu and Salzman (2014). 52. It thus held that the various subparagraphs are not mutually exclusive (§ 5.121). In US–Large Civil Aircraft (Second Complaint), the AB held in a similar vein in footnote 1287: The structure of that provision does not expressly preclude that a transaction could be covered by more than one subparagraph. There is, for example, no “or” included between the subparagraphs. 53. The Panel on US–Softwood Lumber III held that in-kind transfers of resources, such as goods or services that can be valued and that represent a value to the recipient, can qualify as a “financial contribution” in the SCM sense of the term (§ 7.24). One would be ill advised, nevertheless, to rush to sweeping understandings of the term “financial contribution” in the sense that anything that can have an economic value is ipso facto a subsidy. Take the case, for example, of a law that exempts companies in the steel industry from certain environmental regulations, such as certain pollution standards. By doing so, it may well be providing a benefit to the domestic industry, as it will allow these firms to save an important amount of money. As this does not entail the government foregoing revenue, however, such an exemption will not constitute a financial contribution under the SCM. Although, depending on the circumstances, it could qualify as a violation of Article III.4 of GATT; see the relevant discussion in chapter 7, volume 1. 54. An export restraint could, of course, violate Article XI of GATT. 55. Since the SCM Agreement is an elaboration of Article XVI of GATT, and trading nations had accepted the obligation to observe GATT regardless of their choice of regime, albeit with varying degrees of responsibility. 56. ”DRAM” is an acronym that stands for “dynamic random access memory.” A DRAM microchip gives memory to a computer. 57. We refer to the test later in this chapter, when we discuss the AB report on US–Antidumping and Countervailing Duties (China). 58. See also footnote 80 in the same report. 59. SOEs initially were established in sectors that the Chinese Communist Party considered “strategic” and believed that it had to dominate: aviation, power, telecoms, etc. Over the years, they expanded everywhere, and nowadays, less than half of them operate in what would reasonable be termed a “strategic” sector. Over 80,000 of them run hotels, restaurants, and shopping malls, as well as property developments. Following the 1990s reform, it was decided to close a number of them because they were judged unproductive. It is the State Owned Assets Supervisory and Administration Commission (SAASAC) that has the legal power to monitor SOEs. They typically enjoy cheap financing and political favoritism, although evidence about what precisely they enjoy and how they operate is difficult to unearth. Lin and Milhaupt (2011), maintained that Chinese SOEs are still a black box that has not been penetrated. Evidence is hard to come by about whether government exercises “control” or not, and if yes, to what extent. These findings support the view expressed earlier in this chapter and cast doubt
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on the “realism” of the AB approach to request an inquiry into the question of whether an entity exercises government function. 60. Milhaupt and Zheng (2015) advanced similar arguments to support the view that ownership should be dropped in favor of a control criterion, what they termed “capture” by the state. 61. The Panel on US–Countervailing Measures (China) followed this approach, but it added that an IA can still legitimately initiate an investigation even if all it has before it is information regarding “ownership” of the firms under investigation. It thus distinguished the obligations imposed on an IA, holding that ownership in and of itself does not suffice to characterize an entity as a “public body,” but it does constitute sufficient information for an IA to investigate further and eventually accept or reject that it is dealing with a “public body” indeed, see §§ 7.107ff., and especially 7.115. 62. Ahn and Spearot (2015) offer a very detailed discussion of this report, and a comprehensive discussion of all case law on the understanding of the term “public body.” 63. Three reports (two panel reports and one AB report) were issued, since only the report following the Korean complaint against the imposition of CVDs by the US was appealed. 64. The AB on US–Countervailing Duty Investigation on DRAMs confirmed this point when it held that, for a finding that financial contribution has been made (§§ 175ff.), there was no need for compelling evidence. 65. See the relevant discussion in chapter 2. 66. The same panel also expressed the view that a significant degree of cooperation is to be expected of interested parties in a CVD investigation. In the absence of any subpoena or other evidence-gathering powers, the possibility of resorting to the facts available, as well as the possibility of drawing certain inferences from the failure to cooperate can play a crucial role in inducing interested parties to provide the necessary information to the authority (§§ 7.60–61). We discuss later in this chapter the conditions under which recourse to “best information available” can be lawfully made. 67. The reasonableness standard invites discretion by the deciding organ. Discretion, however, is not unlimited. Dworkin’s oft-quoted metaphor for discretion is that it is like “the hole in the doughnut,” since discretion does not exist except in the area left open by a “surrounding belt of restriction”; see Dworkin (1978). 68. Hahn and Mehta (2013) discussed this case in detail. 69. Recall our discussion about the Working Party on Border Tax Adjustments in chapter 7, volume 1. 70. Howse and Neven (2007d) discussed this point in detail. 71. Gehring (2010); Horn and Mavroidis (2010). 72. The agreement has been reproduced in pp. 189ff. of Hufbauer and Erb (1984). 73. Anecdotal evidence suggests that the EU had no intention to complain. It has understood that the quid pro quo for its attitude would be an equivalent promise from the US to avoid complaining about its bananas import regime. When the US complained (EC-Bananas III), the EU did the same. 74. This was a compliance panel, which dealt with the legality of the so-called Extra-territorial Income (ETI), a measure the US had enacted in order to conform with the findings of the original panel. The AB concluded that there appeared to be a marked contrast between the “other rules” of taxation applicable to foreign-source income and the rules of taxation applicable to foreign-source income as qualified in the FSC/ETI measure, the so-called Qualified Foreign Trade Income (QFTI): for US citizens and residents, all foreign-source income (subject to permissible deductions) was taxed; under the ETI measure, QFTI was definitively excluded from US taxation. This, together with the fact that taxpayers could elect to have their income treated more favorably as QFTI or see the normal rules for foreign source income applied to them, led the AB to conclude that the US forewent revenue on QFTI which was otherwise due (§ 105).
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75. Fukuyama (2014a, b) explained how similar tax alleviations are agreed following heavy lobbyism. He noted (p. 479) that US entrepreneurs and their lobbyists mistake “privilege” for “freedom” since tax alleviations are not for everyone, but rather for the few that have lobbied to this effect. Picketty (2014), having studied this issue in detail, concluded that while taxes on rent, interest, and dividends are similarly treated across national jurisdictions, there are important variations with respect to the taxation of capital gains, an area of interest to companies profiting from the FSC legislation; see pp. 283ff. 76. For an excellent discussion on tax issues in trade agreements, see Avi-Yonah and Slemrod (2002). 77. The fact that there were numerous agreements dealing with double taxation that would have to be abolished must also have played a role in the treatment of double taxation in WTO law. 78. See, on this score, the analysis by Howse and Neven (2007d). 79. See the analysis by Horn and Mavroidis (2007b). 80. The facts of this dispute are reproduced in §§ 4.20ff. of the AB report, and we quoted the pertinent paragraphs in chapter 7, volume 1. 81. FIT or FIT-like programs are widespread. In the US, a practice known as “net metering” has developed, whereby consumers with small solar installations can sell surplus power to the grid at the same price they pay for power flowing in. 82. GATT Document BISD 9S/191 at § 11. 83. GATT Panel on Subsidies and State Trading, Report on Subsidies, L/1160, 23 March 1960. 84. Think of this simple illustration explaining why cost to government (financial contribution) is different from benefit to recipient: imagine that a government borrows money at 4 percent and then lends it at 6 percent; doing this does not cost it anything, but it is still a subsidy if private companies would otherwise borrow at 8 percent. 85. The text of Article 1 of SCM does not state that the financial contribution must confer a benefit to a recipient. The AB in its report on Canada–Aircraft held that a benefit (§ 154): “does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a ‘benefit’ can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term ‘benefit,’ therefore, implies that there must be a recipient.” 86. This is the case in principle, at least: of course, one could wonder whether the public body’s involvement incentivized private investors to follow suit. And what if the public body had bought 2,000 shares as opposed to 20? Or, what if it was the first to move and buy shares in substantial numbers? 87. There is, of course, a difference between “book value” and “market value,” since the former is not necessarily equal to the latter. In fact, it rarely is, and this is what prompted James Tobin, a famous economist and Nobel Prize laureate, to formulate “Tobin’s Q” (where Q is the ratio obtained by dividing equity and liabilities market value by equity and liabilities book value). Benefit analysis is not a perfect substitute for Tobin’s Q. It is not excluded, nonetheless, that panels examine the “market value” of financial contributions in the context of benefit analysis, as we will see later in this chapter. Assuming that they are dealing with an equity infusion, they would need to know whether market investors would have provided the same infusion of funds as the government did in order to determine the existence of benefit. Knowing the market value of the firm after the financial contribution occurred may help them answer this question. 88. GATT Document BISD 37S/86ff. 89. Case 234/84, ECR, 1986, at p. 2263. 90. See Francois (2010). 91. See the discussion of Howse and Neven (2007e).
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92. See, for example, the arbitrators’ report on Canada–Aircraft Credits and Guarantees (Article 22.6—Canada) at § 3.60; see also US–Carbon Steel (India), AB report at § 4.123. 93. See, on this score, Janow and Staiger (2007). 94. See the analysis by Hoekman and Howse (2008). 95. For a similar finding, see the panel report on Canada–Autos at § 10.165. 96. Mavroidis (2012) discussed the attitude of WTO toward public goods. 97. The contribution was tied to the use of local machinery (local content requirement), a point that we discuss later in this chapter. Canada’s regime encapsulated the common wisdom across many governments that, unless a subsidy has been paid, consumers will not switch to consumption of the relatively more expensive renewable energy. Other countries eliminated subsidies for fossil fuels in an effort to curb greenhouse gases, but similar measures could not address the price disparity between renewable and nonrenewable energy. 98. To be perfectly clear, even this conclusion is a bit tenuous: the panel never speaks of two distinct markets, but in § 7.322, it goes so far as to state: “Thus, one way to determine whether the challenged measures confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement would involve testing them against the types of arm’s length purchase transactions that would exist in a wholesale electricity market whose broad parameters are defined by the Government of Ontario. In the present set of circumstances, this could be done by comparing the terms and conditions of the challenged FIT and microFIT Contracts with the terms and conditions that would be offered by commercial distributors of electricity acting under a government-imposed obligation to acquire electricity from generators operating solar PV and wind power plants of a comparable scale to those functioning under the FIT Programme.” 99. Note that nowhere did the panel discuss the social cost of using nonrenewable energy. 100. The AB relied on EC and Certain Member States–Large Civil Aircraft (§ 1121) to support the decision to discuss likeness using supply-substitutability as the relevant criterion. This is unfortunate, at best: in EC and Certain Member States–Large Civil Aircraft, supply side was discussed in the context of injury analysis. In this context, it is quite appropriate to do so because the issue is whether, absent subsidies, Boeing would have moved to markets now occupied by Airbus. Using supply side as the criterion to define the relevant product market is a totally different issue, though: the purpose is whether two goods are like (substitutable) in the eyes of the consumer. 101. This reasoning makes it almost possible for any country to actually protect an infant industry without violating the SCM, provided there was no “domestic” supply of something. 102. Most likely, the AB was trying to square the circle here and avoid the wrath of the environmental community. The Canadian program is a subsidy because, in the absence of intervention, producers would not produce energy from renewables, as indeed the panel explained in great detail. There is, in other words, a market failure here, in the sense that the desired good will not be produced through market forces—hence, the government intervention. The AB tried through judicial activism to address an issue that legislators have inadequately addressed: the rationale for subsidization must matter. This is what gave rise to nonactionable subsidies in the first place, and it is high time that negotiators address this issue again. They must return to the table and agree that the rationale for subsidies matters to distinguish wheat from chaff, a principle that this case underscored: subsidies can distort as much as they can address distortions. We will return to this discussion later in this chapter, when we discuss nonactionable subsidies. 103. C-280/00 Altmark Trans and Regierungspräsidium Magdebour, Judgment of the Court of 24 July 2003. 104. The AB explicitly relied on items (j) and (k) of Annex I to the SCM Agreement as contextual support for its interpretation of the AG Agreement (§ 93). 105. Hoekman and Howse (2008) offered an in-depth analysis of this case.
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106. In this sense, it does not suffice that a financial contribution had been bestowed upon the original company. 107. The softwood lumber disputes between the US and Canada are a good example of why intent must matter when we discuss specificity, an issue to which we will return later in this chapter. When subsidizing land where timber can be harvested, and when constructing highways, a subsidizing WTO member can claim that anyone, in principle, can profit from either scheme. The intent, nonetheless, must be to target specific beneficiaries in the former case, but not in the latter. Whereas anyone can hop in a car and drive on a highway, there are some barriers to entry associated with moving into the timber market. Alas, intent-analysis, as we will see when we discuss specificity later in this chapter, is not an issue for panels addressing claims under the SCM Agreement. 108. These two cases are comprehensively discussed in Grossman and Mavroidis (2007) and (2007c). 109. The panel, of course, thought that it was reproducing the standard that the AB itself had established in its report on US–Lead and Bismuth II. 110. This is a long-standing saga. Three companies originating in the US produced large aircraft: Boeing, McDonnell-Douglas, and Lockheed; and the first two merged subsequently. Airbus was established in 1970. Its appearance in the market and the position it acquired forced Lockheed out of the market, and we were left with the Airbus-Boeing duopoly that we know. The aerospace industry has unique characteristics that limit the number of players in the market. Fixed costs are enormous and, as a result, barriers to entry into this market are quite high, and would remain so at least into the foreseeable future. Moreover, there is a more or less fixed number of wide-body planes (in which they both specialize) that can be sold. Absence of profits is probably the reason why Boeing stepped away from a plan to cooperate with Airbus in this market. First movers can enjoy an advantage in this market, and the supply of subsidy could in and of itself deter new entrants. Airbus and Boeing had signed an agreement in 1992 (which we discuss in chapter 19 in detail), which Boeing denounced in 2004, arguing that Airbus had disrespected it when embarking on the subsidization of the wide-body A-380, the development of which was estimated at $12 billion; see Irwin and Pavcnik (2004). The complaint here followed the denouncing of the 1992 agreement. The US is a net exporter, and the argument was that its exports around the world had suffered because of the Airbus subsidization. 111. Since none of the criteria had been met, the panel found against the EU on this score (§§ 741–742). 112. As we stated earlier, though, extinction analysis, and extraction analysis are both pass-through analysis as well. 113. The AB also explained that, assuming that there is a requirement to show pass through because of change in ownership, pass through would be required both for purposes of demonstrating that a subsidy had been bestowed and when CVDs are imposed (§ 766). 114. Compare Kelly (2014), who also argued for case-specific analysis. 115. In the case of alleged subsidization by China (whether in a countervailing context or in the context of a multilateral challenge), China’s Accession Protocol provides that WTO members may deviate from the methodology set forth in Article 14 of SCM for determining benefit, if there are special difficulties in its application. The importing WTO member may then use methodologies for identifying and measuring the benefit that take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks. In applying such methodologies, where practicable, the importing WTO member should adjust such prevailing terms and conditions before considering the use of terms and conditions prevailing outside China. Such methodologies have to be communicated to the SCM Committee. 116. A report by the Informal Group of Experts (IGE) to the Committee on Subsidies and Countervailing Measures (SCM Committee) discusses the various technical problems relating to the calculation of the amount of the subsidy. It distinguishes between nonrecurring subsidies (the benefits of which may have to be allocated over time) and recurring subsidies (which are fully expanded in the course of the year of receipt). It makes a number of recommendations concerning, inter alia, the average useful life of the physical depreciable assets that could be used as a basis for allocating the subsidy benefits; the time value of money; and the need to take account
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of inflation; see WTO Document G/SCM/W/415/Rev. 2 of 15 May 1998. The recommendations made by the IGE have formed the basis for a number of proposals that were made in the course of the negotiations to introduce technical guidelines on subsidy calculations. 117. Of course, the title of Article 14 of SCM suggests that this provision deals with the calculation of the amount of the subsidy in terms of benefit to the recipient, and it deals with the method for calculating the benefit to the recipient as becomes clear from the chapeau of Article 14 of SCM. However, the guidelines set forth in paragraphs (a)–(d), with which the calculation methodology has to comply, also clearly deal with the existence or nonexistence of a benefit. Whether it is the provision of equity capital, a loan, a loan guarantee, or a good or service, each of the paragraphs provides that the financial contribution shall not be considered as conferring a benefit unless one of the contingencies mentioned therein happens. Only in the case of loans and loan guarantees [Articles 14(b) and (c) of SCM] does the text actually state what the amount of the benefit is. So, Article 14 of SCM, on its face, seems to be as much about the existence of a benefit as it is about the calculation of the amount of the benefit. 118. In US–Countrevailing Measures (China), the AB clarified that the term “government” in Article 14 of SCM has the same term as in Article 1 of SCM (“same legal standard”), §§ 4.42ff. 119. Remarkably, the AB did not engage in any barriers-to-entry analysis to verify whether the high market share actually corresponded to market power: it equated the two concepts. 120. This report made a number of other noteworthy findings in this context. The AB underlined that the comparator in Article 14 of SCM is prices of similar goods sold at arm’s length (§ 4.145). It further provided its own understanding of the key finding in US–Softwood Lumber IV cited earlier, stating that it did not lead to an automatic exclusion of government prices, since even government prices could in theory reflect market conditions (§ 4.172). The US authority, however, when practicing its “Tier II” methodology, had not behaved in this way when using out-of-country benchmarks, since it had diligently inquired into the situation in the exporting market (India) before having recourse to out-of-India prices. The AB cautioned that a “due diligence” standard was warranted, and recourse to out-of-country prices should not occur lightly (§ 4.190). In a similar vein, it did not find it objectionable that the US, under “Tier I,” was discarding prices in India originating from auctions that had not been competitively run, as they could not be accepted as market prices (§ 4.161). The wider question to ask is how benefit should be calculated when the investigation concerns an NME. Unlike the case in the AD Agreement, there is no provision regarding NMEs in the SCM Agreement. One might be tempted to say that there is no need for investigation at all. Indeed, the US position moved in this direction. The AB disagreed. Recall that the statutory definition of NMEs (Interpretative Note ad Article VI, inserted at the Review Session of 1955) is hardly self-interpreting. In US-Antidumping and Countervailing Duties (China), the AB held that IAs should distinguish between cases where government is a “significant” from cases where it is a “predominant” supplier even if when facing imports from NMEs, as is the case of China (§ 433). The more predominant the role of government, the likelier it is that prices have been distorted, and can legitimately be rejected (§§ 444ff.). A case by case analysis will of course be required. In US–Carbon Steel (India), the AB held that out of country prices could be used not only when in country prices were nonrepresentative, but also when information concerning them could not be verified (§ 4.189). The lack of specific provision on NMEs is probably the best reason why the list of Article 14 of SCM should not be exhaustive. In US–Carbon Steel (India), the AB found that the US could not reject government prices as benchmark to decide whether a benefit had been conferred. It all depended on whether similar prices were market or distorted prices (§§ 4.161ff.) 121. GATT Document BISD 32S/154. 122. This was a landmark case that involved a number of issues that had simultaneously been brought into the negotiations in the Uruguay round. One could only speculate that the two superpowers were aiming to preempt the negotiating outcome by forcing adjudicators to espouse their point of view on the issues discussed. 123. Article 2 of SCM uses a very careful terminology. It mentions that a subsidy is specific if the granting authority “limits access” to a few companies, or a few companies use it in preponderance and similar phrases.
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It does not matter, thus, if a subsidy is given directly to a company. All that matters is that few companies can/ have profited from it. For example, if a financial contribution (e.g., a grant) was paid to a consumer on the condition that the consumer buy a product manufactured by only one producer or one industry, then there would be strong grounds to say that the benefit from the financial contribution was passed through to the single producer or industry as a specific subsidy. The extent to which a subsidy to consumers can pass through to producers is an area that has not yet been explored very well. Maybe because many WTO members do it sometimes, and they do not want to challenge similar practices. Whatever the reason, the same specificity principles should apply to the subsidy if it is passed through to a producer or producers. 124. A bill was introduced in the US Congress whereby CVDs would be imposed to redress currency manipulations: HR 1276—Currency Reform for Fair Trade Act Sponsor: Levin, Sander M. (D-Mich.) A bill to amend Title VII of the Tariff Act of 1930 to clarify that countervailing duties may be imposed to address subsidies relating to a fundamentally undervalued currency of any foreign country. The bill had 100 cosponsors (67 Democrats, 33 Republicans), which gives evidence of the wide support that similar views enjoy. It would be hard for the US, if it decides to formally adopt the bill, to circumvent the specificity-requirement, a necessary precondition for equating currency manipulations to a subsidy. 125. In a similar vein, in US–Large Civil Aircraft, the panel held that (§ 7.190) The express limitation can be found either in the legislation by which the granting authority operates, or in other statements or means by which the granting authority expresses its will. 126. Sapir and Trachtman (2008) noted that the specificity requirement can be met when a scheme is limited to use by specific industries, enterprises, or both, and the narrower the list of beneficiaries, the likelier that the requirement will be met. 127. In § 873 of the same report, the AB underlined that there was no legal requirement to first examine a claim under subparagraphs (a) and (b) before examining it under (c). It established a logical progression rather than a strict legal hierarchy; see also the AB report on US–Countervailing Measures (China) at §§ 4.118ff. In this vein, the AB held that panels are entitled, where warranted, to examine claims solely under Article 2.1(c) of SCM. 128. The Panel on US–Countervailing Measures (China), agreeing with prior case law to this effect, noted that, unlike the previous two subparagraphs, Article 2.1(c) of SCM refers to “subsidy programmes,” and not to a “subsidy,” and that this specification could not be inconsequential. In its view, this difference calls for broad understanding of the term “subsidy program,” and, thus, an in-depth analysis of facts; see §§ 7.238ff., and especially 7.240. 129. Note, nonetheless, that an IA is not precluded from examining all four criteria, as the Panel on EC–Countervailing Measures on DRAM Chips confirmed. 130. The analysis of de facto specificity in this report was in large part not appealed, but the report contains very informative discussion of the de facto specificity-requirement (§§ 7.960ff.). 131. We have probably not seen the end of this story, though. In EC and Certain Member States–Large Civil Aircraft, the panel (in an unappealed finding) seemed to leave some room for an intent test, when holding that “any other factors” relevant to demonstrating whether a subsidy had been provided for limited use only could be usefully examined in order to determine whether a subsidy is specific. The quoted passage is not explicit, but the wide wording chosen could prove to be the basis for a future “change of heart” by panels and the AB in this respect (§ 7.1039): Thus, we do not consider that there is any form or type of infrastructure which is inherently “general” per se. For instance, in our view, such things as railroads or electrical distribution systems do not necessarily constitute “general infrastructure.” Rather, the determination whether the provision of the good or service in question is “general infrastructure” or not must be made on a case by-case basis, taking into account the existence or absence of de jure or de facto limitations on access or use, and any other factors that tend to demonstrate that the infrastructure was or was not provided to or for the use of only a single entity or a limited group of entities. Such
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factors may relate to the circumstances surrounding the creation of the infrastructure in question, consideration of the type of infrastructure, the conditions and circumstances of the provision of the infrastructure, the recipients or beneficiaries of the infrastructure, and the legal regime applicable to such infrastructure, including the terms and conditions of access to and/or limitations on use of the infrastructure. If an evaluation of relevant facts concerning such factors demonstrates that the infrastructure was provided to a single entity or a limited group of entities, then we believe it cannot properly be considered “general” infrastructure, and consequently falls within the scope of Article 1.1(a)(1) of the SCM Agreement, necessitating further analysis to determine whether a subsidy exists. (italics in the original). 132. Some regional subsidies used to be nonactionable, provided that they did not exceed a certain amount; see the discussion on nonactionable subsidies later in this chapter. 133. In EU law, the term “selectivity” is used instead of “specificity,” and the legal test adopted in case law goes some way toward establishing an intent test: a measure is selective if it is designed to “favor certain undertakings or the production of certain goods” in comparison with other undertakings that are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question. The Court explicitly laid down this test in C-143/99, “Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke” (2001) ECRI-8365, § 41; subsequently, this test has been repeated in many judgments, including the following: Case C-409/00, “Spain v Commission” (2003) ECRI-1487, § 47; Case C-88/03, “Portugal v Commission (Azores)” (2006) ECR I-7115, § 54; C-172/ 03, “Heiser” (2005) ECR I-1627, § 40, and Joined Cases C-428/06 to C-434/06, “UGT-Rioja and Others” (2008) ECR I-0000, § 46. 134. During the Uruguay-round negotiations, this trichotomy was colloquially referred to as the “traffic light” approach. 135. This course of action is particularly warranted when most of the damage suffered is in third markets. WTO members that have small internal markets should almost always fall into this category, and this fact also helps explain why Singapore, Hong Kong, China, etc. almost never impose CVDs. 136. This is a reproduction of the standard GATT test for a successful nonviolation complaint. In Japan–Film (Kodak/Fuji), the panel confronted the following facts: US complained that because of, inter alia, lax enforcement of competition laws in Japan, the exports of film by Kodak had suffered. The panel used the allocation of the burden of proof to solve the matter before it: Japanese measures that predated the exchange of tariff concession should be presumed to be known to the US, and the US should carry the burden to show why it had not anticipated the nefarious effects; in case, though, Japan had enacted measures after it had made its tariff concession, then it should show why its measures had not led to the nullification and impairment suffered by the US. Since the challenged Japanese measures predated the exchange of concessions, and the US could not absolve its burden of proof, Japan obtained gain of cause. 137. Messerlin (1995) took issue with Article 6.1 of SCM, which uses, in his view, a wrong benchmark (a percentage of the subsidy paid, instead of its trade effects) to define serious prejudice. 138. By inference, then, Annex III, which is entitled “Calculation of Ad Valorem Subsidization (Paragraph 1(A) of Article 6),” although in principle in desuetude (since its fate is linked to that of Article 6.1 of SCM), could still provide useful interpretative guidance, when and where warranted. 139. The Panel on Korea–Commercial Vessels held that the use of the words “may arise” in the chapeau of Article 6.3 of SCM is an indication that the list in this provision is not exhaustive (§ 7.601). The list appearing in Article 6.3 of SCM nevertheless covers a wide array of cases. The same panel rejected the argument that, to demonstrate the existence of serious prejudice, the SCM Agreement requires additional elements beyond those referred to in Article 6 of SCM: the importance of that industry to the overall interests of the complaining party was thus judged irrelevant for the purposes of demonstrating serious prejudice (§§ 7.578–579). See also the panel report on US–Upland Cotton at §§ 7.1370–1371. 140. Article 6.3(b) of SCM is further detailed in Article 6.4 of SCM (change in relative shares of the market to the disadvantage of the nonsubsidized like product); Article 6.3(c) of SCM is further detailed in Article 6.5
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of SCM (comparison of prices between subsidized and nonsubsidized goods at the same level of trade to quantify the size of price undercutting). Annex V of SCM, entitled “Procedures for Developing Information Concerning Serious Prejudice,” includes a special procedure for assisting parties involved in dispute settlement in obtaining information and evidence concerning serious prejudice claims. Article 27.9 of SCM contains special rules for determining serious prejudice in case of subsidies provided by developing countries. It is worth mentioning here that the Panel on Indonesia–Autos ruled (§ 14.201) that serious prejudice does not cover damage with regard to products not originating in the complaining WTO member. Recall that origin is defined in national statutes. 141. GATT Document BISD 9S/191 at § 10. 142. In US–Large Civil Aircraft (Second Complaint), the AB underscored that trends must be identified in order for claims of displacement to be successful (§ 1126). 143. It is puzzling why a plethora of terms (“price suppression,” “price depression,” and “price undercutting”) have been used, although they all address more or less the same issue. 144. Recall our discussion of the three terms in the previous chapter. 145. Some products (say, airplanes) compete in the world market; for other products, conditions of competition might be affected, notably through trade barriers, and a narrower definition might be appropriate; see also the panel report on Indonesia— Autos (§ 14.239). 146. Interestingly, the AB, in its report on US–Upland Cotton, siding with the panel, held that a suppression effect on the world price for cotton sufficed for making a determination of price suppression, and that it was not necessary to also determine whether prices of Brazilian cotton, the like product in this case, had been suppressed as a consequence of US subsidies. In its view, if world prices had been suppressed, so would Brazilian cotton prices (§ 417). 147. See also the panel report on Korea–Commercial Vessels (§ 7.571). 148. The Panels on EC–Sugar Exports (Australia) (§ 4.26) and on EC–Sugar Exports (Brazil) (§§ 4.14–15) can serve as illustrations. 149. In this vein, see the Panel on Korea–Commercial Vessels (§ 7.534). 150. See Attachment 1 to the panel report on Korea–Commercial Vessels for an illustration: see also pp. 159–164 of the same panel report, where the Working Procedures are explained. For an early application of this institutional facility, see §§ 1.17–19 of the panel report on Indonesia–Autos. Information gathering under Annex V has been also initiated in US–Upland Cotton (see § 1.3 of the panel report). 151. This case concerns an AD dispute. Causality requirements are identical, though, across the AD and SCM Agreements. 152. See and compare on this score the conclusions of Charnovitz and Fischer (2015), Cosbey and Mavroidis (2014), and Rubini (2014). 153. McDonough (1993). 154. This section borrows from Cosbey and Mavroidis (2014). 155. MTN/NTM/W/26, 28 October 1975, at pp. 7 and 8. 156. GATT, The Tokyo Round of Multilateral Negotiations, Report by the Director-General of GATT, 1979,, at p. 57, The GATT: Geneva. 157. GATT Activities in 1975, April 1976,, at p. 19, The GATT: Geneva. 158. Collins-Williams and Salambier (1996) provide a very comprehensive discussion of the negotiation of Article 8 of SCM.
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159. MTN.GNG/NG10/W/7 of 11 June 1987, at pp. 4–5. 160. MTN.GNG/NG10/W/13 of 9 September 1987. 161. MTN.GNG/NG10/W/17 of 1 February 1988. 162. McDonough (1993), at pp. 901ff., and especially pp. 908–909. 163. Hoekman and Mavroidis (1996b); Horlick and Clarke (1994); Paemen and Bentsch (1995). 164. Some WTO members crossed the aisle, though: Australia was not in favor of extension, while Mexico was; see WTO Document G/SCM/M/22 of 17 February 2000. 165. WTO Document G/SCM/M/24 of 26 April 2000. See also Bigdeli (2011) and Casier et al. (2013). 166. See, for example, WTO Document G/SCM/M/25 of 22 September 2000, and G/SCM/M/26 of 30 March 2001. 167. Stewart (1993), at pp. 228–232. 168. The US statute, named the American Recovery and Reinvestment Act (ARRA), was enacted in 2009. 169. See International Centre for Trade and Sustainable Development (ICTSD), vol. 13, no 2, June 2009. 170. See the discussion of this issue in chapter 9, volume 1, which explained why it is hard for similar arguments to win the day. 171. This concept is thus akin to per se violations of antitrust. 172. See Sykes (2005); Janow and Staiger (2003); Trebilcock and Howse (2005). 173. GATT Document L/1381, at para. 5, adopted on 19 November 1960; and GATT Document BISD 9S/185. 174. Hemmendinger (1969), at p. 206 and Stewart et al. (2007) reflect in detail the US dissatisfaction with the results of the Working Party on Subsidies, as well as the planning of the next steps. 175. A total of 17 GATT contracting parties adhered; see GATT Document MTN.GNG/NG10/W/4 of 28 September 1987. 176. See the detailed discussion in chapter 8 of this volume. 177. Proposal by the US, Supplementary List of Practices That Constitute an Export Subsidy, INT (73)58, 26 June 1973. The Interpretative Note Ad Article VI of GATT mentions “multiple currency practices” as form of dumping or subsidy, but this term refers not to devaluation but to the possibility for companies to sell in foreign currencies while receiving settlements in the home currency. 178. Potipiti (2006) added a voice to this line of thinking by offering an example where banning export subsidies might be the sensible thing to do. She showed how, in a world where trade and transportation costs decrease over time, export sectors grow while import-competing sectors decline. Consequently, export sectors attract new entrants and investment, which erodes the protection rent associated with export subsidies. It follows that the government rent from paying export subsidies declines as well, and under similar conditions, governments might opt to ban export subsidies. This is an argument, of course, that views subsidies from a national welfare perspective, and not an argument suggesting that export subsidies should be banned because of the harm they cause to foreign traders. 179. Hagemeyer (2014), for example, has argued that this provision could be used to punish “tied aid” schemes, since through similar devices, donor countries might be subsidizing their exports to benefit developing countries. 180. A subsequent report clarified that at least one of the factors mentioned in Australia–Automotive Leather II by itself had no probative value that an export subsidy had been paid: the AB in Canada–Aircraft was dealing
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with a subsidy paid by TPC (a Canadian entity) to Canadian aircraft producers. The AB paid particular attention to footnote 4 to Article 3.1 of SCM, holding that mere knowledge that the beneficiary is exporting does not suffice for the de facto threshold to be met. Something more is required. Footnote 4, which interprets the term “subsidies contingent [...] in fact,” reads: This standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy within the meaning of this provision. The AB held that mere knowledge that the company was exporting did not render the subsidy paid “tied to” exports as required by the footnote cited earlier (§§ 172–174). 181. Compare Slot (2010) and Wu (2010) on this issue. 182. Of course, local content and production subsidies can have different effects: a production subsidy could, for example, lead to exports only, without any effect on domestic goods, whereas local content subsidies will increase demand for domestic goods. They could also, nonetheless, have very similar effects, and this is the reason why Sykes’s (2005) remark is pertinent. 183. This is the only case in WTO law where the content of a panel recommendation is specific; normally, WTO adjudicating bodies will recommend that the concerned party bring its measures into compliance, leaving addressees thus with substantial discretion as to the implementing activities (Article 19 of DSU). 184. Footnotes 9 and 10 provide the following comment with respect to the term “appropriate countermeasures”: “This expression is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.” 185. Under Article 22.6 of DSU, it is the original panel, if possible, that act as arbitrators mandated to quantify the level of permissible countermeasures (suspension of concessions). 186. Report of the Arbitrators, Brazil–Aircraft (Article 22.6—Brazil), §§ 3.42–60. 187. The contested practice confirmed, thus, the predictions of Brander and Spencer (1985). A subsidy might further confer a first mover’s advantage, which could be quite substantial in cases of markets with high barriers to entry. 188. Report of the Arbitrators, Brazil–Aircraft (Article 22.6—Brazil), at § 3.48. Similar issues were raised in the panel and AB reports on EC and Certain Member States–Large Civil Aircraft, in the dispute concerning the subsidization of Airbus; see the analysis of Slot (2010) and Wu (2010). 189. Report of the Arbitrators, Brazil–Aircraft (Article 22.6—Brazil), §§ 3.54–3.55. 190. Report of the Arbitrators, US–FSC (Article 22.6—US), §§ 5.30–5.62. 191. Report of the Arbitrators, US–FSC (Article 22.6–US), §§ 6.1–6.30. With respect to the term “not disproportionate,” the arbitrators considered that “the entitlement to countermeasures is to be assessed in light of the legal status of the wrongful act and the manner in which the breach of that obligation has upset the balance of rights and obligations as between Members. It is from that perspective that the judgment as to whether countermeasures are disproportionate is to be made”; Arbitrator, US–FSC (Article 22.6–US), § 5.24. 192. Report of the Arbitrators, US–FSC (Article 22.6–US), § 6.57. 193. Report of the Arbitrators, US–FSC (Article 22.6–US), §§ 6.33–6.34. 194. To allow one complaining member to take countermeasures of an amount equal to the full amount of the subsidy may prove problematic in cases of sequential enforcement, where more than one WTO member decides to challenge the same measure in subsequent WTO proceedings. In US–FSC (Article 22.6–US), the arbitrators
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added a few words to address the hypothetical situation where, subsequent to the EU challenge, another WTO member decided to attack the same US measure (the FSC scheme); see Report of the Arbitrators, US–FSC (Article 22.6–US), §§ 6.28–29: it seems hard to reconcile this passage with the arbitrators’ claim that they would have ended up with the same amount had they used trade effects as a benchmark to quantify the appropriateness of countermeasures. The arbitrators had calculated total trade effects (something that is discernible from the report): if their calculation is correct, this is a case where total trade effects yield a number as high as the amount of subsidy paid. However, since the number chosen is a number within a range of possibilities, we simply do not know if the EU injury is within the lower or the higher part of the range. In other words, the EU might have been overcompensated or undercompensated depending on the location of its injury within the range calculated in the arbitrators’ report. Be it as it may, though, Esserman and Howse (2004) voiced their dissatisfaction with this report, arguing that the ultimate remedy was clearly disproportionate, in violation of the standard enshrined in Article 4.10 of SCM. 195. Report of the Arbitrators, Canada–Aircraft Credits and Guarantees (Article 22.6–Canada), § 3.51. The amount of the subsidy was calculated on the basis of the benefit to the recipient (that is, the benefit conferred by the loan), rather than the amount of the loan as such. Ibid., § 3.60. 196. Ibid., § 3.90. 197. Ibid., § 3.107. 198. Ibid., §§ 3.121–2. 199. This is the “lesser duty” rule, which we describe in detail later in this chapter. 200. This approach is consistent with the Ministerial Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 or Part V of the Agreement on Subsidies and Countervailing Measures, adopted at Marrakesh at the conclusion of the Uruguay round, which recognized the need for a consistent resolution of disputes arising from AD and CVD measures. 201. A proposal has been tabled by the EU to introduce a requirement to calculate an individual duty in the CVD context as well, with the possibility of sampling. The level of the duty to be paid by nonsampled exporters would, as in the AD context, be the weighted average of the duty of the sampled exporters; see WTO Documents TN/RL/GEN/93 and TN/RL/GEN/96. 202. This situation has not been practiced thus far. 203. This list is very similar, although not identical to the list included in Article 3.4 of AD. The injury standard was first heavily negotiated during the Tokyo round. Before the advent of the Tokyo-round SCM Agreement, the US would impose CVDs any time an expert report benefited from a grant regardless of whether injury had been caused as a result; see Graham (1979), pp. 162ff. 204. Horn and Mavroidis (2005a), and (2007b) discussed these two reports. 205. See, for example, § 163 of the AB report on US–Softwood Lumber IV. Note also that the Panel on Mexico– Olive Oil held that there is no requirement that a particular producer be producing the like product at the moment an application is filed. This view (voiced by the EU) could lead to absurd results, since, if accepted, it could, for example, exclude operators that had exited the market because of the subsidies from filing a petition (§§ 7.188ff, and especially 7.203). 206. In China–Autos (US), the panel faced an extraordinary situation. Some producers had not been included in the definition of “domestic industry” without, however, having been a priori excluded. Rather, it was a case of deficient data collection, and the panel held that, under the circumstances, China had not acted inconsistently with its obligations under Article 4.1 of SCM, although it did acknowledge that similar errors may raise concerns of consistency with the injury requirements embedded in the agreement (§ 7.212).
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207. US–Countervailing Duty Investigation on DRAMs, panel report at § 7.233. Panels have not been required, so far, to rule on a determination by an IA that did not look at both an absolute increase and a relative increase in imports. So it remains to be seen whether panels would be really willing to accept a determination based on an absolute increase without examining the volume in relative terms, such as where demand elasticities are substantial. 208. In fact, the level of nonsubsidized imports will be one of the other factors that will need to be examined in the context of the causation and nonattribution analysis under Article 15.5 of SCM. The fact that imports from subsidized and nonsubsidized sources are discussed side by side by the authority is not inconsistent with the agreement; what matters is the use made of the data, and whether the consideration required by Article 15.2 of SCM was made on the basis of data concerning imports found to have been subsidized (Panel on EC– Countervailing Measures on DRAM Chips, at § 7.298). 209. Recall our discussion earlier on embedded causality in price effects analysis. 210. Idem. 211. Annex VII to the SCM Agreement contains a complete list of countries coming under this heading. 212. See also the Panel on US–Countervailing Duty Investigation on DRAMs (§ 7.218). Panels have consistently considered that Article 15.1 of SCM is a provision that informs the more detailed obligations set forth in the remainder of Article 15 of SCM; see, e.g., the panel report on EC–Countervailing Measures on DRAM Chips at § 7.275, quoting from § 106 of the AB report on Thailand–H-Beams. For that reason, panels have first examined the consistency of the measures with the specific obligations contained in Articles 15.2–5 of SCM. See the Panel on US–Countervailing Duty Investigation on DRAMs at § 7.217; and the Panel on US–Softwood Lumber VI, at § 7.26. 213. The GATT Panel on Canada–Grain Corn held that Canada had failed its duty of objective examination by refusing to address the fact that there was a steady decline of the imported subsidized goods (§ 5.2.3). 214. §§ 7.33–37. 215. The Panel on US–Softwood Lumber VI held that wrong facts and assumptions and the absence of any discussion of specific factors appearing in the body of this provision are fatal; a WTO member committing similar errors is deemed not to have respected the causality requirement (§ 7.122). 216. We discuss the methods for calculating in detail later in this chapter. 217. In § 7.98 of its report, this panel held that requiring the posting of a bond or cash deposit went beyond the necessary conservatory measures. 218. Footnote 52 recognizes that the possibility for retrospective assessment exists. 219. See Bhagwati and Mavroidis (2004). 220. It is the Panel on Brazil–EEC Milk that made this point clear in an unambiguous manner. Brazil had imposed CVDs on milk powder of EU origin without conducting an investigation. It then claimed before the panel that its error had been harmless, but the panel rejected its claim (§§ 351–353). 221. See the relevant discussion in the previous chapter. 222. We discuss transparency requirements later in this chapter. 223. Prusa and Vermulst (2014) discussed this dispute in detail. 224. The Panel on Mexico–Olive Oil found that Mexico had violated its obligations under Article 12.4.1 of SCM by not requesting a nonconfidential summary from the party that had supplied confidential information (§§ 7.100–1).
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225. See the relevant discussion in the previous chapter, as well as the attachment dedicated to this issue in the panel report on Korea–Commercial Vessels. 226. See the AB report in Mexico–Antidumping Measures on Rice at § 291 and, for confirmation, the panel report on China–Autos (US) at § 7.172. 227. The Panel on US–Countervailing Measures (China) reached a similar conclusion (§ 7.316). 228. This panel dismissed a challenge by the EU to the effect that Mexico had not allowed sufficient time to consult (in the panel’s calculation, there were only 13 days between the invitation for consultations and the initiation of investigation, § 7.42), arguing that no obligation to allow sufficient time existed in the SCM Agreement. 229. In parallel with AD proceedings, this provision corresponds to what is termed “changed circumstances review” in the US. 230. See also the AB report on US–Countervailing Measures on Certain EC Products at § 141. 231. Recall that the starting point for counting the five-year period is not necessarily that of the original imposition: Article 21.3 of SCM makes it clear that if an administrative review has taken place, and if this review covered both subsidization and injury, then the date when such a review took place becomes the starting point to count the five-year period. 232. Therefore, the panel did not exclude that, in principle, the information before it could have sufficed to substantiate the IA’s findings had the IA addressed other factors that might have detracted from its finding. 233. See McDonough (1993). 234. See, for example, the proposal submitted by New Zealand, which reflects a series of studies conducted to this effect, WTO Document WT/CTE/W/134 of 23 February 2000. 235. WTO Document WT/MIN(01)/DEC/1 of 20 November 2001 at §§ 28 and 31. 236. WTO Document WT/MIN(05)/DEC/1 of 22 December 2001, Annex A. 237. Argentina, Australia, Chile, Colombia, Ecuador, Iceland, New Zealand, Norway, Pakistan, Peru, and the United States were the original members of this group. Costa Rica joined the group at a subsequent stage. For a relatively recent proposal by the group, see WTO Document TN/RL/W/243 of 7 October 2009. 238. WTO Document TN/RL.W/232, Annex C, of 28 May 2008. The US tabled a comprehensive favorable reaction; WTO Document TN/RL/GEN/165 of 22 April 2010. 239. WTO Document WT/MIN(13)/49 of 18 December 2013. Young (2011) offered a very comprehensive discussion on the issue of fisheries subsidies in WTO, and the initiatives to address overfishing in other fora. 240. WTO Doc. TN/RL/W/258 of 19 June 2015. 241. Horn et al. (2011) provided information to this effect. Members of a panel are typically members of delegations to the WTO—commercial attachés with no particular expertise in the kind of issues discussed here.
Chapter 4 1. US Stat. 833 (1943). Safeguards are often referred to in literature as “escape clauses.” 2. S. Rep. No. 1298, 93rd Cong., 2nd Sess. 119 (1974). Or, to borrow from Segal (2011), trade produces winners and losers, as capital and labor get reallocated to the sectors in which countries excel. Since the winners win more than the losers lose, openness is to a nation’s overall benefit—even though the autoworker in Ohio who is
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put out of work after his factory closes may not share in that benefit. Safeguards are to help protect the autoworker in Ohio. Whether this is sound policy is something that we will be discussing in what follows. 3. See Bronckers (1985); Jackson (1969); Stewart and Brilliant (1993). See also Article 5 of the Preliminary Draft International Agreement for the Abolition of Import and Export Prohibitions and Restrictions, League of Nations, Economic and Financial, 1928.II.7. 4. See also Article 5 of the Preliminary Draft International Agreement for the Abolition of Import and Export Prohibitions and Restrictions, League of Nations, Economic and Financial, 1928.II.7. 5. Only in exceptional circumstances would this obligation be waived. Even in such cases, nevertheless, negotiations would resume as soon as practicable after the imposition of the safeguard. 6. The US State Department developed the escape clause in 1941 after Congress expressed concerns about the impact of war and postwar disruptions on US industries. It was a component of the December 1941 template reciprocal trade agreement reproduced in Annex B-1. It first appeared in the US–Mexico trade agreement of 1934, as stated previously. The Article XI safeguard of the 1934 reciprocal trade agreement with Mexico read “If, as a result of unforeseen developments and of the concession granted on any article enumerated and described in the Schedules annexed to this Agreement, such article is being imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers of like or similar articles, the Government of either country shall be free to withdraw the concession, in whole or in part, or to modify it to the extent and for such time as may be necessary to prevent injury” (57 Stat. 845). In addition, as chapter 1 also mentions, Congress required a safeguard measure in all executive trade agreements as a result of a deal with the Harry Truman administration in February 1947. 7. E/PC/T/C.6/28 of 31 January 1947, and Rev. 1 of 8 February 1947; see also E/PC/T/C.6/W.66 of 11 February 1947, at pp. 1ff., and E/PC/T/C.6/W.87, at pp. 1ff. Canada and Chile, nevertheless, continued to be opposed to the idea of allowing safeguard action without prior consultations, even though, according to the agreed text, such action would be limited to exceptional circumstances only; see E/PC/T/C.6/Rev. 1, at p. 3. 8. E/PC/T/W/224 of 24 June 1947, at pp. 1–7. 9. E/PC/T/146 of 31 July 1947. 10. Committee Reports Havana (CRH), at p. 83. There was a change in this respect only many years later with the advent of the Uruguay-round Agreement on Safeguards. 11. By the same token, Article XIX of GATT serves a different purpose than Article XXVIII: this latter provision is not meant to provide relief limited in time. As we will see later in this chapter, the advent of the SG Agreement specified the time limits within which safeguards can be lawfully imposed, in line with the original idea underlying Article XIX of GATT, which did not, however, contain specific time limits as does Article 8 of SG. 12. GATT Document No. GATT/551–3, at p. 21. 13. This section draws on Horn and Mavroidis (2007b). 14. See Bagwell and Staiger (2002); Finger (1993). 15. Tariff bindings in actual trade agreements are typically not conditioned on external events. There is, therefore, a need for instruments that allow ex post adjustment of effective levels of bindings (that is, for escape clauses) and GATT includes several provisions to this effect. Some of them are remedies for problems that are not related to specific industries: Articles XII and XVIII(b) of GATT allow for protective measures in response to economywide, macroeconomic (balance of payments) disturbances; Article XXVIII of GATT could address problems in specific industries since it permits renegotiation with other contracting parties of particular bindings. Thus, it might allow for more long-run (but also presumably more time-consuming) solutions to problems of ex post inefficient tariff bindings.
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16. This stylized example rests on some reasonable assumptions: for example, workers did not stay in the declining industry with less salary because of salary rigidities; if the shock was temporary (and not permanent as presumed in the example), a safeguard could, under certain circumstances, serve a slightly different role by preventing adjustment costs arising from resources first moving out of and then back into the industry. 17. Deardorff (1987) provides an excellent explanation of Corden’s “conservative social welfare function,” as explained in Corden (1971, 1974): in this model, losses are valued more than potential gains, and the argument in favor of introducing safeguards becomes irresistible. Deardorff (1987) explains why a conservative social welfare function can be more of an issue in trade policy than in other fields of economic activity. See also Sykes (1990, 1991). 18. Economists debate on what the appropriate action should be, and opinions vary. In practice, there are some interesting examples. In Germany, for example, in the social-democratic era, Umschulung, where the state would finance the retraining of parts of the population that could not compete on the international scale, was en vogue. The US knows of a comparable institution, the Trade Adjustment Act (TAA), which was first authorized in 1962. Hornbeck (2013) provides a concise historical account of the TAA. 19. Compare the analysis in Bagwell and Staiger (2002). Another version of this argument, based more on a public-choice approach where governments are driven at least partly by motives other than social welfare maximization, is discussed by Sykes (1991). The argument is that governments may, after trade negotiations, face strong pressure for protection in certain industries. A safeguard mechanism makes it possible to give in to such pressures and, thus, to avoid political setbacks from engaging in trade liberalization. As a result, governments are more prone to liberalize ex ante. 20. Horn and Mavroidis (2007b) discussed this issue in detail and explained the manner in which the SG Agreement deals with risk sharing and moral hazard. 21. See the excellent analysis of Bhagwati and Ramaswami (1963) on this score. 22. Similar views have been voiced by Dunoff (2010) and Sykes (2003a). 23. Unlike the AD and SCM Agreements, no agreement on safeguards was negotiated during the Tokyo round. A decision only had been adopted regarding safeguard action by developing countries (GATT Document L/4897). 24. Sykes (2006a), and Wauters (2010) provided an excellent overview of the agreement. 25. A “maverick” is the trading nation, which is the true concern for the country undertaking safeguard action either because it occupies a large market share or because its market share grew faster than any other’s. 26. Article 40 of the Havana Charter, Havana Reports, pp. 82ff. 27. GATT Documents L/4679, at § 22; see also the same document, at § 35. 28. A report prepared by experts at the request of GATT named after Fritz Leutwiler, the chairman of the group; see “Trade Policies for a Better Future: Proposals for Action”, The Leutwiler Report, 1985, The GATT: Geneva, at pp. 42ff; see also Stewart et al. (1993), at pp. 1761ff. 29. This issue is now settled: by virtue of Article 2.2 of SG, safeguards must be nondiscriminatory. See also the Panel on Dominican Republic–Safeguard Measures (§ 7.67). 30. Sometimes referred to as “voluntary restraint agreements (VRAs),” or even “orderly marketing arrangements (OMAs).” 31. Japan–Semiconductors, discussed in chapter 2, could qualify as a VER. The GATT panel report on EEC– Apples I (Chile) mentions in § 2.3 VERs that the EU had concluded with Argentina, Australia, New Zealand, and South Africa on apples. They are often referred to in literature as “gray-area” measures. Preeg (1995, pp.134ff.) includes a comprehensive account of the EU/Japan VER on cars, where EU had obtained not only a
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reduction of Japanese cars exported from Japan to Europe but also of Japanese cars produced in European plants. 32. See AB, US–Wheat Gluten, § 98. Mattoo and Mavroidis (1995) discussed the possibility of invoking EU competition laws to challenge the consistency of the VER on cars concluded between Japan and the EU. They concluded that, in all likelihood, Japanese producers could hide behind a “foreign sovereign compulsion” defense, with good prospects of thwarting a legal challenge against them: this defense is not the end of the road in EU antitrust litigation, for the EU judge could weigh the EU interest to be of higher importance than that of the foreign sovereign. However, this is not something that happens routinely. In the US, Section 607 of the US Trade Act of 1974 immunized steel companies participating in VERs from antitrust actions. The issue of executive power to negotiate VERs under the pre-1974 Trade Act was considered in re: Consumers Union v. Kissinger, 506 F. 2nd 136 (DC Cir. 1975). 33. Similar claims are hard to prove, though, since compensation could come in the form of, say, a favorable vote at the UN or supporting a national candidate who is presenting himself for election at an international forum. 34. The (safe) assumption here is that the country requesting the VER is less competitive; hence, the price of its goods is higher than that of the goods of the country agreeing to limit its exports. 35. See Berry et al. (1999); Kostecki (1987); Hindley (1980). 36. Pub. L. No. 82–50, Stat. 73–74 (1951) Trade Agreements Extension Act of 1951. 37. Trade Act 1974 S. Rep. No. 1298, 93rd Cong., 2nd Sess. 119 (1974). 38. This was probably a legal error since the title of this provision makes it clear that it refers to the types of measures that can be used as safeguards. In contrast, Article 2 of SG, which discusses the “conditions” for lawful imposition, does not mention the “unforeseen developments” requirement. 39. Article XIX of GATT mentions that safeguards can be imposed if imports increased as a result of unforeseen developments “and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions.” Now, the quoted sentence can be interpreted in different ways. It could be seen as underscoring the fact that “normal” increase in imports as a result of tariff reductions does not suffice to trigger the right to a safeguard clause. In this reading, safeguards could be imposed only if there is a link between increased imports and tariff concessions or other obligations assumed under GATT. It could also be understood as being distinct to the “unforeseen developments” requirement. In this reading, unforeseen developments could refer to force majeure (e.g., domestic industry disappeared because it was burned to the ground, an event totally unrelated to obligations assumed under GATT). Either is plausible. 40. This argument is reinforced by an empirical paper authored by Crowley (2010), who concluded that the WTO members that undertook larger tariff reductions also undertook the highest number of SG investigations. 41. This point has been confirmed in subsequent case law: both the Panel on Argentina–Preserved Peaches (§§ 7.26–28) and the Panel on Dominican Republic–Safeguard Measures (§ 7.130) adopted this approach. 42. The Panel on US–Steel Safeguards held that in the case of a multistage review (in the present case, the US IA had first issued a report imposing safeguards, and then added its findings on unforeseen developments), there is no violation of WTO rules if the IA adds its findings on unforeseen developments at a later stage, provided that such findings precede the application of the safeguard measure (§ 10.58). 43. This is not a totally unproblematic statement, though, and some limits must be imposed. It should be the case that at the very least, this requirement was thoroughly considered during the investigation. 44. The AB upheld; see § 330 of its report. In a similar vein, the Panel on Dominican Republic–Safeguard Measures (§§ 7.132–144) held that a mere assertion to the effect that imposition of safeguards was necessary because of the accession of China does not suffice to satisfy the unforeseen developments requirement, which requests a reasoned explanation for why this has been the case.
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45. Unforeseen developments and increased imports are, nevertheless, two distinct matters, as was clearly stated in the panel report on Argentina–Preserved Peaches (§§ 7.17–18). 46. Economic theory suggests that imports per se can never be a cause of injury, for they represent the difference between consumption and domestic production at a given price level: imports, thus, are a proximate, and not the ultimate, cause of injury. Sykes (2003a) has correctly criticized the SG Agreement for being economically naive in this respect. Imports are an endogenous variable and represent the difference between consumption and domestic supply at given price. How, then, can it suddenly become a causal variable? This is the heart of the argument advanced by Sykes, and viewed from this angle, Sykes is definitely right. The only way we can make sense of this requirement is to understand the increased imports requirement in a more sophisticated manner. Thus, to bridge the gap, Grossman and Mavroidis (2007e) required IAs to investigate why imports have risen (and thus address Sykes’s point without modifying the text). The increase in imports in the SG context must be determined in absolute terms, or in terms of imports relative to production, rather than relative to production or consumption as is the case in the AD context; while the increase in imports in the SG context is not necessarily qualified as having to be significant (as in the AD context), the increase has to be such that is capable of causing serious injury. If that is the case though and the question to ask is what drives imports, then some remedial action should be the necessary complement to safeguard action. There is evidence of this in some instances that we have signaled already (the US Trade Adjustment Act or the German “Umschulung”), but there is no requirement for accompanying action embedded in the SG Agreement. 47. In statistics, trend analysis would be employed to detect behavior that would otherwise be hidden by noise (irrelevant information) in a time series. This is probably not what the AB had in mind here. 48. The AB made this point in US–Lamb, and we discuss it next. Recall that there is no definition of the term “material injury” in the AD or the SCM context. It is all a matter of case law. 49. See US–Lamb, footnote 99. 50. On this issue, see also the Panel on US–Steel Safeguards at § 10.378. 51. The AB, in its report on US–Cotton Yarn, referred explicitly (§ 91) to its report on Korea–Alcoholic Beverages, which had been adjudicated under Article III of GATT. 52. See also the AB reports on US–Wheat Gluten at § 70, and US–Line Pipe at § 215. 53. The same panel considered that an additional explanation from the IA was required when there was no time coincidence between increased imports and injury (§ 10.303). 54. This step is the prelude to statutory requirement that the application of safeguards must be to the extent necessary to counteract injury from increased imports, not injury resulting from other factors. 55. In US–Line Pipe, the panel reached the same conclusion when adjudicating a dispute in the SCM context (§ 7.289): “We do not consider that such an analysis allows an investigating authority to determine whether there is ‘a genuine and substantial relationship of cause and effect’ between the serious injury and the increased imports.” 56. The Panel on US–Steel Safeguards observed that quantification of the portion of the injury caused by specific factors might on occasion be desirable (§ 10.336); in certain circumstances, it added, quantification may even be necessary in order to establish nonattribution on the basis of a reasoned and adequate explanation—without, however, explaining when this should be the case (§§ 10.340–342). 57. See Grossman (1986). 58. See Kelly (1988) and Irwin (2003). 59. One can, of course, only wonder how this can happen without quantification of the contribution of at least increased imports in the total injury suffered. Recall that case law has so far held that quantification is not necessary.
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60. Bagwell and Staiger (2005) introduced this terminology. 61. It is highly unlikely that the CTG would disapprove since it adopts its decisions by consensus, and the affected WTO members would likely block a consensus to this effect. 62. Although the term “substantial interest” is not defined any further, one could plausibly make arguments to the effect that it should be constructed in a manner consistent with the term “principal supplying interest” appearing in Article XXVIII of GATT. 63. See Mavroidis (2000a) for details. 64. Switzerland quantified its damage from a US safeguard on steel to be $20,923,000. The US would collect as a result duties amounting to $3,372,000. Switzerland responded by imposing its own restrictive measures on goods originating in the US. The value of goods covered would be $36,562,424, and the collected duties would rise to $3,022,529; see WTO Document G/C/18, G/SG/47 of 22 May 2002. 65. Hoda (2001) showed that there were few (if any) cases of disagreement regarding the amount of compensation to be paid. Ethier (2001) made a similar argument to explain why WTO members have opted for weak rather than strong remedies in the context of dispute settlement. 66. WTO Document G/L/453, G/SG/35 of 2 July 2001. 67. Yano (2006) noted that this is a very frequent practice and pointed to instances of similar notifications. 68. Council Regulation (EC) No.131/2002 of 13 June 2002. 69. See, for example, WTO Documents G/SG/N/8/EEC/2, G/SG/N/10/EEC/2, and G/SG/N/11/ EEC/2/Suppl. 1 of 16 March 2004. 70. Quota modulation cannot take place if a safeguard measure takes the form of tariff increases. In US–Line Pipe, the panel rejected the argument by Korea that tariff quotas are a form of quota/QR and could thus benefit from this regime (§ 7.69). 71. There is, of course, a question about the meaning of the term “representative”; it could be argued that in the case of a sudden and sharp increase in imports in the last year of the period of investigation, this last year was not representative of normal import volumes, but rather the result of some unforeseen developments. Excluding this last year from the representative period, of course, would entail serious implications for the minimum amount of allowable imports. 72. The need for justification in this particular situation led the AB to conclude, in its reports on Korea–Dairy (§§ 99, 103) and US–Line Pipe (§ 234), that in all other situations, there is no need for an authority to provide an explanation of why the level of the measure is actually necessary to prevent or remedy serious injury (§ 99). So, while there is a substantive obligation to ensure compliance with the necessity requirement, there is no procedural obligation to demonstrate that compliance has indeed occurred. The AB underscored this point in its report on US–Line Pipe (§ 234). In the same report, the AB added that in any case, a justification of the measure, while not required as such, would be the incidental effect of the required reasoned and adequate explanation of causal-link analysis under Articles 3.1 and 4.2(b) of SG (§ 236). 73. See chapter 2. 74. Grossman and Sykes (2007b) discussed this point in detail. 75. Article 2 of SG, footnote 1. FTAs have no common external trade policy; hence, its members will continue to apply safeguards individually. 76. Article 2 of SG, footnote 1. FTAs have no common external trade policy; hence, its members will continue to apply safeguards individually. 77. WTO Document G/L/936 of 29 October 2010.
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78. There are, of course, other costs associated with flimsy initiations, both for the IA and for the exporters. 79. WTO Document G/L/1054 of 29 October 2013. 80. On this issue, see Bown (2010). 81. WTO Document WT/L/432, at p. 9, §§ 1–9. 82. WTO Document WT/MIN (01)/3, section 13, §§ 245–50. 83. Idem at §§ 241–2. 84. See § 242(g) of the Report of the Working Party on the Accession of China. 85. WTO Documents G/SG/N/6/EEC/2 and G/SG/N/8/EEC/Suppl.1. 86. Idem, § 1. 87. China’s Accession Protocol, section 16 § 9. 88. Note that Article 16 of the Chinese Protocol of Accession does not require demonstration of causality. Correlation between imports and injury suffices to trigger the safeguard mechanism and the AB in its report on US–Tyres (China) accepted as much (§§ 130ff.). 89. China’s Accession Protocol, § 6. 90. Idem, § 3. 91. Idem, § 6. 92. Idem, § 7. 93. Idem, § 2. 94. See § 246(a) of the Report of the Working Party on the Accession of China. 95. China’s Accession Protocol, section 16 § 5. 96. Idem, § 8. 97. If imports from developing countries have been excluded, an IA must establish in a clear manner that imports from sources other than the excluded developing countries fulfill all conditions for the imposition of a measure (AB, US–Steel Safeguards, § 472). 98. Bown and Wu (2014) discussed this point in detail. They also alerted developing countries to the implications of signing PTAs that contain WTO plus (WTO+) or WTO extra (WTOx) clauses with respect to the application of safeguards, since they might be giving away a very useful tool by agreeing to “stringent” conditions. 99. See Palmeter and Mavroidis (2004). 100. Variations of this proposal have been advanced by Bhagwati (1977), Hufbauer and Rosen (1986), and Wolff (1983).
Chapter 5 1. See Baldwin (1970). 2. This is not to suggest that the standardizing process at the international level is totally immune to “political economy” considerations, as we will see later in this chapter when discussing Büthe and Mattli (2011). This is
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to some extent the result of the unequal bargaining power of participants and the possibility of seeing alliances across those who can influence the outcome of negotiations. Intuitively, nevertheless, one would expect to see some reciprocal concessions on this front. 3. As we will see in the next chapter, the SPS Agreement does provide for some insurance against erratic behavior in this respect. It requests that WTO members adopt consistent levels of protection when facing similar risks. No such obligation exists in the TBT Agreement. 4. Indeed, as analysts conclude, it is hardly the case that international standards are the best interventions either. We will be referring to the work of Mattli in this respect later in this chapter. 5. See Vogel (2003); Graham (1979, pp. 166ff.). 6. Note that standards are not necessarily the best instrument to address the issues discussed here: it could be that a socially optimal outcome can be reached through negotiations, taxes, or subsidies. 7. See Mansfield and Busch (1995). In addition, Kono (2006) observed that it is democracies that typically create NTBs. In his analysis, by increasing the transparency of some policies relative to others, democracy induces politicians to replace transparent trade barriers (such as tariffs) with less transparent ones (such as NTBs). He tested his hypothesis using a sample of 75 countries and concluded that democracy leads to lower tariffs, higher core NTBs, and even higher-quality NTBs. In his view, democracy promotes optimal obfuscation, which allows politicians to protect their markets while maintaining a veneer of liberalization. Compare with Milner (1988). Standardization at the international level, assuming divergent interests participate in the process, is in and of itself a process mitigating capture. 8. OECD countries in general emerged as the main participants throughout the negotiation during the Tokyo and the Uruguay rounds, with the Nordic countries being responsible for numerous proposals; see, for example GATT Document MTN/NTM/W/19 of 24 January 1975. 9. We will discuss the degree and nature of government involvement later in this chapter, when we cover private standards. 10. Its “Blue Flag” award for clean beaches is well known in Europe and abroad. 11. CEN and CENELEC have established “National Mirror Committees” when elaborating standards where all interested parties (i.e., enterprises, consumers, and state entities) can participate; ETSI have established technical bodies composed of technical experts from the industry. 12. See the CEN Internal Regulations. 13. ETSI decided by weighted voting as well, with the “weight” of votes depending on the membership fee of participating companies, which in turn depends on financial turnover (www.etsi.org). 14. See Pub Law 104–13. 15. This example is mentioned in Akhtar and Jones (2013). 16. Neither should one overlook the possibility that harmonization of standards might favor one trading group over another: Büthe and Mattli (2011) provided ample support for the thesis that many international standards are not a compromise between various national attempts to standardize a market, but often the victory of one national standard over another. 17. See WTO Document G/TBT/W/340. 18. International Regulatory Cooperation: Addressing Global Challenges, OECD Publishing: Paris, 2013. 19. Cecchini (1988) provided estimates on the impact of standards on European firms, but nothing on costs for firms engaging in cross-border operations. Some authors went ahead and provided estimations; see, for example,
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de Melo and Tarr (1992), who calculated the tariff equivalent for US standards in the automotive sector at 49 percent. The calculation rests on some assumptions, of course. Baldwin (1991) provided a macro, and Henson (1996) a series of micro estimations of costs of compliance. Kawamoto et al. (1997) estimated that national differences in product standards result in losses for the US alone of between $20–40 billion per year. 20. See Sykes (2000) and Pelkmans (2003). Deardorff and Stern (1998) have shown the measurement of technical barriers to trade is not a simple task even for the most gifted econometricians (in other words, the “tariffication” of NTBs is a demanding enterprise). However, Kee et al. (2009) offered a quantification of NTBs in a sample of 78 countries and concluded that their ad valorem equivalent is higher than the duties in place in these countries. Still, even in the absence of precise measurement, one should not conclude that it is impossible to more or less measure the resulting welfare implications: Wilson and Otsuki (2004) concluded that, in the sectors they examined (289 firms from 25 industries), the negative implications of unilateral standard setting, especially for developing countries, should not be underestimated. The WTO, in partnership with other organizations, delivers technical cooperation to LDCs and other low-income countries through the Standards and Trade Development Facility (STDF): in 2010 and 2011, a total of 27 projects were approved. They were meant to improve the capacity of developing countries to meet international SPS standards and, thus, their ability to trade in food and farm goods. See WTO Document WT/MIN(11)/5 of 18 November 2011, at pp. 9ff. We discuss the STDF in more detail in the next chapter. It is remarkable that developing countries have not invested more negotiating resources in this area, probably because, as Büthe (2008) argued, they overestimated how much they could achieve through the special and differential provisions included in the SPS Agreement. 21. WTO, World Trade Report (2009, pp. 4ff.). 22. This discussion is, of course, relevant for the next chapter as well. 23. GATT Document MTN/3B/23, at p. 17. 24. Vogel (1995) provided one of the first accounts explaining why intra-EU harmonization was not necessarily “minimum” harmonization, but, on occasion, a race to the top following the insistence of Northern countries and their lobbies. Similar occurrences made it harder for Southern exporters to access the EU market. 25. “Smallholder farmers” refers to farmers who do not own or control the land they farm. 26. Minten et al. (2009) reached similar conclusions when reviewing the implications in Madagascar. See also Swinnen and Vandeplas (2011). Maertens et al. (2011) showed that some of these findings even hold under extreme conditions and on gender issues in value chains, in which they challenge another common wisdom— namely, that increased standards in global value chains induce gender discrimination. They provided empirical evidence that women are most likely to benefit from these developments (Maertens and Swinnen, 2012). 27. It is difficult to measure the effectiveness of each instrument since it is very difficult to establish the counterfactual. Although the signing of binding instruments (like recognition agreements) does signal a willingness to abide by whatever has been agreed, one would be ill advised to take the view that nonbinding instruments are totally ineffectual. 28. The ISO was present in the negotiations of the TBT Agreement, not only during the Uruguay round, but during the Tokyo round as well; see GATT Document MTN/NTM/25 of 16 November 1976 and MTN/NTM/41 of 14 March 1978. Its origin and relevance for international trade were discussed in a report that the GATT Secretariat prepared to this effect (GATT Document MTN/NTM/W/177 of 19 July 1978). 29. We discuss them later in this chapter. The size of the EU internal market, in and of itself, is a contributing factor to the prominence of European SSOs. The New Approach to the EU integration process adopted in the latter part of the 1980s has certainly contributed as well: It was decided, then, to use directives (an EU form of legislation that binds member states’ discretion as to the ends sought, but not with respect to the means to reach the agreed ends) as integration means rather than regulations (which bind discretion with respect to both means, as well as ends). These instruments could be characterized as “minimum harmonization” leaving details and technicalities to the European SSOs. SSOs abound and are not limited to Europe. The Pacific Area Standards
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Congress (PASC) is the corresponding institution in the Pacific Rim. Graz and Hauert (2014) took the view that the EU SSOs and ISO share many common elements, and quintessentially, they placed the accent on coordination. The US SSOs, on the other hand, are the apotheosis of liberal markets, as we already mentioned. 30. Of course, we refer to the harmonization of production process here, not of testing methods that do not seem to importantly affect product variety. 31. See Drabek (2005), Sands et al. (2012), at pp. 810ff.; and also the discussion in various parts of the World Trade Report (2005, pp. 29ff.). 32. See Katz and Shapiro (1985). The literature offers numerous examples, some more “classic” than others (computers and plugs, hardware and software, etc.). The argument is that standard setting is preferable to the use of adaptors that come at a cost anyway. 33. Kawamato et al. (1997) calculated that the share of US exports affected by foreign product standards rose from 10 percent in 1970 to 65 percent in 1993. 34. However, what is the counterfactual? Take the case of the negotiations on the Kyoto Protocol, which deals with an admittedly global environmental issue. One reading of the situation is that some states, either because they will not be directly affected by their own pollution or because there is a problem of collective action, might prefer not to intervene at all or to intervene in an uncostly and probably ineffective manner. Another reading, suggested by Gollier et al. (2000), is that some states believe that no intervention is required on an issue like climate change until more about the hazard is known. Assuming that this view is correct, states might be underregulating for fear that by doing so, they might be doing more harm than good. One should, thus, not necessarily impose a negative value on underregulation. It is not suggested here that action in accordance with the Kyoto Protocol is unnecessary. It is merely suggested that underregulation could be a value judgment. Messerlin (2015) discussed the trade-offs that are an issue when harmonization is sought. Some trade-offs are obvious: since a WTO member might have to increase its fixed cost of production by harmonizing, it might also have to evaluate how much it can win by gaining market access. There are other less obvious trade-offs. Directive 2006/40/EC imposed a new coolant on cars, which was less polluting than the previous one. Mercedes-Benz refused to use it since it was also more flammable when placed in its cars, and it was allowed to do this because reducing pollution would increase accidents. Both coolants circulated following a fight between France and Germany. 35. See Beviglia-Zampetti (2000a and 2000b); Nicolaidis (2000); Nicolaidis and Trachtman (2000); Piermartini (2005); Piermartine and Budeta (2009); and Vogel (1997). The depth of integration influences perceptions regarding similarities and differences can be exacerbated depending on the context: the differences between, say, the new EU members and the original members are minimal compared to the differences between LDCs and the most advanced WTO members; and yet they are consistently highlighted in the literature precisely because the EU integration process is more demanding than the WTO. See Maduro (2007). 36. See Baldwin (2000) and Guiso et al. (2009). 37. Marchetti and Mavroidis (2012) discussed proxies from an empirical perspective. 38. And then there are transgovernment networks of regulators that have been cooperating as well. Take ILAC (conformity assessment), for example. ILAC, as we will see later in this chapter in more detail, is short for the International Laboratory Accreditation Cooperation, which was created for both laboratory and inspection accreditation bodies formed more than 30 years ago to help remove technical barriers to trade. Accreditation is the independent evaluation of conformity assessment bodies against recognized standards to carry out specific activities to ensure their impartiality and competence. Through the application of national and international standards, government, procurers, and consumers can have confidence in the calibration and test results, inspection reports, and certifications provided. 39. WTO Document G/TBT/W/348 of 14 February 2012. On TABD, see Quick (2008), who discussed the process in detail and shared this conclusion.
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40. See www.pc.gov.au/inquiries/completed/australia-new-zealand/report. 41. WTO Document G/TBT/W/348 of 14 February 2012. 42. See Coglianese (2000) and Coglianese, Finkel, and Zaring (2009). Kauffmann and Malyshev (2015) classify eleven forms of cooperation ranging from the most stringent (integration/harmonization through supranational institutions, citing the European Union as example) to dialogue/informal exchange of information, like the transatlantic dialogue discussed above. Between the two extremes, they classify specific negotiated agreements (like international treaties); formal regulatory cooperation partnerships (like the US-Canada Regulatory Cooperation Council); joint standard setting (OECD, WTO); trade agreements with regulatory provisions (like modern PTAs); mutual recognition agreements; transgovernmental networks of regulators (like the International Laboratory Accreditation Corporation, ILAC, a forum that manages conformity assessment agreements signed by various accreditation bodies); unilateral convergence through good regulatory practices (like the TBT GRP, Good Regulatory Practice); recognition and incorporation of international standards (like the ISO), and soft law principles, and codes of conduct. Some MRAs are becoming global. OECD’s Environment, Health, and Safety (EHS) Programme has been working for over 40 years, through international regulatory cooperation, to harmonize chemical safety tools and policies across jurisdictions and to share work on chemical assessments and common problems with the aim of minimizing risks posed by chemicals and reducing NTBs to trade. The development and implementation of the Mutual Acceptance of Data (MAD) system—under which chemical safety data developed using OECD Test Guidelines and OECD principles of good laboratory practice in one member country must be accepted in all member countries—underpins much of this work. The MAD system is the mechanism that provides the framework for regulatory cooperation and is the focus of this case study. OECD (2013), “Chemical safety,” in International Regulatory Cooperation: Case Studies, Vol. 1: Chemicals, Consumer Products, Tax and Competition , OECD Publishing, available at http://dx.doi. org/10.1787/9789264200487-3-en. 43. On this issue, see Scott (2009) and Marceau and Trachtman (2002). 44. WTO Document G/SPS/GEN/766 of 27 February 2007. 45. See the overview of Djelic and de Hond (2014); compare with Schepel (2005) and Arcuri (2013). 46. Of course, this is mitigated by the degree of openness of the national economy to international investment, eventual presence of value chains, etc. 47. This is what is termed the “New Approach” to technical harmonization and standards; see the Council Resolution of 7 May 1985, (85/C 136/01), Official Journal of the European Union (OJ) of 4 June 1985, C 136/1ff. See also the Directive 98/34/EC of 22 June 1998, which laid down a procedure for the provision of information in the field of technical standard and regulations, published in the OJ of 21 July 1998, L 204/37ff. 48. The full list of “New Approach” directives is published and updated in http://www.newapproach.org/ Directives/DirectiveList.asp. 49. Max Havelaar: Or the Coffee Auctions of the Dutch Trading Company, is an 1860 novel by Eduard Douwes Dekker. The hero in the novel is combatting corruption by the government of Java, at the time, a Dutch colony. Farm goods carrying this label are supposed to have been produced fairly, that is, farmers have been paid a fair price for their produce, without exploitation of the farmers by corrupt regimes. 50. FLO-CERT is an inspection and certification body for goods labeled “Fairtrade.” Transfair USA, now renamed “Fair Trade USA,” is a nonprofit organization setting standards and certifying labels that correspond to fair trade values. 51. See Marx (2011). 52. Consultancy firms, like Veritas, could intervene in this respect. Abbott and Snidal (2009), at pp, 522ff., discussed the example of conformity assessment of voluntary standards by the Environmental Management and
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Audit System (EMAS), an entity that certifies companies and other organizations that voluntarily make environmental commitments. 53. Marx (2011) noted that transparency regarding the certification process needs to be addressed since issues of conflict of interest between certifiers and certified often arise. Dragusanu et al. (2014) in the same vein, pointed to similar problems. 54. See ISO (2010), at pp. 6ff. 55. WTO Document G/SPS/W/230 of 25 September 2008, at p.1. 56. Marx (2011) noted that the wealthier the country, the higher the percentage of goods sold through supermarkets: supermarkets become, thus, prime outlets to sell certified goods. Mutual recognition across certification schemes is very low; hence, markets are quite competitive in this respect. The UN Industrial Development Organization (UNIDO) issued in 2008 a booklet aptly entitled “Making Private Standard Work for You,” which aimed to familiarize traders with standards worldwide; in a similar vein, the International Trade Centre (ITC) issued its Standards Map, an online tool that enables traders and all other interested parties to analyze and compare private standards. 57. See ISO (2010), at pp. 8ff. 58. See ISO (2010), at p.6. 59. See ISO (2010), at p. 9. 60. See WTO Document G/TBT/13, at § 25. 61. WTO (2012), “Sixth Triennial Review of the Operation and Implementation of the Agreement on Technical Barriers to Trade under Article 15.4,” World Trade Organization, Committee on Technical Barriers to Trade, WTO Document G/TBT/32, 29 November 2012, at p. 4. 62. The concerns mentioned here had been reflected in the Fifth Triennial Review Report (G/TBT/26, at § 26). The three recommendations were contained in G/TBT/26, in § 26(a)–(c). 63. As if the situation were not already complicated enough, here is yet another twist. Marx (2011) warned that we are still trapped in thinking about standards as having some national “home”; i.e., in a national or regional standard-setting body. For many private standards, though, this paradigm does not work. Some private standards are “non-state and multi-stakeholder,” as he put it. Their home is the world, not a particular WTO member. Marx (2011) provided several specific examples to this effect: Fairtrade Labelling Organization (FLO), the Forest Stewardship Council (FSC), the Fair Labour Association (FLA), Social Accountability International (SAI), and the Marine Stewardship Council (MSC). The discussion on private standards depends on the perspective. Here we have understood “private” to mean standards not attributed to WTO members. In a way ISO standards are private as well. ISO members are NSB (national standards bodies), some of which delegate standardization to market forces. 64. International standardization is one of the objectives of the TBT Agreement, prominently featured in its Preamble. Sykes (1995, 1999) provided an excellent overview of the international standardization process, as well as of the various disciplines of the TBT Agreement. 65. Gormann (2009) showed that standards are adopted for a variety of reasons: for example, Brazil, China, and India often adopt ISO/IEC standards lock, stock, and barrel in an effort to avoid becoming the dumping ground for products that are noncompliant with international standards. 66. For this reason alone, the TBT Agreement should not be construed as an instrument mandating common policies (positive integration). 67. In principle, panels can decide that even an ISO standard falls short of the statutory requirements; nowhere does the agreement oblige panels to equate all output by ISO to international standards.
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68. The EU, India, Malaysia, Norway, the Philippines, Switzerland, and Thailand jointly sponsored an early initiative to this effect. This was a remarkable effort since the sponsors included both developed and developing countries. The reason why developing countries agreed to participate was their belief that “a clearer focus on where international standards are developed will facilitate a prioritization and concentration of already scarce resources and thus provide an incentive for greater participation”; see WTO Document JOB/MA/81, at p. 3 (document on file with the author). 69. See Büthe and Mattli (2011), at p. 5. There are also other standard-setting institutions that specialize in a narrower set of issues: the OECD sets standards in tax policy (all by consensus) and targets tax havens. Tax havens have an incentive to take the OECD-led initiative seriously, although only thirty-four countries have participated in its elaboration: they should avoid being on an OECD blacklist, a list where the wealthiest states participate; moreover, if they are committed to cooperating, they would be granted a seat at the OECD table (i.e., transparency in exchange for information). 70. On the advent and history of these two institutions, see Büthe and Mattli (2011), at pp. 128ff. The ISO has 162 members, NSBs (national standard bodies). NSBs are entrusted with elaboration of standards. Some of them, like the US NSB, the ANSI (American National Standards Institute), outsource the standardization process to other bodies (in the case of the US, the ASTM, the American Society for Testing Material). 71. See Büthe and Mattli (2011), at pp. 12–13. The authors noted that the European hierarchical model is better suited to dominate ISO where most standards reflect EU standards. In contrast, before the IASB, it is the US that dominates since the EU has no common policy in this area. Over the last twenty years, we have been experiencing a turn to the privatization of regulation, the main cause being that states often do not have the expertise to do it themselves. 72. “International Standards and Private Standards,” ISO (2010). 73. See ISO (2010), at p.5. 74. The ISO coordinates its policies with other standard-setting institutions like the World Meteorological Organization (WMO), the International Labour Organization (ILO), and the Codex Alimentarius Commission (CAC). 75. “Decision by the Committee on Principles for the Development of International Standards, Guides and Recommendations in Relation to Articles 2, 5 and Annex 3 of the Agreement.” This decision is featured in Annex 4 of WTO Document G/TBT/9 of 13 November 2000. 76. In footnote 745 of the report, the AB noticed that this construction of the TBT Agreement, in line with the six guiding principles embedded in the decision, is very much in line with the intent of the drafters as reflected in various other provisions of the TBT Agreement. The AB, nonetheless, does not point to any negotiating record to this effect. In fact, remarkably, an issue of prime concern like the legal relevance of international standards attracted little attention from negotiators during the Uruguay round. Be it as it may, it is panels from now on that will be using the six guiding principles mentioned here as the benchmark to decide whether we are in the presence of an international standard. 77. See Horn and Weiler (2007); in EC–Sardines, the AB, upholding the panel’s findings in this respect, confirmed that the definition of “standard” in § 2 of Annex 1 to the TBT is relevant not only for domestic (that is, noncompulsory) standards, but for international standards as well (§ 220). 78. Nevertheless, as Büthe and Mattli (2011, pp. 145–6) noted, “consensus” in the ISO/IEC context does not mesh with the commonplace understanding of the term: rather, it means something akin to striving for the greatest feasible agreement among the technical preferences of the member countries that have taken a position on a draft standard; it can also entail that negative opinions without justification will be discarded. 79. On this issue, see the very interesting account with respect to the hormones standards provided in Abdel Motaal (2004). Büthe and Mattli (2011, pp. 140ff.) discussed the structure and voting procedures in ISO/IEC and explained why the US and the EU dominate the process there.
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80. The AB used a TBT decision relating to “Principles for the Development of International Standards,” WTO Document F/TBT/1 Rev. 10 of June 9, 2011, to support its conclusions in this respect. In its view, this decision had acquired the status of “subsequent agreement” by WTO members in the sense of Article 31.3(a) of VCLT (see §§ 371–372). Alas, this finding backfired. Following this report, a series of WTO members insisted on adding to all acts adopted by the committee a statement that they were deprived of any legal effects. 81. Charnovitz (2006) discussed this issue in detail, and showed how Chinese Taipei is a nonparticipant in most UN agencies, some of which are standard-setting bodies. 82. JOB/TBT/119/Rev. 1, 4 December 2014, p. 2. 83. WTO Document G/TBT/M/64 Rev. 1 of 6 March 2015 at §§ 2.305–308. 84. For a more detailed description, see §§ 2–8 of the AB report. 85. (EEC) 2136/89 of 21 June 1989, laying down common marketing standards for preserved sardines; 1989, OJ L212/79. 86. In US–Tuna II (Mexico), the panel addressed an argument by Mexico to the effect that the US had violated its obligations under the TBT Agreement by deviating from an international standard (the AIDCP standard, already discussed earlier in this chapter). The panel held that the invoked standard was not as effective as the US chosen means, since it did not address all concerns advanced by the US as the underlying rationale for adoption of its measure (§§ 7.721ff., and especially 7.726). It thus dismissed the relevance of the standard for the purposes of responding to the question whether the US had to use it as basis for its intervention, as per Article 2.4 of TBT. 87. UNECE has been particularly active on this front. 88. GATT Documents MTN/NTM/W/14 of 26 June 1975; MTN/NTM/W/18 of 17 September 1975. 89. See also the Panel on US–COOL, at § 7.147. 90. In literature, the term “de jure standard” is often used as a synonym for a government-sponsored standard, whereas “de facto standard” refers to a private (industry) standard. Orviska et al. (2013), for example, referred to Microsoft Windows as the standard for software. Farrell and Saloner (1988) explained that private standards have the undeniable merit of swift adoption and adaptation to market needs, and this explained their proliferation, as we discuss later in this chapter. David and Shurmer (1996) on the other hand, warned of the risk that private entrepreneurs might not always take into account public interest when “standardizing,” and hence the need for some form of state endorsement. 91. We discuss the facts of this case in detail later in this chapter. The EU and Peru, following the condemnation of EU’s measures, reached a mutually agreed solution. The marketing of preserved sardines was extended to sardine types. Thus, the EU could still claim that only Sardina pilchardus is a genuine sardine, whereas Sardinops sagax (the Peruvian export) was a sardine type. All sardine and sardine types would have to carry their scientific names as well when marketed in the EU; see WTO Document WT/DS231/18 of 29 July 2003. 92. § 4.5 of the AB report. The regulation goes on to establish that, by way of derogation to the aforementioned, import of seal products will be allowed for the personal use of travelers, as well as on a nonprofit basis for goods that form part of a national program conducted for the sole purpose of sustainable management of marine resources. Following the panel on this score, we have referred to the latter as “MRM hunts,” whereas we called products produced by the Inuit community “Inuit hunts.” The panel and the AB used the term “commercial hunts” to refer to seal products that were neither Inuit nor MRM hunts (and not for the personal use of travelers, of course). 93. The panel noted that raw seal was not traded; thus, it focused on the criteria that allowed “mixed” products to be traded.
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94. The AB felt that it could not complete the analysis, though. As a result, it disagreed with the panel’s approach to review the consistency of the EU measure with Article III of GATT (and not the TBT Agreement), but it confined its own analysis of the measure to the same provision. 95. Based on this analysis, the AB went on to conclude in § 5.70 that the challenged measure (the “EU Seal Regime”) was not a technical regulation. 96. For detailed description of the goods concerned, see § 7.78 of the panel report. 97. Crowley and Howse (2014) criticized the AB report in this respect. 98. Endless discussions with Rodd Izadnia on this score are acknowledged here. 99. For the sake of completeness of this discussion, we should mention that there might be an overlap between technical regulations and marks of origin. In US–COOL, the AB noted in its report (§ 445) that “Article IX does indicate that requiring origin labelling for imported goods is, at least in some circumstances and for some definitions of ‘origin,’ considered under WTO law to be a permissible means of regulating trade in goods.” None of the complainants pushed the originally submitted claims to this effect requesting a ruling from the AB on this score. 100. Panels, when assessing, say, risks to human health, can take into account available scientific and technical information, related processing technology, or the intended end uses of products. 101. See the analysis of the panel report in Howse and Levy (2013). 102. The disputes arose because the majority of flavored cigarettes originating in the US were menthol; flavored cigarettes originating in Indonesia (complainant) were mostly clove cigarettes. 103. In this context, Home would ask whether there would be a social cost “by leaving things to the market,” or whether in light of the minimal social cost, an intervention is warranted. 104. Here, Home would ask, for example, whether, in the name of consumer protection, it needs to include items (i)–(x) as compulsory content of a labeling scheme, or whether it could limit itself to (i)–(v) if, say, the first five items address their concerns. 105. The Panel on US–Clove Cigarettes held that this provision (Article 2.5 of TBT) creates a rebuttable presumption (§ 7.331). 106. AB, Australia–Apples at § 363. We discuss this case in detail in the next chapter: note that the Panel on US–COOL opted for a coherent interpretation of the necessity requirement across GATT, the SPS, and the TBT; it is of legal relevance here for this very reason. 107. Remarkably, the AB did not find anything wrong with the numerous exceptions in US legislation that reduced the relevance of the COOL requirements to roughly half the quantity of beef and pork traded in the US every year. At the very least, as Mavroidis and Saggi (2014) have argued, it should have questioned the necessity for similar, widespread exceptions. 108. See the discussion in chapter 7, volume 1. 109. Various contributions in Wilson and Abiola (2003) made this point. This is an empirical point—there is nothing axiomatic about it: indeed, there are also countries like Norway and Switzerland that exhibit high protection levels in markets where they are not in a position to affect the terms of trade. 110. A 2000 OECD study, prepared by Spencer Henson and Rupert Loader in collaboration with Akira Kawamoto and Anthony Kleitz, entitled “An Assessment of the Costs for International Trade in Meeting Regulatory Requirements” (OECD Document TD/TC/WP(99)8/FINAL of 28 February 2000, hereinafter “OECD 2000”) provides empirical support for the conclusion that big companies enjoy an advantage over small companies when it comes to meeting divergent standards across export markets: in short, big companies have either subsidiaries
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or joint companies overseas, which are used extensively in order to obtain information about standards, and this provides them with an advantage over small companies when it comes to developing or redesigning goods that fit the standards; see OECD (2000, pp. 36ff.). 111. It is questionable, nevertheless, whether regulating states might always have enough incentive to proceed this way since their own producers will have to adjust to the demanding regulatory standard as well. 112. Necessity can weed out a lot of excessive regulation if applied properly, a question to which we turn in what follows. 113. The analysis of like products in this report in contained in §§ 7.215-7.251. It is worth reading, its length notwithstanding. It will become obvious to the reader that the panel had no TBT benchmark for likeness and was merely reproducing the GATT test, which was called to serve a different purpose (namely, to ensure the value of tariff concessions). In §§ 7.248ff., the panel attempts to entertain the EU argument (a third party to the dispute) to the effect that for some US consumers, it mattered whether tuna had been fished in a manner that did not endangered the lives of dolphins. The result is highly disappointing, if not altogether unintelligible. The panel managed not to respond to the EU argument, and it confused the issue as well. Alas, the panel findings on this issue (likeness) were not appealed. 114. The AB did not have to deal with a claim on likeness in US–Tuna II (Mexico). 115. This argument was expressed in more detail in Mavroidis (2013a). 116. This could be the case for various reasons: for purely economic motives (the dolphin-safe tuna might be more expensive since the US measure adds to the fixed cost of production by imposing a particular fishing technology); or because consumers have no idea what the risks are when the number of dolphins is being reduced; or, even though they know what the risks are if the population of dolphins is gradually reduced, they do not think the life of dolphins is worth protecting—or worth protecting at the cost that the more expensive tuna represents; or for other reasons (e.g., why protect dolphin and not other species, where we should draw the line, etc.). 117. A similar obligation exists with respect to standards. 118. Broude and Levy (2014) reviewed the case law on this score and concluded that there is an indeterminacy in the term “likeness.” They argued for a “legislative” solution since case law has not managed to resolve this issue so far. 119. The same attitude is evidenced in the Panel on US–Tuna II (Mexico) at § 7.375, as well as in US–COOL § 7.313: the last report went so far as to state explicitly that Article III.4 of GATT was the legal context for the interpretation of the LFT requirement under the TBT Agreement (§§ 7.234ff.). 120. See also the AB report on US–Clove Cigarettes at § 175. 121. In US–Clove Cigarettes, the panel dismissed an argument by Indonesia to the effect that Article 2.8 of TBT required from WTO members to provide a certain level of specificity. In its view, the only requirement there is to opt for performance requirements if appropriate (§§ 7.473ff.). 122. The AB advanced similar thinking when they discussed the consistency of the compulsory use of US turtleexcluding devices (TEDs) with the chapeau of Article XX of GATT in US–Shrimp; see the discussion of this topic in chapter 9, volume 1. 123. Failure to notify the list of products covered by a technical regulation by the US led the Panel on US–Clove Cigarettes to conclude that the nation had violated its obligations under Article 2.9.2 of TBT (§ 7.550). 124. WTO Document G/TBT/1/Rev. 8 of 23 May 2002. 125. In exceptional circumstances, Article 2.10 of TBT explicitly exempts WTO members from their obligations under Article 2.9. In US–Clove Cigarettes, the panel held that Article 2.10 of TBT can only be invoked as
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justification for deviations from obligations under Article 2.9 of TBT, since “we see no situation in which a WTO Member’s actions would fall within the scope of both obligations at the same time” (§ 7.502). 126. Inquiry points are encouraged to respond to questions by all traders, regardless of whether they originate in a WTO member; WTO Document G/TBT/1 Rev. 8, at § 82. 127. Baller (2007) provided a classification for different types of MRAs. Compare with Messerlin (2015), who distinguished between recognition and equivalence, as we explained in the introduction to this chapter. 128. See, on this score, Messerlin and Palmeter (2000) and Beviglia-Zampetti (2000a). 129. Nicolaidis (2000) has characterized the term “non-discriminatory MRA” as an oxymoron. Mayeda (2013) discussed the position of developing countries in the TBT Agreement in more general terms. 130. WTO Document G/TBT/19, at § 39. 131. The 1999 EU/US MRA has not been implemented (although it was formally signed) with respect to electrical equipment and medical services because regulators found it impossible to build the degree of necessary confidence necessary to bring the agreement into operation. 132. MRA+ is a top priority for the EU in the TTIP negotiations. 133. See ISO/IEC (2004). Djelic and de Hond (2014) noted (p.70) that this definition has become the “standard” for defining “standards.” Timmermans and Epstein (2010) believed, though, that it is futile to try to define standards; rather, one should focus on defining the standard-setting process instead, which they defined as “a process of constructing and implementing agreed-upon rules, usually backed by some external body, with the aim of creating uniformity across time and space between different localized activities.” The discussion regarding “international standards” points to an effort by WTO members to define both aspects (e.g., the standard-setting process), as well as the substantive elements that standards should exhibit. 134. Sykes (1995), Busch (2011), and Ganslandt and Markusen (2001) showed how standards harm especially smaller economies. OECD (2000) provided empirical support for this point and went so far as to conclude that “meeting non-mandatory technical standards was seen (by those interviewed) as much, if not more, of an issue than meeting, mandatory technical requirements” (p. 7). 135. See Marx and Cuypers (2010). 136. In the EU, for example, ETSI, CEN, and CENELEC elaborate standards that can be converted to common technical requirements by the EU Commission after consultations with the EU member states in the context of the Approvals Committee for Technical Equipment (ACTE). In the US, for example, it is the Federal Communications Commission (FCC) that establishes requirements for the certification of telecoms equipment. 137. Abbott and Snidal (2009) cited a vast amount of literature discussing how NGOs have demanded stricter regulation of international firms and their suppliers for various reasons (unhappiness with their practices, a regulatory vacuum when it comes to coordinating efforts by the home and host country to regulate multinationals, etc.). Business has reacted negatively, and voluntary standards are the compromise between requests to regulate and resistance to requests. Regulatory standard setting amounts to voluntary standards that reflect a “Prisoner’s Dilemma” externality rather than coordination network externality, as we observe in ISO. 138. The annex defines “central government standardizing bodies” as “central government, its ministries and departments or any body subject to the control of the central government in respect of the activity in question”; “regional standardizing bodies,” as “regional body or system whose membership is open to the relevant bodies of only some of the Members”; “local government standardizing bodies,” as “local government other than a central government (e.g., states, provinces, Länder, cantons, municipalities, etc.), its ministries or departments or any body subject to the control of such a government in respect of the activity in question”; “non-governmental standardizing body,” as “body other than a central government body or a local government body, including a non-governmental body which has legal power to enforce a technical regulation.”
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139. Of course, standards are set by the market, as the example of the Microsoft experience has amply demonstrated; see Gandal (2001). 140. In practice, reference is also made to “legal metrology”; that is, the regulatory requirements for measurements and measuring instruments: it aims to ensure the appropriate quality and credibility of measurements related to official controls in the areas of health, safety, and the environment; see Lesser (2007). 141. ISO/IEC 17000, International Standard, ISO 2004, Geneva. 142. See De Bievre et al. (2011). 143. See, for example, WTO Documents G/TBT/9 of 13 November 2000; G/TBT/M/33/Add.1 of 21 October 2004; G/TBT/35 of 24 May 2005; and G/TBT/38/Add. 1 of 6 June 2006. 144. Over the years, conformity-assessment procedures have been streamlined: OECD (2000) concluded that deregulation of the approval process has led to increasing competition across approving agencies and, thus, to decreasing costs of approvals. The contribution by the TBT Committee in this respect should not be underestimated here: through its forum on “good regulatory practice,” it has significantly promoted rational behavior when it comes to regulating areas coming under the mandate of the TBT Agreement. 145. The TBT Committee established in 1996 a “Technical Working Group on ISO/IEC Guides Relating to Articles 5 and 6 of the Agreement” (WTO Document G/TBT/M/6 of 6 December 1996 at § 14); it met three times in 1998, and the basic conclusions were compiled in WTO Document G/TBT/W/43. The work and relevance of the ISO/IEC Guides has been discussed in every Triennial Review so far; see, for example, WTO Document G/TBT/26 of 13 November 2009. 146. The European Cooperation for Accreditation (ECA), the Asia Pacific Laboratory Accreditation Cooperation (APLAC), and the Inter-American Accreditation Cooperation (IAAC) are the current ILAC-recognized regions with acceptable MRAs and evaluation procedures. The Southern African Development Community in Accreditation (SADCA) is currently developing their MRA evaluation processes before requesting recognition and approval by ILAC. 147. Recall the previous discussion on recognition of technical regulations, which is applicable here as well. 148. WTO Document G/TBT/13 at §§ 32ff. 149. WTO Document G/TBT/13 at §§ 32. 150. See also, on this score, the quantification by Shepherd (2009), Czubala et al. (2009), and Shepherd and Wilson (2014), and a communication from Mauritius on behalf of the ACP Group; WTO Document JOB/MA/80. 151. This is reasonable, of course, but it also could lead to abuses. Some discipline occurs in the context of the SPS Agreement, as we will see in the next chapter, where a consistency requirement has also been included, and as a result, WTO members must observe it when enacting measures coming under its ambit. 152. Mavroidis and Wijkström (2013) offered a comprehensive assessment of the role and function of the TBT Committee. 153. See Horn et al. (2013). WTO Document G/TBT/1/Rev. 10 of 9 June 2011 contains all decisions by the TBT Committee since 1995. 154. Recall that this provision deals with special and differential treatment for developing countries. 155. WTO Document G/TBT/19 of 14 November 2006. For a more recent report on this score, see WTO Document G/TBT/26. 156. WTO Document G/TBT/13 of 13 November 2009. 157. WTO Document G/TBT/W/340.
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158. The EU/US cooperation has focused on three issues: the “Regulatory Cooperation Roadmap” (sector-specific agreements on a series of goods such as autos, drugs, and medical devices); the US Office of Management and Budget (OMB) and EU Commission dialogue on good regulatory practices (transparency, impact assessment, etc.); and the Regulatory Cooperation Forum (senior-level meetings on issues such as new technology, safety of goods, etc.). The discussions take place under the aegis of the Transatlantic Economic Council (TEC), a body established to direct economic cooperation between the EU and the US; see WTO Document G/TBT/W/287 of 11 March 2008. 159. There are dozens of similar initiatives, and it is simply impossible to reflect all of them in this chapter. For now, we would like to signal a UNECE initiative. UNECE has issued many recommendations on this score, including “Recommendation L”; that is, the “International Model for Technical Harmonization Based on Good Regulatory Practice for the Preparation, Adoption, and Application of Technical Regulations via the Use of International Standards.” 160. And then there are national mechanisms as well, which serve the same transparency function. See, for example, the Canadian “Export Alert! Notification System,” as well as many more schemes featured in WTO Document G/TBT/W/398 of 26 February 2015. 161. Available at http://tbtims.wto.org. At the end of June 2014, 19,723 notifications had been made to the TBT Committee, and 460 STCs had been raised as well. 162. The TBT Committee will periodically issue documents that refer to all of them; see, for example, WTO Document G/TBT/29 of 8 March 2011. 163. WTO Document G/TBT/36 of 23 February 2015. The fact that so many STCs concern necessity is proof that WTO members care about the trade impact of regulation. Economists become more and more sophisticated in measuring the trade impact of regulatory measures, and we will be referring to the OECD work on this score later in this chapter. And yet, panels continue to neglect trade effects in their reports, and they see no place for similar considerations in the standard of review that they apply in GATT and TBT disputes. 164. WTO Document G/TBT/GEN/74/Rev. 8 of 1 June 2011. 165. Horn et al. (2013) discussed in detail the record in this respect. Lang and Scott (2009) discussed the works of the TBT Committee in a more comprehensive manner, not simply its activities relating to settlement of disputes. Compare with Steinberg (2009), who offered a reply to Land and Scott (2009). 166. The OECD, for example, has developed the Trade Restrictiveness Index, which measures the impact of regulation on trade in services; see Nordås and Rouzet (2015). 167. In the Sixth Triennial Review of the TBT Committee, WTO members agreed to a series of steps: namely, transparency, regulatory impact assessment (RIA) for measures they adopt, internal coordination mechanisms to avoid unnecessary duplications and increases in transaction costs, efforts to minimize the burden on traders, measures to ensure compliance with adopted statutes, and measures to ensure that regulators have taken sufficient account of development needs of WTO members (WTO Document G/TBT/32 of 29 November 2012, at p. 3). See also WTO Document JOB/TBT/119/Rev. 1 of 4 December 2014. 168. Driftnets have been a major concern for those aiming to protect dolphin life, and so is the setting on of dolphins. Following the AIDCP in 1999, itself a successor to the 1992 Agreement on the Conservation of Dolphins (known as the “La Jolla Agreement’), observers have been placed on vessels to verify that no intentional setting on of dolphins has taken place. There is a lot of evidence that, as a result of these measures, the size of the problem has been reduced. The US relied on this evidence when enacting its measures on certification. 169. Both instruments must respect the necessity requirement; we discuss standards later in this chapter. 170. This is, of course, a nonissue when an international standard has been followed since international standards are deemed necessary to achieve the objective sought.
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Chapter 6 1. Rigod (2013) provided an excellent analysis of the rationale for the SPS Agreement, drawing on the negotiating record as well as the relevant law and economics literature. 2. And the EU and the US were the arch negotiators of the SPS Agreement; see Alemanno (2007) on this score. Alemanno (2008) explained how the EFSA model was the US FDA (p. 3). This is actually not such a paradox. Whereas the US FDA was established in June 1906, its European counterpart, EFSA, came into being almost 100 years later, in January 2002, through Reg. 178/2002 (the “General Food Law”). The FDA obtains information from its Food Advisory Committee and the Science Board, members of which are drawn from scientists, industry, and consumer groups, but nonscientists may be present only as nonvoting members. Unlike the FDA, EFSA is restricted to risk assessment but not risk management, two notions discussed in more detail later in this chapter. Roughly, the former covers the scientific view on whether risk exists. The latter is a more “political” decision—e.g., how much risk should be tolerated. To design its EFSA, the EU had commissioned a report by three scientists (Philip James, Fritz Kemper, and Gerard Pascal), entitled “A European Food and Public Health Authority: the Future of Scientific Advice” (Brussels: EC Commission, 1999). These scientists suggested that there should be no artificial compartmentalization of risk assessment and risk management, but their view was not heeded, since EFSA only does the former, the latter being a responsibility of the interplay across EU institutions (essentially the Commission, the Council, and the European Parliament). Since the Alpharma and Pfizer decisions by the European Court of Justice (ECJ), the commission has a procedural and substantive duty to consult scientific experts on matters covered by the SPS Agreement. The commission, however, is not bound to follow the views of EFSA, as Reg. 178/2002 makes amply clear. On this issue, see Gabbi (2014) and Pintado (2014), at pp. 41ff. The US enacted in 2011 the FDA Food Safety Modernization Act (Public Law 111–153), which imposed a series of obligations having to do with information regarding the quality and safety of the products that apply to all parties interested in exporting foodstuffs to the US. 3. On this score, see Tai (2014) and Testori Coggi and Deboyser (2014), at pp. 196ff. 4. Standard-setting institutions like the Codex Alimentarius, the International Plant Protection Convention (IPPC), and the Organisation International des Epizooties (OIE), actively participated in the negotiations ever since the very first meeting of the negotiating group; see GATT Document MTN./NG5/WGSP/1 of 9 November 1988 and GATT Document MTN./NG5/WGSP/W/2 of 14 November 1988. The launch of the negotiations coincided with the development of foot and mouth disease, and negotiators cooperated intensely with these institutions by requesting recommendations on possible action against the disease (GATT Document MTN.GNG/ MG5/WGSP/4 of 11 April 1990).Originally, it was unclear if a self-standing agreement would be the end product of the negotiations or whether changes would be added to the existing TBT Agreement (GATT Document MTN. GNG/MG5/WGSP/2 of 29 September 1989). This idea was abandoned fast in light of the limitations inherent in the coverage of the TBT Agreement; see GATT Documents MTN.GNG/MG5/WGSP/W/5 of 22 May 1989 and MTN.GNG/MG5/WGSP/W/6 of 17 October 1989. 5. Brackets signal the absence of agreement; see GATT Document MTN./NG5/WGSP/7 of 20 November 1990. The various proposals made have been included in a succinct manner in GATT Document MTN.GNG/NG5/ WGSP/W/17 of 30 April 1990. 6. What follows is based on Stirling (2001). For an early discussion of this issue, see the classic study of Knight (1921). 7. In epistemic terms, scenario analysis is recommended in cases of uncertainty, sensitivity analysis in cases of ambiguity, and precaution in cases of ignorance. Precaution emerges as the scientific approach used to address incommensurability—that is, the situation where apples are being compared to oranges. In scenario analysis, possible future events are evaluated by considering alternative possible outcomes. In sensitivity analysis, the question is how different values of an independent variable (say, growth hormones) affect a particular dependent variable (say, human health) under a given set of assumptions (namely, that good veterinary practices have been observed).
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8. On this issue, see Gollier et al. (2000), Kuhn (1962, and 1996), and Sunstein (2002). 9. See Melloni (2005). 10. In practice, a measure that falls under the ambit of both agreements will be covered under TBT unless it concerns a disease, a toxin, or a contaminant. 11. Anecdotally, no worldwide regulation of GMOs has been achieved, although great effort has been invested. Negotiations started in the 1990s (see “GMO Food Labeling at Least a Year Out,” Bridges, vol. 3, no 18, 10 May 1999), and finished unceremoniously in 2011 (Compilation of Codex Texts Relevant to Labeling of Food Derived from Modern Biotechnology, CAC/GL76–2011). 12. For a comprehensive discussion of the SPS, see Iynedjan (2002) and Scott (2009). 13. This case dealt with an EU moratorium that would severely hamper, if not prohibit altogether, the marketing and commercialization of GMOs in the EU market. It did not contain any revelations regarding the construction of case law, but it was taken seriously by the research community because of the manner in which it explained the relationship between WTO and public international law: Broude (2007), Conrad (2007), Davies (2007), Footer (2007), Horn and Mavroidis (2013), Howse and Horn (2009), and Perez (2007) have expressed divergent views on the cautious attitude that the panel adopted vis-à-vis the relevance of multilateral environmental agreements (MEAs) in WTO law. 14. The corresponding discussion in the previous chapter is applicable here as well. 15. Our discussion of the same issue in the previous chapter is relevant here as well. 16. See, for example, WTO Document G/SPS/W/230 of 25 September 2008. 17. See WTO Document G/SPS/R/51 of 27 August 2008. 18. See WTO Document G/SPS/W/247/Rev.3 of 11 October 2010. 19. See WTO Document G/SPS/256 of 3 March 2011. 20. See Decision by the SPS Committee, WTO Document G/SPS/5 of 6 April 2011. 21. Anecdotal evidence suggests that over two-thirds of private standards are based on standards developed by Codex Alimentarius. 22. WTO Document G/SPS/W/256 of 3 March 2011; G/SPS/W/280/Rev. 1 of 18 September 2014; G/SPS/ GEN/1334/Rev.1 of 5 August 2014; and G/SPS/W/281 of 30 September 2014. 23. WTO Document G/SPS/W/256 of 3 November 2011. 24. WTO Document G/SPS/W/265/Rev. 2 of 28 September 2012. 25. WTO Document G/SPS/55 of 6 April 2011. 26. WTO Document G/SPS/W/276 of 18 March 2014, at p. 2. 27. WTO Document G/SPS/W/281 of 30 September 2014, at p. 2. 28. Representatives of the Codex Alimentarius made a presentation to the trading community during the negotiation of the SPS Agreement where they explained the mandate and practice of their institution (GATT Document MTN.GNG/NG5/WGSP/W/3 of 30 November 1988). The representative of the IPPC made a similar statement; see GATT Documents MTN.GNG/NG5/WGSP/W/4 of 30 November 1988 and MTN.GNG/NG5/WGSP/W/15 of 20 April 1990. 28. The SPS Committee can also identify which other standards of which institutions are relevant. At the time of writing, no other institution has been identified by the SPS Committee. The door is, of course, always open.
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For example, eventually, one could see the International Health Regulations of the WHO or the Cartagena Protocol coming under the purview of Annex A § 3(d). 29. See, on this issue, the analysis by Luff (2004). 30. This is an issue that deserves more attention by policy makers, although it is quite difficult to allege that undue influence has been exercised in specific areas. The wife of Caesar, though, must be above suspicion. 31. As already explained elsewhere in this volume, this term should be understood as “preponderance of evidence,” rather than leaving no doubt about the truthfulness of the claim. 32. Bown and Hillman (2015) offered an excellent analysis of this dispute. 33. In India–Agricultural Products, the same question arose again. The issue was whether the Indian SPS measure was based on, or conformed with, the Terrestrial Code, an international standard that had been developed by the OIE. The panel reproduced the approach discussed here. The relevant discussion is included in §§ 7.192ff. of the panel report. 34. See GATT Document MTN.GNG/NG5/WGSP/W/8 of 6 December 1989. 35. See GATT Document MTN.GNG/NG5/WGSP/W/10 of 12 February 1990. “Based on” science should thus not be confused with “based on” an international standard. In the former case, drafters had in mind measures consistent with science. In the latter, they wanted to denote that measures do not have to totally conform to international standards, but they could simply be based on them. The presumption of conformity with the standard is not of course the same in either situation, as we have already noted previously. 36. This paragraph reflects the “precautionary principle,” discussed later in this chapter. 37. Garcia (2006) offered a comprehensive analysis of this dispute. Compare with Peel (2010) and McGrady (2011). 38. See the excellent analysis of earlier WTO case law on this score by Trebilcock and Soloway (2002) and Sykes (2006a). 39. Subsequent case law has repeated this approach; see, for example, the panel report on India–Agricultural Products, at § 7.282. 40. See Australia–Apples, § 207. In India–Agricultural Products, the panel found that a document distributed by India to the EU and the US, entitled “India’s Risk Assessment on Avian Influenza for Imposing Ban on Import of Poultry and Poultry Products from Avian Influenza Positive Countries,” did not qualify as risk assessment since it was a brief summary of scientific material, falling short of the standard espoused by the AB (§§ 7.309ff., and especially 7.316). 41. The wish was expressed early in the negotiation to harmonize risk assessment procedures, since it was considered utopic to imagine the harmonization of substantive law; see GATT Documents MTN.GNG/NG5/ WGSP/2 of 29 September 1989 and MTN.GNG/NG5/WGSP/3 of 29 November 1989. 42. Rigod (2014) discussed this issue. 43. In this vein, the panel, in its report on Japan–Apples (Article 21.5–US), dismissed the relevance of two studies presented to it because they did not correspond to natural conditions (§§ 8.65 and 8.140ff). 44. Gruszczynski (2010) offered a very comprehensive discussion of WTO case law regarding risk assessment. 45. We discuss the facts of this case later in this chapter. 46. Dry (2014) offered an entertaining account of the origins of this discussion.
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47. This case is the sequel to EC–Hormones (US). Following the condemnation of its practices, the EU did not change its conduct and did not implement the findings of the WTO adjudicating bodies. The US was authorized to impose countermeasures against the EU (namely, suspension of tariff concessions according to Article 22.6 of DSU), which it did. Years later, the EU initiated a new panel against the US, arguing that it had subsequently complied with the rulings, so the US should withdraw its countermeasures. An astonishing panel report found that the EU was right and that, while the disagreement between the two parties persisted as to whether implementation had indeed occurred, the US should have stopped imposing countermeasures immediately. According to this panel, if the US wanted to resurrect the imposition of countermeasures, it would have to initiate a new dispute. Luckily, the panel was totally overturned by the AB: In US–Suspended Concession, the AB held that countermeasures lawfully remain in place until either the parties to the dispute have agreed that implementation has indeed occurred or a multilateral ruling to this effect has been issued. The unilateral declaration of the party interested in seeing measures against it removed does not suffice, as the AB quite correctly held; see Hoekman and Trachtman (2010). 48. On this issue, see the excellent analysis and the critical remarks of Lianos (2010). 49. See Daubert v Merrell Dow Pharm, Inc., 509 US 579, 588–9 (1993). See also Sykes (2006a). 50. See Lianos (2010) and Rigod (2014). 51. See Daubert v Merrell Dow Pharm, Inc., 509 US (1993) at p. 590. 52. Davey (2006) advanced a series of arguments on this score regarding the reversal of the panel finding. 53. There are already two WTO disputes recorded on this issue: EC–Hormones (US) and US–Suspended Concession. The original dispute dates back to the 1980s, and the narrative has been reflected in the excellent account by Meng (1990). In the late 1970s and early 1980s, EU member states did not share a common attitude toward hormones, but to different degrees, they worried about some hormones because of the so-called hormone scandals. In 1981, the first ban on the use of some hormones on an EU-wide basis was promulgated, covering thyrostatics and stilbenes, but there was no agreement with respect to all other hormones. Between 1981 and 1984, additional research was conducted, the result of which was that natural hormones did not represent any risk to human health; the need to continue examining synthetic hormones was underlined. In 1985, formal rules of control were adopted. In the same year, a ban on all hormones was also adopted (the results of scientific studies notwithstanding). The commission chose Article 43 of the treaty as an appropriate legal basis; this provision allowed the adoption of legal instruments on a qualified majority vote (e.g., dissenting votes notwithstanding). The UK and Denmark dissented (and Ireland abstained); the US introduced a legal complaint before the ECJ (85/469/EEC). It partly prevailed, and the Court declared the legal instrument null and void but accepted the legal basis. The ban on hormones was reenacted (by “healing” the vice observed this time) in 1988, and the ban on all hormones was reimposed. The US requested the establishment of a technical experts group to examine the consistency of the EU measure under the provisions of the Tokyo-round TBT Code. The EU refused the US request (this was at a time when trading nations could still block the establishment of a panel, and this is the only recorded case where a refusal was expressed), and the US imposed countermeasures as a result—however, without prior authorization by the GATT CONTRACTING PARTIES. The EU agreed to a GATT panel, but only in order to examine the consistency of the US countermeasures with GATT. The result of the disagreement was that no panel was ever established in the GATT era. 54. This view has been repeatedly confirmed in case law. The AB, for example, in its report on Japan–Agricultural Products II, held that, as per Article 5.2 of SPS, a legal requirement is imposed on WTO members to provide a rational relationship between the SPS measure enacted and the available scientific evidence (§ 84). See the relevant analysis by Dunoff (1999 and 2006). 55. In a similar vein, the AB noted in Australia–Salmon that the determination of ALOP is “a prerogative of the member concerned” (§ 199).
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56. The AB went so far as to accept that WTO members can opt for “zero risk,” though it is doubtful if that state can ever exist. Prévost (2012, at p. 45) correctly observed, “zero tolerance is an unattainable standard in the case of certain unavoidable pathogens present at levels that do not pose risk to consumers.” 57. See India–Agricultural Products, panel report, at § 7.552. 58. Having defined the ALOP for India, the panel went to decide that the level of protection offered by the alternative proposed by the US was equivalent to India’s ALOP (§§ 7.581ff.). 59. Neven and Weiler (2006) provided an excellent, critical account of this dispute. 60. Among these measures was a prohibition on importing apples from US states other than Oregon and Washington, certification requirements, and the prohibition of exports if fire blight had been detected in a neighboring geographical area. According to the Japanese regulator, in the absence of a total embargo on imports, the risk that the disease would spread was very much alive. 61. See § 160 of the AB report and footnote 289. 62. Herwig (2014) advanced the view that the AB effectively imposed a proportionality test: the experts had testified that the risk was close to zero, but not actually zero; because it was unlikely that this risk would occur, the AB took the view that the trade restriction was disproportionate. De facto, thus, in this line of thinking as well, the AB prejudged the level of protection that Japan had set, and as we argued earlier, this is not what WTO judicial bodies are supposed to do. See also the discussion on the necessity requirement later in this chapter, where we explain that although WTO members are not required to express their ALOP in quantitative terms, they must do so with sufficient precision. 63. Recognition is a form of prevention and occupies an increasingly large space in domestic regulation. The US Food Safety Modernization Act (FSMA), for example, focuses on prevention and the fight against foodborne illness, and to this effect, it establishes a regime for “accreditation laboratories that conduct sampling and food testing for regulatory purposes.” They provide the benchmark for recognition agreements with interested parties; see Public Law 111-353, January 4, 2011, 124 Stat. 38F, 111st Congress. 64. WTO Document G/SPS/19/Rev. 2 of 23 July 2004. 65. Flett (2010) and Mercurio and Shao (2010) offered an analysis of this dispute, as well as of all the WTO case law on precaution. On the economics of precaution, see Vogel (2012). 66. The AB held that the precautionary principle permeates the SPS Agreement but does not override the explicit wording of the provisions; it further acknowledged that it is part and parcel of public international law. In EC– Approval and Marketing of Biotech Products, the panel, when dealing with the EU regime for approval of GMOs, even cited the International Tribunal of the Law of the Sea (ITLOS) to support its finding that the precautionary principle had an uncertain status under customary international law (§ 7.89). 67. This definition implicitly adheres to the necessity principle when referring to cost-effectiveness, a point to which we will return later in this chapter; also see Stoll and Strack (2007). 68. As we will see later in this chapter, some of these elements found their way into the accepted case law definition of the “precautionary principle.” Nordhaus (2013, p. 216) offered a more radical definition when stating that “in the absence of scientific certainty, society should make policies that would prevent the worst outcome” (a minimax strategy in game theory). 69. Foster (2011) offered a construction not espoused by case law and discusses how allocation of the burden of proof (reversal of the burden of production of proof) can help reduce the potential for error when adjudicating disputes regarding the application of the precautionary principle. Compare with the current understanding in case law of the allocation of burden of proof, as explained in Grando (2009). 70. See the analysis of this case by Dunoff (2006) and Button (2004).
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71. See also § 188 of this report. 72. Popper (1992) would have regarded this distinction, as well as the whole idea that there is a firewall between science and precaution, with some consternation. 73. GATT Documents MTN.GNG/NG5/WGSP/7 of 20 November 1990 and MTN.GNG/NG5/ WGSP/17 of 30 April 1990. 74. WTO Document G/SPS/GEN/168 of 14 March 2000. 75. See also the European Council Resolution on the Precautionary Principle, WTO Document G/SPS/GEN/225 of 2 February 2001, and the Communication from the Commission on the Precautionary Principle, COM (2000) 1 final, 2 February 2000. 76. C-41/02, Commission of the European Communities v Kingdom of the Netherlands (2004) ECR I-11375. 77. In the words of Haidt (2001), “the emotional tail wags the rational dog.” 78. In fact, the Panel on India–Agricultural Products explicitly endorsed the view that it could be inspired by the case law under Article XX of GATT in order to interpret Article 2.3 of SPS (§§ 7.400ff.). 79. Compare the discussion on US–Shrimp in chapter 9, volume 1, in this respect. 80. To reach its conclusion, the panel also relied on the “Guidelines to Further the Practical Implementation of Article 6 of the Agreement on the Application of Sanitary and Phyto-sanitary Measures” (WTO Document G/ SPS/48 of 16 May 2008). This document imposed a series of obligations on importing WTO members, regardless of those imposed on exporters. 81. Garcia (2006) discussed this case extensively. In addition, recall that the AB discussed the allocation of the burden of proof in the context of the necessity requirement in US–Gambling (see chapter 9, volume 1). 82. See also the AB report on Japan–Agricultural Products II (§ 95) and § 8.162 of the panel report on Japan– Apples (Article 21.5–US). 83. The panel report on India–Agricultural Products offers a detailed discussion of the three points in §§ 7.550ff. 84. Recall that the AB has discussed the allocation of the burden of proof in the context of the necessity requirement in US–Gambling (see chapter 5). 85. See Pienaar (2003); Horn and Mavroidis (2003). 86. WTO Document G/SPS/15 of 18 July 2000. 87. See p. 3 of the Guidelines, op. cit., under A4. 88. See Horn and Mavroidis (2003). 89. Evidence of this attitude can also be detected in § 240 of the AB’s report on EC–Hormones (US). 90. Compare with Scott (2009). 91. Developing countries have raised complaints regarding strict, and, in their view, unnecessary standards that come under the purview of both the TBT and the SPS agreements. As far as the latter agreement is concerned, see GATT Document MTN/3B/23, at pp. 10ff. 92. In this respect, the STDF reflects the approach taken by the 2005 Paris Declaration on Aid Effectiveness by the Organisation of Economic Cooperation and Development (OECD), and the 2008 Accra Agenda for Action Evaluation of STDF. Both documents have been signed by various WTO members and place the emphasis on accountability regarding approved projects.
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93. See also the panel report on Japan–Apples, at § 8.327. 94. On this issue, see the excellent analysis in Ahman (2012), at pp. 222ff., 242ff., and 256ff. 95. By adding to the evidence required to demonstrate a violation of the WTO in similar cases, the WTO judge de facto reduced the potential for regulatory chill, while increasing the deterrence-factor vis-à-vis potential complainants; see Kaplow (2012). 96. Palmeter (2006) provided thoughts in a similar vein. 97. See http://spsims.wto.org. 98. See http://www.wto.org/english/news_e/news11_e/sps_19oct11_e.htm. 99. WTO Document G/SPS/1 of 15 March 1995. 100. See Horn et al. (2013). 101. Prévost (2012), for example, discussed the STC that the EU raised against a Chinese measure aiming to address H1N1 (also known as “swine flu”), and how the parties managed to resolve their dispute. 102. Horn and Mavroidis (2003) set out a scenario in which a panel selects two economists who are both experts in the field of industrial organization, but one is an “antitrust hawk” and the other an “antitrust dove.” 103. A “claim” consists of a statement to the effect that a particular practice is WTO inconsistent (a factual matter), as well as the legal basis that is allegedly being violated (a legal matter). “Arguments” are logical constructions aiming to substantiate a claim. WTO members, when litigating, are required to present all their claims at the moment that they request the establishment of a panel (Article 6.2 of DSU). They can add arguments to support their claims during the panel proceedings; see Palmeter and Mavroidis (2004). 104. The US had advanced the argument that Japan should have used “testing by product” instead of the measure privileged by Japan; the experts argued that Japan should have used “sorption levels,” a measure that had not been discussed at all by the US in its pleadings. 105. Had the AB taken the view that this was an argument in support of a wider claim regarding the inconsistency of an SPS measure, it would have ruled to the contrary. There are good reasons, which Pauwelyn (1999) has developed in detail, to believe that this will be the case in the future. 106. WTO Document WT/DSB/RC/1 of 11 December 1996. 107. Cross-notification of similar information that has not been divulged by the appointed experts is possible as well. 108. The AB recalled that experts incur disclosure obligations, a necessary step in ensuring that due process has been complied with (§ 438). 109. It is the chair of the DSB, the director-general, and enough other chairs of WTO Councils to make an odd number who will participate to the process, which might lead to the exclusion of appointed experts, according to the procedure established in Article VI of the Rules of Conduct. 110. Prosecutor v Kordic and Cerkez Case No IT-95–14 Transcript 29 Jan 2000 [13–89 or ICTY (Yugoslavia)]. 111. See Simas Santos and Leal-Henriques (2003), at pp. 829ff. 112. See 364 Daubert v Merrell Dow Pharmaceuticals, Inc., 43 F. 3d 1311, 1321 (9th Cir. 1995), and the analysis in Lopatka and Page (2005); see also, re: Linerboard Antitrust Litigation, 497 F. Supp.2d 666, 673 (E.D.Pa2007); United States v Ford, 481 F. 3d 215, 220 n. 6 (3d Cir. 2007); 365 re: Linerboard Antitrust Litigation, at 673; United States v Williams, 2007 WL 1643197, 3 (3d Cir., 7 June 2007).
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113. Paoli R.R. Yard PCB Litig., 35 F. 3d717 (3d Cir. 1994); Raskin v Wyatt Co., 125 F. 3d55, 66 (2d Cir. 1997). 114. Berlyn Inc. v Gazette Newspapers, Inc., 214 F. Supp. 2d 530, 536 (D. Md. 2002). 115. Posner (1999a and 1999b) has suggested that the publication of expertise provided to the court might provide such an incentive, since the authors might suffer reputation costs and, as a result (which could, eventually, make their opinions irrelevant), might have an incentive to come up with the “truth” in the first place. Stein (1996) contemplated how the strategic allocation of the burden of proof might be helpful in this context. Stein (2008), looking at practice in US courts, used Carl Ginet’s concept of “disinterested justification” to pronounce on the boundaries of the epistemic authority of courts. He claims that courts exercise this authority in the “interest-free” zone, in which their determinations of the probabilities of disputed facts can be made solely on epistemic grounds. In the interest-laden domain, where courts allocate risks of error under uncertainty, this is not the case. In this domain, courts will rely on risk-allocating evidentiary rules (burden of proof, corroboration, hearsay, opinion, character, etc.). To a large extent, his analysis echoes WTO practice as well. 116. Grossman et al. (2013) have expressed thoughts to this effect.
Chapter 7 1. Szenzhen is the first, notorious Chinese EPZ. Equally notorious are the Mexican maquiladoras (factories) situated close to the US border. The WTO World Trade Report (2014) mentions (pp. 50ff.) that companies installed in EPZs usually benefit from a good transport and telecommunications infrastructure, waivers for import and export duties, and special income and corporate tax regimes. Of course, export taxes and tax regimes could raise issues of consistency with GATT, depending on the manner in which they have been implemented. The same report presents evidence pointing to a mixed record: some EPZs could be characterized as successes, and others as failures. 2. Graham and Krugman (1990) stated that the profits of MNEs are sometimes exaggerated, and this might lead to a proliferation of TRIMs. 3. These authors pointed to a paradox: for example, absent local content, developing countries could impose AD duties on imports produced at home through “screwdriver operations.” So, in a way, local content requirements have a beneficial effect because they make it impossible (depending on rules of origin, of course) to impose AD duties. 4. Lara (2005) has discussed the questionable merits of similar policies in detail. 5. On the theory of TRIMs, see Grossman (1981). 6. The WTO World Trade Report (2014) notes (pp. 56ff.) that the negotiation of TRIMs and the resulting outlawing of various schemes in practice meant that many of the countries that used TRIMs replaced them with “soft industrial policy” aiming to create a business-friendly environment. They would typically enact policies aiming to lower startup costs and adopt measures aiming to help the coordination of actions across players (intra-industry, but also industry to state). 7. Graham and Krugman (1990), at p. 150. See also Lara (2005), at pp. 431ff. 8. Check Graham and Krugman (1990), at pp. 152ff. for a complete list. 9. See the accounts by Bora (2002), Civello (1999), Lara (2005), Maskus and Eby (1990), McCulloch (1990). 10. This provision, as we will see in chapter 8, regulates state trading enterprises (STEs). Canada had one in place, although similar undertakings were usually features of business life in developing countries (e.g., countries quite interested in adopting and enforcing TRIMs).
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11. For examples of judicial economy, see the panel reports on Indonesia–Autos (§ 14.93); India–Autos (§ 7.324); EC–Bananas III (§ 7.185); and Canada–Autos (§ 10.91). The exercise of judicial economy could be detrimental to the interests of the plaintiff if the panel decided not to review a claim under an agreement that provides a more favorable remedy to it. We come back to this point later in this chapter. 12. There is thematic regulation: Article 1.5 of TBT, for example, states that a measure falling under both the TBT and the SPS agreements should be scrutinized under only the latter. 13. See § 14.52. 14. There is ample literature on this score. Baltagi et al. (2008) discussed the relationship between PTAs and FDI and concluded that removal of trade barriers can lead to substantial flows of FDI for those participating. Their focus was the accession of Bulgaria and Romania to the European Union. 15. The foundational paper for viewing investment and trade as substitutes is Bhagwati et al. (1987), which argued that foreign export-oriented firms may establish import-competing subsidiaries in an effort to jump an existing tariff or to defuse a protectionist threat (tariff jumping). 16. See Irwin et al. (2008), Jackson (1969), and Wilcox (1949). 17. See chapter 1 on this score. 18. Mavroidis (2013) discussed the history of the trade and investment negotiation in the multilateral trading system. 19. See Irwin et al. (2008) and Trebilcock and Howse (2013). 20. WTO Working Group on the Relationship between Trade and Investment, WTO Document WT/WGTI/W/7 of 18 September 1997; see the excellent account of its workings by Koulen (2001). 21. WTO Document WT/MIN(01)/DEC/1 of 20 November 2001 at § 20. 22. The Working Group on Trade and Competition did not fare any better. 23. During the same meeting, it was decided that the Working Group on Trade and Competition must cease its activities as well. 24. See Trachtman (1998) on the issue of linkage between trade and investment, and Sauvé and Wilkie (2000) on the negotiation in the WTO. 25. See WTO, Doha Work Programme, Decision Adopted by the General Council on 1 August 2004 (2004), WTO Document WT/L/579 at § 3. 26. The quintessential elements of discussions that took place have been reproduced in the annual reviews of the negotiation published in WTO Documents WT/WGTI/2, 3, 4, 5, 5 Addendum 1, 6, and 7 of 8 December 1998, 22 October 1999, 27 November 2000, 8 October 2001, 22 October 2001, 9 December 2002, and 11 July 2003, respectively. 27. This is not illogical. We will return to this point later in this chapter, where we explain why capital-importing countries might want to introduce competition among them when it comes to attracting investment, rather than equate conditions of competition. 28. The EU, when the negotiation started, did not have exclusive competence to negotiate on international investment. It had to share it with its member states. 29. MAI is an OECD initiative to multilateralize rules on investment, which is discussed later in this chapter. 30. The US had lost the argument before when trying to design a top-down GATS (General Agreement on Trade in Services), where all services (and investment in services) would be liberalized in principle unless a specific
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exemption was taken; see Marchetti and Mavroidis (2011). Probably this experience had severely reduced their urge for an agreement at the WTO. After all, some of GATS (Mode 3) was a multilateral investment agreement: in this area, commitments were shallow by any reasonable benchmark. 31. See Vadcar (1998) on this score. 32. See Karl (1998) and Daly (1998) for an insider’s narrative on the MAI. See also Trebilcock and Howse (2005), who have provided a slightly different account. 33. See Trebilcock and Howse (2005). 34. On this issue, see the comprehensive analysis in Sacerdotti (1997), and in Sauvé and Wilkie (2000). 35. For an excellent exposé of this principle, see Ortino (2009). 36. Dymond (1999), Henderson (1999), and Wolfe (2011) have expressed similar thoughts. 37. Graham (2000) has provided an excellent account on this issue. His work, however, is very informative on all other aspects surrounding the negotiation of the multilateral investment framework. 38. See Dam (2001). Huner (1998), who acted as secretary to the chair of the OECD Committee negotiating the MAI, argued that the project failed miserably because negotiators were not prepared politically to “sell” the whole project when the time came to do so. 39. See Razin (2001) on this score. 40. See Trebilcock and Howse (2005). 41. Environmentalists’ Letter on MAI, 13 February 1997, reprinted in Inside US Trade, 21 February 1997, pp. 12–13. 42. The NAFTA decision on Metalclad Corp. v Mexico, 40 International Legal Materials 36 (2001), awarding damages when the company’s investment in hazardous waste treatment facility approved by the federal government of Mexico, was blocked by local Mexican authorities. 43. See Hoekman and Kostecki (2009), at pp. 418ff. 44. 34 International Legal Materials 360 (1995). 45. See Walde (1996). 46. UNCTAD, World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (New York and Geneva: United Nations Publications, 2000). Moreover, attracting investment is not just an issue for developing countries. Indeed, developed countries also have had recourse to measures aimed at subsidizing FDI. Discussing the Irish experience in this respect, Razin (2004) concluded that “the heavy subsidization of FDI inflows in Ireland in the past two decades resulted in impressive GDP growth rates but with less pronounced effect on the well-being of Irish residents.” 47. See Hoekman and Kostecki, (2009), at pp. 418ff. 48. 32 International Legal Materials 289 (1993). 49. Free movement of capital is one of the four fundamental freedoms agreed by the EU member states in the context of the Treaty Establishing the European Community (ECT). The EU integration process aims, eventually, at the complete liberalization of investment (free movement of capital). See Bermann et al. (2002). 50. Weston et al. (1999), Sornarajah (2004), and Sacerdotti (1997), among others, provide a comprehensive discussion on this score. 51. See the relevant analysis in Bagwell and Sykes (2007b).
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52. The Panel on Indonesia–Autos ruled to this effect (§ 14.83): “An examination of whether the measures [in question] are covered by Item (1) of the Illustrative List ... will not only indicate whether they are trade-related but also whether they are inconsistent with Article III:4 and thus in violation of Article 2.1 of the TRIMs Agreement.” 53. We discussed this case briefly in chapter 2. Bagwell and Sykes (2007b) have discussed it in detail. Trade balancing was colloquially known as “Mexicanization” of laws. The Gustavo Diaz Ordaz administration had adopted laws in the 1960s whereby, for example, a US company established in Mexico could not export goods unless it could show that it had previously imported goods of the same value, see Boskin (2014) at pp. 35ff. 54. The transition period for LDCs was extended until 2012 by virtue of Annex F of the Hong Kong Ministerial Declaration. 55. WTO Document G/TRIMS/N/1/UGA/1 of 7 July 1997. 56. Extensions were granted to Argentina, Colombia, Malaysia, Mexico, Pakistan, the Philippines (until 30 June 2003), Romania (until 31 May 2003), and Thailand (until 31 December 2003). 57. As we discuss in chapter 12, though, the record of the TPRM is rather disappointing. 58. Decision adopted on 18 December 2005; see WTO Document WT/MIN(05)/DEC of 22 December 2005. 59. The TRIMs Committee will be routinely notified of TRIMs; see, for example, WTO Documents G/L/928 of 4 October 2010, G/L/964 of 10 October 2011, and G/L/1003 of 2 October 2012. 60. WTO Document G/C/W/428. See the detailed discussion on the review of the TRIMs Agreement in Lara (2005).
Chapter 8 1. Article 1(f) of AG defines “implementation period” as follows: “‘implementation period’ means the six-year period commencing in the year 1995, except that, for the purposes of Article 13, it means the nine-year period commencing in 1995.” 2. The advent of the General Agreement on Trade in Services (GATS) and Trade-Related Aspects of Intellectual Property Rights (TRIPs) is a big part of the consideration that developing countries had to pay to secure the farm deal. 3. Eventually, many developing countries abandoned the poor economics associated with this development option and embraced policies consistent with their comparative advantage. Some might have regretted their choice to “industrialize” since, in recent years, where prices of farm goods have increased substantially, investing in farm trade has proved quite profitable. 4. This provision gives precedence to the AG Agreement, but it does not use the term “conflict,” as does the General Interpretative Note. The term “subject to” that has been privileged seems to suggest that recourse should be made to the AG Agreement first, whereas recourse to GATT and the other Annex 1A agreements should be made only when warranted. This linguistic difference thus, should not be exaggerated. 5. Recall that the relationship between Article XX of GATT on the one hand, and the AG Agreement on the other, are discussed in chapter 9, volume 1. 6. Eventually, the US settled the case by agreeing to repeal Step 2 payments (for both domestic users and exporters) and to pay a lump sum to Brazil for technical-capacity purposes, in lieu of other programs found to be causing serious prejudice, such as price-contingent domestic support; see Brink (2011), at p. 38ff. 7. The HS is the source for tariff commitments.
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8. See the relevant discussion in chapter 2, volume 1. 9. Eric Wyndham-White, quoted in Dam (1970, p. 260). 10. One can plausibly hypothesize that experiences of WWII weighed excessively in formulating self-sufficiency as a legitimate objective. 11. GATT Document BISD 3S/32 ff. In fact, the first request by the US was turned down in 1953, and the US went so far as to threaten to quit GATT unless the waiver was granted; see Jackson (1969), at p. 548ff.; and Dam (1970), at p. 260ff. See also the more general discussion in Brewster (2009, p. 246ff.). 12. Over the years, the US reduced subsidization and became a hawk in farm talks, famously adopting a zero protection on farm trade policy during the Uruguay round. “Deficiency payments” (that is, support from the federal government tied to prices and the production of specific crops) were replaced by direct payments in 1996; the US Food, Conservation, and Energy Act (FCE) of 2008 guaranteed a stream of income to farmers (decoupled from production) until 2012, and the US Average Crop Revenue Election (ACRE) program of the same year ensured cash flows regardless of price volatility; see Gardner (2002, 2009), Orden (2009), and Blandford and Orden (2011). 13. Brink (2011) offered a discussion on this score. He perceptively pointed to the fact that the current structure in the AG Agreement corresponds to Haberler’s distinction between measures aimed at discouraging imports, measures aimed at encouraging exports, and those aimed at encouraging domestic production as well. 14. The EU is not alone in this; India is doing the same (see Gopinath, 2011). One might legitimately cast doubt on the wisdom of similar policies in light of the multitude of sources of farm supplies around the world and the impossibility of facing cartelized practices. There are other justifications offered to justify regulation of farm trade often heard in policy circles, such as unusual price instability and preservation of lifestyle. 15. Some variable duties were as high as 480 percent ad valorem; see p. 84 in Committee on Finance, United States Finance, Summary and Analysis of H.R. 10710. The Trade Reform Act of 26 February 1973, US Government Printing Office, Washington, DC, 1974, states that US exports to the world grew twice as much as toward the EU between 1961 and 70. 16. Balassa (1975) offered a most useful discussion on farm protectionism in Europe. 17. Josling and Swinbank (2011) correctly deduced that the combination of variable levies and export subsidies made the need for domestic support mechanisms redundant. 18. GATT Document BISD 10s/135ff. 19. Uruguayan Request to Article XXIII, Report Adopted on 16 November 1962, GATT BISD 11s/95ff. 20. On the other hand, of course, a refusal to concede to the establishment of a panel, would have been quite damaging to the EU’s reputation. In a similar vein, the US could have scored a moral victory had it prevailed before the panel, but the EU could always have blocked adoption of the report and, thus, minimized the negative impact. 21. Some discussions reveal that variable duties often exceeded the level of bound duties and were, thus, illegal: see GATT Document AG/M/3, p. 63 (1984). 22. Eventually, a panel was established that estimated the loss of the US at $26 million; see Lowenfeld (1972) and Walker (1964). This US retaliation was nondiscriminatory, provoking the so-called Chicken War. This US choice (nondiscriminatory retaliation) provoked a series of debates and fueled the revisions to the GATT dispute settlement; see DeKiefer (1980). 23. Marchetti and Mavroidis (2011) provided some evidence to the effect that the EU services lobby was not prepared to sit back and postpone service liberalization in the name of EU farm protectionism, although key political European figures thought otherwise. Compare with Swinbank (2009).
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24. Various contributions in Swinnen (2008) have discussed the reforms in the EU farm policy, whereas Swinnen (2009) discussed the evolution in farm protection in Europe in the nineteenth and twentieth centuries. 25. Various contributions in Anderson (2009) discussed these points. 26. In a similar vein, Swinbank and Tanner (1996) have argued that the eventual accession of the 10 new EU member states (most notably, Poland, a large farming country), with its resulting implications for the EU budget, proved to be a decisive factor in favor of rationalization of the CAP. 27. This was named after Ray MacSharry, the Irish commissioner for farm trade. See Preeg (1995) at pp. 127ff. 28. See Josling and Swinbank (2011), at p. 64ff.; Swinnen (2008). 29. In its October 1990 proposal, the US had called for 80 percent reductions in export subsidies and 76 percent reductions in market access barriers and internal support programs over a 10-year period beginning in 1991. In its November 1990 proposal, the EU had made no specific commitments on either export subsidies or market access barriers and essentially called for 10–30 percent reductions in internal support programs over a 10-year period retroactive to 1986. 30. One should not equate farm protectionism to CAP. Except for the “usual suspects” (Korea and Japan and their price stabilization schemes; Canada and its marketing boards), others have also kept farm markets hermetically shut to imports. Citing abundant evidence, Gopinath (2011) explained how India, in the name of the balance of payments, managed to keep QRs on 96 percent of all tariff lines (until its practices were condemned by the AB in India–Quantitative Restrictions); Trebilcock (2011, p. 101) cited evidence to the effect that farm protection to nonfarm households in Europe, the US, and Japan averaged $1,400 per year in 1992, and Messerlin (2001) cited similar evidence regarding Europe. Government intervention, on the other hand, did not necessarily lead to protectionism, as Cheng (2011) explained in his brief history of farm trade regulation in China. 31. The Cairns group comprised 19 agricultural exporting countries and took its name from the Australian city where the original founders first met. The group was originally composed of Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand, and Uruguay. Later, Hungary and Fiji left the group and Bolivia, Costa Rica, Guatemala, Paraguay, South Africa, Pakistan, and Peru joined. See Breene (1993). 32. On the negotiation of the AG Agreement, see Olsen (2005). For an excellent survey of the WTO Agreement on Agriculture, see McMahon (2006). 33. See De Zeeuw (1997), at p. 473. 34. See De Zeeuw (1997), at pp. 473–474. The Dunkel Draft was comprehensive and covered all negotiating issues, not only farm trade. 35. Blair House is the official state guest house of the president of the United States. Three issues dominated the negotiations: trade in oilseeds (where the US had prevailed in two GATT disputes, but the EU had refused to change its policies), domestic support (since some voices in the US were arguing that direct support payments were trade distorting), and export subsidies (where the US was hoping for a generous reduction of the EU subsidies). It managed to get two out of three: an agreement by the EU to reduce export subsidies that was not far from the US target, and an agreement to reduce the overall production of oilseeds that fell short of the US request but was nevertheless a first step in the direction to open up trade. The US employed all means at its disposal in order to force a deal, and prior to the Blair House meeting, Carla Hill (then the US Trade Representative) had announced countermeasures up to $300 million on white wine and some other farm products that would rise up to $1billion in order to make up for the damage that it had suffered from the EU oilseeds policy, as Preeg (1995, pp.143ff.) reports. The importance of this agreement cannot be overstated. Farm trade liberalization emerged as a genuine “ground breaker,” in the sense that absent an agreement on this score, the fate of the Uruguay round would be sealed. Dunkel himself chaired the negotiating group on Agriculture, evidence of the importance he attached to its successful conclusion. He organized numerous “green room” sessions with delegates from the
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most important trading nations in order to push a deal through, see Preeg (1995) at pp. 132ff. Eventually, Dunkel “took the bull by the horns” as Preeg (1995 at p. 135) notes when tabling his ambitious Dunkel draft mentioned earlier. 36. France and Germany argued bitterly until the very last moment on this score. Preeg (1995) cites Chancellor Kohl stating that the CAP “made no economic sense” (p. 136). Even within the German government, a coalition government at the time, there were divisions, and it was eventually the “liberal” Minister of Economics Jürgen Mollemann that managed to get the better over the skeptical Minister of Agriculture Ignaz Kiechle and push first Germany and then the EU towards liberalization of its CAP. Disagreements existed between EU officials as well. Two weeks before the Blair House talks (which took place on 18 November 18), MacSharry resigned as negotiator, and went public accusing the then President of the EU Commission Jacques Delors for undercutting his authority. He went so far as to accuse him for “betrayal of trust” (Preeg 1995, p. 144). He returned to his post a few days later to resume his role as EU negotiator. 37. We discuss the ATC in the next chapter. 38. For a concise description, see O’Connor (2005). 39. In Canada–Dairy (§§ 7.25 and 7.26), the panel accepted as much, arguing that this agreement was a framework for further liberalization. As stated earlier, negotiations now form part of the Doha-round negotiations. On this score, see the views of Trebilcock and Pue (2015), who explain why, its limited contribution to generating trade liberalization notwithstanding, the AG Agreement was still a remarkable achievement. 40. WTO Document TN/AG/W/3 of 12 July 2006. 41. WTO Document TN/AG/W/4 Rev. 4 of 6 December 2008. 42. MTN.GNG/MA/W/24 of 20 December 1993. This document reflected an agreement among negotiators during the Uruguay round with regard to the schedules of commitments in the farm trade. The AB attitude toward the legal significance of this document is at best confusing. In EC–Bananas III, the AB held that since the “Modalities” paper had not been explicitly referenced in the WTO Agreement on Agriculture, it could, at best, serve as a supplementary means of interpretation (§§ 138–157). In EC–Export Subsidies on Sugar, the AB categorically held that the “Modalities” did not constitute an agreement among parties, and the body decided to ignore it altogether (§ 199). In Canada–Dairy, the AB took it into account when reaching its conclusions regarding the ambit and legality of commitments entered (§ 165). This is a pity. “Modalities” is a very useful document, heavily negotiated, and interpreters can learn a lot from it. Some provisions of the AG Agreement almost verbatim reproduce the corresponding paragraphs in the “Modalities,” and, for this reason alone, direct reference to it was probably thought unnecessary by the framers. 43. The Illustrative List of measures that must be converted to tariffs includes variable import levies and minimum import prices (Article 4.2 of AG); see Panagariya (2005). 44. The AMS was based on, but does not entirely correspond to, the OECD Producer Subsidy Equivalent (PSE), which we discuss in more detail later in this chapter. 45. The choice of “base period” was the outcome of long negotiations between trading nations. The EU managed to force this base period, which suited its interests best, since during that period, world prices were quite low, and, thus, its effective rate of protection was quite high. Hence, all its reduction commitments would start from a high number, giving the EU enough breathing space to rationalize, through progressive reductions, its farm protection. 46. For developing countries, the corresponding reduction was two-thirds of that sum (e.g., 13.3 percent). 47. As a result, disputes might be initiated before the WTO: in US–Upland Cotton, for example, Brazil successfully challenged the US designation of “production flexibility contract (PFC)” as fully decoupled, and therefore, green box–consistent.
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48. Hoekman and Messerlin (2006) estimated that the EU accounted for $4.95 billion of export subsidies; Switzerland, $292 million; and the US, $147 million. The same figures for 1999 were $2.6 billion for the EU and $80 million for the US. The numbers are substantially smaller for domestic subsidies (see WTO Document TN/AG/S/1). Hart and Beghin (2006) showed how the EU has moved many of its programs from the amber box (which includes subsidies that should be eliminated) to the green box (which includes subsidies that are tolerated). 49. In this respect, the report is reminiscent of the AB reports on EC–Bananas III (discussed in chapter 3, volume 1): panels and the AB have the right to review the legality of commitments entered, and the certification process does not immunize them against subsequent legal challenges. 50. Case law has established that measures that violate Article 4.2 of AG also violate Article XI of GATT. In fact, having established violation of the former, panels do not entertain claims under the latter; see the Panel on Peru–Agricultural Products, at §§ 7.270ff. 51. We will be referring to this document as ““Uruguay-round Modalities” to avoid confusion with the “Modalities” discussed in the Doha round. GATT Document MTN.GNG/MA/W/24 of 20 December 1993. This document reproduces the spirit of the “Final Act” (“Dunkel Draft,” GATT Document MTN.TNC/W/FA of 20 December 1991), although a number of adjustments have been entered as result of the negotiations that took place between 1991 and 1993. 52. See Mavroidis (2008). 53. Price bands continued to be used after the report condemned the Chilean practices, as we have already stated. In Peru–Agricultural Products, Guatemala complained that Peru had adopted similar measures. Bagwell and Sykes (2007a) questioned the solidity of the approach followed by the panel and the AB on Chile–Price Band, inter alia, since the band could lead to lower duties as well, and overall have trade liberalizing effects depending on the world price of the commodity. We explain why, in our view, Saggi and Wu (2015) got it right when stating that it all depends on who is risk averse, and why there are good reasons—their trade occasional liberalizing effects notwithstanding— to view price bands with suspicion. Compare with McMahon (2011). 54. Bagwell and Sykes (2007a) discussed this case. 55. See Peru–Agricultural Products, at §§ 7.291ff. 56. Annex 3, § 3, of the Uruguay-round Modalities states as much, and also says that commitments should be entered at the four-digit level, whereas they should be entered at the six-digit level when appropriate, as is the case with respect to fruits and vegetables (Annex 3, § 6). The same paragraph regulates the tariffs for transformed and/or processed goods: it should represent the tariff equivalent of the farm good, which was an input into the final good multiplied by the percentage of its value in the total value of the good. Annex 3 of the Uruguay-round Modalities further explains that to calculate the final duty, WTO members will have to compare an “external price” [that is, the average CIF price for importers, and if not available, the FOB price for exporters (§ 4)], to an “internal price” [that is, the representative wholesale price in the domestic market (§ 6)]. This exercise is necessary since the kind of measures that have to be tariffied almost always reflect a compromise between world and domestic prices. As already mentioned in various parts of this volume, WTO members had often taken recourse in TRQs when scheduling commitments on farm goods. 57. The so-called end-of-the-year rule applies to volume-based special safeguards, whereas the price-based safeguard applies on a shipment-by-shipment basis. 58. Finger (2010) discussed the special safeguard clause in detail. 59. Abbott and Morse (2004), Ingco and Winters (2004), and Laborde and Martin (2011) have discussed practice in this respect. 60. Recall the discussion on the content of schedules in chapter 3.
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61. As if the various forms of AMS were not confusing enough, negotiators managed to make it even worse. During the Doha-round negotiations, the term “Final Bound Total AMS (FBTAMS)” was privileged. 62. The OECD did not adopt a legally binding document. Indeed, the EU member-states would have found it impossible to accept. This was a recommended road map for how to get there: the PSE was that road map. 63. For a comprehensive analysis of this concept, see Corden (1971). 64. OECD’s Producer Support Estimate and Related Indicators of Agricultural Support, Concepts, Calculations, Interpretation and Use (The PSE Manual), September 2010, OECD: Paris, France, at p. 21. 65. Idem, at p. 22. 66. This category is often referred to in the literature as the “development box”; Brink (2011), at p. 29ff. 67. Throughout the agreement, the term “year,” in relation to specific commitments of a member, refers to the calendar, financial, or marketing year specified in the schedule relating to that member [Article 1(i) of AG]. 68. There is no workable definition of what is a nondistorting subsidy, and this is probably the reason why negotiators felt that an indicative list would better reflect their intentions. Compare with Brink (2011), at p. 31ff. 69. Stancanelli (2009, p. 32) mentioned that, during the negotiations, the EU insisted on including hectare and cattle herd payments in the “green box” because this was very much a measure at the core of the CAP reforms. It seems that the extent of the green box was influenced by similar concerns. Stancanelli (2009, at p. 27ff.) discussed the various proposals regarding the green-box entries of the key players during the Uruguay round. 70. WTO Document WT/MIN(13)/W/9 of 6 December 2013. 71. Food and Agriculture Organizations of the United Nations (FAO), 2002. 72. The debate regarding food security focuses on staple foods (e.g., wheat, rice). The prices of farm goods recently increased significantly, as we have indicated in various chapters. Farm goods are low-price elasticity goods in the sense that daily consumption cannot fall below a certain threshold without causing health externalities. As a result, poorer households suffer more from price hikes than wealthier households do, and hence the debate. See also the Decision on “Public Stockholding for Food Security Purposes,” later adopted during the Bali Ministerial Conference. 73. The UN Committee on World Food Security set up a High-Level Panel of Experts on Food Security and Nutrition (HLPE) to provide advice on food security and how to address it. 74. This definition comes close to the OECD definition (to cite one example). The OECD has supplied a series of studies on this issue. An OECD publication entitled “Decoupling: A Conceptual Overview,” OECD: Paris, France, 2001, at p. 7, states: “two distinct ways of defining decoupling are put forward. The less restrictive definition requires, for a policy measure to be deemed decoupled, that production (or trade) not differ from the level that would have occurred in the absence of that measure. Such measures are described as ‘Effectively Fully Decoupled.’ A more restrictive definition requires not only that the equilibrium level of production (or trade) be the same as without the measure, but that also the quantity adjustment due to any outside shock should not be in any way altered. Such a measure would be ‘Fully Decoupled.’” 75. Brazil had challenged payments by the US to its cotton producers, arguing that they constituted export subsidies prohibited by the AG Agreement. 76. Steenblik and Tsai (2009) discussed the environmental impact of all schemes coming under the “green box” category and reported mixed results: while items such as agri-environmental subsidies and inspection services might have a positive impact on environment, entries such as research might have either a positive or a negative impact (depending on the technologies that they give rise to), and direct payments, especially to smaller firms, might have a negative impact.
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77. Compare in this respect the experiences of India, China, and the African countries discussed in Dhar (2009), Xie (2009), and Oduro (2009), respectively. 78. The WTO and the OECD definitions of AMS are not identical. Critically, the OECD definition uses an evolving market benchmark to calculate the subsidy equivalent, whereas the WTO AMS uses a defined, static base period. For a comprehensive discussion about the differences, see Diakosavvas (2002). 79. WTO Document G/AG/N/ARG/24 of 25 April 2006. 80. Hoekman and Howse (2008) offered an in-depth analysis of this case. 81. It follows that WTO members had an incentive to schedule goods if subsidies had been paid in the base period of 1986–1990. In EC–Export Subsidies on Sugar, the AB confirmed that, pursuant to Article 9 of AG, WTO members are required to make both budgetary-outlay and quantity-reduction commitments (§ 193); see also the AB report on US FSC, at §§ 145–146. 82. See Breene (1993) and Hathaway (1990). 83. Reporting Procedures and Consultative Obligations under the FAO Procedures for Surplus Disposal, FAO: Rome, 2001, at § 7. 84. Idem, under “Glossary.” 85. This is not to suggest that the WTO Secretariat does not request details regarding programs that come to its knowledge; see for example, WTO Document TN/AG/S/27/Rev. 1. 86. See Tangermann (2015). 87. Recall the previous discussion on the Panel on Mexico–Olive Oil. Chambovay (2002), Delcros (2000), and Morgan and Goh (2003) have offered different perspectives on this score. 88. Similar conclusions were reported by Bown and Meagher (2010). 89. India was aided by G33, a group of developing countries with similar interests in this respect. 90. WTO Document WT/MIN(13)/W/10 of 6 December 2013. 91. Quoted in the Indian newspaper The Hindu, 4 December 2013. 92. WTO Document WT/GC/W/688 of 28 November 2014. 93. Yu and Jensen (2014) discussed China’s reaction to the food crisis and concluded that the costs imposed on China and the rest of the world (because of China’s reaction) could have been avoided had China privileged simpler, less distorting instruments. 94. Dixit (2014) advanced a series of arguments supporting his claim that value chains can contribute substantially toward achieving food security. 95. Tangermann (2015) took the view that India, which has become a large exporter of both wheat and rice (its staples), could find supplies of these crops on the domestic market without having to generate them through price support for its farmers. It is, thus, political economy in this reading of the situation that largely induced the Indian government to request the Bali Declaration on this score. 96. See the discussion of this provision in chapter 2, volume 1. 97. Schoenbaum (2011) offered a very persuasive explanation of why changing circumstances matter here more than elsewhere. 98. WTO Document G/AG/5/Rev. 10 of 23 March 2012. 99. WTO Document TN/AG/GEN/4 of 16 May 2003.
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100. WTO Document TN/AG/GEN/4 of 16 May 2003, at pp. 3–4. Historically, the US has also been an important producer of this commodity. It used to produce 55 percent of total world production in the nineteenth century, and spinners hailed the superior quality of US cotton because of its longer and stronger fibers. The US was the largest producer of cotton and exported it almost in its entirety to the UK, which in turn accounted for 85 percent of worldwide cotton manufacture; see Steinwender (2014), and Irwin (2003a). Nowadays, China has overtaken the US as the world’s leading producer, followed by India, the US, Pakistan, Uzbekistan, and the EU, while the WCA countries are in seventh place. 101. Panagariya (2005) stated that cotton is an outlier, and that the whole institutional arrangement dealing with trade in cotton should be viewed as idiosyncratic: it is the only known sector-specific case (or one of the very few cases) where subsidization by developed countries has seriously jeopardized the interests of developing countries. Compare with Francois (2005). 102. WTO Document WT/L/579 of 2 August 2004. 103. This mandate is formally known as the WTO Director-General Consultative Framework Mechanism on Cotton. 104. WTO Document TN/AG/13; WTO Document TN/AG/SCC/1. 105. WTO Document WT/L/579 of 2 August 2004. 106. Various drafts have been proposed over the years, but the substance remains the same across all of them; see, for example, WTO Document TN/AG/W/3 of 12 July 2006. 107. WTO Document WT/L/670 of 15 December 2006 explain the DG’s framework. WTO Document TN/AG/ SCC/W/7 of 16 March 2007 and the regularly updated WT/CFMC/6/Rev. 16 of 26 May 2014 present the amounts committed to assist cotton-producing countries. 108. WTO Document WT/MIN(13)/W/13 of 6 December 2013. 109. The reference point for this type of work had been agreed upon in 2008; see WTO Document TN/AG/W/4/ Rev. 4 of 6 December 2008. 110. See Orden et al. (2011b, p. 402ff.), in general, and Nassar (2011, p. 223ff.), with respect to Brazil. 111. Market Access Unfinished Business, Post Uruguay Round Inventory, the WTO: Geneva (2001). 112. Trebilcock (2011, p. 100ff.) offered a brief, concise, yet comprehensive discussion on this issue. 113. McMahon (2011) offered a very comprehensive analysis of all these issues.
Chapter 9 1. The World Bank has produced a number of studies concerning the welfare implications of the MFA and published them in a series entitled Policy Research Working Papers (2001). The OECD did the same with a collection of papers edited by Navaretti, Faini, and Silberston (1995). Faini et al. (1995) and Faini (1995) started from the premise that it is generally agreed that the arrangements that have regulated trade in textiles and clothing have slowed the natural shift in comparative advantage from industrial countries to developing countries. But there is quite a bit of disagreement about how restrictive the MFA was. The authors addressed the potential sources of allocative inefficiency occasioned by the MFA and searched for evidence that the MFA indeed led to such inefficiency. In a theoretical section, they identify five sources of inefficiency relating to allocations across countries, across consumers, and among firms within constrained countries. In the empirical part of the paper, they first provide evidence of the restrictiveness of the quota arrangements from trends in import shares for aggregate categories of textiles and clothing, before and during the MFA. They then provided evidence from a detailed examination of quota utilization rates and price differentials among European Community (EC) import-
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ing countries. Their findings included the following: (i) relatively high utilization rates across exporters suggest a relatively high degree (and stability) of quota binding across exporters; (ii) overshipment was highest for the most important (by shipment value) products; and (iii) there is concentration among a few leading exporters (China, Hong Kong, Taiwan, and Thailand) and a few importers (Benelux, Germany, and the United Kingdom). The data suggest a positive correlation between the coefficients of variation in prices and quota utilization rates for China, Hong Kong, and Korea, suggesting that prices are related, as one would expect, to the degree of binding; and they also suggest that binding quotas would be associated with higher import prices. Martin and Winters (2001) estimated the gains from the elimination of MFA to be up to $25 billion/year for the EC and the United States by 2005, but only $2 billion/year for China. In their view, exporting countries might lose, since quotas raise prices that exporters receive, and their elimination would undoubtedly make some exporters worse off. The countries that would lose from the elimination of the MFA were, in the authors’ view, those that were allotted larger quotas than they should have been in accordance with their comparative advantage, and those that moved into the production of textiles because of the guaranteed market access through the MFA, not because of their comparative production in producing textiles. 2. For a comprehensive account on the history of MFA, see the very informative discussion in Trebilcock and Howse (2013, pp. 482ff.). 3. Austria, Canada, Czechoslovakia, the European Economic Community of 9 in 1977, Finland, Greece, Hungary, Israel, Japan, Korea, Poland, Portugal, Romania, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States all signed the MFA. 4. See Tang (1998), at pp. 176ff. 5. US ITC, The History and Current Status of Multifiber Arrangement, USITC Pub. No. 850 (1978). 6. See Tang (1998), at pp. 180ff. 7. See Low (1993), at pp. 108ff. 8. The International Textiles and Clothing Bureau (ITCB) was established in the mid-1980s to serve as an antechamber where developing countries could meet and coordinate their policies; see Dickerson (1995), at pp. 379ff. 9. The Results of the Uruguay Round of Multilateral Trade Negotiations, Market Access for Goods and Services: Overview of the Results, The GATT: Geneva, 1994. 10. See Dickerson (1995), at pp. 490ff. 11. Actually, even the MFA was on occasion judged insufficient by some importing countries: Dickerson (1995, pp. 87ff.) discussed the US attempts to move to an even more restrictive regime with the discussion of the “Jenkins Bill.” Congressman Ed Jenkins (a Democrat from Georgia) was putting pressure on the Reagan Administration to abrogate the MFA and move to an even tighter regime that would further reduce the volume of textiles imports in the US. He proposed the “Jenkins Bill” to this effect (HR 1502, S. 650). 12. Usually, trading partners would end up settling disputes regarding the amount of quotas, and rare is litigation between exporters and importers during this period. One illustration is provided in the GATT panel report on UK–Cotton Textiles (1973); here, following a conciliation procedure, Israel and the UK agreed that the former was not a low cost– disruptive exporter of textiles in the UK market, and the previously imposed quotas were removed. The GATT panel report on Norway–Textiles (1980) presents another interesting case. Norway had in place bilateral deals with many exporters that lapsed in 1978. Negotiations to renew existing restrictions failed, and Norway had had recourse to unilateral measures. Hong Kong, China (at the time still under UK rule) complained that the new restrictions violated both GATT and the MFA. More specifically, the complaint was that, by allocating quotas to the European Economic Community (EEC) and European Free Trade Association (EFTA) countries, and excluding Hong Kong, China, from similar deals, Norway had violated its obligations under both GATT and the MFA. The GATT panel did not examine the consistency of the measures with the MFA, but it
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did so with respect to GATT. It found that the nonallocation of a quota to Hong Kong, China, was in violation of Article XIX and Article XIII.1 of GATT (§ 16). 13. The drafting history of this agreement has been explained in detail in Bagchi (2001, pp. 224ff.), Cline (1990), Fennell and Tyler (1993), Raffaelli and Jenkins (1995), and Croome (1995). 14. See Raffaelli and Jenkins (1995). 15. In this case, the AB, as well as the Panel on US–Cotton Yarn (§ 7.73), went so far as to state that the MFA was not a legal context, in the Vienna Convention on the Law of Treaties (VCLT) sense of the term, for the interpretation of the ATC. 16. Deardorff and Stern (1998, pp. 20ff.) attempted a quantification of the barriers resulting from MFA and showed how high protection was during the MFA years. 17. The Panel on US–Underwear held that a violation of Article 6 of ATC amounted ipso facto to a violation of Article 2.4 of ATC (§ 7.71). 18. Das (2001, pp. 104ff.) has offered a concise description of the ATC. 19. The “growth rates” were increased on 1 January 1995 by a factor of 16 percent for the first period, and the new growth rate was applied annually. The growth rate for the first period was then increased by 25 percent for the second period (starting on 1 January 1998), and was further increased by 27 percent for the third and final period, which began on 1 January 2002. 20. Recall, however, the discussions in chapter 10 that subsequently, in the case law concerning contingent protection, WTO adjudicating bodies adopted the opposite point of view; that is, that the same facts can be used to support findings of threat of injury and actual injury, without imposing a requirement for separate analysis. 21. See Tang (1998), at pp. 187ff. 22. See, for example, the offer from Finland, GATT Document MTN.GNG/NG1/W/53 of 17 October 1990; Israel, GATT Document MTN.GNG/NG1/W/65 of 30 November 1990; Norway, GATT Document MTN.GNG/ NG1/W/57 of 23 October 1990; and Sweden, GATT Document MTN.GNG/ NG1/W/49 of 17 October 1990. 23. WTO Document WT/MIN(11)/5 of 18 November 2011. 24. Raffaelli (1998) had the prescience to suggest that maybe some exporting nations would be requiring separate negotiation to address issues posed by the growth of Chinese textile exports.
Chapter 10 1. See the relevant discussion in chapter 7. 2. According to the WTO DG, the new GPA package agreed in the Doha round would result in gains in market access of between $80–100 billion annually, but this of course depends on a number of parameters that are unknown or relatively little known at this moment. It is, of course, only natural that the DG should opt for a high number in an effort to persuade trading nations to join the GPA, although probably this was not the case this time since this number includes the potential accession of China; see WTO Document WT/MIN(11)/5 of 18 November 2011, at p. 6. 3. See, for example, Francois et al. (1997), who calculated the welfare implications of liberalization in the government procurement market for the US. 4. OECD (2001), The Size of Government Procurement Markets, the OECD, Paris, available at http://www. oecd.org/dataoecd/34/14/18845927.pdf. Note that the OECD study refers to the contestable market—that is, the
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part of the government procurement market that is open to foreign bidders and not to the overall market which could be substantially higher. 5. Audet (2002) estimated that government purchases represent 14–20 percent of a country’s gross domestic product (GDP). 6. In the same vein, see the results in Chen and Whalley (2011). 7. In December 2014, parties to the GPA were examining the adequacy of the Fifth Revised Offer by China. 8. On this last point, see Anderson (2011), and WTO Committee on Government Procurement, Modalities for the Negotiations on Extension of Coverage and Elimination of Discriminatory Measures and Practices, WTO Document WT/GPA/79 of 19 July 2004. 9. WTO Document GPA/79 of 19 July 2004. 10. WTO Document GPA/W/297 of 11 December 2006. 11. WTO Document GPA/112 of 16 December 2011. 12. On the history of GPA, see Arrowsmith (2003), and Blank and Marceau (1997). 13. For an extensive discussion of the new GPA provisions dealing with special and differential treatment, see Muller (2011) and Reich (2009). 14. WTO Document GPA/116 of 6 December 2012. 15. WTO case law has already made references to the 2011 Model Law; see the panel and AB reports on Canada–Renewable Energy. 16. The panel had reached the opposite outcome. It is probably worth it for the AB to reflect on the grounds that it decided to distance itself from the panel findings in this respect the next time it faces this issue. 17. Originally, during the GATT negotiations, the idea was that, with respect to public works, “each Member shall accord fair and equitable treatment to the commerce of the other Members.” There was no obligation to avoid discrimination, but ITO members would not be totally free to do as they please either (UN Document E/ PC/T/C.II/PV/4, at p. 2). 18. On this issue, see Wood (1997). 19. 41 USC §§10a–10c (1976). The regulations that implemented the federal Buy American Act established a 6 percent margin of preference, 41 CFR §1–1.18–603–1 (1977); see also Graham (1979). 20. “Substantially all” has been understood to refer to purchases where 50 percent of the content was local (US). Other statutes, like the many “Little Buy American Acts” increased this percentage for specific purchases. The Berry Amendment (PL29, ch. 41, 55 Stat. 123, 77th Congress, 1st Sess., 1941) is also referred as a “super percentage: statute since it requires from the Department of Defense to purchase only 100 percent US origin goods. The list of goods featured in the Berry Amendment has varied over the years, but has generally included products made of textiles or specialty metals; see Luckey (2012). 21. For a detailed discussion of the act, see Luckey (2008, 2012) and Linarelli (2011). 22. See, for example, 49 USC §5323(j)(2). 23. The WPA alone employed $3.3 million in 1938 alone; see Taylor (2008). 24. Linarelli (2011) discussed all this in detail. There are borderline cases, though. The bridge in Morrison, Colorado, became a cause célèbre between Canada and the US after the US Federal Highway Administration (FHA) balked at paying its share of $144,000 project unless Ontario-made steel beams were removed. Payment of subsidies, thus, was conditioned upon local content. This looks like a prima facie violation of the Subsidies
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and Countervailing Measures (SCM) Agreement, but also in violation of the spirit of nondiscriminatory government procurement. We discuss nondiscrimination in GPA later in this chapter. 25. GAO, Recovery Act, GAO-10–383, February 2010, GAO: Washington DC. 26. In a similar vein, Article IV.4(b) requests that procuring entities avoid conflicts of interest when conducting procurements. 27. Corruption is an elusive notion. Klitgaard (1988) defined it as discretion minus accountability—a wise definition for sure, but one that leaves of room for interpretation. Procuring entities have a lot of discretion, of course, as we will explain later in this chapter. Accountability cannot exist without transparency, an issue we will emphasize a great deal in what follows, and which for good reasons has become a salient feature of the Revised GPA. The indicative list included in UNCAC is helpful precisely because corruption is an elusive notion. Fukuyama (2014, pp. 478ff.) for example, mentioned various practices that intuitively qualify as “corrupt” practices. The evidentiary burden associated with proving similar practices should not be disregarded. Take the case of “reciprocal altruism,” where a gift provokes a gift without conditioning it; or “gift exchange,” where a state gives a gift with no obligation for recompense, but the gift might influence decisions by procuring entities. This type of “corruption,” even if it qualifies as such, will be hard to prove, hence the reason why both transparency obligations and the indicative list included in UNCAC are so important. 28. This group was established in the 1996 Singapore Ministerial Conference. 29. WTO Document WTO/GPA/1, Annex 2. 30. Each signatory has a delegate participating in the GPA Committee. An indicative time frame for accession negotiations has been agreed (WTO Document GPA/W/109/Rev. 2). The GPA Committee has also agreed on a checklist of issues for the provision of information by the applicant governments (WTO Document GPA/35). 31. Armenia joined the GPA on 15 September 2011. Ukraine was the second developing country that joined the GPA; see WTO Doc. GPA/133 of 16 November 2015. 32. On 9 December 2008, the Committee on Government Procurement adopted a decision inviting Chinese Taipei to accede to the plurilateral agreement, ending their accession negotiations. Chinese Taipei finally joined the GPA on 15 July 2009. 33. On the enlargement of the EU from 15 to 25 members and the corresponding accession of its 10 new members to the GPA (see WTO Document GPA/78 of 4 May 2004); on the enlargement of the EU from 25 to 27 (accession of Bulgaria and Romania to the GPA), see WTO Document GPA/90 of 11 December 2006. 34. Appendix I contains the commitments by parties to the GPA. 35. For example, Japan included “Central-” and “Eastern Nippon Expressway Company Ltd” in its offer, two private companies that engage in train services (they own both tracks and coaches); see WTO Document GPA/13 of 2 April 2012, at pp. 293ff. 36. As we will see in what follows, the GPA imposes three limits on its coverage: with respect to entities covered, with respect to measures by the entities covered, and with respect to the value of procurement as well. 37. Low et al. (1997), and Bronckers (1997) have both discussed in detail this particular point. One would expect that service trade would be liberalized in the context of the government procurement agreement negotiated for service trade only. 38. See Annex C of the Declaration. 39. See WTO Document S/WPGR/M/54 of 20 June 2006. 40. See S/WPGR/17 of 16 November 2007, and WTO Document S/WPGR/M/60 of 17 January 2008.
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41. The usual threshold values used are 130,000 SDRs for goods and services, and 5 million SDR for construction services procured by Annex 1 entities. SDRs are an artificial value. An SDR corresponds more or less to US$1. Higher thresholds have been used for some entities covered by Annexes 2 and 3. 42. In case of uncertainty regarding the nature of the contract (fixed term or indefinite period), it will be considered of indefinite period and the methodology described earlier (monthly installment x 48) will apply [Article II.8 (c) of GPA]. 43. See the discussion in chapter 3. 44. Objections are raised not infrequently; see, for example, objections to Canada’s modifications in WTO Document GPA/92 of 13 December 2007. 45. See Reich (1999). 46. See Horn et al. (2010). 47. Reich (1999) discussed the EFTA experience. 48. See, for example, an account regarding the Transatlantic Trade and Investment Partnership (TTIP) negotiations on government procurement in Yukins and Priess (2014). 49. Horn et al. (2010). 50. See the discussion in chapter 4. 51. Article X.4 of GPA further requires that parties avoid prescribing a particular trademark or trade name, patent, copyright, design, type, specific origin, producer or supplier unless there is no other intelligible way to describe the requirements. This provision aims at avoiding providing specific suppliers (say, holders of a patent) with an unfair advantage. 52. He distinguished between what he termed an “organic” and a “functional” criterion; the first applies to the procuring entity, while the second comes close to what we term the “intent” criterion. 53. See for example, the Defense Procurement Brief of SIGMA/OECD, at p. 2, available at http://www.sigmaweb.org/publications/Defence_Public_Procurement_2011.pdf. 54. See the discussion in chapter 9, volume 1. 55. WTO Document GPA/83. 56. This term allows for modification, albeit one that does not touch upon the quintessential elements of the tender documentation. 57. Note, nevertheless, that the GPA does not require that a full antitrust investigation take place concluding that collusion indeed occurred. Actually, a similar requirement probably would have been exaggerated when one takes into account the time required for similar investigations. Practicality, thus, has inspired the current approach, but practicality might hide abuses, as seemingly similar bids might be characterized “collusive” when in fact no collusion has occurred. This is an area where procuring entities could profit by cooperating with experienced antitrust authorities, which can pronounce very quickly on whether the bid before them passes the “smell test.” 58. Recall the discussion in chapter 12 about “unforeseen” and “unforeseeable” events. The threshold imposed here is very high indeed. 59. Dir. 2014/24 of 26 February 2014, OJ L94/65 of 28 March 2014. 60. Cibinic et al. (2011), at pp. 501ff.
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61. These procedures (“competitive negotiations” and “competitive dialogue”) can be used only on the basis of specific grounds mentioned in the EU legislation; procuring entities cannot use them freely any time they procure. The situation is different in the case of “Utilities” (Dir. 2014/25/EU), such as procurement in the energy or water market, the new Concessions Directive (Dir. 2014/26/EU), and Defence and Security Procurement (Dir. 2009/81/ EC). In all three areas, procuring entities can use “competitive negotiations” (also known as “negotiated procedure with prior notice”) by default. All 2014 directives discussed here are subject to an implementation period that ends on April 18, 2016. 62. See Kutlina-Dimitrova and Lakatos (2015). 63. When the price is “abnormally lower than the prices in other tenders submitted,” the procuring entity can still verify that the supplier can fulfill the terms of the contract before awarding it (Article XV.6 of GPA). 64. See the relevant discussion in Arrowsmith (2005). 65. See WTO document WT/WGTGP/W/32 of 23 May 2002, a compilation of the various discussion topics by the WTO Secretariat. 66. The corresponding provision in the Uruguay-round GPA was Article XIX.5. Although the spirit of the provision stays the same, the letter of the latter was more detailed than that of the former. It is one of the rare occasions where the Revised GPA represents one step back in comparison to the previous text with respect to obligations regarding transparency. 67. Recall the previous discussion about industrial policy in the realm of government procurement. 68. Yukins (2015) mentioned, for example, that six companies dominate the US defense procurement market. 69. The accession of Croatia to the EU led to the extension of the EU list of concessions to Croatia as well. 70. WTO Document GPA/92 of 13 December 2007. 71. See Anderson et al. (2011a), Georgopoulos (2005), and Wood (1997). Dawar and Evenett (2011) reached similar conclusions in their empirical study regarding the government procurement provisions in the EC-CARIFORUM agreement. 72. This is probably an exaggeration since not all companies have identical endowments. It is, however, probably true for a smaller segment of all potential candidates, assuming competition in the relevant market. See, on this score, Mavroidis (1993). 73. What in public international law parlance is known as “guarantees of non-repetition”; see Mavroidis (1993). 74. Mavroidis (2000a), Pauwelyn (2000), and Petersmann (1993) all have discussed remedies in GATT/ WTO practice. 75. Schede (1996) went so far as to call challenge procedures the “Trondheim” provision. Moreover, a system of fines is, of course, an imperfect remedy since it offers no response to the possible scenario where a WTO member with substantial bargaining power refuses to pay; see Limão and Saggi (2008). 76. In the US, though, this is the case only for procurement at the federal level. It is the Department of Justice that will represent private operators in cases involving procurement at the subfederal level, as per 19 US 3512; see Yukins (2015). Recall that Hufbauer (2015) estimated the US federal procurement market at $600 billion annually, but the subfederal procurement is $1 trillion. 77. Galli et al. (2007) discussed the Swiss experience with respect to challenge procedures; Georgopoulos (2000) discussed Greece’s experience of enforcing government procurement. See also Arrowsmith (2002), Davies (1997), Footer (1995), and Weiss (1997). 78. The EU Remedies Directive (for example, the EU domestic instrument to this effect) provides a mandatory standstill period and an automatic suspension; see Priess and Friton (2011).
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79. There are inconsistencies across the two instruments and, consequently, “lock, stock and barrel” transpositions should be avoided; see Zhang (2011) for a comprehensive analysis of this issue. 80. This would have been the case assuming knowledge about the project, of course. In fact, when recourse to “selective tendering” is made, as was the case here, it is quite likely that US companies would have never heard of the project unless they had been selected in the original bid. Anyway, the important point here is the challenge procedures can provide a meaningful remedy against abuses assuming transparency regarding the procurement, which should not be taken for granted, the many provisions in the Revised GPA regarding this issue notwithstanding. 81. This is not the only area of WTO law where private parties appear before domestic courts and request respect of WTO law. In chapter 12, we will discuss the procedure under Article X.3 of GATT, where a similar course of action has been adopted. 82. WTO Document GPA/M/8. 83. WTO Documents WT/DS88/5, WT/DS95/5, and WT/DSB/M/49. Also see Linarelli (2011). 84. Report of the WTO Committee on Government Procurement, WTO Document WT/GPA/103 of 12 November 2009. 85. WTO Document WT/TPR/OV/12 of 18 November 2009 at §139. 86. The issue of statistical data is intimately linked to the quest for increased transparency. Sustainable development and treatment of SMEs figure quite highly on the priority list on both sides of the Atlantic; see Yukins (2015).
Chapter 11 1. We discussed them in chapter 3 of this volume. 2. The whole endeavor is reminiscent of Brander and Spencer (1985). 3. Note that a “Gentlemen’s Agreement” on export credits had also been concluded in the OECD in 1976. 4. The Annex to the Agreement clarified the scope in more detail. A number of notifications have been made to this effect: AIR/1, AIR/TSC/W/49, and AIR/67. 5. TCA/4 23 November 2001. 6. AIR/M/10, §15. 7. AIR/M/10, §24.
Chapter 12 1. WTO Document WT/TPR/OV/14. Overview of Developments for the International Trading Environment, 21 November 2011. 2. The second and third obligations are not transparency obligations, strictly speaking, although they are indirectly related to it. We will be discussing them in this chapter. 3. In this chapter, we are not discussing Agreement-specific transparency obligations, since we have discussed them in the previous chapters. 4. E/PC/T/C.6/W.20 at pp. 4–5; see also E/PC/T/C.6/55 at pp. 38ff.
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5. E/PC/T/C.6/55 at p. 39. 6. E/PC/T/33 at p. 28. 7. E/PC/T/C.6/W.18 of January 24, 1947. Originally, the focus was on transparency as a means of safeguarding the value of tariff concessions, since, as we saw in chapter 1, the GATT was quintessentially a tariff bargain. Eventually, the focus shifted to all sorts of regulatory barriers, since markets are now segmented primarily through regulatory and not tariff barriers. Ostry (1998) has persuasively shown (pp. 16ff.) that the language in Article X GATT reproduces the corresponding language in the US Administrative Procedures Act of 1946. 8. See CRH at p. 79. 9. One does not have to delve deep into Williamson’s “information impactedness” to appreciate the problems that private information can have on international trade. Imagine for example, that information regarding standards is in some unknown area of a provincial office of the national administration, or accessible in part in various offices. One would expect that national players (and maybe a few long-established traders) would gain a substantial advantage from similar practices. In one of the rare papers that managed to come up with a quantification of the costs of nontransparency, Steinwender (2014) discussed the impact that telegraph-transmitted information has had on traders by comparing the situation before and after the advent of the telegraph. She studied the impact on transatlantic trade that the telegraph has had, focusing on the cotton/textiles market. In her calculation, the welfare gains from information transmitting were roughly equivalent to those from abolishing a 6 percent ad valorem tariff. 10. Indeed, as Wolfe (2013) has pointed out, dispute settlement could be seen as a form of reverse notification. 11. Horn et al. (2005) mentioned the uneven distribution of information concerning illegal trade barriers as one of the possible causes explaining participation in the WTO dispute settlement system: absent knowledge that illegal trade barriers exist, it will be impossible to lodge a complaint; knowledge that similar barriers do exist is a function of export diversification, administrative capacity, and other factors. 12. For an illustration, see Biedenkopf (2012). 13. The corresponding SPS provisions are §§ 3 and 10 in Annex B. 14. Of course, WTO Members can on their own initiative provide for similar one-stop shops in the ILA context as well, but here we tackle again the question of incentives. This is not to say that by addressing the costliness of gathering information through the establishment of one-stop shops, the problem disappears. But at least if this happens (a rather noncostly option), we know better what the problem is and how to tackle the (eventually) missing incentives to notify the WTO of import licensing schemes. 15. Brandeis, Louis D. 1914. Other People’s Money and How the Bankers Use it, F.A. Stokes: New York City, New York at p. 92, quoted in Wolfe (2013). 16. Horn et al. (2011) reflected similar conclusions regarding notifications of mutually agreed solutions to the Dispute Settlement Body (DSB). 17. WTO Document WT/TPR/OV/14, Overview of Developments for the International Trading Environment, 21 November 2011(hereinafter referred to as the “Overview Document”). 18. It is of course a daunting task to pronounce in an informed manner about all notifications in the WTO. And this is an area where views are quite divergent across WTO Members, as well as in the literature. 19. See also the Panel on Argentina–Hides and Leather at §§ 11.73ff. 20. See the relevant discussion in chapter 5. 21. The Council Regulation 2658/87 of 23 July 1987 on Tariffs and Statistical Nomenclature and on the Common Customs Tariff, OJ L256/1, 7 September 1987.
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22. See also in this respect the Panel on Argentina–Hides and Leather (§ 11.76). 23. In US–Underwear, the AB had already held that this provision was akin to a due process obligation (p. 29). The AB on US–Countervailing and Antidumping Measures (China) confirmed this point (§ 4.67). 24. The analysis regarding the “comparator” in the previous section applies here as well, as per the report of the AB on US–Countervailing and Antidumping Duties (China). 25. We discussed this case in chapter 2. 26. Hoekman and Mavroidis (2009) approvingly discussed this finding in more detail. 27. In a rather cryptic passage, the precedential value of which can legitimately be brought into question, the panel held that Article XXIV.12 GATT is not an exception to Article X.3(a) GATT. 28. It is traders that should have recourse to tribunals established under this provision. 29. See the analysis leading to the final ruling in § 7.539. 30. The potential for the nonuniform administration of laws sufficed for the panel to find against the EU in its report on EC–Selected Customs Matters. In this case, the panel held that the defendant was in breach of its WTO obligations because of the possibility that blackout drapery lining was treated in German customs differently than it was in other EU customs (§§ 7.276ff.). 31. For additional confirmation of this very point, see § 7.113 of the Panel on EC–Selected Customs Matters. 32. WTO Document WT/MIN(99)/2 of 8 October 1999. 33. WTO Document WT/TPR/OV/14 of 21 November 2011 at § 181. 34. WTO Document WT/TPR/134 of 27 June 2003. 35. WTO Document WT/TPR/287 of 15 November 2011. 36. WTO Document WT/TPR/OV/14 of 21 November 2011 at p. 59. 37. WTO Document WT/TPR/287 of 15 November 2011 at § 7. 38. See Wolfe (2013). Mavroidis and Wolfe (2015) discuss the evolution of transparency obligations in the WTO from a different perspective. They aim to show that transparency will not be served as long as it relies mainly on notifications by WTO members. In their view, there are good arguments to support the WTO in providing transparency, and, hence, in adding to its administrative capacity. 39. WTO Document G/SCM/Q2/CHN/42 of 11 October 2011. 40. WTO Document G/SCM/Q2/IND/20 of 10 October 2011. 41. Trade Policies for a Better Future, Proposals for Action, “The Leutwiler Report,” 1985, The GATT: Geneva. 42. See Long (1989). 43. Report of the Working Party on Notifications Obligations and Procedures, WTO Document G/L/ 112, 7 October 1996. 44. See WTO Document WT/L/225 of 18 July 1997, and WTO Document G/MA/IDB/1/Rev. 1 of 27 June 1997, which explain the modalities and operation of the IDB and the kind of information requested. 45. WTO Document G/MA/239 of 4 September 2009. 46. As many researchers, including Bagwell and Staiger (2005), have explained, levels of protection move in a countercyclical fashion (e.g., in the opposite direction of the business cycle). That is, when economy and trade
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are doing well (and expect to do in the near future), little recourse to protection is sought since the gains of partners increase if they stick to their trade commitments; in the opposite scenario, future benefits will be lower, and hence recourse to protection increases. 47. See, for example, T/TPR/OV/W/6 of 28 June 2012. 48. WTO Document WT/GC/W/604 of 22 May 2009. 49. WTO Document WT/MIN(11)/5 of 18 November 2011 at p. 6. 50. WTO Document WT/L/848 of 19 December 2011. The WTO is no bottleneck when it comes to securing information regarding trade barriers: there are many initiatives in this context. For example, the Global Trade Alert (http://www.globaltradealert.org) has emerged as a databank with information regarding measures taken in response to the financial crisis. The authors probably consciously decided to err on the supply side by including all measures adopted during the crisis, even though many of them were adopted for reasons unrelated to the crisis itself. They, thus, provided the WTO and trading nations with invaluable information, while placing the onus on the trading nations adopting similar measures to explain their rationale. In a similar vein, the World Bank has established a databank with information regarding contingent protection instruments; namely, antidumping, countervailing duties, safeguards, and the China special safeguard clause (http://econ.worldbank.org/ ttbd/). Collins-Williams and Wolfe (2010) have argued in favor of making similar information available through official WTO channels by, for example, allowing cross-notifications by NGOs and other international organizations. 51. The record is difficult to interpret since many of the reported barriers are probably unrelated to the financial crisis, but the overall emerging picture is not as bleak as those drawing parallels with the 1929 crisis might have originally anticipated when arguing that trading nations would rush into protectionist measures as a response to the financial crisis that they had been facing. On the other hand, it is probably too optimistic to give all the credit to the WTO for this trade-favorable outcome; see the various contributions in Bown (2011). 52. The EU issues its own annual report, aptly entitled “Report on Potentially Trade-Restrictive Measures Identified in the Context of the Financial and Economic Crisis.” See, for example, the 11th report covering the period 1 June 2013–30 June 2014, European Commission, Directorate-General for Trade, Brussels, Belgium, 2014. 53. See, for example, WTO Document G/L/223/Rev. 18 of 9 March 2011. 54. Similar thoughts have been expressed in Hoekman and Mavroidis (2000). 55. Brandeis (1914).
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Index
Aart de Zeeuw, 553 Abbott-Snidal pyramid, 394 Accession of China, 368 Accreditation, 436–437 Actionable, 249 Actionable subsidies, 248–249, 263 Activities of standardization, 402 Actual value, 28, 32 Additional deliveries, 647 ADICMA, 686–687, 688 Adjustment, 317 Administered price, 581 Administrative costs, 79 Administrative decision, 58 Administrative review, 87, 116, 123 Administrative rulings, 679 Adobe’s Portable Document Format (PDF), 396 Advance Sworn Import Declaration (DJAI), 23–24 Adverse effects, 473 Affect, 462 Affected exporting Members, 359 Affected international trade, 462 Affected parties, 358–359, 650 Affirmative waiver, 131 Aflatoxin, 384 Africa, 444 African, Caribbean, and Pacific (ACP), 637 African exports, 384 Aggregate Measurement of Support (AMS), 557, 558 Agreement Establishing the WTO, 389 Agreement on Agriculture (AG), 18, 270, 455, 519, 535 Agreement on Antidumping (AD), 73–81 Agreement on Civil Aircraft (CV), 196, 663–671 Agreement on Government Procurement (GPA Agreement), 621 Agreement on Import Licensing, 430 Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade, 201
Agreement on Preshipment Inspection (PSI), 5, 36–46 Agreement on Safeguards, 260 Agreement on Sanitary and Phyto-sanitary Measures (SPS Agreement), 455 Agreement on Subsidies and Countervailing Measures (SCM Agreement), 507–508 Agreement on Technical Barriers to Trade (TBT), 377–382, 387–393, 396–398 Agreement on Textiles and Clothing (ATC), 343, 554, 607 Agreement on the International Dolphin Conservation Programme (AIDCP), 401–402 Agreement on Trade Facilitation (ATF), 5, 43–64, 430, 694 Agreement Relating Principally to Chemicals, 26 Agreements. See also specific types of plurilateral, 621, 631 recognition, 431, 446 subsequent, 405 torn down, 523 Agricultural products, 546 Agricultural trade, 552, 554 AIDCP, 401–402, 404–405, 422, 449 Aid for Trade, 47 Airbus, 100, 231, 245, 249–250, 260, 664–665, 667, 668 Airbus 350, 249 Airbus A-380, 667 Airbus GIE (“groupement d’intérêt économique”), 232 Airbus SAS (“société par action simplifiée”), 232 Akerloff, George A., 674 AKZO, 178 Allocated subsidies, 256 Allocation over productive assets, 312 Allowance, 83 All sales, 85 Altmark, 222 Amber box, 558 Ambiguity, 459
828
American Banana Co v. United Fruits Co, 176 American Dental Association, 432 American Law Institute (ALI), 2 American Recovery and Reinvestment Act (ARRA), 628, 659 American requirements, 629 American Selling Price (ASP), 26, 33 Amounts of subsidy, 245–246 AMS, 571–572 Annex 1A Agreements, 24 “Annual and Final Commitment Levels,” 579 Annual or final bound commitments, 571 Anti-Bribery Convention, 630 Antidumping (AD), 31, 67–184 Antidumping Committee, 94 Anti-Personnel Mines Prohibition Act 1998, 16 Antiprotectionist clause, 378 Apparel, 372 Appellate Body (AB), 12, 17, 24, 67, 72, 74, 77–78, 80, 84–89, 92, 94 Applicable administrative provisions, 411 Appropriate countermeasures, 274–277 Appropriate level of protection (ALOP), 421–422, 455, 458, 466, 471–472, 478–486, 493, 498, 500 Appropriate market access opportunities, 570 Approval, 435 Arbitrary discrimination, 498 Area of low pest or disease prevalence, 491 “Are increasing,” 370 Argentina, 130–132, 157, 266, 362, 374, 522, 524, 552–553 Argentine tanning industry, 684 Arm’s-length transaction, 31 ARRA, 629 ASEAN countries, 699 Asian economic crisis, 525 Asian financial crises, 208, 334 Asian markets, 332 Asia-Pacific, 444 Asia Pacific Economic Cooperation (APEC), 63 Assessment conformity, 377, 384, 389, 410 first-party, 435 objective, 167, 689 peer, 438 qualitative, 427 quantitative, 476 retrospective, 116 risk, 471–475, 479, 482, 484 second-party, 435 third-party, 435 Association of Industrial Producers of Leather, Leather Manufactures and Related Products (ADICMA), 684 Assurance of conformity, 435 ATC, 343, 554, 607 AT&T, 190
Index
Attributes, 410, 413 Australia, 177, 201, 351, 386, 442, 475–476 biosecurity, 475–476 Australian market, 475–476 Australia Quarantine and Inspection Services (AQIS), 475 Authoritative, 680 Authorized operators, 57 Automaticity, 10 Automatic licensing, 6, 8–14 Availability cascade, 487–488 Available pertinent information, 483, 487 Available reasonable measures, 432 Avesta, 125 Baby Bells, 190 Back door mercantilism, 514 Bahrain, 35 Bali, 62 Bali Conference, 595 Bali Declaration, 311, 596 Bali Ministerial Conference, 574, 594, 602 Bali Ministerial Declaration, 591 Bali package, 18 “Base Total AMS,” 579 Basic agricultural product, 573, 580 Beggar-thy-neighbor policies, 459–460 Beijing, 122 Belgian tax system, 210 Belgium, 546 Belgium v. Commission, 218 Benchmark comparability, 498 5 percent, 77 necessity, 303, 361 qualitative, 256 quantitative, 255, 256, 479 reasonable, 443, 496 Beneficial subsidies, 664 Beneficiary, 218 Benefit, 216–219, 222, 228–230, 232–233, 278, 306 Bentham, Jeremy, 696 Berlin Council, 551 Berlin decisions, 551 Berlyn Inc. v. Gazette, 510 Best-endeavors clause, 311, 611 Best information available (BIA), 31, 114, 148, 154–160, 302–303 Best trades, 447 Beyond a reasonable doubt, 289 Bhagwati, 358 Big Deal, 208 Bilateral investment treaty (BIT), 520, 636 Bindingness of language, 417 Biosecurity Australia, 475–476 Biotechnology, 457
Index
Bird flu, 462, 489, 494 Bird influenza, 462, 489, 494 Birth defect, 129 BISD (Basic Instruments and Selected Documents), 611 BITs, 526 Black Economic Empowerment (BEE), 660 Black Sea, 407 Blair House, 554 Blaise Compaoré, 600 Blue box, 558, 573 BMW USA, 122 Body, 401–402 Boeing, 100, 245–246, 249–250, 260, 664–665, 667, 668 Boeing 787, 249 Bolivia, 35 Bombardier, 260, 275, 664–665 Bond, 113 Border Tax Adjustments (BTAs), 268 “Born, Raised, and Slaughtered in the US,” 448 “Born and Raised in Canada, Slaughtered in the US,” 448 “Born in Canada, Raised and Slaughtered in the US,” 448 Bovine spongiform encephalopathy (BSE), 456 Boxes, 557 Brandeis, Louis, 700 Brazil, 26, 85, 93, 126–127, 138, 254, 265, 274–276, 374, 522, 524, 588 Bretton Woods Institutions, 269, 601 BRIC countries, 622, 653–654 British Association for the Advancement of Science, 476 British Retail Consortium Global Standard Food, 394 British Soil Association, 393 British Steel, 227, 238 Brooke Group, 179 Brussels, 35, 183, 547 Brussels Ministerial Conference, 553 BSplc/BSES, 306 Build-Operate-Transfer (BOT), 648–649 Build-Own-Operate-Transfer (BOOT), 648–649 Burden of persuasion, 691 Bureau International des Poids et des Mesures (International Bureau of Weights and Measures), 436 Burkina Faso, 600 Bush administration, 264–265 Business confidential information (BCI), 40–41, 300 But for test, 257 Buy American Act, 627–628 “Buy American” policies, 660–661 Byrd Amendment, 140, 196 Byrd payments, 74, 140–141
829
CAC, 505 Cairns group, 471, 552, 553 Canada, 177, 219–220, 274–276, 282, 310, 413, 425, 427, 442, 516, 624 Canada–European Union Trade Agreement (CETA), 637 Canadian accession, 593 Canadian measure, 518 Cancun Mid-Term Review, 521 Cancun Ministerial Conference, 49 CAP, 187, 455, 546 Cape of Good Hope, 49 CAP Health Check, 551 Capital flight, 26 Capital-importing countries, 526–527 Capping subsidization, 541 Carbon flat rolled steel (CCFRS), 342 Cartagena Protocol on Biosafety, 457 Carter, Jimmy, 190 Carter administration, 264 Cartland, Michael, 177, 264 Cartland drafts, 177, 264 CASA, 232 Cash deposit, 113 Cash extraction, 232 Category A beef, 413–414 Category B beef, 413–414 Category C beef, 413–414 Category D beef, 413–414 Caterpillar, 383 Causality obligation, 109 Causality requirement, 312, 325 Causal link, 261, 347–348, 354, 370 Causal relationship, 232 Causation, 260 CB Test Certificates, 437 CCCN, 559 Ceiling on subsidies, 665 Central American Free Trade Agreement (CAFTA), 637 Central Bank, 679 Central governmental bodies, 439 Central government entities, 631 Central Registry of Notifications (CRN), 697 CEOs, 396 Certain enterprises, 245 Certain Member States–Large Civil Aircraft, 210 Certification, 435 first-party, 394 of goods, 393 labeling, 448–449 one international standard, one test, one, 395 of private standards, 394 second-party, 394 third-party, 394 veterinary, 494 CETA, 638
830
CFS, 597–598 Challenge procedures, 650 Changed circumstances review, 87, 123, 228 Change of corporate identity, 226 Characteristics, 410–411, 413 physical, 413, 416 product, 410, 412 Chicago Housing Authority (CHA), 629 Chicken War, 548, 549 Chile, 201, 374, 407, 522, 524 Chilean measure, 562 China, 184, 387, 405, 442, 464, 465, 524, 555, 622 car industry, 515 export trade, 620 standards, 387 Taipei, 405, 480 textile imports, 372 China Compulsory Certification (CCC), 387, 543 Chinese Protocol of Accession, 93–94, 368–370 Chirundu crossing, 57 Chrysler, 122 Churchill, 459 City of Chicago, 629 City of Wichita, 246 Civil aircraft, 669 Civil Aviation, 196 Clean Report of Findings, 37–38, 40 Clear and present danger, 108 Clearly imminent, 345 Clinton, Bill, 190–191 Clinton administration, 264–265 CNEN, 680 Code of Good Practice, 397–398, 432, 464, 465 for the Preparation, Adoption and Application of Standards by Standardizing Bodies, 402 Codex Alimentarius Commission (CAC), 389, 401, 404, 464, 466, 474, 482, 500 of the Food and Agriculture Organization, 401, 407 CODEX STAN, 407 Codling moth, 480 Coglianese, Cary, 675 Collective action, 395 Collective international schemes, 394 Collective national schemes, 394 Colombia, 35, 264, 375 Colorado group, 49 Comité Européen de Normalisation (CEN), 381, 385 Comité Européen de Normalisation Électrotechnique (CENELEC), 381, 385 Commensurate countermeasures, 248, 261, 276–277 Commercial value, 214 Commission v. Netherlands, 486–487 Committee II, 547–548 Committee on Agriculture, 19, 602 Committee on Conformity Assessment (CASCO), 434 Committee on Customs Valuation, 35, 45
Index
Committee on Food Aid under the Food Aid Convention, 599 Committee on Food Security (CFS), 597–598 Committee on Import Licensing, 19 Committee on Safeguards, 361, 368, 371, 374 Committee on Science of the US House of Representatives, 383 Committee on Subsidies and Countervailing Measures (SCM Committee), 238, 311 Committee on Trade Facilitation, 59, 61–62 Committee on Trade in Civil Aircraft, 671 Committee on Trade-Related Investment Measures (TRIMs Committee), 532 Commodity agreements, 539 Common agricultural policy (CAP), 187, 455, 546 Common elements, 497 Commonwealth Business Council, 51 Community acquis, 653 Comparability, 83 Comparability benchmark, 498 Comparable export transactions, 85, 87–88 Comparable income, 213 Comparators, 681, 688 Compartmentalization, 494 Compensatory adjustment, 635 Competition perfect, 118 Competitive dialogue, 642 Competitive negotiations, 642, 648 Competitive procedures, 647–648 Compilation of Recorded Nontariff Measures (CoRe NTM), 62 Complex goods, 648 Computed value, 31 Conditionality, 58 Conditional subsidies, 263 Conditions, 328–329 Conferred benefit, 219 Conflict, 519, 541 Conformity assessment, 377, 384, 389, 410 assurance of, 435 evaluation of, 435 Consensus, 381, 403, 404 Consistency, 423, 496, 557 Constructed price, 76, 78 Constructive remedies, 166 Consultative Group of Eighteen (CG18), 22, 515 Consultative Subcommittee for Surplus Disposal (CSSD), 589 Consumer Product Safety Association (CPSA), 380 Consumer protection, 391 Contingent protection, 73 Continuation, 129–130 Contracting Parties, 539 Contractual flexibility, 635 Control, 92, 102, 205
Index
“Control, Inspection, and Approval Procedures,” 483 Control-criterion, 204 Convention du Mètre, 436 Cook Islands, 630 Core group, 49 Cost, insurance, and freight (CIF), 30, 568 Costa Rica, 176–177, 375, 522, 615, 618 Costs administrative, 79 general, 79 standardized, 384 switching, 324 trade, 383–384 transaction, 395 Cotton, 4, 601 Cotton Sub-Committee, 601 Council for Trade in Goods (CTG), 48, 50, 358–359, 405, 529, 530, 532, 697 Councils of Ministers, 550 Countervailing duties (CVDs), 73–75, 138, 185–186, 194–195, 208, 225–228, 233, 236, 238–239, 249–250, 264, 274, 278–289, 541, 593, 594, 676 Country-specific safeguards, 323, 368 Covered agreement, 167 Covered procurement, 632 CR4, 140 Crawford Falconer, 555 Creeping protectionism, 640 Creutzfeldt-Jacob disease, 456 Crisis cartels, 266–267 Critical mass of evidence, 486 Crown Agents, 65 Cruz Azul, 160, 164 CTG, 531 Cuba, 16, 72–73, 177 Cumulation, 104 Current Total AMS, 571, 572, 579 Customized regulation, 386 Customs union (CU), 362–363 Customs valuation, 24, 26 Customs Valuation Agreement (CVA), 5, 24–36 CV, 196, 663–671 Czechoslovakia, 21, 93, 332 Dasa, 232 Daubert standard, 477, 509 De C. Grey, Rodney, 189 Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed and Net Food-Importing Developing Countries, 599 Decision on Notification Procedures, 697 Declaration Giving Effect to Provisions of Article XVI.4, 268 Declaration on Export Competition, 591 Decoupled income payments, 575 Dedicated discussions, 591
831
Deductive value, 31 Deemed waiver, 131 De facto business-to-business cooperation, 386 De facto export contingency, 271–273 De facto waiver, 612 De Guch, Karel, 137 De jure export contingency, 271–273 Delete function, 269 Delivered electricity, 214 Delphi, 212 Demanding standards, 500 Demeter Symbol, 393 De minimis thresholds, 309 De novo review, 355 Depression, 98, 252 Designated officials, 42 Design contest, 647 Determination of injury, 94–95 Deutsche Vereiningung des Gas- und Wasserfaches (DVGW), 392 Devedjian, Patrick, 550 Devedjian Report, 550 Development Assistance Committee (DAC), 602 Development support, 665 Difference in differences, 284 Dioxine, 457 Direct beneficiary, 218 Directly competitive or substitutable (DCS), 344, 422, 425, 496, 497 Director-general (DG), 698–699 Director General’s Framework Mechanism for Cotton, 602 Direct payments, 575 Direct transfer of funds, 202 DISC company, 210 Discretionary licensing, 7, 11 Discrimination arbitrary, 498 unjustifiable, 498 Discriminatory pricing, 180 Disease-free area, 491 Disguised restriction of trade, 489 Dispute, 677 Dispute settlement, 524 Dispute Settlement Body (DSB), 254 Dispute Settlement Understanding (DSU), 42, 168–169, 175, 209, 236, 259, 274, 295, 359, 373, 444, 502, 504, 505, 507, 658, 686 Distinguishing mark, 410, 413 DJAI, 23–24 DOC, 159, 171, 239–240 Document, 410–411 Doha Ministerial Conference, 34, 521 Doha Ministerial Decision, 429 Doha Ministerial Declaration, 48, 50, 311, 500, 535 Doha round, 4, 64, 310, 521 Dolphin Protection Consumer Information Act, 425
832
Dolphin safe label, 414–415, 422, 425, 448–451 Dolphin safe tuna, 414–415, 418–419, 426, 428, 447 Domestic antitrust, 391 Domestic competition law, 391 Domestic industry, 102, 281 Domestic International Sales Corporation (DISC), 210 Domestic like pro, 423 Domestic subsidies, 186, 270, 570 Domestic support schemes, 571 Dominican Republic, 373, 390, 686 Double counting, 74–75 Double level of consensus, 401 Downstream benefits, 283 Draft Agreement, 53–54, 57 DRAMs, 208, 209 Drawback schemes, 210 Dresden Agreement, 381 DSB, 258–259, 360 Dual use goods, 641 Due allowance, 84 Due process, 301, 680 Due restraint, 541, 593–594 Dumped goods, 547 Dumped imports, 96 Dumping, 67 targeted, 86–88 zero, 87 Dumping margin, 85–91, 166 Dunkel, Arthur, 553 Dunkel draft, 553–556, 555 Duopolies, 664–665 Duty to cooperate, 154 Dynamic random access memory (DRAM), 205 Dynamic use constraint, 316 Early harvest, 601 Earth Island Institute v. Hogarth, 425 Eastern Tropical Pacific Ocean, 425 Eastern Tropic Pacific (ETP), 449 EC–Asbestos, 388, 410, 412, 413, 502 EC–Bananas III, 12, 18, 388, 544, 559–560, 561, 691 EC–Bed Linen, 80, 96, 166–167, 260–261, 285, 286 EC–Certain Member States-Large Civil Aircraft, 100, 225, 229, 231–232, 244–247, 271, 272, 283, 300 EC–Commercial Vessels, 196 EC–Countervailing Duty on DRAM Chips, 279–280 EC–Countervailing Measures on DRAM Chips, 207, 209, 281, 284, 291, 298, 301–304 EC–Export Subsidies on Sugar, 219, 223, 519, 584, 585 EC–Fasteners, 84, 89, 92, 94, 101, 105, 147, 150 Echoing cases, 183–184 EC–Hormones, 467–468, 470–473, 476–478, 481, 483, 496, 497, 498, 502, 505, 506
Index
EC–IT Products, 680 Economic and Social Council in its Resolution (ECOSOC), 539–540 “Economic Development and Reconstruction,” 520 Economic environment, 315 Economic reality, 232 Economy political, 457, 458, 536 US, 628 EC–Poultry, 17, 678–679, 690, 691 EC Regulation 2171/2005, 685 EC–Salmon, 151 EC–Sardines, 388, 399, 404, 406, 409, 411, 517 EC–Seal Products, 412, 416, 419, 425–426, 438 EC–Selected Customs Matters, 687–688, 690 EC–Selected Matters, 55 EC–Tube or Pipe Fittings, 80, 95, 98, 102, 104, 110 Effect, 413 Efficiency of transparency, 700 EFTA, 637 Egypt, 481 EIB, 244–245 Electronic auction, 645 Electronic Baggage Screening Program, 629 Electronic payment, 56 Electronic procurement, 639 Electronic Working Group, 465 Electrotechnic standards, 381 Eligible domestic user, 543 Embraer, 260, 275, 664–665 Empowerment, 697 Enabling Clause, 65 Energy Charter Treaty, 526 Enquiry points, 501 Entities procuring construction services, 632 Entities procuring services, 632 Environment economic, 315 labeling, 396 management, 396 pollution, 386 programs, 578 standards, 394 subsidies, 262, 265, 267 Equitable share of the world market, 545 Equitable share of world trade, 547 Equity infusions, 667 Equivalent countermeasures, 261 Equivalent Measurement of Support (EMS), 582–583 Essential facts, 151, 170 Essential requirements, 392 Estonia, 524 ETP, 449 EurepGAP, 389 Euro-for-euro, 232 European Community (EC), 376, 474
Index
European Court of Justice (ECJ), 178, 218, 222, 392 European Economic Community (EEC), 323 European Food Safety Authority (EFSA), 456 European Free Trade Association (EFTA), 323, 381, 624 European Neighborhood Policy (ENP), 637 European Telecommunications Standards Institute (ETSI), 381, 385 European Union (EU) Antidumping Regulation, 137 Basic AD Regulation, 89 Commission, 392 Council, 112 Council Regulation, 680 Seal Regime, 412 steel industry, 227–228 EU/US Economic Initiative, 386 EU/US Positive Economic Agenda, 386 Evaluation of conformity, 435 Evidence, 141 critical mass of, 486 positive, 95, 130–131 probative and compelling, 209 relevant, 141 scientific, 481–487, 495 Evidentiary reliability, 477 Examination, 298 Ex ante, 644, 650–651 “Except,” 409 Exceptional circumstances, 151, 300 Exceptionally advantageous conditions, 647 Excess exports, 588 Excessive standardization, 500 Exchange information, 398 Exclusively, 411 Exclusive payments, 218 Executive Order 13609, 442 Executive Order 13659, 442 Ex officio reviews, 125, 127 Ex parte, 683 Expedited shipments, 56 Expensed subsidies, 256 Explanatory Note, 404, 680 Explicitly limits, 242 Export prices (EPs), 75–77, 81–88, 120, 145–146, 150, 165 Export processing zones (EPZs), 514 Exports African, 384 competition, 591 excess, 588 restraint, 216 subsidies, 270 Ex post, 644, 651 Extinction, 226 Extraction, 231–232
833
cash, 232 of subsidies, 226 Extramet, 112 Extramet jurisprudence, 112 Factual analysis, 240 Fair comparison, 82–83 Fair market value, 230 Fair trade, 364 Fair Trade Certification, 393 Fairtrade International, 393 Fair Trade Unit, 390 Fair Trade USA, 393 Falconer, Crawford, 602 Fallback method, 31–33 Farm goods, 554 Farm negotiations, 551–552 Farm subsidies, 537, 540, 551 Farm trade, 552 Fast Track Debenture Programme, 209 Features, 410, 413 Federal Acquisition Regulation (FAR), 648 Federal Rules of Evidence, 509–510 Feed in tariffs (FIT), 214–215, 219–220, 222 Fiat Cinquecento, 100 Fictitious prices, 92 Fielding, William S., 176 Fifth Triennial Review, 398 Fill rates, 18 Financial contribution, 215–219, 224, 233, 306 Financial crisis, 311, 332, 698 Russian, 334 “Fire blight and apple leaf-curling midge” (ALCM), 461 First come, first served approach, 19 First mover’s advantage, 401 First-party assessment, 435 First-party certification, 394 Fishbowl transparency, 443, 675 Fisheries management, 311 5 percent benchmark, 77 Fixed external reference price, 580–581 FLO-CERT, 393 Food Agricultural Organization (FAO), 500, 574–575, 589, 597–598, 601 Food aid, 575 Food Aid Convention, 590 Food and Agriculture Organization (FAO), 465 Food safety, 495 Food security, 574–575, 594, 595 Food Standards Australia/New Zealand (FSANZ), 386–387 Foot-and-mouth disease, 457 Ford, 122 Fordney, Joseph, 176 Foreign direct investment (FDI), 524, 525, 526 Foreign exchange contracts (FOREX), 40
834
Foreign Sales Corporation (FSC), 211–213, 219, 276 Former Yugoslavian Republic of Macedonia (FYROM), 572 “Fortress Europe,” 547 Four-firm concentration (CR4), 140 Fourth Review, 502 Fourth Triennial Review, 431, 441 Fra.Bo’s, 392 Framework for Enhancing Transatlantic Economic Integration, 386 Framework Group, 22 Freely granted, 8 Free-on-board (FOB), 30, 528 Free rider problem, 140 Free riding, 386 Free trade agreement (FTA), 125 Free trade area (FTA), 442, 564 Free trade association (FTA), 362 French Parliament, 550 Frequently asked questions, 683 “Friends of Fish,” 311 Fundamental instrument, 37 G-20, 698–699 Gabon, 35 GATS Rules Working Party, 632 General Accountability Office (GAO), 629 General Agreement on Tariffs and Trade (GATT), 1–4, 6, 10, 12 Article III of, 54 Article I of, 22 Article VII.2(g) of, 32 Article VIII of, 6, 47, 50–51, 54, 63 Article VII of, 24–25, 27–28, 32, 36, 42, 50 Article VII.5 of, 25 Article VI of, 67, 72–73, 75 Article V of, 47, 50, 63 Article XIII.3(a) of, 6 Article XI of, 6–7, 22, 24 Article X of, 47, 50, 52, 58 Article X.3 of, 65 Article XV of, 6 Article XXI of, 15, 22–23, 35 Article XX of, 11, 22–23, 35, 63 General Agreement on Trade in Services (GATS), 200, 397, 494, 532 Annex on Financial Services, 204 General application, 678, 679 General costs, 79 General Council, 45, 62, 535, 600–601 General exceptions, 11, 641 General Interpretative Note, 196, 318, 388, 460, 518, 519, 538, 609, 668 General Introductory Commentary, 30 Generally accepted accounting principles (GAAP), 78 Generally available support program, 244
Index
General Motors, 122 General Notes, 641 “General Principles Governing Commodity Agreements,” 540 “General Provision,” 329 General purpose loans, 666–667 General services, 574 Genetically modified organisms (GMOs), 460, 482 Geneva, 314 Geneva Draft, 187 Genuine and substantial relationship, 347, 348 Geographic product market, 254 George H. W. Bush administration, 190, 264 Gerald Metals Inc., 350 German market, 392 Germany, 393 Glaring omission, 291 GLOBALCAP, 389 Global Food Safety Initiative (GFSI), 394, 396 Global institutions, 385 Global trade, 384 Global Trade Alert, 699 Global value chains (GVCs), 50, 384–385, 515, 538, 610 Glory days, 549 Go-Between, The, 3 Good cause, 150, 300 Good governance, 630 Good regulatory practice (GRP), 405, 441–442 Goods certification of, 393 complex, 648 dual use, 641 dumped, 547 farm, 554 identical, 31, 33 perishable, 56 scheduled, 586 similar, 31, 33 standardized, 380 unscheduled, 586 Good veterinary practices, 475 Gordian knot, 554 Governmentally determined threshold, 565–566 Government/governance, 203 good, 630 local, 432–433 practice, 204–205 Government of Ontario, 222 Government Procurement Agreement (GPA), 50, 518, 538, 621, 623–626, 629, 632–642 Great Depression, 311, 628 Greek Goddess Demeter, 393 Green box, 558 Green-box payments, 573 Green box schemes, 578 Greenhouse gas measurement, 396
Index
Green subsidies, 193 Green technology, 695–696 Grenadines, 389–391, 396, 463 Gross domestic product (GDP), 63, 329, 600 Gross national income (GNI), 236 Growth rates, 611 GRP, 446 Guatemala, 160, 164, 564 Guidelines and Procedures for the Negotiations on Trade in Services, 632 Guidelines on Amortization and Depreciation, 238 Guidelines on the Development and Use of a National Valuation Database as a Risk Assessment Tool, 32 Haberler report, 536 Harmonization, 385–386, 433, 466 of technical regulations, 389 Harmonization Work Programme (HWP), 639 Harmonized System (HS), 613, 669 Hartley, L. P., 3 Hatters’ Fur Sales, 314–315, 331 Havana Charter, 187, 322, 520, 540 Havana Conference, 73 Havelaar, Max, 393 Herfindahl Index, 74, 395 Higher regulatory standards, 423 High-Level Panel of Experts on Food Security and Nutrition (HLPE), 597–598 Highly pathogenic notifiable avian influenza (HPNAI), 469 Highly Sensitive Business Information (HSBI), 300 High policy track, 173 Holmes, Jr., Oliver Wendell, 108, 176 Homeland Security, 629 Homogeneity, 385 Homogeneous products, 192 Honda USA, 122 Honduras, 35, 686 Honest broker, 154 Hong Kong, 177, 524 Hong Kong Ministerial Decision, 531 Hong Kong Ministerial Declaration, 311, 529, 591, 632 Hoover, Herbert, 627–628 Hormone administration, 474–475 Hormone-treated beef, 467 Housing and Urban Development, 629 Howe, 271 HS Convention, 558–559 Hynix, 207–208, 279–280 Hyundai Electronics, 207–208 IC, 413 Identical goods, 31, 33 Identifiable group of products, 411 Identifiable risk, 472
835
Identity, 685 change of corporate, 226 IECEE-CB Scheme (the IEC System for Conformity Assessment for Electrotechnical Equipment and Components), 437 Ignorance, 459 Illegal subsidies, 268, 519 Illustrative List, 269, 513–514, 518, 527, 528, 529, 531, 583 of Export Subsidies, 213 Impartial, 687–688 Impartiality, 403 Impediment, 252–253 Import alerts, 54 Import licensing, 7 Import Licensing Agreement (ILA), 5–24 Imports dumped, 96 massive dumped, 117 subsidized, 285 textile, 372 Improbable risk, 473 Inappropriate international standard, 406 Inchcape, 37 Inchon International Airport, 658 Income comparable, 213 safety net, 577 Inconclusiveness, 487 In country prices, 238 Incremental value, 232 Independent Entity, 42–44 Independent Review Entity, 38–39 Independent trade expert, 43 India, 26, 167, 405, 462, 469, 480, 495, 504, 517, 555, 595–596 Indicative prices, 33 Indirect beneficiary, 218 Indirect government support, 666 Individual schemes, 394 Individual treatment (IT), 89 Indonesia, 37–38, 429 Indonesian subsidization, 252–253 Industries Preservation Act, 176 Industry, 242 Industry producing the like product, 99 Ineffective international standard, 406 Ineffective or inappropriate, 408 Inefficient markets, 221 Influence, 92 Information, 383–384 available pertinent, 483, 487 exchange, 398 necessary, 157–158 positive, 306 relevance of, 142 second best, 154
836
Information (cont.) self-incriminating, 409, 530 timely, 401 verified, 699 Information and communication technology (ICT), 394 Information Management System (IMS), 443 Information technology (IT), 639 Initial triers of facts, 209 Injury, 250, 278 to competition, 73 to competitors, 73 determination of, 94–95 major cause of, 325 material, 94, 280, 288, 340, 369, 542 serious, 340, 345, 369 substantial cause of, 325, 354 threat of, 94, 107, 286–288, 340, 345–346 threat of serious, 345 Inspection, 36–40, 39–40, 435 Institution, 401–402, 405, 468, 494 Insufficiency, 486, 487 Insurance policy, 375 Integrated Database (IDB), 697–698 Inter-American Convention Against Corruption, 630 Interested parties, 136, 152–153, 160, 301 Interim, 87 International Accounting Standards Board (IASB), 400 International Agency for Research on Cancer, 505 International Centre for Trade and Sustainable Development (ICTSD), 446 International Chamber of Commerce (ICC), 43, 50 International Coffee Organization (ICO), 393 International cooperation, 500 International Cotton Advisory Committee (ICAC), 600 International Electrotechnical Commission (IEC), 381, 400 International Federation of Inspection Agencies (IFIA), 37, 43 International Laboratory Accreditation Cooperation (ILAC), 438 International Law Commission (ILC), 276 International Monetary Fund (IMF), 6, 51, 510, 633, 653 International Organization for Standardization (ISO), 381, 389 International Plant Protection Congress (IPPC), 389, 401, 464, 482, 500 International Plant Protection Convention (IPPC), 466 International schemes, collective, 394 International Social and Environmental Accreditation and Labelling Alliance (ISEAL), 396 International standard, 41, 465
Index
inappropriate, 406 ineffective, 406 necessary, 378 science-based, 485 International standardizing bodies, 433 International Standard Setting Bodies, 389 International Telecommunication Union (ITU), 381 International trade, 462, 524 International Trade Centre (ITC), 61, 396, 601, 653 International Trade Organization (ITO), 3, 72 International Wheat Arrangement, 552 Interpretative Note, 28, 322 Investigating authorities (IAs), 75–88, 90–94, 205, 318, 331 Investigation, 349 original, 87 period of, 76, 79, 145, 161–166, 175, 304 Investment aids, 578 foreign direct, 524, 525, 526 liberalization, 524, 525 protection, 524 qualifying, 246 trade and, 522 vertical, 533 Invoice price, 27–28 IPCC, 505 IRB, 246–247 ISO, 385, 394, 395, 396, 399, 400, 403, 404, 432 Policy Development Committee on Conformity Assessment (ISO/CASCO), 395–396 standards, 395–396 ISO/IEC Guide, 404 ISO/IEC Guide 2, 434, 436, 438 ISONET, 433 ITO Charter, 186 Jamaica, 35 Japan, 329, 481, 504–505, 514, 516, 522, 552, 553 Japanese Ministry of Transportation, 658 JECFA (Joint FAO/WHO Expert Committee on Food Additives), 474, 486, 507 Judicial decisions, 679 July package, 49 Kennedy round, 4 Agreement on Antidumping (AD), 72–73, 177, 188 Customs Valuation Agreement (CVA), 26 Kenya, 57 KEXIM, 204–205 Kinmen, 480 Known exporter, 118 Known factors, 109, 174, 289 Korea, 16, 514, 522, 552, 570, 658
Index
Korean chaebol, 208 Korean First Bank (KFB), 208 Kuwait, 35 Kyoto Convention, 55 Labeling, 379, 416, 432 certification, 448–449 dolphin safe, 414–415, 422, 425, 448–451 environmental, 396 produced with renewable energy, 424 voluntary, 414 Laboratory risk, 473 Latin America, 374–375, 444, 553, 562 Latvia, 524 Lawful application of safeguards, 327 Law of constant protection, 358 Law of one price, 118 Least developed countries (LDCs), 48, 58–62, 285, 309, 376, 502, 529–531, 568, 582, 586, 587, 598, 693 Legal obligation, 498 Legal power, 397, 463 Legitimacy, 418 Legitimate objectives, 189, 420 Legitimate science, 477 Less developed countries (LDCs), 443 Lesser duty rule, 166, 293 Less favorable treatment (LFT), 387, 423, 424, 427, 447, 449, 488 Leutwiler report, 323 Level-playing-field, 181–182 Levels of protection, 496–497 Liberalization of farm trade, 546–547 investment, 524, 525 procurement, 629 trade, 440, 536, 560, 603, 626, 697 License to subsidize, 187 Licensing elements, 7 Likeness, 451–452 Like or directly competitive products, 343 Like product, 78, 99, 255, 282–283, 342–343, 424, 426, 449 industry producing the, 99 Limited tendering, 646–647 Linux operating system, 396 Liquid crystal display (LCD), 685 Lithuania, 524 “Little Buy American Act,” 628 Loan guarantee, 202 Local content requirements, 531 Local government, 432–433 Local government bodies, 439 Lomé Convention, 387 London Conference, 25, 72, 186, 268, 314 London Draft, 186, 314, 674 Article 17 of, 72
837
Long-Term Arrangement (LTA), 609 Low market concentration, 395 Low pathogenicity notifiable avian influenza (LPNAI), 469, 489, 492 Low volume of sales, 77, 80 LTFV (less than fair value), 350 Luxembourg, 546 Maciel, George A., 22 Macro approach, 384 MacSharry reforms, 551 Mad cow disease, 456–457 Major cause of injury, 325 Major proportion, 99, 101, 173, 344 Malaba crossing, 57 Mandelson, Peter, 137 Manhattan, 426 “March Statement,” 615 Market Asian, 332 Australian, 475–476 geographic product, 254 German, 392 inefficient, 221 power, 392 price support, 557, 580 Russian, 332 segmentation, 395 tuna, 414–415 value, 223, 228–229 vegetable, 496 world, 253–254, 255, 545 Market economy test (MET), 89 Mark/marking, 416, 432 distinguishing, 410, 413 Marshalling, 171 Marshall Plan, 187 Massive dumped imports, 117 Material injury, 94, 280, 288, 340, 369, 542 Material retardation, 94 Matsu, 480 Mavericks, 327, 361 Max Havelaar standard, 394 Maximum price, 562 McKinsey, 227 McPhail, Hugh, 177 McPhail drafts I, II, and III, 177 Measurement, 482 Mecca of standards, 500 Mediterranean Sea, 407 Mercedes Benz USA, 122 Metrology, 436 Mexican peso devaluation of 1994–1995, 525 Mexican tuna, 447 Mexico, 160, 375, 413, 427, 442, 542 Micro approach, 384 Microsoft, 397
838
Microsoft Windows, 389 Middle East, 444 Minimum access opportunities, 570, 592 Minimum access requirements, 561–562 Minimum export price, 114 Minimum import price, 565, 566–567 Ministerial Conference, 405, 549, 601, 698 of the GATT CONTRACTING PARTIES, 22, 45, 62 Ministerial Decision, 405 Ministerial Declaration, 22, 310 on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI, 279 Ministry of Agriculture, Forestry and Fisheries, 390 Ministry of Commerce of the People’s Republic of China (MOFCOM), 122 Mitsubishi USA, 122 Modalities, 555–556, 602 for the Establishment of Specific Binding Commitments Under the Reform Programme, 555, 561 principle, 555 Model Bilateral Agreement on Mutual Administrative Assistance in Customs Matters, 34 Model Law, 623 Modifications, 634 MOFCOM (Ministry of Commerce), 97, 153 Monitoring, 124 Montreal Midterm Review, 553 Moral legitimacy, 552 Morocco, 35 Most favored nation (MFN), 4, 12, 21, 41, 213, 376, 431, 433, 438, 445, 524, 563, 593, 625, 632 Moving target, 470 “MRA+” agreements, 431, 436, 482 MRM, 413 MRM hunts, 426 Multifiber Arrangement (MFA), 96, 607–611, 618 Multilateral agreement, 526 Multilateral Agreement on Investment (MAI), 523, 524–526 Multilateral Trade Agreement, 36, 538, 540–541 Multilateral trading system, 520 Multinational enterprises (MNEs), 514, 515 Multi-use list, 643 Mutual recognition agreement (MRA), 386, 387, 431, 442, 482 NAI-related risk, 490 Nairobi Ministerial Conference, 602 Narrow scope of negotiations, 516 National defence, 640–641 National schemes, 394 National security, 640 National standards bodies (NSB), 401 National standard-setting institutions, 381
Index
National Technology Transfer and Advancement Act, 382, 391 National treatment (NT), 433, 524 National Wool Act of 1954, 351 Natural disasters, 577–578 Nature’s Choice, 394 Necessary information, 157–158 Necessary international standards, 378 Necessity, 423, 493–494 Necessity benchmark, 303, 361 Necessity obligation, 450–452 Necessity requirement, 486, 492 Negligible volume, 285 Negotiating Group, 553 on Agriculture, 457, 602 on Market Access, 555 on Rules, 310 Negotiations competitive, 642, 648 farm, 551–552 narrow scope of, 516 tariff, 450 Netherlands, 548, 685 Netting back, 84 Network externalities, 380 Nevis, 78 New Deal, 187, 189, 311, 628 New International Economic Order (NIEO), 21, 514–515 New restrictions, 615 New shipments, 89 New shipper reviews, 87 New shippers, 91 New York Conference, 314 New Zealand, 16, 73, 177, 351, 386, 387, 442, 461, 465, 475–476, 481 Nicaragua, 35 Nippon Steel Corporation (NSC), 159 Nixon, Richard, 609 NMDC (National Mineral Development Corporation), 206 No inflexible rule, 230 Nonactionable subsidies, 247–248, 267 Nonattribution, 109, 312, 348, 351 Non-automatic licensing, 6, 14–18 Non Clean Report of Findings, 37 Nondiscrimination, 430, 445–446 necessity and, 452–453, 488 tariff concessions, 450 Non-exempt direct payments, 557, 579, 580 Non-exempt measures, 581 Nonfarm lobbies, 550–551 Nongovernmental body, 397, 433, 439 Nongovernmental entities, 463, 465 Nongovernmental organization (NGO), 393, 442, 446, 523, 525, 699 Nongovernmental standardizing bodies, 397
Index
Non liquet, 236 Nonmarket economies (NMEs), 75, 78, 89, 92–94 Non-science, 477 Nontariff barrier (NTB), 36, 38, 378, 549 Nonviolation complaints (NVCs), 186, 593 Noor, Muhamad, 49 Nordic countries, 458 Nordics, 471 Normal safeguards, 368 Normal value (NV), 75–78, 81–87, 120, 145–146, 149–150, 158, 165, 262 North, 384, 607 North America, 444 North American Free Trade Agreement (NAFTA), 362, 525, 526, 624 North Atlantic Ocean, 407 “North–South” divide, 550 North Western Hemisphere, 607 Norway, 78, 323, 425, 650, 655–656 Norwegian Public Roads Administration, 655 No taxation without representation, 525 Notice of intended procurement, 644–645 Notifiable avian influenza (NAI), 469 Notification Submission System (NSS), 443, 502 Not unreasonable standard, 172 NTB, 389 Nuctech, 184 Nuisance suits, 142 Nullification or impairment, 250 NVC, 594 Obama Administration, 443, 447 Objectives assessment, 167, 689 criteria, 648 examination, 95–97, 298 legitimate, 189, 420 risk, 487 Obligation necessity, 450–452 transparency, 478 One international standard, one test, one certificate, 395 One size fits all, 660 One-stop border post (OSBP), 57 One-stop shops, 675, 676–677 Ontario, 214–215, 219 OPA, 214–215 Opel, 100 “Openness,” 402 Open tendering, 645–646 Operation and Implementation of the TBT Agreement, 441 Operation of the Provisional Article XVI, 201 Opportunities minimum access, 570, 592 Ordinary course of trade, 28, 76–77
839
Ordinary customs duties (OCDs), 50, 64 Organisation International des Epizooties (OIE), 389, 462, 464, 466, 470, 500, 505 Terrestrial Code, 495 Organisation of Economic Cooperation and Development (OECD), 21, 61, 266, 383, 440, 446, 523–524, 525, 538, 572–573, 610, 622, 630, 653 Investment Committee, 523 Organization, 401–402 Organization Internationale des Epizooties (OIE), 401 Original development, 647 Original investigations, 87 Other duties and charges (ODCs), 50 Other factors, 291, 342, 351–352 Other non-exempt policies, 580 Others’ duty, 120 Other similar measures, 326 Otherwise due, 210 Out of country prices, 238 Outsiders, 391 Overinvoicing, 37 “Overview Document,” 695 Pacific Ocean, 407, 414 Packaging, 379, 416, 432 Pakistan, 616 Palestine, 630 Palgrave Dictionary of Political Economy, 200–201 Palookaville, 427 Panama, 176–177, 373 Panel on Argentina–Ceramic Tiles, 147, 150, 152, 156 Panel on Argentina–Footwear, 67, 328, 334, 342, 343, 348, 355, 362–363 Panel on Argentina–Hides and Leather, 682, 683–684, 686, 688, 690 Panel on Argentina–Import Measures, 23 Panel on Argentina–Poultry Antidumping Duties, 101, 113–114, 143–144, 146, 157, 162, 165, 166 Panel on Argentina–Preserved Peaches, 334, 337, 345, 355 Panel on Australia–Ammonium Sulfate, 191, 201 Panel on Australia–Apples, 475–476, 477, 493, 494, 499, 508 Panel on Australia–Automotive Leather II, 175, 271, 272 Panel on Australia–Glacé Cherries, 282 Panel on Australia–Salmon, 471, 472, 479, 488, 489, 490, 498, 505 Panel on Brazil–Aircraft, 269, 274 Panel on Brazil–EEC Milk, 138 Panel on Canada–Aircraft, 216, 218, 271, 274 Panel on Canada–Aircraft Credits and Guarantees, 276
840
Panel on Canada–Autos, 213, 517 Panel on Canada–Dairy, 219, 223, 542, 585, 593 Panel on Canada–FIRA, 516, 520–521 Panel on Canada–Renewable Energy, 202, 214, 219, 223, 262, 266, 273, 312, 519, 624 Panel on Canada–US Regulatory Cooperation Council, 386 Panel on Chile–Price Band, 562–565, 566 Panel on China–Autos, 87, 122, 152, 155 Panel on China–Broiler Products, 79, 152, 153 Panel on China–GOES, 97, 99, 152, 215, 258, 289, 297, 300, 301–303 Panel on China–HP-SSST, 97, 113, 122, 147, 148, 150, 151, 152 Panel on China–Maize, 368 Panel on China–Raw Materials Panel on China–X Ray Equipment, 99, 100 Panel on Colombia–Ports of Entry, 24 Panel on Colombia–Ports of Entry, 33 Panel on Dominican Republic–Importation and Sale of Cigarettes, 679, 686 Panel on Dominican Republic–Safeguard Measures, 373 Panel on EC and Certain Member States–Large Civil Aircraft, 248 Panel on EC–Approval and Marketing of Biotech Products, 462 Panel on EC–Bed Linen, 79, 80–81, 86, 167, 170 Panel on EC–Commercial Vessels, 625 Panel on EC–Countervailing Measures on DRAM Chips, 154, 205, 208, 216, 233, 236, 281, 289–290, 291 Panel on EC–Countervailing Measures on DRAM Chips, 148 Panel on EC–Fasteners, 149–150 Panel on EC–Hormones, 470, 479 Panel on EC–Salmon, 80, 90 Panel on EC–Seal Products, 419 Panel on EC–Selected Customs Matters, 685, 689 Panel on EC–Tube of Pipe Fittings, 84–85, 103, 126–127, 161, 163, 165, 166, 167, 170 Panel on EEC–Cotton Yarn, 77, 96 Panel on EEC–Oilseeds, 218 Panel on EEC–Oilseeds I, 250 Panel on Egypt–Steel Rebar, 83, 103, 158 Panel on EU–China Regulatory Cooperation Framework, 387 Panel on EU–Footwear, 78, 90, 93, 105, 132 Panel on France–Income Tax and Netherlands– Income Tax, 210 Panel on Guatemala–Cement II, 143–144, 145, 146, 148, 149, 157, 159, 162, 164, 174 Panel on Hatters’ Fur Sales, 333 Panel on HP-SSST, 85, 98 Panel on India–Agricultural Products, 406, 420, 462, 468–469, 470–471, 472, 479, 480, 489–490, 491, 492, 494, 495, 501–502, 504
Index
Panel on India–Autos, 517, 528, 529 Panel on Indonesia–Autos, 255, 256, 282, 517, 519, 528, 531 Panel on Indonesia–Dextrose Monohydrate, 368 Panel on Japan–Agricultural Products I, 504–505 Panel on Japan–Agricultural Products II, 484–485, 501, 505 Panel on Japan–Alcoholic Beverages II and Italian–Agricultural Machinery, 450 Panel on Japan–Apples, 475, 476, 480, 481, 485, 511 Panel on Japan–DRAMs, 244 Panel on Japan–Procurement of a Navigation Satellite, 658 Panel on Japan–Semiconductors, 39, 208, 324, 396, 398–399 Panel on Korea–Certain Paper, 91–92, 148, 149, 156, 157, 158, 159, 160 Panel on Korea–Commercial Vessels, 204, 206, 250, 255, 257, 267 Panel on Korea–Dairy, 341, 365, 366, 367 Panel on Korea–Procurement, 658–659 Panel on Korea–Various Measures on Beef, 581 Panel on Mexico–Antidumping Measures on Rice, 90, 113, 119, 123, 126, 132, 155, 160, 161, 162, 163–165 Panel on Mexico–Corn Syrup, 106, 108, 113, 141, 287 Panel on Mexico–Olive Oil, 304, 541, 542 Panel on Mexico–Stainless Steel, 272 Panel on Mexico–Steel Pipes and Tubes, 145, 146, 150, 160, 164 Panel on Norway–Textiles, 322, 323 Panel on Norway–Trondheim Roll Ring, 654–655 Panel on Peru–Agricultural Products, 563, 566 Panel on Thailand–Cigarettes, 28, 33–34 Panel on Thailand–H-Beams, 80, 141 Panel on Turkey–Rice, 18 Panel on Turkey–Textiles, 613, 619 Panel on Ukraine–Passenger Cars, 345, 358 Panel on Underwear, 612, 614–615 Panel on US Agricultural Adjustment Act, 546 Panel on US Antidumping Act, 81 Panel on US–Antidumping and Countervailing Duties, 74–75, 206, 207, 236, 242, 286 Panel on US–Antidumping Measures on OCTG, 126, 127, 133, 134 Panel on US–Canadian Pork, 282 Panel on US–Carbon Steel, 128, 132, 135, 206, 210, 214, 237, 286, 302–303, 307–308, 308–309 Panel on US–Clove Cigarettes, 388, 418, 424, 425, 427, 429, 440 Panel on US Code of Federal Regulations, 425 Panel on US–Continued Zeroing, 172 Panel on US–COOL, 418, 421–422, 427–428, 447, 448, 679–680 Panel on US–Corrosion-Resistant Steel Sunset Review, 129, 130, 132, 133, 135, 136
Index
Panel on US–Cotton Yarn, 343–344, 373, 616, 617 Panel on US–Countervailing and Antidumping Measures, 681, 682 Panel on US–Countervailing Duty Investigation on DRAMs, 205, 207–208, 216, 279, 284–285, 291, 298 Panel on US–Countervailing Measures, 216, 238 Panel on US–Countervailing Measures on Certain EC Products, 228–230, 306 Panel on US Court of Appeals for the Federal Circuit (CAFC), 350 Panel on US–DISC, 210 Panel on US–DRAMS, 126–127, 147 Panel on US–DRAMSheld, 127 Panel on US–Export Restraints, 21, 203, 216 Panel on US–FSC, 210–213, 219, 270, 276 Panel on US–Gambling, 451 Panel on US–Gasoline, 168, 418 Panel on US–Hot-Rolled Steel, 77, 82, 95, 103, 110, 117, 131, 154, 159, 162, 163, 165, 167, 170, 172, 298, 355 Panel on US–Japan VER on Semiconductors, 324–325 Panel on US–Lamb, 110, 171, 334, 340–341, 343, 344, 345, 347, 352, 354, 371, 373 Panel on US–Large Civil Aircraft, 259, 290 Panel on US–Large Civil Aircraft, 249, 253, 283 Panel on US–Lead and Bismuth I, 238, 239 Panel on US–Lead and Bismuth II, 228, 305, 310 Panel on US–Lead and Bismuth II, 228 Panel on US–Line Pipe, 72, 327, 346, 355, 357, 367, 374 Panel on US–Massachusetts State Law Prohibiting Contracts with Firms Doing Business with or in Myanmar, 658 Panel on US–Measures Affecting Trade in Large Civil Aircraft, 243, 245 Panel on US–Mexico Agreement, 329 Panel on US–Mexico Reciprocal Trade Agreement, 313 Panel on US–Norwegian Salmon, 143, 296 Panel on US–OCTG Sunset Reviews, 112, 130–132, 131, 133, 136 Panel on US Office of Marine Conservation, 682 Panel on US–Offset Act (Byrd Amendment), 74, 114, 139, 250, 296 Panel on US–Poultry, 499 Panel on US–Shrimp, 452, 682 Panel on US–Shrimp II, 125, 134, 137 Panel on US–Softwood Lumber III, 213, 226, 234, 283, 292, 294 Panel on US–Softwood Lumber IV, 203, 213, 226, 234, 242, 243, 247, 280, 283 Panel on US–Softwood Lumber V, 79–80, 83, 143, 144, 145, 171, 287, 291 Panel on US–Softwood Lumber VI, 171, 286
841
Panel on US–Softwood Lumber VI, 105–108, 168, 286, 287–288, 310 Panel on US–Stainless Steel, 81–82, 85 Panel on US–Steel Plate, 156, 157 Panel on US–Steel Safeguards, 332, 333–334, 335–336, 338, 339, 356, 360, 362, 365, 374 Panel on US–Suspended Concession, 474, 476, 477, 485, 506–507, 508–509 Panel on US–Swedish Steel Plate, 124, 125, 128 Panel on US–Tuna I, 413 Panel on US–Tuna II, 388, 401, 403, 404, 405, 411, 414, 418, 419, 421, 422, 425, 426, 427, 428, 448 Panel on US–Tyres, 111, 369, 370, 371 Panel on US–Underwear, 680 Panel on US–Upland Cotton, 98, 241, 242, 250, 253, 254, 255, 256, 257–258, 260, 267, 276–277, 588, 590, 591 Panel on US–Wheat Gluten, 341, 347–349, 354–356, 359, 362, 364–366, 367 Panel on US–Wine and Grape Products, 282 Panoptes, 696 Panopticon, 696 Parallelism, 360, 362 Pareto superior outcome, 314 Particular market situation, 77 Pass through, 224–226, 312, 571 Pass through jurisprudence, 218 Payments, 223–224, 585 Byrd, 74, 140–141 decoupled income, 575 direct, 575 electronic, 56 exclusive, 218 green-box, 573 non-exempt direct, 557, 579, 580 production flexibility contract, 576 royalty, 666 Step 2, 542 subsidies and, 585 user marketing, 543 PDF, 396 Péchiney, 112 Peer assessment, 438 Penghu, 480 Perfect competition, 118 Period of investigation (POI), 76, 79, 145, 161–166, 175, 304 Perishable goods, 56 Permanent Group of Experts (PGE), 272, 311–312 Permissible interpretations, 168 Permitted subsidies, 263 Peru, 375, 406–409, 564 Pest-free area, 491 PETPA (Peru Trade Promotion Agreement), 564 Philippines, 570 Philosophies, 523 Physical characteristics, 413, 416
842
Plan B, 314 Plea bargaining, 54 Plurilateral agreements, 621, 631 Poland, 359 Political economy, 457, 458, 536 Political Order and Political Decay, 3 Portuguese Code of Criminal Procedure, 509 Positive evidence, 95, 130–131 Positive information, 306 “Possible Actions for the SPS Committee Regarding SPS-Related Private Standards,” 464 Postclearance audit, 56 Potential effects, 473 Power legal, 397, 463 market, 392 Preamble to the TBT Agreement, 445 Prearrival processing, 56 Prebisch-Singer thesis, 537 Precautionary principle, 486 Predatory prices, 180 Predatory subsidies, 193 Predominance, 237, 238 Predominant staples, 568, 570 Predominant use, 245 Preferential trade agreement (PTA), 4, 360–363, 386, 446, 520, 527, 624, 637–638, 638–639 Preferential trade agreement (PTA) Korea, 383 Prejudice, serious, 250–251, 256, 260, 267 “Preparation, Adoption, and Application of Technical Regulations by Central Government Bodies,” 426 Pre-selection system, 161 Preserved sardines, 412 Preshipment inspection (PSI), 5, 36–46 Preshipment inspection (PSI) Agreement, 36–46, 65 Prevailing market conditions, 217, 234 Price band system (PBS), 562–563, 564 Price/pricing administered, 581 charged by the related company (CMI), 157–158 comparability, 83 constructed, 76, 78 in country, 238 depression, 96, 98, 254–256 differential, 178 discriminatory, 180 effects, 95, 252 export, 75–77, 81–88, 120, 145–146, 150, 165 fictitious, 92 fixed external reference, 580–581 indicative, 33 invoice, 27–28 law of one, 118 maximum, 562 minimum export, 114 minimum import, 565, 566–567 out of country, 238
Index
predatory, 180 reference, 562 RES, 222 significant, 256 support, 216 suppression, 96, 98, 254–256 surveys, 679 third-country, 89 undercutting, 96, 254 undertakings, 166 unfair, 177, 184 world, 564 Price range system (PRS), 562 Principles, 540, 553, 680 generally accepted accounting, 78 modalities, 555 precautionary, 486 “Principles of Surplus Disposal and Consultative Obligations,” 589 Private investor, 204, 217 Private standardization, 382, 393, 464 certification of, 394 Probability, 473–474 Probable risk, 473 Probative and compelling evidence, 209 Procedural requirement, 150 Processes and production methods (PPMs), 412–413, 416 Procurement, 631 covered, 632 electronic, 639 liberalization, 629 methods, 641–642 Produced with renewable energy label, 424 Producer retirement, 578 Producer Subsidy Equivalent (PSE), 572 Producer Support Estimate (PSE), 573 Product agricultural, 546 basic agricultural, 573, 580 categories, 387 characteristics, 410, 412 homogeneous, 192 identifiable group of, 411 like or directly competitive, 343 such, 322 “Product Coverage,” 669 Production flexibility contract payments, 576 Production-limiting programs, 573 Production support, 665 “Product of Canada, US,” 448 Product of Country X, the US, 413–414 Prohibited subsidies, 248, 263, 267–268 Proportionality requirement, 487 Proposed Countervailing Duty Regulations, 240 Protectionism consumer, 391
Index
contingent, 73 creeping, 640 levels of, 496–497 Protocol of Accession, 233, 622 Protocol of Amendment, 623 Prusa, 88 Public body, 203–207 Public entity, 203–204 Public interest, 324 Public Procurement and Management of Public Finances, 630 Public Procurement Bill of India, 624 Public standard, 382 Punitive damages, 276 Punta del Este, 516 Pyrrhic victory, 327 Pythia oracle, 212–213 Qualified supplier, 646 Qualifying investment, 246 Qualitative assessment, 427 Qualitative benchmark, 256 Qualitative element, 40 Qualities, 410, 413 Quantitative assessment, 476 Quantitative benchmark, 255, 256, 479 Quantitative element, 40 Quantitative restriction (QR), 7, 14, 181, 326, 330, 360–363, 535, 544, 546, 610, 616 Quantity effects, 95 Questionnaire, 147 Questionnaire on Import Licensing Procedures, 20 Quota modulation, 361 Rapid Alert System for Nonfood Dangerous Products (RAPEX), 387 Rationalization of domestic policies, 378, 379 Reagan, Ronald, 189–190 Reagan administration, 264 Reaganomics, 189 Real-life risk, 473 Reallocation mechanism, 19 Real risk, 487 Reasonable benchmark, 443, 496 Reasonable interval, 429 Reasonableness standard, 82, 289 Reasonable opportunity, 29 Reasonable period of time, 125 Reasonable proximity, 214 Reasoned explanation, 334 Reasoned transparency, 443, 675 Reciprocity, 637 Recognition agreements, 431, 446 Recognition plus, 431 “Recommendation Concerning the Periods of Data Collection for Antidumping Investigations” (POI Recommendation), 161–164
843
Rectifications, 634 Recurrence, 129–130 Recurring contracts, 633 Reference price, 562 “Reform Programme,” 555, 594, 598, 600, 602, 605 Regional aid, 262 Regional assistance, 578 Regional schemes, 526 Regional standardizing bodies, 433 Registration, 435, 436 Regulations customized, 386 harmonization of technical, 389 technical, 377, 397, 409–417, 451 Regulatory cooperation, 386, 442 Regulatory equivalence, 385 Regulatory Work Plans, 442 Related, 281 Relationship causal, 232 genuine and substantial, 347, 348 Relevance of information, 142 Relevant evidence, 141 Reliability, 477 Remedies, constructive, 166 Repeat players, 643–644 Report of Investigation and Statement of Serious Damage or Actual Threat Thereof: Combed Cotton Yarn for Sale: Category 301, 616 Report of the Working Party on China’s Accession, 368, 371, 372 Representative volume of export sales, 126 Republic of Korea, 16 Requirements American, 629 causality, 312, 325 consistency, 496 minimum access, 561–562 necessity, 486, 492 procedural, 150 Research and development (R&D), 262, 664 Residual duty, 120 Resolution 2235/96, 683–684 Resource retirement, 578 RES prices, 222 Restrictions, new, 615 Restrictive business practices (RBPs), 72 Retail and agrifood industry, 394 Retrospective assessment, 116 Review administrative, 87, 116, 123 changed circumstances, 87, 123, 228 de novo, 355 ex officio, 125, 127 new shipper, 87 self-initiated, 125 sunset, 87, 307–308
844
Review Pursuant to Article XVI.5, 201, 215, 252 Review Session, 187, 268 Revised GPA, 623, 640–641, 652, 653, 654, 658, 659 Rio Declaration on Environment and Development, 483 Risk assessment, 471–475, 479, 482, 484 distribution, 458–459 identifiable, 472 improbable, 473 laboratory, 473 management, 56, 479 NAI-related, 490 objective, 487 probable, 473 real, 487 real-life, 473 zero, 480, 481 Risk assessment I, 473 Risk assessment II, 473 Ritterbusch, Gerald, 383 Ronald Reagan administration, 189 Roosevelt, Franklin D., 628 Roux, 72 Royalty payments, 666 Rule of reason, 273 Rules of Conduct for the Understanding on Rules and Procedures Governing the Settlement of Disputes, 505–506, 507 Rules of Origin, 639 Russian financial crises, 334 Russian markets, 332 Saarstahl, 227, 238 Safeguard country-specific, 323, 368 lawful application of, 327 measures, 614 normal, 368 provisions, 553 targeted, 181–183, 361 textile, 368, 372 transitional, 368–369, 370–371 Safeguards (SG) Agreement, 169, 183 Safeguards Committee, 360–363, 365–367 St. Kitts, 78 Saint Vincent, 389–391, 396, 463 Saint Vincent Agricultural Census, 390 Sale low volume of, 77, 80 third-country, 76 Salmonella, 496 Sampling, 89, 434 Samsung, 279–280 Sanitary and phyto-sanitary (SPS), 4, 53, 398, 455, 661
Index
Agreement, 455 Committee, 502–503 -related private standards, 465 Sardina pilchardus, 407, 411–412 Sardina pilchardus Walbaum, 406–407 Sardinops sagax, 407, 411 Savings clause, 628–629 Scheduled goods, 586 Schedule of Concessions, 561, 567, 583 Schenck v. United States, 108 Science, 458 evidence, 481–487, 495 evolution, 459 international standard, 485 legitimate, 477 method, 477 opinions, 476, 477 risk assessment, 478 uncertainty, 485 Screwdriver operations, 515 SDoC document, 435, 438, 441 Sealed bidding, 648 Seals regime, 425–426 Secondary sources, 160–161 Second best information, 154 Second-party assessment, 435 Second-party certification, 394 Second Supplementary Report, 334 Security, 10, 113 food, 574–575, 594, 595 national, 640 Selective tendering, 646 Self-incriminating information, 409, 530 Self-initiated review, 125 Selling, general, and administrative (SG&A) expenses, 76, 78–81, 149 Semi-quantitative Australia, 476 Senegal, 35 Separation of release from payment of duties, 56 Serious injury, 340, 345, 369 Serious prejudice, 250–251, 256, 260, 267 Set aside subsidies, 578 Sharma, Anand, 595 Shipments expedited, 56 specific, 678 Short-Term Cotton Arrangement (STA), 609 Side-effects, 216 Significant cause, 369–370 Significant effect, 429 Significant price, 256 Similar border measures, 565–567 Similar disease, 499 Similar goods, 31, 33 Similar measures, 565 Simple assertion, 141 Simpler Trade Procedures Board (SITPRO), 51
Index
Singapore, 111 Singapore Ministerial Conference, 521, 522 Singapore Ministerial Declaration, 48, 50 Singer-Prebisch thesis, 514 Single entity, 89, 91 Single undertaking, 379, 631 Single window, 501, 675 Six Principles, 464 Sixth Triennial Review, 398 Slovakia, 359 Slovak Republic, 524 Smoking kills, 416 Snags, 378 SOCBs, 236 Social standards, 394 Société Générale de Surveillance (SGS), 37 Socotel, 37 Solar PV (photo-voltaic) technologies, 221–222 South, 384 Southern African Customs Union, 692 Southern enlargement, 549 Special care, 107, 287 Special circumspection, 156, 160–161 Special consideration, 23 Special drawing rights (SDR), 633 Special economic zones (SEZs), 514 Special Safeguard Mechanism (SSM), 555, 568 Special Sessions, 535 Special treatment, 568–569 Specific action, 74 Specification, 384 Specificity, 241 Specific price band duty, 563 Specific shipments, 678 Specific trade concerns (STCs), 443–444, 446, 503, 510, 675, 677 Spence, Michael, 674 Spirit, 245–246 Sri Lanka, 35 Standardized costs, 384 Standardized goods, 380 Standard privileged, 383 Standards and Trade Development Facility (STDF), 500 Standard-setting institutions, 405, 468, 494 Standard-setting organizations (SSOs), 385, 401, 465 Standards/standardization, 377, 389, 404 activities of, 402 Chinese, 387 demanding, 500 electrotechnic, 381 environmental, 394 excessive, 500 higher regulatory, 423 ISO, 395–396 Max Havelaar, 394
845
Mecca of, 500 private, 382, 393, 464 certification of, 394 public, 382 reasonableness, 82, 289 social, 394 technical, 409–410, 415, 417, 451 telecommunications, 381 where warranted, 125 State authority, 465 Statement of Serious Damage, 615 State-owned commercial banks (SOCBs), 206 State-owned enterprises (SOEs), 206 State trading enterprises (STEs), 626 Statistically valid sample, 90 Step 2 payments, 542 Stiglitz, Joseph, 674 Stimulus packages, 266 Strategic Alliance and Regulatory Group (STAR), 396 Strategic dumping, 180 Strauss, Robert, 268 Stumpage programs, 226 Subcentral government entities, 631 Subsequent agreement, 405 Subsidies and Countervailing Measures (SCM), 75, 96–97, 100, 126, 135, 140, 154, 169, 373, 507–508, 518–519 Committee, 238, 311 subsidies, 185, 189–196, 200–228, 233–237 Subsidies/subsidization actionable, 248–249, 263 allocated, 256 amounts of, 245–246 beneficial, 664 capping, 541 ceiling on, 665 conditional, 263 domestic, 186, 270, 570 environmental, 262, 265, 267 expensed, 256 export, 270 extraction of, 226 farm, 537, 540, 551 green, 193 illegal, 268, 519 imports, 285 Indonesian, 252–253 injury and, 289 license to, 187 nonactionable, 247–248, 267 permitted, 263 predatory, 193 prohibited, 248, 263, 267–268 research and development (R&D), 664 for research and development, 262 set aside, 578
846
Subsidies/subsidization (cont.) Subsidies and Countervailing Measures, 185, 189–196, 200–228, 233–237 unfair, 191 upstream, 283 Substantial cause, 350, 357 of injury, 325, 354 Substantial interest, 359, 368 Substantially equivalent coverage, 635 Substantially equivalent level of concessions, 359 Such product, 322 Sufficiency, 144 Sufficient factual basis, 134 Sugar, 584–586 Sumner reports, 447–448 Sunset clauses, 128 Sunset reviews, 87, 307–308 Supplier, 643 declaration of conformity, 435 registration system, 643–644 Suppression, 252 Surveillance, 124 Sutherland, Peter D., 554 Sweden, 78 Switching costs, 324 Switzerland, 111, 265, 546 Symbols, 416, 431 Taiwan, 480 Targeted dumping, 86–88 Targeted safeguard, 181–183, 361 Tariff Act, 135 Tariffication, 553 Tariff quota (TRQ), 363, 556, 593 Tariffs bindings, 315 concessions, 250, 535 negotiations, 450 peaks, 567 Taxation, 84 Technical assistance, 440 Technical Barriers to Trade (TBT), 4, 41, 377–382, 387–393, 396–402, 428, 429, 431, 436, 441, 446, 447, 517, 661 Technical Committee, 35 Technical regulation, 377, 397, 409–417, 451 Technical specification, 416, 417, 640 Technical standards, 409–410, 415, 417, 451 Technology effects, 253 Telecommunications standards, 381 Temporary Defense Mechanism (TDM) Regulation, 196 Tennessee Valley Authority (TVA), 628 Terminology, 416, 431 Terrestrial Code, 469, 470–471, 494 Testing, 435 Tetrapak, 178
Index
Tetra Pak, 179 Textile imports, 372 Textile safeguard, 368, 372 Textiles Committee, 611 Textiles Monitoring Body (TMB), 612, 615–619 Textiles Surveillance Body (TSB), 610, 618 Textile trade, 607 TFEU, 392 Thai Customs, 33 Thailand, 373 Third-country price, 89 Third-country sales, 76 Third-party assessment, 435 Third-party certification, 394 Third Triennial Review, 438 Threat of injury, 94, 107, 286–288, 340, 345–346 Threat of serious injury, 345 Three-prong test, 493 “Three Sisters,” 464 Tightening the screws, 178 Timely information, 401 Timor, 252 TNC, 601 Tokyo round Agreement on Antidumping (AD), 72, 123–124, 128, 175, 188 Agreement on Technical Barriers to Trade (TBT), 377–381, 416, 433 Customs Valuation Agreement (CVA), 24, 26, 35 Import Licensing Agreement (ILA), 6–8, 10–11, 15, 21–22 Organisation of Economic Cooperation and Development (OECD), 190 technical standards and regulations, 416 Too big to fail, 266 Torn down agreement, 523 Total AMS, 572, 579 TPP, 638 Trade agricultural, 552, 554 best, 447 Chinese export, 620 concessions, 674 costs, 383–384 disguised restriction of, 489 facilitation, 46, 49–50, 63, 65 fair, 364 farm, 552 global, 384 and investment, 522 law, 250, 266 liberalization, 440, 536, 560, 603, 626, 697 ordinary course of, 28, 76–77 textile, 607 unfair, 340 unnecessary obstacles to, 425 world, 432, 547
Index
Trade Act of 1974, 325, 370 Trade Agreements Act (TAA), 442, 628–629 Trade and Investment negotiation, 521 Trade-balancing requirements, 529 Trade-distorting effects, 574 Trade Facilitation Agreement Facility (TFAF), 61 Trade Negotiating Committee (TNC), 601, 612 Trade Policy Review Mechanism (TPRM), 673, 692–697 Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement, 181, 658 Trade Related Investment Measures (TRIMs), 4, 196, 513–518, 527–528, 532 Traditional staple food crops, 595 Traffic light, 191, 263 Transaction comparable export, 85, 87–88 costs, 395 value, 28 Transaction-to-transaction (T-T), 85–86, 165 Transatlantic Business Council (TABC), 386 Transatlantic Business Dialogue (TABD), 385–386 Transatlantic Consumers Dialogue (TACD), 386 Transatlantic Economic Partnership, 386 Trans-Atlantic Trade and Investment Partnership (TTIP), 383, 385–386, 637, 638 Transitional periods, 309, 369 Transitional safeguard, 368–369, 370–371 Trans-Pacific Partnership (TPP), 637 Transparency, 649–650, 651–652, 673–700 efficiency of, 700 fishbowl, 443, 675 obligations, 478 reasoned, 443, 675 Trans-Tasman Mutual Recognition Agreement (TTMRA), 386 Travaux préparatoires, 486 Treatment group, 284 Treaty Establishing the European Economic Community (EEC), 187, 547 Tricolour light, 263 Trondheim dispute, 650, 654–655, 657 Tuna, 414–415 Tunisia, 35 Typical pass, 225 Tyson, Laura D’Andrea, 190 UES, 306 Uganda, 57, 530 Ultimate issue rule, 509 UM, 590 UNCAC, 630 UN Centre for Trade Facilitation and Electronic Business (UN/CEFACT), 51, 53
847
Uncertainty, 107, 459 Unconditionality, 10 Uncooperative behavior, 120 Undercutting, 252 Underfill mechanism, 19 Understanding Regarding Export Restrictions and Charges, 22 Understanding Regarding Notification, Consultation, Dispute Settlement, and Surveillance, 695 Unfair pricing, 177, 184 Unfair subsidies, 191 Unfair trade, 340 Unforeseeable events, 647 Unforeseen developments, 313, 318, 328–334 Uniform, reasonable, and impartial administration of laws, 682 Uniformity, 685 Unilateral or mutual recognition, 385 Union (ex-Community) interest, 112 United Kingdom, 481 United Nations Commission on International Trade Law (UNCITRAL), 623–624, 639, 657 United Nations Conference on Trade and Development (UNCTAD), 48, 51, 61, 390, 514, 526, 653, 698 UN Economic and Social Commission for Asia and the Pacific (ESCAP), 61 UN Economic and Social Commission for Western Asia (ESCWA), 61 UN Economic Commission for Europe (UNECE), 61, 410 UN Economic Commission for Latin America and the Caribbean (ECLAC), 61 UN Global Compact, 394 UN Layout Key (UNLK), 53 UN Trade Data Elements Directory, 53 US Department of Commerce (USDOC), 206, 425 US Department of Defense, 630 US Department of Justice, 629, 630 US Department of State, 682 US economy, 628 US Embassy, 122 US Family Smoking Prevention Tobacco Control Act of 2009, 424 US Federal Register, 615 US Food and Drug Administration (FDA), 456 US International Trade Commission (USITC), 62, 172, 344, 351–352, 357 US–Large Civil Aircraft, 202 US National Marine Fisheries Service, 682 US Ninth Circuit, 509 US Supreme Court, 176, 179, 477 US Trade Act, 325 Unjustifiable discrimination, 498 Unknown exporters, 89, 91 Unnecessary obstacles to trade, 425 Unscheduled goods, 586
848
“Updating of the Listing of Notification Obligations and the Compliance Therewith as Set Out in Annex III of the Report of the Working Group on Notification Obligation and Procedures,” 699 Upstream subsidies, 283 Uruguay Customs Valuation Agreement, 24 Uruguay round, 4, 521 Agreement on Agriculture (AG), 189–191, 535–536 Agreement on Antidumping (AD), 72, 81, 123, 128, 177 Agreement on Technical Barriers to Trade (TBT), 379–381 Customs Valuation Agreement (CVA), 26 Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed Countries and Net FoodImporting Developing Countries, 594 Decision on Texts Relating to Minimum Values and Imports by Sole Agents, Sole Distributors, and Sole Concessionaires, 32 Import Licensing Agreement (ILA), 6–7, 11, 22 Modalities, 561, 575, 592–593, 600 Organisation of Economic Cooperation and Development (OECD), 190 SG Agreement, 322 Subsidies and Countervailing Measures (SCM), 189–193, 267 trade-related investment measures (TRIMs), 513 Uruguay Round Agreements Act, 81 USDOC, 135, 234, 236, 239, 306, 309 User countries, 36 User marketing payments, 543 User members, 36, 39–40 Usinor Sacilor, 227, 238 Usual Marketing Requirements (UMRs), 589 Utility value, 228–230 Validity, 477 Value chains, 385 computed, 31 of the contract, 633 Variable duties, 114 Variable import levies, 565, 566–567 VAT, 633–634 Vegetable market, 496 Verification of conformity, 435 Verified information, 699 Veritas, 37 Vermulst, 88 Vertical investment, 533 Vessel decommissioning programs, 311 Veterinary certificates, 494 Vienna Agreement, 381 Vienna Convention, 3, 172 Vienna Convention on the Law of Treaties (VCLT), 98, 168, 172–173, 403, 405, 561
Index
Vilsack, Thomas J., 413–414, 679–680 Voluntary export restraint (VER), 215–216, 322–323, 372, 375, 565 Voluntary labeling, 414 Von Haberler, Gottfried, 546 Washington, D.C., 183 WCO Compendium, 36 WCO Data Model, 53 Weighted average (WA), 79, 81, 91, 96, 119, 121, 165 Weighted average to weighted average (WA-WA), 85–86 West and Central African (WCA), 600 Where warranted standard, 125 Whewell, William, 476 White House, 190, 443 Williamson, Oliver E., 674 Wind power technologies, 221 Windward Islands, 390 Wool Act, 351 Working Group, 521, 630 on Implementation, 175 on Notifications of Obligations and Procedures, 696 on Private Standards, 463–464 on Transparency in Government Procurement, 650 Working Party, 201, 252, 268, 332, 464, 500 on China’s Accession, 94 on Notifications Obligations and Procedures, 697 on Preshipment Inspection, 43, 45 on Subsidies, 268 Working Procedures, 503 Work program, 48, 659–660 Work Programme, 521 Workshop Agreements, 381 Works Progress Administration (WPA), 628 World Animal Health Organization, 466, 469 World Antidumping Authority, 148, 173 World Bank (WB), 61, 500 World Bank Multilateral Investment Guarantee Agency (MIGA), 526 World Business Economic Survey (WBES), 63 World Customs Organization (WCO), 32, 35–36, 51, 61 World Economic Forum (WEF), 446 World Grains Agreement, 552 World Health Organization (WHO), 407, 462, 466, 500 World market, 253–254, 255 equitable share of the, 545 World market share, 253–254 World Organization for Animal Health, 401, 482 World price, 564 World Standards Cooperation (WSC), 401 World trade, 432 equitable share of, 547
Index
World Trade Organization (WTO), 1–6, 9, 11–20, 22–23, 524 Agreement on Agriculture, 219 Agreement on Antidumping (AD), 67, 90–92, 98, 103–104, 107, 109, 111, 113–114, 126–127, 142–143, 166, 169 Agreements, 4 Antidumping Committee, 161–162, 175 Article X of, 62 Committee on Trade Facilitation, 52 Decision on Texts Relating to Minimum Values and Imports by Sole Agents, Sole Distributors, and Sole Concessionaires, 32 Decision Regarding Cases where Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value, 32 General Council, 521 Technical Committee on Customs Valuation, 28–29 Trade Policy Reviews, 62 zeroing, 87 World Trade Report, 384, 620 World War II (WWII), 187, 201, 544 Written documents, 465 X sardines, 407 Zambia, 57 Zero dumping, 87 Zeroed negative margins, 134 Zeroing, 86–88 Zero option, 191 Zero risk, 480, 481 Zero sum, 314 Zimbabwe, 57 Zoning, 494
849