The Regulation of International Trade, Volume 1: GATT [1 ed.] 0262029847, 9780262029841

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The Regulation of International Trade

The Regulation of International Trade Volume 1: GATT

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. MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email [email protected] This book was set in Times New Roman 10/13pt by Toppan Best-set Premedia Limited. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Names: Mavroidis, Petros C., author. Title: The regulation of international trade : GATT / Mavroidis Petros C. Description: Cambridge, MA : MIT Press, 2016. | Includes bibliographical references and index. Identifiers: LCCN 2015038275 | ISBN 9780262029841 (hardcover : alk. paper) Subjects: LCSH: Foreign trade regulation. | General Agreement on Tariffs and Trade (Organization) | World Trade Organization. Classification: LCC K3943 .M393 2016 | DDC 382/.92–dc23 LC record available at http://lccn.loc.gov/ 2015038275 10

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For Meritas always, as always

Contents

Preface xxv Introduction xxvii 1

From GATT to the WTO

1

1.1

Establishing a Multilateral Trade Order 1

1.1.1

From Drudgery to Excitement

1.1.2

Attempts to Liberalize Trade at the Multilateral Level 1.1.2.1

The 1927 World Economic Conference: Not Suitable

1.1.2.2

The 1933 World Economic Conference: Prewar Pilots

1.1.2.3

World Trade before Bretton Woods

1.1.3

Bretton Woods and Trade

1.1.4

Follow-up to Bretton Woods

1.1.5

1 2

2 4

6

7 7

1.1.4.1

Hull and Nondiscriminatory Trade

1.1.4.2

The Other Side of the Pond: Meade and the International Commercial Union

1.1.4.3

Bilateral Attempts to Tame Imperial Preferences: Keynes Enraged

1.1.4.4

The Atlantic Charter

Onto the World Scene

7 10

11

12

1.1.5.1

From the Atlantic Charter to the “Suggested Charter”

12

1.1.5.2

US Reciprocal Trade Agreements Act

1.1.5.3

The List of Invitees

1.1.5.4

“We Need to Act before the Vested Interests Get Their Vests On”

14

14

1.1.6

The Negotiation of GATT 16

1.1.7

Entry into Force

1.1.8

Property Rights on GATT 19

1.1.9

The People Who Made GATT Happen

18 20

15

9

viii

Contents

1.2

Why GATT?

20

1.2.1

What Did Negotiators Have in Mind?

1.2.2

Economic Theory

20

23

1.2.2.1

Gains from Liberalization

1.2.2.2

No Gain without Pain: The Case for Trade Agreements

23 26

1.2.3

Economics Meets the Negotiating Record

1.3

The (Trans-)Formative Years: GATT in the GATT Era

1.3.1

Flexibility Required: Grandfathering and the Existing Legislation Clause

1.3.2

The GATT Recipe for Trade Liberalization

1.3.3

1.3.4

1.3.2.1

Tariffs and … Supporting Act

1.3.2.2

Embedded Liberalism

Becoming an Institution

34 36 36

37

40

41

42

1.3.3.1

Goodbye, ITO

1.3.3.2

Functional Institutionalism à la GATT 43

42

The GATT Rounds of Trade Liberalization 1.3.4.1

Bringing Tariffs Down

1.3.4.2

Adding to the Legislative Framework

49

49 52

1.3.5

The Transformations of GATT 57

1.3.6

A Brief Appraisal of the GATT Record

1.3.7

A Few Good Men

1.3.8

A Gentlemen’s Club

1.4

Regulation of Trade in Goods in the WTO Era

1.4.1

The “Old” and the “New” GATT: GATT 1947, GATT 1994

1.4.2

The Relationship between GATT and the Other Annex 1A Agreements

1.4.3

The Plurilateral Agreements

1.4.4

Single Undertaking Versus “Clubs”

1.4.5

The Protocols of Accession

1.4.6

The WTO Organs Administering Agreements on Trade in Goods

2

Quantitative Restrictions

2.1

The Legal Discipline and Its Rationale

2.1.1

The Legal Discipline

57

59 60

73

60 61

64 65

67

73 73

69

63

Contents

ix

2.1.2

The Rationale for the Legal Discipline

2.1.3

Discussion

73

73

2.1.3.1

Negotiating History

2.1.3.2

The Economics of QRs

73 75

2.2

Coverage of the Legal Discipline

2.2.1

General Elimination of Quantitative Restrictions

2.2.2

Quotas

2.2.3

Import and Export Licenses

2.2.4

2.2.5

2.2.6

2.2.7

76

78

2.2.3.1

Import Licensing

79

2.2.3.2

Export Licensing

81

Other Measures

79

82

2.2.4.1

De Facto Export Quotas

82

2.2.4.2

Minimum Import Prices

83

2.2.4.3

Minimum Export Prices

84

2.2.4.4

Trade Balancing Condition

2.2.4.5

Local Content

2.2.4.6

Irrevocable Capital Contribution (Investment)

2.2.4.7

Prohibition to Repatriate Profits

2.2.4.8

Trading Rights in China

84

84

Measures Not Covered

85

85

85

86

2.2.5.1

Customs Duties and Charges

2.2.5.2

Export Taxes

2.2.5.3

Production Quotas

2.2.5.4

Tariff Quotas

2.2.5.5

Trade in Textiles

87

87 89

90 91

Attributing QRs to WTO Members 2.2.6.1

No Need to Coerce

2.2.6.2

Export Cartels

Standard of Review

91

91

93

94

2.2.7.1

The Issue

94

2.2.7.2

The Origin of the Problem

2.2.7.3

Breaking with the Past?

95

96

2.2.8

The Relationship with Article III of GATT 99

2.2.9

The Relationship with Article VIII of GATT 100

76

x

Contents

2.3

Exceptions

2.3.1

Critical Shortages

2.3.2

2.3.3

2.3.4

2.3.5

2.3.6

100 100

2.3.1.1

Essential Products

101

2.3.1.2

Foodstuff or “Other Products”

2.3.1.3

Temporarily Applied

2.3.1.4

Burden of Proof

101

102

102

Standards for Classification, Grading, or Marketing of Commodities 2.3.2.1

Key Terms

2.3.2.2

Burden of Proof

104 104

QRs Necessary for Enforcing Governmental Measures 2.3.3.1

The Test

2.3.3.2

The Rationale

2.3.3.3

What Is a Governmental Measure?

2.3.3.4

Product Coverage

2.3.3.5

Restrictions on Like or Substitutable Domestic Goods

2.3.3.6

Temporary Surplus

2.3.3.7

Compensation

111

2.3.3.8

Public Notice

111

2.3.3.9

Burden of Proof

105

105 105 106

108 108

110

111

Balance of Payments (Articles XII and XVIII of GATT)

111

2.3.4.1

The Rationale

2.3.4.2

Procedural and Institutional Issues

111

2.3.4.3

A Typology of Measures Adopted

2.3.4.4

Invocations

2.3.4.5

Dispute Settlement and Internal and External Institutional Balance

2.3.4.6

Burden of Proof

112 113

114 120

Exchange Restrictions

121

2.3.5.1

Global Coherence

2.3.5.2

Currency Manipulations

121

2.3.5.3

Dispute Settlement

2.3.5.4

Burden of Proof

122

124

125

Infant Industry Protection 2.3.6.1

The Rationale

125

2.3.6.2

Dispute Settlement

2.3.6.3

Burden of Proof

125

126

125

115

104

Contents

xi

2.3.7

General Exceptions (Article XX of GATT)

2.3.8

National Security (Article XXI of GATT)

2.3.9

Safeguards (Article XIX of GATT)

126 126

126

2.3.10 Can QRs Be Permissible in Order to Avoid Dumping? 2.4

Applying QRs

127

2.4.1

Nondiscrimination, in Principle

2.4.2

Nondiscrimination, in Practice

127 128

2.4.2.1

Global Quotas

128

2.4.2.2

Origin-Specific Quotas: Historical Shares

2.4.2.3

Licenses/Permits without Quotas

128

129

2.4.3

Discriminatory QRs

130

2.4.4

Import Licensing in the WTO Era

2.5

Institutional Issues

2.5.1

The Committee on Market Access

2.5.2

Transparency

2.6

Concluding Remarks

3

Tariffs

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

130

130 130

130 131

133 133

133 133

134

3.1.3.1

The First Tariff Negotiations

3.1.3.2

The Economics of Tariffs

135

134

3.1.3.3

The Rationale for Tariffs

135

3.1.3.4

Tariff Ceilings and Rigid Tariffs

136

3.2

Expressing Goods in a Common Language

3.2.1

The Harmonized System

137

3.2.1.1

The Need for Common Language

3.2.1.2

The History of Goods Classification

3.2.1.3

What Does the HS Do?

138

137 138

136

126

xii

Contents

3.2.1.4

How Common Is Common Language?

3.2.1.5

Dispute Settlement Regarding Classification

142 143

3.3

The Types of Duties Bound

3.3.1

Reciprocity

3.3.2

OCDs and ODCs: Different Yes, but How?

3.3.3

What Is an Ordinary Customs Duty?

3.3.4

What Is an Other Duty or Charge?

3.3.5

Terms, Conditions, and Qualifications

3.3.6

Consolidating Nontariff Barriers

3.4

The Forum for Tariff Concessions

3.4.1

The “Usual” Forum for Binding Duties: Trade Rounds

3.4.2

3.4.3

145

145 148

148 150 151

152 152

3.4.1.1

Trade Rounds, a Public Good

3.4.1.2

Request—Offer

3.4.1.3

Linear Reductions

3.4.1.4

Harmonized Formula

3.4.1.5

Tiered Cuts

3.4.1.6

Terms of Trade and Tariff-Cutting Techniques

153

153

154 155 155

155

Sectoral Agreements

155

156

3.4.2.1

Distinguishing Sectoral from Critical Mass Agreements

3.4.2.2

The Identity of Sectoral Agreements

157

The Information Technology Agreement (ITA) 3.4.3.1

Why Critical Mass?

3.4.3.2

The Negotiation

3.4.3.3

Dispute Settlement

3.4.3.4

ITA I and II

156

158

158

159 159

161

3.4.4

The Pharma Agreement

162

3.4.5

Coalitions

3.4.6

Unilateral Action

3.5

The Schedules of Concession

3.5.1

Certification, Rectification, and Modification of Schedules

162 163 164

3.5.1.1

A Centralized Process

3.5.1.2

Certification Does Not Confer Legality

164

3.5.1.3

Uncertified Actions

167

165

164

Contents

xiii

3.5.2

The Content and Legal Value of Schedules of Concessions

3.5.3

Defining the Tariff Value: Customs Valuation

3.6

Safeguarding the Value of Tariff Concessions

3.6.1

Change in the Method of Determining Dutiable Value

3.6.2

Import Monopolies

3.6.3

Disputes Regarding the Proper Classification of Goods

3.6.4

Reduction in Par Values

3.7

Renegotiation of Tariff Protection

3.7.1

Maintaining the Level of Concessions

3.7.2

The Participants 3.7.2.1

INR Holders

3.7.2.2

PSI Countries

3.7.2.3

SI Countries

169

170 171 171

171 173

173 174 175

176 177 178 180

3.7.3

The Various Procedures for Renegotiating Tariff Protection

3.7.4

Agreement on the Amount of Compensation

3.7.5

Failure to Agree on the Amount of Compensation

182

3.7.5.1

Procedures Where No Prior Approval Is Required

3.7.5.2

Procedures Where Prior Approval Is Required

183

183

186

3.8

Charges Exempted from Article II of GATT 187

3.8.1

Internal Taxes and Charges

3.8.2

Antidumping and Countervailing Duties

188

3.8.3

Fees and Charges for Services Rendered

188

187

3.8.3.1

Preparatory Work

188

3.8.3.2

Relationship with Article II of GATT 189

3.8.3.3

Measures Covered

3.8.3.4

Standard of Review

189 190

3.8.4

Import Surcharges for BoP Reasons

3.8.5

Safeguards

3.9

Withdrawal from GATT/WTO

3.9.1

Withdrawing from the WTO

3.9.2

The GATT Solution

190

190

191

191

191

181

xiv

Contents

3.9.3

GATT Practice

192

3.10

Exceptions

193

3.11

Institutions

194

3.12

Concluding Remarks

194

4

Most Favored Nation

195

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

195

195 195

196

4.1.3.1

The Historic Dimension of MFN

196

4.1.3.2

MFN at the GATT Negotiating Table

4.1.3.3

MFN at the GATT Negotiating Table: The Economics of MFN

4.1.3.4

MFN and Preferential Trade

196 197

199

4.2

Coverage of the Legal Discipline

200

4.2.1

De Jure versus De Facto Discrimination

4.2.2

Measures Covered: Any “Advantage,” “Favor,” Etc.

200

4.2.2.1

Customs Duties and Charges of Any Kind

4.2.2.2

Methods for Calculating the Level of Duties and Charges

4.2.2.3

Rules and Formalities

4.2.2.4

Internal Measures

201

202 203

203

204

4.3

Exemptions

204

4.3.1

Grandfathering Imperial Preferences

4.3.2

Other Historical Preferences

4.3.3

Imperial and Historical Preferences Today

4.4

The WTO “Club” Must Receive the Best Treatment

4.4.1

WTO Members versus the Rest of the World

4.4.2

As Membership Increases, So Does the Impact of MFN

4.5

Favors/Advantages Must Be Accorded Immediately and Unconditionally 206

4.5.1

Immediately

207

204

205 205 206

206 206

Contents

4.5.2

xv

Unconditionally

207

4.5.2.1

The US Attitude toward Conditional and Unconditional MFN

4.5.2.2

“Unconditionally” in Case Law

4.6

Defining Origin

4.6.1

The Pre-GATT Years

4.6.2

The GATT Regime

4.6.3

4.6.4

209

214 216 217

4.6.2.1

Article VIII of GATT 217

4.6.2.2

Marks of Origin

4.6.2.3

False Origin: A Deceptive Practice

4.6.2.4

Efforts to Harmonize

The WTO Regime

217 220

220

223

4.6.3.1

An Agreement to Disagree

4.6.3.2

MFN In, Preferential Rules of Origin Out

Preferential Rules of Origin

224 225

227

4.6.4.1

Out of HWP, Out of WTO?

4.6.4.2

Empirical Studies Reveal a Mess

227

4.6.4.3

Cumulation

4.6.4.4

Complying with Complicated Rules

4.6.4.5

Utilization Rate

4.6.4.6

Rules of Origin for LDCs

4.6.4.7

If No Negotiations, Then What?

228

229 230

231 232 232

4.6.5

The Rise of Global Value Chains (GVCs)

233

4.7

Like Products

4.7.1

Like Products and Beggar-Thy-Neighbor Policies

4.7.2

Tariff Classification: The Dominant Criterion

4.8

Exceptions

4.8.1

Special and Differential Treatment

4.8.2

PTAs

4.8.3

General Exceptions

4.8.4

National Security

4.8.5

Waivers

4.8.6

Nonapplication

4.9

Concluding Remarks

235

238

238 238 238

238 239 239

238

235

235

207

xvi

Contents

5

Special and Differential Treatment for Developing Countries

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

Discussion

241

241 241

242

5.1.3.1

MFN between Unequal Partners

242

5.1.3.2

The Background: Gottfried Haberler versus Singer/Prebisch

5.1.3.3

Import Substitution

5.2

Toward Special and Differential Treatment

5.2.1

Striving for a Two-Tier GATT 246

5.2.2

The Content of Part IV 246 5.2.2.1

Principles and Objectives

5.2.2.2

Commitments

5.2.2.3

Joint Action

247 248

The Enabling Clause Enters the Frame

5.3.1

An Atypical Birth

5.3.2

The Main Features of the Enabling Clause

5.3.3

The Legal Nature of the Enabling Clause

5.3.4

Donors and Beneficiaries

5.3.6

248

248 249 250

250

5.3.4.1

No Obligation to Donate

5.3.4.2

Self-Selection of Beneficiaries

5.3.4.3

Graduation

GSP Schemes

246

247

5.3

5.3.5

243

245

250 250

253

253

5.3.5.1

The Basic Obligation

5.3.5.2

Preferences Requiring a Waiver

253

5.3.5.3

Preferences for LDCs

5.3.5.4

Preferences for Developing Countries

5.3.5.5

Additional Preferences for Developing Countries

5.3.5.6

Excluding Beneficiaries

5.3.5.7

Evaluating the GSP Schemes: Is the Candle Worth the Flame?

South-South Preferences

254

254 262 262

265

271

5.3.6.1

Tariff Preferences

5.3.6.2

PTAs between Developing Countries

271 271

266

241

Contents

xvii

5.4

Special and Differential Treatment Other Than GSP 273

5.4.1

Typology

5.4.2

Transparency Mechanism for Preferential Trade Advantages

5.5

The Wider Picture: Trade and Development

5.5.1

Early Years

5.5.2

The DDA 277

5.5.3

5.5.4

273 276

276

5.5.2.1

The Mandate (and Its Caveats)

277

5.5.2.2

Capacity Building

5.5.2.3

Cooperation with Other Institutions

5.5.2.4

Action for LDCs

278 278

279

Aid for Trade: Integrated, Not Simply Involved 5.5.3.1

The Jewel of the DDA 282

5.5.3.2

Capacity Building in Aid for Trade

5.5.3.3

Infrastructure

5.5.3.4

Increased Productivity

283

5.5.3.5

Adjustment Assistance

283

5.5.3.6

The WTO’s Involvement

5.5.3.7

Aid for Trade: Early Evaluations

283

283

284

Trade, Poverty, and Inequality 5.5.4.1

Why the Question?

285

5.5.4.2

Trade and Poverty

286

5.5.4.3

Trade and Inequality

284

285

286

5.6

Institutions

287

5.7

Concluding Remarks

6

Preferential Trade Agreements

6.1

The Legal Discipline and Its Rationale

6.1.1

The Legal Discipline

6.1.2

The Rationale for the Legal Discipline

288 291 291

291

6.1.2.1

Frontier Traffic

6.1.2.2

Preexisting Arrangements

292

6.1.2.3

Development Tool

6.1.2.4

Insurance Policy

6.1.2.5

US-Canada Rapprochement

293

293 293 293

291

282

274

xviii

6.1.3

Contents

Discussion

294

6.1.3.1

PTAs and MFN

6.1.3.2

FTAs, CUs, and Beyond

294 294

6.2

Why Go Preferential?

6.3

The Legal Requirements for GATT-Consistent PTAs

6.3.1

An Exception to MFN

6.3.2

Notification Requirements

6.3.3

6.3.4

6.3.5

295

300

6.3.2.1

Who Notifies?

300

6.3.2.2

Notify Whom?

302

6.3.2.3

Notify What?

302

6.3.2.4

Notify When?

302

300

Internal Requirement: Eliminate Duties with Respect to Substantially All Trade 304 6.3.3.1

Same Requirement for FTAs and CUs

6.3.3.2

Substantially All Trade (SAT)

6.3.3.3

Duties and Other Restrictive Regulations of Commerce

304

304

External Requirement: No New Protection 6.3.4.1

External Requirement That FTAs Must Meet

6.3.4.2

External Requirement That CUs Must Meet

The Nature of Review

307 307 308

311

6.3.5.1

A Merger Authority, in Principle

6.3.5.2

A Switch in Focus: The Transparency Mechanism

6.4

Litigating PTAs

6.4.1

Litigation in the GATT Era

313

6.4.2

Litigation in the WTO Era

315

6.4.3

299

311

313

6.4.2.1

Institutional Balance: Things Have Changed?

6.4.2.2

The Ambit of Judicial Review

Why So Little Litigation?

315

317

319

6.4.3.1

The Original Sin

319

6.4.3.2

Other Plausible Explanations

320

6.4.4

Is De Facto Tolerance of PTAs an Issue?

6.5

Institutions

6.6

Concluding Remarks

333 333

322

312

305

Contents

xix

7

Domestic Policies/National Treatment

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

335 335

335 336

337

7.1.3.1

The Impact of the PPA 337

7.1.3.2

NT, Concession Erosion, and Uncertainty

7.1.3.3

Contract Incompleteness

7.1.3.4

Reciprocity

7.1.3.5

Shallow Integration and Deep Integration

337

338

340 340

7.2

Measures Coming under the Purview of Article III of GATT 341

7.2.1

Local Content Requirements

7.2.2

All Other Measures Affecting Trade

7.3

Measures Exempted

7.3.1

Government Procurement

7.3.2

Subsidies

7.3.3

Film Quotas

7.3.4

341 342

343 343

346 346

7.3.3.1

Negotiating History

346

7.3.3.2

Film Quotas in the WTO World

7.3.3.3

Distinguishing GATT from GATS: A Line in the Sand?

7.3.3.4

GATS before GATT 351

347

Income Taxes, Social Security, and Payroll Taxes 7.3.4.1

The WP on BTA 353

7.3.4.2

The Outcome

7.3.4.3

The Legal Value of the Report

356 358

7.3.5

Investment Protection

358

7.3.6

Goods in Transit

7.4

The Scope of National Treatment

7.4.1

De Jure, De Facto Discrimination

7.4.2

Duties Bound and Unbound

7.4.3

Domestic Measures Enforced at the Border

7.4.4

Jurisdictional Issues

359

364

361 361

362 363

349

353

xx

Contents

7.5

Direct Taxes on Products

7.5.1

DCS Products

7.5.2

365

366

7.5.1.1

Why Include DCS Products?

7.5.1.2

Defining DCS Products

7.5.1.3

From Extant to Latent Demand

7.5.1.4

Applied So As to ASATAP 371

Like Products

366

368 370

376

7.5.2.1

Like Products: The Definition

7.5.2.2

Taxation in Excess

376

379

7.6

Other Measures Affecting Trade

380

7.6.1

Laws, Regulations, or Requirements

7.6.2

Affecting Sale, Offering for Sale

7.6.3

Like Products in Article III.4 of GATT 382

7.6.4

Less Favorable Treatment (LFT)

381

382 385

7.6.4.1

LFT Means No Protectionism

7.6.4.2

De Jure and De Facto LFT 385

385

7.6.4.3

Trouble in Korea

7.6.4.4

Sultans of Swing I (Dominican Republic–Import and Sale of Cigarettes)

7.6.4.5

Sultans of Swing II (EC–Seal Products)

7.6.4.6

Swinging in Echternach

386 390

391

7.7

Exceptions

392

7.8

Institutions

392

7.9

Concluding Remarks

7.9.1

Nondiscrimination and Efficiency

7.9.2

Asymmetric Information and Its Discontents

7.9.3

In Search of a Smoking Gun

392 392

395

7.9.3.1

Origin Neutrality

397

7.9.3.2

Use of the First-Best Instrument

7.9.3.3

Scientific Evidence

7.9.3.4

Necessity

7.9.3.5

Who Bears Adjustment Costs?

7.9.3.6

Consistency

7.9.3.7

International Standards

397

397

397 397 397

397

393

389

Contents

xxi

8

State Trading Enterprises

399

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

399

399 399

400

8.1.3.1 Negotiating Record

400

8.1.3.2 Subsequent Practice

402

8.2

Defining STEs

8.2.1

The Law

8.2.2

Practice

8.3

The Obligations Assumed

8.3.1

Nondiscrimination

8.3.2

Commercial Considerations

8.3.3

Adequate Opportunities to Compete

8.3.4

Exceptions

8.4

Transparency

8.5

Institutions

8.6

Concluding Remarks

9

Exceptions and Deviations from Obligations Assumed under GATT 413

9.1

Exceptions and Deviations

9.2

General Exceptions

9.2.1

The Legal Discipline and Its Rationale

9.2.2

Elements Common to All Listed Exceptions

9.2.3

402

403 404 405

406 406 410

411 411

412 412

413

414 414 417

9.2.2.1

Two-Tier Test

9.2.2.2

Burden of Proof

9.2.2.3

Means Are Justiciable, not Ends

9.2.2.4

Pursuing Multiple Means and Ends (What Is a “Measure”?)

Public Morals

421 422 422

427

9.2.3.1

The Scope of Public Morals

9.2.3.2

Necessary to Protect Public Morals

427 430

423

xxii

9.2.4

Contents

Humans, Animals, Plant Life, and Health 9.2.4.1

The Scope of the Provision

9.2.4.2

Necessity

430

430

430

9.2.5

Imports and Exports of Gold and Silver

9.2.6

Compliance with Laws Not Inconsistent with GATT 442 9.2.6.1

The Scope of the Provision

9.2.6.2

The Test for Compliance

441

442 443

9.2.7

Prison Labor

443

9.2.8

National Treasures

9.2.9

Conservation of Exhaustible Natural Resources

444 444

9.2.9.1

Permanent Sovereignty over Natural Resources

9.2.9.2

Jurisdiction

445

9.2.9.3

Exhaustible Natural Resources

9.2.9.4

Exhaustible Natural Resources and Endangered Species

9.2.9.5

Conservation Policies

9.2.9.6

Relating To

9.2.9.7

Proximate and Ultimate Cause

9.2.9.8

In Conjunction with Domestic Consumption or Production

9.2.9.9

The Incidence of the Level of Development

446 447 450

450

451 453 456

9.2.10 Intergovernmental Commodity Agreements (ICAs)

456

9.2.10.1 The Function of Intergovernmental Commodity Agreements 9.2.10.2 ECOSOC Resolution 30(IV)

456

457

9.2.11 Government Stabilization Plans

458

9.2.12 Products in General or Local Short Supply 9.2.13 Complying with the Chapeau

454

459

460

9.2.13.1 Application, Not Substantive Consistency

460

9.2.13.2 Application? Not Substantive Consistency?

461

9.2.13.3 Arbitrary Discrimination, Unjustifiable Discrimination, Disguised Restriction 9.2.13.4 No Effects Test Required

468

9.2.14 Article XX of GATT and Protocols of Accession 9.2.14.1 The Test

469

9.2.14.2 Cases Where the Defense Is Available

471

9.2.14.3 Cases Where the Defense Is Unavailable

471

469

462

Contents

xxiii

9.2.15 Article XX of GATT and Annex 1A Agreements 9.2.15.1

Trade-Related Investment Measures (TRIMs)

9.2.15.2

Sanitary and Phytosanitary Measures (SPS)

9.2.15.3

Agriculture (AG)

9.2.15.4

Agreement on Textiles and Clothing (ATC)

9.2.15.5

Technical Barriers to Trade (TBT)

9.2.15.6

Customs Valuation (CV)

9.2.15.7

Preshipment Inspection (PSI)

9.2.15.8

Rules of Origin (ROO)

9.2.15.9

Import Licensing Agreement (ILA)

474 474

474

9.2.15.10 Antidumping (AD)

475

475

477 477

477 477

477

9.2.15.11 Subsidies and Countervailing Measures (SCM) 9.2.15.12 Safeguards (SG)

478

479

9.3

National Security

9.3.1

Balancing Trade Openness and Essential Interests

9.3.2

National Security in a Divided World

9.3.3

Practice

481

9.4

Waivers

487

9.4.1

A Transitional Arrangement

9.4.2

Waivers Are Justiciable

9.4.3

Waivers in Force

9.5

Nonapplication

9.5.1

The GATT Regime and Its Rationale

9.5.2

Nonapplication in the WTO

9.5.3

List of Instances of Nonapplication

9.6

Concluding Remarks

Notes 499 References 567 Index 591

473

479 480

487

489

490 493

496

493

494 495

479

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

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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-Eleni. 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 this volume) 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 a 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:

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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, and amendment requires consensus across 161 divergent trading nations. Agency costs, so to speak, are quite high.

Introduction

xxix

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 scene is thus set for a “negotiators meet economics” play, and the consequences of this discussion.

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Introduction

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 it will help them continue the discussion and ask further questions in the years ahead.

1

1.1 1.1.1

From GATT to the WTO

Establishing a Multilateral Trade Order From Drudgery to Excitement

Adlai Stevenson is reported to have said that trade is quite boring, and that its greatest need was for fresh clichés.1 Viewed from the perspective of a statesman, this is probably a wise statement. Until recently, with the emergence of the antiglobalization movement that peaked in 1999 in Seattle, Washington, trade talks rarely, if ever, made headlines. This was probably even more the case when the General Agreement on Tariffs and Trade (GATT), the first contract that (eventually) managed to generate multilateral trade liberalization, was created amid other towering achievements in the post—World War II (WWII) era, such as the advent of the United Nations (UN), the World Bank (WB), and the International Monetary Fund (IMF). To make the case for trade being even less of an issue worth headlines, GATT was an agreement that was supposed to come under a world trade institution: a big trade project, the International Trade Organization (ITO), that never saw the light of day. GATT began its life lame, awaiting the eventual advent of the ITO, which was, alas, never to be. During the first years following its establishment, trade negotiators, usually the rank and file of national ministries, would meet in Geneva, Switzerland, and the surrounding area (Annecy) to discuss the level of tariffs they would be imposing on goods, while other institutions like the Organisation for European Economic Cooperation (OEEC) would attract the highly ranked national officials called to administer the Marshall Plan and discuss the road to development for Europe, and the IMF and the WB, the road to world development. Stevenson, the reputed US statesman, was not off base when one takes all of this into consideration. He certainly would not have anticipated that GATT would become the treaty/institution that would administer trade for the next six decades, and even less the excitement it would provoke, the anti-GATT riots in Seattle fifty years later, and the antiglobalization movement. He might well have been puzzled if he had been around long enough to witness the

2

Chapter 1

scope that an agreement initially designed to organize a tariff bargain would eventually cover. In Stevenson’s time, negotiators focused on getting goods across the border. In today’s world, many goods are produced in different countries, and national origin is becoming an increasingly elusive issue. This is very much due to the success of GATT. An agreement (in fact, a provisional agreement with no institutional coverage) managed to rally trading nations behind its disciplines, gradually increase its membership and coverage, and thus increase its relevance as well. In Stevenson’s time, the bulk of trade issues concerned the level of tariff imports in a few markets. Today’s trade issues concern the effect of environmental protection on trade, the (multilateral or regional) standardization of production processes, and the defense against socially unacceptable policies. From a GATT embroiled in negotiating tariff concessions at the four- and six-digit level, we have arrived at the WTO, the worldwide regulatory interface. Here is how the story unfolds. 1.1.2 Attempts to Liberalize Trade at the Multilateral Level Trade integration has existed since time immemorial.2 Indeed, forms of trade integration are present in many ancient civilizations and, as we shall see in chapter 4, “Most Favored Nation,” some aspects of the institutions that form an integral part of today’s trade regime have been present since medieval times. It is true, for example, that aspects of the modern MFN, the most favored nation clause embodying the principle of nondiscrimination in international trade, can be traced to treaties signed by Mantua, an important Italian city-state, and even more so in the CobdenChevalier treaty between France and the United Kingdom (UK) in 1860.3 Similar initiatives, nevertheless, were never meant to provide a multilateral “roof” for trading nations. Besides similar regional attempts, there was never an attempt to establish a multilateral trade order before the end of World War I (WWI). The GATT/WTO followed a path that started with the 1927 World Economic Conference: nothing was set in stone then, but whatever happened from that moment onwards until the advent of GATT was more than lines drawn in the sand. 1.1.2.1 The 1927 World Economic Conference: Not Suitable Following WWI (the war to end all wars, as the saying went), the international community was trying to design ways and mechanisms to address the terrible situation it found itself in both at the national and the international level. Of immediate interest to the topic of this volume is the World Economic Conference organized in Geneva in 1927.4 From May 4 to 23, a meeting was convened between fifty nations under the auspices of the League of Nations5 and chaired by Georges Theunis aiming to curb nationalistic beggar-thy-neighbor policies that were perceived as the

From GATT to the WTO

3

reason for the world’s economic troubles. In the words of W. Leslie Runciman (1927, p. 467): The impression left at the end of them was that the Conference was agreeing on two facts: first, that the world’s economic troubles are the result not so much of the material destruction of the war as of the dislocation of international trade that it involved, and second that the artificial barriers to trade introduced in consequence of this dislocation had outlived the conditions which produced them, were too numerous and ought to be diminished.

Naturally, then, trade figured high on the agenda. Three committees were organized dealing with agriculture, industry, and commerce. The latter, chaired by the Dutch delegate Hendrikus Colijn, notorious for his hands-on methods, produced a series of recommendations in favor of taming customs duties, introducing widespread MFN, and addressing both direct and indirect forms of subsidization. It was a remarkable document exhibiting substantial doses of realism, calling for freer rather than totally free trade, understanding thus, that absent incrementalism, the whole endeavor of trade liberalization would be in peril. At the end of the day, though, it was what it was: a collection of recommendations that it was hoped would find their way into future binding instruments. In the words of the conference chairman, Theunis: Our advice and recommendations will in all probability not be followed immediately on the scale we would desire. Great movements frequently experience many difficulties at the outset. But we are convinced that our work is based on true principles, and of the determination to ensure to the best of our power both the peace and the prosperity of the world.6

The chairman of the Committee on Commerce, Colijn, was even clearer on this point: Of course everybody knows that the decisions of the Conference could bind nobody, that the members were present neither as delegates nor as representatives of their country, but solely as individuals. Individuals perfectly free to express their own opinions, perfectly free to arrive at any conclusion they wished, but not able to tie the hands of their respective Governments. Consequently, one can say that the object of the Conference was first of all discussion. Discussion in order to arrive at better understanding of the present-day economic difficulties and conditions; to arrive at an agreement as to the reforms that were necessary. … Its conclusions can only have practical consequences if the intentions of the Conference are translated into actions by the Governments of the various countries.7

The final output, thus, resembled conclusions of an academic conference more than a document crafted by agents of the political establishment. The agreement signed was unsurprisingly weakened by the withdrawal of the UK and the United States (US), and its legal relevance was gradually reduced to redundancy. Cordell Hull, a US statesman who eventually played a key role in the advent of GATT, explained the reason for the US withdrawal in the following terms: This Convention … is … poorly adapted to the present situation and there is very little possibility that other nations may adhere to it. … I am reluctant to take this action at the present time. It is

4

Chapter 1

important that it not be construed as evidence of any new decision by the American Government to shape its policy on domestic rather than on international lines.8

The trading nations were back at the negotiating table a few years later. They did not have to start from scratch, though. Some of the ideas expressed in this conference did survive, as we will see in the next section. 1.1.2.2 The 1933 World Economic Conference: Prewar Pilots Between 1927 and 1932, the US went through the terrible crisis of 1929, the Great Depression that marked US and world history, as we will see further on, like few events did. Around that time, though, the whole world was in crisis, not just the US. True, the US experienced an abrupt landing following years of superficial (to be generous) prosperity.9 A vicious circle entered center stage: Europe’s economic downfall drove the US economy down, and the troubles of the US economy sank Europe into an even deeper recession. Europe had been in doldrums for some time, as it was coming to grips with the “economic consequences of peace,” to paraphrase Keynes. It is, of course, difficult to draw up an exhaustive list of the reasons for Europe’s troubles. It is even more difficult to decide on the significance of each of them. There is little doubt, though, that Germany’s troubles were a significant factor. Against the advice of British economist John Maynard Keynes,10 onerous post-WWI conditions had been imposed on Germany, which found it difficult to pay the victors for damage done during the war. Deficient payments by Germany meant that the UK and France could not honor their war loans to the US. Europe’s troubles contributed to sinking the US economy into chaos. Runciman (2013, pp. 90ff.) explained that the 1929 crisis signaled, among other things, the end (or severe reduction) of US investment in Germany and, thus, to the intensification of the difficulties that Germany was going through in repaying the victors. The US decision to not renegotiate war loans contracted with the UK and France meant that there was no way out from the vicious circle. To cap it all, in 1931, the UK government decided that the British pound should leave the gold standard, sending out shock waves especially to the French, who were caught unawares by this decision and demanded explanations. It is difficult to ascertain how much this experience veered the US administration toward international cooperation, although the US initiative in bringing about the “London Conference” seems to suggest that this had indeed been the case. In 1933, the London Conference was held from June 12 to July 27 to address all these issues. The conference was the brainchild of US president Herbert Hoover; unfortunately, he left office before it even started, to be replaced by Franklin Delano Roosevelt, who had acceded to the White House in March 1933. Hence, the main proponent of the gathering was absent, and this absence was felt, especially since Roosevelt was not hard pressed to participate in the conference and contribute to its success. In fact, he did not even bother to show up. It was Cordell

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Hull, the secretary of state, who headed the US delegation to a conference with a very ambitious objective: to save the world from its economic troubles. Trade featured in the agenda but was not the only topic of concern. It was not even a priority, at least as far as the US leadership was concerned. Roosevelt is quoted in Runciman (2013) as uttering (p. 93): Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy. I favor as a practical policy the putting of first things first. I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment.

Roosevelt, a persuaded internationalist, was looking for domestic stability first, which would bring the necessary impetus to engage the US internationally as well. World cooperation would follow. It would be a strong US, not a weakened one, that would engage on the international plane. This was Roosevelt’s vision. Because of this belief, Roosevelt only half-heartedly agreed to participate in the conference. Eventually, he dropped his bombshell only weeks before the start of the London Conference when he announced his decision to take the US off the gold standard as the UK had done. This decision caused uproar. Runciman (2013) reported that Keynes was one of the few who supported Roosevelt in this decision, although he quoted Keynes stating (p. 104): “Roosevelt has about as much idea of where he will land as a pre-war pilot.”11 Be that as it may, the UK and US decisions to take their currencies off the gold standard risked creating a serious imbalance between their currencies and those of the gold bloc countries, particularly France. The devaluation of the dollar and the pound sterling raised import prices and lowered export prices in the US and Great Britain. The subject matter of the conference was, inter alia, the stabilization of currencies, and now the whole endeavor was in peril. Unsurprisingly, the conference ended on July 27 having accomplished nothing. The US decision12 contributed to the downfall of the conference, although one would be too harsh to blame the US alone for the failure to reach the conference’s objectives. This failure made waves because of the high hopes that the announcement of the conference had created. Many thought that it would be brought to fruition. There was widespread criticism of the delegations that, contrary to the 1927 World Economic Conference, were gathered in order to produce a binding text that would help move the world out of the financial mess it had found itself in after WWI. H. G. Wells (1933) put it fittingly when he stated (p. 127): The men who assembled had just as good brains as anyone today, and, as an exhaustive analysis by Moreton Canby of the various projects advanced at the Conference proves, they had a substantial understanding of the needs of the world situation, yet collectively, and because of their haunting paralyzing sense of the Mass and Press behind them and of their incalculable impulses and resentments, they achieved an effect of fatuity far beyond the pompous blunderings of Versailles.

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The failure to agree on a cooperation framework in 1927 was followed by the same failure in 1933. Eventually, in 1936, the US, Great Britain, and France agreed on currency stabilization in the context of the Tripartite Agreement, which some other countries of the gold bloc (e.g., Belgium, the Netherlands, and Switzerland) also observed. This was the only tangible success at the multilateral level until WWII erupted. Obviously, such limited international cooperation was not enough to address the post-1929 situation, never mind to preempt a world confrontation. 1.1.2.3 World Trade before Bretton Woods Following these unsuccessful attempts to coordinate policies, trade policies were unilaterally designed, and the world remained segmented. Coordination occurred in a limited manner, and various national/regional blocs emerged as a result. For example, the UK and its colonies (Commonwealth) were enjoying preferential access to each other’s markets. For its part, the US had in place the highest tariffs in its recent history, by virtue of the Smoot–Hawley Tariff Act. Although its impact on the US GDP has been grossly overstated, as the work of Irwin (2011, pp. 140ff.) has shown, its trade impact was quite dramatic. It also had in place a series of treaties of Friendship, Commerce and Navigation (FCN) with targeted countries, including the 1832 Treaty with Chile, the 1932 Treaty with Germany, and the 1937 Treaty with Siam. FCN signatories, even then, would pay the Smoot–Hawley tariffs. In Southeast Asia, a similar preferential zone existed between Japan and various other countries. Germany had developed its own system of (essentially) barter trade with a few of its neighbors. This was the “Schachtian” view of the world, named after Hjalmar Schacht, the former president of the Reichsbank during the Weimar Republic, who had become a Nazi sympathizer and Germany’s minister of economics during that era. Schacht favored few bilateral relations. After 1936, with Goering replacing Schacht, striving for autarky intensified. Tooze (2006, pp. 86ff.) explains how Germany attempted to realized his vision by first denouncing the 1932 Treaty with the US and putting Germany on course for self-sufficiency with limited trade agreements when necessary, with Austria, Spain, Sweden, and Switzerland. Trade relations, thus, did exist between nations in bilateral and regional arrangements, which were not interconnected through any multilateral agreement.13 World markets were quite segmented, kept apart mainly by high tariffs and various types of quantitative restrictions. Worse, through their unilateral policies, they were shifting costs on each other. Sumner Wells, US undersecretary of state, stated in a 1941 speech: Nations have more often than not undertaken economic discriminations and raised up trade barriers with complete disregard for the damaging effects of the trade and livelihood of other peoples, and ironically enough, with similar disregard for the harmful resultant effects upon their export trade.14

It is against this background that the ITO was conceived as the means to put an end to unilateralism. It was meant to serve as the “commercial leg” informally evoked at the

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Bretton Woods conference, the institutional foundation to administer the Havana Charter, an international agreement designed to regulate trade in goods on a worldwide basis. GATT was supposed to be part of the ITO,15 but it turned out to be a substitute for it. 1.1.3

Bretton Woods and Trade

Two important negotiations took place right before the end of WWII, when nations realized in the most awful manner what unrestricted unilateralism can provoke, and trade featured in neither of them: the San Francisco conference, which gave rise to the UN, and the Bretton Woods conference, which gave birth to the WB and the IMF. The UN16 was intended to be the overarching international organization to help avoid another world war; at the risk of vulgarizing, the UN system was designed as a multilateral response to unilateral aggression. The Bretton Woods conference, which took place in that homonymous city in New Hampshire, on the other side of the North American continent from San Francisco, aimed to complement the UN system and address the causes of aggression.17 The intended role of the WB and the IMF, the two institutions established then and there, was to provide technical assistance to address development-related issues and to finance development policies.18 It bears repeating that there was no formal negotiation during the Bretton Woods conference of a commercial leg that would complement the WB and the IMF, although some informal discussions pointed in this direction.19 1.1.4

Follow-up to Bretton Woods

The establishment of a multilateral institution focusing on trade liberalization was very much a shared initiative by the US and UK administrations. The two partners felt that they shared a responsibility for establishing a liberal trade order that would complement the new international architecture (UN, WB, IMF). Shared interests and some remarkable people transformed a noble idea into tangible reality. 1.1.4.1 Hull and Nondiscriminatory Trade It might sound odd to start the GATT narrative with a statesman. After all, if trade liberalization made good sense, anyone in his position would have pursued it. Maybe this is true. As it happened, though, it was Cordell Hull who did so, and his contributions in establishing GATT cannot be overstated. Chosen by President Franklin Delano Roosevelt to serve as secretary of state in 1933, Hull was uniquely positioned to pursue his belief that freer trade20 may lead to economic and political conditions that would be more favorable to peace. He saw a link between trade and peace, in that trade implied communication, and communication, he hoped, would lead to increased understanding of the differences across nations.21 In his own inimitable expression, Hull firmly believed that trade “dovetailed with peace.”22

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Hull had to fight an uphill battle inside the administration in order to advance his ideas. Many economic nationalists were at the time in the payroll of the US government, and they were opposed to free trade, fearing that it might eviscerate Roosevelt’s New Deal policies, such as government price support for farm products. The core of these policies consisted, of course, of government intervention with the intent of correcting the causes of all misfortunes that the US had experienced in the past. Opening up US markets to a flux of imports could be a compromising factor, at least in the minds of some. Luckily, Hull’s beliefs went hand in hand with a substantial dose of realism. The goal he set was not free trade in the sense of zero tariffs, an inconceivable objective at that time, but simply to reduce excessive tariffs and allow some additional growth in foreign trade.23 He was incrementalist, not utopian. Hull believed that the absence of discrimination in world trade relations should be seen not only as part of the US contribution to world peace, but also as a corrective mechanism redressing the adverse trade impact that the imperial preferences had exercised (and were continuing to exercise) on US interests.24 It was around this latter aspect that he would gather support for realizing his innate persuasion. Nondiscriminatory trade liberalization was a costly option for the US (as it would have been to any nation with substantial bargaining power, as the US had at the time), because it allowed free riding. Hull was very aware of the simple economic fact that those with little bargaining power would automatically and unconditionally profit from the tariff promises that those with substantial bargaining power (e.g., the US) had managed to extract from third countries. In a similar vein, they would profit from tariff reductions by the US without necessarily having to pay for them in form of reciprocal tariff reductions.25 The best proof that the US (and Hull) was quite aware of the economic cost of MFN is that before the GATT/ITO negotiations, the US government had not practiced widespread trade liberalization in its trade relations; instead, it had favored “conditional MFN.”26 For Hull, nevertheless, it was ultimately the duty of the US, as a world leader, to adopt a different behavior in the post—WII era and, in this way, to contribute to peace—the long-term objective that GATT should be pursuing, after all.27 In his thinking, economic realism (that is, obliging those who can afford to make reciprocal concessions to the US, to do so) should go hand in hand with contributions to peace (by allowing those who could not afford to pay to profit from the new, less protectionist equilibrium). By reducing its costliness (since free riding would be an option only for those who could not afford to pay, or whose payments were immaterial), the case for nondiscrimination would become more palatable to skeptics. To achieve nondiscrimination, Hull believed that he had to do away with what he perceived to be the greatest obstacle: the “imperial preferences” between the UK and its dominions and colonies that formed the Commonwealth, which were openly discriminatory.28 He went so far as to refer to them, when testifying before the US Congress in 1940,

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as “the greatest injury, in a commercial way, that has been inflicted on this country since I have been in public life.”29 The hostility toward imperial preferences was running deep inside the US administration. Although these preferences as such were decided in Ottawa in 1932, the British government had been practicing a policy of discriminatory trade with its dominions for a long time. Cordell Hull was echoing a sentiment to move to nondiscriminatory trade that had existed for years (since the American Revolution, in fact). Indeed, as Palmeter (2003) noted (p. 140): The American Revolution was fought in part over the issue—the British insistence that the colonies trade with Britain and not with France. Indeed, the Declaration of Independence condemns King George III “for cutting off our trade with all parties of the world.” George Washington recommended a non-discriminatory trade policy to his countrymen in his famous farewell address. Equality of trade was the third of Woodrow Wilson’s Fourteen Points. And the dismantling of the Imperial Preferences was a major goal of US trade policy after the Ottawa Agreements of the 1930s.

The GATT negotiation, in his mindset, would have to introduce MFN in lieu of imperial preferences. Note, nonetheless, that trade between Britain and its Commonwealth partners was not totally uninhibited. The term “imperial preferences” accurately captures reality in this respect. Tooze (2014, pp. 181ff.) for example, mentions that in 1917 India managed to obtain the right to impose tariffs on imports of British industrial cotton goods. Thus, trade in the British empire was preferential but not unobstructed. 1.1.4.2 The Other Side of the Pond: Meade and the International Commercial Union In the UK, there were many voices in favor of preserving the imperial preferences, even from those with a pronounced cosmopolitan outlook. The government favored pursuing a trade deal with the US and other countries, but it was quite reluctant to abandon the system of preferences across Commonwealth countries. Imperial preferences were perceived as a factor in the reinvigoration of the UK economy. Indeed, through this regime, the UK manufacturing industry had privileged access to raw materials around the world. It could, thus, profit from preferential access to necessary inputs when others with competing manufacturing industries (such as the US) could not. Entering into a negotiation aiming to shape the world trading order, the UK government had the unique chance to collaborate with three of the greatest economists that the country ever produced: John Maynard Keynes, James Meade, and Lionel Robbins. The first did not exert much influence on the shaping of the world trade order. He will be remembered for many things, among them his role in steering the Bretton Woods conference to success. But alas, he passed away in 1946 when GATT/ITO was about to be negotiated. The other two were members of the UK delegation to the GATT/ITO negotiation, and Meade should be credited with providing most of the intellectual support for the UK position during this negotiation.

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In Meade (1942), he had already highlighted several features of a possible multilateral trade convention. In his view, an “International Commercial Union” should be established, with three essential characteristics: • Membership open to all states willing to carry out the obligations of membership • No preferences or discrimination (with an exception for imperial preferences) among the participants • A commitment to remove certain protective devices against the commerce of other members of the Union altogether, and to reduce to a defined maximum the degree of protection which they would afford to their own home producers against the produce of other members of the Union30 The scene was thus set for the upcoming transatlantic negotiations. The US would ask the UK to abolish imperial preferences. The UK, in turn, would request from the US meaningful tariff concessions. Two questions, besides the issue of imperial preferences versus US tariff cuts, dominated the agenda of the transatlantic partners: • Who else should participate in the negotiations? • What, besides tariffs, should be the basis for the negotiations? Before we move to provide the responses to these questions, we need to first unravel the shaping of the transatlantic cooperation in the months before the official kick-off of the GATT negotiation. 1.1.4.3 Bilateral Attempts to Tame Imperial Preferences: Keynes Enraged The two countries did not jump directly into an international negotiation. They tried to resolve some of the issues that occupied the minds of policy makers in a bilateral manner. In 1938, the US and the UK already had signed a reciprocal trade agreement, but the results were limited, as the agreement failed to put a dent in Britain’s system of imperial preferences. The agreement went into effect in January 1939 but was rendered moot the following September, when the UK adopted extensive controls on imports, including exchange controls, following its entry into WWII.31 This was the last trade deal before GATT. The US efforts to extract a commitment from the UK to abandon its trade preferences vis-à-vis the other Commonwealth countries did not stop here, though. They were revived thanks to the Lend-Lease program. During WWII, the UK could not afford to finance its war efforts. It turned to the US for help, but that help did not come without consideration. The US Congress passed the “Lend-Lease Act” (enacted on March 11, 1941), and through this legislation, the US government could transfer billions of dollars’ worth of

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equipment and supplies to the UK (and later to other allies as well). Instead of compensation, the UK was required to provide a benefit that the US president deemed satisfactory. The consideration, in its original 1941 formulation in the Lend-Lease Act, would be a commitment by the British “to the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and trade barriers.”32 Lend-Lease, thus, was supposed to help the UK solve the difficulties it was facing at the time.33 The consideration for this assistance was the commitment embedded in this provision (Article VII) that the UK would help establish nondiscriminatory trade in the post-WWII period. For the US, this was very much an objective. Britain had kept demand for US products low by blocking conversion of pounds into dollars into the “sterling area” (Britain, and its colonies and dominions), and by controlling the spending of dollars that its colonies and dominions had earned. Members of the sterling area were, of course, trading with each other through the imperial preferences. Steil (2013) reported that Keynes was infuriated by Article VII, since he saw in it the death of imperial preferences, as well as an obligation by the UK to share with the US access to raw materials and its lucrative export markets. He went so far as to call this provision “the lunatic proposals of Mr Hull,”34 assigning to the US statesman the paternity of this proposal. He was not far wrong in thinking this was Hull’s idea. Keynes, under the influence of Meade, eventually revised his original position and stopped insisting on the need to keep imperial preferences intact at any cost.35 The imperial preferences could be negotiated after all, and the question became: What should the consideration be? The ball was slowly moving into the international arena. 1.1.4.4 The Atlantic Charter The qualms about Lend-Lease notwithstanding, the US and the UK continued to cooperate intensely and plan their next steps. While they continued to disagree on the consideration, their disagreement would not bring their cooperation to a halt. The UK government took the initiative and prepared a document that was meant to relaunch their trade negotiation. In August 1941, UK prime minister Winston Churchill presented Roosevelt with a first draft of the so-called ‘Atlantic Charter’,36 which included the pledge that the two countries would “strive to bring about a fair and equitable distribution of essential produce … between the nations of the world.”37 The final version of the Atlantic Charter that was agreed following negotiations between the two governments endorsed nondiscrimination, albeit in terms that could be interpreted in different ways: Fourth, they will endeavor, with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.38

Correspondingly, the US agreed to dilute Article VII of the Lend-Lease Act, enacted on March 11, 1941. The governing economic conditions would prejudge the consideration

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granted, and the US was obligated to take appropriate domestic measures of production, employment,39 and the exchange of consumption and goods in case of an economic slump.40 It read: In the final determination of the benefits to be provided to the United States of America by the Government of the United Kingdom in return for aid furnished under the Act of Congress of March 11, 1941, the terms and conditions thereof shall be such as not to burden commerce between the two countries, but to promote mutually advantageous economic relations between them and the betterment of world-wide economic relations. To that end, they shall include provision for agreed action by the United States of America and the United Kingdom, open to participation by all other countries of like mind, directed to the expansion, by appropriate international and domestic measures, of production, employment, and the exchange and consumption of goods, which are the material foundations of the liberty and welfare of all peoples; to the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers; and, in general, to the attainment of all the economic objectives set forth in the Joint Declaration made on August 14, 1941, by the President of the United States of America and the Prime Minister of the United Kingdom. At an early convenient date, conversations shall be begun between the two Governments with a view to determining, in the light of governing economic conditions, the best means of attaining the above stated objectives by their own agreed action and of seeking the agreed action of other likeminded Governments.

As a result, both partners felt they had won something in this battle. Hull maintained that expressing Article VII in general terms did not mean that the US had given anything away since all preferential arrangements fell under its purview anyway. Churchill, on the other hand, defending its acceptance of this provision, stated: I did not agree to Article 7… without having previously obtained from the President a definite assurance that we were no more committed to the abolition of Imperial Preference than the American Government were committed to the abolition of their high protective tariffs.41

Termination of discriminatory treatment was the medium- to long-term objective, but its attainment was conditioned on contingencies. At the end of the day, though, the inescapable conclusion is that the pressure at the bilateral level by the US was not enough to make the UK cave in. The future of imperial preferences would be decided by multilateral negotiations. The Atlantic Charter was only the antechamber of that negotiation. 1.1.5

Onto the World Scene

1.1.5.1 From the Atlantic Charter to the “Suggested Charter” Following the negotiation of the Atlantic Charter, the US prepared two documents, which were based on the Atlantic Charter and reflected a substantial part of Meade’s ideas. Nonetheless, they added to them the US point of view.

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The first document was called “Proposals for an International Trade Organization (ITO),” and was issued in 1945.42 James F. Byrnes, US secretary of state at that time, stressed in the foreword to the Proposals: Nations are now determining the policies which they will apply to trade in the postwar world. It is urgently necessary that these policies should be agreed upon, in order that the world may not separate into economic blocs.

The next step was the issuance of the so-called ‘Suggested Charter’ in September 1946, a document based on the ‘Proposals for an ITO’.43 The idea was to submit this document to various trading nations and see to what extent something along the suggested lines could become the first genuinely multilateral trade agreement binding trading nations. Between September and October 1946, US State Department officials traveled to Canada, Cuba, Brazil, Chile, New Zealand, Australia, South Africa, India, and China to brief them on the Suggested Charter and get their reaction. Irwin et al. (2008) reported mixed reactions to the Suggested Charter: while developing countries like Brazil, India, and Australia were rather negative, developed nations supported it. More precisely, Brazil was lukewarm; India questioned the compatibility of nondiscriminatory trade in a world formed by countries with asymmetric bargaining power; and Australian officials believed that the draft had failed to put sufficient emphasis on efforts to expand domestic demand.44 Canada was most supportive, while the UK criticized the draft charter only to the extent that it differed from its own proposals.45 One US State Department document summarized the reactions in this way: A definite different opinion is to be found in the less-developed countries (Australia, New Zealand, India, China, Cuba, Brazil, and Chile) with regard to the reduction of trade barriers. These countries, deeply concerned with the problem of industrialization and full employment, want to use restrictive measures to protect their infant industries. In general, they remain unimpressed with our contention that subsidies offer the least objectionable method for this purpose. They point out that, while tariffs and subsidies both amount to charges on their economies, the very real difficulties in raising the revenue to pay subsidies make the latter impractical for them. The Cubans are reluctant to give up their preferential position in the US market, as are the New Zealanders in the UK. The British, however, are willing to negotiate on preferences if convinced of the sincerity of the US intention to lower substantially our tariff wall, as a defense against which the Empire preferential system was developed. A major point of difficulty will be faced in connection with our cartel provisions. The Dutch, the Czechs, and the Belgians are not willing to concede that all cartels are bad. They would be willing to have the Charter state that certain practices may have undesirable effects, but they object to having the burden of proof put on those engaging in cartel arrangements, as our draft Charter now provides.46

No one, however, dismissed the submitted document out of hand, arguing that it was an inappropriate basis for an eventual negotiation. In fact, for some, it was a giant step toward a final text. In the words of the Chilean delegate, Mr. Videla, for example, “… the

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Chilean Delegation regarded the Suggested Charter as an admirable basis for discussion.”47 Indeed, the Suggested Charter was put before the GATT negotiators when the negotiation of GATT was officially launched after the end of WWII. 1.1.5.2 US Reciprocal Trade Agreements Act The participation of the US in the international negotiation(s) was substantially facilitated by the enactment of the US Reciprocal Trade Agreements Act (RTAA) in 1934. Irwin (2005, pp. 204ff) states that the RTAA fundamentally changed US trade politics by shifting tariff authority from Congress, which proved very responsive to domestic import-competing industries, to the executive branch, which was more apt to consider the national interest and use tariff negotiations in the service of foreign policy objectives.48

The US president, in other words, could strike deals that representatives of individual states could not: if coal meant more to the US than citrus, Pennsylvania would profit and Florida would suffer, but the US would be better off as a whole. While Florida on its own would have opposed similar deals, the US president could make them happen by allowing compensation of those who lost out from trade openness. Of course, one cannot overstate how important the participation of the US in the endeavor to sign a worldwide trade agreement was. It was the leading world power, the biggest trader, and a key player in the post-WWII reconstruction of international cooperation. 1.1.5.3 The List of Invitees The question of who should participate in the negotiation that would eventually signal the advent of the ITO was given substantial thought. On one end of the spectrum (and based on the information received through the dissemination of the Suggested Charter to a host of trading nations), keeping the negotiation to a few like-minded nations would facilitate the whole process and avoid weakening its quintessential elements. On the other hand, this approach was no guarantee that nonparticipants in the original contract would accede eventually to a contract that they had not negotiated (and influenced). Canada had consistently favored a “nucleus” approach, whereby only like-minded countries should participate. This meant that only countries of the so-called ‘Western bloc’ would be included in the negotiations, and the door would be closed to nonmarket economies (NMEs).49 This argument carried the day in the end, albeit with some modifications. Some developing countries, the views of which regarding the Suggested Charter had been sought, were invited to participate in the negotiation of the ITO. The Union of Soviet Socialist Republics (USSR) was invited as well, but rationally, no one would have expected it to accept the invitation. The group that was invited to negotiate the multilateral trade agreement in 1946 consisted of Australia, Belgium, Brazil, Canada, Chile, China, Cuba, Czechoslovakia (before

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it became a socialist country), France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, the Union of South Africa, the USSR, the UK, and the US. The USSR, as expected, declined the invitation to participate.50 1.1.5.4 “We Need to Act before the Vested Interests Get Their Vests On” The negotiation was formally launched following the establishment of a Preparatory Committee for the ITO in 1946.51 The Preparatory Committee held its first meeting in London that same year. It did not take long for negotiators to realize that the endeavor to successfully negotiate the ITO was quite formidable. The sheer number of issues on the table and the alreadyreceived reactions to the Suggested Charter signaled a negotiation that would be cumbersome and delicate, even among basically like-minded countries. The negative reactions did not recede, as countries were becoming increasingly aware of the amount of sovereignty that they would be transferring to the international plane as a result of their accession to the ITO. Although the term “globalization” was invented dozens of years later, some participants effectively reacted to it by invoking the “assault to sovereignty” as the reason to block some far-reaching initiatives to integrate. Indeed, a far-reaching agreement had been put on the table dealing with both state and private barriers to trade liberalization. Issues such as social dumping and domestic employment policies, which many wanted to keep within the realm of national discretion, were on the agenda.52 The ITO project reflected a level of unprecedented ambition to address barriers that segmented markets. GATT was simply one of the chapters that fell under the aegis of the ITO, designed only to address state barriers to trade liberalization. It focused on quotas and tariffs (e.g., eminently negotiable policy instruments). It kept important regulatory choices, such as employment policy, within the exclusive domain of state sovereignty. In fact, it did not even mention them by name, since, as will be discussed later in this chapter, commitments were made on all domestic policies without naming them one by one, and the plan was meant to ensure that commitments on tariffs would not be circumvented through subsequent unilateral action. The GATT looked to be a feasible, realistic exercise compared to the ITO project. It did not take long before skeptics regarding the feasibility of the wider agenda, the ITO, multiplied. Unsurprisingly, negotiators decided already during their first meeting in London on a bifurcation between GATT on the one hand, and the wider ITO agenda on the other: GATT would be negotiated on a separate track from the ITO. Its limited and less controversial content almost guaranteed a swift conclusion of the negotiations. It was thought, thus, that through separate negotiations, trading nations could quickly realize substantial gains from trade liberalization (by focusing on state barriers to trade). Following their decision to bifurcate, negotiators went full throttle and managed to conclude the negotiation of GATT in two additional meetings held in New York and Geneva in 1947.

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The decision to bifurcate the negotiation and quickly conclude the GATT leg was supported by political economy reasons as well. Diebold (1993, p. 336) attributes to Will Clayton, a southern businessman who established a cotton brokerage firm before serving the Roosevelt administration first in the Commerce Department and then, as of 1944, in the State Department (first as assistant secretary and then undersecretary of state for economic affairs, and eventually as head of the US delegation to the Geneva talks), the following phrase: “…we need to act before the vested interests get their vests on.”53 The fear was that a delay in the negotiations might give lobbyists the necessary time to put pressure on governments to avoid trade-opening measures. Acting fast would catch domestic business interests unawares and thus reduce the number of problems that negotiators had to face. It is quite remarkable that the whole negotiation was completed in three meetings conducted over a time span of substantially less than a year. 1.1.6 The Negotiation of GATT GATT was planned as the first step in the direction of the ITO. The signature and entry into force of GATT did not mean, ipso facto, the abandonment of the ITO project. Quoting Diebold (1993) again, GATT was regarded as an “advance installment” that could be folded into the ITO later on. GATT was negotiated first in London, then in Lake Success, New York, a village in northwest Long Island, which had also been the temporary headquarters of the UN (1946–1951), and finally in Geneva, Switzerland. Following the good work done in London, negotiators met between January 20 and February 25, 1947 in Lake Success. They established an ‘Interim Drafting Committee’, which was meant to provide solutions in the areas where no agreement had been reached, complete the draft where necessary, and streamline the drafting of the provisions provisionally agreed upon in London. John Leddy, a member of the US administration who was trained in economics, was in charge. In a confidential document that Leddy addressed to the US delegation,54 he stated that the focus of the Interim Drafting Committee was on what became Part II of GATT (e.g., national treatment, customs valuation, etc.). He praised the attitude of several delegations (Australia, Canada, Cuba, India, and the UK), and was quite laudatory when discussing their contributions, while reserving criticism for others.55 To facilitate conclusion, flexibility was introduced: whereas no reservations were allowed in the final text, they were considered appropriate during the drafting stage.56 The negotiations on the GATT text were eventually complemented by negotiations on tariff reductions. Between April and October 1947, state representatives, negotiating under the institutional umbrella of the Preparatory Committee, conducted the first round of tariff negotiations at the European office of the UN in Geneva.57 Annex 10 of the London Draft58 explained the agreed tariff negotiation process:

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Negotiations should take place under strict reciprocity59 (in the sense, that countries should not be expecting one-way preferences); (a) The agreed “principal supplier rule” meant that the importing state would be negotiating the level of its import tariffs with the most important exporter for a particular commodity.

This effectively meant that the UK and the US would be omnipresent during the first tariff negotiations. The ride was far from smooth. Irwin et al. (2008) reported a cable by Clayton to his authorities stating the abrupt end of negotiations as one possible response to British intransigence. Clayton was getting exasperated with the insistence of the UK to preserve the bulk of its imperial preferences (pp. 100ff.): In a key meeting on July 12, 1947, Clayton and Cripps clashed over preferences. Clayton insisted that the time had come for Britain to eliminate imperial preferences. Cripps completely rejected this demand. They squabbled over the degree to which the United States had reduced its tariff and thereby earned a reduction in preferences. Part of the difference between them was technical: Americans assessed the value of concessions by the percentage of items on which duties were reduced or bound, whereas the British used the pre-war value of trade on which duties bound or reduced. But the British did not even pretend to make serious concessions. A U.S. cable described Cripps as “marked by complete indifference bordering on open hostility toward the objectives of the Geneva conference” (FRUS 1947, I, 965). At one point, Cripps made the amazing suggestion that a better balance might be achieved by the withdrawal or reduction of our offers. Helmore has sought an early termination of tariff negotiations and has indicated that we should be satisfied with modest results. In respect to preferences, the Commonwealth has placed us at a disadvantage in negotiations by taking the position that we must purchase every reduction or elimination of a preference twice—once from the country that receives it, and once from the country that grants it. On the basis of performance to date, it would appear that the United Kingdom will attempt to extract every concession that we will make toward easing their short-run situation without making any appreciable concessions with respect to long-run trade policy. The vested interests that have been built up under the preferential system are strong, and the United Kingdom has shown no willingness to take the political risks involved in reducing or removing the protection afforded them by the preferences which they enjoy. It appears that no concessions are made without the permission of the industry concerned. The real obstacle to effective action on preference exists, not in the Dominions, but in the United Kingdom (FRUS 1947, I, 975). The Americans were flabbergasted that Cripps would suggest that the United States should withdraw some of its offers if it believed it had not received adequate concessions. Clayton was furious over Cripps’s “callous disregard of their commitment on preferences” (FRUS 1947, I, 979). Canadian officials watched with grave concern the deterioration in the Anglo-American relationship at the conference: It is evident that temperamental differences between Clayton and Cripps have grown to the point at which they constitute a real obstacle to agreement (CDER 1947 13, 1192).

In a similar vein, here is an anecdote recounted by Zeiler (1997, p. 711): Worried about getting a deal that would satisfy Congress, Clayton began a long retreat punctuated by pleas, demands, and recrimination toward the British. He first tried to entice Britain and Canada, two nations deemed amenable to free-trade doctrine, to close sixty-five margins. Cripps merely countered with an offer to abolish preferences on frozen salmon and motor bikes, items of lesser significance than other American exports affected by Ottawa margins.

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The eventual compromise was for the US to accept a reduction (rather than an elimination) of the preference margin, and, in response, for the UK to accept in return less farreaching (than originally planned and requested) US tariff cuts. This eventually opened the door to the final agreement. Steil (2013) quoted from the October 15, 1947, New York Times: The vast project [the GATT], which makes all previous international economic accords look puny is the realization of Mr Clayton’s dream: that a group of like-minded democratic nations could deliberately reverse the historical trend toward the strangulation of world trade. It is a big step that nobody but Mr Clayton and a few of his colleagues thought would ever be taken.60

1.1.7

Entry into Force

The outcome of the Geneva tariff negotiations, together with the document negotiated in Lake Success, constituted the Geneva Final Act. This act included the Protocol of Provisional Application (PPA), under the terms of which the governments that participated in the negotiations undertook to fully apply Part I of GATT (dealing with tariff concessions and the MFN clause),61 and Part III of GATT (containing provisions dealing with administrative issues). The same governments further undertook to apply Part II of GATT (the heart of the agreement, covering national treatment, antidumping (AD), subsidies, safeguards, balance of payments (BoP), prohibition of quantitative restrictions, general exceptions to the obligations assumed, and dispute settlement) “to the fullest extent not inconsistent with existing legislation.”62 The application of Part II only to the extent consistent with existing (domestic) legislation is what became known as “grandfathering” of legislation that was inconsistent with the GATT obligations.63 It was agreed that similar inconsistencies would be tolerated on a temporary basis only, and they would be set aside when the ITO would see the light of day: “Part II of this Agreement shall be suspended on the day on which the Havana Charter comes into force.”64 GATT entered into force on January 1, 1948. Its original 23 members were the governments of the Commonwealth of Australia, the Kingdom of Belgium, the United States of Brazil, Burma, Canada, Ceylon, the Republic of Chile, the Republic of China, the Republic of Cuba, the Czechoslovak Republic, the French Republic, India, Lebanon, the Grand Duchy of Luxemburg, the Kingdom of the Netherlands, New Zealand, the Kingdom of Norway, Pakistan, Southern Rhodesia, Syria, the Union of South Africa, the United Kingdom of Great Britain and Northern Ireland, and the United States of America.65 The entry into force of GATT was provisional since it was only by virtue of the PPA. As explained in Jackson (1969), GATT could have entered into force on a permanent basis once a given number of countries representing a high percentage of international trade had agreed to do so. It was decided, nevertheless, not to proceed in this way in order to avoid

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creating discrepancies between those who had accepted GATT on a provisional basis and those who would be accepting it permanently. The adoption of the Havana Charter, which would signal the advent of the ITO, was expected to occur at a later stage, following the entry into force of GATT, and the plan was that GATT would then come under the aegis of the ITO. In the meantime, the legal relationship between GATT and the ITO was governed by Article XXIX of GATT. This provision imposed on the GATT signatories a best-endeavors obligation to behave in an ITO-consistent manner with respect to the obligations included in the chapters of the Havana Charter mentioned in Article XXIX.1 of GATT. Since the Havana Charter never came into force, GATT was provisionally applied for 47 years pending the advent of the ITO. The successful conclusion of the Uruguay round and the consequential advent of the World Trade Organization (WTO) signaled the definitive end of the ITO project. The Uruguay round is the last round of negotiations that has been successfully concluded so far. Besides the institutional innovations capped by the entry into force of the WTO, it covers both agreements on tariff reductions, as well as a series of “regulatory” agreements that we discuss in the second volume of The Regulation of International Trade (covering the WTO Agreements on Trade in Goods) hereafter abbreviated as “volume 2.” 1.1.8

Property Rights on GATT

The influence of the US and UK on the negotiation of GATT cannot be overstated. The Suggested Charter was based on negotiations between the transatlantic partners. In the account provided by Irwin et al. (2008), 75 of 89 provisions featured in the Suggested Charter found their way into the GATT text. There are still some notable provisions that were introduced by other participants, but the overall picture does not change: the US and the UK delegations exerted an immense influence on the drafting of GATT. Tellingly, Leddy’s confidential account stated (p. 4): “… in almost every case the new text is based on drafts prepared by the United States delegation in the light of the experience of the London meeting.”66 Irwin et al. (2008) included a section on the “property rights of the GATT,” in which they discussed which participant proposed which provision and confirmed that the UK and the US should be credited with most of the drafting of the original GATT. It is, of course, difficult to measure influence in a precise manner. There are good reasons, nevertheless, supporting this conclusion: 1. The negotiation was de facto a reaction to the Suggested Charter, the document that the US had prepared based on the discussions it had held with the UK. 2. There was no alternative comprehensive view of the role and function of the world trade institution that was about to be established. The UK and the US were the only

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negotiators with a view of the identity of the new trade institution. The other trading nations advocated narrower trade interests (e.g., Australia and wool). 3. As cited previously, 75 of 89 provisions included in the Suggested Charter found their way into GATT. It should also be noted at this point that these provisions constituted the crux of the GATT recipe of trade liberalization;67 4. Irwin et al. (2008) mentioned that the UK and US participated in all but one negotiating groups and committees, and the rapporteur was almost always a national of one of those two countries. 1.1.9 The People Who Made GATT Happen A handful of remarkable personalities participated directly or indirectly in the negotiation of GATT, which started in 1946. Chief among them was Cordell Hull, a genuine freetrader, whose contribution has already been discussed. Hull had the good fortune to be joined in this endeavor by some remarkable individuals who provided much-needed statesmanship, as well as intellectual rigor, at the times when it was most needed. Will Clayton and Harry Hawkins (secretary of state, then professor at the Fletcher School of Law and Diplomacy, Tufts University) led the US delegation.68 James Meade (winner of the Nobel prize in economics, 1977), Lionel Robbins (professor at the London School of Economics), and Sir Stafford Cripps (a Labour Party politician who was the chief negotiator in the later stages of the project) headed the UK team. 69 For the Canadian delegation, Norman Robertson, a well-known diplomat and close adviser to Prime Minister MacKenzie King; Hector McKinnon, one of Canada’s lead negotiators in from the 1930s through the 1950s; and Dana Wilgress, the High Commissioner to London in the post-WWII years (and first chairman of the GATT CONTRACTING PARTIES) were the key members. Alexandre Kojève, an eminent philosopher, was the leader of the French delegation. And many others were involved as well, including Leddy, who actually wrote the GATT text. (Note: “CONTRACTING PARTIES,” when used in capital letters, refers to the highest organ of GATT; when in small letters, the term refers to the GATT membership.) These statesmen produced a text dealing with highly complicated issues that has managed to withstand the test of time.70 John M. Leddy, an economist, not a lawyer, wrote a text back in 1947 that is very much relevant in today’s world. 1.2 Why GATT? 1.2.1 What Did Negotiators Have in Mind? Trade liberalization can serve different purposes. In Lewis Carroll’s oft-quoted passage from Alice in Wonderland, Alice asks, “Where do we go from here?” only to get the

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response, “It depends where you want to go.” “Where do we want to go with GATT?” is the question a wondering Alice would have asked the framers of GATT. The natural place to look for responses to this question is in the historical account of the negotiation of GATT. Where did negotiators want to go with GATT? The preparatory work of GATT is vast and has been studied and written about by countless trade scholars over the years.71 There is a plethora of accounts as well, detailing the participation and the negotiating objectives of individual trading nations. Hart (2002) offered a very comprehensive account of Canada’s priorities. His main conclusions were that Canada essentially played second fiddle to the UK and US negotiators, who monopolized the negotiations, but nevertheless it was quite happy with the introduction of MFN, which was perceived as a means to curtail the dominance of the two superpowers of that time.72 Capling (2001) discussed Australia’s participation, and concluded that it did not heavily influence the negotiated outcome. In Capling’s account, Australia was largely preoccupied with sectoral negotiations, even threatening to walk out of the negotiating room when the US initially refused to reduce its duties on wool and wool products. As expected, the overwhelming majority of historical accounts focus on the UK and US negotiating positions and the research literature is unanimous regarding the influence that the two had in shaping the original GATT. Because of the influence these two had on the shaping of GATT, it is quite appropriate to visit in more detail the scholarly works detailing their negotiating positions. Irwin (1996) and (2005) delved into the US constitutional process and aptly described the context in which US trade policy was being shaped in order to describe the goals sought by the US administration. The US was coming out of the era of the Great Depression and the Smoot–Hawley Tariff Act,73 under which high tariffs had been imposed on a wide series of products. The US had charged high tariffs a few years before the enactment of Smoot— Hawley as well, but the effects were less dramatic. By the time, for example, that the Fordney–McCumber Tariff Act of 192274 had been implemented, the US economy was growing rapidly, and European exports to the US were growing at a steady pace. By contrast, when the Smoot–Hawley Tariff Act was enacted and implemented, the US economy was contracting and European exports suffered as a result. Irwin (2011, p. 151) stated: The United States’ move to erect even higher trade barriers on top of that imposed in 1922 sharpened European resentment at American policy. With Smoot–Hawley, the United States seemed to be signaling that its economic policies would become more isolationist. For this reason, the European response to the passage of the Smoot–Hawley tariff “was disapproval-immediate, undisguised, and unanimous.” As Percy Bidwell (1932, p. 395) noted: “There was a common note in the chorus of protests, however much they may have differed in expression, namely the conviction that the new American duties constituted a serious menace to the economic progress of western Europe.”

Canada, and then the western European states, reacted and imposed retaliatory tariffs against the US. The negative impact of Smoot–Hawley did not stop here. Anti-US feelings

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rose in Cuba where, as a result, a blatantly anti-American government rose to power.75 The overall amount of international trade was spiraling down at a fast pace. The US was now facing discriminatory tariffs around the world. As a result, its income shrunk like never before. It is of course, the building of tariff walls and the ensuing reduced communication across peoples that fuelled Hull’s belief that GATT should be an instrument to abolish discriminatory treatment on trade issues, establish communication channels, and thus contribute to world peace. His ascent to government positions meant that his views were channeled to the world as the official US position. The US administration was looking for the establishment of nondiscriminatory world trade order, a reduction in the role of the state and statetrading (with the view that trade would be safer in private hands being dominant),76 and for product-by-product tariff reductions.77 The UK attitude was different as to the means, although it shared the same objective, the establishment of a world trade regime. It sought tariff reductions (essentially by the US), but also the maintenance of its imperial preferences. The UK government, largely influenced by the thinking of John Maynard Keynes (who was acting as policy adviser until his death in 1946) and James Meade (who participated in the negotiations as a member of the UK delegation), believed that it would have less to offer in terms of consideration for US across-the-board tariff reductions, if it had already unilaterally removed its imperial preferences. Keeping imperial preferences in place for as long as possible would provide the UK negotiators with an important bargaining chip: imperial preferences would be the quid pro quo for US nondiscriminatory tariff reductions.78 The difference between the two great economists was of course that Meade was eager to negotiate the imperial preferences, whereas Keynes, originally at least, was quite inflexible in this respect. The two delegations had a different approach to the issue of state trading, cartels, and quotas as well. Miller (2000) explained that, for example, the UK delegation, which favored a strong role for government in the post-WWII era, insisted on allowing quotas for the reason of maintaining BoP. In Miller’s account, the pragmatic, government-friendly attitude of the UK delegation found friends at the table, and this explains the regulation of preferences (which were not eliminated but grandfathered), quotas allowed for BoP reasons, state trading (which could legitimately persist, provided that it operated on nondiscriminatory terms), and cartels (that were not disallowed) in the final GATT text.79 Besides their differences, of course, there was a substantial overlap between their positions as well. After all, the Suggested Charter, the US text submitted to negotiators, was based on their shared belief to establish a world trade institution (the British viewing it as a means to curtail US dominance). Both governments shared the belief that trade expansion was an appropriate means to fight the unemployment that had crippled the US economy in the pre—New Deal era and was spreading throughout Europe in the aftermath of WWII,80 and, in light of this, it should come as no surprise that a specific provision in an earlier GATT draft targeted this issue.81

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Their views, however, even on this score, were not totally identical, at least not in the early stages of the discussions. Whereas the US delegates viewed the opening of trade as an antidote to persisting unemployment, the UK government had a more cautious approach to this issue since, arguably influenced by Keynes’s thinking, the UK delegates, while not denying that trade could indeed be beneficial on this score, seemed to prefer short-term, macroeconomic solutions to unemployment. In the dominant UK view, a drop in tariffs would not in and of itself help bring unemployment to an end. This was very much the Keynesian view that constituted the orthodoxy at that time.82 Because Keynes was not part of the actual negotiating process, the UK position was more influenced by the views of Meade and Robbins, who had a more favorable attitude toward trade liberalization.83 In a nutshell, the negotiating record reveals the following: 1. The UK and the US were the drivers of the negotiation. 2. They wanted to constrain each other’s behavior, not to solve domestic problems. 3. They were looking to establish an, in principle, nondiscriminatory world trade order, although both of them had to compromise on the exceptions allowed. Remaining negotiators had influence on specific provisions but offered no alternative view regarding the role of the trade institution that would result from their negotiations. The next section makes a brief detour into economic theory, including a discussion of how economists understand the rationale for trade agreements. After all, GATT pursues economic objectives, and its shaping was influenced by the ideas of eminent economists who, as argued previously, directly participated in its negotiation. 1.2.2

Economic Theory

Typically, economists, when discussing gains from trade, ask the following questions: • Are there gains from trade liberalization? • If so, why are countries not pursuing trade liberalization anyway (that is, in the absence of a written commitment or agreement to do so)? Assuming a positive response to the first question, it is the response to the second one that will allow us to understand the rationale for trade agreements. 1.2.2.1

Gains from Liberalization

One will be hard-pressed to find economists arguing that there are no gains from trade liberalization. Discussions and divergences of opinion have emerged regarding the distribution of gains from trade, but almost all observers acknowledge that there are gains from trade liberalization. Johnson (1960) goes so far as to state that “the proposition that

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freedom of trade is on the whole economically more beneficial than protection is one of the most fundamental propositions economic theory has to offer for the guidance of economic policy” (p. 327). Indeed, as explained in numerous writings from Adam Smith’s classic tome The Wealth of Nations on, all nations have an advantage in producing particular goods, and gains from trade result from specialization.84 Adam Smith had in mind “absolute advantage,” whereby a firm or a nation was better at producing a good than another firm or nation. What if, nonetheless, a nation had an absolute advantage over the production of any good over another nation? Could the two nations still be better off by trading with each other? This is where the notion of comparative advantage comes in. The modern understanding of international trade theory is, to a large extent, still based on the notion of comparative advantage (and the ensuing gains from specializing in the areas where comparative advantage exists), as developed by David Ricardo.85 Economists will compare the situation of a country living in autarky with one in which trade is liberalized. Many countries lived in autarky well into the twentieth century (that is, over a century after Ricardo completed his work), and some continued to live in autarky until well after the establishment of GATT.86 The Ricardian model shows gains from trade; that is, countries are better off (under some very realistic assumptions) when they trade with each other than when they live in autarky. Gains stem from the comparative advantage that countries have in producing goods (i.e., widgets over wheat). Comparative advantage should not be confused with absolute advantage. Even when, say, Home has an absolute advantage in producing wheat and widgets, Foreign will be better off specializing in widgets, where it arguably has a comparative advantage, than in wheat, where it does not. It is the opportunity cost of producing a good that determines comparative advantage, not the amount of resources committed to its production. Even if Home can produce widgets using fewer resources than Foreign (absolute advantage), it might be foregoing the production of many other goods by doing so, and therefore might be better off importing widgets from Foreign (which, by construction, has low opportunity cost in this field). The sources of comparative advantage could be differences in climate, in endowments, or in technology. Ever since Ricardo formulated his theory, there has been a shift in the focus of trade theory from country-, to industry-, to firm-specific analysis. Every time the level of analysis changed, economists managed to point to additional gains from trade, thus strengthening the case for trade liberalization. Economists who shared the view that countries had equal access to technology and information had a hard time understanding what determined comparative advantage: in other words, what determined that Portugal would export wine to England, and the latter cloth to the former? The Heckscher–Ohlin theorem provided a response. Even if all countries had equal access to information and technology, the relative abundance of their

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productive factors would determine trade flows. England, with its textile industry, would be exporting cloth, and Portugal, with its many vineyards, wine.87 But then, especially in the years following WWII, economists were puzzled again. England was now both importing and exporting cloth and textile products. The Heckscher– Ohlin theorem was hard to reconcile with reality, as liberalizing countries were observed to diversify their production and trade rather than specialize. The so-called new trade theory came in and focused on industry analysis, concluding on two new sources of gains (namely, the rise in efficiency resulting from increased scale of production and consumer gains from access to a wider variety of goods). The bad news was that the new trade theory opened the door to “strategic trade theory” and increased the use of subsidies (in an effort to gain competitive advantage). The “new new trade theory,” has a different focus than the “new trade theory.” It focuses on firms (and not on industrywide analysis), and has revealed an additional source of gain from trade: a rise in productivity because the least efficient firms leave the market because of increased competition and the ensuing reallocation of productive resources.88 Gains from varieties, as well as reallocation of resources, thus, are additional gains that economic theory has added to the classic Ricardian analysis. The text that follows explains in more detail the basic findings of the ‘new trade theory’ and the ‘new new trade theory’. Balassa (1966) should be credited as the first economist to take the discussion about gains from trade one step beyond the world of Ricardo and Heckhsher-Ohlin. He argued that gains from trade exist even when it is conducted between homogeneous countries. Balassa studied the European integration process and observed that reduction in tariffs across the participants in the process led to intraindustry specialization, and that in this scenario, the welfare effects of an increased exchange of consumer goods may now consist largely of improvements in the efficiency of exchange (the satisfaction of consumer wants) whereas specialization in narrower ranges of machinery and intermediate products will permit the exploitation of economies of scale through the lengthening of production runs. (Balassa 1966, p. 472)

Balassa contested the then orthodox view regarding gains from trade liberalization, arguing that tariff reductions would lead to interindustry specialization, and the ensuing gains. Thus he opened the door to subsequent research on gains from variety. The new trade theory that emerged as a result of his pioneering research has strengthened the case for trade liberalization by explaining that there are gains even when homogeneous countries open up to trade because of the inherent advantages of specialization (which allows large-scale production).89 In this vein, Krugman (1979) developed a monopolistic competition model, explaining why similar countries gain from trading with each other and why a significant part of that trade may take place within the same industries. Some producers, however, will lose, and governments might wish to protect such producers through the use of safeguards.

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Two assumptions are crucial to Krugman’s model: increasing returns to scale (economies of scale) and consumers’ love of variety.90 There is tension between the two assumptions: consumers’ love of variety favors the existence of many small firms; the organization of production in large firms is key to exploiting economies of scale. Krugman built the two opposite tensions into a single model, whereby producers have a monopoly over a variety of the product they produce and therefore can set their prices unilaterally. Because the varieties are, to some extent, substitutes for one another, each firm continues to face competition from other firms (so some disciplining of companies’ pricing policy occurs because of competition). The opening of trade means that consumers will have access to more varieties of products, but they will also become more price-sensitive. As a result, some firms will go out of business, but the gains from trade opening will outweigh such losses. There will be a “scale effect,” since companies now sell in more than one country and can thus exploit economies of scale. There will be a “variety effect” as well, since consumers now have access to more products. And there will be a “pro-competitive effect,” since consumers will now pay a lower price.91 In this paper, Krugman (1979) pointed to gains from trade liberalization resulting from trade between similar countries, building on Balassa’s work. More recently, the new new trade theory added a new dimension and pointed to yet additional gains from trade liberalization. Melitz (2003) allowed firm heterogeneity. In his model, low-productivity firms will exit the market and resources will be reallocated within the same sector to expanding (i.e., exporting) high-productivity firms. Thus, next to gains from comparative advantage (Ricardo), and from increased varieties (new trade theory), Melitz points to further gains resulting from reallocation of resources.92 1.2.2.2 No Gain without Pain: The Case for Trade Agreements In light of the previous discussion, the question that naturally arises is: If this is so, then why does trade liberalization not take place unilaterally? Why do we need GATT (and now the WTO) in order to do what we should have been doing even without GATT in light of the undisputed gains from trade liberalization? In other words, what stops nations from liberalizing trade unilaterally? According to some economists,93 GATT should not exist, so any attempt to offer an economic interpretation of the agreement is doomed to failure. In this vein, Krugman (1991) noted (pp. 25ff): There is no generally accepted label for the theoretical underpinnings of the GATT. I like to refer to it as “GATT-think”—a simple set of principles that is entirely consistent, explains most of what goes on in negotiations, but makes no sense in terms of economics … The reason why GATT-think works is, instead, that it captures some basic realities of the political process.

A few years later, Krugman (1997), stated (p. 113): If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case: a country serves its own interests by pursuing

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free trade regardless of what other countries may do. Or, as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbours because other countries have rocky coasts. So, if our theories really held sway, there would be no need for treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interests.94

This view is not unanimous. Many economists see the argument for a trade agreement as necessary to reap gains from liberalization. They differ, nevertheless, on the grounds for the agreement, and their divergence is not inconsequential since it will have an impact on the eventual institutional design. Two theories have been advanced to offer a rationale for GATT: the “commitment theory” and the “terms of trade theory.” The former rests on the idea that an international agreement is necessary for trading nations that want to lock in policies in an international agreement and avoid future pressure from domestic lobbies. Their response to lobbies’ rent-seeking behavior will be, “Sorry my hands are tied.” In this view, trade agreements are a response to domestic political economy concerns. The terms of trade theory on the other hand, relies on the concept that since governments might not have any incentive to unilaterally liberalize (perhaps for good reason), an international agreement is necessary in order to internalize all externalities that stem from a unilateral definition of trade policies that might result in “protection.” In this view, trade agreements are a response to an international, not a domestic, concern—namely, cost shifting by other trading nations when they unilaterally design their trade policies. Commitment Theory The focus of commitment theory is the relationship between government and the private sector in a country. A government will choose its trade policy, and that will commit it to an international agreement signed to that effect. As a result of this commitment, it will lose its discretion with respect to the formulation of the policy committed. The gain for the government is that investment decisions will be forestalled (assuming, of course, that the commitment is credible), but it will lose contributions by the various lobbies that will be unhappy with the commitment.95 There are good arguments in support of this view. First, for a government facing unpopular choices (for at least some segments of society), the argument that “my hands are tied” 96 is an easy way out that minimizes (although probably does not eliminate) the political costs associated with similar unpopular choices.97 On this understanding, national governments will use GATT as an excuse for unpopular choices. In other words, to deter pressure from lobbies, a government might be willing to tie its policies to the GATT mast.98 Commitment theory suffers, nevertheless, from some serious weaknesses. First, one can legitimately ask whether an international agreement is required at all when it is commitment theory that explains commitments. All trading nations need is a safe where they can

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lock up their domestic policies. Naturally, though, this should be the national constitution, or something equivalent. Srinivasan (2005), thus, correctly stated that in the commitment theory, there is no need for an international agreement when the source of the distortion is domestic. The terms of trade theory, in stark contrast, requires the conclusion of an international agreement since it is the behavior of foreign sovereigns, not of domestic lobbies, that is being addressed. Second, the incentives to enforce might be totally lacking. Foreigners might be totally uninterested in enforcing commitments aimed at promoting the interests of the country making the commitment, unless in cases where nonenforcement entails negative welfare implications for them. Enforcement, in this constellation, will occur because of the cost shifting that takes place and the resulting deterioration in welfare terms of the situation for foreigners, and not because a commitment has been entered into to lock in specific behavior. This however, resembles the terms of trade story that will be explored next: foreigners will have an incentive to enforce the agreement any time costs are shifted to them. They might or might not have the incentive to enforce the agreement in order to promote an interest of their trading partner (depending on whether, as a result, costs are shifted to them).99,100 The Terms of Trade Theory The terms of trade theory differs from commitment theory in that it traces the rationale for trade agreements not in domestic distortions, but in international externalities. Critically, it is the manner in which similar externalities travel that is at the heart of this approach: through the price mechanism and the ensuing terms of trade between two goods. Bagwell (2008) traced this theory to the work of early- and mid-nineteenth-century economists such as John Stuart Mill and Robert Torrens. Harry Johnson (1953–1954) is credited with its elegant formalization, and the theory more recently found an advocate in the scholarship of Bagwell and Staiger (2002), who took the preexisting analysis a number of steps further, using it to interpret the various GATT institutions in a context of both perfect and imperfect competition.101 The starting point of this theory is that it is simply not the case that unilateral trade liberalization is the best instrument for all trading nations: countries that can influence the terms of trade of specific commodities have a strong incentive to set tariffs and influence to their advantage the terms under which they will be traded. ‘Optimal tariff theory’ suggests that governments behaving in accordance with their self-interests should not necessarily abolish tariffs unilaterally.102 Hence, tariffs can and do occur for good reasons. Unilateral setting of tariffs, however, can lead to terms of trade externalities. A country will choose its tariff rates by calculating the welfare implications of its tariff setting only

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for its domestic producers and consumers. Nevertheless, it will also be imposing an externality on foreign producers of the commodity affected by the tariffs, which (in all likelihood) will not be internalized.103 Affected nations might wish to respond and, consequently, unilateral tariff setting can spiral into a Prisoner’s Dilemma,104 where countries behave in a noncooperative manner and impose externalities on each other. Since many nations might have the power to influence terms of trade in particular markets and commodities if they all behave in this way, the result would be a suboptimal total volume of trade. It is through trade agreements that trade is expanded back to its normal level through reciprocal tariff negotiations. A trade agreement, in other words, is the means to internalize the externalities resulting from unilateral tariff setting, and accordingly, a means to escape from the Prisoner’s Dilemma. That is, through reciprocal international negotiations, trading partners will aim at bringing tariffs down to the politically optimum level (that is, to the level that governments would choose were they not motivated by the implications of their trade policies). Yet another way of saying this is that trade agreements are needed because no country that can influence the terms of trading would have the incentive to unilaterally lower its tariffs, since a unilateral decrease of tariffs from their optimal level would lead to an increase of the world price of the imported good. The importing country, therefore, would be worse off than in the opposite scenario (i.e., if it had kept its optimal tariff in place). The trade agreement leads to a coordinated reduction of optimal import tariffs by two countries. It neutralizes the adverse effects of on each country’s terms of trade—that is, each country’s price of exports relative to its price of imports. Reciprocity, a GATT principle that guides tariff negotiations (which will be discussed in more detail in chapter 3), is the institutional vehicle to achieve this result. At first, this approach was dismissed in essence because the prevailing view was that it rested on the rather weak foundation that trading nations choose their policies without thinking at all in terms of domestic political economy (i.e., disregarding lobbies’ pressure). Its appeal in recent years is largely because Bagwell and Staiger demonstrated in a series of papers that the theory holds regardless of the political motivations of governments. In their reformulation, the theory rests on only two key assumptions: • Ceteris paribus, a government preference is to maximize social welfare, which is not the case when it suffers a welfare loss because terms of trade deteriorate.105 • Assuming a country is large, an increase in an import tariff results in a terms of trade gain for the importing country106 and a terms of trade loss for the exporting country.107 Both assumptions are of course quite reasonable. Bagwell and Staiger (2002) point to the actual design of the main GATT features to make the point that their theory offers a satisfactory explanation of GATT as we know it. Using terms of trade as their workhorse, they have published a series of papers explaining key GATT institutions, such as MFN,

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renegotiation of duties, safeguards, in this prism. In the words of Staiger, one of the proponents of this theory (2011, p. 12): In light with the terms-of-trade theory of trade agreements, foreign exporters are given a “voice” in the tariff choices of their trading partners, so that through negotiations they can make their trading partners responsive to the costs that these trading partners impose on foreign exporters when making their tariff choices. And in accomplishing this, a trade agreement then naturally leads to lower tariffs and an expansion of market access to internationally efficient levels.

A number of voices have been raised against the power of this theory to explain GATT. One common criticism is that the theory provides an elegant way to explain trade agreements, but it is doubtful whether terms of trade are the motivation behind them. In other words, critics doubt that negotiators think of terms of trade when forging a trade agreement. It is almost impossible to prove or disprove this point, although intuitively, one has to concede that calculating terms of trade is a cumbersome task. Ethier (2004) took issue with the terms of trade theory, arguing that trade agreements like GATT do not in fact prevent countries from influencing the terms of trade. For one thing, GATT does not include disciplines on export taxes (duties), an instrument that affects terms of trade in the same way as import duties do. Additionally, the terms of trade theory does not explain why small countries, which cannot affect the terms of trade, participate in trade agreements. Ethier based his first point on the fact that GATT does not include a provision as elaborate as Article II that would be applicable to export taxes. This does not mean, however, that export taxes cannot be negotiated and bound. In fact, GATT treats import and export duties symmetrically, in that they are not disallowed but can be disciplined.108 The presumption behind Ethier’s second point is that developing countries cannot affect the terms of trade at all.109 The work of Broda et al. (2008) is quite relevant here. The authors demonstrated that, absent the WTO framework, countries of different size and bargaining power do impose higher tariffs to the extent that they can affect the price of commodities in specific geographic markets. Their analysis is not direct support for the theory, but it is consistent with it. The wider point, though, is worth reflecting about. The fact that there are positive external effects for smaller players from negotiations based on terms of trade does not necessarily disprove the idea that the negotiation was not based on terms of trade at all. It is probably the case that disregarding similar effects marks the influence that Cordell Hull had on the shaping of GATT—that is, negotiate fiercely with the UK (in a scenario similar to terms of trade), but to allow those with lesser bargaining power to benefit from negotiation. Regan (2006) offered a different critique, arguing that terms of trade manipulation does not happen simply because there is market power. In his view, manipulation of terms of trade is a sophisticated policy that should not be assumed lightly. The models that

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economists use are two countries—two goods-models. And, indeed, there is nothing that makes it mathematically impossible to extrapolate the results to a world with many countries and many goods. The issue, nonetheless, is whether trade delegates as we know them can perform very complicated analyses and be clear about the terms of trade of all their countries’ exports and imports and do the same for each WTO participant. This sounds too demanding, and one has to concede that the author offers valid criticism in this respect. At the same time, however, having a rough idea about terms of trade is probably all that is realistically required.110 Regan (2014) explained in clearer and more comprehensive manner his understanding of what drives trade agreements. He argued that terms of trade is of no concern to policy makers—rather, it is protectionism they are after, which he defines as “unilateral trade policy that restricts imports in order to get political support for the government from import-competing producers.” In doing that, he de facto sided with many economists who proposed rent-seeking explanations for trade agreements. Trade agreements are primarily about restraining politically motivated protectionism. In his view, the models employed by Bagwell and Staiger (2002), and even Grossman and Helpman (1995), would entail that trade agreements never reduce protectionism since the sole function of trade agreements in these models is to eliminate terms-of-trade manipulation. Terms-of-trade manipulation is a completely distinct phenomenon from protectionism, reflecting a different government motivation. Protectionism, as Regan (2014) defined it, aims to affect domestic relative prices in response to special interest politics. Terms-of-trade manipulation aims to affect world prices, and to increase national income. Regan (2014) cared about domestic prices, not world prices as terms-of-trade theorists do.111 Small countries, his argument implies, are more effective at raising domestic prices than large ones (since no one will ask them to bind their tariffs, precisely because they will not affect terms of trade because of their size). There is a lot of empirical support for this observation, which will be detailed in chapter 3. Terms-of-trade theorists would respond, of course, that smaller countries have more political pressure to use high tariffs. Regan’s main point is that welfare effects of tariffs on outside countries travel through terms of trade, but governments impose tariffs to raise domestic prices (i.e., they ignore terms-of-trade effects of their policies). If this interpretation is correct, then his model and the terms of trade model coincide for the small-country case but have different implications for the large-country case. The difficulty for economists would be to understand why rational governments would not account for terms-of-trade effects while choosing tariffs. One potential answer is that terms-of-trade rents go to one wing of the government, while tariffs are set by another branch. This is probably true to some extent. Regardless of their differences, Regan (2014) and terms-of-trade theorists share one common feature: they understand the role of trade agreements to be the means that will

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address international cost shifting. True, they disagree with respect to the manner in which externalities will travel, but it is highly debatable whether this difference has any bearing on the understanding of the basic legal institutions. Take, for example, a case where Home imposes a higher sales tax on domestic drinks than on imported ones. In Regan’s view, this would be outright protectionism, and Home would be found to violate its obligations under Article III of GATT (chapter 7 discusses this issue in more detail). In the Bagwell-Staiger framework, if the foreign country’s trade policy is not set at its politically optimal level, then it is no longer indifferent to small changes in its local price. For this situation, if Home were to raise its sales tax, then international externalities would travel through the terms of trade and the foreign local price (which would be altered due to the underlying change in the terms of trade). In this case, a small hike in Home’s sales tax, even if hypothetically motivated only by local price considerations, could harm the foreign government and reduce joint efficiency as well. The ultimate result is a similar understanding of the national treatment obligation, which is embedded in Article III of GATT. A prima facie weakness of the terms-of trade theory is its assumption that a world market exists. Trading nations will not negotiate with any entity that cannot affect terms of trade. What about their exporters, though, who have been investing in distribution networks in similar markets? The notion of a world market is probably an illusion since it underestimates switching costs from one market to another. Terms-of-trade theorists could respond that, ex post, negotiations with similar markets might indeed occur since terms of trade will be affected because of similar costs. Others have argued that the terms-of-trade theory does not explain important legal institutions like AD. This, it should be noted, was never the intention of the theory: its purpose was to explain the core issues, the heart of GATT. Indeed, GATT could have existed without AD.112 The terms-of-trade theory aims to explain the original GATT, which was largely a tariff negotiation where disciplines on nontariff barriers (NTBs) were some kind of “supporting cast,” in the sense that they were contracted in a manner that would serve (e.g., avoid the circumvention or evisceration of the tariff negotiation.113 It encroaches on difficulties when it comes to explaining negotiations on regulatory (as opposed to tariff) barriers. A good illustration in this vein is offered by the Uruguay round Agreement on Agriculture (see chapter 8 of volume 2), in which negotiators agreed to “tariffy” (i.e., express in tariff terms) existing protection of regulatory nature, obviously because they had found it hard to agree on reciprocal concessions by exchanging the protection of regulatory nature. Moreover, they also had to agree on the types of measures (regulations) that they would tolerate, and to further agree that their disagreements concerning classification of measures (which measure should be classified as tolerable or intolerable) would be submitted to adjudication.

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This is not to suggest that terms of trade cannot be affected through NTBs. There are even specific models that explain how this happens, and these will be discussed further in chapter 7. There is, however, a key difference between tariffs and NTBs. Tariffs, at least historically, were unidimensional (and now are at such low levels that they do not matter anymore): those who could exercise market power would do so and extract the associated benefits. Quantification, the difficulty of measurement notwithstanding, could lead to a rough idea as to what their impact would be in specific markets by specific players. In turn, reciprocal negotiations aiming at the reduction of tariff levels take place. NTBs usually are not unidimensional, though. Consider safety standards where a standard might be affecting terms of trade, but there is also a policy rationale behind it, which could be unrelated to terms-of-trade effects. As a result, it is problematic to see how reciprocal negotiations can take place on this basis.114 Blanchard (2010, 2013) cast some doubt on the terms-of-trade theory, arguing that overseas investment holdings, under assumptions, would offset the beggar-thy-neighbor externality. In case of ownership (e.g., investment by important lobby in a foreign country), governments might be incentivized not to shift costs to the foreign country hosting this investment, since they will be inflicting a cost on a “national” agent.115 This is, of course, a limitation of the theory, not a negation.116 The terms-of-trade theory presupposes reciprocal negotiations. As chapter 3 will describe, reciprocity holds the key to tariff reductions. The manner in which tariff negotiations are being conducted affect the degree of relevance of reciprocity, though. During the GATT negotiations, the “request and offer” approach was adopted: that is, a pair of negotiating partners negotiated the level of tariffs in specific commodities of their interest. This scenario offers fertile ground for a terms-of-trade negotiation. In subsequent rounds, tariff reductions were agreed following certain formulas, such as, for example, a reduction of 25 percent being agreed on in exchange for higher tariffs, and a reduction of 10 percent for lower tariffs. In this scenario, it is difficult (prima facie at least) to see how terms of trade can explain the negotiation. This point concerns more the continued relevance of terms-of-trade theory to explain GATT, and less its power to explain the original negotiation. The US “peril point” provision also seems to cast doubt on the validity of the theory. According to this provision, the then United States Tariff Commission (USTC) was required to evaluate the effects of tariff reductions on US economy. It was further required to determine a point to which tariff reductions could be agreed that would not hurt US producers. This is, of course, a unilateral determination, which is at odds with the very essence of terms of trade. Although the peril point provision has been around since 1948, one would need to know in which negotiations it was used in order to conclude on the relevance of terms of trade. Baldwin (2009), and Hornbeck (2013) offer succinct accounts of this provision.

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The terms-of-trade theory, its limitations notwithstanding, has the correct focus, in that it traces the rationale for GATT to the desire to curb foreign behavior that can have negative external effects beyond national borders. In a world which, in Friedman’s (2005) inimitable expression, becomes increasingly “flat,” the need to constrain unilateral behavior increases as well.117 This theory asks the right question: it is international, and not domestic, problems that a trade agreement like GATT aims to solve. Regan (2014) shares this basic view. Finally, there are those who believe that adherence to GATT/WTO does not matter at all. Rose (2004) is one of these scholars; he argues that there is not much evidence that GATT and WTO have contributed to trade liberalization. In his view, nations would have behaved more or less in the same way even in the absence of such an institutional framework. A series of papers have responded persuasively. First, Subramanian and Wei (2007) showed that there are sizeable effects for developed countries’ trade, but maybe the same is not the case for developing countries’ trade, but this is so because the latter either have not liberalized at all or did so to only a limited extent. By their calculations, GATT/WTO have had a strong positive impact on trade, amounting to 120 percent additional world trade (or $8 trillion in 2000 alone).118 Second, as stated previously, Broda et al. (2008) found evidence of optimal tariffs when checking tariffs of WTO members before accession to the WTO. The larger the market, the higher the tariff in specific goods. Finally, Bagwell and Staiger (2011a) checked the tariff concessions made by countries that have acceded to the WTO and found that small countries make few concessions, whereas big countries make meaningful concessions; concessions are greater where prenegotiation import volumes are greater, as the theory predicts. They also found strong and robust support for the central predictions of the terms-of-trade theory in the observed pattern of negotiated tariff cuts. In short, GATT and WTO do matter.119 1.2.3

Economics Meets the Negotiating Record

There is hardly any historic support in favor of the commitment theory. There is, on the other hand, support for the view that international externalities, not domestic problems, should be addressed in a trade agreement. This does not necessarily mean that the negotiating record supports the view that the negotiation of the GATT was about terms of trade. Only knowledge about the identity of the negotiating partners (i.e., who negotiated with whom the tariff treatment of particular commodities), the level of agreed tariff cuts, and the change in trade volumes provide definitive confirmation that it was all about terms of trade. The negotiating history of GATT is only partly accessible to the public. Unfortunately, the inaccessible part covers the negotiation of the first tariff bargain, the negotiation in Geneva from April to July 1947. We remain in the dark on this score.

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There is ample evidence suggesting that negotiators were indeed addressing international cost shifting, irrespective of whether it drives through the price mechanism (as terms of trade theorists would want it to) or not. Several GATT institutions support this view. It is principal suppliers who negotiated the level of tariffs, and the negotiation of tariff levels was based on reciprocal concessions. Actually, during the original GATT sessions, there was a legally binding obligation to negotiate for all nations to which a request to this effect had been addressed.120 This feature of the negotiation points toward an arrangement focused on unraveling the damage done to the volume of trade by noncooperative tariffs. The renegotiation of schedules lends extra support to this thesis since this instrument addresses the need to rebalance concessions following a deviation from the originally agreed-upon level. These instruments support the view that it was the constraint of each other’s behavior that negotiators were seeking through negotiating GATT. The voices of protagonists point in this direction as well. In the following statement, Clayton aimed to capture that it is reciprocal concessions that drive the GATT: The world will be a better place to live in if nations, instead of taking unilateral actions, without regard to the interests of others, will adopt and follow common principles and enter into consultation when interests come into conflict. And this, throughout the entire range of trade relationships, is what the signatories of the Charter will agree to do. Each will surrender some part of its freedom to take action that might prove harmful to others and each will thus gain the assurance that others will not take action harmful to it.121

Analysts have provided evidence to this effect. Drache (2003), for example, reports that, at their 1941 meeting in Newfoundland, Churchill and Roosevelt held the view that international beggar-thy-neighbor policies must be addressed in the post-WWII era within the framework of a trade institution. All this evidence supports the view that the rationale for GATT was the disciplining of the behavior of trading partners and not the domestication of lobbies at home. GATT was conceived as an agreement aimed at curbing unilateralism.122 Finally, let’s entertain the reason for opting for a formal agreement. If GATT, thus explained, represents an equilibrium from which deviations are suboptimal, why put it down on paper? The case for a formal written agreement is supported by the sheer amount of information that went into the GATT contract. The complexity of the subject matter does not facilitate collusive behavior through tacit cooperation.123 GATT is magnificent in its simplicity, yet it covers a lot of ground, and one should not rationally expect that all trading nations would have always conformed to GATT, even in the absence of a document that they can use as a compass. The agreement is also needed in order to explain to economic operators what their governments have agreed to do and what not to do. The need for formalism has intensified over the years as new agreements were added to the old ones, and as the membership grew from the original 23 to the current 161.

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1.3 The (Trans-)Formative Years: GATT in the GATT Era 1.3.1

Flexibility Required: Grandfathering and the Existing Legislation Clause

Earlier in this chapter, the fact that the MFN, the cornerstone of GATT, was not agreed upon as a rule, without exceptions, was mentioned. Starting with the UK, a number of nations introduced margins of preference in favor of specific beneficiaries that they grandfathered. The grandfathering of margins of preference was intended to provide trading nations that used to live in safe havens insulated from the rest of the world with the breathing space necessary to adjust to the new reality of nondiscriminatory trade. The grandfathered margins of preference will be discussed exhaustively in chapter 4. For the time being, though, it can be simply stated that they have all but lost their relevance nowadays. There was another important flexibility that was agreed on at the signing of GATT, to which we also briefly alluded to previously. The GATT contracting parties agreed to apply Part II of GATT (that is, the core of GATT comprising key obligations like the national treatment) “to the fullest extent not inconsistent with existing legislation.”124 This became known as the “existing legislation clause” (i.e., Article 1(b) of the PPA). The clause was deemed necessary in order to allow trading nations to accept GATT right away and avoid the risk that delayed acceptances might comport. The risk of no eventual agreement was too much of a risk for anyone to take, and the framers opted for a suboptimal agreement instead. In the real world, the concession made through the existing legislation clause proved to be innocuous. There are various contributing factors to this. Essentially, GATT contracting parties did not abuse this privilege. Litigation on this score was rare, and when it did occur, the adjudicating panels interpreted this clause in a restrictive manner. In US–Manufacturing Clause, a GATT panel dealt with a US prohibition to import copyrighted work. The prohibition applied to cases where the author lived in the US, unless portions of the work had been produced in the US or Canada. Following a complaint, the panel established a test that essentially made recourse for violations of this provision quite onerous, if not almost impossible. In its view, GATT contracting parties could decrease the amount of inconsistency between national legislation and GATT using the state of domestic legislation on October 30, 1947, as the benchmark (§ 36). Once they had done so, they could not increase it again, not even to the level that had been in place before October 30, 1947 (§ 39). In other words, they could not go back to the pre–October 30, 1947, level. The same report explained that the existing legislation clause covered only legislation that was mandatory either by its terms or because of the expressed intent. Subsequent panels repeated these findings almost verbatim, constructing the existing legislation clause as a “one-way street” (i.e., only decreases in the inconsistency were allowed), not a “two-way street” (since, following any decrease, there was no way to reverse it).125

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One can easily see why this construction of the clause was so effective. Many trading nations subsequent to the entry into force of GATT had adopted GATT-consistent legislation and undid prior GATT-inconsistent laws. Once they had done this, however, there was no way back, and at best, they would be allowed to keep the new, less inconsistent measures in place. The PPA was eventually rescinded at the end of the Uruguay round. On December 8, 1994, at their Sixth Special Session, the contracting parties adopted a decision on “Transitional Co-existence of the GATT 1947 and the WTO Agreement,” which provided inter alia that: The legal instruments through which the contracting parties apply the GATT 1947 are herewith terminated one year after the date of entry into force of the WTO Agreement. In the light of unforeseen circumstances, the CONTRACTING PARTIES may decide to postpone the date of termination by no more than one year.126

1.3.2 The GATT Recipe for Trade Liberalization The GATT recipe for trade liberalization can be summarized as follows. Instruments affecting trade can be usefully divided into two categories, depending on whether they are imposed only on imports (“border-” or “trade instruments,” in economic jargon), or on both domestic and imported goods (“domestic-” or “behind-the-border instruments”). Since trade instruments can be decomposed into domestic instruments,127 the disciplining of both sets of instruments was necessary. Otherwise, if obligations were imposed solely on trade instruments, trading nations could easily circumvent them by adopting discriminatory domestic policies (e.g., a high consumption tax on imported cars, and a low consumption tax on domestic cars). Once the coverage of the GATT has been addressed this way, the next question is: What kind of (legal) disciplines should trading nations impose on instruments affecting trade? There are only two trade instruments: namely, tariffs and quotas.128 In principle, there is no need to use both of them since, for example, a very high tariff can amount to an import embargo. It was unrealistic to expect that trading nations would agree to move immediately to a free trade equilibrium. They needed to do that at a certain pace, and in an incremental manner. So the question became: What would be the form of transitional protection? For good economic reasons129 (detailed in chapter 2), GATT signatories decided to privilege the use of tariffs over quotas. As a result, upon accession to the GATT, trading nations would not be allowed to apply import and/or export quotas at all (by the terms of Article XI of GATT), whereas recourse to tariffs would be permissible. Tariffs, nevertheless, would be consolidated and then gradually reduced in the context of multilateral tariff negotiations convened to this effect. Consolidation was deemed necessary in order to provide security regarding transaction costs. Otherwise, because the level of tariffs could vary substantially from one day to the

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next, traders might have had little incentive to trade in the first place. The level of tariffs to be imposed on imported products would be a matter for negotiation. Ceilings (or “bindings,” in GATT-speak) would be agreed on through reciprocal concessions, and GATT signatories would no longer be in a position to impose tariffs that were higher than the agreed ceiling (according to Article II of GATT). Through bindings, tariff volatility beyond the agreed cap would become impossible; thus, unpredictability regarding transaction costs would be severely constrained. The binding of tariffs eliminated any uncertainty regarding transaction costs for goods shipped to foreign markets. GATT signatories would be allowed to increase their duties above the ceiling, only following a multilaterally agreed process (as per Article XXVIII of GATT). Furthermore, regardless of whether tariffs had been bound, GATT signatories were required to apply them in a nondiscriminatory manner (Article I of GATT). This is the very essence of the MFN clause that epitomizes the Hullian view of trade liberalization. Importantly, GATT signatories could not treat non-GATT signatories better than their fellow signatories. MFN emerged, thus, as the carrot that would induce outsiders to join the agreement. Acceding countries knew that, in principle at least, their products would receive the best possible treatment in the markets of GATT contracting parties.130 MFN was also the “insurance policy” against concession erosion. GATT signatories should extend the best treatment they offered to anyone to all other GATT signatories. Thus, the incentive to continue making reciprocal tariff concessions would be intact, since the value of tariff concessions was safeguarded by the MFN clause. All exceptions to MFN were included in GATT. For example, members of a preferential trade agreement (PTA)— that is, a customs union (CU) or a free trade area (FTA)—could have recourse to preferential rates (Article XXIV of GATT). However, GATT signatories could not lawfully evade MFN by invoking grounds that had not been contracted into the GATT. MFN was necessary, but not sufficient “insurance” to safeguard the value of negotiated tariff ceilings. Trading nations bought more forms of insurance. First, GATT signatories incurred a nondiscrimination obligation with respect to all domestic policies that they would unilaterally adopt. They accepted to treat imported goods that had paid their ticket to entry (in the form of an import duty) into their national market as if they were domestic goods (Article III of GATT). This provision aimed to ensure that no protection would be afforded to domestic goods beyond the tariff protection that had been negotiated.131 The GATT signatories went one step further in their quest for insurance for tariff concessions, and this is what brings us to our second point: those who saw the value of tariff ceilings negatively affected by even legal (e.g., nondiscriminatory) measures could raise a nonviolation complaint (NVC) and request compensation for damages suffered. To accomplish this, they would have to show that the damages suffered were a result of actions that they could not legitimately anticipate at the moment they had negotiated the tariff ceiling.132 NVC, thus, underscores the importance that negotiators attached to the value of the tariff promise by obliging trading nations to take account of their actions on their

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trading partners even when adopting nondiscriminatory measures following an exchange of tariff promises. It is probably not accidental at all that the majority of NVCs in GATT years were raised against subsidies. The typical scenario would be that where the complainant would claim that a subsidy granted after a tariff concession had been negotiated reduced the value of the tariff concession itself, since the exporter ended up exporting less than anticipated.133 Subsidies were explicitly contracted in Article XVI of GATT, but the discipline on domestic subsidies was ‘incomplete’. In any case in which it is determined that serious prejudice to the interests of any other contracting party had been caused or threatened by subsidization, the contracting party granting the subsidy had to, upon request, discuss with the other contracting party or parties concerned, or with the contracting parties, the possibility of limiting the subsidization. Thus, there was, in principle, no obligation to remove the subsidy (property rules), or even to pay compensation for damage done while keeping the subsidy in place (liability rules, some sort of efficient breach of contract). Subsidizers could simply disregard the plea for limiting the subsidization, and NVCs was the only means to make them change their attitude in this respect. National treatment and NVCs were a kind of ‘market preservation’ rule, in the terminology of Staiger and Sykes (2013), which was aimed to guarantee that the value of tariff concessions would not be undermined through subsequent unilateral actions.134 Finally, a flexibility clause in the form of safeguards was agreed upon. GATT signatories could legitimately raise their duties if, as a result of unforeseen developments, increased imports was damaging their domestic industry. The necessity for a flexibility clause in a trade agreement cannot be overstated. For now, it is enough to state that trading nations have more of an incentive to make meaningful tariff concessions when a flexibility clause has been inserted in the contract allowing them to move to higher tariffs subsequently, assuming certain agreed-upon conditions have been met. This issue will be discussed further in volume 2, chapter 4. Some important policy consequences stem from the points discussed here: • Assuming a reasonable understanding of the term “protection,” GATT allows its signatories to protect their domestic producers only through import tariffs. Tariffs are negotiable, so protection, a rather elusive and hard-to-define concept, becomes a negotiable commodity in itself. • Because of insurance bought with respect to instruments that can affect the value of tariff concessions (in the form of nondiscrimination and NVCs), trading nations continue to have an incentive to negotiate tariff reductions in the future as well. • This discussion also reveals that GATT is a “negative integration” contract: that is, its signatories were left essentially free to unilaterally define their domestic policies and were under no constraint at all to follow a particular antitrust, environmental, labor, or other

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kind of policy. All they promised by acceding to GATT was that, once they had decided on similar policies (if they did so at all), they would apply them in a nondiscriminatory manner to both domestic and imported goods that came under their purview. 1.3.2.1 Tariffs and … Supporting Act The GATT framers can be credited with crafting a remarkable document that has withstood the test of time. Their success is even more formidable considering the enormity of their task: to bring about the first multilateral trade order. The GATT negotiators of the 1940s managed to rise to the challenge and produce a short, concise text that generated remarkable trade over the years, while serving as a template for dozens other trade agreements as well. So far, this chapter has described GATT as an agreement that focuses on tariff negotiation. Why focus on tariffs?135 In equilibrium, any government intervention can affect trade, even if only indirectly or potentially. Consequently, an agreement aiming at liberalizing trade should discipline all government actions. Moreover, countries do not have symmetric preferences, and policies change over time as a result of social preferences. To achieve trade liberalization, thus, trading nations would have to be in a permanent stage of negotiation aiming at disciplining each and every one of these instruments. And yet the GATT framers managed to produce a text that dealt with those issues after only a few months of intense negotiation. How did they do that? They conducted for all practical purposes a tariff negotiation, dealing only to the extent necessary with the dozens (or even hundreds) of other instruments that can affect trade. It is striking that whereas four provisions (Articles I, II, XXVIII, and XXVIII bis of GATT) deal in a detailed manner with tariffs, only one (Article III of GATT) deals with all domestic instruments (policies) ranging from taxation to public health to food safety. In one provision as well (Article XI of GATT), the framers of the GATT banned the use of export and import quotas. Baldwin (1970) provided the most persuasive explanation of the structure of GATT, arguing that negotiators rationally focused on tariff barriers, which constituted the main market access impediment at the time and, because of their sheer size (e.g., Smoot–Hawley), were hiding the relevance of NTBs.136 Disciplining tariffs and import quotas first, and then reducing their bite, would allow trade negotiators to better appreciate the bite of behind-the-border policies (i.e., NTBs): Baldwin aptly called this a “draining of the swamp” effect; in his words (1970, p. 2): “The lowering of tariffs has, in effect, been like draining a swamp. The lower water level has revealed all the snags and stumps of nontariff barriers that still have to be cleared away.” This is why they focused on tariff negotiations. The GATT was thus conceived as the means to curb unilateralism and the resulting uncertainty regarding transaction costs by prioritizing the most egregious trade barriers, tariffs, and quotas. By imposing a nondiscrimination obligation on NTBs, they managed to kill two birds with one stone: they

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safeguarded the value of tariff concessions and they avoided convening a permanent forum for negotiations. NTBs are not reciprocally negotiated; in fact, they are not negotiated at all. GATT contracting parties are free to adopt new policies and modify or abandon existing ones, so long as they do not discriminate between domestic and imported goods when applying them. The solution presupposes, of course, some agreed understanding of discrimination, which will be discussed further in chapter 7, and in volume 2, when we discuss the “new generation” agreements. GATT is all about “shallow” integration. It may be shallow, but it is integration nevertheless. GATT was the first step—a very meaningful first step toward trade integration. 1.3.2.2 Embedded Liberalism We briefly alluded to the negative integration-character of GATT earlier in this chapter. This statement should be taken with a grain of salt. Yes, participants would be free to create the policy mixture that they deemed warranted at home, and GATT would not prejudge the extent of their public health, environmental, or competition policies. The underlying assumption, though, was that participants would be market economies pursuing free trade policies—negative integration, but within limits. For example, the Suggested Charter in Article 28 made this assumption explicit, allowing for an exception for countries establishing or maintaining a complete or substantially complete monopoly of import trade to negotiate accession and eventually participate in the ITO. The fact that Western democracies participated in the negotiation, and only a special provision had been made to accommodate the USSR, is ample testimony to this. GATT was thus built on the implicit understanding that liberal policies would be pursued at home, and free trade would govern the interstate relations (a sort of ‘embedded liberalism’, in other words).137 Over the years, this unwritten foundation of GATT has not changed. Trading nations have made explicit concessions to accommodate instances of illiberal policies, such as Article XVII of GATT (state trading).138 In a similar vein, there is a provision on NMEs in the Interpretative Note in Article XVI of GATT. It is also true that some NMEs that had joined the GATT much before they espoused free market liberalism did not fully implement their GATT obligations. Poland, for example, joined GATT much before the fall of the Berlin Wall and the ensuing events. It applied GATT through a protocol, which guaranteed a certain level of imports from GATT markets that would increase over the years in exchange for MFN access to the markets of GATT contracting parties. This led Hudec (1972, pp. 1369ff) to call Poland’s participation in GATT a “muli-purchase commitment,” or even a “de jure participation,”since de facto a lot of the GATT obligations were never implemented by Poland. More recently, WTO members inserted a series of obligations in addition to those reflected in the WTO contract in the Protocols of Accession of new members that used to be NMEs (e.g., China). Similar adjustments were deemed compulsory in order to ensure

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a smooth implementation of WTO obligations. This point will be discussed in more detail later in this chapter. 1.3.3

Becoming an Institution

1.3.3.1 Goodbye, ITO On December 6, 1950, it became clear to all that the ITO Charter would not be formally presented to the US Congress for ratification.139 Various reasons led to this decision, and it is probably unfair to blame the US alone for the nonadvent of the ITO. Diebold (1993) sums it up fairly when he states: “The efforts to go beyond traditional areas of agreement led to what I regard as a fairly promising chapter about international commodity agreements, a weak one on private business practices, and what turned out to be disastrous provisions about economic development and private investment.”140 It is true that in the US, the mood was not favorable to the ITO. There was dissatisfaction in US business circles with the negotiations. The prevailing feeling in the US was that modernized versions of FCN treaties, bilateral agreements that the US used to sign with a host of interested states, would better correspond to the aspirations of US business than a chapter on investment in the ITO.141 The chapter on employment policies was also perceived as an intrusion into domestic policies that would be better left to national discretion. Two other factors contributed to the demise of the ITO: first, the absence of ITO champions in the administration of President Harry Truman after 1949, and second, the realization how much could be achieved already, solely through the implementation of GATT.142 Those who would have defended the ITO in the Truman administration had left office by 1949–1950. Diebold (1993, p. 341) described the situation as follows: Clayton had gone, as had Wilcox. Nitze was doing other things. Acheson was back but he never put a high priority on trade matters except as part of larger issues. I think he regarded trade liberalization as a kind of hobby of Cordell Hull’s and he did not have a lot of respect for Mr. Hull’s political judgment—at least on international matters. Raymond Vernon has put forward the idea of “policy entrepreneurs” and I wonder whether the absence of one may not have contributed to the Truman administration’s dropping of the ITO.

Odell and Eichengreen (1998) invoked “principal-agent slack.” They compared the ITO with the WTO negotiations and note that in the latter, “principals instructed their negotiating agents earlier, more often, and more precisely.”143 As a result, the final outcome of the WTO negotiations was closer to the Congress’s preferences than the ITO had ever been. The Truman administration lost not only its ITO champions, but it was not fully aware of the implications of the ITO negotiations and was quite reluctant to invest substantial political capital to salvage a process that it had not fully understood. In the meantime, GATT was beginning to show that, its birth defects (as a result of the nonadvent of the ITO simultaneously with it) notwithstanding, it was quite capable of

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accomplishing its assigned mission. By 1950, it had already wrapped up three rounds of tariff negotiations (at Geneva, Annecy, and Torquay). Things looked quite rosy on the trade front. Moreover, the success of GATT had a positive influence on the other grand enterprise that the US had embarked upon: the financing of Europe’s development. Will Clayton, in a preface to the 1949 book by Clair Wilcox, explains that the US had embarked on a dual interlinked process aimed at leading to recovery on the European continent, as well as worldwide: “The program that is embodied in the Charter provides a necessary sequel to the program for European recovery on which the United States is now embarked. The two are interdependent; neither can be wholly successful without the other; both are parts of a common policy.”144 European recovery, of course, would be largely achieved through the Marshall Plan. There was an increasing conviction that the second part (the Charter’s program) could be largely achieved through GATT as it stood. What would the ITO add then in a meaningful manner? Still, there were some voices that tried in vain to persuade the US to endorse the project. Clair Wilcox, one of the chief US negotiators, went as far as to state that, “There is no hope that a multilateral trading system can be maintained in the face of widespread and protracted unemployment. Where the objectives of domestic stability and international freedom come into conflict, the former will be given priority.”145 Similar efforts fell on deaf ears. It is noteworthy, though, that the ITO was never formally abolished. In fact, Article XXIX of GATT kept some of its provisions legally relevant, albeit to a limited extent.146 The advent of the WTO (January 1, 1995) signaled the end of the ITO. 1.3.3.2 Functional Institutionalism à la GATT GATT, which in the meantime had entered into force on January 1, 1948, was left to operate in an institutional vacuum. It was conceived as an agreement under the aegis of the ITO, the world trade institution; and for this reason, it did not contain any institutional architecture other than a few scattered provisions. The best testimony to this is provided by the terminology used throughout GATT: its “members” were “contracting parties,” and the decisive organ of GATT was the CONTRACTING PARTIES. References to important institutions, like the GATT Council, were totally missing from the original text. In fact, Article XXV of GATT explicitly acknowledged the institutional vacuum and the need to fill in order to honor the GATT mandate, when stating that: “… representatives of contracting parties shall meet from time to time for the purposes of giving effect to those provisions of the Agreement which involve joint action and, generally, with a view to facilitating the operation and furthering the objectives of the Agreement.” GATT had to slowly evolve into an international institution in an attempt to fill the gap that had been left by the nonestablishment of the ITO.147 Its institutional development both

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benefited and suffered from its various birth defects. The countries participating in GATT did not plan very far ahead. Institutional innovations were more a practical response to observed needs than a springboard to accommodate future challenges. This “functional institutionalism” à la GATT gained in legitimacy precisely because the edifice was built on perceived and not imaginary needs. The use of GATT panels to forge dispute settlements is probably the most successful example of an organ that was not foreseen in the original GATT, but such panels were subsequently created in order to ensure the smooth functioning of the emerging institution. However, there were also some failures with this approach: the Consultative Group of Eighteen (CG18) was created with the aim to provide some sort of a directory or executive office for GATT, but it never managed to honor a similar mandate. It never managed to become a genuine executive office. But its story supports another advantage of functional institutionalism: when it became obvious that it had not responded to the expectations, the use of CG18 came to an end. It is, of course, much easier to do that with a nonstatutory entity than with a body that has been foreseen and dictated in an international agreement. Before we move to discussing the two institutions, though, it is worth underscoring that all decisions in the GATT years, like the ones described previously, were taken by consensus. Consensus voting added to the legitimacy of the endeavor. Tacit acquiescence sufficed to adopt a decision, and only formal opposition would block consensus. There is a trade-off between consensus voting, and efficiency, of course, since any one GATT signatory could block a decision and thus slow down the decision-making process. The GATT signatories preferred to err on the side of efficiency and sacrificed speed of their integration process to the altar of making consensual decisions at each and every step of their common way. CG18 The CG18 was established by a GATT Council decision taken on July 11, 1975: The task of the Group is to facilitate the carrying out, by the CONTRACTING PARTIES, of their responsibilities, particularly with respect to: following international trade developments with a view to the pursuit and maintenance of trade policies consistent with the objectives and principles of the General Agreement; the forestalling, whenever possible, of sudden disturbances that could represent a threat to the multilateral trading system and to international trade relations generally; and action to deal with such disturbances if they in fact occur; the international adjustment process and the co-ordination, in this context, between the GATT and the IMF. In the pursuit of its task, the Group shall take into account the special characteristics and requirements of the economies of the developing countries and their problems. The Group shall not impinge upon the competence or authority of the CONTRACTING PARTIES148 or of the Council and shall not assume, or detract from, any of the decision-making responsibilities of these two bodies or of the permanent GATT Committees. Neither shall it interfere with the activities and competence of the Trade Negotiations Committee. The Group’s membership shall be balanced and broadly representative due regard being had to rotation of membership as appropriate. Initially the composition of the Group shall be as follows:

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Chairman: To be designated by members of the Group.149 Membership: Argentina

India

Peru

Australia Brazil Canada Egypt EU150

Japan Malaysia Nigeria Nordic country Pakistan

Poland Spain Switzerland United States Zaire

The attendance of alternates shall be provided for. In developing its procedures, the Group shall ensure that, when a matter of particular importance to any contracting party is under discussion, that contracting party shall have the opportunity fully to present its views to the Group. The Group may invite observers to attend during the discussion of an item on the agenda of a meeting. The Group shall meet periodically as necessary. The Group shall report periodically to the Council. It shall submit once a year a comprehensive account of its activities. The Group is established provisionally for a period of one year, its task, composition, and terms of reference being subject to review by the Council at the end of that year.151

Prior to the establishment of the CG18, there was no comparable attempt to bring senior officials from their world capitals to Geneva on a regular basis. Following an initiative by Director-General (DG) Olivier Long,152 discussions on the establishment of the group were initiated. In Long’s mind, the idea was to bring in an “Executive Committee for the GATT,” the membership of which was fast increasing. An organ with limited membership but quite representative of all GATT contracting parties was deemed necessary in order to ensure that expanding membership would not prove an impediment to swift decision making. What he had in mind was a structure akin to the Committee of Twenty (C-20) of the IMF, which had been studying the reform of the international monetary system. This restricted group of high-level representatives, which would not impinge upon the competence or authority of the CONTRACTING PARTIES, the Council, or other permanent GATT bodies, would be able to discuss international trade matters within the political context and on the basis of the personal knowledge and authority of the group’s members. Following consultations about the composition of the group, Long made a further submission to the Council in July 1975, where he set out the terms of reference for the group as was just described, which were approved by the Council without amendment.153 In addition, provision was made for nine alternate members, to be approved each year (along with the permanent groups) by the CONTRACTING PARTIES. In the first year, these were Austria, Côte d’Ivoire, Hungary, Israel, Jamaica, Korea, New Zealand, Norway, and Yugoslavia, followed by a rotation of countries within geographic regions. Alternate members could participate fully in the group’s discussions. The difference between full members and alternate members was that the former were provided with two seats, one to be used by an adviser, while alternate members had only one.

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The first meeting of the group was held in November 1975. The change in its name from “Management Group,” as originally proposed, to “Consultative Group” reflected the intention that this should not be a decision-making body. The group’s function was essentially consultative, and on a number of occasions, it made recommendations or suggestions to the GATT Council on matters of importance. Thus, in July 1981, it recommended that the CONTRACTING PARTIES should envisage convening a Ministerial Meeting in 1982, which eventually led to the launch of the Uruguay round. At the session of CONTRACTING PARTIES in November 1985, it was decided that in 1986, the membership of the group should be somewhat enlarged (to twenty-two full members), while the number of alternate members remained nine. This group became the forum for numerous discussions on the GATT mandate, its eventual expansion to other areas, and other topics. It fell short of deciding anything that meaningfully affected the life and evolution of the GATT institution, however, and eventually it fell into desuetude. Dispute Settlement Two GATT provisions explicitly refer to the settlement of disputes (namely, Articles XXII and XXIII), but they do not contain specific procedures for this purpose. The GATT procedural rules were very limited, largely because it was anticipated that the ITO rules would soon come into force. The ITO Charter contained detailed dispute settlement rules that included a provision for the referral of questions to the International Court of Justice (ICJ). The history of dispute settlement in GATT begins with a complaint submitted in the summer of 1948 by the Netherlands against Cuba, where the issue was whether the MFN obligation (Article I of GATT) also applied to consular taxes.154 The matter was referred to the chairman, who ruled that Article I of GATT effectively applied to consular taxes. Rulings by the chairman were subsequently substituted by a Working Party, whereby the complaining party, the defendant, and any other contracting party that might have an interest in the dispute would participate. We thus moved from chairman rulings to Working Parties, and then, eventually to “Panels.” In 1952, the “Panels on Complaints” took over de facto from where the Working Parties had left off, adjudicating nineteen complaints in total between 1952 and 1963. Three or five neutral panelists would prepare a report that would eventually be submitted to the CONTRACTING PARTIES for their consideration and adoption.155 All this started with a complaint by Norway against Germany. Norway had complained that its exports of sardines to Germany were accorded treatment less favorable than that Germany accorded to sardines originating elsewhere.156 The complaint was supposed to go be submitted to a Working Party. It is then that Eric Wyndham White, the DG of the GATT, “hijacked” the process, proposing that the dispute be referred to a single working party, the terms of which would be decided later.157 A few days later, Greece requested that its dispute with the US regarding the treatment of its exports of dried figs be resolved through the multilateral procedures. The chairman

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recalled the agreement in principle to refer similar disputes to a single panel that should be composed of delegates from Australia, Canada, Ceylon, Cuba, Finland, and the Netherlands. Its terms of reference were stated as follows: To consider, in consultation with representatives of the countries directly concerned and of other interested countries, complaints referred to the CONTRACTING PARTIES under Article XXIII, and such other complaints as the CONTRACTING PARTIES may expressly refer to the Panel, and to submit findings and recommendations to the CONTRACTING PARTIES.158

Denmark then tabled an official proposal aiming to making the move to panels permanent.159 The proposal was not adopted, but panels eventually became a permanent feature of GATT anyway. Still, the absence of formalism did not lead to a total breakdown of GATT dispute settlement. Hudec (1998b, p. 107) explained why, the absence of elaborate procedures notwithstanding, GATT had some early success adjudicating disputes: The first few legal rulings overcame both the time pressure and the neutrality problem by the device of a ruling from the chair, which became a ruling of the entire membership when it was tacitly approved by silence. This device was accepted as sufficiently neutral for two rather special reasons. First, the Chairman of the Contracting Parties during the first four sessions was L. Dana Wilgress, a senior Canadian diplomat who had also been Chairman of the 1946–48 GATT/ITO negotiations. Wilgress’ key role in those negotiations lent an unusual degree of authority to his rulings, both because of his expertise as to the meaning of the agreement and because of the reputation for fairness he had earned in his work as chairman of the ITO negotiations. Second, and perhaps more important, in these early years most of the delegates to GATT meetings were also veterans of the GATT/ITO negotiations themselves. As such, they all felt they knew exactly what was meant by all of the provisions in the agreement they had drafted, and consequently saw nothing amiss in voting on authoritative legal interpretations. There was no problem of neutrality, they thought, when everyone in the room very well knew the right answer.160

In its early stages, thus, dispute settlement in GATT reflected its diplomatic roots: the majority of panelists were diplomats. No formal requirement to have legal training, let alone GATT-related legal training, was imposed. Both Hudec (1993b) and Davey (1987) have observed that the goal of the process was to end up with a mutually acceptable solution rather than to judge on the legal merits of the case, and as a result, the overall tenor of the process was highly conciliatory. The emphasis was on removing cases from the docket. Between 1964 and 1970, dispute adjudication came to an abrupt halt. Hudec (1998b) identifies two reasons for the halt.161 First, the EU had adopted an antilegalist bias requesting from its trading partners a flexible attitude toward its common agricultural policy (CAP), and its PTAs that it had signed with former colonies since, by challenging their consistency with the GATT rules, they would be questioning the EU integration process as such. Second, Wyndham White, the head of GATT at that time, had acceded to the pragmatic approach advocated by the EU. Hudec (1998b, p. 111) mentions that he went so far as to state that GATT could not offer position to lawyers.

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Things changed in the 1970s. The rise of NTBs, and the “drainage of the swamp,” in Baldwin’s (1970) inimitable expression, which fostered a better understanding of the “cost” of NTBs, were the main reason why the US pushed for a new round that would shift its focus from negotiation of tariffs to negotiation of NTBs. In this vein, in Hudec’s (1998b) account, the US Congress made it clear that it would support similar efforts, provided that enforcement of agreed obligations would be strengthened. The US, while negotiating the Tokyo round of agreements, one of the rounds of multilateral trade negotiations that we detail further on, submitted a series of disputes (against the EU) challenging aspects of its CAP. Other countries followed. The challenges pertained to complicated legal issues, and this changing attitude of the trading nations toward the CAP called for reinforcement of the legal expertise embedded in GATT. GATT had to adapt to the new reality and to the many requests for more “legalism.” It responded by formalizing panel procedures by crystallizing prior practices into formal decisions and hiring trade lawyers to staff its services.162 The “Understanding on Notification, Consultation, Dispute Settlement, and Surveillance of 28 November 1979” (in GATT-speak, the “1979 Understanding”) was formally adopted by the GATT CONTRACTING PARTIES at the conclusion of the Tokyo round. This was the first attempt to formalize prior practices. It included an Annex that set out an “Agreed Description of the Customary Practice of the GATT in the Field of Dispute Settlement,” specifying the way in which dispute settlement procedures had evolved since the inception of GATT: Panels set up their own working procedures. The practice for the panels has been to hold two or three formal meetings with the parties concerned. The panel invited the parties to present their views either in writing and/or orally in the presence of each other. The panel can question both parties on any matter which it considers relevant to the dispute. Panels have also heard the views of any contracting party having a substantial interest in the matter, which is not directly party to the dispute, but which has expressed in the Council a desire to present its views. Written memoranda submitted to the panel have been considered confidential, but are made available to the parties to the dispute. Panels often consult with and seek information from any relevant source they deem appropriate and they sometimes consult experts to obtain their technical opinion on certain aspects of the matter. Panels may seek advice or assistance from the secretariat in its capacity as guardian of the General Agreement, especially on historical or procedural aspects. The secretariat provides the secretary and technical services for panels.163

Panels thus formally came into being through this agreement. Three years later, at the 1982 Ministerial Conference,164 the CONTRACTING PARTIES reaffirmed the 1979 Understanding and added more institutional detail to dispute adjudication, including the following requirement: “The contracting party to which such a recommendation [i.e., to bring a challenged measure into conformity with GATT] has been addressed, shall report within a reasonable specified period on action taken or on its reasons for not implementing the recommendation or ruling by the CONTRACTING PARTIES.”165

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Further steps were taken with the Decision on Dispute Settlement Procedures adopted on November 30, 1984.166 Eventually, the Montreal Rules were agreed upon167 during the Uruguay round, and the Panel process began to take its current form. In the meantime, in 1981 Arthur Dunkel (the then-DG of GATT) had appointed as Director of Legal Affairs Hielke van Tuinen, a very respected member of the GATT secretariat, for an experimental two year-term. The 1982 Ministerial Declaration acknowledged the role of the secretariat in assisting panels by stating the following: “(iv) The secretariat of GATT has the responsibility of assisting the panel, especially on the legal, historical, and procedural aspects of the matters dealt with.” In 1983, the Legal Affairs Division was established, and DG Dunkel asked another experienced member of the secretariat, Åke Sten-Oscar Lindén, to head it. The Legal Affairs Division was staffed with additional lawyers and began servicing panels acting as clerks for panelists. The decisive step toward providing panels with professional legal advice was taken there and then.168 Over the years, GATT developed an institutional infrastructure that would adequately cope with its ever-increasing needs. Although the participants in the GATT process continued to be formally called “contracting parties” until the final days of GATT, they behaved de facto as members of an institution, operating under a vague institutional umbrella. 1.3.4 The GATT Rounds of Trade Liberalization 1.3.4.1 Bringing Tariffs Down The GATT mandate calls for progressive tariff liberalization, not for immediate tariff elimination (Article XXVIIIbis). During the GATT years, the contracting parties conducted eight rounds of multilateral negotiations (previously called “Tariff Conferences”) aimed at reducing tariffs (see table 1.1). The Doha round, which was launched in that Middle Eastern city in the autumn of 2001, was the ninth trade round since the inception of GATT, and the first since the advent of the WTO. Table 1.1 Negotiating rounds Name of the Round

Chronology

Number of Participants

Geneva Annecy Torquay Geneva Dillon Kennedy Tokyo Uruguay

1947 1949 1950 1956 1960–1961 1962–1967 1973–1979 1986–1994

23 13 38 26 26 62 102 123

Source: Understanding the WTO, The WTO: Geneva (2015), p. 16; https://www.wto.org/english/thewto_e/ whatis_e/tif_e/understanding_e.pdf.

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The Dillon round was “… the last of the traditional GATT tariff negotiations, which provided a multilateral framework for a collection of bilateral item-by-item tariff negotiations.”169 It was meant to address two issues: general tariff concessions as discussed earlier, and provide the: “… first opportunity for negotiating reductions in the common external tariff of the Community.”170 The focus of the negotiators, up to and including this round [which signaled the first participation of the European Economic Community (EEC) as an entity in the negotiations], had been exclusively on dismantling tariff protection since, as of the Kennedy round, negotiations on developing the legal arsenal of GATT were initiated as well. Tariff reduction represents an area where GATT has enjoyed remarkable success. Irwin (1996 and 1998a) states that average duties across all goods calculated on dutiable imports stood at 19.34 percent in 1947 and 13.87 percent in 1948.171 However, if duty-free trade was included, the ratio of duties collected to total imports amounted to 7.55 percent in 1947 and 5.71 percent in 1948. The average tariffs on dutiable imports weighted with the 1939 trade values was 32.2 percent in 1947, and 25.4 percent in 1948. As 60 percent of US imports were duty-free in 1947, the average tariff for total imports was much lower. In addition, were tariff averages weighted with the 1947 trade weights and prices (and not with 1939 values), then the post-Geneva average tariff on dutiable imports drops from 25.4 percent to 15 percent. Including duty-free imports, the pre-Annecy (GATT 1948) tariff average of all US imports was estimated by the US Tariff Commission to amount to 5.9 percent. This number fits unusually well with the ratio of duties to total imports (free and dutiable) of 5.97 percent in 1950. Today’s duties, with few exceptions, are almost immaterial, as the tables in this chapter show. Bringing down tariff protection to today’s level is quite a remarkable achievement,172 but there are caveats. Reductions have not been symmetric across products or across countries. Farm and textile products essentially lived outside the core disciplines of GATT: the former because of Articles XI.2 and XVI of GATT (which allowed some import restrictions and subsidization, respectively); the latter because of the Multifiber Arrangement (MFA), which established a global quota for textile products. Developing countries, on the other hand, did not make tariff cuts comparable to those made by developed countries, as various tables in the WTO World Trade Report of 2007173 clearly demonstrate. Still, they managed to reduce their tariffs in general—on occasion, quite drastically. The term “developing countries” represents, of course, a very heterogeneous group of countries. Therefore, it is appropriate to operate subdivisions between them. The big developing countries did make a serious effort to reduce tariff levels. Bhagwati, Krishna, and Panagariya (2015) have calculated that the aggregate level of tariffs across goods prevailing in India during the Doha round was around 10 percent ad valorem, while the corresponding level in China was around 8.7 percent, and across Latin American countries at just below 15 percent. Smaller developing countries typically agreed to humbler tariff reductions.174 Still, very few developing countries, in their estimation, exhibit aggregate levels above the 15 percent

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threshold, and this is routinely the case for least developed countries (LDCs)—that is, the “poorest” among developing countries—while south-south cooperation (between developing countries at large) has doubled since 1995; e.g., at the end of the last successful GATT round (Uruguay round), where meaningful tariff reductions were agreed upon. During the Uruguay round, LDCs agreed for the first time to bind many of their duties.175 Tariff reductions should not be attributed solely to GATT. Investment liberalization, for example, has contributed as well. When a constituency holds an economic interest in a foreign market (say, through foreign direct investment), its home government has less incentive to impose tariffs.176 Common sense has contributed as well, since some small countries must have realized that the only effect that their tariffs have had was to deprive its citizens of commodities. To conclude, the dismantlement of tariffs has been the main GATT success story. Ossa (2014) provides a very comprehensive evaluation of potential gains from tariff reductions from now on. His conclusion is that potential gains are modest. The candle is not worth the flame, and the multilateral trading system should focus on regulatory barriers instead. Tables 1.2 and 1.3 show the tariff cuts by developed GATT contracting parties on industrial goods over the years, whereas table 1.4 reflects tariff cuts by countries acceding to the WTO after January 1, 1995. Table 1.2 Tariff cuts by developed countries in industrial goods Implementation Period

Round Covered

Weighted Tariff Reduction

1948 1950 1952 1956–1958 1962–1964 1968–1972 1980–1987 1995–1999

Geneva (1947) Annecy (1949) Torquay (1950–1951) Geneva (1955–1956) Dillon (1961–1962) Kennedy (1964–1947) Tokyo (1973–1979) Uruguay (1986–1994)

–26 (1939) –3 (1947) –4 (1949) –3 (1954) –4 (1960) –38 (1964) –33 (1977 or 1976) –38 (1988 or 1989)

Notes: The last column represents the year during which the MFN import weights were based. Source: The World Trade Report, 2007, p. 207.

Table 1.3 Tariff cuts on industrial goods during the Uruguay round PreTrader

Uruguay Round

United States Japan EU-12 Total

5.4 3.9 5.7 5.2

Post-

3.5 1.7 3.6 3.1

Reduction

Imports (MFN)

rate (%)

Billion $(1988)

–35 –56 –37 –39

297 133 197 627

Source: The World Trade Report, 2007, The GATT: Geneva at p. 209.

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Table 1.4 Tariff cuts by countries acceding at or after the Uruguay round Agricultural Products

Albania (a) Republic of Armenia Bulgaria Cambodia (c) China Croatia (c) Ecuador Estonia (b) FYR Macedonia Georgia Jordan Kyrgyz Republic (c) Latvia (a) Lithuania (b) Moldova (a) Mongolia (c) Nepal (c) Oman (a) Panama (b) Saudi Arabia (d) Chinese Taipei (c)

Industrial Products

Bound

Applied

Bound

Applied

9.4 14.7 35.6 28.1 15.8 9.4 25.5 17.5 11.3 11.7 23.7 12.3 34.6 15.2 12.2 18.9 41.4 28.0 27.7 22.4 15.3

9.0 6.6 18.4 19.5 16.2 9.3 14.7 12.2 12.7 11.7 19.6 7.0 11.8 9.7 10.2 5.1 13.5 10.2 14.8 7.8 16.3

6.6 7.5 23.0 17.7 9.1 5.5 21.1 7.3 6.2 6.5 15.2 6.7 9.4 8.4 6.0 17.3 23.7 11.6 22.9 10.5 4.8

7.2 2.3 8.8 15.9 9.5 4.1 11.5 0.1 8.7 6.9 12.1 4.3 2.2 2.4 4.1 4.9 13.7 5.0 7.4 4.8 5.5

Note: 2004 is the year of applied duties by default unless otherwise indicated: (a) refers to 2001, (b) to 2002, (c) to 2003, and (d) to 2006. It may seem perplexing for the bound duty to be higher than the applied duty, but it actually makes sense: duties have to be reduced to the bound level by the end of an agreed “staging period,” and it may be the case that the information included in this table was collected before the end of this period. For example, the Marrakesh Protocol to GATT 1994 explains in its §2 that agreed tariff reductions should be implemented in five equal rate reductions, and it provides the time period within which all five reductions should take place. Source: The World Trade Report, 2007, The GATT: Geneva at p. 209.

1.3.4.2 Adding to the Legislative Framework During the Kennedy round, the focus shifted for the first time toward examining the role that NTBs play in restricting trade in goods. Originally, negotiations on NTBs focused on barriers imposed for economic reasons, such as AD, countervailing, and safeguards. Eventually, however—first through the negotiation of the Agreement on Technical Barriers to Trade (TBT) during the Tokyo round, and then through the renegotiation of the TBT, as well as the negotiation of the Agreement on the Application of Sanitary and Phyto-sanitary Measures (SPS) during the Uruguay round—trading nations began to negotiate NTBs adopted ostensibly for public policy reasons, such as the protection of human health. The agreements concluded during the Tokyo round dealing with NTBs were the following:177 • Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (AD)

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• Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (SCM) • Agreement on Import Licensing Procedures (ILA) • Agreement on Technical Barriers to Trade (TBT) • Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade and Protocol to the Agreement (CV) • Agreement on Government Procurement (GPA) • Agreement on Trade in Civil Aircraft (CA) • International Dairy Arrangement (IDA) • International Arrangement Regarding Bovine Meat (IBM) The approach followed during the Tokyo round became known as “GATT à la carte,” as GATT contracting parties were given the option to decide whether to accede to the various codes. The list of the signatories to the various Tokyo round agreements is reproduced in table 1.5:178 Under the single-undertaking approach that was adopted during the Uruguay round, trading nations were requested to adhere, with very few exceptions, to all agreements reached, departing thus from the practice during the Tokyo round. The Uruguay round, however, introduced a new distinction between multilateral agreements (where participation was automatic upon accession to the WTO), and plurilateral agreements (where participation was optional). The Tokyo round agreements were “plurilateral,” in today’s terminology. The bulk of the Uruguay round agreements were multilateral: in essence, almost all Tokyo round agreements (codes) were “multilateralized,” and a new multilateral agreement (SPS) was added as well. Four plurilateral agreements were concluded during the Uruguay round: namely, the Dairy Arrangement and the Arrangement Regarding Bovine Meat (both of which have since expired), and the Government Procurement Agreement (GPA) and the Agreement on CA (both of which are still in force). The signing of agreements during the rounds does not exhaust the legislative activity in GATT, since various decisions and recommendations were (and still are) being routinely adopted at the committee level between rounds.179 The increase in the number of participants, as well as the increase of negotiated items, unavoidably took their toll on the duration of rounds. Negotiations gradually took longer to complete (four years for the Kennedy round, six years for the Tokyo round, eight years for the Uruguay round, and the Doha round has been going on for thirteen years).180 The changing subject matter also must have had decisive influence here, since it is easier to negotiate tariffs on reciprocity grounds, while it is harder to create a legal document that aims to provide a test that will distinguish between measures that genuinely pursue a goal such as protection of public health, and measures that do not do so. For these reasons, and

A*

A A A

A A* A A A

O S

A A A A O

O

O

O A*

A A A

O

O

A O

O O A A

O

O

O A* A*

O

A O

A

A

O A

A

A

O A* A O

Subsid. Countervailing

O

A O

O

Gov’t Procur.

A

A

A

A

A

A

A

S O A O

Tech. Barriers

A

Suppl. 1979 Protocol A A

A

Argentina Australia Austria Bangladesh Barbados Belgium Belize Benin Brazil Burma Burundi Cameroon Canada Central African Republic Chad Chile Colombia Congo Cuba Cyprus Czechoslovakia Denmark Dominican Republic Egypt EEC Finland France Gabon Gambia Germany Ghana Greece Guyana

AR AU AT BD BB BE BZ BJ BR BU BI_ CM CA CF TD CL CO CO CU CY CS DK DO EG CE FI FR GA GM DE GH GR GY

Geneva 1979 Protocol

Countries CONTRACTING PARTIES

Table 1.5 Participation in the Tokyo round agreements

O

A A A

O

A

A

A

Prov.

A A A234 O

Bovine Meat

O

S A A

O

O

O

O O

A A A O

Dairy

O A A

A

O

O O

A*

A*

S* A A O

Customs Val.233

O

O

A A A

A

O

A O

A

O

S A A O

Import Lic.

A* O S

A O

S A

O A*

O A

O

A

A O

O

Civil Aircraft

O

A A A

A

O

O O

A

A

O

O A

AD

54 Chapter 1

Haiti Hungary Iceland India Indonesia Ireland Israel Italy Ivory Coast Jamaica Japan Kenya Korea Kuwait Luxembourg Madagascar Malawi Malaysia Maldives Malta Mauritania Mauritius Netherlands New Zealand Nicaragua Niger Nigeria Norway Pakistan Peru Philippines Poland Portugal Romania Rwanda Senegal Sierra Leone Singapore South Africa

Countries CONTRACTING PARTIES HT HU IS IN ID IE IL IT CI JM JP KE KR KW LU MG MW MY MV MT MR MU NL NZ NI NE NG NO PK PA PH PL PT RO RW SN SL SG ZA A

A

A

A

A A

—

A

A A*

A S A

A A

Geneva 1979 Protocol

A

A A

— A

A

A

A

A A

A

Suppl. 1979 Protocol

A

O A A O A O O A S O A O

O O

O O

O A

O O

O

O A A O

O

O O A O O

A

O O

. O

Gov’t Procur.

O

A

A

A

A O A O A O

A*

Tech. Barriers

O

O

O A A O A* O A* O

A O

O

O

A

O O A

O

A A*

O O

Subsid. Countervailing

A

A O A

O A

A O

O

O

A O

O

O

O A

Bovine Meat

A

A O A

O A

A O

O

O O A

O

O

A

Dairy

O A

O A O O O O O A

A* O

A* O

A*

A

O

O

A* O

A

Customs Val.233

A A

O

O A A O A* O O A

A

O

O

O

O O A

O

A O

A

Import Lic.

O

O O A

O A

O A

O

A

A

O O A O A

A O

O

O A A O O A O A

O O

O

O

O

A

O

O

A O

A

AD

(continued)

Civil Aircraft

From GATT to the WTO 55

A

A

A

Suppl. 1979 Protocol

O O O

A

O

O O

O O

O

A S O

A* A

A O

A A O O

A O

Subsid. Countervailing

O

A O

A* A

O O

O O A* A

O

A A

O

Gov’t Procur.

A A O O

A O

Tech. Barriers

A* O O Prov. A

A O

A A O

A* A

O O

O

A A

O

Bovine Meat

O

O O

A

A O

O O

A A

O

Dairy

O

A* O

A O

A* A

O O

O

A A

A* O

Customs Val.233

O O

O

O

O

A O

A* A

O O

A A O O

O O

Import Lic.

O

O

A* A

O O

A A

O O

Civil Aircraft

Notes: A Accepted; B Signed (acceptance pending); O Observer; * Reservation, condition, and/or declaration; ** Provisional accession to GATT

BW BG CR EC GT MX PA PY TN VE

A

A A

A A

A

Spain Sri Lanka Suriname Sweden Switzerland Tanzania Thailand Togo Trinidad and Tobago Turkey Uganda United Kingdom United States Upper Volta Uruguay Yugoslavia Zaire Zambia Zimbabwe Other Countries Botswana Bulgaria Costa Rica Ecuador Guatemala Mexico Panama Paraguay Tunisia Venezuela

ES LK SR SE CH TZ TH TG TT TR UG GB US HV UY YU ZR ZM ZW

Geneva 1979 Protocol

Countries CONTRACTING PARTIES

Table 1.5 (continued)

AD

O

O

O

O

O A O

A* A

O O

A A O O

A O

56 Chapter 1

From GATT to the WTO

57

probably many more, six rounds were successfully concluded in the first twenty years of GATT, as opposed to two in the next fifty years, one of which (the Doha round) is still going on.181 1.3.5 The Transformations of GATT The original GATT underwent a series of changes over the years. In 1948, during the Havana Conference, only minor changes were made to the GATT text, the most important being the expansion of Article XXIV GATT to FTAs. In 1955, the GATT Review Session took place, which amounted to a comprehensive reevaluation of GATT. The provisions on BoP and renegotiation of duties were heavily redrafted at that time. In 1965, Part IV was added to GATT. It was the institutional acknowledgment that MFN was not working to the benefit of developing countries, and it opened the door first to a request for a “waiver” that was granted in 1971 and allowed temporary deviations from MFN in favor of goods originating in developing countries, and then to a decision allowing permanent deviations (Enabling Clause, 1979). This decision enabled GATT contracting parties (developed countries) to provide, through national Generalized System of Preferences (GSP) schemes, a tariff treatment of imports originating in developing countries that was better than that of imports of the same goods originating in developed countries, without developing countries being obligated to pay consideration in return. The ultimate transformation of GATT came in 1995, at the end of the Uruguay round, when, as a result of its successful conclusion, GATT reverted to its original function: an agreement coming under the institutional umbrella of a trade organization. This would no longer be the ITO, but the WTO. 1.3.6 A Brief Appraisal of the GATT Record GATT dismantled tariff protection and added an impressive legislative arsenal regulating trade in goods. Matters were not always always smooth, however. GATT faced numerous challenges, criticism, and doubt as it made its way throughout the years. Its system of monitoring preferential trade agreements failed, and was severely criticized, as we will discuss in chapter 6. The manner in which it dealt with the US decision to delink the dollar from gold in 1971 was less than fortunate, and we will discuss this issue in chapter 2. And the debate was not confined to internal discussions among institutional players. Noted scholars stepped in, and offered their views on the overall character of commitments made under the aegis of the GATT. This debate has been portrayed as a divide between pragmatists and legalists, although, as Hudec (1972) correctly explains nuances, are warranted. After all, it was Hudec who provided the impetus for additional support in favor of a pragmatic approach by virtue of his 1972 paper aptly titled “GATT or GABB” (GABB standing for General Agreement for Better Bargaining).

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Dam (1970) was uneasy with the legalistic turn of GATT. He argued forcefully that the overall purpose of GATT would be better served through an agreement on procedures rather than on strict legal obligations. The limits of human foresight were, in his view, particulary dangerous in a contractual arrangement regarding trade liberalization, where events surpass human imagination and are surpassed themselves by new facts that could not have been adequately described in the original contract. Jackson (1969) took a different view. He believed that binding legal obligations served a purpose in that they imposed a clear discipline on the addressees that would be called to implement it. His concession to pragmatism was that he saw room for what he termed “norms” (pp. 780ff.), e.g., a set of rules that would be agreed on multilaterally but would not have any force unless if implemented voluntarily by national governments. Hudec (1972) was definitely a pragmatist. In fact, he thought nothing of substance would be lost if instead of contracting specific obligations, the whole GATT was about an agreement for third party adjudication any time benefits had been nullified and/or impaired. This was not an intellectual battle for winners and losers. It was a thoughtful analysis of GATT by scholars who had realized that a lot more than trade liberalization was at stake if GATT endeavor failed. Trade was one of the few areas in international relations where a spirit of cooperation had been established, and the hope was that this spirit could be mimicked in other fora as well. GATT was a mix of legalism and pragmatism. Strict legal obligations were enforced with reasonableness; decisions were always made by consensus; and institutional improvements corresponded to actual needs and not to a future mega-design. The GATT was thus a pragmatic implementation of legal obligations. Pragmatism understood in this way served the GATT well—consolidating its existence, and allowing it to take a place among international institutions that promoted cooperation. Equally, if not more importantly, GATT contributed through its pragmatism in bringing about the only genuine compulsory third-party adjudication system, an oddity in international relations, where courts typically will be established to adjudicate disputes between nations only following an agreement between the interested parties to this effect. In Hudec’s (1993b) account, there is only one case where the defendant, although legally entitled to do so, refused to establish a panel: the case concerned the first dispute concerning trade of hormone-treated beef between the EU and the US, and ultimately a panel was not established due to a disagreement between the two parties regarding its composition (one party wanted a scientists-only panel, whereas the other preferred a panel composed of trade experts and, if warranted, scientists as well).182 Hudec’s study showed that between 1947 and 1992, 207 panels were established, and the losing party eventually accepted the results of an adverse panel report in approximately 80 percent of cases.183 The percentage would have been even higher (close to 90 percent) had it not been for panel practice in the 1980s, when blocking adoption occurred with increasing frequency, probably because trading partners moved to the adjudicating table

From GATT to the WTO

59

issues that they could not agree upon while negotiating. A number of panels during this period dealt with farm policy, a contentious issue during the Uruguay round, especially between the two transatlantic partners (EU and US).184 Hudec’s study also revealed that the only time that a GATT contracting party, facing noncompliance by the defendant, requested authorization to impose countermeasures and had its wish granted.185 The thrust of Hudec’s argument is that the passage to negative consensus186 through the Montreal Rules, and its subsequent extension, should not come as a surprise. The trading partners were living in a de facto world of compulsory third-party adjudication. The GATT panel system earned its reputation through a mix of increasing legal rigor (essentially through the establishment of the GATT Legal Affairs Division back in 1982), careful intrusiveness in some sensitive areas of sovereignty (e.g., joint selection of judges; freedom as to the choice of implementing measures), and legitimacy (since the losing party would agree that it had been wrong by adhering to the consensus). By any reasonable account, the system functioned to the satisfaction of its “clients,” the trading nations, and this is probably what prompted them to move to compulsory thirdparty adjudication, thus giving up precious sovereignty. GATT thus promoted a spirit (indeed, a culture) of cooperation, both at the negotiation (tariffs, legislation) and adjudication levels. The best proof that GATT has been a success is probably the fact that its membership has grown steadily over time: 23 nations signed the original text back in the summer of 1947 in Geneva, whereas 120 signed on the dotted line for the Marrakesh Agreement that closed the GATT chapter and opened that of the WTO. That number has risen to 161 since. 1.3.7 A Few Good Men One of the not-so-often told stories of GATT is that the remarkable record that has been discussed in this chapter was the work of a few good men picking up from where the framers of the edifice left off. The GATT secretariat originally consisted of a handful of people routinely working overtime trying to serve trade delegates that were frantically negotiating one trade round after the other in the early 1950s. Not only that, but that legion of workers had to be kept to the bare minimum because of extreme budgetary constraints. Aptly named the ICITO Secretariat (with ICITO standing for “Interim Commission for the International Trade Organization”)187 in an effort to keep the link to the ITO intact, the GATT secretariat was briefly reduced to “five officers, an administrative assistant, and 3 or 4 stenographers.”188 Williams (2014), one of the early GATT officials himself, with a long career at the institution, recalled how GATT was originally composed by former negotiators, such as Jean Royer, a member of the French delegation that had negotiated the original agreement. The link between the administration of the agreement and the negotiating intent thus was kept intact, a link that alas has loosened over the years.189

60

Chapter 1

At the helm of GATT, as noted previously, was Eric Wyndham White, a man of rare intelligence, who in the face of adversity managed to guide GATT to the completion of trade rounds, provide it with institutional infrastructure, and, most important, inspire the confidence of trading nations in the institution he was heading.190 In his obituary for Wyndham White in 1980, John M. Leddy wrote: “As Sir Eric used to point out, the GATT was the Cinderella of international institutions. That it held together at all was due as much as anything to the initiative, persuasive talents and sheer force of will of Sir Eric, who was responsible for converting, often by stratagems bordering on the Byzantine, a simple trade agreement into a vital international institution.”191 1.3.8 A Gentlemen’s Club Economists often describe GATT as a “relational contract,” with like-minded countries brought in by invitation only, and they managed to proceed with consensus decisions. There are dozens of anecdotes that support this view. In 1962, France had imposed import restrictions. The US complained, and the France, to its credit, acknowledged before the panel that its measures were illegal. The natural consequence of this admission would be for the panel to pave the way toward adoption of countermeasures. And yet, in a remarkable passage in its report on France import restrictions, the GATT panel explicitly asked the US to stop short of requesting authorization to impose countermeasures and give France the necessary breathing space to bring its measures into conformity with its obligations (§ 7). The US was probably comforted by the fact that it would be the recipient of similar treatment whenever warranted. An even more persuasive illustration is that the GATT Panel on Germany Starch Duties acknowledged in 1955 that an agreement during the negotiations, to the effect that duties would be set at a certain level that had not been transposed in a schedule of concessions, was an integral part of the balance of concessions agreed during the Torquay round. The word of negotiators sufficed, by and large (§§ 23ff.). 1.4

Regulation of Trade in Goods in the WTO Era

The WTO192 took over from GATT and provided the institutional coverage for a number of agreements, including GATT. The WTO is a “universal” institution, with 161 members, and over 20 more countries waiting to accede to it. The Agreement Establishing the World Trade Organization contains four annexes: • Annex 1 is subdivided into 1A, which covers multilateral agreements on trade in goods; 1B, on trade in services; and 1C, dealing with the TRIPs agreement. • Annex 2 deals with the administration of disputes in the WTO, and the relevant source of law for this purpose is the Dispute Settlement Understanding (DSU).

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61

• Annex 3 includes the Trade Policy Review Mechanism (TPRM). • Annex 4 reflects the plurilateral agreements. When a country (or separate customs territory possessing full autonomy in the conduct of its external commercial relations, as per Article XII.1 of the Agreement Establishing the WTO) accedes to the WTO, it will accept a third (besides accession to multilateral and, possibly, plurilateral agreements) layer of obligations, those assumed through its Protocol of Accession. 1.4.1 The “Old” and the “New” GATT: GATT 1947, GATT 1994 Article II of the Agreement Establishing the WTO explicitly refers to “GATT 1994,” one of the agreements coming under the aegis of the WTO, and adds that it is a legally distinct document from the original GATT (referred to as “GATT 1947”): The General Agreement on Tariffs and Trade 1994 (“GATT 1994”) shall consist of: the provisions in the General Agreement on Tariffs and Trade, dated 30 October 1947, annexed to the Final Act Adopted at the Conclusion of the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment (excluding the Protocol of Provisional Application), as rectified, amended, or modified by the terms of legal instruments which have entered into force before the date of entry into force of the WTO Agreement; the provisions of the legal instruments set forth below that have entered into force under the GATT 1947 before the date of entry into force of the WTO Agreement: protocols and certifications relating to tariff concessions; protocols of accession (excluding the provisions (a) concerning provisional application and withdrawal of provisional application and (b) providing that Part II of GATT 1947 shall be applied provisionally to the fullest extent not inconsistent with legislation existing on the date of the Protocol); decisions on waivers granted under Article XXV of GATT 1947 and still in force on the date of entry into force of the WTO Agreement;193 other decisions of the CONTRACTING PARTIES to GATT 1947; the Understandings set forth below: Understanding on the Interpretation of Article II:1(b) of the General Agreement on Tariffs and Trade 1994; Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994; Understanding on Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994; Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994; Understanding in Respect of Waivers of Obligations under the General Agreement on Tariffs and Trade 1994; Understanding on the Interpretation of Article XXVIII of the General Agreement on Tariffs and Trade 1994; and the Marrakesh Protocol to GATT 1994.

There is no ambiguity regarding the identity and the legal value of “Understandings,” “Protocols of Accession,” “Protocols of Certification,” and “Decisions on Waivers,” which are international agreements binding on their signatories, and have been included one by one in the various Annexes to the Agreement Establishing the WTO. Understandings are treated in WTO practice for all practical purposes as agreements. The Appellate Body (AB), for example, in its report on Turkey—Textiles, followed the definition of the term “general incidence of duties” that had been included in the Understanding on Article XXIV

62

Chapter 1

of GATT, and applied it without any further discussion (§ 53 of the AB report). There is no ambiguity regarding waivers either, as these are identifiable instruments. This point will be discussed further in chapter 9. However, there is ambiguity as to the coverage of the term “other decisions.” The reason for this is that, during the GATT years, there was nothing even resembling a provision discussing in sufficient detail the various legal acts that the CONTRACTING PARTIES could adopt, or their legal consequences. This was the case, because, as covered earlier, GATT was only an agreement designed to come under the aegis of the ITO. It was in the Havana Charter that the framers of the ITO had included institutional provisions. The GATT CONTRACTING PARTIES, though, adopted a series of acts aiming to further the objectives pursued through GATT. They employed a highly varied terminology in order to achieve essentially the same outcome. For example, the terms “decision” and “recommendation” were often used to refer to essentially the same concept. The problem with respect to similar acts should not be overstated, since many decisions, recommendations, and other acts adopted during the GATT-era have found their way into subsequent agreements. The question has also been raised in case law whether the term “other decisions” covers panel reports as well. The panel, in its report on Japan–Alcoholic Beverages II, was the first that was called upon to address this issue. The panel took the view that adopted panel reports enjoyed the status of “other decisions” (§ 6.10). The AB194 disagreed with the panel, though, holding that the decision to adopt a panel report is not a “decision” within the meaning of Article 1(b)(iv) of GATT 1994, although it did acknowledge that adopted reports are “an important part of the GATT acquis” (p. 15 of the AB report on Japan–Alcogholic Beverages II). The term “GATT acquis” is a creation of the AB, and its meaning was clarified in a subsequent report. In US–Shrimp (Article 21.5–Malaysia), the AB held that this term covered the legitimate expectations of WTO members to see that relevant prior case law, even in the absence of stare decisis195 in the WTO legal order, will be duly taken into account in future disputes—to the extent, of course, that it is relevant (§§ 108–109). This issue arose again in US–FSC. This time, the panel found that, instead of understanding decisions to adopt panel reports as “other decisions” in the sense of GATT 1994, it was more appropriate to subject them to Article XVI of the Agreement Establishing the WTO. This provision reads as follows: “… the WTO shall be guided by the decisions, procedures, and customary practices followed by the CONTRACTING PARTIES to GATT 1947.” The panel held as much, a construction that came very close to the substantive content of GATT acquis that had already been endorsed by the AB, and the AB explicitly approved this finding (§§ 108–115), holding that adopted GATT reports provide guidance to future panels dealing with the same issue. It is unclear what “guidance” actually entails, although it cannot amount to stare decisis. Guidance can be provided not only by adopted panel reports, but by unadopted ones as well. Panels in the WTO era have, on occasion, cited and followed the reasoning of unadopted GATT reports to the extent that they found it

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63

persuasive in a particular dispute. The AB, in its report on Japan–Alcoholic Beverages II, held that (p. 16) “a panel could nevertheless find useful guidance in the reasoning of an un-adopted panel report that it considered to be relevant.”196 1.4.2 The Relationship between GATT and the Other Annex 1A Agreements Annex 1A to the WTO Agreement includes GATT 1994; twelve agreements [Antidumping (AD), Agriculture (AG); Textiles and Clothing (ATC); Customs Valuation (CV); Import Licensing (ILA); Preshipment Inspection (PSI); Rules of Origin (ROO); Subsidies and Countervailing Measures (SCM); Safeguards (SG); Sanitary and Phyto-Sanitary Measures (SPS); Technical Barriers to Trade (TBT); and Trade-related Investment Measures (TRIMs)]; six Understandings [on Article II.1(b) GATT; on Article XVII GATT; on Balance of Payments (BoP); on Article XXIV GATT; on Waivers; and on Article XXVIII GATT]; and the Marrakesh Protocol to the GATT 1994 concerning implementation of agreed tariff reductions. A thirteenth Agreement was concluded in the Bali Ministerial Conference, the Agreement on Trade Facilitation (TF).197 The General Interpretative Note to Annex 1A establishes the legal relationship between GATT on the one hand and Annex 1A Agreements on the other, in the following sense: In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A to the Agreement Establishing the World Trade Organization (referred to in the agreements in Annex 1A as the “WTO Agreement”), the provision of the other agreement shall prevail to the extent of the conflict.

The term “conflict” emerges as key to understanding the relationship between GATT and the other Annex 1A Agreements. Earlier case law suggests that this term should be interpreted narrowly: in the absence of genuine conflict (in the sense that there is a legal impossibility to respect two provisions simultaneously—that is, a provision of GATT and a provision of another Annex 1A Agreement), a WTO adjudicating body could start its analysis from the review of GATT instead of the provisions of the specialized agreements. An appropriate illustration of this case law is offered by the panel report on EC–Bananas III (§§ 7.158–7.163). Subsequent case law construes the term “conflict” more in line with the lex specialis principle. This principle is not explicitly included in the Vienna Convention on the Law of Treaties (VCLT).198 Rather, to some extent, it reflects the spirit of “ut regis valeat quam pereat,” the principle of effective treaty interpretation, the cornerstone of the VCLT edifice, which requires that the interpreter avoid interpreting terms to redundancy. Assuming that two provisions regulate the same transaction, privileging recourse to the relatively more general one would reduce the more specific provision to redundancy. In this understanding, an interpreter should always start the interpretative exercise from the agreement that more specifically deals with a particular issue, reverting to the more general provision only when necessary.

64

Chapter 1

The relationship between TBT/SPS, on the one hand, and GATT, on the other, is the area that provoked most of the discussion on this score. In § 77 of its report on EC– Asbestos, the AB concluded that a measure revealing that characteristics of a technical regulation that simultaneously fell under both the TBT and GATT should have been examined under the TBT rather than under GATT. In holding this proposition, the AB distanced itself from the panel’s findings. The panel had opted for a review of the measure under GATT in the absence of a genuine conflict between GATT and the TBT disciplines. The subsequent panel on EC–Sardines went the extra mile, so to speak, and provided the rationale for its preference to examine claims under the TBT Agreement before examining them under GATT. It explicitly stated that, in its view, the TBT disciplines deal more specifically with the disputed transaction, and for this reason, it provided the priority forum to entertain legal claims (§§ 7.14–16). On appeal, the panel’s approach was upheld by the AB (§ 195). The relationship between two multilateral Annex 1A agreements is sometimes prescribed by legislative means (see, e.g., Article 1.5 of the TBT, which clarifies the relationship between the TBT and the SPS Agreements). Otherwise, it is left to the discretion of the WTO adjudicating bodies. The other chapters of this book and in the next volume will refer to case law in this area.199 1.4.3 The Plurilateral Agreements Earlier in this chapter, we mention that, as a reaction to the GATT à la carte approach followed in the Tokyo round, which resulted in different contractual relations between different GATT contracting parties,200 the WTO was negotiated following the singleundertaking approach. All WTO members should be signatories to all agreements negotiated under the auspices of the Uruguay round. The decision to adopt “single-undertaking” was not made overnight. The Ministerial Declaration of 1982 included a provision mandating a review of the operation of the Tokyo-round “Codes.”201 A bridge was then established between reviews by the various committees administering the Codes and the negotiation of the Uruguay round (as of 1986). The concern for unity and consistency of the GATT system started gaining speed. Two ideas were advanced: either incorporate the Codes as such into the GATT system (the ambitious proposal), or take the appropriate measures to ensure that as many GATT contracting parties as possible joined the Codes (the realistic proposal).202 It was decided that a Working Party would be assigned to discuss this issue in more detail. It is in the context of these discussions that the ambitious proposal won the argument, almost without exception.203 Plurilateral agreements are the only exception to this rule. Initially, there were four plurilateral agreements: the CA, the GPA, the IDA, and the IBM. The terms for participation

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in the Annex 4 Agreements are spelled out in each of the four agreements (Article XII.3 of the Agreement Establishing the WTO).204 These four agreements are only open for accession to WTO members (Article II.3 of the Agreement Establishing the WTO). WTO members (Article X.9 of the Agreement Establishing the WTO) can, through consensus voting, add new agreements to the existing list of plurilateral agreements. WTO members enjoy the right to terminate the plurilateral agreements. They decided to terminate the IBM and IDA agreements by decisions of the General Council adopted on December 31, 1997, and December 17, 1997, respectively. As a result, there are only two plurilateral agreements now in place: the GPA, which entered into force on January 1, 1996;205 and the CA, which entered into force on January 1, 1995. Note that they were both negotiated and signed for the first time during the Tokyo round. The original GPA and CA were Tokyo round Codes, and they entered into force on January 1, 1980.206 1.4.4

Single Undertaking Versus “Clubs”

Following the Uruguay round of negotiations, the single-undertaking approach was supposed to be followed in the Doha round as well. §47 of the Doha Ministerial Declaration stated: With the exception of the improvements and clarifications of the Dispute Settlement Understanding, the conduct, conclusion, and entry into force of the outcome of the negotiations shall be treated as parts of a single undertaking. However, agreements reached at an early stage may be implemented on a provisional or a definitive basis. Early agreements shall be taken into account in assessing the overall balance of the negotiations.207

This paragraph is a bit of mystery, though. On the one hand it endorses “single undertaking,” but on the other it does not reject “early harvesting”; that is, it allows for agreements that have been concluded earlier than others to enter into force, even though there is uncertainty looming regarding the conclusion of the remaining agreements. And early harvesting has indeed occurred in the face of the “Aid for Trade” package and the successful conclusion of the meeting in Indonesia (December 2013), the so-called Bali package. The entry into force of these agreements was not conditional on the successful conclusion of the remaining issues. §1.11 of the “Bali Ministerial Declaration” stated: to further demonstrate this commitment, we instruct the Trade Negotiations Committee to prepare within the next 12 months a clearly defined work program on the remaining Doha Development Agenda issues.208

And yet, the Agreement on Trade Facilitation should have entered into force already by July 31, 2014, as per §3 of the decision announcing the agreement on this issue (WTO

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Document WT/MIN(13)/W/8 of December 6, 2013). Its definitive entry into force was delayed, as is recounted in chapter 1, volume 2 of this work. Nothing, for example, in the decision adopting the Agreement on Trade Facilitation links its adoption to the adoption of the remaining Doha agenda. Hence, one can safely conclude that single undertaking was de facto not observed in the Doha talks, as it was not in the Tokyo round, where the “codes” approach had been followed.209 Practice, thus, shows a back-and-forth between single undertaking and deals between club members. The Tokyo round was full of similar deals, and four of them survived the Uruguay round. Where does research literature stand on this issue? It is a commonplace argument that there is a greater scope for deals as possibilities abound (through offering a large set of agreements).210 Single undertaking offers negotiators more to bargain for, but maybe it also offers much more than they can handle. It is the inflexibility that has been associated with the fact that single undertaking requires trading nations to form an integral part of all agreements that has been criticized. Hufbauer and Schott (2013), when discussing the Doha round, explained how the single-undertaking approach has impeded the attainment of several deals that could have come to fruition had their fate not been linked to that of the round. Lawrence (2006) added his voice to similar claims, arguing for a “clubs” approach as a result of the increasing participation in the WTO of nations with highly uneven development levels. As new issues arise as a result of dialogue within societies, it is not to be expected that all WTO members will be ready to discuss them in the multilateral forum. Hoekman and Mavroidis (2015) have argued that clubs are inevitable. Integration of domestic policies requires instruments beyond nondiscrimination, which cannot guarantee market access.211 Those interested in doing so employ other instruments such as recognition or harmonization. Similar arrangements are common across relatively homogeneous states (i.e., across clubs).212 Note that there is nothing legally wrong with proceeding this way, so long as the outcomes of similar exercises will be mutlilateralized to those who can meet the contracted standards. Indeed, this is what MFN is all about. Integration of domestic policies, therefore, will inevitably occur within clubs, and it is in the WTO’s interest to keep bridges to them. These authors also point to a second, independent reason why bridges to clubs must be a priority for the WTO. Clubs could emerge as the “hothouse” for the future multilateral agenda. A look at the regulatory agenda in the Trans-Atlantic Trade and Investment Partnership (TTIP), for example, is quite revealing regarding the issues that the EU and the US view as the modern trade agenda. In TTIP, the EU and the US have embarked on a comprehensive negotiation of regulatory barriers to trade. Some of the negotiating items in the area of standards could eventually be mutlilateralized, or, at the very least, provide some food for thought regarding the approach that should be taken at the multilateral level to address some issues. And the institutional design of clubs is in and of itself of interest

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to the WTO, since maybe some of their features that make them attractive to trading nations could be reproduced at the multilateral level. As things stand, nevertheless, WTO members have made very little use of plurilaterals. The Civil Aviation agreement could only be plurilateral since there are not many producers of aircraft anyway, and there is nothing like a world competition law to address consumer concerns. The GPA stayed plurilateral, probably because the agreement was a remnant of the Tokyo round, and others were not interested in joining in. On July 8, 2014, fourteen WTO members initiated negotiations with the aim of adding a third plurilateral agreement to the WTO arsenal, this time on environmental goods. On the other hand, over 500 PTAs have been concluded. It is PTAs that are the “club” par excellence, and this will be covered in more detail in chapter 6. 1.4.5 The Protocols of Accession A Protocol of Accession reflects the terms under which a country (or customs territory) accedes to GATT/WTO. For years, similar documents would reflect the level of agreed tariff bindings, and rarely, they extend to cover commitments of a different nature. Their legal relevance thus would be largely limited to providing information regarding the level of duties that the new contracting party had agreed to apply following its accession to GATT. Following the successful conclusion of the Uruguay round, a flurry of countries joined the WTO, and many of them had one thing in common: they were NMEs (nonmarket economies). Now what exactly constitutes an NME is not an exact science. The Interpretative Note of Article VI of GATT includes the only statutory definition: 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.

It might seem odd that the only reference to NMEs appears in the context of Article VI of GATT, which deals with the conditions under which AD duties can be imposed.213 One should not neglect the fact that in the context of AD duties or countervailing duties (CVDs), the pricing mechanism in the exporting country is of particular relevance, and NMEs are relevant for this reason as well. Decisions affecting trade, though, can be affected across the board, and it is remarkable that recognition of NME status becomes legally relevant only in the context of contingent protection.214 On paper, an NME must have a complete (or substantially complete) monopoly of trade, and all its domestic prices must be centrally fixed. Surely many centrally planned economies would fail the second condition, and since the two conditions must be cumulatively met, one would expect scarce practice on this score. Practice, however, demonstrates that

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only non–“Western bloc” states have often been treated as NMEs by market economies in the context of AD investigations. WTO adjudicating bodies have not disturbed this practice either. An appropriate illustration is offered by the recent panel on EC—Fasteners (China), which satisfied itself with the observation that China is treated by many as an NME without going any further (§§ 7.68ff). NMEs have been asked to pay a price that WTO incumbents had not paid upon their accession to the world trading system. The Protocols of Accession post-1995 are akin to inventories of obligations that go much further than whatever WTO incumbents had agreed to observe. For example, during the negotiations leading up to the accession of the People’s Republic of China to the WTO, a special safeguard mechanism was concluded which, contrary to the terms of the WTO Safeguards Agreement, allows WTO members the possibility to impose discriminatory (i.e., country-specific) safeguards against China.215 In a similar vein, China was requested to accept a legal obligation to join the GPA, although, as mentioned previously, accession to plurilaterals is an option for WTO members.216 With respect to trading rights, China accepted for all practical purposes to partially give up its rights under Article XVII of GATT: Without prejudice to China’s right to regulate trade in a manner consistent with the WTO Agreement, China shall progressively liberalize the availability and scope of the right to trade, so that, within three years after accession, all enterprises in China shall have the right to trade in all goods throughout the customs territory of China, except for those goods listed in Annex 2A which continue to be subject to state trading in accordance with this Protocol. Such right to trade shall be the right to import and export goods. (emphasis added)217

By the same token, when Saudi Arabia joined the WTO, it promised, following requests by its partners, that when transforming the Gulf Cooperation Council (GCC) into a FTA, it would respect the conditions of Article XXIV of GATT, and Article V of GATS (the General Agreement on Trade in Services that was agreed on in 1995 and has come under the aegis of the WTO), thus waiving the possibility to notify the preferential scheme under the Enabling Clause, which contains less stringent obligations.218 Notification under the Enabling Clause is a privilege that all developing countries enjoy, and the qualification of a WTO member as developing is the exclusive privilege of the individual member (the lack of merits of this approach notwithstanding). More generally, similar stipulations can represent either additional obligations to those assumed by the WTO membership (“WTO plus” or “WTO+,” like the obligation accepted by China), or even, on occasion, a lessening of these obligations (“WTO minus” or “WTO−”):219 for instance, Lithuania acceded to the WTO on May 31, 2001, but it was given until December 31, 2005, to bring its excise taxes on beer and mead into conformity with Article III of GATT.220 WTO− obligations, hence, have a function akin to the grandfathering of obligations that some of the original GATT signatories practiced.

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During the early GATT years, before the Tokyo round Codes were negotiated, accession to GATT was symmetric across incumbents and newly acceding countries. Article XXVI.4 of GATT read to this effect: “Each government accepting this Agreement shall deposit an instrument of acceptance with…” (emphasis added). Arguably, nowadays there is more leeway to negotiate conditions above and beyond the multilateral framework. Article XII of the Agreement Establishing the WTO reads: Any State or separate customs territory possessing full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement and Multilateral Trade Agreements may accede to this Agreement, on terms to be agreed between it and the WTO. (emphasis added)

This provision does implicitly impose a limit: the Protocol of Accession cannot extend beyond issues not covered by the current mandate of the WTO. In this vein, imposing obligations on a particular environmental or competition policy would go beyond the current WTO mandate, what Horn, Mavroidis, and Sapir (2010) have termed “WTO extra,” or “WTOx” obligations. This issue will not be discussed further in this volume. Suffice to say that those interested in an overview of the obligations of those WTO members that acceded to the organization after 1995 should be studying not only the multilateral and plurilateral agreements, but their Protocols of Accession as well.221 1.4.6 The WTO Organs Administering Agreements on Trade in Goods The highest organ in the WTO institutional architecture is the Ministerial Conference. This organ meets every two years (at a minimum by law, but in practice, exactly every two years) and can adopt decisions regarding all matters, such as decisions regarding trade in goods (Article IV.1 of the Agreement Establishing the WTO).222 The General Council will meet in between the meetings of the Ministerial Conference, and assume all competences entrusted to the Ministerial Conference (Article IV.2 of the Agreement Establishing the WTO). The Council for Trade in Goods (CTG), which comes under the aegis of the General Council, oversees the functioning of the Multilateral Trade Agreements in Annex 1A (to the Agreement Establishing the WTO); that is, the agreements dealing with trade in goods (Article IV.5 of the Agreement Establishing the WTO). A series of committees with well-delineated competence have been established and deal with the day-to-day operations of the agreements included in Annex 1A. Some committees have been established through provisions of the Annex 1A Agreements, or through decisions of the WTO membership.223 The Agreement Establishing the WTO provides for the advent of two committees: namely, the Committee on Trade and Development (CTD), and the Committee on Balance of Payments (Article IV.7 of the Agreement Establishing the WTO).

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All committees are serviced by the WTO secretariat. The secretariat is appointed by the DG of the WTO (Article VI.2 of the Agreement Establishing the WTO); §§ 3 and 4 of Article VI of the Agreement Establishing the WTO read: 3. The Director-General shall appoint the members of the staff of the Secretariat and determine their duties and conditions of service in accordance with regulations adopted by the Ministerial Conference. 4. The responsibilities of the Director-General and of the staff of the Secretariat shall be exclusively international in character. In the discharge of their duties, the Director-General and the staff of the Secretariat shall not seek or accept instructions from any government or any other authority external to the WTO. They shall refrain from any action which might adversely reflect on their position as international officials. The Members of the WTO shall respect the international character of the responsibilities of the Director-General and of the staff of the Secretariat and shall not seek to influence them in the discharge of their duties.

The term “Secretariat” denotes the will of the GATT framers to reduce the international officials appointed to clerk-like functions only. The Secretariat has nonetheless, on occasion, assumed some important initiatives. Preeg (1995) refers to the package deal prepared by Wyndham-White in 1967 in the context of the Kennedy round (p. 139). More to the point, Arthur Dunkel prepared the “Dunkel draft” (aspects of which we discuss in chapter 8 of volume 2), a very comprehensive attempt to get over the deadlock reached during the Uruguay round. Preeg (1995) notes to this effect (p. 139): “As director-general of the GATT, Arthur Dunkel was a creature of the GATT membership with no designated authority to act as a mediator. Such a role of the head of an international secretariat is not uncommon, however, and the crucial factor is the judgment as to when and how to act.” Dunkel paid for his audacity as, a few weeks after presenting his draft, he left the Secretariat.224 Four deputy director generals are entrusted with the supervision of the various WTO divisions. The committees dealing with trade in goods are as follows: the Market Access Committee, which deals with tariff and nontariff concessions not dealt with by any other committee, and with keeping all schedules of concessions updated, including the introduction of changes introduced to the Harmonized System.225 The Customs Valuation Committee, the Committee on Rules of Origin, the Import Licensing Committee, and the Committee on Trade Facilitation focus on the administration of the four WTO Agreements that established them (CV, ROO, ILA, TF). The Customs Valuation Committee also manages the Agreement on Preshipment Inspection, whereas the Committee on Rules of Origin, together with the WCO226 Technical Committee on Rules of Origin (TCRO), carry out the main work of harmonizing nonpreferential rules of origin. The Agriculture Committee administers the implementation of the Agreement on Agriculture. The Technical Barriers to Trade Committee and the Sanitary and Phyto-sanitary Measures Committee deal with the day-to-day administration of the respective agreements (TBT, SPS), and provide a

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forum for raising and debating “specific trade concerns,” an informal mechanism for settling disputes that we discuss in detail in chapter 5 of volume 2. The Trade-Related Investment Measures (TRIMs) Committee monitors the implementation and operation of the TRIMs Agreement. The Antidumping Practices Committee, the Subsidies and Countervailing Measures Committee, and the Safeguards Committee provide WTO members with a forum to discuss all matters arising from the operation of the three agreements (AD, SCM, SG). The Working Party on State Trading Enterprises reviews notifications by WTO members on their state trading activities; the ITA Committee (or, more formally, the Committee of the Participants on the Expansion of Trade in Information Technology Products) oversees issues concerning the operation of the ITA Agreement.227 Then there are two committees established under the auspices of the two plurilateral agreements still in force: the Committee on Civil Aircraft, and the Committee on Government Procurement, dealing with the operation of the two corresponding agreements. The Market Access Committee, the Customs Valuation Committee, the Rules of Origin Committee, the Import Licensing Committee, and the ITA Committee are serviced by the Market Access Division. The Agriculture Committee is serviced by the Agriculture and Commodities Division; the Technical Barriers to Trade Committee, as well as the Sanitary and Phyto-sanitary Measures Committee, are serviced by the Trade and Environment Division. The Trade-Related Investment Measures Committee, the Antidumping Practices Committee, the Subsidies and Countervailing Measures Committee, the Safeguards Committee, the Committee on Civil Aviation, and the Working Party on State Trading Enterprises228 are all serviced by the Rules Division. Finally, the Committee on Government Procurement is serviced by the Intellectual Property Division of the WTO. The WTO committees, with few exceptions that will be discussed later, spend their time dealing with day-to-day issues, and, typically, abstain from entertaining discussions regarding the future of the world trading system. Partly, this is because the WTO secretariat, the common agent that could be entrusted with similar functions, is kept at a bare minimum number-wise and is not trusted with a mandate to this effect. It includes only a handful of researchers (unlike, for example, the WB and the IMF). Even The World Trade Report, the closest thing there is to research at the WTO, which is issued on yearly basis by the WTO Research Division, reflects a survey of economics literature on a given topic, and nothing beyond that. There are some unwanted consequences stemming from the WTO corporate governance, as has been described here. The trade agenda is shaped by those who are researching the area and trying to match the needs of the private sector with the appropriate institutional design. This exercise is, for this and other reasons, easier accomplished within clubs (and, most notably, PTAs), than in the WTO. This issue will be explored further in chapter 6. The previous discussion on committees referred to exceptions, and the TBT Committee is one of them. It spends time and effort discussing issues of daily concern, as it does debating on the future shape of the Agreement. It is not that it has a different mandate

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than other committees, since they are all entrusted with the task to review the operation of the WTO Agreement they serve. It might have to do with the composition of the committee, since typically it is not trade negotiators that participate therein, but technical experts interesting in addressing the necessity of regulatory interventions. This is an area where research is making its first steps, and additional work is required.229 Two WTO divisions are important for the discussions in this volume: the Legal Affairs Division and the Appellate Body Division service the panels and the AB, respectively; e.g., the adjudicatory organs entrusted with the exclusive competence to interpret the agreements regulating trade in goods. All this is, of course, relevant to the internal organization of the WTO. The WTO has a legal personality (Article VIII of the Agreement Establishing the WTO) and can conclude international agreements with other organizations, thus establishing the links necessary for it to carry out its functions (Article V of the Agreement Establishing the WTO). For example, more intense cooperation between the WTO, on the one hand, and the IMF and the WB, on the other, has become necessary in order for the WTO to discuss and administer issues relating to currency and trade, trade and development, or both. To this effect, the WTO has signed agreements of cooperation with the institutions on both sides of 18th Street in Washington, DC, that is, the World Bank and the International Monetary Fund. In the WTO era, it began with the “Declaration on the Contribution of the WTO to Achieving Greater Coherence in Global Economic Policymaking” (§ 5 of the Declaration), which was adopted at the end of the Uruguay round. It reflected an invitation to the WB and IMF delegates to brainstorm on ways and means to render the policies adopted by the three institutions mutually supportive. Picking up on ideas that have been floating around since the birth of GATT,230 the WTO eventually signed formal agreements with both the WB231 and the IMF.232 The overarching principle guiding these agreements is “global coherence”; e.g., to ensure that the three institutions will not impose conflicting obligations. Additionally, there are provisions that guarantee that distribution of labor between the three institutions will correspond to the comparative advantage of each of them. Chapter 2, for example, will explain how IMF expertise is taken into account in the context of dispute settlement when issues relating to exchange and BoP restrictions arise.

2

Quantitative Restrictions

2.1 The Legal Discipline and Its Rationale 2.1.1 The Legal Discipline Import and export quantitative restrictions (QRs) are illegal by virtue of Article XI.1 of GATT. Members of the WTO can still justify an import- or export QR that they have imposed if they successfully carry the burden of proof associated with one of the exceptions included in the GATT. They can invoke, to this effect, economic (e.g., balance of payments or BoP) or noneconomic (e.g., environmental or public health protection) motives in order to justify violations of the obligation that they assumed under Article XI.1 of GATT. 2.1.2 The Rationale for the Legal Discipline Any agreement aiming to liberalize trade, of course, should discipline QRs since similar instruments segment markets. The questions that occupied the mind of the GATT framers during negotiations were whether the rationale for QRs should matter, and, if so, what should the obligations be in case recourse to QRs was justified. An in principle ban on QRs was consonant with the preference of the framers to allow for only one border instrument that could lawfully segment markets—namely, tariffs. Should one nevertheless, put all QRs in one basket? QRs are imposed for various reasons, ranging from simply protecting domestic producers’ income to addressing a health hazard. Sometimes a justification has been offered for imposing a QR, and sometimes not. Negotiators felt that QRs imposed for nonprotectionist reasons should not be treated in the same manner as naked attempts to favor domestic producers. 2.1.3

Discussion

2.1.3.1 Negotiating History Article 25 of the “London Draft” (the progenitor of Article XI.1 of GATT) excluded from its coverage measures that dealt with postwar shortages or surpluses of foodstuffs and

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other farm goods. These were the two areas that were mentioned as examples of “permissible” QRs. Postwar anxieties regarding food security provided the rationale for this caveat. Negotiations during the New York Conference did not produce any major change to this provisional agreement, and these two areas eventually found their way into Article XI.2 GATT.1 The list of Article XI.2 of GATT was probably not meant as an exception to the prohibition established in Article XI.1 of GATT, but as a limit to the coverage of the in principle ban on QRs. If this understanding is correct, then in the case of disputes on whether, for example, a QR was meant to address a critical shortage, the complainant would carry the burden of proof and have to provide prima facie evidence that this was not the case. However, this is not how case law understood the allocation of burden of proof under Article XI.2 of GATT, as we will see later in this chapter. Regardless of the allocation of the burden of proof, Article XI.2 of GATT had to be drafted in a way that it would not become a self-fulfilling prophecy. 7 Disagreements, however, continued to persist regarding the extent of the carve-out— that is, what else should be included in the provision that “carved out” subject matter from the discipline to abolish QRs in principle. Norway for example, insisted that only farm products should be covered. Chile, on the other hand, pressed in the opposite direction— that is, it proposed more extended coverage.2 The majority of negotiators sided with Norway, but developing countries stood behind the Chilean proposal. The Geneva Draft3 followed the New York Draft, and the disagreement between Norway and Chile ended provisionally in victory for the former.4 Eventually, the words “or other products” were added, as the current text of Article XI.2 of GATT suggests. Chile could claim victory. Furthermore, developing countries introduced exceptions not in the body of Article XI, but in the body of (what became) Article XVIII(c) of GATT; that is, the provision allowing for deviations from obligations assumed in order to protect “infant industry.”5 And, echoing the UK/Keynesian belief that short-term macroeconomic solutions were appropriate and a flat-out prohibition of QRs would have made it impossible to have recourse to similar instruments, exceptions to preserve BoP were agreed on as well. Article XI of GATT was not modified any further during the subsequent Havana Conference.6 And of course, the list of general exceptions was also agreed at a later stage (Article XX of GATT). It is probably fair to state that the negotiation of this provision focused more on the extent of the carve out rather than on the negotiation of the in principle ban on QRs. Note, finally, that during the negotiations leading to the signature of the original GATT, a separate provision dealing exclusively with boycotts was also discussed. In essence, this provision would have requested from trading nations to avoid participating actively in campaigns that aimed to discourage consumption of imported goods (Article 23 of the London Draft). But it was not included in the final GATT text. Negotiators found it impossible to agree on the formulation of the provision during the London Conference. A consensus emerged to distinguish between boycotts and “Buy National” policies, and that subsequent rounds of discussions would differentiate between the treatments of the two policies.8

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This distinction was retained in the New York Draft (in Article 23). It was during that meeting that the US delegate suggested that the initial rationale for boycotts was to preclude “Buy National” policies, but since no agreement on this score could be achieved, the provision should be scrapped altogether, and so it happened.9 This provision was omitted from the GATT text and was not reintroduced in the Review Session of 1955. 2.1.3.2 The Economics of QRs QRs create deadweight losses since a number of beneficial trades will not take place, and also because resources in the country imposing the quota will be misallocated as a result of their imposition. That is, domestic (inefficient) producers will move in and produce the good where the quota is imposed, even if they price their produce above the world price. QRs can, of course, also be imposed for public policy reasons, and then the question is to what extent the QR is the best instrument to serve the stated public purpose. For example, an embargo could be called in order to shun imports of beef contaminated with mad cow disease. Chapter 9 will discuss this type of intervention. Economists have delved into the question of whether the GATT framers got it right when deciding to treat QRs and tariffs differently. Both QRs and tariffs are instruments that segment markets; yet, whereas import- and export QRs are prohibited outright, tariffs (as the next chapter will explore in more detail) are not. They can be capped and reduced through negotiation. Consequently, unlike import and export QRs, tariffs are not in principle illegal. Is there any reason for this differential treatment, especially since, in a perfect competition model, tariffs have a QR-equivalent (e.g., they can lead to the same result)? Economic theory has advanced good arguments in favor of the differentiated treatment of the two instruments. Recall from chapter 1 that the GATT framers wanted to establish a nondiscriminatory (most-favored-nation, or MFN) world trade order. MFN is easily applicable in a tariffs-only context, while it is quite onerous when applied to QRs. In the former case, all a WTO Member has to do is impose the same customs duty on an import— for example, wheat—irrespective of its origin. How is MFN served when 1,000 tons of wheat are allowed in a market? Should it be first come, first served? Does MFN require in this scenario adjustments to ensure that those who are not in geographic proximity will not be disadvantaged? These are questions to which there are no easy answers. Negotiators also felt that trade negotiations are substantially facilitated when they focus on one measure (tariff) rather than two (tariff, quota). In this vein, Krueger (1964) researched the negative external effects associated with the administration of QRs. Her work shows that there are substantial costs associated with the administration of quotas. There is a need, for example, to monitor whether QRs have been filled; whether they have been filled in a nondiscriminatory manner; eventually, if (import or export) licenses have been issued; and, if so, whether they have been issued in a nondiscriminatory manner.10 The administration of a tariff-based import system, on the other hand, does not raise similar issues. In other words, MFN trade works better when tariff

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promises are being exchanged, and considerably worse when QR promises become the vehicle for trade liberalization. Bhagwati (1965) provided additional support for the argument that QRs must be treated differently than tariffs. He shows that, in a perfect-competition model, tariffs have a QRequivalent, but he also shows that this is not necessarily the case in imperfect competition (i.e., in a more realistic setting). For example, a monopolist in a market where a QR has been imposed will capture all residual demand—that is, demand after the QR has been exhausted. If, instead, a tariff (in lieu of a QR) has been introduced, some competitive pressure will always be exercised on the monopolist, who may not be in position to profit as much as if a QR (in lieu of a tariff) had been in place. This point becomes even more persuasive were one to take into account the nature of tariffs imposed. Ad valorem duties are expressed as a percentage imposed on the import price. As prices fall, the “bite” of tariffs is gradually diminished. This is not the case with QRs, which are immune to price variation. Economists have also studied the effects of QRs in the domestic economy. A QR—just like a customs duty (the treatment of which under GATT we examine in the next chapter)—effectively redistributes income between segments of the society. Producers will enjoy additional profits thanks to the limited competition from abroad, whereas consumers will have to switch from cheaper imported goods to more expensive domestic products. The economic rationality of redistribution of income through trade instruments is highly questionable. Dixit (1985) has pointed to the negative external effects resulting from similar initiatives. Rodrik (1995) put it very aptly and in colorful terms when stating “… saying that trade policy exists because it serves to transfer income to favored groups is a bit like saying Sir Edmund Hillary climbed Mount Everest because he wanted to get some mountain air.” Just as the famous New Zealander could have taken a stroll on a hill, states could simply use taxation instead of QRs for the purposes of redistributing income. Political economy serves to explain similar actions. There are many definitions of “political economy” that could be usefully summed up as the study into the reasons explaining the divergence between the socially optimal outcome and whatever we observe in practice. Rodrik (1995) underlines the exaggerations that we often observe in the realm of trade policy in the following manner (p. 1457): “Perhaps no other area of economics displays such a gap between what policy makers practice and what economists preach as does international trade.” 2.2 2.2.1

Coverage of the Legal Discipline General Elimination of Quantitative Restrictions

The title of Article XI of GATT is: “General Elimination of Quantitative Restrictions.” Article XI.1 of GATT specifies what the legal discipline actually consists of:

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No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

The term “quantitative restrictions” does not appear in the body of Article XI.1 of GATT—only in the title of this provision. It is replaced by the terms “prohibitions” and “restrictions.” Both terms point to a restrictive effect, and complainants have often referred to both in tandem when requesting consultations and the establishment of a panel. Panels have understood that the collective scope of these two terms obliges them, in principle, to punish all measures restricting international trade, other than those explicitly exempted from the coverage of this provision. In Colombia–Ports of Entry, the panel revisited prior case law and provided its understanding of the wide coverage of this provision. In its words (§ 7.240): Thus, as evidenced above, a number of GATT and WTO panels have recognized the applicability of Article XI:1 to measures which create uncertainties and affect investment plans, restrict market access for imports or make importation prohibitively costly, all of which have implications on the competitive situation of an importer. Moreover, it appears that findings in each of these cases were based on the design of the measure and its potential to adversely affect importation, as opposed to a standalone analysis of the actual impact of the measure on trade flows.

In similar vein, the Appellate Body (AB) provided its understanding of the terms “prohibition” and “restriction” in its report on Argentina–Import Measures (§ 5.217): In China–Raw Materials, the Appellate Body observed that the term “prohibition” is defined as a “legal ban on the trade or importation of a specified commodity.” In that dispute, the Appellate Body also referred to the term “restriction” as “[a] thing which restricts someone or something, a limitation on action, a limiting condition or regulation” and, thus, generally, as something that has a limiting effect. The use of the word “quantitative” in the title of Article XI of the GATT 1994 informs the interpretation of the words “restriction” and “prohibition” in Article XI:1, suggesting that the coverage of Article XI includes those prohibitions and restrictions that limit the quantity or amount of a product being imported or exported. This provision, however, does not cover simply any restriction or prohibition. Rather, Article XI:1 refers to prohibitions or restrictions “on the importation … or on the exportation or sale for export.” Thus, in our view, not every condition or burden placed on importation or exportation will be inconsistent with Article XI, but only those that are limiting, that is, those that limit the importation or exportation of products. Moreover, this limitation need not be demonstrated by quantifying the effects of the measure at issue; rather, such limiting effects can be demonstrated through the design, architecture, and revealing structure of the measure at issue considered in its relevant context. (italics in the original)

The excerpts cited above support the conclusions that a wide understanding of the terms “prohibition” and “restriction” is appropriate. Panels do not need to quantify the effect of challenged measures to decide whether Article XI.1 of GATT has been violated. It suffices that they look into the design, architecture, and revealing structure of the measure—a

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rather open-ended test—to form an opinion on whether Article XI.1 of GATT has been violated or not. Finally, the measures captured by Article XI.1 of GATT are measures imposed on importation and/or exportation of goods, and not any measures that might affect the volume of imports and/or exports. We will discuss all these points in detail later in this chapter. “Quantitative restrictions” can take three forms: • Quotas • Import or export licenses • Other measures Therefore, “quotas” and “QRs” are not synonymous. The former only partially overlaps with the latter. A quota, as we detail later in this chapter, is a measure imposing a numerical target, such as 5 tons or 1,000 liters. Import or export licenses condition trade upon the prior granting of a license. Problems arise with respect to the understanding of the all-encompassing term “other measures,” prima facie at least. Recall that only “other measures” that have been “instituted or maintained on importation … or exportation” are covered by Article XI.1 of GATT. These words should suffice to exclude measures of a purely domestic nature (e.g., production quotas) from the coverage of the discipline, a point to which we will return later and explain in more detail why this should be the case. The text of Article XI of GATT explicitly prohibits measures other than “duties, taxes, or other charges,” which are thus excluded from the coverage of Article XI of GATT. This, of course, is normal since otherwise, GATT would be imposing two diametrically opposed disciplines on import duties: they would be allowed under Article II of GATT and prohibited under Article XI of GATT. The same is true with respect to the other terms appearing in this carve-out (“taxes,” “other charges”).11 Furthermore, through Article XI.2 of GATT, some farm quotas were explicitly excluded from the coverage of this provision as well. We discuss this in more detail later in this chapter. 2.2.2

Quotas

The commonplace definition of a “quota” requires the presence of a numerical target. A quota, for example, would be a measure limiting imports to 1,000 tons of wheat, 5,000 liters of beer, or 5,000 passenger vehicles. The GATT Panel on France-Import Restrictions (discussed in chapter 1) is a typical case of an import quota. Export quotas also have been found to be GATT-inconsistent. In China–Raw Materials, the complainants claimed that China, through its “Export Quota Administrative Measures,” was in violation of its obligations under Article XI of GATT. Under this regime, the Chinese Ministry of Commerce (MOFCOM) had been entrusted with the administration of exports of a series of commodities (i.e., bauxite, coke, and zinc). MOFCOM would publish an annual export quota, a numerical target that exporters could not exceed, and if they did so, they would

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be liable to paying penalties. The panel found that export quotas constituted a clear violation of Article XI.1 of GATT. It further found that, since China admitted that the absence of mention of an export quota for a particular commodity (zinc) amounted to impossibility to export at all, an export embargo (that is, omission from the published lists) amounted to an export quota and thus constituted violation of Article XI.1 of GATT (§§ 7.214ff.). A de facto import/export quota—that is, a measure that does not include a numerical target—could still be considered to be an “other measure,” and thus would be prohibited by Article XI.1 of GATT. This would be the case, for example, when the Home nation imposes a “trade balancing” condition, in which imports will be allowed only when a certain amount of exports have been realized. We discuss the case law on the understanding of the term “other measures” later in this chapter. 2.2.3

Import and Export Licenses

Import and export licensing are not subject to the same rules. They both come under Article XI of GATT—that much is clear. In 1979, nevertheless, the Tokyo-round ILA, the first agreement in this area, was enacted. It has since been replaced by the Uruguay round agreement on this score. There is no WTO agreement on export licensing. As a result, whereas it is the various provisions embedded in ILA that constitute the legal benchmark to evaluate whether the various import licensing schemes are WTO-consistent,12 the consistency of export licensing schemes with GATT will be reviewed by referring to the discipline embedded in Article XI of GATT. 2.2.3.1 Import Licensing Article XI of GATT was enacted in 1947, when the first ILA was not even contemplated. The question arises about whether an instrument that qualifies as import licensing should be checked for its consistency with the multilateral rules under Article XI.1 of GATT, or under the disciplines included in the ILA. There was, of course, no issue until January 1, 1980, when the Tokyo-round ILA (the first ILA) entered into force. Up to that time, Article XI.1 of GATT was the only forum to perform similar inquiries. The question would be whether it sufficed that a scheme qualified as import licensing for its inconsistency with Article XI.1 of GATT to be ipso facto proclaimed, or whether something more needed to be demonstrated to this effect. The wording of Article XI.1 of GATT might legitimately lead to the conclusion that import and export licensing were per se illegal. Although this is now a moot point (since ILA provides—or at least should provide—the benchmark for evaluating the consistency of import licensing schemes), a GATT panel did not adhere to this view. It refused to treat import licensing as a per se violation of Article XI of GATT. It inquired into whether the challenged measure, an import-licensing measure, constituted a prohibition or restriction. Only in the case of an affirmative response to this question would it be prepared to establish a violation of Article XI.1 of GATT.

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In EEC–Minimum Import Prices, a GATT panel was facing a European Union (EU) regime that conditioned imports of tomatoes and other products upon the prior granting of an import certificate (license). The panel described the regime in the following terms (§ 4.1): “… lodging of security to guarantee the undertaking to effect certain imports for as long as the certificate is valid.” The panel issued its report in 1978, a few months before the conclusion of the Tokyo round and the advent of the first ILA. It found that the EU regime was properly characterized as “automatic licensing,” and it was thus not inconsistent with Article XI.1 of GATT since all interested parties would be granted an import certificate upon payment of the security (§ 4.1). No prohibition or restriction thus existed in the eyes of the panel. What if the security was not of nominal value? Would the fact that the challenged measure qualified as “automatic licensing” in and of itself have sufficed to shield the challenged measure from claims that it was in violation of Article XI.1 of GATT? The opportunity to respond to these questions arose during the litigation in Argentina–Import Measures. There, the panel and the AB dealt with the consistency of an Argentine measure, the DJAI (“Declaración Jurada Anticipada de Importación,” translated in English as “Advanced Sworn Import Declaration”), with Articles VIII and XI.1 of GATT and the ILA. DJAI was a procedure aiming to provide Argentine authorities with information about importers of various commodities. Importers would not be allowed to proceed with imports unless they first demonstrated that they had satisfied a series of criteria, including the achievement of “trade balance” and “export surplus.” The question arose whether the panel should start its analysis from Article XI.1 of GATT or from the ILA. The relationship between Article XI.1 of GATT and Article VIII of GATT was less of an issue (as discussed later in this chapter). The panel reviewed the consistency of the measure under Article XI.1 of GATT, and, having found that the Argentine measure was in violation of this provision, did not proceed to examine whether it was in violation of the ILA as well. Argentina appealed the panel report, but not this finding. In an obiter dictum, the AB held (§ 5.253): That the Panel took such an approach did not, in our view, contribute either to the clarity of its reasoning, or to a clear understanding of the relationship between different obligations under the GATT 1994 and the Import Licensing Agreement. [footnote 666 in the report appeared here] Nevertheless, no party has challenged the Panel’s approach on appeal.

In footnote 666, the AB added: Similarly to these disputes, the complainants in EC–Bananas made claims under provisions of the GATT 1994 and the Import Licensing Agreement. In that case, the Appellate Body considered that a panel should apply first the agreement that “deals specifically, and in detail,” with the matter at issue. (Appellate Body Report, EC–Bananas III, para. 204) As the Panel’s decision to start its examination with the claims under Article XI:1 is not appealed, we neither endorse nor reject the Panel’s approach in this regard. (See Panel Reports, paras. 6.358–6.361 and 6.448) In addition, we recall that the Panel examined the consistency of the DJAI procedure with Article XI:1 of the GATT 1994, irrespective of whether the DJAI procedure constitutes an import licensing procedure, and

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subsequently refrained from making any findings under the Import Licensing Agreement. (Ibid., paras. 6.479, 6.505, 6.511, 6.517, 6.523, 6.529, 6.535, 6.540, and 6.543) As the Panel’s approach, in this regard, is not appealed, we neither endorse nor reject it. Moreover, since the Panel made no finding as to the consistency of the DJAI procedure with the Import Licensing Agreement, we do not opine on the general relationship between the GATT 1994 and the Import Licensing Agreement.

The AB, thus, did not reverse the panel findings in this respect because it did not have the mandate to do so. It did note, however, that panels should start their analysis from the agreement dealing more specifically with the issue (that is, the ILA), as indeed the AB itself had done when facing similar issues in EC–Bananas III. Chapter 1 of volume 2 will discuss in detail the current statutory requirements for complying with the ILA. What do we conclude from the discussion here? Panels should from now on, when facing challenges against import licensing regimes, examine the consistency of the challenged measures with the ILA, and not with Article XI.1 of GATT anymore. The purpose of the disciplines embedded in the ILA is to ensure that no restrictions should be imposed through these measures additional to whatever is required to establish a functioning licensing regime. Failure to meet the statutory requirements of the ILA would thus, amount to an imposition of an impermissible quantitative restriction. Under the circumstances, there will be no need to find that a measure that violates the ILA also violates Article XI.1 of GATT as well. 2.2.3.2 Export Licensing There has not been much litigation practice in the context of export licensing. In China– Raw Materials, the panel faced a claim to the effect that China had in place a system of export licensing that amounted to a violation of Article XI.1 of GATT. The Chinese Chamber of Commerce of Metals, Minerals, and Chemicals Importers and Exporters (CCCMC) had in place a system whereby it would deliver export licenses upon submission of a series of documents. Export licenses would cover various commodities, such as bauxite, coke, and zinc. Three facts stand out in this case: 1. Some licenses were delivered automatically, whereas others were not. 2. Some documents had been specifically mentioned and made publicly available, and thus potential exporters were well aware of the procedure to obtain a license, whereas other documents were not mentioned or made publicly available. 3. For some goods, a justification for the restrictive regime was provided. The panel held that to the extent that export licenses were granted automatically, or measures implementing restrictions were justified by Article XI.2, XII, XVIII, XIX, XX, or XXI of GATT, no violation of GATT was established (§ 7.957). To the extent, however, that CCCMC retained discretion because some of the documents necessary to obtain an export license had not been clearly spelled out in the relevant legislation, the measure

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amounted to an additional restriction and was thus in violation of Article XI.1 of GATT (§ 7.959). It is, therefore, the exercise of discretion and the resulting uncertainty regarding the export transaction that provide the decisive criterion when it comes to distinguishing lawful from unlawful export licensing. In the presence of discretion to decide on granting an export license, the challenged scheme will be judged GATT-inconsistent, unless successful recourse could be made to one of the aforementioned justifying grounds. The opposite will be the case if export licenses are granted automatically. 2.2.4

Other Measures

The definition of the term “other measures” has been the subject matter of various panel reports. Recapping prior case law, the panel on Argentina–Import Measures ruled: Concerning the term “other measures,” the panel in Argentina–Hides and Leather interpreted this term as a “broad residual category.” A broad interpretation of the term “other measures” is also supported by a GATT panel in Japan–Semi-Conductors, in which “[t]he Panel noted that this wording was comprehensive: it applied to all measures instituted or maintained by a contracting party prohibiting or restricting the importation, exportation or sale for export of products other than measures that take the form of duties, taxes or other charges.” [italics in the original]

The next sections discuss this “broad residual category”; that is, the various measures that panels have subjected to the coverage of the term “other measures.”13 2.2.4.1 De Facto Export Quotas The leading case regarding de facto export quotas is Japan–Semiconductors. A GATT panel was called to address a situation in which the government of Japan, when implementing an agreement that it had reached with the United States (US) known as the “US–Japan Semiconductor Pact,” adopted a series of measures that induced Japanese companies producing semiconductors to raise their export prices to approximate the prices charged by their US competitors.14 As a result of the increase in price, the EU suffered a net welfare loss. The EU was a consumer (and no producer) of semiconductors at that time, and US semiconductors were the only competition to Japanese semiconductors sold in the EU market. The EU challenged the consistency of the Japanese measure with Article XI of GATT, arguing that the volume of Japanese exports to the EU had been substantially reduced as a result of the adoption of this measure. The measure, in the EU’s view, was a government measure since Japanese producers would not have raised their export prices in the absence of the incentive mechanism provided by the Japanese government. The issue of attribution of the challenged practice to the Japanese government will be discussed later in this chapter. For now, we concentrate on whether the Japanese measure could qualify as an “other measure” outlawed by the discipline in Article XI.1 of GATT. The panel first described in detail the measures that Japanese operators adopted in order to implement the Semiconductor Pact. The report mentions that, to avoid below-cost sales

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in export markets (§ 112), Japan had put in place a system (“administrative guidance”) whereby producers and exporters were requested to submit detailed information of costs and export rates on a regular basis (§ 113). Fines were imposed for failing to notify practiced prices, but not for failing to follow suggested prices (§ 113). Japan, in a nutshell, using administrative guidance, aimed at eliminating pricing of semiconductors below cost, but had not put a numerical target limiting its exports of semiconductors. In principle, the same and even a larger volume of sales could occur, so long as the asking price sufficed to recoup the costs incurred. The panel found that the Japanese measure was in violation of Article XI.1 of GATT since it could de facto lead to fewer exports, the counterfactual being the volume of exports realized before the adoption of the measure. The rise in export price that would result from the obligation to notify the Japanese authorities of prices practiced, as well as the obligation to avoid dumping, were reason enough for the panel to decide this way since they both could lead to a lower volume of exports. The panel did not check whether fewer semiconductors had actually been exported. The potential for fewer exports sufficed for its finding of violation (§§ 109ff). This outcome, which is not necessarily correct, was the outcome of the standard of review practiced by this panel, an issue that will be covered further later in this chapter. 2.2.4.2 Minimum Import Prices The Panel on EEC–Minimum Import Prices found that the requirement that importers of tomato concentrates provide additional “security” to guarantee that the price charged at the moment of import clearance of goods at the EU frontier plus the customs duty payable would equal or exceed a predetermined minimum import price was in violation of Article XI.1 of GATT (§ 4.9).15 The rationale for this finding is obvious: a minimum import price restricts entry, since all goods priced below the statutory minimum price will not access the market.16 One might respond that customs duties are essentially “minimum import prices.” In that case, why allow customs duties but not minimum import prices? What is good for the goose is good for the gander, as the popular saying goes. First, customs duties and minimum import prices are not necessarily substitutes, as they could be complements. Minimum import prices could be imposed above and beyond customs duties if necessary, in order to ensure that the price of imports equals that of domestic goods. Second, minimum import prices are not formally customs duties, and, as such, they do not have to respect the discipline imposed in Article II of GATT. Minimum import prices are not fixed by reference to the price of the imported good only, but rather by looking into the difference between the price of the domestic good and the price of the imported one. Typically, they represent the difference between the two prices. The only provision that can put a halt to similar practices is Article XI.1 of GATT. Finally, whereas customs duties are “negotiable,” as trading nations can determine their level through exchange of concessions, the level of minimum import prices is unilaterally by importers.

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Consequently, by banning the use of minimum import prices, case law has essentially ensured that no circumvention of Article II of GATT will occur. Protection of domestic producers can occur only through customs duties, not through any other form. 2.2.4.3 Minimum Export Prices In Japan–Semiconductors, the panel effectively outlawed a scheme that prohibited exports below a certain price level. Recall that Japanese producers had to report their prices and, as we will see later in this chapter in more detail, were requested to avoid one form of dumping when asked to price their exports above cost. The panel referred directly to the rationale for outlawing the EU scheme applied by the Panel on EEC–Minimum Import Prices, stating that it was good law in the context of export prices as well, since both import and export QRs were in violation of Article XI.1 of GATT (§ 106). In a similar vein, in China–Raw Materials, the panel found that a system of coordinating minimum export prices imposed by China violated this provision. The panel held that the scheme was in violation of Article XI.1 of GATT since it restricted exports: the minimum price imposed ensured that more of the domestic production would be sold in the domestic market instead (§ 7.181). Minimum export prices have economic effects similar to export duties (taxes), of course, as both restrict exports. There is a difference, though: unlike export taxes (duties), it is probably producers who will capture “monopoly rents” when minimum export prices are practiced. Minimum export prices are similar to export cartels as well. The difference, however, is that in the case of minimum export prices, it is the government that mandates the export cartel, whereas export cartels are usually formed without government involvement. This issue will be explored further later in this chapter. 2.2.4.4 Trade Balancing Condition In India–Autos, the panel addressed the Indian “trade balancing condition”: the Indian government would establish a threshold on the amount of exports that each manufacturer should make, which in turn would determine the amount of imports that they could make. This measure, in the panel’s view, amounted to an import restriction. The panel examined the function of the trade balancing condition and held that, absent this measure, the quantity of imports could have been larger. In light of the standard of review practiced, the panel found that the Indian measure was in violation of Article XI.1 of GATT (see §§ 7.254, 7.257–7.260, 7.264, 7.268, 7.270–7.272, and 7.276–7.277). In a similar vein, the Panel on Argentina–Import Measures outlawed an Argentine “limiting condition,” whereby imports would be allowed only if prior export targets had been reached (§§ 6.256–6.257).17 2.2.4.5 Local Content Local content requirements are inconsistent with Article III of GATT, as will be discussed in chapter 7. In Argentina–Import Measures, the panel explained in pertinent terms why they also violate Article XI.1 of GATT (§ 6.258):

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The required increase of local content, either by purchasing from domestic producers or by developing local manufacture, has a direct limiting effect on imports, because the measure is designed to force the substitution of imports in line with policies set by Argentina in the PEI 2020. Economic operators in the motorcycle or the agricultural machinery sectors have been required to replace a specified amount of imports with domestic products in order to continue importing.

Since, because of local content, imports can be displaced, Article XI.1 of GATT is violated. 2.2.4.6 Irrevocable Capital Contribution (Investment) In Argentina–Import Restrictions, the panel faced a measure whereby economic operators were required to invest in Argentina. The right to import was linked to prior demonstration that an investment had been made. In the panel’s view, economic operators unwilling to invest in the Argentine market thus would be barred from importing goods, and, consequently, were obliged to use domestic goods instead. It is for this reason that the panel found that this requirement acted as a prohibition to import because otherwise (e.g., if no obligation to invest was present), economic operators might have imported more (§ 6.259). The standard of review matters here as well, since the panel saw no need in examining whether fewer imports had actually occurred. 2.2.4.7 Prohibition to Repatriate Profits Argentina had imposed on foreign economic operators an obligation to not repatriate profits. Unless they had met this requirement, economic operators would be in no position to import goods. As with the “irrevocable capital contribution” and the local content requirements, this was a measure designed to address the onerous financial situation that Argentina was in following the 2008 financial crisis. In Argentina–Import Restrictions, the panel held that, since the right to import was linked to prior demonstration of no repatriation of profits, this latter requirement acted as a prohibition to import because otherwise (e.g., if no similar obligation existed), economic operators might have imported more (§ 6.259). Once again, the standard of review holds the key to understanding the panel’s finding. This point will be detailed later in this chapter. 2.2.4.8 Trading Rights in China When China acceded to the WTO, it adopted a number of obligations (in addition to those that the rest of the WTO membership had to observe) that were included in its Protocol of Accession. Some of them concerned trading rights for companies (Chinese as well as foreign). The term “trading rights” roughly means the right of traders to import into and export goods out of China. China had agreed to eliminate them within a specified time period. It did not do so, and this provoked a complaint before the WTO. In China–Raw Materials, the panel outlawed a practice by China whereby exports were conditioned on prior performance, a measure that closely resembles the trade balancing condition discussed previously. The panel also outlawed “minimum capital requirements”

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that applicants to export commodities from China had to satisfy in order to be eligible to export in the first place. In its view, both these requirements amounted to trading rights that had to be abolished since they could restrict trade from China to the world (§§ 7.224ff.). 2.2.5

Measures Not Covered

The following section examines exhaustively the various exemptions from the discipline imposed in Article XI.1 of GATT. “Exemptions” should not be confused with “exceptions”: the former term covers transactions that do not come at all under the ambit of the relevant legal discipline, the consequence being that parties remain free to act on their own volition (unless, of course, if they are bound by another legal discipline). For example, WTO members do not have to abolish their customs duties by virtue of the ban on QRs. They do not even have to justify their existence, since customs duties constitute an exemption from, not an exception to, this provision. Customs duties, in other words, do not constitute an agreed deviation from the discipline imposed through Article XI of GATT. They are alien to this discipline. Conversely, an exception is an agreed deviation from an established discipline and signals a shift in the allocation of burden of proof if a WTO member wants to avail itself of this possibility. For instance, a WTO member that imposes a ban on imports of contaminated bovine meat that represents a risk to human health can do so only if it successfully meets the requirements of Article XX(b) of GATT. If not, it will be violating Article XI.1 of GATT. One would expect that the allocation of burden of proof would not be identical with respect to both exceptions and exemptions: indeed, exemptions could in principle, be left out not only from the coverage of Article XI.1 GATT, but from the coverage of GATT altogether. If they have to respect a different discipline, then it should be the complainant that would be asked to demonstrate why that discipline had been violated. In practice, this is indeed the case for customs duties, since it is complainants that must show that Article II of GATT has been violated when customs duties have been imposed. This is not the case with respect to some other exemptions from the coverage of Article XI.1 of GATT, those included in Article XI.2 of GATT.18 And yet, the wording of this provision is unambiguous, as it states that: “The provisions of paragraph 1 of this Article shall not extend to the following” (italic added). This would suggest that the complainant would have to show that a measure is a QR, in the sense of Article XI.1 of GATT, and is not a measure featured in Article XI.2 of GATT. This is not what has happened in practice, as we explain in what immediately follows. It seems that panels have adopted two different solutions with respect to exemptions simply because some of them are disciplined in the body of Article XI of GATT (food shortages), whereas, some others in a different provision, namely in Article II of GATT (customs duties). Case law has been treating the exemptions embedded in Article XI.2 of

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GATT as if they were exceptions. “Animal health,” for example, does not feature in Article XI of GATT. It features in Article XX of GATT, entitled ‘General Exceptions’. QRs aimed to protect “animal health” are consequently not “exempted” from the coverage of the discipline embedded in Article XI.1 of GATT. Measures for the protection of “animal health” can be lawfully taken only if the requirements embedded in Article XX(b) of GATT have been met (as explored further in chapter 9). In this case, it will be the party taking measures to protect animal health that will carry the associated burden of proof. The distinction thus, of “exemption” from and “exception” to Article XI.1 of GATT has been blurred in case law. Here is how it happened. 2.2.5.1 Customs Duties and Charges Article XI.1 of GATT explicitly exempts from its coverage “duties, taxes, or other charges” (duties fall under Article II; taxes, under Article III; other charges, under Article VIII of GATT). Standing case law suggests that the burden of proof to show violation of any of the aforementioned three provisions rests with the complainant. 2.2.5.2 Export Taxes The question arises whether the term “duties, taxes, and other charges” should cover only import duties or extend to cover export duties (taxes) as well? A positive response seems warranted. Prima facie, there seems to be an imbalance in GATT. Whereas Article II of GATT refers to schedules of concessions for import duties only, there is no corresponding provision regarding export duties.19 There should be no doubt, nevertheless, that export duties are treated symmetrically with import duties in the GATT-system. Article XXVIIIbis supports this approach, calling for negotiations “directed to the substantial reduction of the general level of tariffs and other charges on imports and exports. …” If export taxes were covered by the prohibition included in Article XI.1 of GATT, there would be no need for negotiations, right? A Note prepared by the GATT Secretariat20 during the Uruguay round confirms the view that, absent specific commitment to this effect, WTO members are free to impose export taxes. It states in clear language that GATT “permits the imposition of charges on exports” and explains that, if imposed, export taxes must respect the MFN principle. The perceived imbalance mentioned previously should thus be given no weight at all when it comes to understanding the type of customs duties exempted from the coverage of Article XI.1 of GATT: both import and export customs duties are exempted. In fact, the negotiating history is quite illuminating in this respect and largely explains the observed imbalance regarding the treatment of import and export duties. Originally, a US report prepared by the “Special Committee on Relaxation of Trade Barriers,” a body comprising government officials, recommended that a provision should be made in the context of a trade agreement to abolish all “objectionable” export taxes. Why would the US want to outlaw export taxes?

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A production tax reduces a firm’s incentive to supply goods. An export tax reduces a firm’s incentive to supply an export market. It creates an incentive to supply the domestic market. The reduction in export supply drives prices up in the export market. The diversion of supplies to the domestic market resulting from the imposition of the export tax drives prices down in the domestic market. As a result, domestic producers of, say, a downstream good will profit from cheaper prices of inputs in the domestic market, whereas their foreign competitors will be disadvantaged. So there are good reasons to view export taxes with suspicion. The distinction between objectionable and nonobjectionable export duties, though, was not watertight by any reasonable benchmark. The US report provided for a list of nonobjectionable export taxes: • Taxes imposed for revenue purposes • Taxes enforced pursuant to international agreements • Taxes imposed under the conditions of famine or severe domestic shortage in the exporting country • Taxes designed to regulate the trade in military supplies under specified conditions21 The same report recognized that there was lack of significant practice in the field of export taxes. This is probably the single most important reason explaining why GATT framers did not spend time and effort designing a mechanism for negotiation of export tariffs à la Article II of GATT. For example, the report states:22 Except during wartime, governmentally-imposed export duties, and prohibitions and quantitative restrictions on exports have had relatively little influence in limiting the overall movement of commodities in world trade, although they have seriously affected the movement of specific products. Export taxes and quantitative restrictions on exports have been instituted for a variety of reasons. Some, such as export taxes on coffee in certain Latin American countries, have been imposed for revenue purposes. Some have been imposed for indirect protective reasons: for example, the United States prohibition on commercial exports of tobacco seed for the purpose of preventing the cultivation abroad of American types of tobacco. In a different category are the Mexican export taxes, which are used for revenue purposes and, in combination with an export tax-rebate system to enforce membership in export cooperatives. Some, such as the United States control of helium exports, have been imposed for security reasons. Some have been imposed pursuant to international agreements; for example, the undertaking by Cuba, in connection with the trade agreement with the United States, to prohibit the exportation of avocados to the United States except during the months of July through September …

Political economy considerations could of course, also contribute to this outcome, that is, to avoid a detailed discussion on export taxes. Exporters would not be necessarily interested in seeing their revenue divided between them and their government (that would pocket the export tax), unless if there were perks for them because of this division. Assuming that their lobby power matters to the government, one would thus expect few export taxes. The producers’ interests are, of course, the exact opposite when it comes to import

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tariffs. This largely explains the proliferation of import duties and the almost total absence (initially, at least, when GATT was being negotiated) of export duties. Producers, if interested, could achieve the same outcome as export taxes through other mechanisms such as export cartels. Unlike what is the case with respect to export taxes, in an export cartel scenario, it is members of the cartel (not the government) that would be pocketing monopoly rents.23 This will be covered in more detail later in this chapter. The previous discussion explains the perceived imbalance and further explains that, the imbalance notwithstanding, one would be ill advised to rush to the conclusion that export taxes are illegal because they share characteristics with export quotas. There is no better argument than practice itself to put this claim to rest. WTO members have, on occasion, negotiated export concessions.24 For example, WTO members negotiated with China a specific clause that was inserted into its Protocol of Accession, whereby “China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994.”25 Annex 6 of the Protocol of Accession contains the maximum export duties applicable on 84 products. China cannot levy export taxes on goods not included in the agreed list featured in Annex 6. In this vein, the Panel on China–Raw Materials Exports found that export taxes on a series of goods not included in the agreed list (bauxite, coke, etc.) were in violation of China’s commitments under its Protocol of Accession, and inconsistent with its obligations under the WTO for this reason (§ 7.105). During the negotiations that led to the accession of Russia to the WTO, a fifth part was added to the WTO Protocol of Accession. The level of various agreed export taxes was reflected therein, and it was also agreed that a violation (of the agreed level) would ipso facto entail a violation of Article II.1(a) of GATT. Unless a concession has been entered, export taxes (like unbound import duties) can lawfully be enacted. In this case, they will have to respect Article I of GATT. In chapter 4 we will return to this issue. 2.2.5.3 Production Quotas Production quotas are not explicitly discussed in GATT.26 Their function might resemble that of export quotas. The wording of Article XI.1 of GATT, though, suggests a restrictive understanding of its coverage and does not condone the view that production quotas come under its purview. It refers to restrictions on importation/exportation, and not, for example, “in connexion” with importation/exportation, as is the case with Article I of GATT. If the intention of the parties was to allow for any QR to come under the purview of Article XI.1 of GATT, they could have chosen a more appropriate wording to this effect. A literal interpretation of this provision would suggest that domestic (e.g., production) quotas are GATT-consistent, since similar quotas are not imposed on the exportation (or on the sale for exportation).

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A reduction in the quantity produced would, other things being equal, lead to fewer exports as well. Unlike export quotas, the presumption that production quotas necessarily favor the domestic market is weaker. All in-quota production could be exported in principle, if the price offered by foreigners is higher than that offered by domestic buyers (for example). This is why they should not be considered to necessarily run afoul of Article XI.1 of GATT. Practice provides additional support to this view. Production quotas practiced by members of the Organisation of the Petroleum Exporting Countries (OPEC) is particularly relevant here. While some of the OPEC members are not WTO members (i.e., Algeria, Iran, Iraq, and Libya), the majority of them are (i.e., Angola, Ecuador, Kuwait, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela). When Saudi Arabia, the OPEC member that most recently joined the WTO, negotiated its terms of accession, trade in energy products was quite high on any incumbent WTO member’s agenda. Still, the Working Party Report on its accession reflects a rather benign discussion of petroleum production quotas. Under the circumstances, it seems safe to conclude that production quotas should not be considered GATT-inconsistent.27 Finally, even if all arguments mentioned so far were to be judged GATT-inconsistent and thus were rejected by a panel, production quotas can still be justified through recourse to various paragraphs of Article XX of GATT:28 • Article XX(g) allows for measures relating to the conservation of exhaustible natural resources, if such measures are made effective in conjunction with restrictions on domestic production or consumption. • Article XX(i) allows for measures involving restrictions on exports of domestic materials, if such measures are part of a stabilization plan and do not operate to increase the exports of or the protection afforded to the domestic industry. • Article XX(j) allows for measures essential to the acquisition of products in general or local short supply, provided that all contracting parties are entitled to an equitable share of the international supply of that product. 2.2.5.4 Tariff Quotas A tariff quota (TRQ) is an import measure, whereby a lower tariff will be applied for a certain volume of imports (in-quota tariff), and a higher tariff will be applied to imports above and beyond the set quota (out-of-quota tariff). For example, a 5 percent ad valorem duty will be imposed for the first 10,000 cars, and a 50 percent ad valorem duty for any additional entry. The context of Article XI of GATT makes it clear that there should be no doubts as to the overall consistency of TRQs with GATT, even though on their face, they seem to function as a QR.29 Article XIII.5 of GATT (Non-Discriminatory Administration of Quantitative Restrictions), for example, calls for application of this provision to TRQs. By the

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same token, § 6 of the “Understanding on the Interpretation of Article XXVIII of the GATT 1994” states that a TRQ can lawfully replace an unlimited tariff concession, provided that the conditions (payment of compensation) embedded in this paragraph have been met. TRQs, thus, can lawfully be contracted between WTO members. In practice, most TRQs concern farm products. Australia, for example, has TRQs in place, inter alia, for fresh cheese (HS 0406.10.00) and grated or powdered cheese (HS 0406.20.00), but also for tobacco for use in the manufacture of cigarettes (HS 2401.1012) and tobacco refuse (HS 2401.30.00). By the same token, Indonesia has TRQs in place for milk and cream of fat and its products (HS 0402 Ex) and rice (HS 1006 Ex). In 2006, 45 members had in place 1,434 individual TRQs.30 The administration of TRQs is considered a form of licensing, as is explained in chapter 1 of volume 2. 2.2.5.5 Trade in Textiles Before the entry into force of the Uruguay round agreements, trade in textile products was regulated in the Multifibre Agreement (MFA).31 This agreement was signed in 1974 between 8 developed and 31 developing countries and essentially imposed a worldwide system of bilateral quotas between exporters (usually in the Southern Hemisphere) and importers (in the Northern Hemisphere). The relationship of the MFA with GATT (and Article XI) was not clarified by law. On the one hand, Article 1.6 MFA states that this agreement will not affect the rights and obligations of contracting parties under GATT. On the other, Article 2 MFA makes it clear that QRs notified under the MFA will be deemed GATT-consistent if they conform to the many requirements embedded therein. Practice confirms that Article 1.6 of the MFA has cosmetic value. It aimed to reaffirm the commitment of trading nations’ signatories of the MFA to the multilateral system when the MFA itself violated the quintessential elements of GATT. This should not come as a surprise since the whole idea of the MFA was to establish a system of administered bilateral quotas.32 Practice also confirms that the MFA was not challenged per se for being inconsistent with GATT. A legislative solution was privileged instead. The Agreement on Textiles and Clothing (ATC) was signed along with the other Uruguay round agreements and replaced the MFA, bringing textiles into the realm of the GATT disciplines after 2005. This topic is discussed in more detail in chapter 9 of volume 2. 2.2.6 Attributing QRs to WTO Members 2.2.6.1 No Need to Coerce GATT disciplines government behavior only; it does not constrain the behavior of private parties. Sometimes it is clear who the agent of behavior is; sometimes it is less so. The former could be the case when, for example, it is a government agent that adopts a particular measure (such as allegedly violating Article XI.1 of GATT). What is the answer,

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though, if a government uses a private party as a conduit? Or, to go even further, what if the government adopts measures that incentivize private parties to act in particular way? The GATT Panel on Japan–Semiconductors stands for the proposition that providing incentives to private parties to act in a particular manner suffices for a measure to be attributed to a government (§§ 109ff.). In §117 of its report, it held: The Panel considered that the complex of measures exhibited the rationale as well as the essential elements of a formal system of export control. The only distinction in this case was the absence of formal legally binding obligations in respect of exportation or sale for export of semi-conductors. However, the Panel concluded that this amounted to a difference in form rather than substance because the measures were operated in a manner equivalent to mandatory requirements. The Panel concluded that the complex of measures constituted a coherent system restricting the sale for export of monitored semi-conductors at prices below company-specific costs to markets other than the United States, inconsistent with Article XI:1.

Subsequent GATT and WTO case law has consistently referred to this ruling when deciding whether a particular measure should be attributed to a government. Hence, it is not only government actions that can be challenged before a panel, but also private actions, to the extent that they are attributable to a government. To decide on attributability, WTO panels will be using the incentives test described previously as the criterion. This test could be phrased as a “but-for” test: the question will be whether, but for the incentives provided by the government, a private party would have adopted the behavior that is being challenged for being GATT-inconsistent before a panel. Providing agents with incentives to act in a particular way is the lowest intensity involvement of governments for their measures to be challengeable before GATT. If governments incentivize private agents to act in a particular way, then private actions are attributed to government. It goes without saying that, to the extent government involvement is more intense, then actions are of course attributed to governments. Case law reveals many instances where governments had more intensive involvement in ensuring that the addressees of their actions would adopt a certain conduct. In Japan–Film,33 a measure endorsed (but not performed) by government was attributed to it (§ 10.45). In China– Raw Materials, the panel satisfied itself that a measure was attributable to the Chinese government because it had delegated authority to CCCMC, the organization that had introduced the measures that were being challenged (§§ 7.1004–1005). In US–Corrosion Resistant Steel Sunset Reviews, the AB held that omissions to enforce law also can be challenged before a WTO panel (§ 81). It follows that case law so far stands for the proposition that, besides actions undertaken directly by government agents, actions will be attributed to a government if it has done any of the following: • Endorsed them • Acquiesced by omitting enforcement against them

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• Delegated authority to an entity to act on its behalf • Provided incentives that made the challenged behavior happen34 2.2.6.2 Export Cartels There are still some gray areas that have provoked a lot of discussion, both in WTO practice and in the literature. The consistency of export cartels with the GATT rules is one of them, and their consistency with the multilateral rules has been debated not only in the literature, but also in WTO committees. Antitrust authorities have little, if any, interest in regulating the activities of their national export cartels, of course, since the domestic market will not be immediately affected by such activities. An argument could even be made that national markets might be positively affected since high export prices could be used to subsidize domestic sales and lead to more intense competition in the home market.35 As a result, some nations have gone so far as to exempt export cartels from national prosecution. The US Webb-Pomerene Act of 1918, for example, partially exempts export cartels from antitrust prosecution. US economic operators, as a result, can decide to cartelize export markets in the safe knowledge that the US authorities will not prosecute them for doing so. They can thus engage in practices that are illegal under US law, such as price agreements, when they target export markets. In light of the previous discussion, the question arises whether the US law is in violation of Article XI.1 of GATT. Recall that, following Japan–Semiconductors, WTO members cannot provide incentives to private traders to restrict commerce. In Japan–Semiconductors, the Japanese government put in place for all practical purposes an export cartel. Although the panel stopped short of explicitly referring to the presence of an export cartel, it did find, as described previously, that Japan was in violation of its obligations under Article XI.1 of GATT. Although Japanese and US producers did not align the prices they charged when exporting to the EU market, there should be no doubt that the measure was intended and practiced so as to reduce/ eliminate competition between US and Japanese producers. US producers could do so in the safe knowledge that, because of the Webb-Pomerene Act, they would not be charged with violating US antitrust laws in deciding on prices they charged when exporting to the EU market. Then, is the US government providing, through Webb-Pomerene, incentives to its economic operators to cartelize the world market by partially exempting them from antitrust prosecution?36 A negative response seems appropriate. There is a notable difference between WebbPomerene and Japan–Semiconductors. What does the US do? It promises that it will not act against companies if they cartelize export markets. Is this enough of an incentive to export cartels (and thus, restrict exports)? The ultimate decision to cartelize a foreign market lies with the economic operators themselves since the US government is not imposing cartelization. Economic operators know that they may have to face a foreign antitrust authority anyway, should they decide

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to cartelize. The severity of the sanctions that they might be facing in export markets, as well as the likelihood that they will be punished (which is considerable because of the increasing sophistication of antitrust authorities around the world, and because they can now rely on legal assistance treaties and other legal devices), the level of remedies imposed (usually a multiplier of profits made through export cartelization) and the worldwide acceptance of the “effects doctrine” (which guarantees prosecution abroad in case of detection) will definitely be a factor in the calculation and the ultimate decision of whether to cartelize. It seems that the lack of legal pursuit in the US market is an ancillary consideration, if it is considered at all. Economic operators will decide on the course of action, taking into account the gains from cartelization on the one hand, and the consequences if they are successfully prosecuted in a foreign jurisdiction on the other. This argument casts doubt on the legitimacy of the approach taken by the panel on Japan–Semiconductors. Indeed, whereas the panel applied inducement as a criterion to decide whether private behavior had been affected, it did so in a clumsy way. It asked only the question whether Japanese producers had been induced by the measures adopted by their own government. It did not ask the question whether they had also been induced by the potential threat of antitrust prosecution in the EU. What if, for example, fines for antitrust violations were much higher than penalties paid in Japan for inadequate notification of prices? There is, of course, one key difference between the discussion here and the facts in Japan–Semiconductors: the Japanese government essentially de facto established an export cartel. Contrary to the Webb-Pomerene Act, therefore, the Japanese government did not merely allow the establishment of an export cartel (leaving the eventual decision whether to export cartelize world markets to private operators); it de facto mandated it by reducing the potential for price competition across its producers. Still, any rational Japanese agent would have factored in the possibility of being prosecuted by the EU antitrust authority and whatever antitrust prosecution might entail. It seems that the panel adopted a very generous understanding of the term “incentives” in this case. In short, it asked the right question but responded to it only by half measures. 2.2.7

Standard of Review

2.2.7.1 The Issue The question being asked here is whether panels (and the AB) should adopt the same standard of review, regardless whether they are dealing with a quota or an “other measure.” When a numerical target is set (quota), it is clear that the imposition of the target in and of itself leads to a QR effect. It is less than clear, though, if (and if so, to what extent) the same is true when another measure has been introduced. For example, what evidence supports the finding that the Japanese exported fewer semiconductors to the EU market because of the administrative guidance that the government had put in place in order to

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implement its agreement with the US? How did the Panel on Japan–Semiconductors establish that the QR effect was the result of incentives to act in a particular manner? The short answer is that it did not. It did not even check if the volume of exports had been reduced, never mind providing a causal link between reduced exports and the Japanese measures. In the name of the “no-effects-cum-no-intent” test that it had borrowed from prior case law,37 it satisfied itself that Japan was in violation of its GATT obligations by the mere fact that it had provided incentives that could (but did not necessarily) affect the behavior of private parties. Indeed, for all we know, it could very well be the case that Japanese private operators, when they realized that they were not facing serious competition from US producers, changed their pricing policies (or cut back on their production).38 Ideally, it would be good to see some discussion of the competitive conditions in the EU market—some analysis that would explain, at the very least, why the incentives were necessary in this particular case for the Japanese to behave in this particular way. 2.2.7.2 The Origin of the Problem Where does the “no-effects-cum-no-intent” test, on which the Panel on Japan–Semiconductors relied so heavily, come from? The panel on Japan–Leather II (US), a GATT panel, dealt with a challenge against a quota. Japan had in place a quota on leather and other products. That much was not disputed. Japan however, argued before the panel that no violation of Article XI.1 of GATT had been committed, since the quota had not been filled. This panel rejected the view that a quota should not be considered as restraining trade simply because the quota had not been fully utilized and thus could not have negatively affected trade volumes. The panel explained that nullification or impairment arises from prohibited QRs, not only because of the effects on trade volumes but also because importers investment plans would be affected negatively and transaction costs would increase (§ 55): [T]the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had had on the volume of trade but also for other reasons, e.g., it would lead to increased transaction costs and would create uncertainties which could affect investment plans.

The Panel on US–Superfund extended this approach to the case law under Article III of GATT as well. It stands for the proposition that Article III of GATT (just like Article XI.1 of GATT) protects expectations regarding competitive conditions in national markets. In this particular case, the complainants argued that a US internal tax, which granted domestic (petroleum) products slightly better treatment than the imported similar products, was inconsistent with Article III of GATT. The tax differential between domestic and imported goods was close to any reasonable definition of de minimis. The complainants argued, however, that there was no requirement to demonstrate trade effects.

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The US defended itself before the panel by arguing that the tax differential was not substantial, so it could not have had any bearing on the volume of goods traded. The US, thus, effectively argued that effects mattered and that, since no trade effects could be shown in light of the minimal difference in tax treatment across the two categories of goods, no violation of GATT could have been established. The panel disagreed with the US (§ 5.2.2): The general prohibition of quantitative restrictions under Article XI, which the Panel on Japanese Measures on Imports of Leather examined, and the national treatment obligation of Article III, which Canada and the EEC invoked in the present case, have essentially the same rationale, namely to protect expectations of the contracting parties as to the competitive relationship between their products and those of the other contracting parties. Both articles are not only to protect current trade but also to create the predictability needed to plan future trade. That objective could not be attained if contracting parties could not challenge existing legislation mandating actions at variance with the General Agreement until the administrative acts implementing it had actually been applied to their trade. Just as the very existence of a regulation providing for a quota, without it restricting particular imports, has been recognized to constitute a violation of Article XI:1, the very existence of mandatory legislation providing for an internal tax, without it being applied to a particular imported product, should be regarded as falling within the scope of Article III:2, first sentence.

This report suggests that laws that have not produced any effects, but that are mandatory (in that they leave no discretion as to the behavior that must be followed), still violate Article III (and Article XI.1) of GATT. US–Superfund dealt with a case of de jure discrimination, since the level of tax imposition was exclusively a function of the origin of the good: domestic goods paid one tax, while imported goods paid a higher tax. Japan–Leather II (US) also dealt with a challenge against a quota. The Panel on Japan–Semiconductors extended the coverage of US–Superfund and Japan–Leather II (US) to cases of “other measures” as well, without thinking whether a more nuanced approach was appropriate. This approach is erroneous for the reason we explain in what follows. Before we provide our assessment explaining why this is the case though, we first need to bring in more recent case law that, prima facie, seems to cast doubt on the validity of the standard of review adopted by the panel on Japan-Semiconductors. 2.2.7.3 Breaking with the Past? In Argentina–Hides and Leather, a dispute that arose fifteen years after Japan–Semiconductors, the question before the panel was whether an Argentine law that allowed for the presence of delegates of the downstream industry (leather products) at the customs clearance of hides was inconsistent with Article XI.1 of GATT. The EU had argued before the panel that the presence of delegates of the downstream industry had a dissuasive effect on producers of hides: Argentine producers of hides might be unwilling to export their produce to Europe for fear that they would be earmarked by the domestic downstream industry and excluded from the Argentine market altogether (§ 11.18).

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This panel held that Article XI.1 of GATT should not be construed as tantamount to an obligation imposed on WTO members to eliminate the potential for private parties to restrict trade (§ 11.19): [W]e do not think that it follows either from that panel’s statement or from the text or context of Article XI:1 that Members are under an obligation to exclude any possibility that governmental measures may enable private parties, directly or indirectly, to restrict trade, where those measures themselves are not trade-restrictive.

Consequently, following this approach, the panel requested from complainants claiming a violation of Article XI.1 of GATT to demonstrate, at the very least, a nexus between the challenged measure and the QR effect. Now, the question arises whether this is a departure from the test established in Japan–Semiconductors. The Panel on Argentina–Hides and Leather distanced itself from the previously followed approach by distinguishing between the standard of review applied to quotas and that applied to “other measures.” With respect to the latter, the panel was of the view that, for a successful legal challenge to be mounted, the complainant must demonstrate a causal nexus between the challenged measure and the reduced level of imports or exports. Without elaborating further, the panel articulated that the evidentiary standard should be lower in cases where the consistency of a quota with the multilateral rules is being challenged (§§ 11.21 and 11.22): Finally, as to whether Resolution 2235 makes effective a restriction, it should be recalled that Article XI:1, like Articles I, II and III of the GATT 1994, protects competitive opportunities of imported products, not trade flows. In order to establish that Resolution 2235 infringes Article XI:1, the European Communities need not prove actual trade effects. However, it must be borne in mind that Resolution 2235 is alleged by the European Communities to make effective a de facto rather than a de jure restriction. In such circumstances, it is inevitable, as an evidentiary matter, that greater weight attaches to the actual trade impact of a measure. Even if it emerges from trade statistics that the level of exports is unusually low, this does not prove, in and of itself, that that level is attributable, in whole or in part, to the measure alleged to constitute an export restriction. Particularly in the context of an alleged de facto restriction and where, as here, there are possibly multiple restrictions, it is necessary for a complaining party to establish a causal link between the contested measure and the low level of exports. In our view, whatever else it may involve, a demonstration of causation must consist of a persuasive explanation of precisely how the measure at issue causes or contributes to the low level of exports. (italics in the original)

In a footnote to § 11.22, the panel noted: The Appellate Body in European Communities–Measures Affecting the Importation of Certain Poultry Products similarly required of the complaining party in that case a demonstration of a causal relationship between the imposition of an EC licensing procedure and the alleged trade distortion. See the Appellate Body Report on European Communities–Measures Affecting the Importation of Certain Poultry Products (hereafter “European Communities–Poultry”), adopted on 23 July 1999,

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WT/ DS69/AB/R, at paras. 126–127. While this interpretation related to a claim under the Agreement on Import Licensing Procedures, it is not apparent why the logic should be any different in the case of a claim under Article XI:1 of the GATT 1994. (italics in the original)

The panel thus rejected the EU claim in Argentina–Hides and Leather and found that the presence of representatives of the domestic industry was insufficient (or rather the causal link too remote) for establishing a violation of Article XI.1 of GATT (§ 7.35): We agree that it is unusual to have representatives from a downstream consuming industry involved in the Customs process of export clearance. As noted above, it seems to us that the levels of exports of raw hides from Argentina may be low. The European Communities have stated the matter to us in the form of a rhetorical question—what other purpose could these downstream industry representatives have in this government process of export clearance than restricting exports? However, it is up to the European Communities to provide evidence sufficient to convince us of that. In this instance, we do not find that the evidence is sufficient to prove that there is an export restriction made effective by the mere presence of tanners’ representatives within the meaning of Article XI.

There is, thus, a difference between Japan–Semiconductors on the one hand, and Argentina–Hides and Leather on the other, in that the former does not distinguish between de jure and de facto restrictions, whereas the latter does. The former requires the same standard of review to apply to all cases coming under the purview of Article XI of GATT, whereas the latter suggests that this should not be the case. The low burden of persuasion in Japan-Semiconductors could in principle be justified because the regulatory intent was to abolish QRs. Recall that unless the door to QRs was hermetically shut, negotiators might have found it difficult to negotiate concessions on tariffs only. Uncertainty regarding which QRs could be justified and which not, might have led to underinvestment (fewer tariff concessions). Nevertheless, a low burden of persuasion can lead to false positives, and WTO panels might be outlawing perfectly legitimate measures. WTO members might lose their confidence in a world trading regime that strikes down measures aiming to advance social preferences and not to protect domestic producers. The test adopted by the panel on Argentina-Hides and Leather provides some guarantee to this effect, even though one might have legitimately suspected that the objectives sought by Argentina in this case were of economic nature. This approach makes intuitive sense. Quotas are like per se violations of antitrust law. It is the practice that is illegal regardless of its consequences. When it comes to challenges against “other measures” though, for a violation to be established, one needs to know not only what the measure was, but, crucially, how it operated. We know that quotas restrict trade, we do not know which measures in the realm of “other measures” do so. Recall, that this term must operate as a “restriction” or a “prohibition”, as we have stated supra in this chapter. An approach akin to the “rule of reason” known in many antitrust statutes is thus warranted.

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Japan–Semiconductors got it wrong in this respect, and Argentina–Hides and Leather got it, in principle, right. A number of questions remain unanswered though, and we are very far from establishing a genuine “rule of reason” test in case law. In Argentina–Hides and Leather, the panel on the one hand suggests that a different approach is indeed warranted when the consistency of “other measures” with Article XI.1 of GATT is at stake, but on the other, it often refers to Japan–Semiconductors and does not explicitly discard its relevance. It does not even provide an explicit statement for the proposition that trade effects should matter, at least as a proxy to show the nexus. Thus, it could be interpreted as a request to make a plausible case of a nexus between challenged measure and trade outcome, rather than an empirically robust demonstration that this is indeed the case. In fact, this is exactly how a subsequent panel understood this finding. In Argentina–Import Measures, the panel was dealing with de facto QRs and held that absence of trade data was not fatal to the claims presented by the complainant (§ 6.264). Even if this is so, this report is irreconcilable with Japan–Semiconductors, precisely because of the dichotomy introduced.39 Now that the door has opened, panels could and should go the extra mile in future.40 2.2.8 The Relationship with Article III of GATT The Interpretative Note to Article III reads: Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provision of Article III.

This note imposes a limit on the ambit of Article XI of GATT: domestic measures, even if applicable at the border, will continue to be covered by the discipline included in Article III of GATT, and consequently evade the purview of Article XI of GATT. The two disciplines impose distinct obligations, and that is why one needs to be sure about their respective coverage. Case law has acknowledged this point. The Panel on Canada–FIRA suggested that with the exception of truly unique circumstances, such as state trading companies, which often operate as both importers and distributors, a dividing line must be drawn between measures covered by Article III and by Article XI of GATT. In the WTO era, the Panel on India–Autos added that different facets of the same measure could be regarded differently, some as border- and some as internal measures. The same facet of a measure, though, cannot simultaneously fall under the ambit of Articles III and XI of GATT.

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2.2.9 The Relationship with Article VIII of GATT In Argentina–Import Measures, the panel faced a claim regarding the consistency of DJAI with various GATT provisions, including Article XI of GATT. Recall from the previous discussion that the DJAI was a document that all importers had to file and submit to the relevant authority before they could import certain commodities (§ 6.364). Argentina argued before the panel that this measure came under the purview of Article VIII of GATT, since it was a customs formality. The panel responded that even if that were the case (an issue on which it refused to pronounce), nothing stopped it from examining the consistency of the measure with Article XI of GATT. The panel, thus, saw no firewall between the two provisions (§ 6.444): [T]he Panel finds that, irrespective of whether the DJAI procedure is considered to be a customs or import formality subject to the obligations contained in Article VIII of the GATT 1994, this fact per se does not exclude the applicability of Article XI:1 to the examination of the measure. Therefore, there is no impediment that prevents the Panel from examining the complainants’ claims against the DJAI procedure under Article XI:1 of the GATT 1994.

On appeal, the AB upheld the panel’s findings in this respect in their entirety (§§ 5.247ff., and especially 5.264). 2.3

Exceptions

GATT contains a number of exceptions to the prohibition to use QRs. The majority41 concern both import and export restrictions. Some of them, though, like the possibility to deviate from the imperative of Article XI.1 of GATT if a WTO member faces critical shortages of a specific product, concern only export restrictions.42 2.3.1

Critical Shortages

If a WTO member experiences critical shortages of a foodstuff or any other essential product, export restrictions can be temporarily applied. The ambit of this provision is circumscribed by the coverage of the terms “essential products,” and “temporarily applied.” We will discuss both terms later. For now, we turn our attention to the understanding of the term “critical shortages,” the quintessential term in Article XI.2(a) of GATT. In China–Raw Materials, the AB understood the term “critical shortage” to refer to (§ 324) “those deficiencies in quantity that are crucial, that amount to a situation of decisive importance, or that reach a vitally important or decisive stage, a turning point.” In § 325, the AB noted the difference in the language between this provision and Article XX(j), where the term “critical” does not appear before the term “short supply,” to make the point that the coverage of Article XI.2(a) of GATT should be narrower than that of Article XX(j) of GATT. Note, nevertheless, that the AB did not put into question the panel

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finding (§ 7.294) to the effect that this provision covers preventing actions, as well as attempts to relieve the population from problems caused by critical shortages. So while the class of measures (the “extensive margin”) is construed narrowly, their ambit (the “intensive margin”) is not prejudged by the AB findings quoted previously. 2.3.1.1 Essential Products It is critical shortages of “essential products” (and not just of any product) that are covered by this provision. The term “essential product” is not defined there, but it is defined in Article 4 of the “Understanding on BoP” (see a more detailed discussion of this later in this chapter) as covering goods that meet basic consumption needs or help a WTO member improve its BoP situation. The question arose before the panel on China–Raw Materials whether this statutory definition could also be used for the purposes of addressing a claim under Article XI.2 of GATT. The panel felt that this should not be the case, since the Understanding reflected a definition, which was unduly restrictive for the purposes of Article XI.2(a) of GATT, that was meant to address situations beyond BoP (§§ 7.278 ff.). In the view of the panel, a product is “essential” if it is “important,” “necessary,” or “indispensable” to a particular WTO member (§ 7.282). These are open-ended terms. The panel did not go so far as to provide a numerical figure, such as, the percentage of gross domestic product (GDP) that should be affected for a product to be considered essential. It did, nevertheless, provide some clarification regarding the ambit of the term. It stated, for example, that substitutability across products could cast doubt on the essential character of a product when in the presence of other substitutable products (§ 7.344). The panel also held that an input to a final product could be regarded as essential, and consequently, that there was no need for a good to be final in order to be essential (§ 7.340). This is all that exists for now. So we know that even goods, which do not address basic consumption needs, could be considered “essential products,” but we do not know where exactly to draw the line between essential and nonessential products. The AB upheld the panel’s understanding of the term without providing any additional clarification (§ 326). 2.3.1.2 Foodstuff or “Other Products” The negotiating record of Article XI of GATT that we have cited above44 supports the view that, initially, the “essential” products, the critical shortages of which are being addressed, should be farm goods only. The drafters of GATT, though, eventually added the words “or other products,” as shown previously, without specifying what “other” means. Thus, in China–Raw Materials, China had imposed a restriction on bauxite, and it claimed before the panel and the AB that its measure was necessary to address critical shortages of an essential product. The AB noted that the term “other products” appearing in the body of Article XI.2(a) of GATT was wide enough to cover this product as well (§§ 326, and 335ff.). “Other” in this reading should mean “other than foodstuff”, without any further precision. What matters thus, is the definition of “essential product,” since foodstuff, as well as any other product, can at least in principle be essential.

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2.3.1.3 Temporarily Applied The Panel on China–Raw Materials underscored that Article XI.2(a) of GATT deals with temporary shortages only, and not with chronic shortages of essential products (§ 7.297). In that, this provision was, in its eyes, distinguished from Article XX(g) of GATT, which deals with conservation of exhaustible natural resources (§ 7.349) without imposing time limits on the action undertaken. The panel found that in the case before it, the Chinese action was already ten years old, and that for this reason, it was essentially irreconcilable with the requirement that the action be temporary. The AB upheld the panel’s finding in this respect (§§ 339–340). Before doing so, the AB (§ 327) had already established that this provision allowed WTO members to undertake both preventive (e.g., measures aiming to avoid a critical shortage in the future) and repressive action (e.g., measures aiming to address a critical shortage that already exists). In other words, the term “temporarily” limits the duration of action undertaken but does not require that action should be aimed to address future or past shortages. Although the AB did not explicitly state it as such, it must be the case that any action undertaken to address critical shortages must be close in time to the situation being addressed. In other words, WTO adjudicating bodies should outlaw speculative action regarding shortages that might or might not occur in the future, or critical shortages that occurred years ago whose effects have been wiped out since. Case law could be informed in this respect by the case law on “threat of injury” in contingent protection instruments, which is discussed in chapters 2, 3, and 4 in volume 2. 2.3.1.4 Burden of Proof There are three issues that should be discussed in this context. First, is burden of proof an issue at all here—that is, can panels on their own initiative, once they have established that a violation of Article XI.1 of GATT has occurred, move on and examine whether it can be cured through invocation of another GATT provision? Second, if not, who should carry the burden of proof, the original complainant (e.g., the party arguing that a QR has been imposed) or the defendant? The third issue is prima facie counterintuitive: how does the allocation of burden of proof affect the relationship of Article XI.2 of GATT with Article XX of GATT (e.g., the list of general exceptions, and vice versa)? The question could be reformulated as follows: Is Article XI.2 of GATT a self-standing obligation, which, if violated, can be justified through recourse to Article XX of GATT? If yes, should this construction affect the allocation of burden of proof under Article XI.2 of GATT? Note that this third question is asked with respect to all exceptions included under Article XI.2 of GATT, and not only with respect to “critical shortages.” This is so because it has been addressed in this way in case law. Panels will not ex officio examine whether a violation of Article XI.1 of GATT can be justified through recourse to one of the grounds available mentioned in the body of Article

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XI, or elsewhere in GATT. A series of GATT panels have underscored this point.43 The question, thus, is whether it is the original complainant or the original defendant that should carry the burden to justify a violation of Article XI.1 of GATT. In China–Raw Materials, the panel held that it must be China (e.g., the defendant seeking justification for violating the imperative included in Article XI.1 of GATT) that should carry the burden of proof. To do that, the panel first stated prior case law citing the AB report on US–Wool Shirts and Blouses (p. 16): Articles XX and XI:(2)(c)(i) are limited exceptions from obligations under certain other provisions of the GATT 1994, not positive rules establishing obligations in themselves. They are in the nature of affirmative defences. It is only reasonable that the burden of establishing such a defence should rest on the party asserting it.

Note that the AB in this report was dealing with a situation coming under the aegis of a different provision (namely, Article XI.2(c) of GATT). The panel went on to find that a similar solution also should be applied in cases coming under the aegis of Article XI.2(a) of GATT (§ 7.212–213). It follows that all the complainant needs to show is violation of Article XI.1 of GATT, and the burden will then shift to the defendant to invoke Article XI.2 of GATT in order to justify its measures. The question has also arisen in case law whether a party that has invoked unsuccessfully Article XI.2 of GATT (an exception to Article XI.1 of GATT) can still invoke Article XX of GATT (an exception to the exception, that is). The AB in China–Raw Materials stated that when the requirements of Article XI.2(a) of GATT have been met, no recourse to Article XX of GATT is possible (§ 334): By contrast, Article XI:2 provides that the general elimination of quantitative restrictions shall not extend to the items listed under subparagraphs (a) to (c) of that provision. This language seems to indicate that the scope of the obligation not to impose quantitative restrictions itself is limited by Article XI:2(a). Accordingly, where the requirements of Article XI:2(a) are met, there would be no scope for the application of Article XX, because no obligation exists. (italic in the original)

This is a puzzling statement at first sight, but a sensible one all the same. The AB is making one simple claim: a transaction that qualifies, say, as a “critical shortage” justifies the imposition of a QR. In this case, recourse to an additional justification (that offered by Article XX of GATT) would be redundant. If, on the other hand, a transaction does not meet the Article XI.2 GATT-standard, then the WTO member concerned would have to look for a different justification. The AB, thus, following its own report on US–Wool Shirts and Blouses, did not construe Article XI.2 of GATT as a self-standing obligation, but as a provision limiting the coverage of Article XI.1 of GATT. The overall conclusion is that Article XI.2 of GATT is construed as an exception to Article XI.1 of GATT, and the party invoking it carries the associated burden of proof.

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Standards for Classification, Grading, or Marketing of Commodities

There is not much practice regarding this provision, which was thought of as a means to avoid challenges against measures aiming to promote the quality of goods sold and related matters. 2.3.2.1 Key Terms The GATT Panel on Canada–Herring and Salmon discussed the key terms appearing in this provision [Article XI.2(b) of GATT]. The consistency of Canada’s export restrictions on pink salmon and herring with Article XI.1 of GATT had been challenged. Canada responded that it had applied quality standards to fish, and that it had decided to ban exports of fish not meeting these standards. In its view, allowing only high-quality fish to be exported would have a beneficial effect on all Canada’s fish exports. Since, nevertheless, it was proved before the panel that even exports of fish that did meet the standards were prohibited, the panel rejected the Canadian argument (§ 4.2). Implicitly, thus, this report accepted that trading nations could adopt one production standard for the domestic market and a different one for exports. The problem with similar export-promoting strategies is that often, under the guise of export promotion, an advantage is granted to domestic producers. Take the case, for example, of inputs that are lawfully sold in the domestic market. Assume further that the final product is sold both in the domestic and the exporting market. In this case, could a WTO member impose an export ban on similar inputs? The facts in Canada–Herring and Salmon were quite straightforward and allowed the panel to reach an uncontroversial finding of inconsistency between Canada’s practices and the GATT regime. Unavoidably, nevertheless, a more in-depth inquiry will be required in order to address issues like the one described in the previous scenario. Panels will have to use tools that will allow them to decide whether WTO members employing similar measures do so in order to increase the quality and reputation of their goods in export markets or, conversely, whether through similar policies, they simply aim to provide their downstream industry a commercial advantage (since, arguably, the price of the input restricted for sale in the domestic market will drop). This understanding is consonant with the intentions of the drafters as well. In §4.3 of its report on Canada–Herring and Salmon, the panel noted the purpose for including this paragraph in Article XI of GATT: “During the drafting, mention was made only of export restrictions designed to promote foreign sales of the restricted product but not of export restrictions on one commodity designed to promote sales of another commodity.” 2.3.2.2 Burden of Proof The conclusions given earlier in this chapter apply here as well since they cover all of Article XI.2 of GATT. Moreover, the panel report on Canada–Herring and Salmon supports this conclusion (at least implicitly), since it was Canada that advanced the claim regarding the applicability of Article XI.2 of GATT.

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QRs Necessary for Enforcing Governmental Measures

Article XI.2(c) of GATT allows the imposition of import QRs on farm and fishery products, which are necessary for the enforcement of a “governmental measure”: • To restrict the quantity of the domestic similar (or substitutable) product • To address temporary surpluses • To restrict the quantity of animal goods, the production of which depends on the restricted import 2.3.3.1 The Test The Panel on Canada–Ice Cream and Yoghurt laid down in pertinent terms the test for consistency with this provision. All of the following must be shown (§ 62): (a) An import QR is in place. (b) It concerns agricultural or fishery products. (c) The restriction is imposed on all like products. (d) The government measure restricts the quantity of domestic products marketed, produced, or both. (e) The QR is necessary to enforce the government measure. (f) A public notice has been issued. (g) The ratio between imports and domestic goods circulating in the market remains unchanged.46 All these conditions must be met cumulatively. Therefore, it is a demanding test, as the Panel on EEC–Dessert Apples observed (§ 12.4): The Panel observed that the requirements of Article XI:2(c)(i) for invoking an exception to the general prohibition on quantitative restrictions made this provision extremely difficult to comply with in practice. Indeed no contracting party had to date been found by a Panel to comply with all its requirements. The Panel was also aware that there existed widespread dissatisfaction with this provision and that its revision was under discussion. The Panel recalled, however, that it was not the function of panels to propose changes to the provisions of the General Agreement but to make findings regarding their interpretation and application.

2.3.3.2 The Rationale The Panel on Japan–Agricultural Products held (§ 5.1.2) that this provision was necessary because in agriculture and fisheries you have to deal with the capricious bounty of nature, which will sometimes give you a huge catch of fish, a huge crop, which knocks the bottom out of prices. You also have the phenomenon peculiar to agriculture and fisheries of a multitude of small, unorganized producers that cannot organize themselves. It often happens that the government has to step in and

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organize them. But if it does so, it cannot allow the result of its organization to be frustrated by uncontrolled imports. The exception was not intended to provide a means of protecting domestic producers against foreign competition but simply to permit … the enforcement of … governmental measures necessitated by the special problems relating to the production and marketing of agricultural and fisheries products.45

The Panel on EEC–Dessert Apples underscored this view even further in the following terms (§§ 12.15–17): Concerning the purpose of Article XI:2(c)(i), the Panel recalled that the title of Article XI was “General Elimination of Quantitative Restrictions.” Article XI:2(c)(i) made an exception to this general rule. It permitted governments, under certain conditions, to enforce domestic output restrictions at the border. The Panel furthermore considered that, as one of the basic functions of the General Agreement was to provide a legal framework for the exchange of tariff concessions, great care had to be taken to avoid an interpretation of Article XI:2(c)(i) which would impair this function. The Panel noted that Article XI:2(c)(i)—unlike all provisions of the General Agreement specifically permitting actions to protect domestic producers—did not provide either for compensation to be granted by the contracting party invoking it, or for compensatory withdrawals by contracting parties adversely affected by the invocation. This reflected the fact that Article XI:2(c)(i) was not intended to be a provision permitting protective actions. If Article XI:2(c)(i) could be used to justify import restrictions which were not the counterpart of any governmental measure capable of limiting production, the value of the General Agreement as a legal frame-work for the exchange of tariff concessions in the agricultural field would be seriously impaired.

This panel noted that during the drafting of the provision, it was agreed that the exception under Article XI:2(c)(i): “... was not intended to provide a means of protecting domestic producers against foreign competition, but simply to permit, in appropriate cases, the enforcement of domestic governmental measures. ...” The drafters had also given some guidance as to the nature of the governmental measures intended to be covered by the provision. They recognized that output limitation might coexist with subsidies, but that: “in interpreting the term ‘restrict’ for the purposes of paragraph 2, the essential point was that the measures of domestic restriction must effectively keep output below the level which it would have attained in the absence of restrictions.” In the light of the considerations set out here, the panel found that the measures taken under the intervention system for apples did not constitute marketing restrictions of a type that could justify import restrictions under Article XI:2(c)(i). Intervention by the EU authorities was thus viewed as a measure aimed to protect domestic EU producers. Of course, there is a fine line between measures aimed at organizing farm production and measures aiming to protect farmers outright. This provision has been largely superseded by the Uruguay Agreement on Agriculture, that we discuss in volume 2. 2.3.3.3 What Is a Governmental Measure? There is, of course, no doubt that a measure is “governmental” if it is performed by government agents. In this vein, the Panel on Canada–Eggs had no trouble qualifying a supply

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management program of eggs as “governmental” since government entities were entrusted with its administration. The question arises whether schemes operated by private agents can also be considered “governmental,” and if yes, what level of government involvement in similar schemes is necessary? Case law has established that the measures covered will be considered “government measures” even if the government concerned has not exercised compulsion, so long as it has provided traders with sufficient incentives to adopt a particular behavior.47 It thus established a parallel with the approach adopted in Japan–Semiconductors that was discussed previously. The Panel on EEC–Dessert Apples addressed a series of measures relating to the common organization of the market for apples in the EU coming under the aegis of the common agricultural policy (CAP). The EU would buy in at fixed prices apples of EU origin, should the market price be below the “fixed price” (e.g., the price at which the EU would buy, and which was a regulated and not a market price) for three days in a row. It would also buy in at fixed prices when prices were likely to fall because of a temporary surplus. In this case, the EU member states’ authorities would permit withdrawal operations, and the “withdrawal price” would be the fixed price plus 10 percent (withdrawn goods would go to free distribution, animal feed, industrial processing, and other areas). Apples were protected by a variable duty as well (the difference between the world price and the EU fixed price for buying in), which would be added to the bound duty. Chile was challenging the consistency of these measures with GATT. The EU did not contest that an import restriction had been in place, and, to justify it, invoked Article XI.2(c) of GATT. To decide whether these measures were indeed GATTinconsistent, the panel had to first decide whether they could be regarded as “governmental measures.” It quoted approvingly prior case law that had found that incentives sufficed for a measure to be considered “governmental.” In other words, governments did not need to compel (§§ 12.8–9): The Panel proceeded by examining first whether the EEC did have “governmental” measures consistent with Article XI:2(c)(i), and second whether such measures did operate to restrict domestic supply in terms of the same provision. The Panel noted that the EEC did not claim that it restricted production of apples, but that it effectively restricted their marketing, through a system of market withdrawals carried out mainly by producer groups. The Panel also took note of the argument that these could not be considered “governmental” measures in terms of Article XI:2(c) because of the voluntary basis of the organization and the non-obligatory method of their operation. The Panel recalled that the concept of “governmental” measure had been previously examined on a number of occasions in respect of different articles of the General Agreement. A 1960 Panel, examining the question of whether subsidies financed by non-governmental levy were notifiable under Article XVI, expressed the view that “... the question ... depends upon the source of the funds and the extent of government action, if any, in their collection.” Another Panel found that the informal administrative guidance caused by the Japanese Government to restrict production of certain agricultural products could be considered to be a governmental measure within the meaning of Article XI:2 because it

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emanated from the Government and was effective in the Japanese context. A third Panel considered that legally non-mandatory measures could constitute restrictions within the meaning of Article XI:1 if “sufficient incentives or disincentives existed for non-mandatory measures to take effect ... [and] the operation of the measures ... was essentially dependent on Government action or intervention [because in that case] ... the measures would be operating in a manner equivalent to mandatory requirements such that the difference between the measures and mandatory requirements was only one of form and not of substance.”

The panel examined the measures in the light of these decisions by the CONTRACTING PARTIES. It noted that the internal regime for apples was a hybrid one that combined elements of public and private responsibility. Legally, there were two possible systems: direct buying-in of apples by member state authorities and withdrawals by producer groups. Under the system of withdrawals by producer groups, which was the EU’s preferred option, the operational involvement of public authorities was indirect. However, the regime as a whole was established by EU regulations, which set out its structure. Its operation depended on EU decisions fixing prices, and on public financing; apples withdrawn were disposed of in ways prescribed by regulation. The panel, therefore, found that both the buying-in and withdrawal systems established for apples under EEC Regulation 1035/72 (as amended) could be considered to be governmental measures for the purposes of Article XI:2(c)(i). 2.3.3.4 Product Coverage The coverage of this provision was limited in the GATT years to chapters 1–24 of the Customs Cooperation Council Nomenclature.48 In the WTO era, the coverage has been modified since agricultural products are now defined in Annex 1 of the Agreement on Agriculture. Although chapters 1–24 continue to form the basis for the provision, some of the products mentioned therein have been excluded, whereas others (e.g., cigarettes) were not. In this vein, for example, before the advent of the WTO, the Panel on Thailand– Cigarettes held that the reference to “fresh” products in the Interpretative Note to this provision meant that leaf was covered but cigarettes were not (§§ 69–70). Note, nonetheless, that the preparatory work suggests narrower product coverage. During the negotiation of GATT, the view was held that measures applying to seasonal goods at a time when like domestic goods were not available could not qualify as “necessary” under this provision.49 The GATT Working Party on Quantitative Restrictions adopted a less stringent view in its report, to the effect that similar measures would be GATTconsistent only if they were necessary to achieve the objectives of government measures relating to the control of domestic products.50 2.3.3.5 Restrictions on Like or Substitutable Domestic Goods When a restriction is imposed, it must be extended to all “like goods.” If similar restrictions on domestic (and foreign) “like goods” have not been adopted, then the WTO member enacting this measure will be found to be in violation of its obligations under this provision: the GATT Panel on EEC–Minimum Import Prices ruled as much.

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The Panel on EEC–Apples (US), echoing prior case law, held that two goods that perform a similar function for the consumer are like: hence, it is consumers that will decide whether two goods are like in the context of this provision (§ 5.7). Article XI.2(c) of GATT refers to “restrictions” only, whereas the previous two provisions, Articles XI.2(a) and (b), refer to “prohibitions and restrictions”: the linguistic difference suggests that outright bans on imports or exports are not covered by Article XI.2(c) of GATT. The Panel on US–Canadian Tuna has confirmed this point (§ 4.6):51 The sub-Committee agreed that in interpreting the term “restrict” for the purposes of paragraph (2)(c), the essential point was that the measures of domestic restriction must effectively keep domestic output below the level which it would have attained in the absence of restrictions.”52 In EEC–Dessert Apples, the panel explained that, when deciding on the restrictive effect of challenged measures, measures imposing no restrictions on quantities sold could not come under its purview. In this vein, measures banning sales below a certain price threshold could not come under the purview of this provision. This finding might seem surprising, and indeed it is. The panel paid attention to the fact that no limit on quantities sold was imposed, but no attention at all to another aspect of the measure: because of the prohibition to sell below a certain price, the overall quantities sold were affected. It is unclear whether this finding was aimed as endorsement of only de jure QRs. There is no subsequent practice, either, that would help clarify this point. In light of the uncertainty regarding the ambit of this finding, we cite it as such (§§ 12.12–14): The Panel considered it necessary to examine a basic interpretative issue involved in this GATT requirement––i.e., did Article XI:2(c)(i) cover only schemes which set quantitative limits on the amount producers could offer for sale, or did it also cover schemes which could result in a reduction of products reaching the consumer through withdrawals activated by reference to a floor price without quantitative targets? The Panel examined this interpretative issue in the light of the wording of Article XI:2(c)(i), the context in which this provision appears in the General Agreement, the purpose of the General Agreement and the intentions of the drafters. The Panel noted that Article XI:2(c)(i) referred to governmental measures which “operated to restrict the quantities” of the domestic products “permitted to be marketed or produced.” Given the ordinary meanings of “to permit” (to authorize or allow) and “to market” (to expose for sale in a market or to sell) the wording of the provision suggested in the view of the Panel that the governmental measures must include an effective limitation on the quantity that domestic producers are authorized or allowed to sell. Measures which simply prevented consumers from buying products below certain prices would not appear to be covered by this wording. If the withdrawal of a product from the market without any governmental limitation on the amount that could be sold was included within the purview of Article XI:2(c)(i), the words “permitted to be” would not have any function. The Panel took into consideration, however, the argument that in the official languages of the General Agreement this provision could possibly be interpreted in a way which concentrated more on the market effects than on the government policy direction. It had been argued, for example, that the fact that a quantity of apples had been withdrawn from the dessert apple market as a result of governmental measures amounted, in effect, to a marketing restriction in terms of Article XI:2(c)(i). This interpretation would involve a more flexible reading of “permitted to be marketed.” The Panel

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recalled the legal principle that exceptions were to be interpreted narrowly and considered that this argued against such a flexible interpretation of Article XI:2(c)(i). As to the context in which the provision appears, the Panel noted that the final paragraph of Article XI:2 stipulated that imports may be restricted under Article XI:2(c)(i) only in proportion to domestic production, whether the government has chosen to restrict the quantities permitted to be marketed or those permitted to be produced. It is thus clear that in the case of marketing restrictions, also, imports may only be reduced to the extent that production declines. Schemes which operate to prevent, or effectively discourage, producers from selling their products beyond fixed amounts can reasonably be expected to have an effect on production because producers will tend to produce only up to the quantitative ceiling set. By contrast, a scheme which imposes no limitations on what producers may sell cannot, by itself, bring about a restriction of production. It therefore follows from the context of the provision that such a scheme would not be covered by Article XI:2(c)(i). The Panel also noted that, unlike Article XI:2(c)(i), Article XI:2(c)(ii), which concerned the removal of a temporary surplus, did not stipulate any restriction on domestic output in order to justify import restrictions. A withdrawal program not capable of limiting production could possibly come under Article XI:2(c)(ii), provided that the specific requirements of the provision were met. The difference between the two sub-paragraphs was a further contextual indication that Article XI:2(c)(i) could not be interpreted as widely as argued by the EEC.

2.3.3.6 Temporary Surplus In EEC–Apples I (Chile), the panel faced a situation where for several years, the EU was facing a surplus. In 1979, though, the surplus was abnormally high. The panel held that that it could legitimately consider that year as the surplus year (§ 4.10). Thus, the arithmetic difference between two years (a point-to-point comparison) sufficed for the panel to decide that a surplus was indeed present. In EEC–Dessert Apples, the panel took a different view. In its ruling, it said that it should compare the situation in the year when measures had been adopted with the situation leading up to that year. It was not point-to-point comparisons that mattered, therefore, but trends. In this case, the EU had adopted restrictions in 1988. The panel examined the situation during the previous years and found that the EU had been consistently running surpluses. In its view, the EU was running a structural and not a temporary surplus under the circumstances; as a result, it could not invoke Article XI.2(c)(ii) of GATT (§ 12.19): Article XI:2(c)(ii) provides an exception to Article XI:1 for “import restrictions ... necessary to the enforcement of government measures which operate to remove a temporary surplus of the like domestic product ... by making the surplus available to certain groups of domestic consumers free of charge or at prices below the current market level.” The Panel also took note of the views of the 1980 Panel on this point, noting that that Panel’s finding of a “temporary surplus above the recurring surplus” related only to the situation in 1979. Article XI:2(c)(ii) clearly required the Panel to consider whether the EEC’s surplus at the time the import restrictions were imposed, i.e. April 1988, had been demonstrated to be temporary. The Panel considered that the only practicable way to reach a finding on this point was to compare the EEC’s apple surplus in 1988 with that in the previous years. From the statistics available to it (see Table I), it observed that while amounts withdrawn had varied in the years up to and including the 1987–88 marketing year, stocks had remained relatively stable

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at levels which indicated a substantial structural surplus. The Panel thus found that the 1988 surplus could not be considered a temporary one, and that therefore the EEC did not meet the conditions for imposing import restrictions under Article XI:2(c)(ii). In the light of this finding the Panel did not consider it necessary to examine whether the EEC measures were in conformity with the other requirements of this provision.

2.3.3.7 Compensation In Japan–Agricultural Products I, the panel held that, contrary to other provisions, no obligation to compensate for damage suffered is provided for in Article XI.2(c) of GATT. This is why, in the panel’s view, this provision requires similar restrictions on domestic goods (§ 12.15). 2.3.3.8 Public Notice A public notice must be issued by virtue of the last sentence in Article XI.2 of GATT. The EU was found in violation of its obligations in this respect in EEC–Apples I (Chile).53 2.3.3.9 Burden of Proof In light with this chapter’s generic discussion of this issue, the GATT panel report on Japan–Agricultural Products I, held that it is the trading nation imposing the restriction that carries the associated burden of proof (§ 5.1.3.7). 2.3.4

Balance of Payments (Articles XII and XVIII of GATT)

WTO members can legitimately deviate from their obligations under Article XI of GATT if they encounter BoP problems, and, to this effect, they are in a position to demonstrate that they have complied with the requirements of Article XII of GATT. Developing countries facing similar concerns can invoke Article XVIII of GATT, a twin provision that contains less stringent requirements for compliance than those embedded in Article XII of GATT. 2.3.4.1 The Rationale The inclusion of these two provisions in GATT was supported by the UK delegation, as chapter 1 described, and was deemed necessary in light of the inflexibilities associated with the system of fixed exchange rates (fixed parities) that prevailed when GATT/ITO were originally negotiated.54 Under the fixed parities regime, a country with a payments deficit could not unilaterally devalue its currency, as it would have to follow the multilateral process established to this effect. The International Monetary Fund (IMF) had an important role to play in this respect. Its role was recognized in the GATT legal order, as Article XV.6 of GATT makes clear that: Any contracting party which is not a member of the Fund shall, within a time to be determined by the CONTRACTING PARTIES after consultation with the Fund, become a member of the Fund,

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or, failing that, enter into a special exchange agreement with the CONTRACTING PARTIES. A contracting party which ceases to be a member of the Fund shall forthwith enter into a special exchange agreement with the CONTRACTING PARTIES. Any special exchange agreement entered into by a contracting party under this paragraph shall thereupon become part of its obligations under this Agreement.

At present, most countries have shifted to flexible exchange rates. Given that the exchange rate is a more appropriate instrument to deal with BoP disequilibria as part of a comprehensive macroeconomic adjustment program, the GATT provisions on BoP have become largely redundant. Other things being equal, WTO members would rather devaluate and profit from the increase in export income than impose a QR and keep their exchange rate intact.55 In other words, this provision, although still present in GATT, is largely confined to historic interest.56 2.3.4.2 Procedural and Institutional Issues Articles XII and XVIII of GATT did not contain elaborate provisions detailing the procedural steps to be taken whenever recourse to restrictions adopted on BoP grounds was being made. The “Understanding on the BoP Provisions of the GATT 1994” was concluded during the Uruguay round, adding to the existing framework. WTO members must announce publicly a “time-schedule” for all measures they have unilaterally taken to address BoP problems (§ 1 of the Understanding). The same provision allows for subsequent changes to announced time-schedules and even provides WTO members with the opportunity to avoid announcing a time-schedule, if they can justify doing so. From that moment onward, a parallel procedure comes into place. On the one hand, the WTO member concerned might find itself before the Committee on Balance of Payments Restrictions (BoP Committee) discussing its measures; on the other, it incurs an obligation of transparency toward the General Council of the WTO. The BoP Committee carries out consultations in order to review all restrictive import measures taken for BoP purposes. It follows the procedures for consultations on BoP restrictions, which were formally approved on April 28, 1970 (“full consultation procedures”).57 A WTO member applying a new restriction, or raising the general level of its existing restrictions, shall enter into consultations with the BoP Committee within four months of the adoption of such measures, either upon its request, or upon invitation by the chair of the BoP Committee [Article XII.4(a), and Article XVIII.12(a) of GATT]. Parallel to this process, whenever recourse to BoP restrictions is made, WTO members must notify the WTO General Council of: (1) The introduction of, or any change in, the application of trade-restricting import measures taken for BoP purposes; and (2) Any modification concerning the timing of withdrawal of such measures. These notifications shall include information at the tariff-line level about the product coverage and trade flows affected.

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At the request of a WTO member, notifications may be reviewed by the BoP Committee. The BoP Committee shall periodically review restrictions applied for BoP purposes. The two processes (WTO member consulting within BoP Committee and WTO member informing the General Council) de facto merge when the BoP Committee contacts the General Council directly. It can go so far as to include proposals for a recommendation (§ 13 of the Understanding). This will be the case, of course, if the BoP Committee can manage to “speak with one voice.” In this case, assuming agreement at the General Council level (which is to be expected since all WTO members participate in both the BoP Committee and the General Council), the final recommendation by the General Council to the WTO member in question will include the General Council opinion regarding the timeschedule. If the WTO member adheres to the recommendation of the General Council, it will be deemed in compliance with its obligations (§ 13 of the Understanding). It could be the case, though, that no agreement was possible at the BoP Committee level (and, consequently, at the General Council level as well). In this case, the recommendation by the General Council will reflect the divergent views expressed at the BoP Committee level (§ 13 of the Understanding). It stems from all this that consultations within the BoP Committee are, for all practical purposes, an exercise in transparency. Trading nations do not have to await the green light by the committee in order to adopt measures. The committee is the place where the measures adopted are being discussed. Moreover, it is also quite possible that no agreement regarding the phasing-out of measures adopted (i.e., the time-schedule) has been reached. Or, it could even be that the very invocation of the provision has been contested. Disputes thus may arise, and they do not have to await adjudication until the committee has finished its work. WTO members affected by recourse to the BoP exception have the right to request the establishment of a panel to adjudicate their complaint. This raises the question of “institutional balance” between WTO committees (the “legislative” cum “administrative” branch of the WTO) and WTO panels (the “judiciary” of the WTO), which will be detailed later in this chapter. The role of the BoP Committee has not always been pivotal. Originally, BoP-related measures would be discussed in the context of Special Working Parties established to this effect. Its role was strengthened during the Tokyo round, when the CONTRACTING PARTIES adopted the “Declaration on Trade Measures taken for Balance-of-Payments Purposes,”58 which subjected all measures taken for BoP purposes to an examination by the BoP Committee (and not by a Special Working Party). 2.3.4.3 A Typology of Measures Adopted Article XII of GATT was designed as an exception to Article XI of GATT.59 In practice, however, trading nations have often had recourse to measures such as import surcharges (e.g., tariff measures, not QRs) in order to safeguard their BoP position. In the absence of specific language to this effect, it was at best unclear whether measures like import

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surcharges, which are tariff measures, could be justified through a textual reading of Article XII of GATT. It was clear, on the other hand, that import surcharges would have had less of a disruptive effect on trade than a QR in principle. Early on, Jackson (1972) held the view that import surcharges violated Article II of GATT and could not be exempted through recourse to Article XII, which had been thought of as only an exception to QRs. He mentioned, however, evidence of tolerance of similar practices in GATT. The dispute concerning the import surcharge applied by the US in 1971 (covered later in this chapter) is a case in point. The “Declaration on Trade Measures taken for Balance-of-Payments Purposes” (1979) is the first legal document to acknowledge in its preamble the use of measures other than QRs for BoP purposes—in fact, it encouraged their use. Through this declaration, the CONTRACTING PARTIES expressed the common preference for the use of measures, which would have less disruptive effect on trade than QRs. The “Understanding on the BoP Provisions of the GATT 1994” strengthened the surveillance of restrictions (§§ 9–12), and contained provisions that reproduced the essence of the 1979 Declaration. According to the Understanding, WTO members were encouraged to give preference to measures with the least disruptive effect on trade (“price-based” measures); e.g., import surcharges, import deposit requirements that can lawfully be applied in excess of bound duties, and other measures (§ 2 of the Understanding). WTO members should seek to avoid applying QRs, and, whenever they do so, they should explain why they did not have had recourse to price-based actions (§ 3 of the Understanding). None of these documents qualified price-based measures as “other measures” in the sense of Article XI.1 of GATT. The legal qualification nevertheless is unimportant at this stage. Price-based are explicitly mentioned among the measures that WTO members can adopt in order to address BoP-related issues. When applying their measures, WTO members should make sure that they are tailored to address the BoP crisis that they face and should not have incidental effects beyond what is needed to address it. To this effect—e.g., in order to eliminate (reduce) incidental effects—WTO members are required to administer their measures in a transparent manner (§ 4 of the Understanding). WTO members should apply restrictions across the board, except for essential products;60 that is, products that meet basic consumption needs or that contribute to the members’ efforts to improve their BoP situation, such as capital goods (§ 4). 2.3.4.4 Invocations Developed countries, with a few notable exceptions, almost never made use of this provision, and none of the restrictions on BoP grounds are still in place today.61 Developing countries have used Article XVIII(b) of GATT (that is, the provision corresponding to Article XII of GATT), which developing countries can invoke when facing BoP problems (see table 2.1). The requirements for compliance with this provision are less stringent62 than the corresponding requirements for compliance with Article XII of GATT. Recourse

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Table 2.1 Invocations of Article XVIII(b) of GATT WTO Member

Period

Argentina Bangladesh Brazil Chile Colombia Egypt Ghana India Indonesia Korea Nigeria Pakistan Philippines Peru Sri Lanka Tunisia

1972–1978, 1986–1991 1974–2008a 1962–1971, 1976–1991 1961–1980 1981–1992 1963–1995 1959–1989 1960–1997 1960–1997 1969–1989 1985–1998 1960–2002 1980–1995 1968–1991 1960–1998 1967–1997

a. Bangladesh notified its intention to phase out its remaining restrictions by 1 January 2005 (WTO Document WT/BOP/N/54 of 15 December 2000 and WT/BOP/N/62 of 18 February 2004). Subsequent to this notification, Bangladesh imposed import restrictions under Article XVIII(c) of GATT, invoking infant industry protection; see WTO Document G/C/7 of 16 January 2002.

to the former provision (Article XVIII of GATT) is reserved to developing countries with “inadequate monetary reserves” that are members of the WTO. Recourse to the latter (Article XII of GATT) is reserved to developed countries with “very low monetary reserves” that are members of the WTO. Arguably, the term “inadequate monetary reserves” leaves more discretion to the state invoking this provision and, consequently, would entail a more deferential standard of review should litigation occur. The differences regarding the requirements embedded in the two provisions do not stop here. Whereas Article XII of GATT requires that WTO members progressively relax the restrictions imposed, Article XVIII(b) of GATT provides that no member shall be required to modify restrictions on the grounds that a change in its development policy would render such restrictions unnecessary.63 Finally, a “simplified consultation procedure” is available for developing countries invoking the BoP safeguard, and it was approved on December 19, 1972.64 This procedure is available to all developing countries and least developed countries (LDCs); the latter, however, can have recourse to it provided that they are pursuing trade liberalization efforts in conformity with the schedule presented to the BoP Committee in previous consultations. 2.3.4.5 Dispute Settlement and Internal and External Institutional Balance As discussed earlier in this chapter, the legitimacy of measures adopted on BoP grounds (and their phasing out) is discussed before the BoP Committee and the General Council and can be challenged before a panel. Scholarship has been divided on the issue concerning the justiciability of BoP restrictions. Some have argued that decisions regarding the

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legitimacy of BoP restrictions are of a political nature and should be best left to the WTO organs; but then, others have argued that, since political organs might not be in a position to reach a conclusion, recourse to dispute settlement should always be possible.65 This issue did not take long to find its way before a GATT panel. In Korea–Beef (New Zealand), the panel faced the Korean argument that it had no jurisdiction to review the legality of its invocation of Article XVIII of GATT because the issue was pending before the BoP Committee. The panel rejected this claim outright, arguing that it had no support at all in GATT (§§ 110–113). In the panel’s view, nothing in GATT supported the claim that certain provisions of the agreement were not justiciable. One might have thought that this issue was settled as a result of this ruling—and yet it resurfaced. The reason for that was the argument that, because of the reinvigorated institutional infrastructure of the WTO—a far cry from the institutional deficiencies that GATT had to live with—similar issues should be best left to the discretion of WTO committees. In India–Quantitative Restrictions, India attempted to justify its QRs on over 2,700 agricultural and industrial product tariff lines by invoking Article XVIII(b) of GATT. India maintained QRs on consumer goods in 2,714 tariff lines (i.e., approximately 30 percent of the total number of tariff lines where India had made concessions). India, when challenged by the US, invoked its status as a developing country (thus falling under Article XVIII of GATT) in order to justify its violation of Article XI of GATT. It also claimed that Article XVIII of GATT was not justiciable, as decisions regarding the legitimacy of measures adopted to address BoP fell, in its view, under the exclusive jurisdiction of the BoP Committee. The panel found India’s measures to be inconsistent with Article XI.1 of GATT. It also went on to find that they could not be justified through recourse to Article XVIII.11.66 Most important, the panel found (and the AB upheld) that, in contrast to the argument advanced by India, BoP restrictions could legitimately be the subject of judicial review.67 On appeal, the AB noted the relevance of institutional balance within the framework of the WTO Agreement, rejecting India’s argument that only the WTO BoP Committee could review the consistency of its measures with GATT. It stated that (§ 105): such a requirement would be inconsistent with Article XXIII of the GATT 1994, as elaborated and applied by the DSU, and footnote 1 to the BOP Understanding which, as discussed above, clearly provides for the availability of the WTO dispute settlement procedures with respect to any matters relating to balance-of-payments restrictions. (italics in the original)

The AB upheld this finding and went on to rule against India because it had not demonstrated that it had met its burden of proof, and because it had not explained why the removal of the QRs would lead to a change in its development policy, and ultimately to a deterioration of its overall situation. Critically, expertise provided by the IMF supported the view that India was no longer facing BoP problems, and the AB, like the panel before it, relied on the provided expertise to reach its conclusions (§§ 150ff.).

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This is a well-founded decision since the BoP Committee might not be in a position to decide an issue where there was disagreement between its members. The discussion so far concerns the “internal institutional balance”; that is, the relationship between panels and other WTO organs. The panel and the AB on India–Quantitative Restrictions dealt with a different issue as well: by inviting expertise from the IMF, the question arose whether they were bound to respect what the IMF experts had to suggest. The relationship between the WTO and the IMF concerns the “external institutional balance”; that is, the relationship between WTO and non-WTO organs. The relationship between WTO and the IMF is an issue that concerns not only Article XII, but also Article XV of GATT, which deals with exchange restrictions. There is little doubt that the whole system of Article XV of GATT was meant to establish a bridge between the trade issue (QR), and the wider macroeconomic concerns that gave rise to the trade measure.68 Expertise by the IMF concerning the latter aspect thus should, in principle, be welcome since this is an area where WTO has neither institutional expertise nor a mandate to recommend action. That much was clear to the GATT framers who, recall from our discussion in chapter 1, were negotiating GATT in the shadow of the Bretton Woods negotiation. GATT discusses explicitly the relevance of IMF expertise into GATT legal proceedings in Article XV, that we discuss later. Case law and subsequent practice have provided their own understanding of how much deference to IMF was warranted. Chapter 1 discussed the agreement signed between the WTO and the IMF as evidence of the treaty-making power of the WTO, the natural consequence of endowing it with legal personality. In line with the spirit of “global coherence” reflected in the IMF/WTO Agreement, IMF experts can participate in panel proceedings. Typically, it is panels using their discretion under Article 13 of the Dispute Settlement Understanding (DSU) that will initiate this process, requesting the participation of IMF experts whenever warranted. The IMF can also on its own initiative submit its views to a panel: Article 4(b) of the agreement between the WTO and the IMF provides as such.69 The Panel on India–Quantitative Restrictions followed well-established practice in this area, turning to IMF experts to request their views regarding the solidity of the Indian action.70 Of interest to this discussion is the degree of deference that WTO panels will show to expertise supplied by IMF officials. In India–Quantitative Restrictions, the panel showed considerable deference since it endorsed for all practical purposes the views expressed by IMF experts. The Panel on Dominican Republic–Import and Sale of Cigarettes adopted a similar approach and deferred to the IMF expertise as well. This has not always been the case, as in a remarkable, high-profile case, discussed next, where a panel showed no deference toward IMF expertise: the GATT panel adjudicating the consistency of the import surcharge that the US imposed in 1971 with the relevant GATT rules. In 1971, the US unilaterally decided to put an end to the “fixed parities” scheme that was established during the Bretton Woods conference. The US dollar was consistently

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valued at $35/ounce of gold, and the “London Gold Pool,” in which eight central banks (that of the US and seven European nations, namely, Belgium, France, Germany, Italy, the Netherlands, Switzerland, and the United Kingdom) participated, was pooling gold reserves in order to maintain this rate. Over the years, nevertheless, the US accumulated for various reasons (ranging from the cost of former president Lyndon Johnson’s social policies establishing what became known as the “Great Society” to the cost of the Vietnam War) a negative BoP. The US dollar was overvalued, and the US economy suffered as a result. President Richard Nixon suspended the convertibility of the dollar to gold, opening the door to free convertibility of currencies, in what became known as the “Nixon shock.” A pact called the “Smithsonian Agreement” was signed in 1971, where the dollar was valued at $38/ounce with 2.25 percent trading bands, and the “Group of Ten” (the seven European states mentioned above, Sweden, plus Canada and Japan) agreed to appreciate their currencies vis-à-vis the US dollar. Of interest to this discussion is primarily the US decision to impose an import surcharge on all dutiable goods (not all goods) as a shortterm measure to allow the US industry to “breathe” until the realignment of currencies would allow exports to grow again. It was not the first time the US would run a deficit in merchandise trade, but it was the first since 1893, as Vincke (1972) notes. The US notified GATT of its import surcharge,71 and a Working Party was established to examine its consistency with the GATT rules.72 The rationale offered by the US was that its trade account had deteriorated significantly, and this deterioration had been an important factor in the overall BoP problem. In parallel with the proceedings before GATT, Yoshida, a Japanese company, challenged the legality of the surcharge before a US court.73 It lost. The proceedings before GATT continued, however, unaffected by the US court’s ruling. The GATT Working Party consulted with the IMF when preparing its report. In §§ 4–5 of its report, the officials of IMF wrote that the import surcharge can be regarded as being within the bounds of what is necessary to stop a serious deterioration in the United States balance of payments position. However, a corrective adjustment in the pattern of exchange rates would be a preferred means for achieving a better balance in international payments… the Fund had no suggestion to make as to any alternative measures that the United States might take at present.

In Annex II to the report, nevertheless, it said that Austria, Canada, Chile, Ghana, Greece, India, Japan, Spain, Sweden, Switzerland, and Trinidad and Tobago all intervened before the Working Party, expressing critical views of the US measure, the IMF view notwithstanding. Most of them insisted that developing countries’ goods should be totally exempted from surcharges. The US received sympathy only from the UK delegate. Article XV.2 limits the discretion of the WTO when it comes to issues coming under the aegis of the IMF: In all cases in which the CONTRACTING PARTIES are called upon to consider or deal with problems concerning monetary reserves, balances of payments or foreign exchange arrangements, they

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shall consult fully with the International Monetary Fund. In such consultations, the CONTRACTING PARTIES shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund, or with the terms of a special exchange agreement between that contracting party and the CONTRACTING PARTIES.

This paragraph would suggest deference toward the IMF expert. Deference, however, is limited to facts and “determinations” by the IMF, not to opinions expressed by IMF experts in GATT adjudication. Arguably though, this provision could be seen as some sort of more general deference towards opinions expressed by IMF experts when acting in their official capacity. In § 9 of the report we read, nonetheless, that the Working Party distanced itself from the views expressed by the IMF, and the reasons for doing so. It considered that the measures restricting imports were not an appropriate means to correct the US BoP disequilibrium. They could not endorse the IMF’s view because they considered that the trade balance had only a minor role to play in the US BoP. In § 10 is this characteristic excerpt: “In the view of these members, the most important and immediate cause of the present balanceof-payments deficit in the United States had been the massive outflow of short-term capital, which reflected a loss of confidence in the stability of the United States economy.” It seems that the Working Party did not attribute the problems that the US was facing to trade, trade being relegated to a proximate, but not the ultimate, cause of the US imbalances. In §27, the report went even further, suggesting that, pending the abolition of the surcharge, the US should explore all ways and means available to it that would help reduce the incidence of its measure on trade: [T]he latter process could advisably start at an early date with the few primary commodities not yet benefiting from an exemption. Considering the stable demand and supply of these products, and their low elasticity of demand, the application of the surcharge to these products seemed to serve little purpose and their liberalization was not expected to have a significant on the United States bill.

In §§ 39–40, the Working Party stated its overall conclusion—namely, that the surcharge was inappropriate given the nature of the United States balance-of-payments situation and the undue burden of adjustment placed upon the import account with consequent serious effects on the trade of other contracting parties … the Working Party explored with the United States the feasibility of exempting more products exported by developing countries from the surcharge … the measure should be eliminated within a short time.74

Consequently, panels have shown asymmetric deference toward expertise supplied by IMF experts. Suffice to state here that so far, the Working Party discussing the consistency of the US surcharge with the GATT rules is an outlier. Usually panels show considerable deference not only toward expertise supplied by IMF experts, but also toward scientific expertise in general. Case law under the SPS Agreement (discussed in chapter 6 of volume 2) provides ample proof in this respect.

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2.3.4.6 Burden of Proof Intuitively, one would expect that it should be the party invoking BoP as rationale for justifying a QR that would be called to carry the associated burden of proof. Case law, however, has not always been crystal clear on this score. In Korea–Beef (US), the panel refers to a claim by the US that Korea violated Article XVIII.11 of GATT, and a defense raised by Korea to the effect that it had met the conditions under Article XVIII, Section B, of GATT (§§ 116ff.). It did not clearly state who carried the burden of proof to show compliance with Article XVIII of GATT. The situation got a bit more perplexed in India–Quantitative Restrictions. Recall that India had in place widespread trade impeding measures that it sought to justify through reference to Article XVIII of GATT. The US had presented claims under both Articles XI and XVIII of GATT, and the panel ruled (§ 5.119): In all instances, each party has to provide evidence in support of each of its particular assertions. This implies that the United States has to prove any of its claims in relation to the alleged violation of Article XI:1 and XVIII:11. Similarly, India has to support its assertion that its measures are justified under Article XVIII:B. We also view the rules stated by the Appellate Body as requiring that the United States as the complainant cannot limit itself to stating its claim. It must present a prima facie case that the Indian balance-of-payments measures are not justified by reference to Articles XI:1 and XVIII:11 of GATT 1994.

What if the US had presented claims only with respect to Article XI of GATT? Would the panel have reached the same decision? The correct response should be no. The rationale for imposing QRs is in principle in the realm of private information. Consequently, it should be India that should carry the burden of proof to show that its measures are justified because they were adopted as response to BoP problems. This should be the correct response. The AB, nevertheless, has cast doubt on similar allocations of burden of proof. In the context of the TBT Agreement (chapter 5 of volume 2), it held that the transparency obligations embedded in the TBT Agreement effectively address concerns about private information. It could be that similar case law is exported in this area as well: since WTO members must notify the BoP Committee of their measures adopted to address BoP concerns, complainants are well aware of the rationale for QRs and should consequently carry the burden of proof to show violation of Article XII/XVIII of GATT. This is a hypothesis. As chapter 5 of volume 2 explains in more detail, this view rests on the very questionable assumption that measures have been notified, and the true rationale for their adoption has been revealed as well. This is not always the case, and the question will eventually arise as to what to do with cases where no measure has been notified. Once again, it will be impermissible to have one sauce for the goose and another for the gander. The proper allocation of burden of proof would thus request that the WTO member that adopted measures on BoP grounds is the one that should carry the burden of proof to show that the requirements of Article XII/XVIII of GATT have been met.

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Exchange Restrictions

2.3.5.1 Global Coherence WTO members can impose exchange restrictions, provided that they have done so in accordance with their obligations under the IMF,75 or impose import and export restrictions and controls in order to make their exchange restrictions effective. Article XV.9 says to this effect: Nothing in this Agreement shall preclude: (a) the use by a contracting party of exchange controls or exchange restrictions in accordance with the Articles of Agreement of the International Monetary Fund or with that contracting party’s special exchange agreement with the CONTRACTING PARTIES, or (b) the use by a contracting party of restrictions or controls in imports or exports, the sole effect of which, additional to the effects permitted under Articles XI, XII, XIII and XIV, is to make effective such exchange controls or exchange restrictions.

There is a limit, though, when undertaking similar action (Article XV.4 of GATT): Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.

The term “frustrate,” appearing in Article XV.4 of GATT, is further interpreted in an Interpretative Note added to GATT as follows: The word “frustrate” is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article. Thus, a contracting party which, as part of its exchange control operated in accordance with the Articles of Agreement of the International Monetary Fund, requires payment to be received for its exports in its own currency or in the currency of one or more members of the International Monetary Fund will not thereby be deemed to contravene Article XI or Article XIII. Another example would be that of a contracting party which specifies on an import licence the country from which the goods may be imported, for the purpose not of introducing any additional element of discrimination in its import licensing system but of enforcing permissible exchange controls.

Consequently, WTO members are entitled, by virtue of Article XV.9 of GATT, to impose, under certain conditions, exchange restrictions in accordance with the IMF provisions, and they will be violating these provisions only if they frustrate the intent of the GATT provisions. Alas, the term “frustrate,” the quoted definition of the term notwithstanding, is difficult to define. This provision calls for all practical purposes for an “intent” analysis and offers two examples (of the thousands possible) that would lead to the conclusion that no violation has been established. To understand the “intent” of the provision, though, we need to go back to the negotiation of Bretton Woods. Pisani-Ferry (2014) discusses this point succinctly (p. 20):

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At the Bretton Woods conference in 1944, the principle of national autonomy over the national currencies prevailed. The only deviation was a collective commitment to refrain from manipulating exchange rates to gain market shares and export unemployment. But for the rest, national monetary authorities were free to interest rates at the level they though appropriate. Some were tough on inflation and some were tolerant, some regarded full employment as an imperative and some a desirable aim only. The abandonment of the fixed-exchange-rate regime in 1973 further enhanced national autonomy. By the end of the 20th century, the strictures of the Gold Standard were a matter of interest to students of the international monetary system, not for policymakers or politicians. The one-country, one-currency configuration was seen as a natural order.

There was, thus, a quest of coherence between GATT and the Bretton Woods institutions from early on. Actually, the relationship between trade and the financial system predates GATT, as it was already in the mind of negotiators during the ITO negotiations76 (as shown in chapter 1) and was eloquently presented in the Declaration of Ministers at the opening of the Tokyo round:77 The policy of liberalizing world trade cannot be carried out successfully in the absence of parallel efforts to set up a monetary system which shields the world economy from the shocks and imbalances which have previously occurred. The Ministers will not lose sight of the fact that the efforts which are to be made in the trade field imply continuing efforts to maintain orderly conditions and to establish a durable and equitable monetary system. The Ministers recognize equally that the new phase in the liberalization of trade which it is their intention to undertake should facilitate the orderly functioning of the monetary system.

The WTO continued down this path, and Article III.5 of the Agreement Establishing the WTO reads: With a view to achieving greater coherence in global economic policy-making, the WTO shall cooperate, as appropriate, with the International Monetary Fund and with the International Bank for Reconstruction and Development and its affiliated agencies.

The 1996 agreements with the IMF and the World Bank (referred to chapter 1) epitomize this view.78 The IMF expertise is channeled to various areas of WTO activities and, crucially, for the purposes of this chapter, to issues relating to BoP and exchange restrictions.79 Coherence, however, was not best served in a world where the discussion to decide on exchange rates was subjected to little (if any) discipline, especially after the gold standard (the fixed exchange rates regime that was discussed previously) became a thing of the past. Indeed, where precisely should the line be drawn between devaluation to address actual concerns, and devaluation to gain a competitive export advantage? Very often, if a line exists at all, it is a line in the sand. All this leads directly into a discussion of currency manipulations. 2.3.5.2 Currency Manipulations In the commonplace scenario, a trading nation devalues its currency to gain an export advantage. Similar actions, of course, are not inconsequential, and hence they do not occur

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without some additional thinking. What if, for example, the nation at hand is also burdened with debt? Devaluation of its national currency will ipso facto lead to an increase in the overall amount that it owes to its creditors. Or, what if others follow? This issue did not create much acrimony in the GATT years. Indeed, beyond the US unilateral decision to undo the fixed parities system, not much has happened. The issue of exchange rates gained prominence during the “Great Recession” of 2007– 2008 with voices, essentially in the US, saying that China was engaging in currency manipulation, keeping its domestic currency (renminbi, RMB) artificially low and thus boosting its exports. So, what should the WTO do in similar cases? A very narrow reading of the WTO contract suggests that not much can be done. Voices have been heard in the literature, though, arguing for an active role for the WTO when competitive devaluations occur. Article XV of GATT has been invoked in this vein as one of the potential points of departure justifying WTO involvement. Mattoo and Subramanian (2009) have argued for the WTO to be given a role in addressing similar practices. A number of possible legal bases have been offered as potentially relevant to attack the Chinese practices. Article XV of GATT, because of its subject matter, is the obvious candidate. Assuming that the attitude of the Panels on India–Quantitative Restrictions, and Dominican Republic–Import and Sale of Cigarettes is followed (a rather safe assumption), panels would defer to the IMF, and hence, the WTO’s involvement would be minimal. The next section discusses the panel report on Dominican Republic– Import and Sale of Cigarettes in detail. Suffice to say for now that, for Mattoo and Subramanian’s views to hold, a change in the attitude of these panels is warranted. The same authors also argue in favor of treating currency manipulations as subsidies. This argument does not seem to hold since the legal definition of “subsidy” in the SCM Agreement does not reconcile with the facts here. For a subsidy to exist, a financial contribution by government must be paid to a specific recipient that could not obtain the benefit conferred under market conditions.80 Even if one extends the concept of “financial contribution” to cover similar instances, the specificity requirement, a condition that must also be met for a subsidy to exist, would be impossible to show since the benefit would not be conferred to a few, targeted recipients. All using the Chinese “undervalued” currency (e.g., traders, private citizens, currency speculators, etc.) would, in principle, profit from “currency manipulation.” Finally, an argument has been made in favor of WTO members raising a nonviolation complaint (NVC). In this case, however, as noted in chapter 1, plaintiffs would have a mountain to climb when arguing that they legitimately expected China to act against its own interests by raising the value of the RMB against other currencies; the Chinese policy (refusal to reevaluate) is exactly what a rational agent facing the same set of facts would be following. Staiger and Sykes (2010) conclude that there is some difficulty in identifying trade effects stemming from currency practices and, because of this factor, the role of WTO dispute settlement is (or should be) limited. They note that, with respect to arguments

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raised under Article XV of GATT, there is not much a panel could do in light of the high burden of proof (that the intent was “frustrated”) associated with this provision.81 This is a very fair conclusion to which one could add two further points. First, it would be quite awkward to entrust panels composed of trade delegates with the authority to decide on monetary issues. Deference to IMF is highly warranted as well because no expertise regarding similar issues is embedded in the WTO. Second, even the IMF itself, the body with expertise on such issues, has found it difficult to conclude whether currency manipulation has occurred, although it has been treating similar questions on hundreds of occasions. It should be noted that in this context, IMF has yet to decide that currency manipulation has occurred. Under the circumstances, it is hard to see what role the WTO could play in this context. There is probably an additional argument here. The whole idea of “global coherence,” of policies that would not meet the test of WTO consistency when they have failed that of IMF, would argue against an active role for WTO panels. IMF, in this framework, would take the lead in monetary issues, and WTO in trade.82 2.3.5.3 Dispute Settlement There is scant practice in this context. The panel, in its report on Dominican Republic– Import and Sale of Cigarettes, dealt with an exchange restriction imposed by the Dominican Republic.83 Essentially, the Dominican Republic had modified its original measure, which covered all transactions, but subsequently replaced it with a measure that covered only imports. Thus, it was discriminating against imports. In the panel’s view, this change was evidence that the Dominican Republic was not genuinely addressing the issue that, in name, it was purporting to address. However, to cement its opinion on this issue, the panel decided to consult with the IMF.84 In the panel’s view, if the IMF authorities held that the measures imposed by the Dominican Republic were in accordance with the IMF Articles of Agreement, these measures would ipso facto be deemed to be GATT-consistent as well (§ 7.139). This approach was the only one that, in the panel’s view, was consistent with a textual reading of Article XV.2 of GATT. So, the panel decided to request the IMF’s advice on whether the restriction applied by the Dominican Republic could be regarded as an exchange restriction in the sense of Article XV of GATT that had its approval. The IMF responded that the measure at hand was not a “multiple currency practice” (since it was only targeting imports and, as such, could not qualify as an exchange restriction in accordance with Article XV of GATT), and, hence, was no longer approved.85 Against this background, the panel concluded that the Dominican Republic could not justify its measures through recourse to Article XV.9 of GATT (§§ 7.143–7.145).86 This finding was not appealed. This panel, hence, was quite deferential to the IMF. Its attitude was at the antipodes of the approach followed by the Working Party discussing the 1971 US import surcharge.87

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2.3.5.4 Burden of Proof The panel on Dominican Republic–Import and Sale of Cigarettes held that the party invoking Article XV of GATT carries the burden of proof associated with this provision (§ 7.131). 2.3.6

Infant Industry Protection

2.3.6.1 The Rationale Article XVIII(c) of GATT allows developing countries that are WTO members to deviate from their obligations to protect their infant industries. Such practices were quite popular in the 1960s and 1970s, but recently developing countries have not made much use of this provision.88 This provision was negotiated during the 1955 Review Session of the GATT to provide developing countries with the necessary legal space to adopt import substitution policies. In theory, one could make the case in favor of protection during the early stages of development.89 The manner in which similar measures have been practiced, nevertheless, has quite often been counterproductive. Lucas (1988), for example, offers a skill acquisition model of endogenous growth and suggests that, by allowing countries to establish a comparative advantage in the production of high learning goods, the erection of trade barriers during the early stages of development may enhance their long-term growth. It is, of course, a totally different issue whether Lucas is followed in the practice of Article XXVIII(c). The test that economists apply in similar cases is called “Mills-Bastable.” It consists of two legs: the first leg is that, assuming existence of learning effects external to a firm, a firm should receive support if, in the medium run, it becomes viable so as to pay back received benefits (Mills). The second leg is that the firm should pay back the present cost of protection assuming discounted future benefits (Bastable). The GATT provision does not replicate this test. It does not even take a stance on the welfare implications of similar invocations. It leaves it to WTO members to make their calculation and decide whether to avail themselves of this possibility. All GATT does is explain the substantive and procedural requirements if recourse to this provision has been decided. In essence, the invoking state must show that the measure favoring a particular industry is meant to raise the general standard of living (a judgment that can hardly be brought into question by its trading partners) and has to respect notification requirements, as well as having an obligation to enter into consultations if the measure envisaged concerns a commodity that has to respect a bound tariff. 2.3.6.2 Dispute Settlement The Panel on India–Quantitative Restrictions made it clear that an invocation of Article XVIII(c) of GATT is justiciable. At the time of writing, the only such restriction in place is by Bangladesh.90

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2.3.6.3 Burden of Proof The previous discussion of BoP and exchange restrictions applies here as well. 2.3.7

General Exceptions (Article XX of GATT)

Assuming that a violation of Article XI of GATT has been established, the violating WTO member can seek justification by invoking one of the grounds mentioned in Article XX of GATT. This provision is discussed further in chapter 9. 2.3.8

National Security (Article XXI of GATT)

Assuming that a violation of Article XI of GATT has been established, the violating WTO member can seek justification by invoking one of the grounds mentioned in Article XXI of GATT. This provision is discussed further in chapter 9. 2.3.9

Safeguards (Article XIX of GATT)

WTO members can limit the amount of imports in their market (and thus legitimately have recourse to a QR), if they have complied with the various conditions included in Article XIX of GATT and the SG Agreement. This point is covered in chapter 4 of volume 2. 2.3.10

Can QRs Be Permissible in Order to Avoid Dumping?

The question arose in case law whether, in an effort to avoid dumping,91 they could legitimately impose a QR. The question, thus, was whether nonstatutory grounds (because this possibility is not provided for anywhere in GATT or the Annex 1A Agreements) could be advanced to justify the imposition of QRs. A GATT panel decided that this could not be the case. In Japan–Semiconductors, Japan was in violation of its GATT obligations because it had provided its economic operators with incentives not to dump. Japan had argued before the panel that, even if its actions were considered to be inconsistent with the discipline embedded in Article XI of GATT, it was still justified in acting in this way since it was aiming to dissuade Japanese economic operators from dumping. Dumping is a practice condemned by Article VI of GATT, as will be explored in more detail in chapter 2 of volume 2. It does not feature anywhere, though, , as an exception to Article XI of GATT. The panel was thus, led to discuss the relationship between Articles VI and XI. It held that Article VI did not address actions by exporting countries. It addressed only actions by importing countries, since it allowed them to impose antidumping duties in order to counteract dumping. It then went on to conclude that (§ 120) “Article VI did not provide a justification for measures restricting the exportation or sale for export of a product inconsistently with Article XI:1.”

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Consequently, one cannot justify an export QR in the name of an effort to avoid dumping practices. 2.4 Applying QRs Article XIII of GATT deals with the application of QRs. It essentially requests from WTO members to respect nondiscrimination when imposing QRs. This provision is silent on a couple of issues. First, it does not mention the period of time that a QR can remain in place. This must be a voluntary omission, though, since the length depends on the “distortion” that it aims to address. Ostensibly, the length of time that a QR can be imposed depends on the rationale behind it. For instance, a WTO member experiencing BoP problems for two years should logically have a QR in place for the same period of time. Conversely, safeguard action that takes the form of QRs can remain lawfully in place for a maximum of eight years, by virtue of Article 7.3 SG. Second, obligations regarding the administration of QRs should kick in only after the consistency of a QR with GATT has been established. For example, if a QR has been justified on BoP grounds, it also must comply, in principle, with Article XIII of GATT.92 In the opposite scenario (that is, if a QR has been judged GATT-inconsistent), recourse to Article XIII would have been superfluous. Article XIII.5 of GATT applies to TRQs as well, a point confirmed in the AB report on EC–Bananas III (§ 160).93 The EU had in place two TRQs, one applicable to bananas originating in the so-called ACP (African, Caribbean, and Pacific) countries94 and another applicable to bananas originating in the rest of the world. The tariff rate for the former was much lower than that for the latter, and, as a result, non-ACP producers had suffered an important trade loss. The EU also agreed during the Uruguay round to provide preferential treatment for bananas originating in countries that signed the so-called Framework Agreement with it (which the EU had attached in its schedule). The panel and the AB upheld the claim advanced by the complainants to the effect that the two-quota system ran afoul of the MFN requirement (§ 191 of the AB report). The AB went on to find that the EU regime was also in violation of Article XIII of GATT, without, however, establishing first that a violation of Article XI of GATT had also occurred. 2.4.1

Nondiscrimination, in Principle

Article XIII.1 of GATT reads: No prohibition or restriction shall be applied by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation of any product destined for the territory of any other contracting party, unless the importation of the like product of all third countries or the exportation of the like product to all third countries is similarly prohibited or restricted.

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So, in principle, legal QRs should not favor a particular source of supply. This was very much the negotiating rationale, to wit: “The basic rule laid down is the rule of non-discrimination. The rest of that Article is an attempt to define what is meant by non-discrimination.”95 The rest of the provision provides three different ways that could be used for this principle to be applied in practice: global quotas, import licensing without quotas, and historic quotas. It is debatable whether the last option (historic quotas) promotes nondiscrimination since it freezes existing market shares. 2.4.2

Nondiscrimination, in Practice

No matter which of the three options a WTO member chooses to adopt, it must be guided by the following principle, embedded in Article XIII.2 of GATT: “In applying import restrictions to any product, contracting parties shall aim at a distribution of trade in such product approaching as closely as possible the shares which the various contracting parties might be expected to obtain in the absence of such restrictions.” This provision reflects a “but for” test: what would the share of the import market look like but for the imposition of the quota? The three options, though, speculate on the counterfactual in different ways, as will be explained next. 2.4.2.1 Global Quotas Article XIII.2(a) of GATT reads: Wherever practicable, quotas representing the total amount of permitted imports (whether allocated among supplying countries or not) shall be fixed, and notice given of their amount in accordance with paragraph 3(b) of this Article.

The words in parentheses make it clear that there is no need to allocate the global quota established to particular sources of supply. According to the preparatory work: Imports could be distributed among traders by any system it chose, provided it did not require them to import from any particular source of supply: in other words, provided it was left to the trader to choose his source.96

2.4.2.2 Origin-Specific Quotas: Historical Shares Paragraphs (c) and (d) of Article XIII.2 of GATT read: Contracting parties shall not, except for purposes of operating quotas allocated in accordance with subparagraph (d) of this paragraph, require that import licences or permits be utilized for the importation of the product concerned from a particular country or source; In cases in which a quota is allocated among supplying countries the contracting party applying the restrictions may seek agreement with respect to the allocation of shares in the quota with all other contracting parties having a substantial interest in supplying the product concerned. In cases in which this method is not reasonably practicable, the contracting party concerned shall allot to

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contracting parties having a substantial interest in supplying the product shares based upon the proportions, supplied by such contracting parties during a previous representative period, of the total quantity or value of imports of the product, due account being taken of any special factors which may have affected or may be affecting the trade in the product. No conditions or formalities shall be imposed which would prevent any contracting party from utilizing fully the share of any such total quantity or value which has been allotted to it, subject to importation being made within any prescribed period to which the quota may relate.

Pursuant to Article XIII.2(d) of GATT, a WTO member lawfully imposing a QR is required to allocate quotas to various suppliers in a manner that respects their pre-QR market shares. A reference period (usually the previous three to five years)97 will be used as the benchmark for the calculation of market shares.98 Hence, it is not nondiscriminatory administration of quotas that is privileged through this provision; rather, it is respect for historical shares. This is, nevertheless, a rather discriminatory policy since new aggressive suppliers will not be put on an equal footing with old suppliers. It could be, for example, that new suppliers come from Home, whereas old suppliers originate in Foreign, and that Home is a more competitive producer than Foreign. Foreign, nevertheless, will be treated better than Home since its share in the export market will be preserved, whereas Home might find it impossible to penetrate the same market because of the advantage granted to Foreign. In similar situations, the constitutive elements of MFN violation will all be present. Article XIII.2(d) of GATT, by preserving historical shares, thus does not account for changes in supply and demand. Therefore, one cannot exclude alignment of incentives between some exporters and the WTO member imposing the QR either: exporters fearing a maverick would support QRs as a means of preserving (at least in the short run) their market share; the importing state would serve its purpose by facilitating agreement toward legalizing its QR in, say, the BoP Committee. In short, preserving historical shares is, in a very superficial manner, only an application of the principle of nondiscrimination. 2.4.2.3 Licenses/Permits without Quotas A third possibility is provided for in Article XIII.2(b) of GATT: “In cases in which quotas are not practicable, the restrictions may be applied by means of import licences or permits without a quota.” The negotiating record explains that importers must not be required to use the licenses they got for imports from any particular source. If licenses are issued, the importer must choose the source from which he will buy. There is the further proviso that full information will be provided as to the licenses granted over a past period. The purpose is to enable supplying countries to see what the distribution among supplying countries in fact was.99

Although not all of this was reflected in Article XIII of GATT, it still has some legal value, being part of the travaux préparatoires. Moreover, as will be explained in chapter 1 of volume 2, the spirit of this quoted passage was embedded in the ILA.

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Discriminatory QRs

Article XIV of GATT allows WTO members that have invoked either Article XII or Article XVIII of GATT to deviate from their obligations under Article XIII. The rationale for this provision is that a WTO member invoking the BoP provision may, by virtue of Article VIII of the IMF Articles of Agreement (which is explicitly mentioned in Article XIV.1 of GATT), be authorized to deviate from its obligations not to discriminate based on the origin of the goods that it will be restricting in its own market.100 The following two conditions must be met: first, the quota must have been imposed to address problems relating to BoP; and second, the discriminatory quota must affect a small part of its trade. 2.4.4

Import Licensing in the WTO Era

The ILA entered into force on 1 January 1995, and regulates import licensing. It is lex specialis to Article XIII of GATT and deals with the obligations imposed on WTO members wishing to have recourse to an import licensing scheme. This point will be discussed in detail in chapter 1 of volume 2. 2.5

Institutional Issues

2.5.1 The Committee on Market Access There is no committee established to deal exclusively with QRs. Consequently, it is the Committee on Market Access that deals with this issue (as well as with tariffs). 2.5.2 Transparency On 22 June 2012, the Council for Trade in Goods (CTG) adopted the “Decision on Notification Procedures for Quantitative Restrictions,” a revision of the previous decision on this score.101 There is nothing remarkable about this legal instrument, other than that it confirmed the prevailing view in academia that notifications are function of the incentives that trading nations have to be transparent.102 According to the decision, WTO members were required to notify the WTO of all QRs they had in place by 30 September 2012, and twice a year after that, as well as of all changes to QRs within six months from the date that a change occurred (§ 1). The notification is quite elaborate, since they must include a description of the QR and the products covered, the type of restriction,103 the tariff lines affected, the grounds for justifying the QR in place, and any additional comments deemed appropriate (§ 2). One might wonder what this decision adds to the legal arsenal, since all QRs are illegal anyway unless a justification has been advanced by the WTO member imposing it. The short answer is transparency. Footnote 3 to the decision states:

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The justification is provided for transparency purposes only and is therefore indicative. It shall not prejudice any legal position a Member may take on the particular measure that the justification is intended to cover.

So, notifications do not immunize notifying members from challenges. Moreover, notifying members can change the legal grounds for justifying their QRs. Under the circumstances, it should come as no surprise at all that only a handful of notifications have taken place, the possibility for “reverse notifications” notwithstanding (§ 1). Eighteen WTO members notified QRs in 2012,104 followed by a few more subsequently.105 2.6

Concluding Remarks

The GATT framers chose wisely when allowing for tariffs and eliminating QRs. Trade liberalization had to be undertaken progressively for various reasons, and the next chapter will return to the necessity for graduation. In this light, tariff concessions are easier to administer within a context of nondiscriminatory trade liberalization. The question, of course, is: How much has been eliminated, and how much has been left to negotiate? There is an inherent indeterminacy in the term “QR,” and unavoidably, absent legislative efforts to specify its meaning, the onus fell on the adjudicators to do so. It was more of a “hot potato” than a softball. Case law has understood the term in a liberal manner in two ways. First, it established that even actions by private persons might be judged GATT-inconsistent if a government had provided private agents with enough incentives to act this way. Second, it subsumed under this term both measures reflecting a numerical target, as well as other measures that de facto lead to a QR effect. Absent extension to de facto QRs, WTO members might have found it easy to circumvent the obligation embedded in Article XI of GATT, and thus defy the spirit of the law. This much is true, but that is not the end of the story. The problem with de facto QRs (“other measures,” in the terminology of Article XI.1 of GATT) is that a line needs to be drawn somewhere, or else we might be casting the net too wide. In equilibrium, all measures at least directly or potentially will affect trade flows. There is some legislative guidance to be sure, but a lot has been left for the interpreter to do. The standard of review that panels will adopt holds the key here: a relaxed standard might lead to type I errors (false positives), and panels will be sanctioning practices that they should not be bothered with in the first place. A very demanding standard might lead to the opposite result and provide disservice to the original intent to widen the coverage of the provision. This is still an open discussion in case law since panels have adopted hard to reconcile attitudes on this score. Think of Japan–Semiconductors for a moment. It is quite unclear, based on the available facts, whether Japanese producers would have behaved the way they did had they not been incited to do so by the Ministry for International Trade and Industry (MITI).106 For

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example, do we really know whether Japanese producers exported less of their produce because of a government scheme asking them to disclose their prices and avoid dumping? How do we know whether they had any incentive to dump when they were obviously more productive than their US competition (otherwise, why would the US have requested the Semiconductor Pact in the first place)? Yes, one could plausibly construct a hypothetical where this could have been the case, but is it enough? What probability can one attach that a similar scenario will occur? And why construct hypotheticals in the first place? Why not ask what happened in the case at hand? Argentina—Hides and Leather was, against this background, a step in the right direction. It established the dichotomy between quotas and “other measures” and paved the way to a more demanding test with respect to the latter category. The analogy with antitrust regulation seems well placed here. Quotas should amount to per se violations. Any numerical target should be considered GATT-inconsistent, and if the WTO member imposing it believes that it does so on legitimate public policy grounds, then it should seek to justify it by citing one of the mentioned exceptions. “Other measures,” on the other hand, should be adjudicated following the rule of reason. We share the idea that the evidentiary standard should be higher for them. Argentina–Hides and Leather went some way in this direction by requesting evidence from complainants challenging the consistency of de facto QRs with GATT beyond the potential for restrictive effect. The term “nexus” used, nevertheless, is rather uninformative. It is high time for panels to start spelling out what specific items they see reflecting the idea of “nexus.” In this endeavor, they will be well advised to drop the sterile “no-intent-cum-no-effects” test, which makes sense only with respect to per se violations (e.g., quotas). They should open the door to entertaining all available evidence that could cement a finding that an “other measure” has operated as a QR. Trade effects could be a powerful indicator in this endeavor, although often they are not dispositive in and of themselves. A government-sponsored diversion of a river, for example, could lead to better irrigation of lands and thus to fewer imports of farm goods. Yes, similar schemes do produce trade effects, and maybe some suffer more than others. But this type of knowledge is many times unknown to the regulator ex ante, and it would be quite far-fetched to label similar practices QRs. In the context of their analysis of “other measures,” panels will inevitably have to ask whether the measure was intended to operate as an import QR. This is a tall order because the party detaining private information here (i.e., the WTO member imposing the contested measure) is also the party with the least incentive to behave in a cooperative manner. It is a classic Prisoner’s Dilemma: tell the truth and go to jail; or lie and face a soft sanction, if any sanction at all. Chapter 7 will return to this discussion, detailing the various elements that could form a coherent test to show de facto violation of a GATT provision. The analysis there applies here as well.

3

Tariffs

3.1 The Legal Discipline and Its Rationale 3.1.1 The Legal Discipline The term “tariffs” (also referred to as “customs” or “import duties”) can be loosely defined as a monetary burden on imports. Following accession to the WTO, tariffs can be “bound”; that is, they have to respect a “tariff ceiling,” a level of tariffs that parties have agreed to observe following negotiations to this effect.1 Once “bound,” tariffs cannot be unilaterally increased any more. If they want to increase the bound level of duty, WTO members must be prepared to pay compensation. Tariffs can also remain unbound, either because negotiations were not held or because they proved unsuccessful; in this case, WTO members remain free to unilaterally set the level of tariffs. At any rate, no matter whether they have bound their tariffs or not, WTO members must observe, in principle, the most favored nation (MFN) obligation when imposing tariffs; that is, they cannot impose a different level of tariffs on “like” products originating in different WTO members. The next chapter will discuss the MFN obligation in more detail. For now, this discussion will focus on the binding of tariffs. Of course, WTO members can impose lower customs duties (than the established “ceiling”) anyway, as per Article II.1(b) of GATT. Although there is no obligation to bind all duties, as suggested previously, WTO members have done so, quite extensively. GATT was a tariff bargain with a supporting act after all, as shown in chapter 1.2 3.1.2 The Rationale for the Legal Discipline To understand the rationale behind the legal discipline on tariffs, it is quite appropriate to think of the counterfactual—that is, the world before the advent of GATT. In the pre-GATT years, in the absence of international commitments to this effect, trading nations were free to change their level of tariffs as they deemed appropriate. They were also free to

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distinguish the tariff treatment between sources of supply. The advent of GATT signaled the end of these two practices. The latter aspect (tariff discrimination) will be covered in the next chapter. For now, we focus on the rationale for agreeing on a “ceiling” for tariffs. The reason for introducing the “ceiling” on the level of tariffs has to do with the need for certainty regarding transaction costs. Tariff volatility could be (and indeed was) the consequence of unlimited freedom to set unilaterally the level of tariffs. International trade would suffer as a result since it would be impossible for traders to calculate the cost of import and export transactions, precisely because of the uncertainty surrounding the level of tariffs imposed. Producers would have to decide on their exports (and importers on their imports) in the face of uncertainty regarding the final price of goods in export and import markets. Uncertainty might in and of itself be an important dissuading factor, and rational agents, characterized by a reasonable amount of risk aversion, could very well decide not to engage in international trade at all and focus on their domestic market instead.3 By agreeing on a tariff ceiling, uncertainty regarding transaction costs would be dealt a fatal blow. Over the years, by lowering the agreed level of tariffs, trade would be incrementally liberalized. We stated earlier that not all tariffs on all goods traded were simultaneously bound. Initially, negotiators focused on tariffs of the important markets for the exported goods they cared most. Over the years, the sample of bound tariffs expanded substantially, and few tariffs remain unbound nowadays. Trade Profiles, an annual publication by the WTO, is an invaluable source for this type of information. For 2013, Brazil, China, the EU, and the US had 100 percent of their tariff lines bound; South Africa stood at 96 percent; India, at 74.4 percent; and only a few developing countries and LDCs exhibited low levels of binding (Cameroon, 13 percent; Chad, 13 percent; Congo, 16 percent; Benin, 39 percent.) It is also quite striking that the more recent the accession to the WTO, the higher the percentage of bindings.4 3.1.3

Discussion

3.1.3.1 The First Tariff Negotiations The first multilateral tariff negotiation took place in Geneva between the late spring and summer of 1947. The legal framework for the Geneva negotiations had been established at the London Conference. Article 24 of the London Draft dealt with the process of binding duties, but did more than that. It imposed an obligation on all states to negotiate tariff reductions, if requested to do so. If this obligation had not been observed (i.e., if a request to negotiate were refuted), requesting states could be authorized by the ITO to withhold the extension of MFN rights on tariff reductions negotiated with third partners. This is a remarkable provision, which was omitted from subsequent drafts. It obviously aimed at reducing the free rider problem. Trading nations could not stay idle, reduce their

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involvement to that of innocent bystanders, and still profit from tariff reductions that others agreed upon in the context of reciprocal negotiations.5 It was some sort of an early version of “conditional MFN.” There was a caveat, though. Countries with low tariffs could justifiably refuse to negotiate because their pre-negotiation level could not be regarded as a serious obstacle to international trade. What constituted a “low tariff” was not defined.6 It was left to the discretion of negotiators, and the (often elusive) common sense that hopefully would prevail. This provision was later dropped. Article VIII of the New York Draft7 kept some of the elements of Article 24 of the London Draft. It stopped short, though, of including an obligation to negotiate whenever a request to this effect had been tabled.8 Cordell Hull wanted to allow some countries (those that mattered less in international trade) to profit from tariff reductions without paying a price. In his view, discussed in chapter 1, this was the contribution of the “big guys”—the duty of leaders, indeed—to incite cooperation from everybody else. Cooperation could occur in trade, of course, as well as in other areas of international relations. Trading nations, though, did not stop worrying about the free rider problem. Hull won the battle as far as the first negotiation was concerned, but he did not win the war. In later years, the idea of a conditional MFN reentered the picture in a more relaxed form—admittedly, in the form of “critical mass agreements,” discussed in the following chapter. 3.1.3.2 The Economics of Tariffs Tariffs represent a tax on imports. They have a distributive impact, in the sense that some win (domestic producers of the competing good), and some lose (consumers, and industrial users of the input). At any rate, there will be deadweight losses, in the form of underconsumption. Tariff income will be directed to the National Treasury.9 Recall from our discussion in chapter 2 that the administrative costs of clearing goods through customs are low since tariff income will be on its way to the National Treasury every time a transaction is cleared at customs and the dutiable amount has been imposed. Conversely, in the case of import quotas, governments will make income only if they auction the right to import the scarce commodity. The auction, of course, is associated with its own transaction costs.10 3.1.3.3 The Rationale for Tariffs Tariffs are imposed for a variety of reasons. Governments might want to protect domestic producers. Olson (1965) stated the “collective action” problem, which producers are more successful than consumers in organizing representations of their interests, and lobby their government successfully to this effect. Protecting domestic producers does not exhaust governments’ decisions to impose tariffs, as they might, assuming they have the necessary bargaining power to this effect, want to affect the terms of trade. They might even want to punish foreign producers polluting the environment, or they might simply wish to raise income. And they might as well want to do so for a combination of the reasons mentioned

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so far, or for many other reasons. In short, governments might be willing to impose tariffs for a variety of reasons. GATT does not discuss at all the rationale for tariff imposition, even though the rationale might affect the negotiating strategy of trading nations. It simply requests that, regardless of the rationale for imposing tariffs, tariff commitments must be respected once they are entered into. 3.1.3.4 Tariff Ceilings and Rigid Tariffs It was stated earlier in this chapter that tariff commitments were meant to curb uncertainty with regard to transaction costs that would have persisted in their absence. Against this background, one might legitimately ask why have tariff ceilings, and why not have rigid tariff bindings? A ceiling is preferable to a rigid tariff binding because, while it serves curbing uncertainty, it also allows downward flexibility to preference shocks and permits efficiencyenhancing tariff reductions. Certainty is served anyway, since traders know the maximum tariff imposition anyway. Flexibility in trade relations is quite welcome since legal commitments entered represent preferences at a given time, but preferences might change before the legal framework does. And it is not simply a question of preferences. For example, governments might find it opportune to reduce their level in case their domestic industry does not need protection because of a technology shock that increased its productivity. Furthermore, Maggi and Rodriguez-Clare (2007) have explained why, due to political economy considerations, governments might have an incentive to opt for ceilings rather than for rigid tariff commitments. With rigid tariff commitments, lobbying effectively ends at the time of the agreement (since the agreement leaves no discretion for governments to choose tariffs in the future). With tariff ceilings, on the other hand, governments retain the option of setting tariffs below the maximum level,11 and thus they might invite lobbying (and the corresponding contributions) after the agreement has been signed. A threat to lower tariffs could persuade lobbies to contribute to the government in order to keep to the agreed level. 3.2

Expressing Goods in a Common Language

The process for binding duties entails a discussion regarding the forum where tariff promises will be made and exchanged, as well as an additional discussion regarding the ambit of the legal obligations assumed. To do all this, negotiators need to be clear as to what exactly they will be contracting (e.g., the identity of goods on which they will be promising to reserve a particular tariff treatment). The Harmonized System (HS) is the instrument to do this job. The HS is not the only available taxonomy for goods. The UN CPC (Central Product Classification) has a similar function, and was first enacted in 1990. The UN CPC in fact,

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unlike the HS, classifies not only goods but also services. In fact, Marchetti and Mavroidis (2011) explain that the W/120, the document used by WTO negotiators to schedule commitments under the GATS, was modeled after the UN CPC. Why then not use the CPC for both goods and services? Two are the important reasons why. First, as we explain infra, the trading nations had been using the predecessors to the current HS for many years before the enactment of the CPC. Switching to another classification regime is costly, a cost that WTO Members did not wish to incur. Second, whereas the CPC is elaborated by “bureaucrats,” this is not the case of the HS, an instrument to the preparation of which national customs authorities have substantial input. The HS could thus, more appropriately take care of the needs of traders around the world. 3.2.1 The Harmonized System 3.2.1.1 The Need for Common Language Goods can be expressed in various ways. Think of the following: the terms “shirt,” “textile product,” and “cotton shirt” could all describe the same item; and “shirt” itself could refer to ostensibly different goods, such as an elegant polyester shirt with a brand name or a very prosaic T-shirt. Add to this the fact that each of these terms can be translated into French, Spanish, Chinese, or Hindi, for example, and you have a Pandora’s box unlocked in front of you. The need for common language to describe traded goods is the consequence of the possibility to express the same item in different ways and the resulting insecurity regarding what precisely is being traded. However, a caveat is warranted at this point. One should not approach the concept of a “common language” as a panacea, since common language is not synonymous to “complete” contract. As will be described in some detail later in this chapter, common descriptions of traded goods still leave room for discretion regarding classification to the implementing domestic authorities. The creators of common language had to balance two competing interests: the level of detail needed to eliminate misunderstandings as much as possible and the need to subsume various products and their varieties under common descriptions. The former objective calls for specific language, whereas the latter requires generic. The level of detail matters, and the more detailed a description is, the more legal security regarding the parameters of the transaction will be served. If, nevertheless, descriptions become too detailed, then not only the lists become longer and longer, but included classifications become so specific, that they might be ill equipped to accommodate new products or varieties. Compromises are necessary, but not always fortunate. Ferrantino (2014) mentions this most appropriate example (p. 1): In 2003, the US Court of International Trade (CIT) ruled in a landmark case, Toy Biz vs. United States, that the X-Men, Marvel’s popular mutant superheroes, were not human. Or at least, action figures representing the X-Men, and imported from China, were not “Dolls representing only human

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beings and parts and accessories thereof” (HS 9502.10), but “Toys representing animals or other nonhuman creatures (for example, robots and monsters) and parts and accessories thereof” (HS 9503.49). It is pecuniary interests, of course, that largely explain the interest in the proper classification (and, thus, the incentive to litigate), and they might be served sometimes by precision, and other times by lack of precision. In this example, when acceding the US market, items falling under HS 9503.49 carry a duty of 6.8 percent, whereas items falling under HS 9502.10 have a duty of 12 percent—nearly twice as much.12

3.2.1.2 The History of Goods Classification The first attempt to provide a multilaterally agreed description of traded goods led to the Geneva Nomenclature (GN), which came into being on July 1, 1937. The GN was replaced in 1959 by the Brussels Convention on Nomenclature for the Classification of Goods in Customs Tariffs (BTN). The BTN was, in turn, replaced in 1974 by the Customs Cooperation Council (CCC) Nomenclature in 1974, which was eventually replaced by the WCO in 1988. The WCO is the successor institution that now supplies the common language for describing goods. It is an international organization with headquarters in Brussels, Belgium. The HS is a document prepared by the World Customs Organization (WCO).13 The WCO has 179 members. The HS Convention is used by more than 200 countries worldwide, and serves as the basis for defining goods for customs purposes. The WCO prepares and updates the HS Convention, which comprises about 5,000 commodity groups. The HS has been amended five times since 1988 (largely in order to account for changes in technology): 1992, 1996, 2002, 2007, and 2011 (the last of these entered into force in 2012).14 3.2.1.3 What Does the HS Do? The HS provides a classification for all traded goods, as well as a series of rules to help address conflicts regarding classification that might arise. The sum of classifications circumscribes of course the coverage of the GATT. The HS is administered by the HS Committee, which is composed of representatives from each HS contracting party, usually customs officers with substantial experience in classifying goods. The HS Committee decides on the classification of goods, on the introduction of new goods in the existing classification, or the deletion of goods that have fallen into desuetude.15 Descriptions of goods (“tariff lines”) are expressed in two, four, and six digits. The fewer the number of digits there is, the more generic the product category will be. Conversely, the greater the number of digits, the more specific the product category described therein will be. For example, at the two-digit level, one might find the term “vehicles,” whereas at the six-digit level, the term is “passenger cars of less than 2 tons.” Any given good is classified under the same tariff line (“heading”) across national jurisdictions. For example, bumpers come under the heading 8708.10, which reads “Bumpers and Parts Thereof” in the schedules of all WTO members. What might vary is the

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tariff treatment of bumpers: for instance, the United States (US) might impose a 2 percent import duty, whereas Pakistan might impose a 10 percent duty on bumpers. Not all WTO members have formally adhered to the HS, but all of them follow the HS classification, either because they are legally bound to do so (by virtue of their membership to the WCO), or de facto (by virtue of state practice). Assuming that a WTO member has made a concession at the four-digit level, it can only treat subclassifications more favorably. Here is an illustration from the US Tariff Schedule: chapter 87 of the HS is entitled “Vehicles Other than Railway Rolling-Stock, and Parts and Accessories Thereof.” HS 8708 is entitled “Parts and Accessories of the Motor Vehicles of Headings 8701 to 8705” (the categories corresponding to tractors, motor vehicles for the transport of ten or more persons, and motor cars principally designed for the transport of persons). HS 8708.10 reads “Bumpers and Parts thereof.” HS 8708.10.60 reads “Bumpers” (i.e., stampings).16 The US bound its tariffs in chapter 87 at the eight-digit level at 2.7 percent. This means that, if it enters a new subcategory (of 8708.10.60) at the 10- or 12-digit level, it will be able to impose a maximum duty of 2.7 percent. A similar outcome would result had the US committed to observe a 2.7 percent ceiling at the four-digit level—that is, for the entry 8708. Any subclassification of this entry (i.e., 8708.01, 8708.02, or 8708.01.01) would have to observe this 2.7 percent ceiling. Headings often include more than one product. HS 5702.10 for example includes carpets and floor coverings, and specifically mentions “kelem” and “schumacks” in its list of covered products. If Home makes a binding with respect to all goods mentioned, it will be making a “full binding,” and if it enters a binding only with respect to “kelem,” it will be making a “partial binding.” Two instruments complement the HS Convention: the Harmonized System Explanatory Notes (HSEN), and the General Interpretative Rules (GIR). These two instruments help decide on the proper classification of goods. HSEN constitute the official interpretation of the HS, and typically clarify the scope of tariff headings and—subheadings. Conflicts regarding their scope, though, might still arise in case for example, a good could come under two distinct headings. GIRs, a legal instrument akin to “conflict rules,” help decide what the scope should the explanation offered by the HSEN not suffice. There are six GIRs, and each one of them addresses a different situation. GIR 3(a) stipulates, for example, that the heading, which provides that the most specific description shall be preferred to headings providing a more general description, whereas GIR 4 deals with cases where recourse to GIRs 1–3 cannot help resolve the problem posed, and states that: “Goods which cannot be classified in accordance with the above Rules shall be classified under the heading appropriate to the goods to which they are most akin.”17 It is hoped that recourse to HSEN and GIR would reduce the size of interpretative issues that might arise, but this is not necessarily always the case. There is a Plan B

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embedded in the HS Convention, in case recourse to the GIRs has been fruitless. Since disputes regarding the proper classification might still arise, for whatever reason, the HS Convention allows dispute resolution. This instrument will be discussed later in this chapter. We stated earlier that the HS de facto circumscribes the coverage of the GATT as well, since it reflects all goods for which tariff concessions can be exchanged. The GATT does not contain a provision on its coverage. From day one it was assumed that tariff concessions would take place using the predecessor of HS as the background for goods’ descriptions. This was all there was. The NAMA (non-agricultural market access) negotiation of the Doha round, conversely, contains explicit reference to the effect that the coverage of the negotiations extended to HS chapters 25–97 except for specific entries that concern farm goods.18 What about non-NAMA goods? The Agreement on Agriculture that we discuss in chapter 8 of volume 2 contains an explicit provision regarding its coverage. Still, issues regarding the coverage of the GATT have arisen in practice because of the so-called optional headings in HS, and because of the uncertainty regarding the line of demarcation between GATT and GATS. We take each issue in turn. No goods are ex ante excluded from the scope of the GATT. Even electricity is considered a good and there is a specific entry in the classification regime of the “Harmonized System,” namely 2716.00. The HS explicitly labels this code as “optional heading.” In fact, HS2716 is the only “optional heading” there is. WTO Members wishing to exchange concessions on electricity do not have to use this heading, its long presence in the HSsystem notwithstanding (it corresponds to heading 27.17 of the CCC nomenclature); they can use a different description for electricity. In fact, Australia, New Zealand, and Maldives decided not to include this heading in their schedule. Some WTO Members, on the other hand, have taken tariff commitments under this heading. The CTS (Consolidated Tariff Schedules) database shows 80 schedules with commitments on electrical energy (counting the EU-28 as one). The WTO operates two databases concerning tariffs: the IDB (Integrated Database), and the CTS. Whereas the IDB contains data regarding imports, and “applied rates,” and CTS reflects data regarding ‘bound’ level of duties. It is not the case nonetheless, that all 80 schedules contain “specific” commitments on 2716. Many of them include generic “ceiling bindings” on all products, that is, a maximum level of duty on all goods (included those reflected in the “optional heading”). The remaining Members did not include the “optional heading” in their schedules. The question has arisen of late about whether energy products like electricity should evade—as far as Members unwilling to transpose heading 27.16 in their schedules are concerned—not only the scope of tariff concessions, but the scope of GATT altogether. A detour in the Uruguay round negotiations is necessary in order to shed light on this point. The question whether energy goods are covered by the GATT was raised during the Uruguay round within the Negotiating Group on Nature Resource-Based Products (NRBP).

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This group picked up the mandate of the 1982 “Working Group on Trade in Natural Recourse Products,” which focused on trade in non-ferrous metals and minerals, forestry products, and fish and fisheries products. The question arose early on in the negotiating process whether the coverage would stay the same or whether electricity and more generally energy products would also be covered.19 The Nordics, the EU, the US, and Australia all tabled proposals in favor of inclusion of energy products.20 Developing countries were between skeptical to hostile to the idea of extending the coverage of this group.21 Various GATT Secretariat document reflect that there was disagreement between the members of the negotiating group on this score.22 Participants in the Uruguay round were thus, left free to decide whether they would enter commitments on similar goods (using the HS “optional heading” to this effect) or not, without addressing the overarching issue regarding the coverage of the GATT. The issue reemerged in the context of the negotiation on Trade Facilitation, where the EU on the one hand (WTO Docs. G/C/W/422, TN/TF/W/79), and Egypt and Turkey on the other (WTO Doc. TN/TF/W/179) presented opposite views as to the coverage of electricity by the GATT. The same issue occupied the Panel on Canada—Renewable Energy, where electricity was treated as good only because the parties to this dispute agreed this to be the case (footnote 46). This Panel did not provide a definitive finding on the coverage of the GATT on this issue. In our view, the GATT covers all products mentioned in the HS, including those referred to in the “optional heading.” The latter should be understood as “suggested” classification and nothing beyond that. In other words, WTO Members should be free to classify energy goods in any other way they deem appropriate, but by not accepting the “optional heading” they are not ipso facto escaping their obligations with respect to energy products under Articles I, III, V GATT, etc. The “option” in other words, concerns the classification suggested by the HS, and it is not carte blanche to decide on the coverage of electricity. Electricity comes under the purview of GATT, and WTO Members retain discretion as to the classification they want to use in order to exchange concessions (as they have done in the past). Energy is regulated under the GATS as well. The GATS-equivalent to the HS is the document “W/120” prepared by the WTO Secretariat (WTO Documents MTN. GNS/W/120), which was based on a UN CPC that we discussed earlier. Neither W/120, nor the CPC contain a separate section for energy services, but include a reference to “services incidental to energy distribution” under the heading “business services.” It is clear, nevertheless, that under GATS commitments will be made regarding services relating to energy goods, and not the goods as such.23 In this vein, the production of electricity is not a service. But the distribution, transport, trading and other related services are. For WTO law purposes what matters is whether a commitment has been entered under GATT or GATS. The line between commitments in goods and in services is often a line in the sand, and we will revert to this issue in chapter 7 of this volume, where we explain why commitments under the GATS should be given precedence.

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3.2.1.4 How Common Is Common Language? The “optional heading” is not the only reason for discrepancies across schedules regarding the factual description of goods. From the six-digit level onward, WTO members retain some discretion in describing goods. Article 3.3 of HS reads: Nothing in this Article shall prevent a Contracting Party from establishing, in its Customs tariff or statistical nomenclatures, subdivisions classifying goods beyond the level of the Harmonized System, provided that any such subdivision is added and coded at a level beyond that of the six-digit numerical code set out in the Annex to this Convention.

Descriptions of 8 digits and above are national classifications. There is no guarantee that they are lawful, and thus they can be challenged before the WTO for not observing Article 3.3 of HS.24 The argument could be, for example, that two subdivisions reserve different tariff treatment to two “like products.” The only guidance so far on this issue is provided by the GATT panel report on Japan–SPF Dimension Lumber. Japan was imposing a 0 percent duty on some lumber, and 8 percent on spruce, pine, and fir (SPF) lumber. Canada was producing more of the latter, and it argued that the two goods were like, and, consequently, that Japan had violated its obligations under Article I of GATT. Japan’s tariff treatment was on “national” classifications (e.g., beyond the six-digit level). The panel started its analysis by acknowledging that the HS structure was intentional, and it had been designed the way it was in order to leave room for further specifications (§ 5.8). It recognized that the lack of absolute uniformity carried the inherent risk of abuse, but it insisted that this had to be accepted, and so the panel’s role would be to ensure that the risk would not be material (§ 5.9). To this effect, it devised a test that would allow it to distinguish wheat from chaff: it would counterbalance the interest for internal protection (Japan), against the impact that the measure had on imports (Canada) (§5.10). When applying the test in the case before it, it held that Canada’s claim could not succeed since it had not established that the goods were like. Canada had insisted that the two types of lumber qualified as “dimension” lumber. Japan, nevertheless, had not even used this term in its classification. Canada was exporting its own classification and denomination and, for this reason, was not sufficiently taking into account the Japanese interest in internal protection (§§ 5.15ff.). This case law is not much help, alas. The problem is that the interest for internal protection can be presumed to exist—otherwise, why establish the subdivision in the first place? Some will be positively affected by the subdivision, and others will be negatively affected, that much is certain. We know nothing, though, about the single most important feature of this test (namely, the balancing exercise). The panel stopped its analysis where it should have started it, and, as a result, we remain in the dark as to what the balancing test entails. Some trading nations [the US and the European Union (EU) among them] routinely schedule their commitments at the eight-and-above digit level. To decide whether similar classifications are lawful, Panels would have to first decide whether “like goods” are treated in unlike manner. We will return to this discussion in the next chapter.

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3.2.1.5 Dispute Settlement Regarding Classification Disputes regarding tariff classification can of course, be resolved before the GATT/WTO.25 They can also be resolved before the HS Committee. There is no “hierarchy,” there is no sequence between the two adjudicating fora. In principle thus, “forum shopping” cannot be excluded. This possibility, nevertheless, is not realistic, for the reasons explained in what immediately follows. Article 10 of HS reflects the dispute settlement provisions available to its signatories. All disputes will be submitted to the HS Committee, which will make recommendations to the parties. This is not necessarily the end of the story, though, since the losers might just ignore the ruling. The WCO does not include a mechanism to enforce its rulings. Moreover, nothing will stop parties to a dispute before the WCO from raising the same dispute before the WTO. Of interest to this volume is the question of what happens if a dispute about tariff classification becomes a WTO dispute. This raises the question of whether WTO panels should (or must) observe prior rulings by the HS Committee, if of course a ruling to this effect exists.26 The legal status of the HS in WTO law is not addressed in the Agreement Establishing the WTO (WTO Agreement) but has been clarified in case law. The panel on EC–Chicken Cuts dealt with this issue. The facts of this case are as follows. Brazil exported salted meat to the EU market. The EU had entered a commitment whereby a higher tariff level was imposed on meat, and a lower tariff level on salted meat. Brazil claimed that it did not profit from the lower level of tariff, the fact that it had been exporting salted meat to the EU notwithstanding. Its claim was that it was paying the higher duty reserved for meat when it should be paying the lower duty applicable to salted meat. The EU justified its refusal to apply the lower duty to Brazilian exports of meat, arguing that meat, if not salted for preservation purposes, could not benefit from the lower tariff since that tariff line (e.g., “salted meat”) was intended to cover meat salted for preservation purposes only. This was not the case with Brazil’s exports, which in the EU view was meat sprinkled with salt, but the quantity of salt would not suffice in order to preserve the meat exported. The panel rejected the arguments advanced by the EU and agreed with Brazil.27 In its view, nothing in the HS description conditioned the classification of salted meat under 02.10 (the relevant HS tariff heading) on the purpose of salting. As a result, any salted meat, regardless whether it was salted for preservation purposes or otherwise, should come under this heading. In doing that, it went through all interpretative elements of the Vienna Convention on the Law of Treaties (VCLT) system, paying particular attention to the HS system since it considered it to be the context of the negotiation. It saw nothing in the HS tariff heading linking salting meat to an attempt to preserve it. There is even evidence in the report that the panel corresponded with the HS Committee to this effect. At the end of the day, how-

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ever, it decided the issue based on its own evaluation of the facts (§§ 7.104ff). The Appellate Body (AB) upheld the panel’s findings in this respect (§§ 199ff).28 The AB stated clearly in its report that the HS Convention provided legal context to the Agreement Establishing the WTO (and more specifically, to the schedules of concessions29 submitted by WTO members), in the VCLT sense of the term (Article 31.2). As a result, panels have no discretion—they must always take it into account when the issue of interpretation of a particular concession arises. WTO panels should thus be looking at the HS Convention, the HSEN, and the GIR before deciding tariff classification issues. The AB report left unclear one important angle, however: what about the HS “secondary law” (e.g., the decisions of the HS Committee)? In the absence of any guidance to this effect, it is left to panels to decide this issue. The panel on EC–Chicken Cuts cooperated with the HS organs but reserved the final decision of the dispute before it to its own judgment. It did not feel compelled to defer to similar decisions. From a pure legal perspective, this seems to be the correct approach. It is doubtful, nevertheless, whether this is a sound approach. The HS Committee, in light of its institutional mandate, is probably better placed to decide on classification issues. At any rate, in the interest of easing transaction costs, it would be probably useful for the WTO to enter into a more detailed contractual arrangement with the WCO, inspired by its practice with the WB and the IMF. This panel did not have to decide whether, for WCO members, there is an obligation to first attempt to solve their differences using the WCO adjudication procedures before having recourse to the WTO. From a WTO law perspective, a negative response seems warranted. WTO law (Article 1 of the DSU) does not contain any clause akin to “exhaustion of local remedies.” To the extent that a dispute comes under the ambit of Article 1 of the DSU, the establishment of a WTO panel can legitimately be requested. EC–Computer Equipment concerned a similar disagreement between the EU and the US—namely, the proper classification of certain computer equipment that the US had been exporting to the EU market. The particular commodity [local area network (LAN) equipment] could, conceivably, come under two different HS classifications. In light of the difference in the tariff level, the US had a strong trade interest in seeing that it classified under the heading with the lower import duty.30 To make matters even more complicated, there were divergent practices with respect to the classification of LAN equipment even among individual EU member states. The panel was asked, among other things, to decide whether the legitimate expectations of the WTO member that had negotiated the concession (the US) mattered for the classification of the good. The panel agreed with the US, finding that in the case of ambiguity, legitimate expectations mattered. The AB rejected the panel’s interpretation. In its view, if expectations were relevant at all, it should be the legitimate expectations of the WTO membership, not of one individual member (§§ 80–96). In its words (§ 84):

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The purpose of treaty interpretation under Article 31 of the Vienna Convention is to ascertain the common intention of the parties. These common intentions cannot be ascertained on the basis of the subjective and unilaterally determined “expectations” of one of the parties to a treaty. Tariff concessions provided for in a member’s Schedule—the interpretation of which is at issue here—are reciprocal and result from a mutually advantageous negotiation between importing and exporting members. A Schedule is made an integral part of the GATT 1994 by Article II:7 of the GATT 1994. Therefore, the concessions provided for in that Schedule are part of the terms of treaty. As such, the only rules which may be applied in interpreting the meaning of a concession are the general rules of treaty interpretation set out in the Vienna Convention. (italics and emphasis in the original)31

This passage is a bit cryptic,32 but it seems to provide even more support for the proposition that HS should be the legal context for schedules of concessions. After all, it is there, in the premises of the WCO, that the common approach regarding the proper classification of any given good will be established. 3.3 The Types of Duties Bound People colloquially refer to “duties,” “customs duties,” “tariffs,” “import tariffs,” and “charges” as if they all mean one and the same thing. Indeed, some of the terms are interchangeable, but some are not. In what follows, we aim to analyze what exactly is being bound for the purposes of customs clearance. In the classic scenario, duties will be bound following reciprocal negotiations, where trading nations give a tariff promise in exchange for a tariff promise they receive. Reciprocity holds the key in the process of binding duties, and it is only natural for any discussion to start there. 3.3.1

Reciprocity

Tariff (and nontariff) concessions can, of course, and do on occasion, take place unilaterally. This possibility will be explored later in this chapter. Typically, however, they are based on reciprocal commitments that take place in the context of the so-called “trade rounds.” Why reciprocity though? Recall that classical trade theory (reviewed in chapter 1) holds that unilateral trade liberalization is advantageous. Viewed from this angle, why bother about reciprocity? We saw in chapter 1, when referring to optimal tariff, that countries representing a sizeable amount of the overall demand for a commodity can profit by imposing a tariff that will force exporters of commodity to reduce the price. Terms of trade theorists base their work on examples where countries that can affect terms of trade of different commodities can profit through reciprocal reductions of tariffs. But even outside this framework, Home will simply profit more if Foreign also reduces its tariffs, since, in this scenario, it will benefit both in the import and export size as well.33 Recall from chapter 1 that negotiations on tariff liberalization generally been based on reciprocal commitments, especially during the first years of the GATT era. Eric Wyndham-

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White, ex–director general (DG) of GATT, captured “reciprocity” in the following terms, when speaking during the Torquay round: ... a number of European countries with a comparatively low level of tariff rates considered that they had entered the Torquay negotiations at a disadvantage. Having bound many of their rates of duty in 1947 and 1949, what could these low tariff countries offer at Torquay in order to obtain further concessions from the countries with higher level of tariffs?34

Reciprocity in tariff negotiations (and nontariff negotiations as well) is first-difference reciprocity. The value of commitments will be appreciated against the background of the pre-existing situation. Home for example, imposes a 25 percent duty on widgets, and Foreign 20 percent on the same good, and they agree to reduce their levels by 50 percent each. In contrast, full reciprocity would require that Home and Foreign impose identical tariff levels on widgets, say 10 percent. GATT/WTO negotiations are about first-difference, and not about full reciprocity.35 Reciprocity is often referred to as a GATT legal principle. The term “reciprocal” is mentioned twice in connection with tariff reductions, the first time in the GATT Preamble, and the second time in Article XXVIIIbis of GATT. We quote: Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs … The contracting parties recognize that customs duties often constitute serious obstacles to trade; thus negotiations on a reciprocal and mutually advantageous basis, directed to the substantial reduction of the general level of tariffs and other charges on imports and exports and in particular to the reduction of such high tariffs as discourage the importation even of minimum quantities, and conducted with due regard to the objectives of this Agreement and the varying needs of individual contracting parties, are of great importance to the expansion of international trade.

Both times, thus, it is a mention of hortatory nature, and not of a binding legal obligation. The term “reciprocal” is also mentioned in Article XXVIII of GATT, which deals with renegotiation of tariffs as we shall see later in this chapter: “… the contracting parties concerned shall endeavour to maintain a general level of reciprocal and mutually advantageous concessions.” And then, there are numerous references throughout GATT and the various Annex 1A Agreements to terms like “substantially equivalent concessions” that reflect the concept of “reciprocity.” Most notably, Article 22.4 DSU states that (multilaterally authorized) retaliation against violations of the covered agreements shall be limited to withdrawal of “substantially equivalent concessions,” aiming thus to preserve reciprocity when recalcitrant WTO members are punished. The WTO is a “multilateral contract” though, and not a series of bilateral relationships. In the name of reciprocity, for example, WTO members are not free to disrespect their obligations, simply because one of their partners has failed to do so. Foreign cannot argue that it does not have to observe the WTO contract because Home has failed to do so: if

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Home violates the contract, Foreign cannot, by invoking “non adimplenti contractus” (reciprocity), stop honoring its own commitments. At most, Foreign can challenge Home’s practices before the WTO adjudicating bodies, and Home will, if found guilty, have to implement the rulings. In the meantime, Foreign will have to continue observing the contract. Only if Home refuses to implement the multilateral rulings can Foreign request authorization to stop honoring its own commitments, on a transitional basis, until Home starts respecting the contract once again. Reciprocity is, of course, the negotiating principle adopted during negotiations aiming to consolidate the level of tariffs. In a request-offer, for example, unless both parties are happy with the offer (counteroffer) they have received, they will not leave the negotiating table, or they will leave it empty-handed.36 Reciprocity is very much present in the context of the other negotiating techniques used in reducing tariff protection mentioned later in this chapter, although it might, on occasion, be more complicated to calculate the value of concessions received in a nonbilateral context. Indeed, even when it comes to measuring the impact of tariff concessions that Home and Foreign will operate in two goods, equivalence of concessions is hard to establish. It suffices that offer and counteroffer seem “equivalent” in the eyes of the negotiators. For the rest, time in and of itself will swing the bargain one way or the other. These are forwardlooking endeavors, and even if one could demonstrate that a 5 percent reduction of Home’s duties on widgets today equals a 2 percent of Foreign’s duties on wheat, no one can demonstrate with certainty that this will be the case tomorrow. There are, of course, mechanisms (like Article XXVIII of GATT, which will be discussed later in this chapter) that aim to reestablish the balance of rights and obligations when it has been altered. Keohane (1986) distinguishes between two elements in reciprocity: contingency and equivalence. Contingency means that action by Home will be contingent on action by Foreign. Contingency, nevertheless, is not enough. Why would Home accept to reduce its tariffs drastically (and, thus, eviscerate its power to affect terms of trade, remove an instrument of protection for its domestic industry, or both), unless Foreign does (at least) the same? This is where equivalence kicks in. Home will do this if Foreign does the same, even with the caveat regarding the measurement of offer and counteroffer mentioned previously.37 Keohane (1986) further distinguishes between “specific” and “diffuse reciprocity.” Specific reciprocity is best suited to bilateral agreements where the exchange of equivalent treatments can be better measured. Diffuse reciprocity is better suited to multilateral agreements, like GATT and the WTO. Various trading nations participate, and one country’s tariff reductions affect (positively or negatively) nations other than the one that negotiated the tariff reduction. Hence, the inclusion of disciplines, like MFN and National Treatment, which we discuss in chapters 4 and 7 in this volume, and which reflect general standards of behavior. The innate characteristics of both MFN, and National Treatment are hard to reconcile with “specific reciprocity,” and quite akin to “diffuse reciprocity.”

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All this to return to the point made earlier in this chapter: namely, it is difficult to measure equivalence when it comes to evaluating trade concessions. This is why Keohane has rightly insisted that diffuse reciprocity better suits the GATT setting. The former DG of GATT himself, Arthur Dunkel, put it very eloquently, when stating: “Reciprocity cannot be determined exactly, it can only be agreed upon.”38 In a similar vein, one GATT document says: No rules were laid down regarding the measurement of reciprocity other than those already contained in Article XXVIII bis, and the traditional view of the GATT on this matter (that “governments participating in negotiations should retain complete freedom to adopt any method they might feel most appropriate for estimating the value of duty reductions and bindings”) was reaffirmed.39

This is true for tariff concessions, and a fortiori true for concessions on regulatory barriers, hence the insistence on general standards of behavior when contracting in this area. Wherever the line of reciprocity has been drawn, it constitutes the point of departure from which compensation will be calculated in case the original contract is renegotiated. This question will be considered later in this chapter. 3.3.2

OCDs and ODCs: Different Yes, but How?

Article II of GATT explains that it is the level of “ordinary customs duties” (OCD) and “other duties and charges” (ODC) that will be “bound.” Neither of the two terms is detailed any further in the body of Article II of GATT. The wording of Article II of GATT, however, suggests that a dividing line must be drawn between the two terms since different obligations were assumed with respect to each one of them, at least initially. The relevant part of Article II.1(b) of GATT reads: The products described in Part I of the Schedule relating to any contracting party, which are the products of territories of other contracting parties, shall, on their importation into the territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein. Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with the importation in excess of those imposed on the date of this Agreement or those directly and mandatorily required to be imposed thereafter by legislation in force in the importing territory on that date.

3.3.3 What Is an Ordinary Customs Duty? Surprisingly, there is no statutory definition of the term “ordinary customs duty” (ODC), although as we have stated a number of times so far in this volume, the main purpose of GATT was the “binding” of customs duties. It is imaginative impositions of customs duties that brought the question of definition of OCDs before GATT/WTO panels. The Panel on Chile—Price Band System first, and the AB later, dealt with this issue in considerable detail. The thrust of the analysis in the two reports is that a measure cannot simultaneously

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be both an OCD and an ODC. The issue before the WTO adjudicating bodies was the consistency of the notorious price band system (PBS) that Chile practiced with the WTO rules. In § 7.39 of its report, the panel explained the function of PBS in the following terms: When a product covered by the Chilean PBS arrives at the border for importation into Chile, Chilean customs authorities will determine whether the total amount of applicable duties declared by the importer corresponds to the amount due under Chilean legislation, and, if necessary, revise the amount accordingly. In application of the Chilean PBS, they will levy an 8 per cent ad valorem duty, plus an “additional specific duty” if an administratively determined lowest offer price from a selected foreign market (hereinafter referred to as “the Reference Price”) falls below the lower threshold of the PBS. They will apply only the 8 per cent ad valorem duty if the same Reference Price is between the lower and upper thresholds of the PBS. They will grant a “rebate” on the 8 per cent ad valorem duty if the Reference Price is above upper threshold of the PBS. The PBS is determined annually on the basis of f.o.b. prices observed on a particular international market over the course of the preceding 60 months, which are adjusted in accordance with a Central Bank of Chile index, and listed in descending order. The lower and upper thresholds of the PBS are obtained by discarding 25 per cent at the bottom and at the top of that list and adding “usual import costs” to the prices. The lowest and highest prices which are obtained after these operations constitute the lower and upper thresholds of the PBS. The specific duties and rebates corresponding to different f.o.b. prices are published in the Official Journal of Chile. The Reference Price is determined weekly, every Friday, using the lowest f.o.b. price for the covered products on foreign “markets of concern to Chile.” Unlike the prices used for the composition of the PBS, it is not subject to adjustment for “usual import costs.” The applicable Reference Price for a particular shipment is determined in reference to the date of the bill of lading. The Reference Price is not published, but can be consulted by the public at the offices of the Chilean customs authorities. As indicated, if the Reference Price falls below the lower threshold of the PBS, an “additional specific duty” will be levied in addition to the 8 per cent ad valorem applied rate. We will term this additional duty the PBS duty. The PBS duty will equal the difference between the Reference Price applicable on the date of the bill of lading and the lower threshold of the PBS.

As a result (§ 7.41): “Thus, the Chilean PBS operates to insulate the Chilean market from world market prices.”40 Argentina had complained that, when applying this system, Chile sometimes imposed duties in excess of the bound level. One of the questions was whether the Chilean system qualified as an OCD in the first place. The panel41 defined OCDs as duties that, as an “empirical” matter, take the form of ad valorem, specific duties, etc., and as a “normative” matter, they relate to the value of the imported good but are levied without regard to exogenous factors; e.g., market prices (§7.52). The AB disagreed with this definition, arguing that many applied duties take into account exogenous factors such as the needs of producers and consumers. In the AB’s view, all that is required for a measure to constitute an OCD is that it is expressed in a particular form. The AB thus endorsed only the empirical element in the panel’s analysis (§§ 264–278).

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Since the empirical element is what matters when qualifying a measure as an OCD, we need to look at the practice regarding forms of duties. Schedules of concessions reveal that (except for tariff quotas, as already discussed in chapter 2) WTO members practice the following forms of duties: 1. Ad valorem 2. Specific 3. Compound 4. Alternative (or mixed) 5. Technical duties An ad valorem duty is a percentage of the value of the imported product (e.g., 15 percent of a fax machine, the import price of which is $400). A specific duty is related to the weight, volume, surface, and other aspects of the good at hand (e.g., $20 per ton of imported wheat). A compound duty comprises an ad valorem duty to which the customs authority adds or from which it subtracts a specific duty (e.g., 10 percent on the import price of wheat plus $2 per imported kilogram of wheat). An alternative or mixed duty ensures a minimum or maximum tariff protection through the choice between say an ad valorem and a specific duty (e.g., 10 percent on the import price of wheat, or $2 per imported ton, whichever is the greater). Finally, particularly where agricultural products are concerned, a technical duty is determined by complex technical factors such as alcohol or sugar content. 3.3.4 What Is an Other Duty or Charge? In the absence of a legislative definition, the GATT Secretariat was requested to produce a document,42 which provided the first step toward a definition. The Secretariat document suggested elements that should be used in order to define ODCs. The Secretariat document used state practice regarding ODCs as inspiration for the criteria proposed. It focused on elements around which a consensus had been built through state practice, namely: 1. ODCs should be applicable only to imports. 2. The applicable date concerning the binding of an ODC. 3. The legal effect of inscribing an ODC in a schedule of concessions. Most of these points found their way into the Understanding on the Interpretation of Article II.1(b) of GATT, concluded during the Uruguay round. The travaux préparatoires of the Understanding reveal that it was agreed that it would have been a daunting task to attempt to draw up an exhaustive list of ODCs, a point that the panel, in its report on Dominican Republic–Import and Sale of Cigarettes, first observed and then fully endorsed (§ 7.114).

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The Understanding, thus, provides that: 1. ODCs have to be recorded in schedules of concessions; otherwise, they are ipso facto GATT-inconsistent. 2. Since ODCs are linked to customs duties, and since only bound customs duties appear in a schedule, in practice, ODCs applicable to unbound duties do not have to be included in schedules of concessions.43 Nevertheless, ODCs do not become GATT-consistent by the mere virtue of inclusion in a schedule of concession. WTO members were entitled, for a period of three years after the entry into force of the WTO Agreement, to challenge the consistency of ODCs reflected in a schedule of concessions with GATT, either because an ODC did not exist at the time of the original binding of the item in question or because it exceeded its prior level ((§ 4). WTO members can still challenge ODCs after the established three year-deadline on grounds other than those mentioned previously, and argue that they are GATTinconsistent (§5). Nowadays, ODCs are being negotiated just like OCDs and, in practice, they are usually expressed in ad valorem terms.44 As is the case with OCDs, ODCs have to respect the negotiated ceiling. 3.3.5 Terms, Conditions, and Qualifications Recall that, as per Article II of GATT, imported goods will not be burdened with duties higher than those reflected in the schedule of concessions, subject to “terms, conditions, and qualifications” specified therein. There is nothing like statutory definitions of the terms. They referred to the level of duties agreed, as well as various clauses that would have been added. Since schedules of concession contained few clauses other than the level of duties agreed, little attention was paid for years to these terms. It was made clear, though, early on, that they could not be offered to justify the violation of WTO obligations. The GATT Panel on US—Sugar reviewed the preparatory work of Article II of GATT, holding that (§ 5.6): “Schedule provisions qualifying obligations under the General Agreement were not included in the specimen Schedule, nor was the possibility of such Schedule provisions mentioned by the drafters.” In the same paragraph, this panel explained that the term “terms and qualifications” was added next to “conditions” in order to make room for additional concessions (as opposed to qualifying existing obligations). Practice, in the post-Uruguay round era, brought these terms back to the center of the discussion. The countries that acceded to the WTO after 1995 were in large part former communist countries—“transition economies,” as they were labeled. They accepted numerous obligations that incumbents did not have to accept when they had joined. Their

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obligations were reflected in their Protocols of Accession. Similar obligations were typically judged necessary by the incumbents because otherwise (e.g., in the absence of similar arrangements), the effectiveness of trade commitments agreed would have been curtailed. They were thought necessary because the newly acceding countries did not have mature market economies yet, and it was feared that the value of trade concessions would be eviscerated because of the absence of functioning markets. Many of the obligations assumed had to do with trading rights; that is, for the possibility to allow private agents to freely import and export, or do so within agreed transitional periods. These arrangements aimed at circumventing (or eliminating) existing import and export institutional bottlenecks that hampered international trade and could qualify as “terms, conditions, and qualifications.” Countries that have acceded after 1995, thus, have to observe obligations that incumbents did not have to adhere to. The legal justification for this two-tier system is included in the various “terms, conditions, and qualifications.” 3.3.6

Consolidating Nontariff Barriers

The fact that it is tariffs that are routinely consolidated in schedules of concessions does not mean that nontariff barriers (NTBs) cannot be consolidated as well. The report of the Review Working Party on Other Barriers to Trade states: The Working Party also agreed that there was nothing to prevent contracting parties, when they negotiate for the binding or reduction of tariffs, from negotiating on matters such as subsidies, which might affect the practical effects of tariff negotiations; provided that the results of such negotiations should not conflict with other provisions of the Agreement.45

Subsidies are now being regulated in a separate agreement, discussed in chapter 3 of volume 2. Commitments on NTBs do exist and appear (albeit not often) in some schedules of concessions. 3.4 The Forum for Tariff Concessions Tariffs have been typically reduced in trade rounds, progressively. Why progressively, and not all at once? It is clear from the negotiating history related in chapter 1 that trading nations were, for various reasons, unprepared to eliminate tariffs right away. Economic theory lends support to this approach: Mussa (1986) showed that elimination of tariffs at one go would be optimal only when trading nations can credibly commit to tariff rates and there are no distortions in goods and factor markets. At that time, the first condition was not met, and the second was highly exceptional, if not illusory altogether.46 There is one exception to this rule. In 1998, the WTO Members agreed to abolish customs duties on all goods traded electronically.47 Their decision (entitled Work Programme

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for Electronic Commerce) to do so defined “electronic commerce” (or “e-commerce,” as it is often referred to in the following terms: “‘electronic commerce’ is understood to mean the production, distribution, marketing or sale or delivery of goods and services by electronic means.” An e-book, for example, would satisfy this definition. In Bali, in December 2013, WTO Members reiterated their support for the Work Programme on Electronic Commerce.48 We stated in chapter 1, that reduction of tariffs is the single most important success of the GATT. As of 2013, the simple average tariff for all goods in China is 10 percent for bound duties, and 9 percent for applied duties. The corresponding numbers for the EU are 5.2, and 5.5 percent; Brazil, 31.4, and 13.5 percent; for India, 48.6, and 13.5 percent; for South Africa, 19, and 7.6 percent, and for the US, 3.5, and 3.4 percent. It is only small developing countries and LDCs that continue to have very high duties. The numbers for Togo for example are 80 and 12 percent.49 Notice nonetheless, that the WTO members with high bound duties are also the members with a lot of “water,” that is, the members with substantial difference between the bound and the applied rate of duty.50 3.4.1 The “Usual” Forum for Binding Duties: Trade Rounds The “usual” forum for tariff reductions is a “trade round.” This term denotes the period of time within which trading nations engage in negotiations and eventually agree on further liberalization of trade. Article XXVIIIbis of GATT explains that it is the WTO membership that will decide when to start a trade round, without including a precise date to this effect. As described in chapter 1, eight rounds have been completed, and the ninth, the Doha round, has produced some results (“Bali package”) but has not concluded on all negotiating items that were featured in its original negotiating agenda, the notorious Doha Development Agenda (DDA). The Trade Negotiating Committee (TNC), in which representatives of all WTO members participate, is the body entrusted with the overall administration of negotiations. The DG of the WTO presides over the TNC. Duties will be bound in trade rounds following different procedures: request-offer; linear reductions, harmonized formula, tiered cuts, and sectoral approach. There is no compulsion to use one or the other, and all are discussed later in this chapter. Trading nations will typically decide the procedure to follow in the context of any given round. 3.4.1.1 Trade Rounds, a Public Good Staiger (2004) first argued that the WTO provides trading partners with a global public good in the form of the negotiating forum where tariff commitments will be exchanged. Although arguments could be raised regarding the absence of costs for participants, a hallmark of public goods,51 there is no doubt that no trading nation would by itself have the incentive to establish this framework. Actually, the proliferation of PTAs is ample

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proof that trading nations would rather invest in relationships where they are the exclusive or quasi-exclusive beneficiaries than in relations where they can only benefit in small part. Various techniques have been employed over time in order to negotiate tariff reductions within trade rounds, and the next sections cover these. 3.4.1.2 Request—Offer Two WTO members will bilaterally negotiate tariff cuts until a mutually agreed solution has been reached and the WTO has been notified thereof. Home will present a list to Foreign that it wishes to negotiate with, indicating the tariff item number, the description of products, the present rate of duty, and the requested rate of duty.52 Foreign will do the same. When Home and Foreign are happy with the outcome of their negotiation, they will communicate it to the WTO, and it will be multilateralized, that is, the tariff duties agreed by Home and Foreign will be applied on MFN basis. In this case, things are left “to the market,” so to speak, and one would expect that the WTO members with the greatest interest in negotiating the tariff treatment of a particular commodity with another WTO member, to do so. Ideally, the WTO member with the bargaining power to extract the maximum promise from another WTO member would be expected to conduct a negotiation, the outcome of which will benefit the rest of the WTO membership. The benefit, of course, will consist of the low duty extracted from the negotiator with the bargaining power that will have to be applied, in principle, on an MFN basis (e.g., to all goods that benefit from the tariff concession regardless of their nationality). In this scenario, the potential for free riding is, in principle, substantial. Even the WTO Members though, with the maximum bargaining power do not possess unlimited negotiating resources, and they might wish to concentrate on the export markets that they care most about. As a result, different WTO members will negotiate different tariff treatments of different commodities with different WTO members. There is, thus, to some extent, distribution of the negotiating costs across the membership.53 One cannot exclude, however, that some might be unhappy with the outcome of the first negotiation. To make room for similar reactions, negotiations on “request and offer” have in practice developed as follows. Assume, that Home and Foreign negotiate the import duty on wheat that Home will be applying. Assume further that Foreign manages to extract from Home a promise that the latter will apply a 10 percent duty ad valorem. Foreign and Home will notify the WTO Secretariat of the outcome of their negotiation. Their agreement, however, remains confidential until the end of negotiations. In the meantime, nothing stops say Third, another WTO member, from negotiating with Home. Home can either repeat the promise it already made to Foreign, or move even further and make a better offer if Third has something to offer that Foreign does not. In this latter case, one cannot exclude the possibility that Third might extract a promise from Home that the latter imposes a 7 percent duty on imports of wheat. Third, as well, will notify the WTO Secretariat of the bilateral agreement that it has reached with Home.

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At the end of the negotiations, Home will have to impose, by virtue of the MFN obligation, a 7 percent import duty on all wheat imported into its market, regardless of its origin. Still, the promise of a 10 percent duty that it gave to Foreign is not without legal consequences. Assuming, subsequent to the original negotiation, that Home wishes to invoke the procedures established by Article XXVIII of GATT, and to revise its duty on wheat upward, for example to 12 percent, Foreign will be recognized as a holder of initial negotiating rights (INR) and will have the right to participate in the negotiations. If, conversely, Home wishes to revise its duties upward, but to 9 percent, Foreign will not enjoy this right. We will return to the mechanics of renegotiation of customs duties later in this chapter. 3.4.1.3 Linear Reductions During some rounds, instead of opting for bilateral negotiations, trading partners agreed upon tariff cuts across the board. In this setting, WTO members will agree on reducing bound, or applied tariffs by a fixed percentage, say 5 percent. The percentage of reduction is thus symmetric across trading nations (and could be symmetric across goods as well). 3.4.1.4 Harmonized Formula This method leads to tariff cuts by a fixed percentage. In contrast to linear reductions, though, it is meant to lead those WTO members that had been imposing higher tariff levels to more substantial reductions than those WTO members practicing lower duties. WTO members that had been imposing low duties will be requested to make less important cuts, since past liberalization efforts will be acknowledged; the WTO membership will be asking that this group of countries make it less of a liberalization effort. This type of tariff cuts is often referred to in WTO-speak as “Swiss formula.” Here is an illustration. Home imposes a tariff of 50 percent on widgets and Foreign of 20 percent on the same good. According to the “Swiss formula,” Home might be asked to reduce its duties by 35 percent, and Foreign by only 5 percent. The “Swiss formula” was practiced, for example, during the Doha round for the nonagricultural market access (NAMA) negotiations, which cover tariff reductions for manufactured goods. It owes its name to the fact that a Swiss delegate first proposed it during the Tokyo round.54 3.4.1.5 Tiered Cuts The tiered cuts approach is reminiscent of, but not identical to, the “Swiss formula.” Duties will be divided into bands (tiers) and the duties of higher bands will be cut more drastically than those of the lower band.55 The level of aggregation is, thus, different in tiered cuts from that applied in the “Swiss formula,” where it is individual tariff lines and not bands that provide the benchmark for tariff cuts. 3.4.1.6 Terms of Trade and Tariff-Cutting Techniques In chapter 1, the terms of trade theory was described as one of the possible explanations for the original GATT, which was negotiated using “request and offer.” This technique

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allows trading nations to pick and choose who they will be negotiating with, as well as the amount of tariff reductions that they should be willing to achieve. The other techniques seem to foreclose the relevance of terms of trade-based tariff negotiations. Only accidentally, for example, would an x percent reduction of tariffs across all trading nations for particular commodities would correspond to the number that would be obtained had the negotiations been aimed to reduce tariff levels while preserving terms of trade between two or more goods. It is, thus, difficult to reconcile the terms of trade theory with tariff negotiations during rounds where the request-and-offer approach has not been followed. 3.4.2

Sectoral Agreements

3.4.2.1 Distinguishing Sectoral from Critical Mass Agreements The term “sectoral” refers to agreements where the membership as a whole agreed to liberalize trade in a particular sector. The term “critical mass” refers to agreements, which we discuss later in this chapter, where a subset of the membership agreed to do so. Although both sets of agreements are sectoral in the sense that they cover tariff reductions in one product-area, it is the level of participation that usefully distinguishes one from the other. As we will see in what follows, the GATT history is full of sectoral agreements (or, rather, sectoral initiatives). Critical mass agreements came in vogue during and following the Uruguay round, when some WTO members became uneasy with the extent of free riding following MFN tariff reductions negotiated between the “usual suspects.” Critical mass agreements are not an invention of the WTO. Nations have been sensitized to the dangers of free riding for many years now. A good illustration is offered by the Convention on the Regulation of Whaling, which was signed in 1931, and entered into force in 1935 (United States Treaties Series 880). Important whaling nations, like Germany and Japan, had not signed the treaty, and in 1931 alone 43,000 whales were killed. Nowadays, the International Whaling Convention (the successor treaty) is in place, with 89 members, and the volume of killings has been substantially reduced. There are two critical mass agreements: the Information Technology Agreement (ITA) and the Pharma Agreement. Later in this chapter, these will be covered in succession. For now, though, the discussion turns to sectoral agreements. There is a long history of sectoral agreements in GATT.56 It all started as part and parcel of an exercise in transparency. A WTO document, dedicated to sectoral liberalization ever since the advent of GATT,57 distinguishes between sector specific discussions and sector specific negotiations. The GATT recipe for liberalization concerned all goods. Over the years some contracting parties complained about the slow growth of trade in particular goods, whereas others saw an opportunity to liberalize faster in some specific sectors. For these and many other reasons, sector-specific discussions were initiated, and eventually led to sector-specific negotiations.

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The trading nations became interested in examining the evolution of trade in specific areas. The first initiative of the sort was recorded as early as 1956, when the trading nations decided to annually follow the trends in trade of various commodities.58 They would review trends in commodity trading based on a report prepared by the chairman of the Interim Coordinating Committee for International Commodity. Since then, a number of sector-specific discussions took place. Following a proposal by Australia submitted in 1959, a group was established during the Dillon round to examine trends in trade of farm goods.59 A Special Group on Trade in Tropical Products was then established in 1962.60 A Committee on Trade in Industrial Products was established in 1967;61 A Group on Quantitative Restrictions and Other Non-Tariff Measures, aimed at reviewing trade of goods of particular interest to developing countries, was agreed and established in 1982.62 And, finally, a Working Group on Problems of Trade in Certain Natural Resource Products saw the light of day in 1984.63 3.4.2.2 The Identity of Sectoral Agreements Based on input from these groups, a series of sectoral negotiations were initiated and concluded. Sectoral agreements have been concluded in the last three completed rounds, namely, the Kennedy-, the Tokyo-, and the Uruguay round.64 During the Kennedy round, the Committee on Agriculture was established, as well as the Groups on Cereals, Meat, Tropical Products, and the Pilot Group on Dairy Products. Although the working hypothesis for the round was a 50% reduction of pre-existing tariffs, in some of the groups mentioned above actual reductions as reflected in the schedules of concessions shied away from the original target.65 In the Tokyo round, the Group on Tropical Products, the Group on Agriculture (with subgroups on cereals, meat, and other products), and most important of all, the group called “Sectoral Approach” were established. The former discussed the evolution of farm trade, whereas the latter discussed the role of sectoral approaches in GATT in general, the criteria for selecting sectors, and other related topics. The “Sectoral Approach” group focused on the negotiation of goods such as aluminum, chemicals, electronics, and fish and fisheries products. Tariff reductions were agreed following the “Swiss formula” previously discussed.66 In the Uruguay round, sectoral negotiations were held (besides agricultural and textile goods, discussed in chapters 8 and 9 of volume 2, respectively) in pharmaceuticals, chemicals, construction equipment, medical equipment, steel, beer, furniture, farm equipment, and distilled spirits (brown), paper, and toys.67 All in all thus, eleven sectoral agreements were successfully concluded during the Uruguay round. Two approaches were followed for tariff reductions: the “zero-for-zero” and the “harmonization” approach. The former meant that in some areas negotiators would agree to a zero tariff level. When having recourse to the latter, trading nations would agree to apply the same level of duty.

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3.4.3 The Information Technology Agreement (ITA) 3.4.3.1 Why Critical Mass? The ITA is the first of the two critical mass agreements adopted so far (the other one being the Pharma Agreement, discussed later in this chapter). These two negotiations represent a break with past practice. Until their advent, negotiations would take place across those interested in negotiating, and the outcome would have to respect the MFN obligation. On two occasions (i.e., ITA and the Pharma Agreement), WTO members agreed ex ante that their agreement would not enter into force unless if a certain percentage of world production had first agreed to liberalize the product-market under negotiation. If this were the case, they would agree to extend all benefits to all nonparticipating WTO members, accepting the realistic probability that free riders might profit from their negotiation. The free rider problem, though, would be severely mitigated since all major stakeholders would have already agreed to participate in the negotiation and be bound by the outcome. Those who profited from the ensuing liberalization would be, for all practical purposes, consumers worldwide and not important producers of the liberalized goods among the nonparticipating WTO members. By securing that a critical mass of the world producers of goods would negotiate and agree on liberalization, they managed to facilitate the process (since like-minded countries would be present) without running the risk of massive free riding. It is not hard to understand why these two conditions are not easily met; otherwise, the history of the GATT/ WTO integration might have been full of critical mass agreements since, as we stated in chapter 1, conditional MFN has long been the subject of been serious debate in the US. Why critical mass agreements? This chapter has already alluded to the response to this question. Trading nations that were getting tired of free riders did not have many other options left. Preferential trade agreements (PTAs) cannot be signed for just one or several products only since that would not not satisfy the “substantially all trade requirement,” as we will see in the chapter 6. Conditional MFN, no matter how dear to the heart of some nations, is, on its face, inconsistent with GATT, and we will return to this point in the next chapter. A request for a waiver would realistically not succeed because of the high percentage of concurring votes required, as chapter 9 will discuss. Finally, plurilateral agreements cannot be negotiated unless the WTO membership has given its consent. In light of all this, the only thing trading nations could do, when facing lack of unanimity in pursuing the trade liberalization agenda, was to minimize the potential of free riding. In this vein, faced with the unwillingness of some information technology (IT)–producing WTO members to participate in the negotiation, negotiators were not left with much of a choice. They had to extend the benefits from their negotiation to all WTO membership (by virtue of the MFN clause, discussed in chapter 4), if they wanted to avoid legal challenges. They did, however, manage to minimize the problem of free riding by securing first that a substantial percentage of worldwide production of IT products would make liberalization commitments.

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3.4.3.2 The Negotiation The ITA was concluded at the Singapore Ministerial Conference68 in December 1996. At that time, 29 countries (including the then-15 member states of the EU) or separate customs territories signed a declaration to this effect.69 The successful conclusion of the ITA followed a failed sectoral initiative on electronic goods in the Uruguay round. The Japan Electronic Industries Development Association (JEIDA) and the Information Technology Association of Canada (ITAC) together represented the private sector behind the negotiation of the ITA. These entities came up with the name “ITA” to describe what the negotiation was all about. The original target was that WTO members representing 90 percent of world trade would participate in the agreement. The target was not met right away. It was revised downward to a more realistic level, and WTO members representing 80 percent of world trade initiated the talks. The original target (90 percent) was met only a few months after the beginning of the negotiations. All results of the ITA negotiations are now applied on a nondiscriminatory basis. Today the ITA has 76 members70 (counting the 28 members of the EU), most of which are developing countries. No least developed country (LDC) has joined so far, though. Together, the 76 members of the ITA represent approximately 96 percent of world trade in IT products. To date, Mexico and Brazil remain the most important non-ITA participants, accounting for about 3 percent of world ITA trade. After its peak in 2000 (16.5 percent), the ITA now accounts for approximately 12 percent of total world exports (in value terms).71 In 2013, the share of ITA products in world trade exceeded that of farm products. With the outcome of the Doha round still pending, it is probably fair to state that the ITA is the most important MFN trade liberalization initiative enacted since the conclusion of the Uruguay round.72 3.4.3.3 Dispute Settlement The negotiation of the ITA was not problem-free, and the final text reflects a number of compromises that had to be secured for the agreement to enter into force. Unsurprisingly, it has given rise to disputes regarding classification of products coming under its purview, largely because it suffers from a birth defect. When concluded, its product coverage was reflected in two attachments. The first of these, “Attachment A,” included HS numbers and was divided into two sections. Section 1 dealt with specific products, the tariff classification of which was undisputed (112 items, corresponding to 110 HS 1996 classifications), whereas Section 2 took a hybrid form in which 78 items corresponding to 45 HS 1996 classifications were included, whereas an additional 42 items were labeled “for Attachment B.” Attachment B included 13 product descriptions, the tariff classification of which was in dispute among the WTO members.73 Contrary to Attachment A that included tariff lines, Attachment B included only product descriptions that could be classified under various tariff lines. The WTO Secretariat had put in place a process to help WTO members classify goods in harmonized manner; there was, however, no legal compulsion to do so.

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As a result, various WTO members classified the same good under different tariff lines, and disputes arose regarding the consistency of national classifications with the WTO. We read in Attachment B, for example, entries such as “network equipment,” “flat panel displays,” or “multimedia upgrade kits.” Similar entries were prone to creating a divergence of views across participants as to what precisely had been agreed. To make matters worse, technology moved fast, and new products appeared in the market. To respond to the challenges presented by technological evolution, signatories to the ITA agreed to meet periodically in order to specify and update the coverage of the ITA, and ideally to make unanimous suggestions to the WCO Committee.74 Technology surprised traders all right, but this is not a totally new issue, and even early GATT practice saw cases along these lines. In Greece–Phonograph Records, a GATT panel faced the following situation: Greece had bound its duties for long-playing records (LPs) based upon revolutions per minute. New technology developed after the Greek binding— namely, LPs of 33 1/3 and 45 revolutions per minute. Greece had imposed a duty higher than its binding and, when challenged by Germany, argued that it could do so since the products at hand did not exist at the time the binding had been entered. The panel disagreed and found that Greece should have followed the procedures regarding modification of duties instead of unilaterally setting a duty.75 Panels are still called to pronounce on similar instances nowadays. The periodic meetings of the WCO notwithstanding, divergences across WTO members regarding the treatment of new products might still arise in practice76 and gave rise to disputes.77 The question, for example, did arise in practice regarding what to do with new “multifunctional goods” that could be described either as an ITA or as another, non-ITA consumer good. “Technological convergence” might present similar issues. This term aims to capture cases where different systems can perform similar tasks—for example, when an interface with multiple devices becomes a reality as a result of technological innovations. Classification of goods then becomes an issue. The HS Convention gets updated every six to seven years on average. In the meantime, four different products (TV, CD, PC, and speakers) might converge into one (multimedia). How should they be classified until a new classification has been agreed? In theory, various criteria are available: one could use, for example, the “preponderant commercial use” criterion to classify multifunctional goods.78 In practice, nevertheless, disputes often arise from similar practices, the rationality of criteria used notwithstanding. The local area network (LAN) dispute (EC–Computer Equipment) between the US and the EU involved a disagreement between the two parties as to the proper classification of certain computer equipment.79 The products concerned were computers and network equipment. Computers had been defined in the ITA as “automatic data processing machines” capable of storing the processing program or programs and at least the data immediately necessary for the execution of the program; being freely programmed in accordance with the requirements of the user; performing arithmetical computations specified by

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the user; and executing, without human intervention, a processing program which requires them to modify their execution by logical decision during the processing run.

The agreement covers “automatic data processing machines,” whether they are able to receive and process with the assistance of central processing unit telephony signals, television signals, or other analog or digitally processed audio or video signals. Machines performing a specific function other than data processing or incorporating or working in conjunction with an automatic data processing machine, and not otherwise specified under Attachment A or B, were not covered by this agreement. “Network equipment” is defined as LAN and wide area network (WAN) apparatuses, including products dedicated for use solely or principally to permit the interconnection of automatic data processing machines and units thereof for a network that is used primarily for the sharing of resources, such as central processor units, data storage devices, and input or output units, including adapters, hubs, inline repeaters, converters, concentrators, bridges and routers, and printed circuit assemblies for physical incorporation into automatic data processing machines and units thereof. In light of these definitions, a number of products could either totally or partially come under the coverage of the ITA. The panel had found in favor of the US claim to subsume the products at hand under the coverage of the ITA. As discussed previously, though, the AB disagreed with the panel only as to the relevance of the US expectations, arguing that the expectations of the membership were what mattered. At the end of the day, although the AB did not exclude the applicability of the ITA, it did not condone it either. More or less the same products gave rise to another dispute between the EU and the US, albeit raising different legal issues: in EC–IT Products, the panel dealt with a challenge against the EU classification of three goods that, in the complainants’ opinion, were covered by the ITA and hence should be benefiting from tariff-free entry, whereas in the EU view, they should be classified as consumer goods and accordingly burdened by a 14 percent duty. The panel did not accept the EU view that the products, because of one additional function, were totally new, thus escaping the disciplines of the ITA. It consequently requested the EU to take corrective action. The panel inquired into whether the goods could come under one of the product descriptions included in Attachment B. If the response was affirmative, then the good would enjoy zero tariff treatment. If the response was negative, then it would be subjected to the tariff treatment provided for in the national schedule and applicable to the relevant consumer good. In those cases where the panel felt more at ease that the additional function did not substantially alter the nature of the original product, it recommended that the EU applied the lower tariff treatment. 3.4.3.4 ITA I and II On November 12, 2014, the US and China announced their agreement in principle on the liberalization of a series of goods coming under the ITA. Their agreement was hailed as the necessary impetus to unblock the negotiations of ITA II.

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ITA II aimed to eliminate the level of tariffs and ODCs for all IT goods. IT goods were classified under six categories (computers; semiconductors; semiconductor manufacturing equipment; telecoms; other instruments and apparatus, like cash registers and electronic calculators; and data storage media and software) and their parts and accessories. Negotiators did not manage to conclude the agreement within the originally agreed time frame, but voices were increasingly multiplying to conclude ITA II. It is estimated that an additional $800 billion of gains would be added to the staggering $4 trillion already created through prior liberalization.80 Originally, 6 WTO members, known as the “Technical Group” (Chinese Taipei, Costa Rica, EU, Japan, Korea, US), started the ITA II negotiation on the product coverage with heavy involvement of the private sector. China and 21 more WTO members subsequently joined in the negotiations, and the eventual group of 28 represented over 90 percent of world trade in the covered field. The new negotiation marked a shift of goods from Attachment B to Attachment A: only five goods will remain in the former, with the latter now comprising 286 HS subheadings.81 On July 28, 2015, the ITA II was finally agreed (WTO Doc. WT/L/956 of 28 July 2015). WTO members participating in the negotiation agreed to eliminate duties for a total of 201 products. Elimination of duties would take place within a period of three years. 3.4.4 The Pharma Agreement The Agreement on Trade in Pharmaceutical Products, widely known as the “Pharma Agreement,” was negotiated and concluded during the Uruguay round. As is the case with the ITA, a critical mass approach was followed to create this. The participants (Australia, Austria, Canada, the Czech Republic, the EU, Finland, Japan, Norway, the Slovak Republic, Sweden, Switzerland, and the US)82 accounted for well over 90 percent of world trade in pharmaceutical products. The purpose of the agreement was to eliminate duties on pharmaceutical products or, if this was not feasible right away, to do so in the near future.83 This agreement includes a complete list of products covered, ranging from goods coming under chapter 30 of HS to pharmaceutical active ingredients that bear international nonproprietary names from the World Health Organization (WHO), the notorious “INNs,” (International Non-proprietary Names) and intermediates used for production and manufacture of finished pharmaceuticals.84 The subsequent reviews, which take place (at least) every three years following the conclusion of the original agreement, have expanded the coverage of the agreement and further liberalized the market for pharmaceutical goods.85 3.4.5

Coalitions

WTO members rarely negotiate on their own. Hegemonic powers dwindle down, and new hegemons emerge. If the US was the “only game in town” for a few years, it soon learned to share power with the EU, to a lesser extent with the original Quad (which also included

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Canada and Japan), and to an increasing extent with the new Quad (China and India having taken the place of Canada and Japan). It is unrealistic for a WTO member to think that it can push an issue by itself. Bargaining power is one consideration, and consensus voting another. WTO members will find it easier to block an issue because of the consensus rule than to press forward their point of view. In an effort to increase bargaining power (and curb problems posed because of the consensus rule), alliances have been formed during rounds across like-minded countries to push forward a particular agenda.86 The Cairns group, for example, named after the city in Australia where it was first established, became notorious during the Uruguay round for pushing for lower duties in farm goods. Brazil, India, and South Africa head the NAMA 11 group, which has been very active during the NAMA negotiations of the Doha round. During the Doha round, negotiations have mainly centered around three groups: the Organisation for Economic Cooperation and Development (OECD)—that is, the rich countries’ club; the G-20, comprising the leading developing countries, such as Argentina, Brazil, and India; the G-90, comprising the LDCs, as well as other developing countries. Most of the negotiations of the Doha round concern demands that the G-20 has been formulating and are directed toward the OECD group (and some counterdemands by the latter directed at the former). The G-90 has been to a considerable extent absent from the negotiating scene, partly because of declarations from EU officials that they should have the round for free (that is, without making any concessions). Notorious across rounds are the so-called green room meetings, where only chosen delegations participate in meetings in the DG’s office (which used to be green). The objective is to restrict access to a few key delegations in order to facilitate agreement. The meetings of “Heads of Dels” (i.e., Heads of Delegations) regroup all heads of delegations to the WTO. 3.4.6

Unilateral Action

Nothing, of course, stops WTO members from unilaterally lowering import duties at any time and notifying the WTO of the new level. In 1997, for example, two WTO members, through unilateral modification procedures, bound their tariffs for “white” spirits (petroleum-deprived liquid used as solvent for painting and/or decorating) at 0 percent.87 Unilateral reductions do not have to be approved by consensus voting (as per Article XXX of GATT): the GATT panel report on US–Margins of Preference held as much. Similar actions are rare, however. As much as economists plausibly make the case for unilateral reduction of tariffs, at least by those who cannot affect the terms of trade, reality goes in the opposite direction, probably because tariffs are imposed for a variety of reasons extending beyond the concern to make income. Trade rounds remain the usual forum for tariff reductions.

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3.5 The Schedules of Concession The tariff promise of each WTO member will be reflected in a document called the “schedule of concession.” 3.5.1

Certification, Rectification, and Modification of Schedules

Schedules of concessions of all WTO members must be certified in order to ensure that their content conforms to the agreement reached. Changes in the form of rectification, modification, or both can be inserted following the procedures established. 3.5.1.1 A Centralized Process Through the procedures adopted regarding certification, rectification, and modification of schedules, the WTO aims at providing a centralized system for ensuring the accuracy of commitments entered. The WTO Secretariat is at the center of the system established whereby the authenticity of commitments will be certified (“certification”). The Secretariat is the institutional bottleneck, and it will be notified of subsequent changes as well (such as rectification and modification of schedules). Certification is the process that attests the validity of entries in a schedule of concessions as a result of the successful conclusion of a trade round. It also can occur in between rounds. Over the years, schedules of concessions undergo changes since, as a result of negotiations, trading nations agree to reduce their duties. Think of the ITA negotiation, for example, where a substantial number of the WTO membership agreed to reduce tariffs in IT products between the end of the Uruguay round and before the conclusion of the Doha round. The resulting new schedules of concessions on IT goods had to be certified. It is the WTO Secretariat that will circulate the members’ schedules of concessions (or, as it is sometimes called, the “list of commitments”) for verification and certification.88 The Legal Affairs Division of the WTO is in charge of the certification process. The protocol, including all certifications of schedules, will be registered in accordance with the provisions of Article 102 of the UN Charter.89 Rectification captures mundane changes (whereby the level of the tariff concession is not affected), whereas modification is about substantive changes, such as those resulting from a renegotiation of duties conducted under Article XXVIII of GATT. Rectifications and modifications were originally informal. Over the years, formalism has been introduced in response to disputes that arose regarding what exactly had been committed. Until 1959, changes at the tariff level were incorporated into GATT and its schedules through a series of protocols. There were five protocols of rectification, one protocol of modification, and nine protocols of both rectification and modification. In 1959, the CONTRACTING PARTIES agreed, subject to the revised text of Article XXX of GATT being accepted, to adopt a procedure of certification and discontinue the

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practice of preparing protocols of rectifications and modifications. The protocol amending Article XXX of GATT was adopted, but its authority lapsed in 1967. The CONTRACTING PARTIES decided next, in November 1968, to establish certification procedures applicable to both modifications and rectifications. To this effect, they adopted the Procedures for Modification and Rectification,90 according to which all modifications and rectifications would have to take place through certification. The idea was that certification would constitute some sort of formal multilateral approval of all modifications and rectifications entered.91 Six collective certifications were adopted under this decision, which was finally replaced by another, more detailed, decision adopted in 1980: the Decision on Procedures for Modification and Rectification of Schedules of Tariff Concessions (known for short as “the 1980 Decision”).92 Although that term refers to modifications resulting from actions under specified articles, in practice these procedures have also been used to include schedules of unilateral commitments. The 1980 Decision confirms that modifications imply substantive change of the concession (§ 1), whereas rectifications imply no such change (§ 2). Modifications could be the outcome of action under various provisions, and the 1980 Decision mentions to this effect Articles II, XVIII, XXIV, XXVII, and XXVIII of GATT. The 1980 Decision further confirms that multilateral review of both rectifications and modifications was necessary, probably because there is often a fine line between the two, and WTO members might have an incentive to cheat and call “rectification” what should be understood as “modification.” It is to be expected, of course, that the WTO membership would pay attention to every modification notified, whereas it will not heed rectifications. The proper classification, therefore, matters. Both modifications and rectifications are communicated to the DG of the WTO. Modifications have to be communicated within three months after the action (under one of the abovementioned provisions) has been completed. Rectifications must be communicated within six months after the amendment has been introduced in national legislation or, in the case of other rectifications, whenever the circumstances permit this to be the case. If no objection has been raised within three months of the communication, the notified modifications and rectifications become certifications (§ 3 of the 1980 Decision). There should be no doubt that the 1980 Decision is part of GATT 1994 by virtue of Article 1(b) (iv) of this agreement since it is a formal decision adopted by the CONTRACTING PARTIES, and thus binding upon all WTO members. 3.5.1.2 Certification Does Not Confer Legality Certification, nevertheless, does not ipso facto confer legality to whatever has been certified. In EC–Bananas III, a dispute between the EU and various banana-exporting countries, the AB had the opportunity to address this point.

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Schedules of concessions will be typically annexed to the final agreement concluding a round and are then open to all WTO members to sign.93 The EU had included in its schedule of concessions a condition whereby some WTO members could profit from a preferential duty rate on bananas. These members were Costa Rica, Colombia, Nicaragua, and Venezuela—the countries with which the EU had concluded the Banana Framework Agreement (BFA).94 The preferential rate (an import duty substantially lower than the MFN rate) was already applicable to bananas originating in ACP countries (i.e., African, Caribbean, Pacific countries, ex-colonies of EU member states that had concluded the Lomé Convention with the EU), and was extended to the signatories of the BFA. A series of banana-exporting WTO members that did not sign the BFA continued to pay the MFN rate. They complained to the WTO, claiming that the EU measure (the preferential rate applied to ACP- and BFA bananas) was inconsistent with the MFN rule (namely, Article I of GATT). The EU had argued, among other things, that its regime was consistent with Article II.1(b) of GATT since the WTO had been notified, and the certification process had been observed, without any WTO member raising an issue as to its legality.95 The panel and the AB, recalling the earlier “Headnote” jurisprudence96, held that a WTO member can grant other WTO members rights but cannot diminish its own obligations through conditions added to its schedule (§§ 157–158): That said, we do not see anything in Article 4.1 to suggest that market access concessions and commitments made as a result of the Uruguay Round negotiations on agriculture can be inconsistent with the provisions of Article XIII of the GATT 1994. There is nothing in Articles 4.1 or 4.2, or in any other article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products. If the negotiators had intended to permit Members to act inconsistently with Article XIII of the GATT 1994, they would have said so explicitly. The Agreement on Agriculture contains several specific provisions dealing with the relationship between articles of the Agreement on Agriculture and the GATT 1994. For example, Article 5 of the Agreement on Agriculture allows Members to impose special safeguards measures that would otherwise be inconsistent with Article XIX of the GATT 1994 and with the Agreement on Safeguards. In addition, Article 13 of the Agreement on Agriculture provides that, during the implementation period for that agreement, Members may not bring dispute settlement actions under either Article XVI of the GATT 1994 or Part III of the Agreement on Subsidies and Countervailing Measures for domestic support measures or export subsidy measures that conform fully with the provisions of the Agreement on Agriculture. With these examples in mind, we believe it is significant that Article 13 of the Agreement on Agriculture does not, by its terms, prevent dispute settlement actions relating to the consistency of market access concessions for agricultural products with Article XIII of the GATT 1994. As we have noted, the negotiators of the Agreement on Agriculture did not hesitate to specify such limitations elsewhere in that agreement; had they intended to do so with respect to Article XIII of the GATT 1994, they could, and presumably would, have done so. We note further that the Agreement on Agriculture makes no reference to the Modalities document or to any “common understanding” among the negotiators of the Agreement on Agriculture that the market access commitments for agricultural products would not be subject to Article XIII of the GATT 1994.

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For these reasons, we agree with the Panel’s conclusion that the Agreement on Agriculture does not permit the European Communities to act inconsistently with the requirements of Article XIII of the GATT 1994. (italics in the original)

The AB did not even summarily discuss the legal value of the certification process. By finding against the EU, though, the AB, at the very least, implicitly accepted that certification does not confer legality. This outcome might upset the formalist, but actually it is quite defensible. To decide on the legality of schedules at the moment of certification, one would need to discuss each and every entry in a schedule of concessions. Were one to introduce a comprehensive legal review of all schedules at the end of a negotiation, the process would have been disproportionately burdened. Moreover, in the absence of centralized monitoring of the legality of certified schedules, it would have been essentially incumbent upon WTO members to check each other’s schedules from a GATT-consistency perspective. Disagreements would have to be submitted to a panel, by virtue of Article 23.2 DSU, and one could potentially imagine dozens of panels introduced at this stage. The WTO Secretariat, which is the certifying entity, does not have the power to decide the question of legality. Its involvement aims at ascertaining the accuracy of submitted schedules of concessions only. Under the circumstances, it seems quite reasonable to argue that the certification process is limited to verification of the accuracy of commitments, for good reason, and does not prejudge their legality one way or the other. The AB, in EC–Bananas III, through its decision also closed the door to MFN deviations that the EU was opening up through the Framework Agreement. MFN deviations can only be based on provisions of GATT (legal exceptions), and not on bargained (e.g., negotiated) solutions.97 3.5.1.3 Uncertified Actions Unilateral actions that have not been certified risk being challenged before the WTO and eventually deemed illegal. This issue arose for the first time in Spain–Unroasted Coffee, a GATT dispute. Spain had originally made a tariff concession without differentiating between the various types of unroasted coffee.98 It then modified its negotiated concession by reserving a tariff treatment to “unwashed Arabia” and “Robusta” coffees that was less favorable than that reserved for “Colombia” and “Colombia mild” coffee (all three types of coffee being unroasted). Whereas it kept a 0 percent duty on the latter, it imposed a 7 percent duty on the former. All types of coffee came under CCCN 09.01 (the Brussels Nomenclature), since this case preceded the advent of the HS Convention. Brazil complained that, as a result of this intervention, its coffee exports to the Spanish market were being negatively affected (since Brazil was not exporting “mild” coffee). Spain responded that, under the Brussels Nomenclature system, it was allowed to make

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subclassifications to tariff headings, and this is exactly what it had done in this case (§ 3.3 of the panel report). The panel did not agree with the Spanish claim, finding the Spanish measure to be inconsistent with GATT. It held that Spain was free to make tariff classifications, provided that it had done so when scheduling its commitments, not ex post facto without consulting its trading partners (§ 4.4). The panel found that there was no obligation under GATT to follow any particular system for classifying goods, and that a contracting party had the right to introduce in its customs tariff new positions or subpositions as appropriate. A footnote to this paragraph reads: “Provided that a reclassification subsequent to the making of a concession under GATT would not be a violation of the basic commitment regarding that concession (Article II:5).” [emphasis added] In this case, nevertheless, a violation had occurred as a result of the Spanish subclassification. This was the case because, in the panel’s view, the various types of coffee were like products and, in the absence of prior distinction across the three types, Spain was in violation of its obligations since it was treating like products in an unlike manner (§ 4.10).99 The AB on Argentina–Textiles and Apparel faced a different case of unilateral action that occurred after certification of a national schedule and allegedly affected the value of commitments entered. Argentina had bound its duties on footwear during the Uruguay round at 35 percent. Subsequently, it had been applying to imports of footwear either an ad valorem duty of 35 percent or a specific duty that was calculated on the basis of the world price. It later decided to apply specific duties only. Since, in its view, the case did not concern a change in the bound duties, it did not provide notification of the various duties it was applying (as it should have done, in accordance with the 1980 Decision). The complainant had argued that a change between different types of tariffs was not permissible. In its view, through binding, WTO members had agreed neither to impose tariffs beyond the established ceiling nor to change the type of duty (e.g., move from ad valorem to specific duties). The panel upheld its claim. The AB overturned this finding and held that switching between different types of duties is perfectly legitimate so long as the overall ceiling of protection had not been violated (§§ 44–55). The AB did, nevertheless, find that Argentina had violated its obligations since, following the conversion from ad valorem to specific duties, the level of duty exceeded the negotiated ceiling. To decide whether this has indeed been the case, one would need to go back in time to the moment when the concession was negotiated and convert the rate of protection from ad valorem to a specific duty (keeping the price of the dutiable item constant, of course). Argentina had not notified the WTO of its measure, as briefly mentioned earlier in this chapter. In fact, Argentina did not have to follow the procedures of the 1980 Decision at all since the case concerned applied and not bound duties. Argentina, nonetheless, disrespected the General Council Decision dating from 1997,100 which requests from WTO

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members to notify the organization of all information regarding not only current bound, but also current applied, duties on an annual basis.101 The panel and the AB report did not insist on this failure—wrongly so, in my view.102 The AB examined the consistency of the Argentine measure with Article II.1(b) of GATT. This provision disallows the imposition of duties upon importation in excess of the level bound. Probably, though, the correct legal basis would have been Article II.3 of GATT, which reads: “No contracting party shall alter its method of determining dutiable value or of converting currencies so as to impair the value of any of the concessions provided for in the appropriate Schedule annexed to this Agreement.” In effect, Argentina had changed its method of determining dutiable value by switching from one form to another form of duty. The question to ask, then, would be whether the value of concessions it had agreed to had been impaired. Note that this issue had already been raised, but the AB decided to totally disregarded prior case law. In 1984, the GATT panel report on EEC–Newsprint referred to the “longstanding practice” in GATT that “even conversion” from ad valorem to specific duties required renegotiation (§ 50). By opening the door to unilateralism in this context, the AB adopted an interpretation that is hardly supported by logic and practice. 3.5.2 The Content and Legal Value of Schedules of Concessions The legal value of schedules of concessions is clarified in Article II.7 of GATT: “The Schedules annexed to this Agreement are hereby made an integral part of Part I of this Agreement.” The content of schedules of concessions differs across rounds. The agreed form of the Uruguay round schedules is that they should consist of four parts:103 1. Part I is divided into two sections: Section 1 includes all agricultural tariff concessions, whereas Section 2 reflects tariff concessions on nonfarm goods. Section 1 is subdivided into two subparts, the first reflecting tariff concessions, whereas the second applies to tariff quotas. 2. Part II includes historic preferential tariffs from the early GATT days, not preferential rates that are applied in free trade areas or customs unions since the latter are not considered tariff concessions. This part is empty across all schedules since no historic preferential rates exist anymore;104 3. Part III reflects nontariff measures; e.g., commitments regarding import licensing. 4. Part IV reflects WTO members’ commitments on farm goods of nontariff nature; e.g., commitments with respect to domestic support, and export subsidies.105 Part I needs some additional explanation. It contains “headnotes,” where a WTO member explains the implementation of its commitments,106 as well as ten “columns.” Column

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1 reflects the tariff line (e.g., HS 224646); Column 2, the product description; Column 3, tariff quotas; Column 4, the “base rate of duty” (e.g., the point of departure for the Uruguay round cuts, either bound or applied on 1 September 1986); Column 5, the “final bound rate of duty” (i.e., the bound level committed during the Uruguay round); Column 6, the implementation period at the end of which the WTO member must at the very least apply its final bound rate of duty; Column 7, special provisions for agricultural products;107 Column 8, initial negotiating rights;108 Column 9, ODCs; Column 10, other terms and conditions [e.g., clarifications on the scope of the commitment which, as per the AB report on Canada–Dairy (§ 7.151) are not void of legal effect]. Recall, nonetheless, the ruling of the AB in EC–Bananas III: WTO members cannot add terms and conditions that violate GATT obligations. 3.5.3

Defining the Tariff Value: Customs Valuation

Customs duties will be imposed on imported goods by reference to the declared “import price.” Importers, as well as exporters, might have an incentive to cheat, though, when declaring the import price. By raising the import price of goods, customs authorities might be raising the overall tariff revenue (assuming that quantities of imports will not be severely affected as a result), or protecting domestic competing goods more efficiently (in the opposite case, such as when import quantities are affected as a result). By lowering the price of exported goods, exporters will be burdened with lesser duties and their goods will be more competitive in the export market. There is, thus, a genuine need for insurance policy against the incentive to cheat. Customs valuation (CV) is the process applied to determine the true customs value of imported goods upon which import duties will be imposed. The CV Agreement provides the legal framework to organize this process. CV procedures are, of course, applicable only when imported items have to face ad valorem duties, or duties of which a component is ad valorem. The starting point is the declared import price, or the “actual value” of the imported goods, as it is known in WTO jargon. Article VII of GATT states that the value of imported merchandise for customs purposes should be based on the actual value of the imported merchandise on which the duty is assessed, and should not be based on the value of merchandise of national origin or on arbitrary or fictitious values. Article VII.2(b) of GATT defines “actual value” as follows: “Actual value” should be the price at which, at a time and place determined by the legislation of the country of importation, such or like merchandise is sold or offered for sale in the ordinary course of trade under fully competitive conditions. To the extent to which the price of such or like merchandise is governed by the quantity in a particular transaction, the price to be considered should uniformly be related to either (i) comparable quantities, or (ii) quantities not less favorable to importers than those in which the greater volume of the merchandise is sold in the trade between the countries of exportation and importation.

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The 1950 Convention on the Valuation of Goods for Customs Purposes, better known as the “Brussels Definition of Value (BDV),” contained a similar concept: the “normal price,” defined as follows: “The price which [the imported goods] would fetch at the time when the duty becomes payable on a sale in the open market between buyer and seller independent of each other.”109 It was the CCC, now known as the WCO, as described earlier in this chapter, that would administer customs valuation using BDV, the widestknown method at that time. During the Tokyo round, a CV Agreement was adopted that introduced new disciplines and that has since been superseded by the Agreement on Customs Valuation, decided during the Uruguay round (discussed in detail in chapter 1 of volume 2). This agreement has added a lot of detail about CV disciplines. Through preshipment inspection, part of the Agreement on Preshipment, also concluded during the Uruguay round and discussed in chapter 1 of volume 2, one aims to ensure that the quantity and quality of the goods to be exported conform to the specifications reflected in a sales contract. 3.6

Safeguarding the Value of Tariff Concessions

Article II of GATT contains various clauses aiming to safeguard the value of concessions. The value of concessions is, of course, further safeguarded by the obligation to avoid adding to the agreed tariff protection by means of domestic policies (Article III of GATT), as well as by so-called nonviolation complaints (NVCs), which aim to guarantee that WTO members abide by the good faith principle and implement their various commitments in line with the spirit and not only the letter of GATT. Chapter 7 discusses Article III of GATT in detail; for now, we look only at safeguards included in the body of Article II of GATT. 3.6.1

Change in the Method of Determining Dutiable Value

We briefly referred to Article II.3 of GATT earlier in this chapter, when discussing the AB report on Argentina–Textiles and Apparel. Suffice to add here that this provision captures not only changes in the method of determining dutiable duties, but also conversion of currencies. This brings this discussion squarely to the relationship between IMF and GATT. We have already discussed this relationship in the previous chapter, and we will be complementing our discussion of the issue so far when analyzing Article II.6 of GATT later in this chapter. 3.6.2

Import Monopolies

GATT does not contain disciplines on competition law, as seen in chapter 1. As a result, WTO members can legally put in place import monopolies in charge of channeling trade

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into their sovereignty. There is a risk, nevertheless, that through similar policies, they might be negatively affecting the value of tariff concessions. This is so because import monopolies do not operate on commercial considerations, as they might be favoring domestic production. Similar practices were very much in vogue at the time when the GATT was negotiated, and this is what explains the inclusion of this paragraph in the GATT. They are less of an issue nowadays. Article II.4 of GATT is the insurance policy against this risk, as it explains that WTO members cannot, through the operation of import monopolies,110 add to the agreed protection: If any contracting party establishes, maintains, or authorizes, formally or in effect, a monopoly of the importation of any product described in the appropriate Schedule annexed to this Agreement, such monopoly shall not, except as provided for in that Schedule or as otherwise agreed between the parties which initially negotiated the concession, operate so as to afford protection on the average in excess of the amount of protection provided for in that Schedule.

A footnote of the provision explains that Article 31 of the Havana Charter is relevant to understanding this provision. Article 31 of the Havana Charter explains in more detail the basic obligation embedded in Article II.4 of GATT. This provision requests from WTO members, practicing import monopolies, to enter into negotiations with affected parties in order to limit or reduce the protection afforded through the operation of the import monopoly to domestic goods. To this effect, a maximum import duty could be agreed between the parties, as well as measures aiming to relax limitations in the quantities imported.111 Article II.4 of GATT allows, thus, only for protection that has been either included in the schedule of concessions or agreed between the parties. The question has arisen in practice how to quantify “protection” in case of litigation: 1. The GATT Panel on Canada–Provincial Liquor Boards (EEC) held that an import monopoly can lawfully charge, beyond the customs duty, transportation- and distribution costs, as well as a “reasonable amount of profit”;112 2. The GATT Panel on Korea–Beef (Australia) found a profit to be reasonable if it corresponded to the margin obtained under normal conditions of competition (e.g., when no monopoly was in place). The GATT Panel on Canada–Provincial Liquor Boards (US) confirmed this finding, adding that monopoly profit margins should be excluded since the profit margin should correspond to what could be obtained under normal conditions of competition (§ 4.15);113 3. The GATT Panel on Canada–Provincial Liquor Boards (US) accepted that differential markups (e.g., costs imposed on imported products only) were legitimate to the extent that they corresponded to costs necessarily associated with the marketing of imported goods.114

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Disputes Regarding the Proper Classification of Goods

Article II.5 of GATT deals with a sui generis issue. If one WTO member believes that its exports do not receive the tariff treatment contemplated by GATT, and the reason for that is a court order by the importing WTO member that has, in its view, improperly classified imported goods, then the WTO members concerned, as well as any other WTO member substantially interested in the proper tariff treatment of the same good in the same market, will enter negotiations to reach a compensatory adjustment. The Greece–Phonograph Records case discussed earlier in this chapter falls into this category. The parties managed to settle their dispute eventually without informing the GATT Secretariat of a compensatory adjustment. The GATT Analytical Index mentions only one case under this provision, where the GATT Secretariat was informed of a compensatory adjustment. It concerned “flash guns,” and the dispute was between Canada and the EU. The GATT Secretariat issued a note that stated that disputes under Article II.5 of GATT typically would be resolved through reclassification of goods following the procedures of WCO.115 3.6.4

Reduction in Par Values

Article II.6 of GATT116 was drafted with the system of fixed exchange rates in mind. Article IV of the original Articles of Agreement of the IMF required from its members to declare par values for their national currencies in terms of gold, or US dollars, or a fixed gold value. A “par value” is a finance/accounting term and denotes the face or stated value of a currency. A change in par values could only occur following consultations with the IMF. The obligation to declare par values bound members of the IMF, as well as those countries that have entered into a special exchange agreement with it. The terms “or provisionally recognized” were added to the body of Article II.6 of GATT in order to address the case of Brazil, which had not formally established a par value, but had provisionally agreed to do so.117 Article II.6 of GATT states that, if reductions of par values by more than 20 percent take place, and they are in accordance with the IMF (and not unilateral), customs duties have to be adjusted to take account of similar reductions. It is, of course, only specific duties that would need to be adjusted since the bite of ad valorem duties is impervious to reductions in par value (or devaluations). Specific duties, on the contrary, are expressed in national currency. As a result, a 50 percent devaluation of the national currency would lead to a substantial loss (by 50 percent) of the bite of the tariff rate. A Working Party on Specific Duties was established and was charged with the task to review the modalities of application of this provision. The Articles of Agreement of the IMF were amended in 1978 since the members of the fund had moved to a system of “floating exchange rates.” The amended Article IV of the IMF reads: “… each member undertakes to collaborate with the Fund and other members

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to assure orderly exchange arrangements and to promote a stable system of exchange rates.”118 Article II.6 of GATT had to be adjusted, as well. The Guidelines for Decisions Under Article II.6 of the General Agreement on Tariffs and Trade were adopted in 1980.119 These guidelines read in pertinent part: The CONTRACTING PARTIES shall be deemed to have authorized the contracting party to adjust its specific duties … if the IMF advises the CONTRACTING PARTIES that the depreciation calculated as set out above … is in excess of 20 per cent and consistent with the Fund’s Articles of Agreement, and if, during the sixty days following the Fund’s advice to the contracting parties, no contracting party claims that a specific duty adjustment to take into account the depreciation would impair the value of a concession.

Depreciation took the place of reduction in par value, but the primary responsibility to pronounce on the legitimacy of the ensuing actions rests with the IMF. 3.7

Renegotiation of Tariff Protection

WTO members might, for various reasons, be willing to renegotiate their tariff protection, and intuitively one would expect that political economy-driven considerations would rank high in this context. The reasons for renegotiating the originally agreed level of tariffs are not put into question by the GATT. This procedure, nonetheless, is not geared toward addressing momentary imbalances. The provision on safeguards that we discuss in chapter 4 of volume 2 is meant to deal with this issue. Article XXVIII of GATT is meant to redress the level of tariffs on more permanent basis. After all, one should not neglect that it is because of the possibility to renegotiate tariff protection (offered by Article XXVIII of GATT) that trading nations might have had the incentive to agree to “generous” tariff reductions in the first place. Eventually, they might want to take back some of their concessions, and Article XXVIII of GATT is the institutional vehicle to help them realize similar endeavors. Case law has over the years contributed toward ensuring that renegotiations of duties will be discussed following the multilateral procedure to this effect. It has thus, as a result, closed the door to unilateral practices by some trading nations that have had, over the years, recourse to outright violations of their commitments, instead of requesting a renegotiation. In Greece–Import Duties (1952), a GATT panel observed that Greece was facing acute, persistent financial difficulties that had led it to the imposition of import surcharges. Greece did not attempt to renegotiate its duties and had unilaterally proceeded to the increase of some of its duties. It was requested to remove the new measures by 1 July 1953. A similar story gave rise to the complaint that led to the GATT panel report on France–Compensatory Tax (1955). Canada was a bit more imaginative. Instead of imposing a blunt import surcharge, it adopted the value for duty, which in this case was fixed at $2.67 per 100 pounds of

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potatoes. Any imported good that was priced less than the fixed price would see a “dumping duty” levied against it. The US complained, arguing, inter alia, that the Canadian measure was violating the Canadian tariff concession, which had been agreed at $0.375 per 100 pounds of potatoes. The GATT Panel on Canada–Potatoes asked first if Canada had been violating Article VII of GATT, and its decision was in the negative (§ 16). It then asked the question whether the measure could qualify as AD duty, only to respond in the negative yet again (§ 47). The only claim that it upheld was that concerning Article II of GATT, siding with the complainant that had argued that the Canadian measure was above and beyond the agreed tariff ceiling on potatoes (§ 18). Case law, thus, contributed toward closing the door to imaginative bureaucratic practices aiming at circumventing tariff concessions entered, and channeling those interested in renegotiating the agreed tariff protection toward the mechanism instituted by Article XXVIII of GATT. 3.7.1

Maintaining the Level of Concessions

The quintessential element of Article XXVIII of GATT is that, postconsolidation, the level of tariffs can be altered only through multilateral action.120 GATT puts in place a procedure whereby a WTO member requesting to revise its duties upward must consult with those affected by the change and eventually pay compensation in order to do so. Since consideration had been provided for the original tariff bindings (Home promises a tariff concession in exchange for Foreign doing the same), consideration should be paid if the original balance of rights and obligations is affected (Home must be compensated if Foreign wants to undo the agreed balance of concessions). A series of procedural obligations have been introduced in order to serve this objective. A WTO member can increase its bound protection on a given tariff line provided that the multilateral process reflected in Article XXVIII of GATT has been followed. In the typical case, the member wishing to raise its duties on a bound item will negotiate and agree on compensation (in practice, a lowering of tariff protection on some items in exchange for tariff increase in others) with a subset of the WTO membership that has been more severely affected by the tariff change. The agreed compensation will then be applied on an MFN basis. According to Article XXVIII.2 of GATT, the WTO members participating in the renegotiation of the concession “shall endeavour to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade than that provided for in this Agreement prior to such negotiations.” Article XXVIII of GATT epitomizes, thus, the idea that GATT is about maintaining a level of reciprocally negotiated concessions. Tariff adjustments might be deemed necessary for a variety of reasons over time, and what matters is that WTO members feel that they get their concession’s worth at all times. Recall that, as stated previously, GATT does not inquire into the reasons why a WTO member might want to avail itself of this possibility. Consequently, although

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good theoretical arguments could support the inclusion of this provision in the GATT system,121 there is nothing legally wrong with invoking it out of mere political expediency.122 3.7.2 The Participants The procedure starts with a request tabled by the WTO member interested in renegotiating its bound level of duties on a tariff line (the “applicant contracting party”).123 The request will have to be submitted to the WTO. As we will see later in this chapter, for some negotiations, there is requirement that the WTO membership agrees to the opening of negotiations, whereas for others, no such requirement exists. Three questions need to be addressed: • Who will participate in the renegotiation of duties? • Who should be compensated? • How will compensation be calculated? This section deals only with the first question. To respond to this question, one needs to ask first what the benchmark for choosing participants should be. It could be, for example, that only those affected by the renegotiation be allowed to participate in the first place. In principle, though, all WTO members might actually, or potentially, be affected by the new higher duty, and hence, they should all be invited to participate in the process. Indeed, even those not currently producing the commodity the import duties on which will be revised, might be dissuaded from entering the market precisely because of the anticipated higher duties. On the other hand, if all affected (or potentially affected), WTO members were accepted to participate in the negotiation, the negotiation itself would have become quite burdensome. Stalling the negotiation is in and of itself a factor that contributes to uncertainty regarding the tariff treatment of the particular commodity. The whole purpose of GATT is, of course, the exact opposite—that is, to bring about certainty regarding the transaction costs of commercial transactions. Additionally, the much-needed flexibility, which is necessary to induce generous commitments in the first place, would be jeopardized. The GATT framers thus had to balance two competing objectives: a fairness requirement (namely, to compensate those negatively affected by the tariff increase); and the wish for speedy completion of the negotiation. GATT privileged the latter objective without unduly prejudging the former. In an effort to speed up the negotiation process, GATT limits participation to those WTO members that are primarily affected by the request to renegotiate the concession: the INR holders and the principal supplying interest (PSI). These two categories of WTO members, along with the applicant contracting party, are the “primarily concerned parties.” A third category, the WTO members having a substantial interest, will be consulted but have no legal right to participate in the negotiations.

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The GATT framers implicitly assumed that the cost of neglecting the fairness requirement was not disproportionate. Nonparticipants would still benefit from the new MFN tariffs. Participants enjoy an important advantage. They take a seat at the table of negotiations and design the compensation package. It is for them to decide where compensation should be paid. As a result, in the extreme case, compensation risks being meaningless for nonparticipants who might be offered lower tariffs on commodities that they do not produce or export. To avoid this being the case, they could, of course, always try to influence participants through informal means in order to avoid the agreed compensation being of no trade interest to them. This risk was much higher in the early years of GATT because of the high percentage of trade that few enjoyed and the absence of internationalized investment. The emergence of new trade powers and the internationalization of investment have decidedly tilted the balance in recent years. Global value chains keep proliferating, and thus, the risk of being offered a useless gift has been reduced even further as far as nonparticipants are concerned. 3.7.2.1 INR Holders An “INR holder” is a WTO member that has negotiated a specific concession with the applicant contracting party. Detecting who an INR is might seem trivial, but sometimes it proves to be a cumbersome task. The form of international negotiations holds the key in identifying INRs (since there can be more than one). During some rounds, concessions are negotiated and concluded on a bilateral basis (request-offer), as demonstrated earlier in this chapter. In these cases, the identification of the INR holder is a simple factual question (these are the so-called fixed INRs). Fixed INRs are subdivided into historic INRs and current INRs. An illustration can help us distinguish between the two. Assume that during the Tokyo round, Home had bound duties on fax machines at 15 percent as a result of a negotiation that it conducted with Foreign. During the Uruguay round, Home agreed to reduce the duty on fax machines to 10 percent; this time, however, it negotiated the concession with Third. Foreign is the historic INR holder, and Third is the current INR holder. Foreign, the historic INR holder, retains the legal right to participate in an Article XXVIII of GATT negotiation only if the proposed tariff increase exceeds 15 percent. Third, on the other hand, will participate no matter what the proposed increase is. Historic INRs have not always been incorporated into schedules of concessions. The situation changed when the Council for Trade in Goods (CTG) adopted the Decision on the Establishment of Loose-Leaf Schedules: Each Member shall include in its schedule all INRs at the current bound rate. Other Members may request the inclusion of any INR that had been granted to them. Historic INRs different from the current bound rate not specifically identified shall remain valid where a Member modifies its concession at a rate different from the rate at which the INR was granted.124

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The situation has further improved with the finalization of the Consolidated Tariff Schedules (CTS) Database, which provides consolidated information on the schedules of concessions of members. As a result, when the request-offer mode is followed, it is now quite easy to detect INRs. During other rounds, however (e.g., the Kennedy round), trading nations have agreed on tariff cuts using a formula like the Swiss formula (as discussed earlier in this chapter), or tiered cuts. In similar cases, no fixed INRs exist, and the question arises of how to identify who the INR is. The GATT CONTRACTING PARTIES adopted the following decision to address this issue: In respect of the concessions specified in the Schedules annexed to the Geneva Protocol (1967), a contracting party shall, when the question arises, be deemed for the purposes of the General Agreement to be the contracting party with which a concession was initially negotiated if it had during a representative period prior to that time a principal supplying interest in the product concerned.125

These are the so-called floating INRs, who will be identified in the same way as PSI countries.126 This is discussed in the next sections. 3.7.2.2 PSI Countries There are two definitions of the term “PSI country,” which, according to the Interpretative Note of Article XXVIII of GATT, typically covers a WTO member that has had, over a reasonable period of time prior to the negotiations, a larger share in the market of the applicant contracting party than a contracting party with which the concession was initially negotiated or would, in the judgment of the CONTRACTING PARTIES, have had such a share in the absence of discriminatory quantitative restrictions by the applicant contracting party. (emphasis added)

The same provision provides the second, exceptional definition: the CONTRACTING PARTIES may exceptionally determine that a contracting party has a principal supplying interest if the concession in question affects trade which constitutes a major part of the local exports of such contracting party. (emphasis added)

The Understanding on the Interpretation of Article XXVIII of GATT, which was adopted during the Uruguay round negotiations, further explained the “exceptional definition” of PSIs in its § 1 in the following manner: For the purposes of modification or withdrawal of a concession, the WTO member which has the highest ratio of exports affected by the concession (i.e., exports of the product to the market of the Member modifying or withdrawing the concession) to its total exports shall be deemed to have a principal supplying interest if it does not already have an initial negotiating right or a principal supplying interest as provided for in paragraph 1 of Article XXVIII. (emphasis added)

This clause, as made explicit in the Understanding, would be reviewed within five years to check whether it has functioned in a satisfactory manner or whether it has to be

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amended. In early 2000, the CTG requested the Committee on Market Access to undertake the review, and the Committee noted in its report that “… at this stage, there was no basis to change the criterion contained in paragraph 1 of the aforementioned Understanding.”127 The absence of use of this possibility notwithstanding, developing countries were eager to keep it in place.128 This item was discussed more than once.129 No action was taken and, as a result, the clause was neither amended nor abolished. The rationale for including PSIs in the negotiation is explained in the Interpretative Note of Article XXVIII of GATT, which relevantly provides: The object of providing for the participation in the negotiation of any contracting party with a principal supplying interest, in addition to any contracting party with which the concession was originally negotiated, is to ensure that a contracting party with a larger share in the trade affected by the concession than a contracting party with which the concession was originally negotiated shall have an effective opportunity to protect the contractual right which it enjoys under this Agreement. It would … not be appropriate for the CONTRACTING PARTIES to determine that more than one contracting party, or in those exceptional cases where there is near equality more than two contracting parties, had a principal supplying interest.

It is not intended that the scope of the negotiations should be designed to make negotiations and agreement under Article XXVIII unduly difficult, nor to create complications in the application of this article in the future to concessions that result from negotiations thereunder. The inclusion of INRs is justified on the grounds that, historically at least, they had a strong export interest in this particular market. They should be compensated either because there is a presumption that they continue to do so, or simply because of their negotiating efforts that led to the extraction of the original tariff promise. PSIs take a seat at the table because the legislator wanted to account for the new market situation and ensure that those who suffer the largest damage at the moment when the renegotiation takes place will play a role in the negotiations. Thus, Article XXVIII of GATT aims to strike a balance between the old and the new market situation. It could, of course, be the case that the INRs are PSIs, in the sense that INRs continue have the largest share in the market of the WTO member requesting renegotiation. In this case, PSIs will be selected according to the exceptional definition. INRs and PSIs derive, by virtue of their participation in the negotiation, an advantage since they can, either acting separately or collectively, identify the commodity (or list of commodities) where compensation will be paid. Of course, the advantage consists of selecting the area of compensation, as already noted earlier in this chapter. So, even though compensation will be nondiscriminatory, it will be in product-markets where INRs and PSIs have a strong presence.130 For the abovementioned reasons, the damage to nonparticipants resulting from their physical absence from the negotiation is being gradually reduced as a result of the internationalization of production.

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3.7.2.3 SI Countries The term “substantial interest (SI) country” is defined in the Interpretative Note of Article XXVIII: The expression “substantial interest” is not capable of a precise definition and accordingly may present difficulties for the CONTRACTING PARTIES. It is however, intended to be construed to cover only those contracting parties which have, or in the absence of discriminatory quantitative restrictions affecting their exports could reasonably be expected to have a significant share in the market of the contracting party seeking to modify or withdraw the concession.

In practice, WTO members with 10 percent or more of the market of the “applicant contracting party” are considered as having SI in the concession. A report of the Committee on Tariff Concessions dating from July 1985 confirms that the 10 percent share has been generally applied.131 The Understanding on the Interpretation of Article XXVIII of GATT, decided in the Uruguay round, states in § 3: In the determination of which Members have a principal supplying interest … or substantial interest, only trade in the affected product which has taken place on a MFN basis shall be taken into consideration. However, trade in the affected product which has taken place under non-contractual preferences shall also be taken into account if the trade in question has ceased to benefit from such preferential treatment, thus becoming MFN trade, at the time of the negotiation for the modification or withdrawal of the concession, or will do so by the conclusion of that negotiation.

It is, thus, MFN trade only that will define PSI and SI countries. WTO members that have preferential arrangement with the applicant contracting party can thus never become PSIs or SIs. This analysis presupposes the existence of trade statistics; otherwise, how could anyone measure market shares for PSIs? What if, for example, renegotiation of duties is requested for a product-market for which no statistics exist? Usually, the period of three years before the renegotiation is considered in order to define what a PSI is. In the case of new products, though, production patterns in the same tariff line (and not necessarily the same product) will serve as the basis to define PSIs. The Understanding on the Interpretation of Article XXVIII of GATT provides in § 4: When a tariff concession is modified or withdrawn on a new product (i.e., a product for which three years’ trade statistics are not available) the Member possessing initial negotiating rights on the tariff line where the product is or was formerly classified shall be deemed to have an initial negotiating right in the concession in question. The determination of principal supplying and substantial interests and the calculation of compensation shall take into account, inter alia, production capacity and investment in the affected product in the exporting Member and estimates of export growth, as well as forecasts of demand for the product in the importing Member. For the purposes of this paragraph, “new product” is understood to include a tariff item created by means of a breakout from existing tariff line. [italics in the original]

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3.7.3 The Various Procedures for Renegotiating Tariff Protection Article XXVIII of GATT distinguishes between procedures where no prior approval is required and procedures where it is. The first is described in Article XXVIII.1 of GATT, where the applicant contracting party must initiate negotiations during a specified period (July–October) in any three-year period starting on January 1, 1958 (e.g., 1958–1961; 1961–1964, etc.). The applicant contracting party will notify the CTG of its interest in initiating negotiations, and the CTG will determine the identity of the other primarily concerned parties.132 The second category of procedures where no prior approval is required is described in Article XXVIII.5 of GATT. WTO members can reserve their right to renegotiate and eventually exercise this right at a later date: Before 1 January 1958 and before the end of any period envisaged in paragraph 1 a contracting party may elect by notifying the CONTRACTING PARTIES to reserve the right, for the duration of the next period, to modify the appropriate Schedule in accordance with the procedures of paragraph 1 to 3. If a contracting party so elects, other contracting parties shall have the right, during the same period, to modify or withdraw, in accordance with the same procedures, concessions initially negotiated with that contracting party.

Practice in this context constitutes the majority of Article XXVIII of GATT negotiations. This discussion is, mutatis mutandis, applicable in this context as well. The procedures in which no prior approval is required for the negotiation to begin have one important downside, in that the right to renegotiate can be exercised only within a particular time period. WTO members that have not reserved their right to renegotiate, or those that wish to negotiate outside the period prescribed in Article XXVIII.1 of GATT, can do so only if they have first secured the authorization of the WTO membership (following the procedure included in Article XXVIII.4 of GATT). For the remaining cases, the WTO member concerned will submit its request to the CTG, the competent organ to decide. Any request for authorization must include the elements specified in the Interpretative Note of Article XXVIII of GATT (§ 4.1): “Any request for authorization to enter into negotiations shall be accompanied by all relevant statistical and other data. A decision on such request shall be made within thirty days of its submission.” The time period within which the negotiation must be completed should be short (60 days), but could be extended. The Interpretative Note of Article XXVIII of GATT relevantly provides in this respect (§ 4.3): It is expected that negotiations authorized under paragraph 4 for modification or withdrawal of a single item, or a very small group of items, could normally be brought to a conclusion in sixty days. It is recognized, however, that such a period will be inadequate for cases involving negotiations for the modification or withdrawal of a larger number of items and in such cases, therefore, it would be appropriate for the CONTRACTING PARTIES to prescribe a longer period.

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Recall that the purpose and object of negotiations are reflected in Article XXVIII.2 of GATT: In such negotiations and agreement, which may include provision for compensatory adjustment with respect to other products, the contracting parties concerned shall endeavor to maintain a general level of reciprocal and mutually advantageous concessions not less favorable to trade than that provided for in this Agreement prior to such negotiations.

The Interpretative Note of Article XXVIII of GATT adds (§ 4.6): It is not intended that provision for participation in the negotiations of any contracting party with a principal supplying interest, and for consultation with any contracting party having a substantial interest in the concession which the applicant contracting party is seeking to modify or withdraw, should have the effect that it should have to pay compensation or suffer retaliation greater than the withdrawal or modification sought, judged in the light of the conditions of trade at the time of the proposed withdrawal or modification, making allowance for any discriminatory quantitative restrictions maintained by the applicant contracting party.

It is, thus, clear that flexibility in this context should be understood as allowing for rebalancing of tariff protection. The idea is that because trading nations would be allowed to revise tariffs upward after they have been consolidated, their original tariff concessions would be more generous than otherwise. The question is, of course, what is the optimal amount of flexibility? Should an agreement for compensation be the authorization necessary for the applicant contracting party to revise its duties upward? Or should it be allowed to do so even in absence of an agreement to compensate? The GATT framers opted for allowing changes in tariff levels even in the absence of agreement between participants regarding the amount of compensation. They might have anticipated that, had they done otherwise, the flexibility of this provision would have been eliminated in the face of unreasonable demands. 3.7.4 Agreement on the Amount of Compensation Assuming that an agreement has been reached between the participants at the end of the negotiations, the applicant contracting party will notify the WTO of its new schedule of concessions, which will be applied on an MFN basis. It could be, though, that a WTO member that qualifies as having SI in the commodity is unsatisfied with the agreement reached. If this is the case, then it can take action against the applicant contracting party, as per Article XXVIII.3 (b) of GATT: If agreement between the contracting parties primarily concerned is reached but any other contracting party determined under paragraph 1 of this Article to have a substantial interest is not satisfied, such other contracting party shall be free, not later than six months after action under such agreement is taken, to withdraw, upon the expiration of thirty days from the day on which written notice of such withdrawal is received by the CONTRACTING PARTIES, substantially equivalent concessions initially negotiated with the applicant contracting party.

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This solution obtains regardless whether it is dealing with a procedure where prior approval for initiation is required or not. 3.7.5

Failure to Agree on the Amount of Compensation

If negotiations do not manage to produce an agreement, the applicant contracting party is still free to increase its tariff protection. INR holders, PSIs, and SIs will have, according to Article XXVIII.3 of GATT, the right to withdraw substantially equivalent concessions. Thus, this provision allows “efficient breach of contract” without explicitly saying so. The text of the agreement, though, as will be covered in more detail later in this chapter, leaves unanswered the question whether withdrawal of concessions will be on a bilateral or on an erga omnes basis. 3.7.5.1 Procedures Where No Prior Approval Is Required If the applicant contracting party decides to withdraw concession even in the absence of agreement on the compensation, it runs the risk of facing retaliation, not only from the members participating in the negotiation but from the rest of the WTO membership as well. The relevant part of Article XXVIII.3(a) of GATT reads in this respect: If agreement between the contracting parties primarily concerned cannot be reached before 1 January 1958 or before the expiration of a period envisaged in paragraph 1 of this Article, the contracting party which proposes to modify or withdraw the concession shall, nevertheless, be free to do so and if such action is taken any contracting party with which such concession was initially negotiated, any contracting party determined under paragraph 1 to have a principal supplying interest and any contracting party determined under paragraph 1 to have a substantial interest shall then be free not later than six months after such action is taken, to withdraw, upon the expiration of thirty days from the day on which written notice of such withdrawal is received by the CONTRACTING PARTIES, substantially equivalent concessions initially negotiated with the applicant contracting party.

PSIs, INRs, and SIs can react, provided that they do so on goods initially negotiated with the applicant contracting party. The provision is, nonetheless, incomplete, and it provides no definitive response to the following questions that might arise in practice: • What if PSIs and SIs have no concessions initially negotiated with the applicant contracting party? Should they lose their right to retaliate? • Should the retaliation by PSIs and SIs be only vis-à-vis the applicant contracting party, or vis-à-vis the WTO membership? • It could be the case that WTO members other than INRs, PSIs, or SIs are affected by the unilateral modification of the concession.133 Should they not be entitled to react as well? Let us start with the first question. The number of WTO members nowadays makes it quite likely134 that “primarily concerned parties,” SIs, or both have no initially negotiated concessions with the applicant contracting party.

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There is not much precedent in this area. The only known instance suggests that retaliating WTO members indicate the goods where they purport to increase tariffs in retaliation, regardless of whether they have initially negotiated concessions on these goods with the applicant state. This is what almost happened in Canada/European Communities–Article XXVIII Rights. The negotiation in this case occurred as a result of the enlargement of the EU (and the ensuing obligation of new EU members to raise their level of protection in some goods to the EU level), and Canada’s dissatisfaction with the offer for compensation that was tabled by the EU. This case is covered in more detail later in this chapter, but for now, it is enough to state that Canada threatened to retaliate by raising duties on goods for which it was no INR-holder vis-à-vis the EU. It did not eventually act upon its threat, however, since an agreement with the EU was finally reached. Had it done so, though, this practice would have run counter to the explicit wording of Article XXVIII of GATT. Let us move now to the second question, namely, who should be the object of retaliation? Article XXVIII of GATT is not explicit in this respect. Intuitively, though, one would expect that retaliating WTO members should do so only on a bilateral basis—that is, they should be barred from raising their tariffs in retaliation erga omnes. Indeed, why should innocent bystanders pay for the absence of agreement in a negotiation where they did not participate? Surprisingly, there are at least two instances in practice where the WTO member reacting to a unilateral modification threatened to do so erga omnes. First, the 1990 award by the Arbitrator on Canada/European Communities–Article XXVIII Rights notes, with respect to Canada’s threat to withdraw concessions substantially equivalent to those modified by the EU, that “should Canada exercise her right to withdraw concessions, she undertakes obligations to compensate third countries having negotiating rights in respect of Canada for the products on which concessions would be withdrawn.”135 Canada assumed that it would incur no obligations to compensate anyone, had its retaliation taken place on a bilateral basis. Implicitly, therefore, this passage suggests that Canada would be raising duties, not only vis-à-vis the EU, but also vis-à-vis the rest of its trading partners on an MFN basis. This view has been confirmed in subsequent practice. Canada and the EU were also the protagonists in the second instance, when they ran into the same argument in the context of the EU’s enlargement from 12 to 15 member states (with the accession of Austria, Finland, and Sweden in 1995). The three acceding countries had to raise their duties with respect to some products from their prior unilateral level to the new, harmonized EU level. According to Article XXIV.6 of GATT, the members of the preferential trade agreement and the outsiders enter into negotiations in similar cases: the aim is to compensate those affected by tariff increases. When discussing the amount of compensation, a benefit that results because acceding countries had to lower their tariffs in some tariff lines to the EU level with respect to

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certain goods will be taken into account (referred to as “in-built compensation”). This is where Canada and the EU disagreed. The former believed that the in-built compensation was inadequate, but the latter believed the opposite.136 Canada threatened to retaliate: As a result of tariff modifications which became effective 1 January 1995, the access of Canadian exporters to the acceding countries has been impaired. Consequently, Canada wishes to notify Members that it will exercise its rights under Article XXVIII:3 to withdraw substantially equivalent tariff concessions on products of interest to the European Union as outlined in the attached table. These modifications shall take effect 30 days after distribution of this notification to WTO members. Members may wish to note that in this respect, these modifications will not affect the application of rates under the Generalized System of Preferences. Any Member that believes it has supplier rights which are affected by this action is invited to inform the Permanent Representative of Canada to the WTO.137

The last sentence here indicates that Canada’s purported retaliation was erga omnes. The parties finally agreed to a settlement, and as a result, Canada never enacted its threat.138 This practice suggests that, for some WTO members at least, erga omnes retaliation in response to unilateral modifications is very possible. The negotiating record, and especially the interventions by the US and India delegates (based on which the agreement on this score finally emerged), seem to support this view. The interventions by these two delegates suggest that, should a WTO member withdraw concessions without prior agreement, affected members will use the value of the withdrawn concessions as the basis to calculate their own withdrawal, which should be on an MFN basis.139 This is regrettable for two reasons. First, innocent bystanders will have to pay the price of trade wars between aliens. Second, since the incentive of the retaliating member is to overshoot the amount of suspended concessions to provide the applicant contracting party with an incentive not to unilaterally modify the concession in the first place, one might end up with trade wars spiraling with no end in sight because of counterretaliation by WTO members. Moreover, the current institutional framework is ill equipped to deal with the scenario of MFN retaliation. Assume that Canada had retaliated on an MFN basis in its dispute with the EU, and that it had then invited any affected parties to negotiate their compensation with it. Under what GATT provision would such negotiations take place? Arguably, Article XXVIII of GATT is not applicable to this context since none of the three statutory procedures for renegotiation applies here and no other provision emerges as a candidate to host similar negotiations. An amendment of Article XXVIII of GATT is warranted to prevent similar instances in the future. Two elements should be introduced into the current text: • If no agreement has been reached between the interested parties, retaliation shall be bilateral.

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• The amount of retaliation, in the case of disagreement, shall be fixed through recourse to binding arbitration (as per Article 22.6 of the DSU).140 With respect to the third question—e.g., whether WTO members other than INRs, PSIs, or SIs can legitimately retaliate against the trading nation raising its duties—the current text does not explicitly acknowledge that they have a legal right to retaliate under this provision. On the other hand, they will, in all likelihood, be affected by a modification of the schedule, regardless of whether an agreement between the primarily concerned parties has been reached. What can be done if such an occasion arises? The most reasonable way out would be to acknowledge the right of WTO members to take an NVC against the applicant contracting party.141 This solution seems warranted in light of the explicit acknowledgment in Article XXVIII.3 of GATT that the applicant contracting party has the right to unilaterally modify its schedule of concessions even in the absence of agreed compensation. Its actions to this effect are thus lawful. The only question remaining in this context is whether the right to file an NVC can be exercised regardless of whether an agreement between the primarily concerned parties has been reached. In the absence of relevant practice, I tend to respond to this question in the affirmative. From the perspective of the affected state, it could be totally immaterial whether an agreement occurred or not since in either scenario, its rights might be negatively affected.142 So long as damage has been suffered as a result of unexpected behavior, the affected WTO members should have the right to raise an NVC. 3.7.5.2 Procedures Where Prior Approval Is Required If no agreement can be reached, then according to Article XXVIII.4 of GATT: the applicant contracting party shall be free to modify or withdraw the concession, unless the CONTRACTING PARTIES determine that the applicant contracting party has unreasonably failed to offer adequate compensation.

Hence, in the case of disagreement between the negotiating partners, the CTG will determine whether adequate compensation has been offered. The Interpretative Note of Article XXVIII of GATT states that the CTG must decide a matter before it within 30 days from its submission unless the applicant member agrees to a longer period (§ 4.4). The Interpretative Note of Article XXVIII of GATT further provides some useful information as to the elements that the CTG should take into account when determining whether adequate compensation had indeed been offered (§ 4.5): In determining under paragraph 4 (d) whether an applicant contracting party has unreasonably failed to offer adequate compensation, it is understood that the CONTRACTING PARTIES will take due account of the special position of a contracting party which has bound a high proportion of its tariffs at very low rates of duty and to this extent has less scope than other contracting parties to make compensatory adjustment.

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If the CTG determines that adequate compensation has indeed been offered, the modified concession will be allowed to stand. If not, the applicant WTO member might still go ahead and unilaterally modify the concession. In this case, INRs, PSIs, and SIs have the right to suspend substantially equivalent concessions (Article XXVIII.4 of GATT): If such action is taken, any contracting party with which the concession was initially negotiated, any contracting party determined under paragraph 4 (a) to have a principal supplying interest and any contracting party determined under paragraph 4 (a) to have a substantial interest, shall be free, not later than six months after such action is taken, to modify or withdraw, upon the expiration of thirty days from the day on which written notice of such withdrawal is received by the CONTRACTING PARTIES, substantially equivalent concessions initially negotiated with applicant contracting party. In light of the fact that: (a) An authorization is required before the applicant WTO Member enters into an Art. XXVIII.4 GATT negotiation; (b) The authorization will be granted following a consensus decision to this effect; and (c) The agreement of potential INRs, PSIs, SIs is essential, indeed the conditio sine qua non for a favorable decision, it is to be expected that the negotiation on the level of compensation, in similar cases, effectively takes place before the authorization has been granted. This might explain why some requests are being withdrawn (in the absence of agreement on the compensation).143

3.8

Charges Exempted from Article II of GATT

A number of impositions, other than OCDs and ODCs, typically burden imports at the port of entry to a market. Article II of GATT mentions some of them (internal taxes and charges; antidumping and countervailing duties; fees and charges for services rendered), but there are others (import surcharges for balance of payment reasons; safeguards), that have not been explicitly mentioned up to this point, but will be in the following sections. 3.8.1

Internal Taxes and Charges

Article II.2(a) of GATT reads: Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product: a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III* in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part;

This provision is reminiscent of the Interpretative Note of Article III of GATT. Internal measures, like a sales ban of a health-hazardous commodity imposed at the border, should not be considered to be in violation of Article XI of GATT.

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In India–Additional Import Duties, the panel and the AB had the opportunity to set the record straight and establish this parallelism. They were facing a claim that two Indian measures were in violation of Articles II and III of GATT. The measures were the “Additional Duty,” imposed on alcoholic beverages, and the “Extra Additional Duty” imposed on a wider range of goods. The two measures were discriminatory, and there is no doubt that they were violating Article III of GATT. The claim that the two measures ran afoul of Article II of GATT as well was mounted probably because they were being imposed at the border. The AB could have simply stated that the measures at hand violated Article III of GATT, but that would have sidestepped the subject matter of Article II of GATT, as per Article II.2(a) of GATT. Instead, it adopted a roundabout way (§§ 165ff.) to reach its findings, which, for all practical purposes, do not contradict the abovementioned preferred approach. In § 193 of its report, the AB did clarify that the complaining party carries the burden of proof to establish violation of Article II.2(a) of GATT. 3.8.2 Antidumping and Countervailing Duties WTO members can impose antidumping (AD) duties, countervailing duties (CVDs), or both if imports are dumped or have been subsidized. This topic will be discussed further in chapters 2 and 3 of volume 2, respectively. 3.8.3

Fees and Charges for Services Rendered

Article VIII.1 of GATT is akin to a catchall provision, covering all measures imposed at the border corresponding to a service that is being provided at the border in connection with importation. 3.8.3.1 Preparatory Work This provision was initially reflected in Article 13, as well as in Article 19 of the London Draft. Items that corresponded to ODCs, as well as fees and formalities that come under the ambit of today’s Article VIII of GATT, would fall under these two provisions. Both ODCs and fees and formalities were distinguished from ordinary customs duties, which were the subject matter of Article 24 of the London Draft. The negotiators agreed that duties and charges coming under the aegis of Article 19 of the London Draft should not be used as indirect protection for domestic products.144 This provision was intended to operate as an anticircumvention, ensuring that Article 24 of the London Draft would not be undermined through the imposition of duties and charges other than ordinary customs duties. No change is reported in the subsequent reincarnations of this provision.145 The negotiators believed that some harmonization (standardization) of national practices was probably necessary to reduce this risk, but they did not go beyond expressing a wish

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to this effect.146 Harmonization could be realized along the lines of the Geneva Convention of 3 November 1923. In fact, France, with the support of Belgium, Luxembourg, Czechoslovakia, the Netherlands, and the United Kingdom, held the view that this provision would be useless unless all ITO members agreed to adhere to the Geneva Convention.147 The World Economic Conference of 1927 had made similar recommendations, and a number of countries, following France’s lead, wanted to ensure consistency across its recommendations and the eventual ITO provision.148 Nevertheless, the negotiators could not agree on the modalities.149 Another area of disagreement was the availability of penalties depending on the gravity of the act (whether it was due to negligence or accidental error).150 At the end, although negotiators managed to agree on an indicative list of charges coming under the purview of this provision,151 they decided that deeper harmonization should be left for a later stage.152 Alas, it never happened. 3.8.3.2 Relationship with Article II of GATT The previous discussion of the negotiating record strongly supports the conclusion that there should be no overlap between the subject matter of this provision and that of Article II of GATT. This point was confirmed in case law in the panel report on Dominican Republic–Import and Sale of Cigarettes (§ 7.115).153 3.8.3.3 Measures Covered There is no need to provide the same services across national borders, nor is there a need to show that the service is necessary for importation to occur. It suffices that a service is “in connection with importation (or exportation).” For the rest, WTO members are free to decide on the services that they will be providing upon importation of goods. Article VIII.4 of GATT provides an indicative list of measures that come under its purview: consular transactions, such as consular invoices and certificates; quantitative restrictions; licensing; exchange control; statistical services; documents, documentation, and certification; analysis and inspection; and quarantine, sanitation, and fumigation: All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

This list, like all indicative lists, serves two purposes. It reduces the potential for a type II error (false negative). A judge cannot decide that, say, a statistical service or sanitation mechanism does not come under the purview of Article VIII of GATT. On the other hand, the types of services featured in the indicative list set the tone for the type of other (not explicitly mentioned) measures that should be considered fees and formalities covered by Article VIII of GATT. Therefore, although the class of measures has not been exhaustively

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provided for, the typecasting operated through the indicative list will provide the judge with enough ammunition if a dispute to this effect appears. 3.8.3.4 Standard of Review The GATT panel report on US–Customs User Fee provided a series of clarifications regarding the ambit of Article VIII of GATT. The facts of the case that are crucial to our study are summarized in § 7 of the report: The term “customs user fee” refers to a number of fees imposed by the United States for the processing by the US Customs Service of passengers, conveyances and merchandise entering the United States. Only one of these fees is at issue in this dispute. It is the “merchandise processing fee,” an ad valorem charge imposed for the processing of commercial merchandise entering the United States. (italics in the original)

The panel went on to explain that the services rendered, for which a charge would be imposed, did not have to be requested by the traders, as they could be unilaterally decided by the importing state (§ 77). It further explained that the service rendered must be linked to a particular transaction, not to the total cost of service (§ 81). Based on this analysis, the panel went on to find that the US measure at hand was GATT-inconsistent since, by virtue of its nature (ad valorem), the duty imposed was not linked to the cost of the provided service. Minor value transactions would pay less than major value transactions for exactly the same service (§§ 84–86). The analysis in US–Customs User Fee has not been brought into question in subsequent cases. WTO panels that had to deal with this issue borrowed from it and explicitly referred to this case law when dealing with a legal claim under Article VIII of GATT. The Panel on Argentina–Footwear reflects a quasi-identical ruling on a similar issue. Argentina had an ad valorem charge for services rendered in connection with the importation of goods. The panel found the Argentine measure to be GATT-inconsistent, confirming that ad valorem schemes are by construction inconsistent with Article VIII of GATT.154 3.8.4

Import Surcharges for BoP Reasons

Recall that import surcharges are often practiced to address balance of payments (BoP) problems. They are not explicitly provided for in the body of Article XI of GATT, but both practice (the Working Party on the US surcharge, discussed in chapter 2) and the literature [Jackson (1972) cites GATT practice to this effect] support the argument that similar instruments can legitimately come under Article XII of GATT. 3.8.5

Safeguards

Curiously, Article II of GATT mentions AD and CVDs and omits references to safeguards. Yet, as will be seen in chapter 4 of volume 2, the majority of safeguards do take the form of import duties (surcharges) in practice.

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3.9 Withdrawal from GATT/WTO The consequence of withdrawal from the WTO is that neither the withdrawing member, nor those that have decided to stay in the WTO, are bound by their previous contractual relationships as a result of their membership at the WTO. 3.9.1 Withdrawing from the WTO A WTO member leaving the WTO is not bound by the obligations that it assumed because of its membership in the organization. Article XV of the Agreement Establishing the WTO provides that: 1. Any Member may withdraw from this Agreement. Such withdrawal shall apply both to this Agreement and the Multilateral Trade Agreements and shall take effect upon the expiration of six months from the date on which written notice of withdrawal is received by the Director-General of the WTO. 2. Withdrawal from a Plurilateral Trade Agreement shall be governed by the provisions of that Agreement. 3.9.2 The GATT Solution The provision quoted here is the successor to Article XXVII of GATT. It allowed, in a similar vein, WTO members to withhold or withdraw concessions vis-à-vis other trading nations that had left GATT. Since GATT was no institution, formally speaking, as explained in chapter 1, the agreement did not provide for the possibility of withdrawal of its contracting parties. It did provide, though, for the possibility to withdraw concessions vis-à-vis other contracting parties that either never became or ceased to be “contracting parties” to GATT. Article XXVII of GATT reads: Any contracting party shall at any time be free to withhold or to withdraw in whole or in part any concession, provided for in the appropriate Schedule annexed to this Agreement, in respect of which such contracting party determines that it was initially negotiated with a government which has not become, or has ceased to be, a contracting party. A contracting party taking such action shall notify the CONTRACTING PARTIES and, upon request, consult with contracting parties which have a substantial interest in the product concerned.

China is a good example of this concept. It participated in the GATT negotiations but did not become a contracting party. This was the case because the split between China and the Chinese Taipei occurred while GATT was entering the last stages of negotiation. Following the split that led to the independence of Chinese Taipei, China decided to abstain from participating in GATT. Chinese Taipei did not participate either. A number of the contracting parties withdrew concessions that they had made to China during the negotiation of GATT.

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Table 3.1 Withdrawal of Concessions under Article XXVII of GATT Concessions Granted By

Initially Negotiated With

Reference

Australia Benelux: Section A—Metropolitan Territories Benelux: Section C—Netherlands, New Guinea Canada Ceylon Chile Czechoslovakia Finland France Germany, Federal Republic of India Pakistan Sweden United Kingdom United States Uruguay

China, Syria/Lebanon, Philippines China, Syria/Lebanon, Liberia, Philippines

L/1266 L/674

China China, Liberia, Philippines, Korea China Colombia Palestine China China, Syria/Lebanon, Philippines Philippines China, Colombia, Philippines China Colombia, Philippines, China China China China, Colombia

L/658 and Add. 1 L/553 L/1102, L/1505 L/3191 GATT/CP/23 L/659 L/460 and L/1269 L/1264 G/77 and L/1430 L/1293 L/950 L/786 GATT/CP/115, Add. 3 L/1613

Of course, in 2001, China joined the WTO, and, at around the same time, Chinese Taipei joined as well. Table 3.1 provides a list of invocations of Article XXVII of GATT. 3.9.3

GATT Practice

Article XXVII of GATT does not exhaust the possibility for withdrawing concessions. Practice has added to it in two cases. The territorial scope of a member’s obligations can be modified over time, and an appropriate illustration to this effect is offered by the first example, the mandate in favor of the United Kingdom to also represent Palestine before GATT. Upon termination of the mandate that the League of Nations had provided the United Kingdom with respect to Palestine, the successor state could not be regarded as being bound by obligations under GATT. The Declaration adopted by the CONTRACTING PARTIES on May 9, 1949, provides: Whereas the Government of the United Kingdom in the course of the negotiations leading up to the drawing up of the General Agreement on Tariffs and Trade in 1947, negotiated on behalf of the mandated territory of Palestine for concessions to be accorded to products originating in such territory and for concessions to be accorded to the products of other contracting parties entering such territory, and Whereas the Government of the United Kingdom ceased to be responsible for the mandated territory of Palestine on 15 May 1948, The CONTRACTING PARTIES Declare that, since the United Kingdom ceased, as from 15 May 1948, to be a contracting party in respect of the territory formerly included in the Palestine mandate,

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Section E shall be deemed to be no longer part of Schedule XIX; and Any contracting party shall, in accordance with Article XXVII of the General Agreement, be free to withhold or withdraw, in whole or in part, any concession provided for in the appropriate schedule annexed to the GATT which such contracting party determines was initially negotiated with the United Kingdom on behalf of Palestine, provided that the contracting party taking such action shall give notice to all other contracting parties and, upon request, consult with the contracting parties which have a substantial interest in the product concerned. (italics in the original)

The second instance concerns Yugoslavia following the civil war that erupted in this country in the late 1980s and early 1990s, and led to the freezing of Yugoslavia’s participation in GATT. During this period, the Yugoslav Federation slowly collapsed, and new state entities appeared on the international scene. One of them, the Federal Republic of Yugoslavia, claimed to be the successor to the Yugoslav Federation and requested to be acknowledged as such. Had its request been accepted, the new state would have preserved the GATT contracting party status originally enjoyed by the Yugoslav Federation. GATT contracting parties reacted negatively to this request and decided to freeze the participation of the Federal Republic of Yugoslavia:155 Yugoslavia —Status as a contracting party (L/7000, L/7002, L/7007, L/7008, L/7009, L/7022) The Chairman said that the break-up of the former Socialist Federal Republic of Yugoslavia had posed the question of its status as a contracting party. While the delegation speaking in the name of the Federal Republic of Yugoslavia (FRY) had laid claim to the status of successor to the former Socialist Federal Republic of Yugoslavia (L/7000), this claim had been contested by some contracting parties and some others had reserved their position on the issue. Some contracting parties had also suggested that the delegation claiming to represent the FRY as a successor to the Socialist Federal Republic of Yugoslavia (SFRY) in GATT should not participate in GATT activities until the FRY had sought fresh membership, while others held the view that its participation should be without prejudice to the FRY’s claim to successor status. He had held extensive informal consultations with contracting parties and believed there was agreement that this issue would need consideration by the Council. In these circumstances, without prejudice to the question of who should succeed the former SFRY in the GATT, and until the Council considered this issue, he proposed that the representative of the FRY should refrain from participating in the business of the Council. The Council so agreed.

As a result of all this, the Federal Republic of Yugoslavia did not participate in the General Council meetings. Later, with the advent of the WTO, Serbia and Montenegro (a state entity corresponding geographically to the Federal Republic of Yugoslavia), followed by other former Yugoslav republics, requested accession to the WTO anew, and working parties were established to this effect.156 3.10

Exceptions

Articles XX and XXI of GATT can justify deviations from the obligation assumed under Article II of GATT, as do waivers. All these subjects will be discussed in detail in chapter 9.

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Chapter 3

Institutions

We stated in the previous chapter that the Market Access Committee deals with issues relating to both tariff- and nontariff barriers. It thus, runs the IDB/CTS (Integrated Data Base, Consolidated Tariff Schedules) dataset, which comprises data regarding both boundas well as applied duties by WTO members. We discuss it in more detail in chapter 12, volume 2.157 There are many extra-WTO initiatives aiming to increase transparency regarding tariffs (as well as nontariff measures). The most ambitious is the recent Transparency in Trade Initiative (TNT), which aimed to bring under one roof a number of pre-existing transparency mechanisms. The TNT is a joint initiative by the AfDB (African Development Bank), the ITC (International Trade Centre), the UNCTAD (United Nations Conference on Trade and Development), and the WB (World Bank). It brings together various initiatives: namely the WITS (World Integrated Trade Systems), a joint UNCTAD/WB initiative, which puts together the UN COMTRADE (International Trade Statistics Database), a repository of official trade statistics, the UNCTAD TRAINS (Trade Analysis Information System), a computerized information system at the HS six digit-level, and the WTO IDB/CTS; the MAcMap (Market Access Map), an ITC initiative that provides tools for market analysis for MFN and preferential rates for 190 countries, and is accessible by private operators as well; and the TTBD (Temporary Trade Barriers Database), a dataset regrouping all contingent protection measures, namely, antidumping, countervailing, and safeguards. 3.12

Concluding Remarks

The decision to differentiate the legal treatment of tariffs from that reserved to quantitative restrictions (QRs) is quite sensible. Tariff-based negotiations are easier to reconcile with the resolute belief of the GATT framers to move to nondiscriminatory trade liberalization, and the economic theories discussed in this chapter provides ample support for this view. Reduction of tariffs is probably the single most important success that the GATT/WTO has recorded so far. It is because of this success that WTO members could switch their focus to the negotiation of disciplines on NTBs, the main focus during the Tokyo and Uruguay rounds. This success had another by-product: tariff-preferences under preferential trade agreements have been eroded because the margin of preferences granted has gradually reduced as a result of the reduction of MFN tariffs. The regulation of renegotiation of tariffs leaves a lot to be desired, especially when it comes to the compensation paid in case no agreement is reached and the applicant goes ahead and raises tariffs. Only a legislative amendment would settle this issue once and for all.

4

Most Favored Nation

4.1 The Legal Discipline and Its Rationale 4.1.1 The Legal Discipline By virtue of Article I of GATT, WTO members must automatically and unconditionally accord to products originating in any WTO member any trade advantage that they have granted to a like product originating in another nation, regardless of whether the latter is a WTO member. 4.1.2 The Rationale for the Legal Discipline The most favored nation (MFN) obligation is the quintessential GATT/WTO discipline. As we saw in chapter 1, the whole GATT edifice was built around this concept since the aim of the GATT framers was to establish a world trading order where like goods would be treated in the same way regardless of their origin.1 The negotiating rationale involved the conviction (at least among the leaders at the negotiating table) that existing preferences were not only bad for business, but also a factor contributing to conflicts among nations. GATT, through MFN, its cornerstone, was conceived as the means to equalize conditions of competition across its adherents in an effort to curb asymmetric access to foreign markets. The MFN also represented a gift for those with weak bargaining power, who could not effectively negotiate the reduction of trade barriers. Cordell Hull believed that this was the leaders’ duty and their contribution to world peace. MFN largely represents the value of joining GATT; by introducing the MFN requirement into GATT, club members (e.g., GATT contracting parties) were insured against the risk of being treated worse than outsiders (hence the term “MFN”). If a club member accorded better or the same treatment to an outsider, then what would have been the purpose of joining GATT in the first place? To make adherence to GATT worthwhile, club members would have to immediately and unconditionally extend to all other club members any advantage they had previously accorded to outsiders.2 Conversely, club members were

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not obliged to accord to outsiders the advantages they had accorded to other club members. Joining the GATT provided trading nations with certainty in the treatment of traded goods, a luxury that was not extended to outsiders. While club members were certain that they would never be disadvantaged over outsiders, the latter could not count on similar treatment.3 4.1.3

Discussion

4.1.3.1 The Historic Dimension of MFN Nondiscriminatory trade liberalization is not an invention of the GATT system. Hudec (1988) explains that, as early as medieval times, the city of Mantua, Italy, obtained from the Holy Roman Emperor the promise that it would always benefit from any privilege granted by the emperor to “whatsoever other town.” Jackson (1997, p. 158) notes that the term “MFN” appears for the first time at the end of the seventeenth century. During the nineteenth century, the provision appeared in a number of treaties between European states. For instance, the Cobden-Chevalier treaty of 1860, which liberalized trade between Great Britain and France, included an MFN clause guaranteeing that neither signatory would be treated worse in each other’s market than any other state with which one of the two signatories had, or would assume, trade relations. In the earlier part of the twentieth century, the US signed many bilateral treaties containing an MFN clause. The League of Nations included a clause to this effect and based its formulation on treaties signed by the US, as well as numerous other bilateral trade treaties that saw the light of day before World War I. Although not quite an MFN clause as it is known today, Article 21 of the Covenant of the League of Nations stated: The high contracting parties agree that provision shall be made through the instrumentality of the League to secure and maintain freedom of transit and equitable treatment for the commerce of all states members of the League, having in mind, among other things, special arrangements with regard to the necessities of the regions devastated during the war of 1914–18.4

The drafters of the GATT MFN clause were inspired by this formulation but opted for an explicit prohibition of discrimination.5 4.1.3.2 MFN at the GATT Negotiating Table The MFN obligation was reflected in Article 14 of the London Draft and did not change much afterward. The London Draft looks very much like Article I of GATT. There was, in principle, an agreement early on with respect to at least some of the policies that should be left out of the coverage of MFN.6 There was, however, dissatisfaction with the formulation of the legal provision. Terms such as “like products” that had been used to operationalize the obligation not to discriminate were prone to confusion. Still, negotiators took the view that it would be counterproductive to delay the negotiation in search of more appropriate language. In the view of those around the table at the time, one could always attempt

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clarifications later, when the ITO would come into force.7 Thus, only cosmetic changes were agreed on subsequent to the London Conference. MFN was, of course, a frontal attack against British imperial preferences. The UK would not go down without a fight. It did not wish to battle against MFN, though. It was fighting in order to secure a carve-out from MFN. The UK was in favor of nondiscriminatory trade liberalization so long as room could be made to accommodate its preferential trade. A substantial part of the negotiations during the London conference, and in the subsequent conferences as well, centered around one theme: which preferences would be grandfathered? It was finally agreed that, in addition to the imperial preferences, § 3 should be added, which concerns the special position of certain countries of the Near East (specifically the Ottoman Empire),8 some annexes that concerned Portuguese territories, and the special regime between Italy, San Marino, and the Vatican.9 4.1.3.3 MFN at the GATT Negotiating Table: The Economics of MFN There is a widespread view of a strong economic rationale in favor of nondiscrimination, and that economists do not hesitate at all to recommend it. For instance, it seems to be a rather commonly held view (particularly among noneconomists) that nonuniform tariff structures give rise to inefficient production and consumption patterns in a static sense. Other arguments in favor of nondiscrimination hold that it eases tariff negotiations or may even prevent the formation of preferential trading agreements that are formed to exploit market power in world markets. A general, theoretical prima facie case for nondiscrimination is not that simple and obvious, though. Indeed, Johnson (1976) goes as far as to argue that “the principle of non-discrimination has no basis whatsoever in the theoretical argument for the benefits of a liberal international trade order in general, or in any rational economic theory of the bargaining process in particular.” This statement, which is probably a bit extreme, should not be equated to a rejection of the principle of nondiscrimination either. In fact, a nuance here is appropriate: economic theory does support the claims concerning the beneficial effects of MFN, but not without reservation. Horn and Mavroidis (2001), in their survey of the economic literature on this score, concluded that models show that there would be less trade liberalization without MFN. They also point to literature that adopts a more nuanced position when arguing the case for nondiscrimination.10 There are other reasons why the introduction of MFN is sensible. Concession erosion is particularly relevant in trade negotiations, and it is probably the best reason for introducing MFN into GATT in the first place. MFN is an insurance policy against concession erosion, which could occur in multiparty negotiations. Here is how it works: Home and Foreign reciprocally exchange concessions. Subsequently, Home provides a third country with an advantage larger than that that it had originally granted to Foreign. Absent some assurance that similar behavior will not happen, Foreign will have little incentive to negotiate with Home ever again. MFN is the insurance policy that Foreign buys in order to

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guarantee that concession erosion will not occur (since whatever advantage Home grants third countries in the future will automatically and unconditionally be extended to Foreign as well). It is important that Foreign continues to be “incentivized” to negotiate in a setting like GATT. As discussed in chapter 1, tariffs were quite high when GATT came to fruition, and the road to tariff liberalization was a slow, incremental process where tariffs would be gradually reduced through reciprocal commitments, not eliminated in one go.11 MFN is the means to avoid concession erosion, but concessions can be eroded through the formation of preferential trade agreements (PTAs). Many PTAs were indeed formed (and continue to be); this issue will be explored further in chapter 6. By conditioning the legality of PTAs on a series of conditions, the potential for erosion was somewhat restricted. Alas, as chapter 6 will reveal, these conditions were almost never enforced in practice. This is not to suggest that the value of MFN is limited to avoiding concession erosion. MFN is about protecting and preserving multilateralism. It is as relevant for unbound duties as it is for all nontariff barriers. In a world where tariffs will be a thing of the past, MFN will still apply and require that policies affecting trade are applied in nondiscriminatory manner, providing thus the umbilical cord to multilateralism. It is also important to note that MFN greatly simplifies trade negotiations. Multiparty tariff negotiations are inherently complex. Imagine a world without MFN. Negotiators would have to enter into bilateral deals with all trading nations, a tall order by any reasonable standard. While it is fine to acknowledge that theoretically, the case for nondiscrimination is not watertight, it is quite optimistic (if not altogether illusory) to hope that negotiators would actually achieve a more efficient international allocation of production and consumption if they were allowed to agree on non-MFN tariffs, which require highly complicated negotiations. The simplicity associated with MFN negotiations must look attractive to negotiators. Therefore, there are strong grounds to support its inclusion into GATT/WTO. MFN is not free of problems, though. As briefly alluded to earlier in this section, the case for nondiscrimination is not watertight. It is a bit like Churchill’s saying about democracy: to paraphrase, it is the worst system we know of except for everything else. Free riding is probably the first thing that comes to mind when one thinks of the weak points of MFN. MFN promotes, or at least allows, free riding because countries may opt to wait for agreements between other countries to spill over via MFN, rather than contribute by making concessions themselves. This would be inefficient, however, because there would be delays in achieving an agreement or because the agreement would feature higher tariffs compared to some other, undefined situation. Assume that Home and Foreign have signed an agreement including an MFN clause. Home subsequently negotiates with a third country and knows that whatever benefit it grants this third party has to automatically extend to Foreign as well. Foreign, in other words, will be free riding on Home’s negotiation with the third country. Any subsequent

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negotiation to obtain advantages involves additional negotiating costs for Home, but Foreign just gets the additional advantages. Under the circumstances, Home might be dissuaded from entering into subsequent negotiations with third countries. Moreover, MFN prevents countries from punishing free riding since punishments must be nondiscriminatory and not targeted, in light of the fact that free riding does not amount to illegality. The free rider problem has occupied the minds of both economists and policy makers. One obvious solution to it would be to invite all participants to participate in the negotiation simultaneously. But what if they do not accept?12 The GATT system has other mechanisms and instruments that reduce the impact of free riding. Reciprocity, for a start, reduces the size of the problem. The size of the reduction depends, of course, on the number of players entering into reciprocal concessions, and this is where the critical mass agreements that we saw in chapter 3 are relevant.13 It is of limited value though, since any advantages negotiated must be extended “unconditionally” to all WTO members. When a subset of the membership participates in the negotiation, then reciprocity can only limit the extent of the problem that free riding presents us with. It is to be expected though, that principal suppliers will participate in tariff negotiations, and, consequently, free riders will be those that do not matter (or do not matter much) in the trade context—at least in most cases. This is the most effective instrument in the fight against free riding. In short, the problem continues to exist, but its size is being reduced through the mechanisms described previously. Another criticism frequently voiced is that MFN incites narrow commitments. Under MFN, countries may have incentives to use narrow product classifications to avoid having to extend concessions granted on an MFN basis to a greater variety of products. This could create reasons for countries to try to manipulate customs classification schemes. The danger of having too fine-tuned tariff classifications exists, but its importance should not be exaggerated. When classifications are expressed in a higher-than-six-digit level, as shown in chapter 3, then the danger is real. Those who practice similar classifications, though, tend to have the lowest bound duties across goods. 4.1.3.4 MFN and Preferential Trade In light of trade liberalization within the hundreds of free trade areas that have been formed over the years, a number of analysts have described MFN as the least favored nation (LFN) clause. De facto, MFN is the default payment to WTO members, assuming that one of the many preferential payments does not occur. Over the years, non-MFN schemes—be it PTAs14, preferences for developing countries, and, more recently, plurilateral agreements—have proliferated and substantially reduced the volume of MFN trade. A series of empirical works has demonstrated15 that most trade nowadays is conducted on non-MFN terms, and the proportion of non-MFN trade in the overall volume of trade is only increasing.

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Chapter 4

Coverage of the Legal Discipline

The coverage of MFN was of course, the sticking point during the negotiations of GATT as discussed in chapter 1. The UK delegation was not willing to multilateralize its imperial preferences, and the US had to eventually concede this point. The final compromise was that any state measure affecting trade would be, in principle, subjected to MFN, unless explicitly exempted from the coverage of the clause. The focus was of course on border measures that were explicitly mentioned in the body of Article I of GATT. Internal measures were mentioned as well, since, unless disciplined, they too could lead to erosion of tariff commitments. Article I of GATT mentions some measures specifically but adds that any “favor” or “advantage” with respect to the mentioned measures must be extended automatically and unconditionally to all WTO members. The terms “favor” and “advantage,” as well as the term “of any kind” following the terms “duties and charges” denote the preference of the legislator for wide coverage of the MFN clause. In principle, thus, unless a measure affecting trade that has been adopted by a WTO member has not been excluded, it must observe the MFN clause. We kick off our discussion with a few words on de jure- and de facto discrimination, since both forms of discrimination are outlawed by virtue of case law construction of the MFN clause to this effect. 4.2.1

De Jure versus De Facto Discrimination

The question arose in Canada–Autos whether both de jure and de facto discrimination were covered by the discipline embedded in Article I of GATT. The former term refers to measures that are discriminatory on their face, or a law whereby an advantage is granted by explicitly using origin as the criterion for its conferral (e.g., widgets originating in Home will pay a 10 percent import duty when imported into Foreign, whereas widgets originating anywhere else will pay 20 percent). The latter term covers measures that on their face are origin-neutral but still confer an advantage to some imported goods, or a law that confers an advantage on a condition that only one or more particular WTO members can satisfy (e.g., Home imposes 10 percent customs duty on widgets produced in a country with which it has a positive trade balance, and 20 percent on widgets originating elsewhere). Confining the ambit of Article I of GATT to cases of de jure discrimination only has an obvious advantage: it is an easy-to-use rule of thumb, as practitioners and judges alike can apply it without having to delve into elaborate thought processes. It also has an obvious disadvantage: it can be circumvented, sometimes with remarkable ease. Extending the coverage of this provision to cases of de facto discrimination addresses the circumvention issue. It opens the door to problems, though, since proof that advantage was granted because of the origin of the good and for no other reason might not be easy to obtain.16

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The AB, in its report on Canada–Autos, held that both de jure and de facto discrimination are covered by the prohibition included in Article I.1 of GATT (§ 78): In approaching this question, we observe first that the words of Article I:1 do not restrict its scope only to cases in which the failure to accord an “advantage” to like products of all other Members appears on the face of the measure, or can be demonstrated on the basis of the words of the measure. Neither the words “de jure” nor “de facto” appear in Article I:1. Nevertheless, we observe that Article I:1 does not cover only “in law,” or de jure, discrimination. As several GATT panel reports confirmed, Article I:1 covers also “in fact,” or de facto, discrimination. Like the Panel, we cannot accept Canada’s argument that Article I:1 does not apply to measures which, on their face, are “origin-neutral.” (italics in the original)

The burden of persuasion associated with establishing de jure or de facto MFN violation should be different—in principle, at least. In case of a claim of de jure discrimination, all a complainant needs to show is that two like goods are treated differently. Citing prior case law established by the AB, the Panel on US–Tuna II (Mexico) (Article 21.5–Mexico) held that complainants claiming a case of de facto discrimination face the arduous task of showing why seemingly nondiscriminatory measures still discriminate in favor of domestic goods. To this effect, recourse to proxies might be necessary. In the words of the Panel (§ 7.65): To establish this fact, the complainant must provide evidence of the measure’s design, architecture, and revealing structure, and link these aspects of the measure to the detrimental impact that it claims its imports are suffering. A complainant, especially in a case of de facto discrimination, cannot simply point to the measure at issue and then expect the panel to find a violation where the respondent fails to show that the measure at issue never could result in a violation of one or more WTO obligations. In cases of de facto discrimination, the complainant must provide evidence and argument sufficient to show why a measure that appears to be non-discriminatory on its face nevertheless in fact provides less favourable treatment to imported products in a way that is repugnant to WTO law.

4.2.2

Measures Covered: Any “Advantage,” “Favor,” Etc.

The coverage of the MFN discipline extends to any “advantage,” “favor,” “privilege,” and “immunity” with respect to four categories of measures mentioned in the body of Article I of GATT, namely: • Customs duties and charges of any kind imposed on or in connection with importation and exportation • Any method for calculating the measures mentioned previously • Rules and formalities in connection with importation and exportation • Internal measures The word “any” prefacing the terms “advantage,” “favor,” etc., is indicative of the will of the framers to ensure wide coverage for the MFN clause. Its coverage extends to border

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measures (all charges imposed on imported and exported goods, the method for calculating them, as well as all other rules and formalities in connection with both importation and exportation), and domestic instruments—that is, behind-the-border measures covered by Article III of GATT. We discuss the coverage of this provision in chapter 7. Not only actions, but also omissions (to the extent that they confer an advantage) are covered by the discipline laid down in Article I.1 of GATT. The GATT panel on US–Customs User Fee held that an exemption from the imposition of a customs fee should be considered an advantage under Article I.1 of GATT.17 The panel on US–Non-Rubber Footwear dealt with the issue of the so-called unit account, to wit: should we understand “advantage,” “favor,” etc., with respect to one specific measure imposed on imports, or should we look at the total treatment of imports to decide whether MFN has been respected or not? In other words, should we allow rebalancing in the treatment of imports? The US had claimed that it could legitimately rebalance or offset the damage done to some imports through more favorable treatment of the same imports through other measures. In its view, it was permissible under Article I.1 of GATT to discriminate negatively with respect to some measures, so long as some positive discrimination were provided through other measures. In the US view, what matters is the total treatment of imports— that is, the treatment with respect to all the legislation applied to a particular import transaction. Thus, claims that an advantage had not been extended immediately and unconditionally should be dismissed, absent proof that imports from a particular source had been treated in a discriminatory manner when the totality of law applicable to them has been considered. The panel disagreed with the argument presented by the US. In its view, no rebalancing is permissible under Article I of GATT (§§ 6.10ff). The panel held that MFN must be respected with regard to each and every measure that comes under its ambit. This seems like the only plausible conclusion. Otherwise, importers would be allowed to discriminate with respect to specific measures across imports, and complainants would have a tough time demonstrating that differentiated measures applied to different imports conferred an advantage to some and not to others. 4.2.2.1 Customs Duties and Charges of Any Kind Customs duties (like other duties or charges) can be either bound or unbound, as we saw in chapter 3. The GATT panel on Spain–Unroasted Coffee held that the MFN clause is equally applicable to both bound and unbound customs duties (§ 4.3): “Having noted that Spain had not bound under the GATT its tariff rate on unroasted coffee, the Panel pointed out that Article I:1 equally applied to bound and unbound tariff items.” The words “of any kind” that qualifies the terms “duties and charges” appearing in Article I.1 of GATT suggest that the charges and duties envisioned in this provision are not limited to OCDs and ODCs. They also cover fees paid for services rendered at the

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border that are covered by Article VIII of GATT (a point confirmed by the panel on US–Customs User Fee), as well as antidumping (AD) duties, countervailing duties, surcharges, etc. In this vein, the AB held, in its report on EC–Poultry (§§ 96ff.), that Article I.1 of GATT covers tariff quotas as well. When deciding on rates within and outside the tariff quota, WTO members must ensure that they have adhered to the nondiscrimination principle. In this vein, in EC–Bananas III, the panel found that conditioning the imposition on certain bananas of the in-quota (lower) tariff rate upon their origin was an advantage that came under the purview of Article I of GATT (§§ 7.235ff., confirmed by the AB in its report in § 207). GATT practice further suggests that other customs-related activities come under the purview of Article I of GATT as well. In Cuba–Consular Taxes, for example, a GATT panel held that consular fees must respect the MFN clause.18 4.2.2.2 Methods for Calculating the Level of Duties and Charges Article I of GATT makes it clear that methods for calculating the level of duties (e.g., the actual value for customs valuation purposes) must be applied on an MFN basis. 4.2.2.3 Rules and Formalities Case law has identified a number of rules and formalities that come under the purview of Article I of GATT. The leading case in this respect is EC–Bananas III. This panel found that the following rules and formalities in connection with importation came under the ambit of Article I.1 of GATT: • The use of a less complicated licensing procedure (§§ 7.188ff.) • The incentive given to operators to purchase bananas of a particular origin (§ 7.194) • The issuance of a license to import bananas of a particular origin upon the economic activity performed by the economic operator requesting the license (§§ 7.220ff.) • The granting of licenses only to operators representing producers from certain countries (§§ 7.251ff.) • The imposition of the in quota tariff rate on certain bananas, provided that they originate in particular countries (§§ 7.235ff.) The AB confirmed all these findings (§§ 206ff.).19 The GATT panel on US–Non-Rubber Footwear further found that the automatic backdating of the revocation of a countervailing duty order without the need to conduct an injury review is an “advantage” in the sense that this term is used in Article I.1 of GATT (§ 6.8). And the GATT panel on US–CVD (India) held that the US was in violation of its obligations under Article I of GATT because it did not apply the injury criteria featured in Article VI.6 of GATT to imports originating in India, but did so to imports originating in any other place.

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4.2.2.4 Internal Measures Article I.1 of GATT makes it clear that, by virtue of explicit reference to Articles III.2 and III.4 of GATT, MFN covers internal measures as well. Very early in GATT history, the GATT panel on India–Tax Rebates (1948) dealt with a case of rebates of domestic excise duties: exported goods would not be subject to the same taxes as goods sold in the domestic market. The topic of differential treatment between goods sold in the domestic and export markets is discussed in chapter 7. For now, the issue is (and indeed was before the panel) whether rebates should respect MFN. The panel responded affirmatively. Four years later, the GATT panel on Belgium–Family Allowances held that internal tax exemptions for products purchased by public bodies were covered by Article I.1 of GATT. 4.3

Exemptions

The MFN discipline does not cover the UK imperial and other historic preferences, which have been explicitly exempted through their inclusion in the various annexes to GATT. At the moment of the advent of GATT, probably no one expected that the imperial preferences would survive the test of time. Their dismantlement, though, had to wait almost 50 years, as we explain in what follows. 4.3.1

Grandfathering Imperial Preferences

Articles I.2 and I.3 of GATT contain the “grandfathering” clause. According to the former provision, GATT contracting parties agreed to exempt from the MFN coverage the imperial preferences granted by the UK to countries and territories participating in its Commonwealth. In return, a few other preferences in place before 1 January 1948, were also grandfathered. They appear in Annexes A–F to GATT.20 Imperial preferences involved higher duties for goods that did not originate in the British Empire and lower duties on “Dominion goods” (i.e., goods that originated in the British Empire). This drew the ire of excluded countries for discriminating against their trade. Recall from the discussion in chapter 1 that Cordell Hull was an especially sharp critic of imperial preferences because of their adverse effect on US exports, particularly to the UK and Canada, two of the most important US markets. Testifying before Congress in 1940, Hull called imperial preferences “the greatest injury, in a commercial way, that has been inflicted on this country since I have been in public life.”21 Will Clayton was very much in line with Hull with respect to his attitude toward imperial preferences. Recall from chapter 1 that he went so far as to suggest suspending the talks in Geneva as one of the options that the US government should contemplate if the UK delegation insisted on preserving imperial preferences. It was only a decision by President Truman to override Clayton’s counsel to push for an agreement outlawing the system of imperial preferences that ultimately ensured the success of the Geneva tariff

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negotiations and the advent of GATT. To Clayton’s disappointment, Britain’s imperial preferences remained largely intact.22 All the US negotiators achieved was to impose a standstill obligation on imperial preferences so they could not be increased beyond the level existing on 1 July 1939, or 1 July 1946, whichever was lower. The imperial preferences were included in Annex A to GATT. 4.3.2

Other Historical Preferences

During the London Conference, it was agreed that, in addition to imperial preferences, other long-standing preferences would be temporarily permitted.23 All preferences of this sort that would provisionally remain intact were included in Annexes B–F as follows: • B, preferences granted by France • C, preferences granted by Belgium, the Netherlands, and Luxembourg • D, US preferences to dependent territories and the Philippines • E, preferences between Chile and Argentina, Bolivia, and Peru • F, preferences between Lebanon, Syria, Palestine, and Transjordan The remaining grandfathered preferences concerned Portuguese territories and the special regime between Italy, San Marino, and the Vatican.24 In a similar vein, § 3 was added to Article I of GATT at the Havana Conference. This paragraph deals with preferences across certain countries of the former Ottoman Empire, and, contrary to Article I.2 of GATT, it does not refer to the absence of a requirement to eliminate existing preferences; new preferences are, thus, conceivable. To this effect, though, they would be waived through the procedures established in Article XXV.5 of GATT. This provision found application in the accession of the United Arab Republic and the preferences that it accorded to a host of countries.25 The margin of preference would, in accordance with Article I.4 of GATT, be explicitly stated in the relevant Annex (e.g., preferences by France would be reflected in Annex B), or the schedule of concession. If this had not been the case, then it is the rate applicable in 1947 (that the donor applied to imports from the beneficiary) that would be grandfathered.26 4.3.3

Imperial and Historical Preferences Today

Already during the negotiation of the GATT, a provision had been agreed whereby parties granting preferences would enter into negotiations in order to reduce them, upon request of the Organization. The provision referred to “substantial reduction” of preferences as a result of mutually advantageous negotiations to this effect. The Organization was, of course, the ITO. Because the ITO never saw the light of day, this provision was never

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applied either.27 Preferences grandfathered during the GATT stayed in place for a long, long time. During the Uruguay round, it was agreed that parties would notify the Legal Drafting Group, one of the negotiating groups, of all remaining preferences. It turned out that most of the schedules of concession did not reflect any of the grandfathered preferences that were originally excepted. This signaled the end of not only the imperial preferences, but all preferences that had been originally reflected in Article I of GATT and its annexes. There is one exception to this rule. Cuba still retains its preferential treatment with the US, although de facto there have been no commercial ties between the two following the ascent of Fidel Castro to power.28 The recent (April 2015) rapprochement between the US and Cuba is expected to result in the normalization of trade relations between the two countries. 4.4 The WTO “Club” Must Receive the Best Treatment 4.4.1 WTO Members versus the Rest of the World Article I.1 of GATT refers to “any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country”(emphasis added). As a result, WTO members cannot treat outsiders (non-WTO members) better than they treat insiders (WTO members) with respect to any of the measures coming under the purview of Article I of GATT. 4.4.2 As Membership Increases, So Does the Impact of MFN At the inception of GATT, this provision was thought of as the carrot offered to numerous outsiders to join the club. Since only 23 countries originally joined, the value of MFN was limited, the presence of the US and the UK in the club notwithstanding. Its practical importance has substantially increased as a result of the rise of WTO membership from 23 to its current level of 161 nations. 4.5

Favors/Advantages Must Be Accorded Immediately and Unconditionally

A WTO member must extend to all WTO members, immediately and unconditionally, a trade advantage that it has already granted to another WTO or a non-WTO member. WTO adjudicating bodies will typically review the consistency of a measure with the two requirements (immediately and unconditionally) at the same time. The AB report on Canada–Autos is a good illustration of this (§§ 75–86). The two terms, nonetheless, have different meanings, a point that will be discussed next.

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Immediately

The term “immediately” suggests a temporal criterion. No time should lapse between granting an advantage to one country and extending it to all WTO members. As such, the word does not lead to confusion. 4.5.2

Unconditionally

4.5.2.1 The US Attitude toward Conditional and Unconditional MFN We saw in chapter 1 that Hull did not demand full reciprocity (that is, reciprocity of access) during the original GATT negotiation; rather, he sought what economists usually call “first difference reciprocity,” where the goal was to match concessions from the initial conditions.29 The road to unconditional MFN was not smooth, though. Many a fight was fought inside the US administration, and the end result in GATT risked being overturned in subsequent years. Irwin (2015) explains that, except for Hull, William Culbertson of the Tariff Commission played the key role in getting the US to adopt the unconditional MFN clause in US commercial agreements signed before the advent of GATT. The US desire for equality of treatment in world trade went back to the days of the revolution and Thomas Jefferson’s report on foreign trade barriers and discriminations. In his Farewell Address at the end of his second term as president, George Washington advised that “our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences.” The US almost always opposed discriminatory treatment in international trade policies. With few exceptions for tariff preferences (Cuba, the Philippines, Puerto Rico, Hawaii), the US offered all countries equal access to its market.30 In return, it expected that other countries would grant it equal, nondiscriminatory access for its exports as well. European countries pursued discriminatory tariff policies in the decades prior to World War I through bilateral trade agreements and colonial trade preferences. The US found itself increasingly discriminated against in world commerce. As a result, prior to World War I, it found itself embroiled in an increasing number of tariff disputes over the treatment of its goods in foreign markets. The US would have to become more assertive if it wanted to ensure equal treatment for its exports in foreign markets. Before World War I, European countries such as France and Germany had maximum-minimum tariff schedules and the United States was ineligible for the lower tariff rates. The US faced widespread discrimination against its trade as a result of colonial trade networks and maximum-minimum tariff schedules. Irwin (2015) further mentions that in 1919, the Tariff Commission issued a report entitled “Reciprocity and Commercial Treaties,” which addressed how the US should confront this new problem. Completed under the guidance of the commission’s chairman, Frank Taussig, the document proved to be one of the most influential government reports on trade since Alexander Hamilton’s “Report on Manufactures.”31 The report noted that,

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to the extent that the US sought to eliminate discrimination by other countries through bilateral negotiations, it was handicapped by its long-standing use of the conditional interpretation of the MFN clause. Under conditional MFN, a concession granted to one country would not be given automatically to other countries unless they also granted new concessions. This policy dated back to the Treaty of Amity and Commerce with France in 1778. If taken seriously, this meant that if the US agreed to reduce its tariff on some goods to secure equal treatment for its exports in another country, those US tariff reductions could not be applied to imports originating in other countries unless they also agreed to grant the US new concessions. The Tariff Commission argued that the old conditional-MFN policy no longer served the nation’s best interests. Given its increasing participation in world affairs, the US could not realistically craft a country-by-country trade policy. But if it offered equal treatment to all countries unconditionally, the US risked losing bargaining leverage against others. Such leverage could be restored either by giving special concessions to countries that gave equal treatment to US goods or by imposing penalty duties on countries that did not. Irwin (2015) cites a series of documents produced by the Tariff Commission arguing that penalty duties imposed at the discretion of the US president would be the better option. At the end of the day, although the Tariff Commission did not make a specific policy recommendation, it strongly implied that a policy of unconditional MFN with penalty duties for countries discriminating against the US would be the best outcome. Irwin (2015) notes that the US Congress did not act upon this recommendation until it took up the tariff revision in early 1921. The House version of the Fordney-McCumber Tariff of 1922 included a provision, designed with a view for securing reciprocal trade with foreign countries, similar to that in the Dingley Tariff of 1897. It gave the US president permission, for a period of three years, to reduce import duties by no more than 20 percent on selected commodities in agreements with foreign countries. These new duties could be established by presidential proclamation and would not require congressional approval, although the reduction would expire after five years unless renewed by legislation. Culbertson was working to convince Congress that unconditional MFN with penalty duties would be better than conditional MFN with special concessions. Culbertson persuaded Senator Reed Smoot to adopt this approach and scrap the one endorsed by the House. The Senate approved this provision, which was accepted by the House. It became section 317 of the Fordney-McCumber Tariff. This section, based on the maximumminimum provision of the Payne-Aldrich Tariff of 1909, allowed the president to proclaim new or additional duties (not exceeding 50 percent) upon imports of any or all products of a country that discriminated and placed US goods at a disadvantage compared with those from any foreign country. Section 317 sparked virtually no debate in Congress, which was preoccupied with the precise duties in the tariff schedule. The phrasing of Section 317 appeared to endorse

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unconditional MFN, although it did not explicitly mandate it. Culbertson then turned his attention to the executive branch and the president to make sure that it was implemented as administration policy. It is largely thanks to his efforts that the US adopted the unconditional MFN clause. The new unconditional-MFN policy was unveiled in a new commercial treaty with Germany. The treaty did not alter any import duties but required that each country extend unconditional MFN benefits to each other in the application of its tariff and other commercial benefits.32 This is not the end of the story, though. Over the years, unhappy with the response its offer for unconditional MFN had received around the world, voices arguing for MFN conditionality were being raised and gathering steam. Bhagwati and Irwin (1987, p. 109) quote President Ronald Reagan stating in 1987:33 “We are always willing to be trade partners, but never trade patsies.” “Patsies” would be trading nations that, in the name of unconditional MFN, offer concessions that remain unanswered. Similar thoughts have led to critical mass agreements, as discussed in chapter 3, as well as to some negotiations outside the WTO [the Trade in Services Agreement (TISA) being the most prominent example]. The US however, did not manage to introduce full-fledged conditional MFN into the multilateral trading regime. The extent of free-riding was of course reduced through critical mass agreements, and preferential trade agreements. It is against this background that we propose to discuss the case law regarding the term “unconditionally” as it appears in Article I of GATT. 4.5.2.2 “Unconditionally” in Case Law The term “unconditionally” can be interpreted in different ways and, unsurprisingly, has often become the subject matter of litigation. There is, of course, nothing like “total” unconditionality. MFN involves a one good, two countries comparison. Home, Foreign and Third are all WTO Members, and Home grants Foreign a 5 percent duty on polyester shirts (assume they belong to a tariff line on their own). Third wants to profit from this rate, but must of course first satisfy the condition that its shirts are made of polyester. Home cannot impose on Foreign additional conditions for granting this treatment. It cannot request, on reciprocity grounds, a tariff reduction by Third. This is, or at least should be, the meaning of “unconditional” in the MFN clause. Home has been paid a consideration by Foreign for agreeing to the 5 percent rate, it should not be paid an additional consideration by Third. This might pose a problem regarding the distribution of negotiating costs as we noted in chapter 1, but in the “Hullian” view, this was the price to pay by the leaders of the world in the post WWII era. Case law has exacerbated this understanding of “unconditionally,” and moved to reject conditions of whatever nature imposed by the party granting a benefit. Originally, panels adopted an uncompromising stance. In this vein, the GATT Panel report on Belgium–Family Allowances held that tax exemptions for products purchased

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by public bodies that were made conditional on the existence of a certain system of family allowances in force in the exporting country were inconsistent with Article I.1 of GATT. Many other panels followed this approach. The GATT Panel on EEC–Imports of Beef found that conditioning a duty waiver on certification by a particular government violated the obligation to grant MFN unconditionally. The report of the Working Party on the Accession of Hungary34 stated that to condition a tariff treatment upon the prior acceptance of a cooperation agreement is a violation of the requirement imposed by Article I.1 of GATT. The WTO Panel on Indonesia–Autos found that granting tax advantages to Korean companies, which had entered into arrangements with Indonesian companies, was inconsistent with the obligation under Article I.1 of GATT because the tax advantages had not been extended to other WTO members that had not entered into similar arrangements. The Panel on EC–Tariff Preferences probably best captures this line of thinking by explicitly stating that the term “unconditionally” should be understood as “not limited by or subject to any conditions,” regardless of whether conditions had been imposed ex ante for the granting of the advantage, or simply ex post, which would make the requirement more akin to a requirement of symmetry (§§ 7.59–60): In the Panel’s view, moreover, the term “unconditionally” in Article I:1 has a broader meaning than simply that of not requiring compensation. While the Panel acknowledges the European Communities’ argument that conditionality in the context of traditional MFN clauses in bilateral treaties may relate to conditions of trade compensation for receiving MFN treatment, the Panel does not consider this to be the full meaning of “unconditionally” under Article I:1. Rather, the Panel sees no reason not to give that term its ordinary meaning under Article I:1, that is, “not limited by or subject to any conditions.” Because the tariff preferences under the Drug Arrangements are accorded only on the condition that the receiving countries are experiencing a certain gravity of drug problems, these tariff preferences are not accorded “unconditionally” to the like products originating in all other WTO members, as required by Article I:1. The Panel therefore finds that the tariff advantages under the Drug Arrangements are not consistent with Article I:1 of GATT 1994.

Is this case law reasonable? What if, for example, paraphrasing the facts in EEC– Imports of Beef, the EU had conditioned imports of beef from regions that had experienced mad cow disease upon certification that the products had not been contaminated? Should the EU be obliged to impose that certification obligation of beef products on WTO members that had not been subjected to mad cow disease as well? It simply cannot be the case that the obligation not to discriminate should be equated to an obligation to impose no conditions upon importation at all. A similar construction of the MFN clause would lead to an understanding of this discipline as an instrument for deregulation that only the ayatollahs of free trade at all costs would subscribe to. The WTO panel on Canada–Autos, probably aware of this risk, adopted a more nuanced approach. In its report, the panel suggested that imposing conditions unrelated to the origin

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of a good does not violate the requirement to extend advantages unconditionally if the same requirement has been imposed on those benefiting from the advantage. The facts of the case are as follows: Canadians had in place a duty-free mechanism provided to importers of automobiles, buses, and other vehicles by certain manufacturers.35 In § 9 of its report, the AB reflects its understanding of the conditions that had to be satisfied for duty-free treatment to apply: Under the MVTO 1998, the import duty exception is available to manufacturers of motor vehicles on imports “from any country entitled to the Most-Favored-Nation Tariff,” if the manufacturer meets the following three conditions: (1) it must have produced in Canada, during the designated base year, motor vehicles of the class imported; (2) the ratio of the net sales value of the vehicles produced in Canada to the net sales value of all vehicles of that class sold for consumption in Canada in the period of importation must be “equal to or higher than” the ratio in the “base year,” and the ratio shall not in any case be lower than 75:100 (the “ratio requirements”); and (3) the amount of Canadian value added in the manufacturer’s local production of motor vehicles must be “equal to or greater than” the amount of Canadian value added in the local production of motor vehicles of that class during the “base year” (the “CVA requirements”). (italics in the original)

The AB did not have to address the issue of whether the conditions imposed were lawful since this issue had not been added to the grounds for appeal. It was the panel that had to respond to the question of whether the Canadian condition constituted a violation of MFN. It did so in §§ 10.22 and 10.24, to wit: In our view, whether an advantage within the meaning of Article I:1 is accorded “unconditionally” cannot be determined independently of an examination of whether it involves discrimination between like products of different countries. … In this respect, it appears to us that there is an important distinction to be made between, on the one hand, the issue of whether an advantage within the meaning of Article I:1 is subject to conditions, and, on the other, whether an advantage, once it has been granted to the product of any country, is accorded “unconditionally” to the like product of all other Members. An advantage can be granted subject to conditions without necessarily implying that it is not accorded “unconditionally” to the like product of other Members. More specifically, the fact that conditions attached to such an advantage are not related to the imported product itself does not necessarily imply that such conditions are discriminatory with respect to the origin of imported products. We therefore do not believe that, as argued by Japan, the word “unconditionally” in Article I:1 must be interpreted to mean that making an advantage conditional on criteria not related to the imported product itself is per se inconsistent with Article I:1, irrespective of whether and how such criteria relate to the origin of the imported products.

In the last sentence of the quoted passage, the panel suggests that conditioning access to MFN treatment is perfectly legitimate, so long as the conditions are unrelated to the origin of goods, and are applied in nondiscriminatory manner across all WTO members. This case remains an outlier in case law. Still, the question that arises is whether the panel was addressing a false or a real risk by distancing itself from the case law mentioned earlier in this section and summarized in EC–Tariff Preferences.

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Think again of the example that began this discussion, where Home requests a certificate for importation of beef only from regions that have been plagued with mad cow disease. How else could Home protect itself, other than through this request? Note that, the underlying assumption in this scenario is that it would be totally unnecessary to request similar certification from WTO members that had not experienced the same disease. Why burden them with additional costs in the name of respecting MFN when it is well known that they are safe suppliers of bovine meat? Home could have bought an insurance policy by including in its schedule of concessions elaborate tariff classifications that respect Article 3.3 HS:36 for example, one could imagine in this vein that Home distinguishes say in its eight- or ten-digit classification between bovine meat slaughtered in houses that observe demanding hygiene standards and bovine meat slaughtered in other houses where less demanding standards are being observed. “Likeness” of goods, thus, could take care of some of the problems. But it would not solve all the problems: “likeness” cannot address the issue brought up earlier, where a certificate for importation is being requested only for the importation of beef from regions that have been plagued by mad cow disease. New diseases, or new facts in general, arise that warrant adjustment in trade policies. In similar cases, of course, Home can always take recourse in Article XX of GATT and argue that the conditions across countries that have and have not been hit by mad cow disease are different thus justifying the asymmetric requirements on certification that it had imposed.37 Was Canada–Autos addressing a false problem, then? In a way, this report was shifting the burden of proof. Under the orthodox approach (i.e., the approach followed by panels and summarized in EC–Tariff Preferences), Home, the defendant, should be the one explaining why asymmetric certification procedures had been put in place. Under Canada– Autos, the panel ruled that Foreign, the affected WTO member, should bring forward the evidence that the conditions in its own market are symmetric to the members enjoying privileged access into Home’s market. Foreign would be required to demonstrate that its exports of bovine meat were safe even though mad cow disease had been seen in the country.38 Canada–Autos, in a way, saw elements of the chapeau (that is, the introductory paragraph) of Article XX of GATT in the tenets of Article I of GATT. It requests that nondiscrimination be observed where similar conditions prevail. In that, the test is perfectly reasonable. It would be awkward for different conditions to be treated in an identical manner, merely in the name of MFN. One might have thought that this discussion would be brought to an end in EC–Seal Products. In this case, the AB had the opportunity to address this issue once and for all in a definitive manner. Alas, the AB’s solution left yet again many questions unanswered. Here are the facts: the EU had banned imports of seal products in the name of protection of public morals (animal welfare), but it did allow some imports under the following limited conditions: (1) IC hunts (products from seals harvested by the Inuit community); (2) MRM hunts, provided that they were commercialized on a nonprofit basis (seal

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products originating in countries where marine resource management programs were in place, and harvesting of seals took place only for the purpose of sustainable development); and (3) seal products imported by travelers for their personal use.39 The panel had found that the EU was in violation of its obligations because it had not extended to seal products of Canadian and Norwegian origin the same advantage (access to the market) that it had extended to seal products originating in the Inuit community established in Greenland. The EU appealed this finding (§§ 5.78ff. of the AB report), claiming that the panel had erred since the term “unconditionally” should not be interpreted as prohibiting conditions in general. In its view, the policy rationale of the measure should be taken into account and should exonerate even measures that have a detrimental impact on some imports, provided that the impact stems from a “legitimate regulatory distinction” (§ 5.89). The AB accepted that imposing conditions was not per se an unlawful act but rejected the EU argument all the same. It held first, in § 5.88: … it does not follow that Article I:1 prohibits a Member from attaching any conditions to the granting of an “advantage” within the meaning of Article I:1. Instead, it prohibits those conditions that have a detrimental impact on the competitive opportunities for like imported products from any Member. Conversely, Article I:1 permits regulatory distinctions to be drawn between like imported products, provided that such distinctions do not result in a detrimental impact on the competitive opportunities for like imported products from any Member. (emphasis in the original)

And then, in (§ 5.90), it stated: … we see no basis in the text of Article I:1 to find that, for the purposes of establishing an inconsistency with that provision, it must be demonstrated that the detrimental impact of a measure on competitive opportunities for like imported products does not stem exclusively from a legitimate regulatory distinction.

Thus, unsurprisingly, the AB rejected the EU claim a few paragraphs later (§ 5.90). The quoted excerpts raise more questions than they purport to answer, and it seems that the AB got more than it had bargained for when entering this analysis. It is clear by the construction of case law that it is tariff classifications that define likeness in Article I of GATT. One might understandably ask then what kind of legitimate regulatory distinctions exist between like imported products that do not result in a detrimental impact on the competitive opportunities and like imported products from any Member the AB had in mind? How can it ever be the case that regulatory distinctions between competing goods do not affect competitive conditions? The AB muddied the waters here, and, alas, did not provide any illustrations to help us understand what it had in mind. As is often the case, the AB kept its cards very close to chest, and, like Pythia, expressed a Delphic oracle rather than a clear statement. In light of the above, it is probably safe to conclude that WTO members that do include conditions will most likely have to justify them under Article XX of GATT. Indeed, the fact that Article I does have an exception (i.e., Article XX of GATT) emerges as the reason

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why the AB applied a test of likeness that was different than its analysis of Article 2.1 of Technical Barriers to Trade (TBT), which does not have a similar exception.39 4.6

Defining Origin

WTO members must immediately and unconditionally extend any advantage with respect to the measures mentioned in the body of Article I.1 of GATT granted to a product originating in one country to all like goods originating in all other WTO member countries. This raises the question of how to define the origin of the goods. How do we know whether a good originates in Home or in Foreign? This question was easy to answer when goods were being routinely produced (“wholly obtained” or “wholly produced” in the frequently used terminology) in one country only. It is a particularly difficult exercise today, when parts of many goods are being produced in different countries. The continuing rise of global value chains (GVCs) or supply chains that include offshoring/outsourcing is quite remarkable and has made determining origin an elusive notion. Indeed, check the picture of the Volvo car in figure 4.1 and ask the question “where does this car originate?” What is the answer? To make matters worse, it is not simply the rise of GVCs that has made detection of origin onerous. It is also political economy. Actually, political economy probably has

Figure 4.1 Production chain of a Volvo car. Source: Reproduced from Richard Baldwin and Philip Thornton, “Multilateralising Regionalism,” Centre for Economic Policy Research, 29 February 2008.

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complicated things more than any other factor. Rules of origin are distinguished into MFN, preferential, and those applied only to developing countries. They are also distinguished in light of the legal context where they operate so that, for example, rules of origin in AD can be different from those applied in the subsidies context. They can be further distinguished using the level of “industrialization” as a benchmark, and thus agree that a lower percentage of value added suffices to confer origin for primary goods, but a higher percentage is required when primary goods are being processed. They can allow “cumulation,”—that is, allow for a good to have the origin of Home if say x percent of its total value originates in Home and Foreign, or a form of cumulation when defining origin, or they can disallow it altogether. (See the discussion on preferential rules of origin later in this chapter.) Domestic lobbies have managed to make out of rules of origin one of the most thorny, complicated, and indeed Byzantine themes in world trade. And it is domestic lobbies that have largely contributed to the deadlock that the multilateral trading system finds itself in nowadays, despite its valiant attempt to come up with a harmonized framework. Rules of origin are of course necessary for the various WTO disciplines to apply. For one, WTO members need to be sure about the WTO origin of goods; otherwise, they might be affording fiscal treatment to non-WTO goods that they are not entitled to. The size of this problem has diminished in practice, of course, since the WTO is nowadays 161 members strong, and so fewer and fewer goods originate in non-WTO countries. Rules of origin can of course matter for other reasons as well. It is useful to know, for example, that imported beef originates in Foreign when it is known that “mad cow disease” has been observed there, and imported beef will need additional sanitary control at the border. And then there are cases where it is a particular source of supply that will be compensated for with a lower tariff rate. Rules of origin are especially useful in the context of PTAs. Absent a “certificate of origin,” an issue that will be discussed further in chapter 6, members of a PTA will not be in a position to profit from the preferential tariff rate that they are entitled to. In a similar vein, rules of origin are necessary in order to confer origin to goods produced in developing countries, which are also entitled to preferential rates under the conditions of special and differential treatment that are discussed in detail in chapter 5. An illustration is appropriate here. If Home enacts a law whereby a car will be granted WTO origin if 50 percent of its value added originates in a WTO member, some WTO members that outsource more than 50 percent of the total value of cars to non-WTO members will not be in a position to profit from the MFN rate when exporting to Home. This is no longer a big problem because of the current WTO membership. Assume, however, that Home and Foreign have signed an agreement to create a free trade area (FTA), and goods are granted FTA origin only if 50 percent of the value added originates in the two countries. Assume further that Foreign outsources, for the production of cars, 55

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percent of the added value to Third, a country that does not participate in the FTA (free trade area) signed with Home. In this case, depending on the size of the preference, Third might have the incentive to invest in Foreign and start shipping its goods to Home from its plants in Foreign. Thus, rules of origin in this scenario switch trade from low-cost nonregional producers to high-cost regional partners.40 Since rules of origin can shift costs to foreigners who did not participate in their elaboration, there is a good argument to include them in the framework of a trade agreement. Conferring origin is thus, more of an issue in PTAs, where conferral is tantamount to granting a tariff advantage. It is of interest to MFN trade, though, as well. Take the example of a “Swatch” watch. Origin can be conferred based on the nationality of the designer or the engineer (responsible for the watch’s movement). If the former, it is Swiss, if the latter, it is Chinese. If the former, Chinese private producers might be happy to “free ride” on the Swiss “brand name”; China itself might be happy as well, since its trade surplus, a source of acrimony in some quarters, will be reduced. The US when importing “Swatch” watches might classify it as “Swiss origin,” whereas the EU, might opt for “China origin.” The link of rules of origin to issues such as marks of origin, trade statistics, and consumer protection becomes apparent. The US and EU have followed different paths towards conferring origin. Whereas there is no difference between origin and marking in the US regime, a significant difference can very well be the case in the EU context. Their divergent regimes have led them to many disputes, with some taking place before the WTO. Their dispute regarding origin of textiles and apparel products was the reason for two disputes, and eventually to a mutually agreed solution.41 Before discussing the WTO regulation of rules of origin, let us first briefly review the GATT regulation of rules of origin. Actually, we will pick the trail from the pre-GATT years, as the GATT discussion did not take place in a vacuum. 4.6.1 The Pre-GATT Years Trade relations have existed since humans acquired goods to exchange , and the origin of goods became an issue when nations started granting trade advantages. The first comprehensive attempt to address origin in a multilateral manner came with the signing of the 1923 International Convention relating to the Simplification of Customs Formalities (signed in Geneva on 3 November 1923). Thirty-three nations signed it, with Britain signing it on behalf of the Commonwealth of Australia, the Union of South Africa (as it was known then), New Zealand, and India—that is, four additional nations. Many of the GATT original members (with the notable exception of the US) signed the agreement, and it is against this background that they subsequently negotiated origin in GATT. The overarching objective of the 1923 Agreement was to ensure that trade would not be (Article 1): “… hindered by excessive, unnecessary or arbitrary customs or other similar formalities.”

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Article 11 is of utmost interest to our discussion here. In its chapeau, it acknowledged the right of importing nations to verify the origin of the good, while expressing the wish to reduce the number of cases where certificates of origin or other documents testifying origin (such as “consular invoices”) would be required. In Article 11.4 it provided concrete examples where request to produce a certificate of origin would be unwarranted: goods, for example, that lawfully were entitled to regional appellation did not have to be accompanied by a certificate of origin. In Article 11.1, the Agreement endorsed the need for simplification of procedures regarding certification of origin, and in Article 11.2 it provided that the latter be issued not only by official authorities but by any organization that might possess the authority to issue similar documents. Simplification of procedures, exemptions from compulsory demonstration of origin, and avoiding bottlenecks when it comes to issuing certificates of origin are three of the issues that occupied the minds of trading nations following their accession to the GATT. 4.6.2 The GATT Regime GATT, as we saw in chapter 1, adopted a friendly attitude towards prior agreements to which its members had adhered. It stopped short, nonetheless, of fully espousing the 1923 Convention, and the discussion on origin started anew. Those that had participated in the 1923 Convention reproduced the spirit of that agreement. The GATT regime is characterized by a scattered regulation of origin, and by subsequent efforts to harmonize rules of origin, which, alas, remained unsuccessful. We take each issue in turn. 4.6.2.1 Article VIII of GATT Article VIII.1 of GATT, which we have discussed in the previous chapter, recognizes the need to minimize the incidence and complexity of import and export formalities. To this effect, the Interpretative Note number 2 to this provision states that “… it would be consistent with paragraph 1 if, on the importation of products from the territory of a contracting party into the territory of another contracting party, the production of certificates of origin should only be required to the extent that is strictly indispensable.” This sounds like the provisions embedded in the 1923 Convention, does it not? The other relevant provision to our discussion is Article IX of GATT, to which we now turn. 4.6.2.2 Marks of Origin A mark of origin, as the name indicates in no uncertain terms, is meant to communicate the origin of imported goods. It is, thus, a signaling device, a label, addressed to importing WTO members (so that they can impose the appropriate customs duty, which is of course a function of the origin of the good), as well as to consumers and industrial users in the importing market. Marks of origin should not be confused with certificates of origin. While a mark of origin is affixed on goods, certificates of origin accompany imported goods. WTO members request both or none. The link is that, in practice, unless WTO members

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request mark of origin, they will not be requesting origin at all, but if they do, some proof of origin will be required. As we will see later, WTO members are free to choose whether they will use it or not. No matter what the choice, WTO members must respect the MFN clause. This provision had been originally included in Article 20 of the London Draft.42 Negotiators had aimed to strike a balance between consumer protection and burdens on commercial transactions. The idea was that the former should be protected without unduly burdening the latter.43 Marks of origin had been previously regulated in various international agreements, such as the Madrid Convention of 14 April 1891; the Washington Arrangement of 2 June 1911; the Hague Arrangement of 6 November 1925; and the Union Agreement of Paris/Brussels of 14 December 1900.44 Negotiators aimed to ensure that Article IX would be compatible with the aforementioned agreements.45 France, which played a prominent role in the discussion of this provision, wanted to bring under the heading “Marks of Origin” a discussion of marks of geographical or regional origin as well. Recall that “appellations of origin” featured in the 1923 Convention, and France was a signatory of that Convention. France wanted to seize the opportunity and take the discussion one step further.46 The majority of the delegates, however, thought that this should not be an issue of concern for GATT or the ITO Charter; and that similar issues would be more appropriately dealt with in bilateral consultations, or, at most, that a multilateral conference should be organized to specifically discuss the matter.47 France insisted on protection for geographical or regional origin (wines, etc.), referring to the obligations already imposed on signatories of the Madrid Convention of 1891.48 Subsequently, a joint US/UK proposal aimed at eliminating, in principle, compulsory marks of origin was tabled.49 France’s proposal was not retained, at least not as France had contemplated. All it achieved was a best-endeavors (the current Article IX.6 of GATT), a duty to cooperate in order to avoid damage against goods carrying “appellation of origin,” e.g., distinctive names of products of the territory of a GATT contracting party protected under domestic laws. The US/UK proposal became for all practical purposes Article IX of GATT, as it is now known. Article IX.1 of GATT imposes an obligation to act in a nondiscriminatory manner, but it does not require “compulsory marks of origin.” In principle, WTO members are free to decide that no mark of origin is necessary at all. In that, it stops short of even including the corresponding best-endeavors provision we encountered in the Interpretative Note to Article VIII.1 of GATT. Article IX of GATT thus condones regulatory diversity in the sense that the system for affixing marks of origin on goods is left to the discretion of the importing WTO member. It requests that WTO members apply their regime on an MFN basis, and further requests that they cooperate to ensure that fraudulent practices regarding the indication of origin will be avoided. In US–Tuna (Mexico), the panel confirmed that the legal obligation

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with respect to marks of origin is restricted to MFN, and WTO members do not incur a national-treatment obligation with respect to marks of origin (§ 5.41). In doing so, it rejected Mexico’s claim to the effect that the US was violating Article IX.1 of GATT, since the US was imposing the same requirements regarding dolphin-safe tuna on US producers as well. Although, Article IX of GATT does not impose a harmonized regime for marking origin, some steps had been taken toward prejudging national discretion in this respect. Article IX.2 of GATT contains a best-endeavors clause to the effect that when adopting their regime, WTO members strive to minimize the cost of international trade. Simple indications of origin are thus preferred over complicated schemes. No damage should result for imported goods because of the manner in which national legislation requires marks of origin to be affixed, and no disproportionate cost should result in an effort to avoid similar damage (Article IX.4 of GATT). In a similar vein, Article IX.3 of GATT suggests that, if “administratively practicable”, marks of origin should be affixed at the moment of importation. Furthermore, WTO members, following the French request to this effect as stated above, incur an obligation to cooperate to ensure that the true origin of a product has been indicated and that consumers have not been misled as a result of a false mark of origin. This duty also must respect the MFN requirement (Article IX.6 of GATT). The panel on Japan–Alcoholic Beverages I referred to the drafting history of Article IX.6 of GATT, which includes the duty to cooperate, and the panel understood that this provision should not have the effect of prejudicing the present situation as regards certain distinctive names of products, provided always that the names affixed to the products cannot misrepresent their true origin. This is particularly the case when the name of the producing country is clearly indicated. It will rest with the governments concerned to proceed to a joint examination of particular cases which might arise if disputes occur as a result of the use of distinctive names of products which may have lost their original significance through constant use permitted by law in the country where they are used. (Havana Reports, p. 79)

In § 5.15, the panel found that Japan had not violated its obligation under Article IX.6 of GATT, simply because it was using foreign names to describe domestic goods. Japan, in the eyes of the panel, was not violating distinctive regional or geographical names of products by acting this way. Moreover, Japan was observing its duty to cooperate by participating in the Madrid Agreement for the Repression of False or Deceptive Indications of Source on Goods: The Panel did not dispose of evidence and was unable to find that the use by Japanese manufacturers of labels written partly in English (in the case of whisky and brandy) or in French (in the case of wine), the use of the names of varieties of grapes (such as “Riesling” or ‘semillon”), or the use of foreign terms to describe Japanese spirits (“whisky,” “brandy”) or Japanese wines (“chateau,” “reserve,” “vin rose”) had actually been to the detriment of “distinctive regional or geographical names of products” produced and legally protected in the EEC. Nor could the Panel find that Japan

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given, for example, its participation in the Madrid Agreement for the Repression of False or Deceptive Indications of Source on Goods and its internal laws and regulations on labelling and on the protection of distinctive regional or geographical names (such as “Armagnac” or “Chianti”) had failed to meet its obligation to cooperate pursuant to GATT Article IX:6.

Thus, Article IX.6 of GATT was understood as imposing a mere obligation to cooperate in order to ensure that the true mark of origin will be indicated. If the exporter does not cooperate, though, importing states are not defenseless. They can, as a last resort, disallow imports of goods with false indications and then justify the ban through recourse to Article XX(d) of GATT, that we discuss infra in brief. This provision is discussed in detail in chapter 9. The advent of TRIPs (Trade Related Intellectual Property Rights) has taken care of some of the problems discussed in Japan–Alcoholic Beverages I regarding the use of names like “cognac,” for example. 4.6.2.3 False Origin: A Deceptive Practice Assuming violation of say Article XI of GATT or any other provision because the importer had taken the view that origin had been falsely declared, then it could seek to justify its measures by invoking Article XX(d) of GATT. We discuss this provision in detail in chapter 9. Suffice to state that for now false declaration of origin would definitely qualify as “deceptive practice,” one of the grounds for which violations of obligations assumed under the GATT can be justified. 4.6.2.4 Efforts to Harmonize Following the advent of the GATT, a few initiatives were undertaken in order to add to the regulatory framework as described above. The impetus came from a resolution of the ICC (International Chamber of Commerce), which requested from GATT contracting parties to consider the adoption of uniform rules determining the nationality of imported goods. This led to the establishment of the Working Party on Certificates of Origin, Marks of Origin, and Consular Formalities. The Working Party 5 on Valuation, Nationality of Goods and Consular Formalities, operating under its aegis, issued its report in 1953.50 The twelve members of the Working Group were divided. Eight of them (and most notably, France, Germany, and Italy) were in favor of adopting an international definition of origin along the following lines: • A distinction would be drawn between goods “resulting exclusively from materials and a labour of a single country,” and goods “resulting from materials and labour of two or more countries.” • Whereas the former would have the nationality of the country where they were produced, the latter would have the nationality of the country where they had “last undergone a substantial transformation.” • “A substantial transformation shall—inter alia—be considered to have occurred when the processing results in a new individuality being conferred on the goods.”

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The four members that dissented (United Kingdom and New Zealand leading the group) thought that the proposed definition only amounted to an illusion of assuring uniformity since the term “substantial transformation” could be easily manipulated. The divide proved hard to bridge. In a subsequent report by the Technical Group on Customs Administration, the GATT body which was called upon to decide on the proposed definition, we read the acrimony with which the ICC had to come to grips with the (unpleasant to it) reality: “… It has become clear … that the time is not yet ripe for attempting to obtain general acceptance by governments of a standard definition of origin.”51 The discussion regarding the harmonization of conditions for conferring origin continued in various GATT fora.52 Following the advent of the Kyoto Protocol (1975), there was an attempt by the CCC (now WCO) Secretariat to increase its powers in dispute adjudication in this area, which was met with skepticism if not outright hostility by its members.53 The ball stayed in the camp of the GATT, and its members tried yet again to reach a solution during the Uruguay round, as we detail later in this chapter. Advances were made with respect to the limits that should be imposed on requests for certificates of origin, the use of marks of origin, and the abolition of consular formalities, but not on the main theme—harmonized definition of origin.54 In 1958, the CONTRACTING PARTIES to GATT adopted a recommendation that further reinforced the idea that there should be no widespread requirement to indicate origin. In the document, §§ 1–2 stated that the requirement to indicate origin should be reduced to the cases where it is judged indispensable; § 3 required trading nations to accept any method of legible and conspicuous marking and not to impose a particular method; § 5 expressed in bestendeavors terms the wish that trading nations accept that the designation “made in” (as expressed in English), satisfies their requirement to indicate the origin of import goods; in similar best-endeavors terms, § 6 stated that commonly used abbreviations (like “UK” and “US”) should be acceptable; and, finally, § 11 stated that goods in transit should be free from the mark-of-origin requirement.55 A 1981 document prepared by the GATT Secretariat56 sheds light on two issues: • it presents the criteria to confer origin used; • it also presents the rules of origin applied in various PTAs. It turns out that trading nations have employed a variety of methods to confer origin and sometimes a combination of distinct processes. All countries and PTAs reviewed distinguish between instances where goods are wholly obtained (or wholly produced) in one country, and instances where this is not the case. In the latter case, the question would be to define substantial transformation. The three most frequently used regimes to this effect were (1) change in tariff classification; (2) added value (“percentage criterion”); and (3) specific manufacturing process. Wholly obtained (or wholly produced) was (and is) mostly used with respect to farm goods and minerals, whereas practice showed that different trading nations used different

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methods to decide whether substantial transformation had indeed occurred. Still, the Note of the Secretariat states that change in tariff heading was the most frequently used criterion to demonstrate that substantial transformation (“sufficient working or processing”) had occurred.57 The question asked here is whether, as a result of processing a particular good, the resulting good should be classified differently in the Harmonized System (HS) than the good from which it has been obtained.58 If yes, then the country producing the processed good will be considered the country of origin of the good. The value added method, also known as “percentage criterion,” asks the question whether a certain percentage of value has been added to the input good. The percentage may vary by country, good, etc. Assuming that the statutory threshold has been met, then the WTO member producing the output will be considered the origin of the good. The specific manufacturing process, also known as the “technical criterion,” prescribes certain production or sourcing processes that may (positive technical criterion) or may not (negative technical criterion) confer originating status. To produce a fertilizer for example, three ingredients must be mixed together, and through this process a new product is produced. All methods have their pros and cons. The “value added” method is clear but could act as disincentive to use the “cheapest source of supply.” The “specified manufacturing process” could become unusable if the specified process becomes obsolete. The “change in tariff classification” invites substantial discretion by the importing member, which will need to be constrained in order to avoid abuses/discriminatory practices. Palmeter (1990a) adds that the fact that the HS was not negotiated with attributing origin in mind, has added to the problems. The HS, it is true, implicitly reflects some sort of “value escalation”: it starts with farm products, moves to industrial products, and finally to more complex goods, such as information technology. It does not at all however, explain how changes in the tariff heading occur.59 There is no perfect method, and to make matters worse, trading nations have been making things worse by employing a variety of methods, often nontransparent as Vermulst and Fjellner (2015) note, that have substantially increased transaction costs for international trade. The criteria to confer origin, unavoidably probably, often leave substantial discretion to the administering authority. As a result, disputes regarding the origin of goods arise frequently before national forums, although not so frequently before the WTO.60 It could be, for example, that the manufacturing process chosen to confer origin has not been described adequately, or that the value added is judged in an unduly restrictive or discriminatory manner. Besides differences, regimes are often characterized by increased complexity, and it is no exaggeration to state that complexity in and of itself was reason to attempt to simplify and harmonize. We will see, for example, in chapter 5 in this volume that complexity of rules of origin emerges as the main reason why beneficiaries of preferences apply for the MFN—rather than the preferential rate when exporting to donors. Complexity is an issue for both preferential- as well MFN rates. Quoting from Gilbert Ryle, Palmeter (1990),

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when referring to the various methods of conferring origin, goes so far as to state (p. 27): “… to the guests of Charybdis, Scylla appears to be the more hospitable resort.” In a similar vein, McGovern (1986) describes EU rules of origin as follows (p. 186): “Community rules of origin are at best complicated, and at worst almost unfathomable. It is against this background that negotiators tried yet again during the Uruguay round to define origin in harmonized manner. 4.6.3 The WTO Regime At the wake of the Uruguay round, the situation regarding regulation of origin could be described as follows: • Regulation of origin was left to discretion of domestic authorities. National definitions would have to respect MFN since, otherwise, a trade advantage could be granted to a sub-part of the WTO membership in contravention to Article I of GATT. • Preferential rules of origin were applied as well. By 1994, at the end of the Uruguay round, a hundred PTAs had entered into force, so this issue was gaining in importance. The consistency of preferential rules of origin with the GATT remains to this day an open issue. The legal benchmark to evaluate consistency of preferential rules of origin was Article XXIV of GATT. As we explain in chapter 6 in more detail, WTO members did not manage to decide on this issue. • Article VIII of GATT would require restrain when it comes to requesting production of certificates of origin. • Article IX of GATT did the same with respect to marks of origin. • Finally, Article X of GATT, that we discuss in detail in chapter 12 of volume 2, would require from WTO members that they administer their customs rules and formalities (including thus, rules of origin) in an impartial manner. • All violations of GATT provisions could, in principle, be justified through recourse to Article XX(d) of GATT, which could offer the appropriate means to justify violations of obligations assumed under the GATT if necessary to combat deceptive practices (like the false declaration of origin). It is against this background that, during the Uruguay round, an Agreement on Rules of Origin (ROO) was negotiated and concluded. Negotiators did not make any link to the preexisting regime. They felt they should be starting from a clean slate, and we cannot blame them too much for that. The regime we describe above is highly scattered, and the safest way to defend national definitions of origin seems to be the exceptional provision, e.g., Article XX(d) of GATT. The idea was to come up with a harmonized understanding for conferring origin in an effort to reduce transaction costs and facilitate trade liberalization. The idea was also to simplify existing complex procedures. The previous regime was,

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as briefly described in the previous section, a forest of rules of origin, even at the national level. Some consolidation was deemed warranted. Alas, the efforts to do this failed. The size of the failure is even more spectacular if one takes into account that the biggest thorn, preferential rules of origin, was left outside the negotiation: WTO ROO deals with MFN rules of origin—that is, with rules of origin that apply when considering MFN as opposed to preferential trade (e.g., trade across partners in a customs union or an FTA [Article 1.2 of ROO]).61 This is of course a very severe limitation since, as stated previously, the trade impact of rules of origin is more meaningful in the PTA context nowadays. The WTO ROO imposes two sets of obligations: during the transitional period, and following it. During the transitional period, all the ROO adds to what we have described above is that WTO members must respect national treatment when defining origin, that is, they must, by virtue of Article 2(d) of ROO, apply the same criteria for conferring origin to domestic and foreign goods. A few other obligations of lesser importance were added as well, and we discuss them infra. During the transitional period the Harmonized Working Programme (HWP), aimed at simplifying and harmonizing MFN rules of origin, was supposed to be agreed as well. Alas, this was not to be the case. 4.6.3.1 An Agreement to Disagree The ROO does not impose a harmonized set of rules that WTO members must observe when it comes to conferring origin. WTO members remain free to adopt their own rules of origin for goods they produce and must apply them in a nondiscriminatory manner. Thus, regulatory diversity is condoned, and a requirement of nondiscrimination is imposed on national definitions, as explained above. Besides nondiscrimination, WTO members must also ensure that their rules of origin are transparent [Article 2(a) ROO], that they do not have restricting effects on international trade [Article 2(b) ROO], and that they are administered in a consistent, uniform, impartial, and reasonable manner [Article 2(e) ROO].62 WTO members can confer origin in different ways even on the same good. For example, nothing stops a WTO member from deciding that canned tomatoes are considered domestic if 30 percent of their added value is domestic, whereas fresh tomatoes are domestic if 75 percent of their added value is domestic. Moreover, they can adopt different rules of origin under different agreements for the same good. WTO members can (and very often do) state that say 25 percent of domestic added value is necessary for a product to originate in a particular market for all customs purposes, but only 15 percent is necessary for AD purposes. There is thus, no obligation to act consistently, either across goods or across agreements, when conferring origin. By acting inconsistently across agreements (while respecting MFN), WTO members have more discretion to accommodate domestic lobbies’ demands.63

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In the only reported case so far before the WTO, US–Textiles Rules of Origin, the panel underscored the wide discretion that WTO members enjoy when designing their rules of origin (§§ 6.23–24): With regard to the provisions of Article 2 at issue in this case—subparagraphs (b) through (d)—we note that they set out what rules of origin should not do: rules of origin should not pursue trade objectives directly or indirectly; they should not themselves create restrictive, distorting or disruptive effects on international trade; they should not pose unduly strict requirements or require the fulfilment of a condition unrelated to manufacturing or processing; and they should not discriminate between other Members. These provisions do not prescribe what a Member must do.

4.6.3.2 MFN In, Preferential Rules of Origin Out WTO members have often expressed their wish to harmonize rules of origin, since they seem to share the belief that the current regulatory diversity is quite costly. The most important objective of the ROO is to eventually harmonize nonpreferential rules of origin (Article 9), this is what64 the Harmonization Work Programme (HWP) is all about. Negotiations have been taking place under the aegis of the WTO Committee on Rules of Origin,65 and the Technical Committee operating under the auspices of the World Customs Organization (WCO), where all WTO members participate, as well as non-WTO members acting as observers. Article 9 of ROO does reflect a preference for the change in tariff classification method discussed supra. In § 1, it calls for negotiations to define a product that is wholly obtained in a particular sovereignty. In § 2(c)(ii), it calls for negotiations on goods that have not been wholly obtained in one particular sovereignty. To this effect, negotiations should focus on streamlining the change in tariff classification method, and, as supplementary criteria only, the value added and the specific manufacturing process methods. To attain this objective, work on 5,000 tariff lines was initiated. This work was originally due to be completed by July 1998, but several deadlines have been missed since that date, and conclusion of the negotiation is still elusive. Although meaningful discussions have taken place, trading partners are still quite far from agreeing on a harmonized way of conferring origin.66 It has been unofficially reported that WTO members have reached a consensus on rules of origin for 55 percent of the products negotiated. Some core policy issues have been heavily negotiated, and product-specific rules of origin have also been negotiated. Still, some hard issues remain open. The rules of origin applied to AD, countervailing, safeguards, Sanitary and Phyto-sanitary Measures (SPS), TBT, and labeling figure to be among the thorniest issues, where no consensus has been reached yet.67 The question has also been repeatedly raised whether the Committee of Rules of Origin is the appropriate forum for the negotiation of the HWP, in view of the fact that some of the issues involved are not purely technical, but essentially of political nature.68

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So far, attempts to conclude work on the agreement have failed largely because of the so called implication issue: once the harmonized set of nonpreferential rules of origin has been agreed, it must be applied to various WTO Agreements (Articles 1 and 3(a) ROO). This has not been the case so far, as various WTO members have been applying different rules of origin to say the same good when dealing with it under various agreements. This is the major reason for the current stalemate, although the whole purpose of the HWP was to ensure that rules of origin would apply across the board. Substantial progress has been made, and, although it is highly speculative at this stage to suggest that the text, in principle, agreed—leaving disagreements aside—will have policy impact, it is worthwhile to describe briefly the regime that has been reflected in the various negotiating documents. The question is first asked whether a good has been “wholly obtained” in one WTO member. A product is wholly obtained even when some of the inputs used for its production originate elsewhere. To this effect, nonetheless, they would have to qualify as “neutral elements,” which are defined in General Rule 3 of the ROO as it now stands as follows: “In order to determine whether a good originates in a country, the origin of the power and fuel, plant and equipment, including safety equipment, or machines and tools used to obtain a good or the materials used in its manufacture which do not remain in the good or form part of the good shall not be taken into account.” If a good is produced with components from more than one country, then the final good will carry the origin of the last WTO member in the production chain, if the good has undergone “substantial transformation.” The ROO includes the following three independent methodologies inspired from the practice described above that will allow a WTO member to show whether the downstream good has indeed undergone “substantial transformation: • Change in tariff heading • Value added • A specific process has been used The last one of these is the “cleanest” method, but it is highly restrictive. WTO members, as stated previously, have been using the first two methods, and they both have their pros and cons. The HWP expresses a preference for the first method—change in tariff heading—because it is widely used, and because it solves many of the encountered problems. There are areas, though, where its use is problematic. For example, should any assembly of parts confer origin, even if we deal with classic “screwdriver operations”? This is an acute issue and created a lot of acrimony during the negotiations of the HWP. At the end a compromise was necessary to deal with conferral of origin in machinery when all the importing market does is assembly of finished parts. The “dual rule for machinery” was agreed, where WTO members remain free to use either the change in tariff heading or a 35 percent value-added rule to decide on the origin of machinery.

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Negotiations are ongoing at present.69 While awaiting the successful conclusion to the negotiations, it is Article 2(d) of ROO that is applicable, and it explicitly condones regulatory diversity when conferring origin:70 Until the work program for the harmonization of rules of origin set out in Part IV is completed, Members shall ensure that … the rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic and shall not discriminate between other Members, irrespective of the affiliation of the manufacturers of the good concerned.

As things stand, forty-four WTO members have notified the WTO Committee on Rules of Origin (the committee responsible for this issue) that they apply nonpreferential rules of origin. An additional fifty members have notified the same committee that they do not apply nonpreferential rules of origin, whereas the remaining members of the WTO have not notified the committee one way or the other.71 4.6.4

Preferential Rules of Origin

Besides MFN, there are preferential rules of origin; in fact, there is a plethora of preferential rules of origin, including the PanEuroMed system, comprising the 28 EU members, the European Free Trade Association (EFTA), the Faroe Islands, Turkey, and those participating in the Barcelona process (e.g., Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia, and the Palestinian Authority); the North American Free Trade Agreement (NAFTA) system; and Asian systems. The term “preferential rules of origin” refers to both reciprocal (e.g., between members of an FTA), as well as unilateral (e.g., one way development aid–related) preferences. Preferential rules of origin are an enigma. In principle, there is no need for preferential rules of origin in order to grant preferences. The same criteria for conferring origin could apply to both MFN- and preferential patterns. The only change would be the level of duty applied. Arguably, the rules emerged in practice as instrument to grant an additional preference. We will see in what follows if this is indeed the case. Moreover, there is no explicit legal basis for providing preferential rules of origin. As we will see in what follows, though, a legal basis to evaluate their consistency emerged in practice. 4.6.4.1 Out of HWP, Out of WTO? Earlier in this chapter, we explained that until the successful conclusion and advent of ROO, WTO members can unilaterally define the rules of origin applied in their home market, and must observe nondiscrimination as well; that is, they must be imposing the same rules of origin on imported and domestic like goods. What about preferential rules of origin? What is the legal standard to evaluate their consistency with the WTO since, by construction, preferential rules of origin must be discriminatory? Recall, preferential rules of origin do not come under the HWP mandate.72

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In theory, the consistency of preferential rules of origin with the WTO can be challenged. As chapter 6 will explain in more detail, rules of origin could be regarded as “other regulations of commerce” (Article XXIV.5 of GATT), or as “restrictive regulations of commerce” (Article XXIV.8 of GATT). These two provisions require WTO members that establish PTAs to avoid adding to existing protection (the former), and to liberalize all trade substantially (the latter). Indeed, this issue has already been discussed (although sometimes tangentially) in the context of the Committee on Regional Trade Agreements (CRTA), the organ entrusted with the surveillance of noted PTAs, and its predecessors. Nevertheless, WTO members have not managed to agree on a solution, and all there has been is a series of inconclusive debates. Following 2006 and the advent of the Transparency Mechanism discussed in chapter 6 in detail, there have been no more multilateral discussions on the consistency of similar schemes with the WTO rules. In the absence of multilateral solutions, of course, interested parties could litigate and claim that preferential rules of origin within a given FTA are in violation of Article XXIV of GATT. This has not happened for various reasons, which will be explored further in chapter 6.73 Essentially, potential claimants lack the incentives to litigate the consistency of a PTA with the multilateral rules. Neither the multilateral process nor the dispute settlement has thus managed to yield responses regarding the legality of preferential rules of origin. Under the circumstances, it is warranted to see how preferential rules of origin have been operating in practice. 4.6.4.2 Empirical Studies Reveal a Mess There are common elements in some preferential rules of origin, but there is substantial discrepancy between them as well. Literature has emerged aiming to trace both the extent of overlap and the important differences across schemes.74 To provide an illustration about the latter, different rules apply depending on the percentage of value added, the overall integration process pursued, the possibility for cumulation, the type of cumulation (that we discuss later), and various other criteria conferring origin.75 There is a plethora of preferential rules in place, and very often the same “hub” has adopted different rules with its various “spokes.” Literature has tried to understand what drives the current multiplication of preferential rules of origin, as well as the consequences of this phenomenon. There is by now ample evidence to the effect that preferential rules of origin have substantially contributed to trade diversion.76 The studies by Hoekman (1993), Krishna and Krueger (1995), and Krueger (1999) provide a horizontal evaluation of the size of the problem. Then, there are studies that evaluate the record for specific integration schemes. Cadot et al. (2005) looked at the EU/ PANEURO and US/NAFTA regimes and concluded that the rules employed are tailormade to fit protectionist requests by EU and US lobbies. Serra et al. (1997) showed that

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rules of origin are one of the most important causes of trade diversion in the NAFTA context. Many others studying the same issue have arrived at this conclusion. Lack of cumulation and very complicated rules of origin emerge as the two devices that have effectively transformed preferential rules of origin to an empty shell. The term “preferential,” when used in conjunction with rules of origin, is the apotheosis of sugarcoating. 4.6.4.3 Cumulation “Cumulation” loosely refers to the idea that goods will be considered to originate within an FTA (and thus, benefit from the preferential customs rate) if they have been produced within the WTO members belonging to the FTA and not wholly obtained in one of them. Assume that Home and Foreign have concluded an FTA stating that cars must have 50 percent FTA value added to be granted FTA origin. If no cumulation was allowed, then the car should have 50 percent either Home or Foreign value added. Under cumulation, a car would be granted FTA origin if it included 25 percent Home and 25 percent Foreign value added. There are different forms of cumulation. There is bilateral cumulation (that is, the example given just previously).77 This is not necessarily an economic advantage since it can lead to trade diversion, as already discussed. A shirt from Senegal would qualify as an African, Caribbean, Pacific (ACP) shirt and thus benefit from the preferential rate contained in the Cotounou Agreements signed between the EU and ACP countries, even if it contained fabric from the EU. The EU is not a low-cost fabric-producing entity, though. Senegalese shirt producers would have been much more competitive had they been allowed to use fabric, say, from Pakistan or Bangladesh. This is where diagonal cumulation kicks in. In this shirt example, a shirt will be considered an ACP-shirt if the fabric originates in Pakistan or Bangladesh, two countries that have not signed the Cotounou Agreements. The pan-European system discussed previously allows for diagonal cumulation. Other regimes also follow this example. including EFTA, the Central and Eastern Europe Free Trade Area, Association of Southeast Asian Nations (ASEAN), the Central American Common Market (CACM), the Andean Community, and the South American Association for Regional Cooperation (SAARC).78 Diagonal cumulation could contractually be limited in geographic space. And then there is full cumulation, where origin will be conferred to any processing activity regardless of whether it is sufficient to confer originating status to the materials themselves. Brenton (2011) states that full cumulation is rare; he notes its existence in the Cotounou Agreements, as well as in Generalized Systems of Preferences (GSP) schemes offered by Japan and the US.79 Here is an example of cumulation from the EU webpage:80 The existing Free Trade Agreements with the Western Balkans (Stabilization and Association Agreements with Croatia and the former Yugoslav Republic of Macedonia) are based on a system of bilateral cumulation. This means Croatia and the former Yugoslav Republic of Macedonia can

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cumulate with the Community but not among each other. Under the system of diagonal cumulation they will also be able to cumulate among each other. For a system of diagonal cumulation to work, it requires that all partners have Free Trade Agreements with the same rules of origin among each other.

The benefits can best be illustrated by using a simple illustration. A product receives 30 percent value added in Croatia and 30 percent value added in the former Yugoslav Republic of Macedonia. Let’s assume the EU requirement for the import of a good as “originating in Croatia” is 50 percent value added in that country. Under bilateral cumulation, this product will not be exportable to the EU under preferential conditions, while with diagonal cumulation, these percentages can be cumulated and the product qualifies with 60 percent originating in Croatia or in the former Yugoslav Republic of Macedonia.81 Some forms of cumulation, specifically bilateral cumulation, are more restrictive than others. As a result, beneficiaries might be hampered in their effort to export at preferential rates. 4.6.4.4 Complying with Complicated Rules Transaction costs emanating from complicated rules of origin often increase in a highly disproportionate manner.82 Litigation regarding preferential rules of origin is, unsurprisingly, also quite substantial, as Vermulst (1992, pp. 37ff), for example, details. The following illustration offered by Palmeter (2003, p. 143) is self-explanatory: Catsup (or, “ketchup”) is classified in chapter 21 of the HTS [Harmonized Tariff Schedule], under items 2103.20, while tomato paste is classified in chapter 20, under item 2002.90. The Canada-US FTA rule of origin provides that the operations necessary to convert a product classified in any chapter of the HTS other than chapter 21 into a product classified in that chapter will confer preferential origin on the resulting chapter 21 product. Thus, when imported tomato paste (chapter 20) is processed into catsup (chapter 21), the catsup qualifies for the FTA preference. Not so under NAFTA. The formulation of the NAFTA rule is that a change to item 2103.20 (catsup) from any other chapter except subheading 2002.90 (tomato paste) will confer origin. Under NAFTA, then, the tomato paste itself must be produced within the territory of a NAFTA member if the resulting catsup is to receive preferential treatment. Now it happens that in 1992, just before NAFTA’s rules were drawn up, Chile was the leading foreign supplier of tomato paste to the United States, and catsup made in Canada or the US from Chilean tomato paste received preferential treatment under the FTA. Interestingly, in 1992, Mexico was the second leading supplier of tomato paste to the United States, but by 1998 it was overwhelmingly first. We might speculate that the occasion of the negotiation and drafting of NAFTA’s rules of origin was used by the Mexico tomato paste industry to squeeze its Chilean competitors out of the NAFTA market. Or we might speculate that the change is merely the result of a decision by the negotiators that truth, justice, and consumer welfare required it.

What rules of origin did for Mexican ketchup producers in this context, they have done for numerous producers of dozens of products originating in countries signing PTAs. Brenton (2011, p. 168) offers yet another characteristic illustration: A change to subheading 620111 from any other chapter except from heading 5106 through 5113, 5204 through 5212, 5307 through 5308, or 5310 through 5311, chapter 54 or heading 5508 through

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5516, 5801 through 5802, or 6001 through 6006, provided that the good is both cut and sewn or otherwise assembled in the territory of one or more of the parties.

Bhagwati, Krishna, and Panagariya (2015) looked at the ASEAN experience, and more specifically the FTAs signed by ASEAN with third countries. Their conclusion was that only one-third of tariff lines share rules of origin in FTAs signed by ASEAN with third countries. Faced with similar rules, trading nations might decide to forego the preferential rate and opt for the MFN rate instead. The ultimate decision will depend on the calculation of the preference margin, the costs of complying with the rules, and the transaction costs for benefitting from lower rates. Trading nations often decide to go for MFN rates precisely because transaction costs are quite substantial. As a result, the utilization rate of preferences often remains low. The next section of this chapter explores this topic. 4.6.4.5 Utilization Rate In his pioneering study that sensitized observers about the bite of rules of origin and provided the impetus for dozens of studies in this area, Herin (1986) researched the impact that rules of origin have had on European Free Trade Association (EFTA)83 traders when trading with the EU. He concluded that many of them would rather pay the MFN rate when exporting to the EU rather than going to the trouble of applying for the preferential rate. The small significance of the preferential margin coupled with administrative costs were cited as the main reasons behind this attitude. In a similar vein, Sapir (1998a) shows that 78 percent of imports from GSP beneficiaries qualified for preferential import rates, and yet only 38 percent of them entered at this rate. The majority of qualifying imports paid the MFN rate, for essentially the reasons already cited by Herin (1986). The studies by Krishna and Krueger (1995), Krueger (1999), and Hoekman (1993) pointed in the same direction. Cadot and de Melo (2008) reached the same conclusion. In their study, they explained how rules of origin oblige developing countries to buy inefficient intermediate goods from developed countries in order to qualify for favorable treatment, pointing, thus, to the limits of cumulation. Worse, as a result of the multiplication of rules of origin, traders might find it too much of an investment to spend time and effort familiarizing themselves with the procedures. As a result, the amount of overall preferential trade might suffer, and both producers in developing countries and consumers in developed countries experience adverse welfare implications.84 Mattoo et al. (2003) estimate the medium-term benefits for African exporters stemming from the US Africa Growth and Opportunity Act (AGOA) and argue that the gains would be five times as much were the US to relax its current stringent rules of origin.85 Unsurprisingly, there are some experts arguing for total recall in this context. Brenton and Manchin (2003), to cite but one of the many papers in this area, investigated EU

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preferential schemes (such as “Everything but Arms”)86 and suggest that, to generate substantial improvements for developing countries, the EU should first and foremost reconsider its current rules of origin.87 It is true that rules of origin have been relaxed over the years, although much remains to be done in the years to come. One area where efforts have led to some results concerns the treatment of imports originating in least-developed countries (LDCs). 4.6.4.6 Rules of Origin for LDCs Complicated rules of origin could be even more of a challenge for those WTO members with reduced capacity to process the required information (e.g., developing countries, especially LDCs). Acknowledging this fact, the WTO has recently undertaken some action to address the problems encountered by LDCs when it comes to complying with rules of origin. The Bali Ministerial Declaration included a Decision on Preferential Rules of Origin for Least-Developed Countries.88 Without imposing any concrete legal obligations, this decision is a call to the willing to simplify existing procedures: (a) In § 1.2, it declares that “preferential rules of origin should be as transparent, simple, and objective as possible.” (b) The same paragraph calls for recognition of the principle that origin will be conferred by “substantial or sufficient transformation,” which could be defined through an ad valorem percentage criterion, a change in tariff classification, and/or a specific manufacturing or processing operation. (c) In § 1.3, it expresses a wish that when the value-added criterion is chosen, the level of value addition threshold should be kept at a low, reasonable level, and the methods for calculating value added should be simple (§ 1.4). (d) The “change in tariff classification” criterion should be fulfilled when, having imported inputs, LDCs have created a good that comes under a different classification subheading than the inputs (§ 1.5). (e) When recourse is made to the specific manufacturing or processing operation criterion, the productive capacity of LDCs should be taken into account (§ 1.6). (f) Finally, cumulation should be considered so as to allow goods originating in various LDCs to profit from preferential access (§ 1.7). 4.6.4.7 If No Negotiations, Then What? The Bali Declaration discussed in the previous sections is the only multilateral initiative so far to address the problems posed by preferential rules of origin. Otherwise, as stated earlier, the HWP does not include a negotiation of preferential rules of origin. True, the current ROO, in its Annex II, includes a common declaration with regard to preferential rules of origin, but does not move beyond that. In essence, this annex imposes

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a transparency obligation. Without denying the value of transparency, more is definitely required. Simplification of rules should be a priority and harmonization to the extent warranted would be a decisive step in this direction. The literature includes some imaginative proposals aimed at counteracting the nefarious effects caused by the plethora of complicated preferential rules of origin. Lloyd (1993), probably inspired by the negotiation of the WTO Agreement on Agriculture, proposed the introduction of a tariff equivalent that would be negotiable. By “tariffing” the current rules of origin, WTO members would be led to the table to negotiate tariff reductions instead of regulatory equivalence, a much more burdensome task. Alas, similar suggestions have fallen on deaf ears so far. The political willingness to move into this area and establish an easy-to-use, workable regime has been missing to date. 4.6.5 The Rise of Global Value Chains (GVCs) Questions regarding rules of origin would not arise at all if products where wholly obtained or produced in one country, as stated previously.89 Issues arise only if more than one country is involved in the production process. This is, alas, a very likely scenario in today’s world. Supply chains, or GVCs as they are frequently referred to, are being formed around the world, comprising different countries that produce parts of final goods. There is nothing new about specialization, though. Steil and Hinds (2009) put it aptly: This is Adam Smith’s famous pin factory example writ global. Just as division of labor in the manufacture of items as simple as pins can be shown to increase pin output per worker hundreds or even thousands of times, the global connectivity revolution is introducing startling productivity gains across a rapidly expanding array of goods and services—all driven by the simple idea, specialization, that Smith showed to be supply-side driver of the eighteenth century Industrial Revolution.

The difference now is that the pin factory is located in various jurisdictions. It is geographic location of its various components that supplies the “G” in “GVCs.”90 The picture of the origin of a Volvo car given in figure 4.1 is quite telling in this respect. Figure 4.1 is the natural outcome of the current explosion of outsourcing, or offshoring,91 or, less colloquially, trade in tasks. GVCs multiplied (and have kept multiplying) in recent years. Their origins trace to the 1980s.92 Tempest (1996), in one of the first papers in this context, showed how and why China, Indonesia, Japan, Malaysia, and Chinese Taipei were all participating in the production process of a Barbie doll, along with the US.93 In a similar vein, the WTO Annual World Trade Report of 1998 explains that a typical US car includes 30 percent Korean added value, 17.5 percent Japanese, 7.5 percent German, etc. We have come a long way since the Barbie doll example. The explosion of offshoring is, of course, the outcome of economically rational decisions. No one mandated particular

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production lines. Increasing competition around the world, partially as a result of the success that the GATT/WTO regime has had in liberalizing trade, has led to this form of production process.94 The explosion of GVCs is not, nevertheless, the result of liberalization of movement of production factors (due, in part at least to the reduction of barriers to trade) only. The increasing ability of firms to coordinate complex tasks from afar is also an important contributing factor.95 Information technology (IT) has certainly contributed to the rise of fragmentation in the production process across firms and countries. It is definitely no longer wine for cloth, the transaction that the political economist David Ricardo had in mind when constructing his theory of comparative advantage. The WTO World Trade Report (2014)96 goes so far as to state that “there is now no alternative to GVC participation. Attempting to source all or most components of a product domestically nowadays implies that many will not be competitively priced, and the product produced will generally not be competitive in world markets” (pp. 98–99). The explosion of GVCs97 has provoked a lot of discussion worldwide regarding the proper adaptation of the multilateral trade regime to this new reality. The range of questions asked is quite impressive, including the inclusion of preferential rules in the agenda (since many developing countries participate in supply chains); coordination of policies in order to facilitate trade; and to what extent the emergence of bargaining solutions (in the form of supply chains) makes the case for some positive integration at the WTO (e.g., a move toward adopting common policies necessary to facilitate the operation supply chains).98 In short, the whole negotiating process in the WTO would be affected had negotiators adopted a GVC perspective when debating trade liberalization. What emerges from this literature is that there is clearly a disconnect between the requests and aspirations of the business community and the WTO agenda as it was shaped in the context of the Doha negotiations. The former request an ambitious plan, aimed at cutting red tape at and behind the borders, and customized solutions that correspond to the specificities of trade transactions. The WTO has tried to respond through the enactment of the Trade Facilitation Agreement (discussed in chapter 1 of volume 2). Recently, it also issued a study called “Made in the World” and launched a corresponding initiative in order to commit resources to the study of supply chains.99 There is still, however, a lot that needs to be done for the WTO to keep pace with the current aspirations of the business community in this respect. Importantly, GVCs would greatly benefit from more rational, less complicated rules of origin. If negotiators do not achieve a similar outcome in Geneva, then maybe individual trading nations profiting from their participation in GVCs could find it to their advantage to simplify or rationalize their own national regimes.

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Like Products Like Products and Beggar-Thy-Neighbor Policies

The reason why the obligation to accord MFN is restricted to like products only has to do with the type of beggar-thy-neighbor policies that the GATT framers wanted to outlaw. GATT outlaws some, but not all, protectionist policies. Recall from the brief discussion in chapter 1 that “protection” is a term that is hard to define.100 The presumption that a policy is protectionist is more correct across two like products (e.g., goods competing in the same relevant product market) than it is otherwise. This does not mean that beggar-thy-neighbor policies cannot take place through policies that concern unlike goods, though. An example could be helpful here. Home imposes a 2 percent import duty on cars (which it produces and where it is competitive), and a 52 percent import duty on wheat (which it does not produce).101 Home would be violating no GATT provision, although it is imposing a cost on its trading partners who, depending on Home’s power to affect the terms of trade, might have to bite the bullet and reduce the price of wheat (e.g., share their profits with Home). With the income made from its tariff setting, Home would be financing its own policies. GATT did not want to go as far as challenging the legitimacy of similar policies. The framers were well versed in the virtues of realism, as shown in chapter 1, and avoided slippery slopes that could endanger the whole negotiation. 4.7.2 Tariff Classification: The Dominant Criterion The term “like products” appears in various GATT provisions. The test for deciding on likeness is not the same across all GATT provisions, however. This section will discuss likeness with respect to border measures (e.g., tariffs).102 Tariff classification emerges as the dominant criterion to decide on likeness with respect to tariff treatment.103 The Panel on Japan–SPF Dimension Lumber provided an explicit acknowledgment of the relevance of tariff classification as the dominant criterion to establish likeness (§§ 5.11–12): … if a claim of likeness was raised by a contracting party in relation to the tariff treatment of its goods on importation by some other contracting party, such a claim should be based on the classification of the latter, i.e., the importing country’s tariff. The Panel noted in this respect that “dimension lumber,” as defined by Canada, was a concept extraneous to the Japanese Tariff … nor did it belong to any internationally accepted customs classification. The Panel concluded therefore that reliance by Canada on the concept of dimension lumber was not an appropriate basis for establishing “likeness” of products under Article I:1 of the General Agreement.

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This finding has been followed consistently in subsequent case law. GATT panels have further dismissed the relevance of some factors, arguing that they are irrelevant for the purpose of defining likeness. In a 1978 panel on EEC–Animal Feed Proteins, the question arose as to whether, by treating different protein products in different ways, the EU was violating its obligations.104 There was little doubt that the products at hand could be regarded as substitutable (that is, as belonging to the same relevant product market). The question, however, was whether such a criterion (substitutability) was still appropriate to decide likeness under Article I of GATT. The panel decided that this should not be the case (§ 4.20): The Panel noted that the general most-favored-nation treatment provided for in Article I:1 … did not mention directly competitive or substitutable products. In this regard the Panel did not consider animal, marine, and synthetic proteins to be products like those vegetable proteins covered by the measures.

The Panel on Spain–Unroasted Coffee, on the other hand, set aside the relevance of process-based distinctions in defining likeness (§§ 4.7–4.10): The Panel examined all arguments that had been advanced during the proceedings for the justification of a different tariff treatment for various groups and types of unroasted coffee. It noted that these arguments mainly related to organoleptic differences resulting from geographical factors, cultivation methods, the processing of the beans, and the genetic factor. The Panel did not consider that such differences were sufficient reason to allow for a different treatment. It pointed out that it was not unusual in the case of agricultural products that the taste and aroma of the end-product would differ because of one or several of the above-mentioned factors. The Panel furthermore found relevant to its examination of the matter that unroasted coffee was mainly, if not exclusively, sold in the form of blends, combining various types of coffee, and that coffee, in its end-use, was universally regarded as a well-defined and single product intended for drinking. The Panel noted that no other contracting party applied its tariff regime in respect of unroasted, non-decaffeinated coffee in such a way that different types of coffee were subject to different tariff rates. In light of the foregoing, the Panel concluded that un-roasted, non-decaffeinated coffee beans listed in the Spanish Customs Tariff … should be considered as like products within the meaning of Article I:1. (emphasis in the original)

Why was similar analysis necessary? The question whether two goods share the same tariff classification requires some thought: in order to decide, for example, whether “Nespresso” and “Lavazza” coffee pods share the same tariff classification, the judge first needs to be satisfied that he or she is dealing with coffee pods in the first place. The judge will have to ask what is a reasonable understanding of the term “coffee pod” and then subject Nespresso and Lavazza coffee pods to it. To this effect, such criteria as physical characteristics and end uses should be relevant. The comparator, thus, is the tariff classification, and the more detailed it is, the easier it will be for the judge to decide the case. To the extent that production or process methods (PPMs) are not featured in the classification, they are irrelevant.

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Recall that agreed HS classifications contain a maximum of six digits. The level of specificity is not symmetric across classifications. For example, tariff heading 030312, which comprises “Other Pacific Salmon,” specifies geographically the product category that it applies to. In parentheses, six different species of “oncorhynchus” (e.g., gorbuscha, keta, etc.) are mentioned. These are terms from marine biology that refer to specific categories of salmon. The judge will have a relatively easy time decising the tariff classification of similar goods upon request. The same is not true, however, with tariff heading 8406.10, “Turbines of Marine Propulsion.” The title at the four-digit level is “Stream Turbines and other Vapor Turbines.” Now this seems to be quite open-ended since both small boats and well liners use turbines of marine propulsion. In similar cases, the judge’s discretion is wider. Finally, as will be discussed in more detail in chapter 7, the term “like products” has a different meaning in Article III of GATT. There, likeness is relative in the sense that the issue is whether two goods are like one another. In this example, the issue is whether Lavazza and Nespresso coffee pods are like one another, regardless of whether they come under the same tariff classification. The latter criterion could be relevant, but it is not the quintessential element that two goods must share. Moreover, it could be the case that goods coming under the same tariff classification are not considered to be like for the purposes of Article III of GATT. Take, for example, tariff heading 0201.10 (Bovine Meat, Carcasses, and Half-Carcasses), and assume that mad cow disease has spread within one WTO member country. Importing states can legitimately impose a sales ban on bovine meat originating there, while allowing other carcasses and half-carcasses to circulate freely in its market. As will be shown in the coverage of EC–Asbestos in chapter 7, reasonable consumers would always distinguish between these two goods. For this reason, the two goods are unlike. Regardless of the intellectual legitimacy of this finding, this is standard case law nowadays. It follows that, while likeness has a universal dimension when discussed in the context of tariff treatment, it has a market-specific dimension when discussed in the context of Article III of GATT. This should not strike the reader as odd. The rationale for negotiating tariffs is different from the rationale for regulating the internal market. It follows that the same term, interpreted in light of the rationale of the relevant provision, could be understood in two different ways.105 There are, of course, agreed and unilateral tariff classifications. As we saw in the previous chapter, the HS provides for agreed tariff classifications up to the six digit-level: by virtue of Article 3.3 of HS, national classifications beyond the six-digit level can legitimately come into the picture, so long as they specify a six-digit classification. WTO members might prefer to use a trade (elaborate tariff classification) instead of a domestic instrument in order to advance social preferences. Should the response remain the same? The answer should be a function of the legality of similar classifications. Unilateral classifications are not necessarily GATT consistent

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and can be challenged before WTO panels for (to provide but one example) unlawfully distinguishing between two like products. If panels consent to their lawfulness—that is, if they find that they respect Article 3.3 of HS—then they can provide a benchmark for deciding likeness. There is no case law on this score. Intuitively, one could use EC– LAN Equipment (discussed later), and ask whether similar classification could have been expected by the trading nations at the moment when the tariff concession was negotiated. 4.8 4.8.1

Exceptions Special and Differential Treatment

Developing countries can benefit from preferential tariffs and nontariff measures, as discussed in chapter 5. 4.8.2

PTAs

WTO members can provide each other market access on preferential conditions if they comply with the obligations embedded in Article XXIV of GATT, the Enabling Clause (chapter 6), or both. 4.8.3

General Exceptions

GATT contains an exhaustive list of general exceptions that enable the WTO member invoking them to deviate from any obligation assumed under GATT, including MFN (see chapter 9). 4.8.4

National Security

A WTO member can invoke a threat to its national security in order to deviate from its obligations under GATT, including MFN (see chapter 9). 4.8.5 Waivers A WTO member may, in exceptional circumstances, request that it be exempted from its obligations under the WTO. To this effect, a member must submit a request for a waiver to the WTO membership (Article IX of the Agreement Establishing the WTO). Waivers are discussed further in chapter 9 since they constitute an exception not only to MFN, but also to other obligations assumed under GATT.

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Nonapplication

A WTO member may legitimately refuse application of GATT to another WTO member if it has invoked the nonapplication clause to this effect. This possibility is explored in chapter 9. 4.9

Concluding Remarks

MFN is legitimately called the cornerstone of the GATT/WTO: it is MFN that keeps the multilateral trading system together. There is inherent tension between MFN and the other quintessential GATT principle, reciprocity. MFN, by inviting free riding, reduces the scope for reciprocity. This is what has prompted some nations to insist on “conditional” MFN; e.g., the idea that tariff reductions, or conferral of trade advantages more generally, will benefit only those who are prepared to offer something in return. Similar efforts have failed. In the classic theory explaining trade agreements, though, one should not overemphasize this risk since negotiations across principal suppliers and, more recently, critical mass agreements have greatly reduced the scope for free riding. In the next two chapters, we will be discussing two institutions where reciprocity has a drastically different impact. It is totally irrelevant when it comes to concessions in favor of developing countries (chapter 5), and very much the linchpin of commitments in the context of PTAs (chapter 6).

5

Special and Differential Treatment for Developing Countries

5.1 The Legal Discipline and Its Rationale 5.1.1 The Legal Discipline The GATT/WTO provisions on special and differential treatment (Part IV, and the Enabling Clause, which both constitute additions to the original GATT) provide donors (typically, developed nations) with the possibility to provide a subset of the WTO membership, namely developing countries, with trade advantages that they do not have to extend to the remaining WTO members. Thus, these provisions constitute an exception to the Most Favored Nation (MFN) Clause since advantages granted to goods originating in developing countries will not be extended to like goods originating in developed countries. Furthermore, donors cannot expect reciprocity, since trade advantages granted to developing countries are one way preferences. 5.1.2 The Rationale for the Legal Discipline The idea behind the Enabling Clause is that equal treatment across unequal partners does not work. Most developing countries, as they are called nowadays, did not participate in the negotiation of GATT, as already shown in chapter 1. Only a few of the participants advanced proposals in favor of “special and differential” treatment. GATT, except for sporadic references (as in Article XVIII), did not concede this point. What, then, explains the change in attitude? Why was Part IV deemed necessary? In a nutshell, it is all due to the ideas prevailing in the late 1950s and early 1960s (at least in some corners), as well as the creation of new, independent states around that period that saw merit in these ideas, espoused them, and fought for their adoption at the multilateral level. The term “industrialization” was being used as a synonym for “development”—indeed, the pathway toward development that all nations had to take. Domestic subsidies could of course contribute towards this objective, but the treasuries of many interested in this endeavor were empty. Import substitution and export expansion were the remaining instruments necessary to achieve industrialization. There were legitimate doubts

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regarding the consistency of both instruments with the GATT. Those interested in industrializing their economy in this manner thus, needed to be granted exceptions from MFN. Many developing countries gained their independence around the time when similar ideas regarding industrialization flourished. These ideas did not fall on deaf ears. Upon joining GATT, as they almost all did, they brought these views to the world trading system, calling for the necessary adjustments. They requested the introduction of instruments to advance their quest for industrialization. It all boiled down to two points. First, developing countries should be benefiting from concessions that would not be extended to like products originating in developed countries. This would be done through the Enabling Clause. Second, developed nations, when making concessions, should not expect reciprocity from developing countries. Article XXXVI.8 reflects this point: “The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.” All this is discussed in the rest of this chapter. 5.1.3

Discussion

5.1.3.1 MFN between Unequal Partners In chapter 1 we explained why the MFN clause was designed to be the cornerstone of GATT. The original GATT consisted of a relatively homogeneous group of 23 countries. At the very least, all participants shared the commitment to nondiscriminatory trade liberalization. Already, during the negotiation of the original GATT, Lebanon had argued in favor of introducing tariff preferences for developing countries, but its proposal was not accepted.1 Moreover, Lebanon did not sign the GATT, and this voice was lost. It was not the only one. In a similar vein, Irwin, Mavroidis, and Sykes (2008) noted that India (before partition) had a hostile reaction when it was presented with the Suggested Charter and was requested to comment upon it. Its criticism focused on MFN, arguing that this instrument was ill equipped to deal with countries at different stages of development.2 India’s voice was not totally ignored. The provision on infant industry [Article XXVIII(c) of GATT] was one response to this and similar requests. Besides a few sporadic provisions allowing special and differential treatment for developing countries, though, GATT did not reflect a comprehensive chapter dealing with issues of interest exclusively to developing countries. In the years subsequent to the advent of GATT, a number of countries acceded to independence and eventually joined GATT. Many of them were rather poor, developing countries. They were joining a GATT including provisions that, with few exceptions as noted previously, were not conceived to discriminate across the membership using development level as a benchmark for making distinctions. From the early days of their participation, developing countries, influenced by the writings of Prebisch (1950) and Singer (1950), and (1950a) that are described later in

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this chapter, aimed at changing this basic scaffolding by requesting the introduction of preferential tariffs for products originating in developing countries with no reciprocal obligation on behalf of developing countries to liberalize their markets.3 They believed that they could not compete for export markets on an equal basis with developed countries. In their view, the MFN tariff rate amounted to an impediment to their export trade, in that it provided for nondiscriminatory access to markets regardless of the level of development of the exporting country. They also thought that a few sporadic provisions here and there (like the provision on infant industry) felt short of advancing their concerns. They requested a comprehensive discussion on trade and development. Their request was answered. A comprehensive discussion on GATT and its contribution to development took place in 1958. The background for the discussion was the circulation of the Haberler report, discussed in the next section.4 5.1.3.2 The Background: Gottfried Haberler versus Singer/Prebisch Haberler had been requested by the GATT contracting parties to examine the validity of claims by the less-developed trading partners to the effect that the existing rules on trade liberalization would not necessarily work to their advantage. Exports of farm and textile goods were growing at a much slower pace than exports of industrial goods, and this was the reason for the anxiety of developing countries. They believed that they would never catch up with the developed world unless they could switch to producing industrial goods. Haberler concluded in his study that developing countries had some valid reasons to be worried. He examined both the short- and long-term trends in commodity prices and the factors influencing them. He concluded that the protectionist policies of developed nations in the farm sector, as well as their tariff escalation practices, were factors contributing to lack of growth in the export of textiles and farm products originating in developing countries. It is worth recounting in this respect that the US had obtained a waiver in 1955, which allowed it to grossly subsidize its farm production over the subsequent years and essentially shield domestic producers from the challenges of international competition.5 The Haberler report made a series of recommendations to address the issue, and reduction of the existing protectionism was one of the measures suggested. His main conclusions were that labor-intensive goods, like farm and textile goods, which are typically produced in developing countries’ markets, were facing formidable barriers to entry in the markets of developed countries. Haberler, nevertheless, was not advocating industrialization and import substitution. His report sensitized the trading partners to the fact that not all parties were gaining equally from the existing regime. His recommendations included a painful recipe for some developed nations: open up their textiles and farm markets. Developing countries seized the opportunity (without paying too much attention to the details in the Haberler report) and raised the volume of their voice in GATT, claiming that the imbalance had to be addressed. They argued that something needed to be done to

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address the concerns of those who were being left behind. Something needed to be done, but what was it exactly? Haberler’s report was not the only game in town. Hans Singer, a German professor of economics at Cambridge, and Raoul Prebisch, an Argentine economist, had been independently advocating for some time that the safest way toward development was to strive for industrialization through import substitution policies.6 The argument for import substitution was justified as the adequate response to what was termed “terms of trade pessimism”: exports of developing countries were progressing at a slower pace than total exports. No one denied that. But unlike Haberler, who thought that it was protectionism with respect to farm goods that caused the slow growth of exports, Singer and Prebisch argued that the slow growth of exports was due to the prevailing terms of trade between farm and industrial goods. Fast development required industrialization. This was the Prebisch-Singer thesis, also called the “Prebisch-Singer hypothesis.”7 Consequently, both Haberler and Singer and Prebisch were looking at the same picture, but drawing different conclusions. Exports of labor-intensive goods were growing slower than exports of industrial goods. They disagreed on the necessary treatment to correct this imbalance: Haberler was recommending that textiles and farm protectionism be dismantled, whereas Singer and Prebisch were advocating import substitution policies. Haberler was addressing the causes for slow growth of exports of farm goods. Singer and Prebisch moved to prescribe policies that should be followed to bridge the gap between the rates of growth of exports (industrial-, farm goods) without asking first what had given rise to the gap. The view that development essentially equaled industrialization (supported by the influence of terms-of-trade elasticity pessimism)8 resonated well with many developing countries. Note that during that time, liberal market economies were discredited in the eyes of many observers, especially in developing countries, and a strong argument in favor of government-driven economies was finding a receptive audience. Prebisch and Singer had a head start over Haberler in many quarters. Unsurprisingly, many developing countries espoused negotiating strategies aimed at achieving preferential access in developed countries’ markets. In a nutshell, their request would be framed in terms of nonreciprocal preferential access to developed countries’ markets, and, thanks to economies of scale resulting from nonreciprocal preferential access of their products (so the argument goes), they would gradually become more competitive in the production of industrial goods. Then and there, Haberler lost his intellectual argument to Singer and Prebisch, at least as far as developing countries were concerned. Haberler lost support among developed countries as well, this time for reasons of political economy. They found it easier to accept one-way preferences in areas of their choice, as will be explored later in this chapter, rather than a painful opening of their textiles and farm markets that would bring their governments into direct collision with powerful lobbies. The US had just been granted its farm waiver, as we saw earlier, and some of its

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southern states (the so-called textile belt) were clearly reluctant to open up to foreign competition. The EU, on the other hand, was taking its first steps toward integration and had already assigned itself the objective to become self-sufficient with respect to farm production. Haberler’s report was not inconsequential, though. Three committees were established in its aftermath: Committee I, which was supposed to prepare a new tariff negotiating round; Committee II, mandated to review the agricultural policies of governments; and Committee III, which would deal with the problems that developing countries were facing. Nothing tangible came from Committee II, and the request for one-way preferences dominated discussions in Committee III. 5.1.3.3 Import Substitution The Prebisch-Singer hypothesis persuaded many developing countries that adoption of import substitution policies was the pathway to development. To do that, some support was necessary, either in the form of tariffs or, as we saw in chapter 2, in the form of quotas [Article XVIII(c) of GATT], or, on occasion, through subsidization. The test in economic theory to support an industry is the so-called Mill-Bastable test. John Stuart Mill first explained that the absolute precondition for government support of an industry should be the presence of learning effects external to firms, e.g., knowledge that others can use as well. In addition, support should be temporary, as subsidized firms should become viable after a moderate amount of time. Charles Francis Bastable added that, once viable, formerly subsidized firms should be in a position to pay back to society the grants received.9 In practice, there have been various cases where import substitution policies were followed without meeting the Mill-Bastable test, and, alas, these cases led to wasteful expenditure in countries where the opportunity cost of similar actions was quite high. Early analysis of the issue cast doubt on the validity of import substitution policies. Studies conducted by Bhagwati (1982) and Krueger (1978) for the National Bureau of Economic Research (NBER)10 provided ample support for this claim. Theoretical papers included in the two studies actually supported the view that the focus should be on export policies, which, besides economies of scale, ensure that fewer quantitative restrictions will be in place. Empirical papers underlined the shortcomings of import substitution policies in terms of misallocation of resources.11 Subsequently, some analysts have presented empirical evidence regarding the merits of import substitution through infant industry support. Rodrik (2009) presents evidence of success stories from Latin American countries.12 Some empirical evidence suggests that it is the government’s role in enforcing conditionality that will distinguish winners from losers.13 Overall, while economists legitimately continue to look at import substitution policies with a considerable amount of skepticism, there are some examples that support the view that, under very restrictive conditions, similar interventions could be successful.

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5.2 Toward Special and Differential Treatment 5.2.1

Striving for a Two-Tier GATT

The discussions on the previous topic slowly found its way into GATT at the end of the 1950s and the beginning of the 1960s. Initiatives multiplied that were aimed at reforming GATT into a two-tier system that would allow developing countries to continue under the aegis of GATT without having to be bound by its quintessential provision, the MFN. First, a GATT Working Party on Commodities was established to review trends and developments in international commodity trade. The Singer-Prebisch thesis was reflected therein, as evidenced by the following quoted passage from the report in 1961: … in the long term, only the industrialization of the less-developed countries would enable these countries to overcome the present difficulties in their external trade; in turn, this industrialization and the economic development generally of the less-developed countries would only be achieved through an increase in their exports, including exports of manufactured and semi-manufactured goods. Direct investment and financial aid alone would not solve this problem.14

Almost naturally, and without asking too many questions to this effect, the discussions moved from the generic to the specific. During the Kennedy round of international trade negotiations (1962–1967), the Committee on Legal and Institutional Framework of GATT in Relation to Less-Developed Countries (one of the negotiating groups) worked on a chapter on Trade and Development. This chapter was finalized at a special session of the CONTRACTING PARTIES, held from November 17, 1964, to February 8, 1965. It was annexed to GATT as an amending protocol, and it now appears as Part IV. Part IV was hailed by developing countries as their only major benefit from the negotiations of the Kennedy round. Reductions of tariffs on products of interest to them were far short of the 50 percent level that had been accepted as the working hypothesis for the negotiations.15 Moreover, some of the products of interest to them had been totally excluded from the negotiation. 5.2.2 The Content of Part IV Part IV came into effect on June 27, 1966, and consists of three new legal provisions: • Principles and Objectives (Article XXXVI of GATT) • Commitments (Article XXXVII of GATT) • Joint Action (Article XXXVIII of GATT) A look at the wording of each provision leaves no doubt that these were meant to be “best-endeavors” clauses aimed at opening the door to discriminatory, preferential trade.

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5.2.2.1 Principles and Objectives Article XXXVI of GATT constitutes the formal recognition that market access for products of export interest to developing countries has to be improved. It stops short of prescribing specific measures that should be adopted to this effect. It does, on the other hand, provide the foundation for nonreciprocity (§ 8): The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.

The Interpretative Note to this provision adds: It is understood that the phrase “do not expect reciprocity” means, in accordance with the objectives set forth in this Article, that the less-developed contracting parties should not be expected, in the course of trade negotiations, to make contributions which are inconsistent with their individual development, financial and trade needs, taking into consideration past trade developments.

During the Kennedy round, this provision was further interpreted as follows: There will, therefore, be no balancing of concessions granted on products of interest to developing countries by developed participants on the one hand and the contribution which developing participants would make to the objective of trade liberalization on the other and which it is agreed should be considered in the light of the development, financial and trade needs of developing countries themselves. It is, therefore, recognized that the developing countries themselves must decide what contributions they can make.16

It follows that developing countries were expected to make contributions only to the extent that when doing so, they did not endanger their development needs. Since only they would be the judge of their own situation, this provision did not mean much, and subsequent practice confirmed its irrelevance. 5.2.2.2 Commitments Article XXXVII of GATT is a general clause recommending various actions that developed countries should undertake to help promote issues of interest to developing countries. Chief among them was the inducement to reduce the gap between high barriers on processed goods and low barriers on primary products. This is, of course, what tariff escalation is all about. The validity of the tariff escalation argument is doubtful at best. In a scenario of high tariffs for processed goods and low tariffs for primary goods, the problem seems to be the high tariffs on processed goods, not the gap in the level of tariffs between processed and primary goods.17 Be it as it may, though, this provision seems to attach validity to the escalation argument more than it does to the high-tariff component. The remaining part of this provision deals with issues that were also further detailed in other agreements. For example, developed countries, when imposing countervailing duties

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(CVDs) or antidumping (AD) duties, or when introducing safeguard measures, should “have special regard to the trade interests” of developing countries. To this effect, they should “explore all possibilities of constructive remedies before applying such measures.” In the AD Agreement concluded during the Uruguay round, WTO members agreed to transform this provision into a binding legal obligation. It has since been consistently interpreted as an obligation to examine the feasibility of introducing price undertakings on dumped imports originating in developing countries before AD duties are eventually imposed.18 5.2.2.3 Joint Action Article XXXVIII of GATT was meant to provide the institutional vehicle that would make the principles reflected in the two aforementioned provisions operational. It does not, however, provide the definitive solution. It simply calls for institutional arrangements for furthering the objectives of Part IV. It further calls for collaboration to this effect with the UN and its organs and agencies. Finally, it expresses the view that some monitoring of the rate of growth of the trade of developing countries should be introduced. The response to the call for institutional arrangements to further the objectives of Part IV came with the advent of the Enabling Clause, discussed next.19 5.3 The Enabling Clause Enters the Frame 5.3.1 An Atypical Birth The Enabling Clause came to life in two steps. Initially, the GATT CONTRACTING PARTIES agreed in 1971 that those interested in treating goods originating from developing countries better than like goods originating elsewhere could benefit from a ten-year waiver. The waiver was necessary, of course, to legalize the deviation from Article I of GATT (MFN). Before the waiver lapsed, the Enabling Clause was agreed to in 1979, providing a permanent deviation from Article I of GATT.20 The waiver ran out but preferences would continue, thanks to the enactment of the Enabling Clause. The Enabling Clause reproduces the nonreciprocity idea, first embedded in Article XXXVI.8 of GATT.21 It was negotiated in one of the negotiating groups formed during the Tokyo round, the Negotiating Group on Framework.22 The Panel on EC–Tariff Preferences recounts the advent of the Enabling Clause in the following terms: During the Second Session of UNCTAD, on 26 March 1968, a Resolution was adopted on “Expansion and Diversification of Exports and Manufactures and semi-manufactures of Developing Countries” (Resolution 21 (II)). In this Resolution, UNCTAD agreed to the “early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences which would be beneficial to the developing countries” and established a Special Committee on

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Preferences as a subsidiary organ of the Trade and Development Board, with a mandate to settle the details of the GSP arrangements. In 1970, UNCTAD’s Special Committee on Preferences adopted Agreed Conclusions which set up the agreed details of the GSP arrangement. UNCTAD’s Trade and Development Board took note of these Agreed Conclusions on 13 January 1970. In accordance with the Agreed Conclusions, certain developed GATT contracting parties sought a waiver for the GSP from the GATT Council. The GATT granted a 10-year waiver on 25 June 1971. Before the expiry of this waiver, the CONTRACTING PARTIES adopted a decision on “Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries” (the “Enabling Clause”) on 28 November 1979.

5.3.2 The Main Features of the Enabling Clause The function of the Enabling Clause is to help WTO members that are developed nations accord trade advantages to developing countries without running the risk of seeing their own practices being challenged for violating MFN. National Generalized System of Preferences (GSP) schemes were the vehicle to make this happen.23 A GSP is a list reflecting concessions granted by donors to beneficiaries. GSP lists, of course, must respect the legal requirements imposed through the Enabling Clause—namely:24 1. The general principle that deviations from MFN are allowed for products originating in developing countries (§ 1). 2. Concessions (§ 2) can be expressed in tariff terms (§ 2(a)), as well as nontariff terms (§ 2(b)). 3. Distinctions can be made between developing countries and least-developed countries (LDCs), the latter being a subgroup of the former; and additional preferences can be granted to LDCs (§ 2(d)). 4. Measures must be designed to correspond to the “development, financial, and trade needs of developing countries” (§ 3(c)). 5. WTO members that have recourse to measures coming under the purview of the Enabling Clause must notify the WTO membership and consult with them, whenever appropriate (§ 4). 6. Donors should not expect reciprocity from beneficiaries (§ 5). LDCs should not, in general, be expected to make commitments that might jeopardize their development, financial, and trade needs (§ 8). The Enabling Clause further provides in § 2(c) the legal basis for developing countries to form preferential trade agreements (PTAs) between themselves, while respecting less onerous requirements than those established by Article XXIV of GATT.25 Finally, the possibility for graduation is established: developing countries are expected to participate more fully in the multilateral trading system as their economic situation improves (§ 7).26

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5.3.3 The Legal Nature of the Enabling Clause The Appellate Body (AB), in its report on EC–Tariff Preferences, held that the Enabling Clause became an integral part of GATT by virtue of Article 1(b)(iv) of GATT (1994).27 In the same report, it held that since the Enabling Clause permits WTO members to grant tariff preferences to a subset of the WTO membership, it constituted a legal exception to Article I of GATT (§ 99). The legal implication, in the AB’s view, is that the Enabling Clause takes precedence over Article I of GATT (§ 102). As to the allocation of the burden of proof, the AB, reversing the panel’s decision in this respect, held that it is insufficient for a complaining party, when challenging a measure taken pursuant to the Enabling Clause, to simply claim violation of Article I of GATT (§ 110). Due process considerations (§ 113) require that the complaining party “identify those provisions of the Enabling Clause with which the scheme is allegedly inconsistent, without bearing the burden of establishing the facts necessary to support such inconsistency” (§ 115; emphasis in the original). The soundness of this approach can be questioned, of course. It would probably have made better sense for the AB to go all the way and construct the Enabling Clause as a self-standing obligation, not as an exception to Article I of GATT. WTO members that want to do that anyway apply one set of tariffs to imports from developed nations and another on imports originating in developing countries. Complainants will carry a similar burden of proof, regardless of whether they attack violations of MFN or of the Enabling Clause. 5.3.4

Donors and Beneficiaries

5.3.4.1 No Obligation to Donate WTO members are permitted, but are not required, to provide preferences. If they decide to do so, though, then they must respect the Enabling Clause. The letter and the spirit of this clause both make it clear that preferences are granted by developed nations and can be granted only to developing countries, not to other developed countries. The Enabling Clause, however, does not lay down any specific criteria for which WTO members will be classified as developing countries. 5.3.4.2 Self-selection of Beneficiaries Several discussions have taken place within GATT/WTO that aim to provide some certainty as to the identity of donors and beneficiaries, but, alas, none of them has been conclusive.28 In practice, developing countries in the WTO are designated on the basis of the self-selection principle (which itself is an expression of the principle of sovereignty). Their declaration has ramifications for a host of issues, not simply eligibility for GSP advantages. Unilateral declarations to the effect that a WTO member is a developing country can, in principle, be challenged before a WTO panel. No formal challenge has been launched so far in this context.

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There are, nevertheless, instances where the legitimacy of developing-country status has been questioned, but no instance where the challenging party went as far as to submit a formal dispute to this effect. While negotiating on the implementation of the TradeRelated Aspects of Intellectual Property Rights (TRIPs) Agreement, for example, the US and the EU voiced their wish that WTO members like Singapore, Korea, and Hong Kong be considered developed nations, at least for the purposes of complying with TRIPs. These three southeast Asian countries disagreed. Subsequently, discussions took place in the TRIPs Council. During these discussions, the principle of self-selection as such was not questioned, and a mutually satisfactory solution was agreed to among the interested parties.29 To cite another example, during the discussions before the Dispute Settlement Body (DSB) regarding the adoption of the AB report on Korea–Various Measures on Beef, the EU delegate: … noted with surprise that Korea had been treated as a developing country for the purposes of the Agreement on Agriculture. Although this issue did not seem to have been in dispute, the EC was compelled to underline its disagreement with Korea’s self-characterization as a developing country.30

There may have been a disagreement, but the EU did not formally challenge this issue. WTO practice points to instances where, through negotiated solutions, the WTO membership has managed to mitigate what it considered to be unreasonable demands. China, for example, defends its developing-country status. The Chinese Protocol of Accession, though, states that the de minimis threshold for calculation of the Aggregate Measurement of Support (AMS)31, in accordance with Article 6.4 of AG, should be 8.5 percent, when the corresponding numbers are 10 percent for developing countries and 5 percent for developed countries. All these instances show that WTO members have opted for ad hoc agreements to resolve similar disputes instead of launching a formal complaint in accordance with Article 1 of the Dispute Settlement Understanding (DSU), whereby they would be contesting the developing-country status of another WTO member. The WTO World Trade Report (2014, p. 66) divides WTO members between “developed,” on the one hand, and “developing and emerging economies,” on the other. The term “developing and emerging economies” is further subdivided into “emerging economies,” “developing economies,” and “LDCs.” There is no doubt as to the identity of the LDCs, a subset of the developing-countries group as per § 2(d) of the Enabling Clause. The WTO recognizes as LDCs the countries that have been designated as such by the UN. The UN criteria for including a country among the LDCs are as follows: 1. A low-income criterion based on a three-year average estimate of the gross national income (GNI) per capita. The so-called Atlas method has been used to this effect, a

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mathematical formula used to reduce the impact of short-term exchange rate fluctuations. Graduation takes place if, following this method, the GNI per capita rises by 20 percent over a given three-year period: $992 GNI per capita was the threshold for inclusion of a country in the LDC category in 2011. If the GNI per capita of any country that had been originally included in the LDC category had risen above $1,190 for two of the three years between 2011 and 2014, then graduation would occur. 2. A human-capital-status criterion that involves a composite Human Assets Index (HAI) based on indicators of: (i) nutrition (percentage of population undernourished); (ii) health (mortality rate for children aged five years or under); (iii) education (gross secondary school enrollment ratio); and (iv) adult literacy rate. 3. An economic vulnerability criterion involving a composite Economic Vulnerability Index (EVI) based on indicators of (i) population size; (ii) remoteness; (iii) merchandise export concentration; (iv) share of agriculture, forestry, and fisheries in gross domestic product (GDP); (v) homelessness owing to natural disasters; (vi) instability of agricultural production; and (vii) instability of exports of goods and services.32 A country must satisfy all three criteria. In addition, large economies are excluded. No country with a population exceeding 75 million people may be included, regardless of its GNI per capita. There are currently 48 LDCs on the UN list, 33 of which are WTO members: Angola, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Democratic Republic of Congo, Djibouti, Gambia, Guinea, Guinea Bissau, Haiti, Laos, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Senegal, Sierra Leone, Solomon Islands, Tanzania, Togo, Uganda, Vanuatu, and Zambia. Nine more LDCs are currently negotiating their accession to the WTO: Afghanistan, Bhutan, Comoros, Equatorial Guinea, Ethiopia, Liberia, São Tomé and Príncipe, Sudan, and Yemen. Geographically, 34 of the 48 are located in Africa, 13 in Asia Pacific, and 1 (Haiti) in the Caribbean. Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey are designated as “emerging economies.” Note that Mexico and Turkey are Organisation for Economic Co-operation and Development (OECD) members (e.g., members of the “club of rich countries”). Three more OECD members (Chile, Israel, and Korea) are designated as “developing countries” in the WTO publication. All emerging economies present themselves as developing countries in the various WTO forums. On the other hand, several EU member states that are not OECD members have been designated as “developed economies” (Bulgaria, Cyprus, Latvia, Lithuania, and Romania). Finally, Bermuda, Faeroe Islands, Gibraltar, Greenland, Liechtenstein, and Saint Pierre and Miquelon have been designated as “developed economies.”

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5.3.4.3 Graduation Graduation from the LDC list is possible, as we discussed when we referred to the UN criteria for conferring LDC status. Since its inception, Botswana (1994), Cape Verde (2007),33 Maldives (2011), and Samoa (2014) have all been removed from the list.34 Graduation can, of course, occur from the list of developing countries to that of developed countries. In fact, this should not come as a surprise at all. Since development is an ongoing process, one would normally expect that the group of developing countries is dynamic, not static. No precise criteria have been established, though, that will explain under what conditions graduation will take place. Donors have removed beneficiaries from lists without always explaining the reason for doing so. No beneficiary that has been removed has challenged the legality of similar actions. As a result, neither as a matter of law nor as a matter of case law is it clear as to the criteria for graduation to developed-country status. 5.3.5

GSP Schemes

5.3.5.1 The Basic Obligation § 2(a) of the Enabling Clause states that the clause applies to Preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences

A footnote to this paragraph clarifies that preferences must be • Generalized • Nondiscriminatory • Nonreciprocal • Beneficial to developing countries The wording of the footnote leaves no doubt that all these properties must be cumulatively present in a GSP scheme. § 2(d) of the Enabling Clause further provides that the clause protects: “special treatment on the least developed among the developing countries in the context of any general or specific measures in favour of developing countries.” Finally, § 3(c) of the Enabling Clause holds that “… treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial, and trade needs of developing countries.”35 A donor, thus, can legitimately impose an MFN rate for widgets of 10 percent, a preferential rate of 5 percent, and a rate applicable to LDCs of only 2 percent. Additional preferences are often denoted with a “+”: we distinguish, thus, between GSP, GSP+, and preferences for LDCs.36

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The question that arises at that point is whether there is tension between § 2(d) and § 3(c): that is, can donors distinguish beneficiaries based on their “development, financial, and trade needs” beyond the statutory distinction operated between developing countries and LDCs? The response provided by WTO adjudicating bodies on this score is explored later in this chapter. 5.3.5.2 Preferences Requiring a Waiver Let’s kick-start this discussion with an idiosyncratic program, the US African Growth and Opportunity Act (AGOA), which is a scheme targeting beneficiaries geographically located in sub-Saharan Africa. It roughly aims at compensating performance; that is, the US aims at picking “winners” and providing them with extra preferences. Because of its idiosyncratic elements (e.g., not all countries in a similar position from a level-of-development perspective will participate), it required a waiver for the US to be lawfully positioned to compensate the designated beneficiaries. The US obtained a waiver that runs until September 30, 2015.37 The EU requested and obtained a waiver in order to provide Pakistan with necessary aid and thus help it with the problems that it faced as a result of the 2011–2012 floods that had affected extensive regions of the country. The form of the aid was principally exemptions from payment of customs duties.38 The granting of waiver dispenses the EU from the obligation to help other countries similarly situated in the future. The EU can behave as it did when Pakistan was hit by torrential floods, but does not have to do so. 5.3.5.3 Preferences for LDCs Donors have adopted asymmetric schemes when granting preferences to LDCs. The Chinese schemes, for example, are often a two-way street guaranteeing a return for China in terms of accessing the minerals market of beneficiaries. China’s dependency on raw materials explains why this is the case. New Zealand has been offering, since July 1, 2001, duty-free and quota-free (DFQF) access to all imports originating in LDCs. Japan, in December 2000, announced its 99% Initiative on Industrial Tariffs, which practically meant that, as of April 2001, the coverage of DFQF treatment for industrial products originating in LDCs and imported into Japan increased from 94 to 99 percent. Crucially, textile and clothing products—a product market of particular interest to LDCs—enjoyed DFQF treatment in the Japanese market. The EU’s Everything But Arms (EBA) is a bit more complicated.39 First, in February 2001, the European Council adopted Regulation (EC) 416/2001, granting DFQF access to imports of all products from LDCs (except for arms and ammunitions) without any quantitative restrictions (except for bananas, sugar, and rice, for a limited period). EBA was later incorporated into the GSP Council Regulation (EC) No. 2501/2001. The regulation foresaw that the special arrangements for LDCs should be maintained for an unlimited period of time and not be subject to the periodic renewal of the EU GSP.

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The EBA allows for LDCs that have graduated to profit from EBA for three years following graduation: Maldives, for example, profited from EBA benefits until the end of 2013, three years following its graduation from the LDC list.40 The treatment accorded to products originating in LDCs has been heavily negotiated during the Doha round, and the various innovations agreed to will be explored later in this chapter. Table 5.1 Preferences in favor of LDCs PreferenceGranting Country Australia Belarus

Brazil

Canada

China

Description

Beneficiaries

Coverage/Margin of Preference

Duty- and quota-free entry. Entry into force: July 1, 2003 Harmonized System (HS) of preference by the Eurasian Economic Community (EAEC); entry into force: May 2001 Duty-free and quota-free scheme for LDCs

LDCs

All products

WT/ COMTD/N/18

47 LDCs

Duty-free access for all products

WT/TPR/S/170

LDCs

WT/COMTD/ LDC/M/55

GSP–Least-Developed Countries’ Tariff Programme (LDCT); entry into force: 1 January 2003; extended until 30 June 2014 Asia-Pacific Trade Agreement (APTA)b— amendment to the Bangkok Agreement; entry into force: 1 September 2006

LDCs

Duty-free and quota-free access for products from LDCs covering 80 percent of all tariff lines to be granted by mid-2010 With the exception of over-quota tariff items for dairy, poultry, and egg products, Canada provides duty-free access under all tariff items for imports from LDCs. In addition to 1,697 products (with average margin of preference of 26.7 percent) available to all APTA members, tariff concessions granted exclusively to LDC members on 161 products with average margin of preference of 77.9 percent. On top of the Asia-Pacific Trade Agreement (APTA), unilateral special preferential tariffs (zero rated) are offered on additional 87 tariff lines

Bangladesh Lao PDR

References

WT/ COMTD/N/15/ Add.l and Add.2 WT/ COMTD/W/159 WT/ COMTD/N/22 Information received from the government of China

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Table 5.1 (continued) PreferenceGranting Country

Description

Beneficiaries

Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China; entry into force: 1 January 2006

Cambodia

Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China Entry into force: 1 January 2006

Lao PDR

Lao PDR

Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China Entry into force: 1 January 2006

Myanmar

Myanmar

Coverage/Margin of Preference

References

Duty-free treatment on 418 tariff lines. On top of Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China, unilateral special preferential tariffs (zero rated) are offered on additional 420 tariff lines Duty-free treatment on 330 tariff lines

Information received from the government of China

On top of Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China, unilateral special preferential tariffs (zero rated) are offered on additional 300 tariff lines Duty-free treatment on 220 tariff lines

Information received from the government of China

On top of Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China, unilateral special preferential tariffs (zero rated) are offered on additional 226 tariff lines

Information received from the government of China

Information received from the government of China

Information received from the government of China

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Table 5.1 (continued) PreferenceGranting Country

EU

Description

Beneficiaries

Forum on ChinaAfrica Co-operation

African countries, including LDCs, having diplomatic relations with China

Special preference tariff

Afghanistan, Maldives, Samoa, Vanuatu, and Yemen LDCs

GSP-EBA initiative; entry into force: 5 March 2001

EPAs

79 African, Caribbean, and Pacific (ACP) countries, 40 of which are LDCs

Coverage/Margin of Preference As of July 1, 2010, China grants zero-tariff to 4,762 tariff lines imported from 33 LDCs, which had completed the exchange of letters for that purpose. Another 8 LDCs will enjoy the same treatment once the exchange of letters is completed. The 4,762 tariff lines account for roughly 60 percent of China’s total tariff lines, and represented 98.2 percent of all LDC exports to China in value in 2008. Zero-tariff treatment will be expanded, with the aim of achieving the final objective of including 95 percent of China’s total tariff lines. Unilateral special preferential tariffs (zero rated) are offered on 286 categories of products. Since October 1, 2009, the EBA has been granting DFQF access for all products from all LDCs (except arms and ammunitions). The EU introduced revised rules of origin for the GSP as of January 1, 2011, simplifying rules specially for the LDCs. EPAs include provision for duty-free and quota-free market access. As of February 2011, a full EPA was signed by the 15 countries in the Caribbean Forum of ACP states (CARIFORUM), of which Haiti is an LDC. Interim EPAs are signed by the following LDCs: (i) Southern African Development Community (SADC): Lesotho and Mozambique; (ii) Eastern and Southern

References WT /COMTD/ W/164 WT/ COMTD/M/77 WT/ COMTD/ LDC/M/57

Information received from the government of China WT/COMTD/ N/4/Add.2 andAdd.4 WT/TPR/S/214/ Rev. 1 ec.europa.eu

WT/TPR/S/214/ Rev. 1 WT7COMTD/ LDC/W/ 46/ Rev. 1/Corr.l ,http://ec. europa.eu/trade/ index_en. Htm

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Table 5.1 (continued) PreferenceGranting Country

Description

Beneficiaries

Iceland

GSP–Tariff Preferences in Regard to the Importation of Products Originating in the World’s Poorest Developing Countries; entry into force: 29 January 2002

LDCs

India

APTA—Amendment to the Bangkok Agreement; entry into force: 1 September 2006

Bangladesh Lao PDR

Duty-Free Tariff Preference (DFTP) Scheme; entry into force: 13 August 2008 South Asian Free Trade Agreement (SAFTA)C; entry into force: 1 January 2006

LDCs

Bangladesh

Bhutan Maldives Nepal

Coverage/Margin of Preference Africa (ESA): Madagascar (signatures by Comoros and Zambia are pending). Interim EPAs are initialed with the East African Community (EAC), which includes four LDCs: Burundi, Rwanda, Tanzania, and Uganda. Essentially all products, with some exceptions in agricultural products (HS chapters: 4, 15, 18, 19, 21, and 22) and nonagricultural products (HS subheadings: 3502 and 3823, and all of HS 16, with the exception of subheadings 1603 to 1605) In addition to 570 products (with an average margin of preference of 23.9 percent) available to all APTA members, tariff concessions granted exclusively to LDC members on 48 products with average margin of preference of 39.7 percent DFTP Scheme announced in April 2008. Duty-free access on 85 percent tariff lines at HS six-digit level within a five-year time frame. In addition to tariff concessions on 2,940 lines at the HS six-digit level to all SAFTA members, special concessions exclusively granted to LDC members. Between 2006 and 2007, preferential rates were granted on 84.4 percent of all tariff lines at average rate of 10.6 percent (while 15 percent for non-LDC members)

References

WT/COMTD/ N/17 and Corr. l WT/ TPR/S/164

WT/COMTD/ N/22

WT/COMTD/ M/69

WT/COMTD/ IO WT/ TPR/S/182. Rev.l and WT/ COMTD/N/26

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Table 5.1 (continued) PreferenceGranting Country

Description

Beneficiaries

Bilateral agreement; entry into force: 13 May 2003

Afghanistan

Bilateral agreement; entry into force 2002: extended on 29 July 2006 for 10 years Bilateral agreement

Bhutan

Japan

GSP–Enhanced duty- and quota-free market access; entry into force: 1 April 2007

LDCs

Kazakhstan

HS of preference by the Eurasian Economic Community (EAEC); entry into force: May 2001 Presidential Decree on Preferential Tariff for LDCs; entry into force: 1 January 2000 APTA—Amendment to the Bangkok Agreement

47 LDCs

Entry into force: 1 September 2006 HS of preference by the EAEC Entry into force: May 2001 Preferential tariff treatment for LDCs; entry into force: 1 January 2001

Lao PDR

Korea

Kyrgyz Republic Morocco

Nepal

Coverage/Margin of Preference Tariff reductions on 38 HS six-digit lines, with margins of preferences of 50 percent or 100 percent of MFN tariff All products

Tariff exemptions for all goods subject to rules of origin. Imports of certain goods (vanaspati, copper products, acrylic yarn, and zinc oxide) are subject to annual quota. Duty-free access on 8,859 tariff lines (or 98 percent of the tariff line level), covering over 99 percent in terms of the import value from LDCs Duty free for all products

References WT/TPR/ S/182 .Rev. 1 WT/TPR/ S/182 .Rev. 1 and WT/COMTD/ N/28 WT/TPR/ S/182 .Rev. 1

WT/ COMTD/N/2/ Add. 14

WT/TPR/S/170

LDCs

Duty-free access is granted on 87 tariff items (HS six-digit)

WT/COMTD/ N/12/ Rev.l WT/TPR/S/137

Bangladesh

In addition to 1,367 products (with average margin of preference of 35.4 percent) available to all APTA members, tariff concessions granted exclusively to LDC members on 306 products with average margin of preference of 64.6 percent

WT/ COMTD/N/22

47 LDCs

Duty free for all products

WT/TPR/S/170

33 African LDCs

Duty-free access on 61 products (at the HS four- to ten-digit level)

WT/LDC/SWG/ IF/18 and G/C/6

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Table 5.1 (continued) PreferenceGranting Country New Zealand Norway

Pakistan

Sri Lanka

Switzerland

Tajikistan

Turkey Russia United States

Description

Beneficiaries

Coverage/Margin of Preference

GSP–Tariff Treatment for LDCs; entry into force: 1 July 2001 GSP–Duty- and quotafree market access; entry into force: 1 July 2002 South Asian Free Trade Area (SAFTA); entry into force: 1 January 2006

LDCs

All products

LDCs

All products

Bangladesh Bhutan Maldives Nepal

Special concessions available for leastdeveloped contracting states

South Asian Free Trade Area (SAFTA); entry into force: 1 January 2006 APTA–Amendment to the Bangkok Agreement; entry into force: 1 September 2006

Bangladesh Bhutan Maldives Nepal Bangladesh Lao PDR

Special concessions available for leastdeveloped contracting states

GSP–Revised Preferential Tariffs Ordinance; entry into force: 1 April 2007 HS of preference by the ECEA; entry into force: May 2001 GSP; entry into force: 31 December 2005 HS of preference by the ECEA GSP for leastdeveloped beneficiary developing countries (LDBDCs); entry into force: 1 January 1976, extended until 31 December 2010 (further extensions are currently being considered)

LDCs

In addition to 427 products (with average margin of preference of 14 percent) available to all APTA members, tariff concessions granted exclusively to LDC members on 72 products with average margin of preference of 12 percent Duty-free access for all products originating from all LDCs as of September 2009

47 LDCs

Duty free for all products

LDCs

Duties are eliminated for LDCs on the basis of the EU’s EBA Initiative Duty free for all products

47 LDCs 43 designated LDCsd

In addition to the standard GSP coverage of nearly 5,000 products, 1,450 articles exclusively available for LDC beneficiaries for duty-free treatment

References WT/ COMTD/27 WT/TPR/S/115 WT/TPR/S/138 WT/ COMTD/N/6/ Add.4 SAARC Secretariat website (www. saarc sec.org) WT/TPR/S/193 SAARC Secretariat website (www. saarc-sec.org) WT/ COMTD/N/22

TN/CTD/M/28 WT/ COMTD/N/7/ Add.2 and Add.3 WT/TPR/S/170

WT/TPR/S/192 WT/TPR/S/170 WT/COMTD/ N/l/Add.4 & Add. 5 WT/TPR/S/235 www.ustr.gov

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Table 5.1 (continued) PreferenceGranting Country

Description

Beneficiaries

AGOA

38 designated sub-Saharan African Countries (including 25 LDCsf)

Entry into force: May 2000, extended until 30 September 2015e Caribbean Basin Trade Partnership Act (CBTPA)

Uzbekistan

HS of preference by the ECEA

Coverage/Margin of Preference 1,835 products, including textiles and apparel,g available for duty-free treatment, in addition to duty-free treatment on products benefiting from GSP

References WT/COMTD/ N/l/Add.3

WT/TPR/S/235 WT/L/754 19 designated beneficiaries (including one LDC; i.e., Haiti) in Central America and the Caribbean

47 LDCs

Duty free for most products, including textiles and apparels. The Haitian Hemispheric Opportunity through Partnership Encouragement Act enhanced Haiti’s benefits under CBERA. The Haiti Economic Lift Program Act of 2010 further expanded Haiti’s benefits, including broadening duty-free access for Haitian textile and apparel exports Duty free for all products

WT/TPR/S/235 WT/L/753 www.ustr.gov

WT/TPR/S/170

Notes: a. This table, which represents a nonexhaustive list of market access initiatives undertaken in favor of LDCs, updates the information contained in the previous report by the Secretariat (WT/ COMTD/LDC/W/46/ Rev. 1). For those measures taken in favor of exports originating from LDCs prior to 2001, see the document WT/COMTD/LDC/W/38. The most recent update is WT/COMTD/LDC/W/58 of 10 September 2013. b. Members of the APTA are Bangladesh, China, India, Lao PDR, Korea, and Sri Lanka. c. Members of SAFTA, which superseded the SAPTA in 2006, are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. d. Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, East Timor, Equatorial Guinea, Ethiopia, The Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nepal, Niger, Rwanda, Samoa, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Somalia, Tanzania, Togo, Tuvalu, Uganda, Vanuatu, Yemen, and Zambia. e. The Africa Investment Incentive Act of 2006, or AGOA IV, extended the third-country fabric provision from September 2007 until September 2012; added an abundant supply provision; designated certain denim articles as being in abundant supply; and allows lesser developed beneficiary sub-Saharan African countries to export certain textile articles under AGOA. Section 3 of the Andean Trade Preference Extension Act of 2008 (Public Law 110–436) removed the abundant supply provisions, and redesignated Mauritius as a lesser developed beneficiary sub-Saharan African country for AGOA apparel benefits. See more information about this at the official AGOA website (http://www.ustr.gov/trade-topics/trade-development/preference-programs/african-growth-andopportunity-act-agoa). f. Angola, Benin, Burkina Faso, Burundi, Chad, Comoros, Democratic Republic of Congo, Djibouti, Ethiopia, The Gambia, Guinea-Bissau, Lesotho, Liberia, Malawi, Mali, Mauritania, Mozambique, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zambia. g. 25 sub-Saharan African countries, including 15 LDCs (Benin, Burkina Faso, Chad, Ethiopia, The Gambia, Lesotho, Malawi, Mali, Mozambique, Rwanda, Senegal, Sierra Leone, Tanzania, Uganda, Zambia), are eligible for AGOA apparel benefits.

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5.3.5.4 Preferences for Developing Countries Developing countries that do not qualify as LDCs will profit from preferences—the usual GSP preferences. The treatment of goods originating in these countries will be somewhere between the MFN rate and the margin of preference for LDCs. The Enabling Clause does not require anything more precise than that. 5.3.5.5 Additional Preferences for Developing Countries In EC–Tariff Preferences, the panel and the AB faced the following question: is the statutory distinction between developing countries and LDCs the only permissible distinction across beneficiaries that could serve as the basis for differentiating the level of preferences granted? Recall that the text of the Enabling Clause, on the one hand, makes a distinction between developing countries, and on the other, requests in § 3(c) that preferences “shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial, and trade needs of developing countries.” So the question before the panel was whether the distinction between developing countries and LDCs was the only permissible distinction that could serve as a benchmark to differentiate the preference intensity, or, conversely, whether additional distinctions were permissible as well. The facts in this dispute were as follows: India and Pakistan both benefited from the EU GSP. However, Pakistan had received extra preferences because it qualified under the so-called Drug Arrangements, a scheme aimed at compensating those WTO members that had adopted active policies against drug production and trafficking. India had complained that by discriminating in favor of Pakistani imports, the EU was in violation of Article I of GATT, a claim upheld by the panel (§ 7.60). The panel went on to examine to what extent recourse to the Enabling Clause could be offered to justify the violation. In the panel’s view, the Enabling Clause requires that developed countries (donors) must, by virtue of the term “non-discriminatory” in footnote 3 of the Enabling Clause, give identical tariff preferences to all developing countries.41 Hence, in the panel’s view, the EU, by treating Pakistani imports better than Indian imports of like goods, was violating the Enabling Clause. The AB reversed the panel’s findings in this respect. It started its analysis (§ 157) by pointing out that the terms used in § 3(c) of the Enabling Clause made it plain that development needs are not necessarily identical in all developing countries (§ 162).42 As a result, a donor wishing to do justice to this provision might have to provide customized treatment to different beneficiaries. In this case, the scheme would not ipso facto (e.g., because of the differentiation) be judged discriminatory since, as the previously quoted passage from § 3(c) of the Enabling Clause makes plain, differentiation might be warranted—indeed necessary—in order to

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respect the “effet utile” of this provision, that is, in order to ensure that preferences are tailored to the needs of each individual beneficiary (§ 165). The differential treatment, in other words, was not a function of the identity of the beneficiary, but of factors endogenous to the beneficiary, which, nevertheless, could exist elsewhere as well. At the end of the day, what mattered was whether the same “medicine” was being prescribed for the same “disease.” As a result, additional preferences cannot be excluded outright (§ 169). It went on to rule that in granting such differential tariff treatment, however, preference-granting countries are required, by virtue of the term “non-discriminatory,” to ensure that identical treatment is available to all similarly-situated GSP beneficiaries, that is, to all GSP beneficiaries that have the “development, financial and trade needs” to which the treatment in question is intended to respond. (§ 173)

Applying its test to the specific case, the AB found that the Drug Arrangements were not WTO-consistent, but only because the EU had included in its scheme a closed list of beneficiaries (§§ 180 and 187). The following text from § 183 gives the core of the AB argument: What is more, the Drug Arrangements themselves do not set out any clear pre-requisites—or “objective criteria”—that, if met, would allow for other developing countries “that are similarly affected by the drug problem” to be included as beneficiaries under the Drug Arrangements. Indeed, the European Commission’s own Explanatory Memorandum notes that “the benefits of the drug regime … are given without any prerequisite.” Similarly, the Regulation offers no criteria according to which a beneficiary could be removed specifically from the Drug Arrangements on the basis that it is no longer “similarly affected by the drug problem.” Indeed, Article 25.3 expressly states that the evaluation of the effects of the Drug Arrangements described in Articles 25.1(b) and 25.2 “will be without prejudice to the continuation of the [Drug Arrangements] until 2004, and their possible extension thereafter.” This implies that, even if the European Commission found that the Drug Arrangements were having no effect whatsoever on a beneficiary’s “efforts in combating drug production and trafficking,” or that a beneficiary was no longer suffering from the drug problem, beneficiary status would continue. Therefore, even if the Regulation allowed for the list of beneficiaries under the Drug Arrangements to be modified, the Regulation itself gives no indication as to how the beneficiaries under the Drug Arrangements were chosen or what kind of considerations would or could be used to determine the effect of the “drug problem” on a particular country. In addition, we note that the Regulation does not, for instance, provide any indication as to how the European Communities would assess whether the Drug Arrangements provide an “adequate and proportionate response” to the needs of developing countries suffering from the drug problem. (emphasis in the original)

For its scheme to become WTO-consistent, the EU would have to modify its regulation so as to ensure that it reflects “criteria or standards to provide a basis for distinguishing beneficiaries under the Drug Arrangements from other GSP beneficiaries” (§ 188). It follows from this case law that WTO members can distinguish between recipients of preferences (developing countries) beyond the distinction between developing countries and LDCs included in the Enabling Clause, provided that their distinctions correspond to objective criteria. Whereas the panel had taken the view that the distinction between

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developing countries and LDCs was the exclusive operationalization of the generic standard to target aid to needs of development level, the AB felt that additional subdivisions were warranted. The AB, alas, did not provide any guidance as to how the term “objective criteria and standards” that it employed in EC–Tariff Preferences for the first time should be understood. Distinctions are possible, but there is no evidence—nor even an indicative list— concerning how distinctions should be drawn. Various questions legitimately arise. For example: how fine-tuned can similar distinctions be? Indeed, if § 3(c) of the Enabling Clause is taken seriously, then there could conceivably be customized solutions for each and every beneficiary. Development needs differ across countries, as it is highly unlikely that two countries have identical needs. On the other hand however, some sort of standardization is necessary, otherwise, donors risk all sorts of challenges when fine-tuning preferences that they grant to the effect that their schemes are discriminatory. The statutory distinction between LDCs and developing countries corresponds to the need for standardization. So do, in principle at least, the judge-made “objective criteria and standards.” Whereas there is relative clarity with respect to the former though, there is total obfuscation with respect to the latter.43 One might further legitimately ask why the AB did not bring into question the EU’s discretion to unilaterally draw up objective criteria and standards. It is at best debatable, nonetheless, whether donors have any incentives to adopt criteria that will promote development of the recipients and not simply advance their own social preferences. It might sound cynical, but was not the EU addressing (at least in part) its own domestic problems through the Drug Arrangements? Is it certain that by allowing donors to pick the areas of regulatory changes that beneficiaries must undertake first in order to be eligible for GSP+ benefits, they will do so by selecting policies that are beneficial to developing countries? By not addressing similar questions, the AB involuntarily opened the door that could lead to potential abuses: it allowed for unilateral definition by donors of “objective criteria and standards,” but it did not attach any conditions on what their content should look like. There is a risk that donors might be pursuing their own agenda through the granting of preferences. Similar policies would be running counter the explicit wording and spirit of the Enabling Clause, which calls for pro-development programs. There is the more nuanced risk that donors might undo the prioritization of development options that the recipients have decided for themselves, if the perks were too good to turn down.44 This is an area where some additional thinking is required before embarking upon the exercise as currently designed by the WTO adjudicating bodies. The EU regulation cited here, conditions GSP+ benefits on two criteria. First, the vulnerability criterion: a beneficiary meets this criterion by virtue of its size or the limited diversification of its exports.45 Second, beneficiaries must also be willing to ratify conventions, such as the International Convention on the Rights of the Child, the Freedom of Association and Protection of the Right to Organize Convention, or even the Convention on International Trade in Endangered Species (CITES). This could be a tall order for some

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developing countries, which might legitimately take the view that they have other priorities. Alas, these are nonnegotiable items as things stand, and they could be perceived to qualify as “objective criteria and standards.” The only discipline that the EU has to respect is quite weak. § 3(a) of the Enabling Clause provides that preferences “shall be designed to facilitate and promote the trade of developing countries and not to raise barriers to or create undue difficulties for the trade of any other contracting parties.” This is a condition that GSP schemes will routinely meet since any policy could, in principle, qualify as development related. It is doubtful, nevertheless, whether developmentrelated policies are indeed development friendly as well. This discussion will continue later in this chapter, with an exploration of the debatable effectiveness of GSP schemes. 5.3.5.6 Excluding Beneficiaries It is necessary to distinguish between exclusion from the LDC, the GSP, and the GSP+ list. Exclusion from the first two can legitimately occur only in the case of graduation. Exclusion from the GSP+ list can occur if the circumstances that gave rise to additional benefits no longer exist. Take, for example, the Drug Arrangements. Assume that because of the efforts of those implicated, drug trafficking is not an issue anymore. In this case, Pakistan will stop receiving the GSP+ benefits. We refer in what follows to some relevant practice of exclusion from GSP benefits. The examples cited underscore that donors often walk on a tightrope between legality and illegality when excluding beneficiaries from their GSP lists. With the exception of EC-Tariff Preferences, though, we observe no legal challenges against similar practice, probably because beneficiaries fear that if they did challenge similar practices they might be permanently excluded form benefits. After all, the GSP regime carries inherently discretion, and the AB only added to it through the introduction of the possibility to grant preferences on “objective criteria and standards.” The EU had originally included Sri Lanka in its list for GSP+ preferences. In a press release dated 15 December 2009, however, the Commission of the EU (DG Trade)46 announced that the EU would remove Sri Lanka from the list of GSP+ beneficiaries immediately. The EU justified its actions on the grounds that Sri Lanka had failed to implement three UN Human Rights Conventions—namely, the International Covenant on Civil and Political Rights (ICCPR), the Convention against Torture (CAT), and the Convention on the Rights of the Child (CRC).47 The EU also removed Myanmar from the list of beneficiaries following charges that Myanmar was violating the International Labour Organization (ILO) conventions on forced labor (Council Regulation 552/97). Following the decision by the Conference of the ILO to suspend its restrictive resolution on Myanmar in June 2012, the EU reinstated GSP benefits for Myanmar on 19 July 2013, with retroactive application as of 13 June 2012. The EU, on the other hand, has kept Maldives among the beneficiaries, although as of January 1, 2011, Maldives does not figure among the LDCs because it graduated, as stated

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previously. The EU justified its actions on the grounds that Maldives was benefiting from a generous transitional period.48 The US excluded Argentina from the list of its GSP beneficiaries for failure to enforce an arbitral award.49 The EU, probably unhappy with the expropriation of shareholders of Repsol (a Spanish energy company), eliminated Argentina from its list of beneficiaries in the new GSP, which came into effect in 2014. On the one hand, the overall number of beneficiaries was reduced in the new EU regulation from 176 to 89 since the EU took the view that by focusing on those in real need, its scheme would become more effective.50 On the other hand, the EU did not invoke any grounds for excluding some of the addressees (including Argentina), and it is questionable at the very least (if not altogether baseless) to claim that Argentina was excluded because it had graduated to the club of developed countries in the WTO. To date, none of the excluded beneficiaries has contested its exclusion from the list before a WTO panel.51 We have argued supra that the fear of the consequences in case of legal action is legitimate, of course, since the threat of punishing innocent bystanders must weigh in. Recall that donors do not have to confer trade advantages in the first place, and in the name of legality, they could eliminate their GSP lists altogether. That action would make complainants quite unpopular in many quarters. As a result, donors de facto enjoy substantial discretion in deciding who is in and who is out, as they do unilaterally decide on the criteria for inclusion. In the face of many schemes that are hardly compatible with the requirements for “generalized,” “non-discriminatory,” and “beneficial” GSP schemes, the fact that only one complaint has been launched so far testifies to the donors’ de facto discretion. 5.3.5.7 Evaluating the GSP Schemes: Is the Candle Worth the Flame?52 For various reasons, scholars have cast doubt on the efficacy of GSP schemes to address development concerns and help beneficiaries “graduate” to developed-country status. This part of the discussion should probably start by underscoring that the policy debate has shifted nowadays from an unambiguous “trade, not aid” perspective in the 1950s to “aid rather than (preferential) trade,” a point explored in more detail later in this chapter in an explanation of the Aid for Trade initiative.53 One thus might legitimately ask: If GSP schemes were fulfilling their intended function, why bother with the whole Aid for Trade endeavor? Even if the Aid for Trade initiative is perceived as a complement to and not as a substitute for GSP schemes, a complement was deemed necessary all the same. Therefore, the emergence of Aid for Trade, in and of itself, is reason enough to ask the question of what went wrong with GSP schemes. The following presents the main critique of this instrument. The basis of the discussion is the substantive antinomy between tariff preferences and the role of GATT. The point is that beneficiaries have the incentive to block GATT from fulfilling its role since otherwise, the value of their gift is reduced. Here is how it works.

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The margin of preferences in favor of developing countries (e.g., the difference between the MFN and the preferential tariff rate) has been affected over the years by MFN tariff liberalization. In the 1970s, MFN rates were much higher than they are now across all products. The reduction of MFN rates led to preference erosion. MFN tariff liberalization confirmed the transitional nature of GSP preferences. If GATT works as it should, then eventually there will be no room for tariff preferences anymore. To understand preference erosion, consider this example: Hoekman, Ng, and Olarreaga (2001) ran a simulation, and they assumed that any tariff rate greater than 15 percent should be treated as a tariff peak. In this vein, assuming that LDCs benefited from a 0 percent tariff rate on all tariff peaks, their exports would increase by 11 percent. If all GSP beneficiaries benefited from a 0 percent tariff rate on all tariff peaks, then LDC exports would increase by only 5 percent. If, however, the MFN rate for tariff peaks drops to 5 percent, then LDC exports would not increase at all. Because of preference erosion, developing countries have less of an incentive to liberalize trade on an MFN basis, as § 3 of the Enabling Clause would request them to do.54 They have the incentive to become the enemies of MFN tariff liberalization. Although, empirically speaking, preference erosion does not seem to be much of an issue for lowincome countries in high-income export markets,55 it is still an important issue for others concerned. The problem for them is that they cannot do much to stop others from unilaterally dropping their MFN rates—unless, of course, they form coalitions with the donors’ industry interested in keeping protection.56 The only thing they can do is refuse to drop their rates themselves, but this attitude would only have an effect on South-South cooperation. They can, on the other hand, block multilateral liberalizing initiatives such as “linear cuts.” Developing countries have taken a defensive stance when it comes to tariff reductions in both the Uruguay and the Doha rounds. Grossman and Sykes (2005), citing abundant empirical evidence to this effect,57 concluded that the candle is not worth the flame. They conclude that there is little support for the proposition that GSP schemes have had substantial positive welfare effects on recipients. Take the EU scheme, for example, which distinguished between nonsensitive, semisensitive, sensitive, and very sensitive products. Grossman and Sykes (2005) calculate that during the period of their investigation, developing countries received tariff reductions of roughly 100 percent (for nonsensitive), 65 percent (for semisensitive), 30 percent (for sensitive), and 15 percent (for very sensitive products), compared with the usual MFN rate for goods in each category.58 Of course, the export interest of most developing countries concentrates on the very sensitive category of products, the one that receives the smallest preference margin.59 Reductions of little interest to developing countries happened because beneficiaries did not negotiate the areas where tariff reductions would take place (discussed further later in this chapter). This is, of course, less of an issue for LDCs because of the DFQF programs that have been adopted, even though Bangladesh, for example, complained that when some donors decided not to extend preferences to 100 percent of

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tariff lines, items in their interest, like textiles, were left out. For some developing countries and LDCs, most of the trade is concentrated in a few tariff lines; hence, DFQF that stops short of covering 100 percent of tariff lines might have a dramatic impact on their export earnings (which will arguably be financing their quest for development). Dean and Wainio (2009) discussed the effects of US GSP on beneficiaries and concluded that high utilization rates should not hide the fact that preference margins for nonagricultural goods are low (preference erosion here is the direct result of low US MFN tariffs), whereas preference margins are low for agricultural goods, largely because of the exclusion of products that face high tariffs from GSP schemes. Their data support the view that the US is more generous toward its PTA partners than it is to its GSP beneficiaries. Candau and Jean (2009) concluded that the EU GSP scheme is quite important for subSaharan LDCs, but not for South Asian LDCs, essentially because of the constraints imposed by rules of origin on textile and clothing exports. In a similar vein, Kowalski (2009) concluded that the welfare impact of Canadian preferences is very small for developing countries. And Lippoldt (2009) concluded that the Australian GSP scheme has had unambiguously beneficial effects only for those developing countries in geographic proximity to the donor. Why is this so? One could imagine dozens of plausible explanations, but a key one is that GSP schemes simply do not reproduce a negotiation based on reciprocal concessions. Developing countries are not there to request the opening of the export markets that they are interested in. Rather, they wait for donors to draw up their GSP lists. § 4 of the Enabling Clause reads as follows: Any contracting party taking action to introduce an arrangement pursuant to paragraphs 1, 2 and 3 above or subsequently taking action to introduce modification or withdrawal of the differential and more favourable treatment so provided shall: a) notify the CONTRACTING PARTIES and furnish them with all the information they may deem appropriate relating to such action; b) afford adequate opportunity for prompt consultations at the request of any interested contracting party with respect to any difficulty or matter that may arise. The CONTRACTING PARTIES shall, if requested to do so by such contracting party, consult with all contracting parties concerned with respect to the matter with a view to reaching solutions satisfactory to all such contracting parties.

Donors do not have to secure agreement from beneficiaries in the areas where preferences will be granted, and they do not have to negotiate the margin of preferences with them either. If requested, they must consult; that is all they are required to do. Consultations do not guarantee adherence to the views expressed by beneficiaries. First, Hudec (1987) criticized the consequences of lack of reciprocity. He likened the system established in the Enabling Clause to some sort of “welfare obligation” that wealthier participants incurred voluntarily toward their poorer counterparts. Through similar payments, wealthier members would earn “moral credit,” while beneficiaries would de

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facto be exiting the realm of GATT obligations. Alas, in Hudec’s account, it was all “form without substance” since all the initiative to decide on the size of the cake was in the hands of donors.60 Then, Bagwell and Staiger (2014) reached a similar conclusion, stating that GSP schemes essentially drove many developing countries away from the negotiating table where useful bargains would be struck and left them waiting in the antechamber for the mercy of donors. Donors will negotiate with their domestic lobbies, and the opening of their markets is in response to the question “Where and how much would my lobbies want me to open up to international trade?” rather than “Where would developing countries want me to open up?”61 In this vein, Blanchard and Matschke (2014) provide empirical evidence to the effect that many of the donors’ decisions are driven by endogenous reasons: trade preferences follow investment patterns by donors in the wide sample of countries they examined. In fact, thus, quite often when granting preferences, they favor intra-industry trade, their own investors who have delocalized production, or both. Finally, subdividing beneficiaries into various categories, which are not necessarily linked to their development level, might entail various negative external effects. Let’s return to the EU GSP scheme for illustrative purposes. There are three classes of beneficiaries under this scheme, as noted earlier. The subdivision operated in the EU framework might lead to a race across developing countries to secure benefits, which might undo legitimate policy priorities62 (especially if one factors in political economy63), and might entail externalities of political nature as well. The alliance across developing countries might be damaged because of the resulting trade diversion if some developing countries race in to secure benefits under GSP+. Grossman and Sykes (2005) showed, when discussing EC–Tariff Preferences, that the EU was essentially paying Pakistan (and all beneficiaries of the Drug Arrangements) with India’s money. Similar payments drive a wedge between beneficiaries who might embark in a race between them to attract sympathy from donors. The empirical studies cited here prove that GSP schemes have not been very effective, nor have they been nondiscriminatory. The US GSP scheme excludes communist countries from its coverage, as well as countries that withhold the supply of vital commodity resources (aimed at OPEC countries), countries that injure US commerce by affording preferences to other developed countries, countries that do not enforce arbitral awards in favor of US citizens, countries that aid terrorism, countries that do not protect internationally recognized workers’ rights, and countries that do not act to prevent child labor.64 As a result, the list of beneficiaries might be a function of political decisions rather than development needs. The countries that got out of the vicious circle of underdevelopment are those that liberalized and enjoyed gains from trade. Sachs and Warner (1995) showed that developing countries with more liberal trade policies have achieved higher rates of growth and development than countries that are more protectionist.65

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Özden and Reinhardt (2003), in an empirical study, underscored this conclusion. Countries that gradually extricated themselves from GSP schemes subsequently undertook greater liberalization than those that chose to retain their eligibility to participate in them. It is a sort of wicked variation on the Jevons paradox: preferences were supposed to help beneficiaries graduate to nonbeneficiary status, but instead, they become “hooked” on the benefit granted, use it more than before (or as much as they can), and never graduate. The WTO gradually becomes irrelevant to them: They live in the WTO world, but outside its legal disciplines. A number of more recent studies point to the same result. Trefler (2004) showed how tariff cuts can increase the industry-level productivity of the country. Tokarick (2006) examined import protection in 26 developing countries; the sample used in this study was quite disparate and hence largely representative of the situation prevailing across all developing countries: Argentina, Brazil, Botswana, Malawi, China, India, Albania, and Romania were reviewed. The study’s main objective was to quantify the extent to which import protection implicitly acts as a tax on a country’s export sector. Tokarick found that such an effect was indeed the case, and concluded that a 12 percent tax had been imposed on exports of the 26 countries in his sample.66 Mostashari (2010) showed that tariff cuts by countries exporting to the US market are more important in explaining the success that these countries have enjoyed exporting to the US market than the US import tariff cuts themselves. GSP schemes are ineffective, discriminatory, and also sometimes very hard to use. The complexities associated with the administration of preferential schemes should not be underestimated either. Most of these complexities have been linked to the preferential rules of origin, which make evidence of the origin of a product a particularly cumbersome exercise.67 It is true that there has recently been a considerable easing of similar rules, as was pointed out in the previous discussion about rules of origin. However, there is still a way to go. Hudec (1987) took the view that GSP schemes were not all that beneficial to developing countries. They essentially blocked beneficiaries from adopting much-needed changes. In his view, developing countries would have been better off simply abandoning such schemes in exchange for nondiscriminatory access to the agricultural and textile markets of donors. He urged (p. 235): “Governments of developing countries will have to be persuaded that it is in their own national economic interest to respond with a fuller commitment to GATT law.” Developing countries, alas, turned a blind eye to this and similar calls. They preferred to continue with one-way preferences and have not changed this strategy, even in the face of evidence that similar schemes do not work. Hudec’s intuition that one-way preferences will have the opposite of the desired outcome, sadly, has been largely confirmed by subsequent practice and research.68

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To provide an evaluation of GSP schemes, one needs a benchmark. The response depends on the counterfactual, and that cannot be the situation before 1971. It must be a sophisticated analysis of exports by developing countries after 1971, with preferences (the real world) and without (the simulation). The economic studies referred to in this discussion provide ample evidence that the record is disappointing. 5.3.6

South-South Preferences

The WTO regime favors South-South cooperation in two ways: it allows developing countries to grant preferences to LDCs and to form PTAs on conditions that are less stringent than those included in Article XXIV of GATT, which governs the formation of PTAs when at least one constituent is a developed country. 5.3.6.1 Tariff Preferences In 1999, WTO members adopted a waiver that allows developing countries to provide preferential tariff treatment to products of LDCs, designated as such by the UN, without being required to extend the same tariff rates to like products of any other member.69 LDCs will benefit from one-way preferential treatment since they are not required to reciprocate. 5.3.6.2 PTAs between Developing Countries The Enabling Clause provides the basis for facilitating PTAs across developing countries that do not have to follow the requirements embedded in Article XXIV of GATT. § 2(c) of the Enabling Clause exempts the following from the usual GATT discipline: Regional or global arrangements entered into among less-developed contracting parties for the mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of nontariff measures, on products imported from one another.

This provision does not explain the specifics of the test that will be applied when a PTA among developing countries is examined. Following the advent of the Transparency Mechanism (discussed in more detail in the next chapter), there is a standard procedure applicable to all PTAs, regardless whether they have been notified under Article XXIV of GATT, Article V of GATS, or § 2(c) of the Enabling Clause. The only difference is that, whereas it is the Committee on Regional Trade Agreements (CRTA) that is notified of the first two, it is the Committee on Trade and Development (CTD) that is notified of the latter. There are very few completed reports on the issue, such as the report concerning the Bangkok Agreement, and hence no meaningful conclusion can be drawn on the nature of multilateral review of South-South cooperation.70 To date, no direct legal challenge has been made to South-South preferences.71

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Table 5.2 Preferential arrangements notified under § 2(c) of the Enabling Clause RTA Name

Coverage

Type

Date of Notification

Notification

Date of Entry into Force

Andean Community (CAN) ASEAN–China

Goods

CU

1 October 1990

Enabling Clause

25 May 1988

Goods and

PSA and EIA

Enabling Clause and GATS Article V

1 January 2005

Services ASEAN–India ASEAN–Korea, Republic of

Goods Goods and Services

FTA FTA and EIA

21 September 2005(G) 26 June 2008(S) 19 August 2010

ASEAN Free Trade Area (AFTA) Asia Pacific Trade Agreement (APTA) Asia Pacific Trade Agreement (APTA)– Accession of China Common Market for Eastern and Southern Africa (COMESA) East African Community (EAC) Economic and Monetary Community of Central Africa (CEMAC) Economic Community of West African States (ECOWAS) Economic Cooperation Organization (ECO) Egypt–Turkey Global System of Trade Preferences among Developing Countries (GSTP) Gulf Cooperation Council (GCC) India–Afghanistan IndiaBhutan India–Nepal India–Sri Lanka

Goods

FTA

Goods

PSA

Goods

Korea, Republic of–India Lao People’s Democratic Republic– Thailand Latin American Integration Association (LAIA)

Enabling Clause

(G) 1 July 2007(S) 1 January 2010 1 January, 2010 (G) 1 May 2009(S) 28 January 1992

Enabling Clause

17 June 1976

Enabling Clause

1 January 2002

4 May 1995

Enabling Clause

8 December 1994

CU

9 October 2000

Enabling Clause

7 July 2000

Goods

CU

21 July, 1999

Enabling Clause

24 June 1999

Goods

CU

6 July 2005

Enabling Clause

24 July 1993

Goods

PSA

10 July 1992

Enabling Clause

17 February 1992

Goods Goods

FTA PSA

5 October 2007 25 September 1989

Enabling Clause Enabling Clause

1 March 2007 19 April 1989

Goods

CU

Goods Goods Goods Goods

PSA FTA PSA FTA

Goods and Services Goods

FTA and EIA PSA

Goods

PSA

PSA

30 October 1992 2 November 1976 30 April 2004

Goods

FTA

Goods

Enabling Clause

1 January 2003 8 March 2010 30 June 2008 2 August 2010 17 June 2002

Enabling Clause Enabling Clause Enabling Clause Enabling Clause

13 May 2003 29 July 2006 27 October 2009 15 December 2005 1 January 2010

26 November 1991

Enabling Clause

20 June 1991

1 July 1982

Enabling Clause

18 March 1981

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Table 5.2 (continued) RTA Name

Coverage

Type

Date of Notification

Notification

Date of Entry into Force

Melanesian Spearhead Group (MSG) MERCOSUR–India

Goods

PSA

3 August 1999

Enabling Clause

1 January 1994

Goods

PSA

Enabling Clause

1 June 2009

Pacific Island Countries Trade Agreement (PICTA) Pakistan–Malaysia

Goods

FTA

23 February 2010 28 August 2008

Enabling Clause

13 April 2003

Goods and Service

FTA and EIA

19 February 2008

01 January 2008

Pakistan–Sri Lanka

Goods

FTA

11 June 2008

Enabling Clause and GATS Article V Enabling Clause

5.4

12 June 2005

Special and Differential Treatment Other Than GSP

5.4.1 Typology There are numerous provisions in the covered agreements that qualify as special and differential treatment provisions, and this is how a document prepared by the WTO Secretariat72 classified them: • Provisions aimed at increasing trade opportunities • Provisions safeguarding the interests of developing-country members • Flexibility of commitments, of action, and use of policy instruments • Transitional time periods73 • Technical assistance74 • Provisions relating to LDCs only75 In essence, these provisions aim to improve the position of developing countries within the WTO, either by introducing “lighter” disciplines that are applicable to developing countries only, or by increasing the expertise of developing countries on WTO-related issues (what is usually referred to as “technical assistance” or “capacity building”). It is very difficult to assess the actual impact of these provisions, which on occasion might prove to be counterproductive. Indeed, price undertakings in the AD Agreement, a remedy that must be explored during the investigation of companies originating in developing countries, could be defended as a means for developing countries to charge the rents that otherwise would have become duties in the treasury of the WTO member. Through price undertakings, though, some price collusion across exporters is legitimized. Similar practices could lead to the cartelization not only of the destination market, but also of the exporting developing country, and the welfare implications could be nefarious.

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Some scholars have questioned the efficacy of these provisions. Rodrik (2001) has forcefully argued in favor of adding to the existing arsenal, pointing to the very limited usefulness (if not complete uselessness) of some of the existing provisions. Transitional periods often come and go, with no preparation for full implementation of whatever has been agreed. Awareness about export opportunities is often useless knowledge anyway. And, finally, the effectiveness of increasing technical capacity in developing countries has come under a lot of criticism. At the other end of the spectrum, views have been expressed about the dangers inherent in overextension of “special and differential” provisions. Hoekman (2005) warns that the WTO could become an irrelevant policy prescription for beneficiaries, and thus all gains from trade liberalization and participation in the negotiating process could be severely undermined were one to continue increasing the sphere of special and differential treatment ad nauseam. Low (2007) has expressed criticism of the current regime from a different angle. His well-founded reservations concern the one-size-fits-all approach adopted by the WTO. Developing countries present a very diverse group, which is becoming increasingly diverse over the years. The provisions echo the very basic distinction between developing countries and LDCs first reflected in the Enabling Clause, which is largely outdated now. This distinction was probably more or less acceptable in 1979, when one could usefully distinguish between two groups of developing countries. Nowadays, the developing-countries group comprises countries like Mexico, Vietnam, Senegal, India, and China. It is no longer sensible to continue with the current distinction when the development needs of the five countries selectively referred to in this discussion are drastically different. There has been an institutional acknowledgment that the implementation of these provisions is essential to the credibility of the commitments entered. The Bali Ministerial Declaration included a decision establishing a “Monitoring Mechanism on Special and Differential Treatment.”76 According to this decision, the mechanism would operate in “Dedicated Sessions” of the CTD and make recommendations regarding the status of implementation of all provisions relating to special and differential treatment. At the same time, action in favor developing countries, even when it concerns trade issues, does not necessarily come under the institutional aegis of the WTO. Various WTO members participate in numerous other initiatives outside the WTO aimed at improving the position of developing countries in the WTO. The Advisory Centre for WTO Law (ACWL) is the best-known initiative of the sort, and it aims at providing legal expertise to developing countries at nonmarket (e.g., subsidized) rates.77 5.4.2 Transparency Mechanism for Preferential Trade Advantages In 2010, the General Council of the WTO adopted the Transparency Mechanism for Preferential Trade Advantages,78 aimed at standardizing and clarifying the content of unilateral

Subsidies and Countervailing Measures Safeguards GATS TRIPs Understanding on Rules and Procedures Governing the Settlement of Disputes GATT 1994 Article XVIII GATT 1994 Article XXXVI GATT 1994–Article XXXVII GATT 1994–Article XXXVIII Enabling Clause Decision on Measures in Favour of Least-Developed Countries Waiver Preferential Tariff Treatment of LDCs Total

Agriculture Decision on NFIDCs Application of SPS Measures Textiles and Clothing Technical Barriers to Trade Trade-Related Investment Measures Implementation of Article VI of GATT 1994 Implementation of Article VII of GATT 1994 Decision on Texts Relating to Minimum Values and Imports by Sole Agents, Sole Distributors and Sole Concessionaires Pre-shipment inspection Rules of Origin Import Licensing Procedures

Agreement

1

7

2

33

3 6 5

50

14

3 1

1 4

1 4

19

2

14

2 1 1

2 3 2

1

155

1

1 7

24

3 8 8 7 4 7

2 15 6 11

3 2

1 6

0 0 4 16

8

2

1

14 5 5 6 16 4

2

4

2 1 1

3

Total by Agreement

8

2

7

1 1

(v) Technical assistance

1

1 2

2

1

(iv) Transitional time periods

(vi) Provisions relating to measures to assist least- developed country members

1

1 1

9

(iii) Flexibility of commitments, of action, and use of policy instruments

1

4 2 3 6

(ii) Provisions that require WTO members to safeguard the interests of developing country members

4 2 2 1

3

1

1

(i) Provisions aimed at increasing the trade opportunities of developing country members

Table 5.3 Special and Differential Treatment Provisions in Multilateral Agreements

Special and Differential Treatment for Developing Countries 275

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trade advantages granted by donors to beneficiaries. This document79 explains that it does not apply to bilateral deals, such as South-South PTAs (§ 1). In two annexes, it explains the content of notifications (tariffs, exceptions, rules of origin, etc.), whereas in § 3, it requests donors notify the WTO of unilateral advantages granted before their application or, at the very latest, within three months after a preferential trade advantage has been in force. 5.5 The Wider Picture: Trade and Development The discussion so far has referred to the period leading up to the launch of the Doha round. There were sporadic references to Aid for Trade, one of the few milestones of the Doha round, but overwhelmingly the discussion has examined the attitude of the world trading system toward concerns expressed by developing countries in the period up to and including the Uruguay round. Following the adoption of the Doha Development Agenda (DDA), the WTO took a decisive turn and embarked, along with partners, on a more comprehensive involvement in the trade and development agenda, if not the development agenda altogether. The WTO has, of course, some innate limitations due to its mandate. It can commit only so much to the overall development agenda. Development implicates many instruments other than trade liberalization, and for such other instruments, the WTO has no competence to say anything at all. This point will be discussed in more detail later in this section. The involvement of the WTO in development-related issues has widened over the years and extended beyond the so-called classic trade content with which it was originally endowed. In the minds of the original framers of GATT, the contribution of the world trading system toward development was unidimensional: nondiscriminatory trade liberalization. Following the discussions in the late 1950s, as explored previously, the rules of the trading system were amended so as to make room for discriminatory (preferential) trade for goods originating in developing countries and, in the aftermath of the Uruguay round, the discussion moved to nontrade development-related issues. 5.5.1

Early Years

In 1964, the International Trade Centre (ITC) was established with the aim of promoting trade of developing countries. The ITC later became a joint agency of the UN Conference on Trade and Development (UNCTAD) and GATT (and eventually the WTO). In 1998, the WTO, together with UNCTAD and the ITC, established the Common Trust Fund, with the expressed goal of financing technical capacity in developing countries. Scattered initiatives saw the light of day, but, by and large, the multilateral trading regime did not invest considerable resources into the trade and development agenda until

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the advent of the Doha round. Advertised as the “development round,” it was only normal that development-related issues would find their way into the negotiating agenda. 5.5.2 The DDA 5.5.2.1 The Mandate (and Its Caveats) § 51 of the Doha Ministerial Declaration reads The Committee on Trade and Development and the Committee on Trade and Environment shall, within their respective mandates, each act as a forum to identify and debate developmental and environmental aspects of the negotiations, in order to help achieve the objective of having sustainable development appropriately reflected.

Soon thereafter, the Trade Negotiations Committee (TNC) decided that the CTD should convene in special sessions to discuss all provisions relating to special and differential treatment, evaluating and complementing them, if need be: As reaffirmed by Ministers at Doha, provisions for special and differential treatment are an integral part of the WTO Agreements. The negotiations and other aspects of the work program shall take fully into account the principle of special and differential treatment for developing and least-developed countries as provided for in paragraph 50 of the Ministerial Declaration. The review of all special and differential treatment provisions with a view to strengthening them and making them more precise, effective and operational provided for in paragraph 44 of the Ministerial Declaration shall be carried out by the Committee on Trade and Development in Special Sessions.80

Without directly stating so, the feeling was that past efforts had simply proven inadequate, and a change was required to redress the ever-growing gap between developed and developing WTO members. Jawara and Kwa (2003) captured the feeling among developing countries when they noted (p. 269): Developed countries are benefiting from the WTO, as are a handful of (mostly upper) middle income countries. The rest, including the great majority of developing countries, are not. It is as simple as that.81

There are, of course, two important caveats. First, trade is only one component of a wider development agenda. Its contribution to GDP is asymmetric across countries, but it is never a perfect substitute for development, which is a function of many other policies as well. In the very appropriate words of the WTO World Trade Report (2014) at p. 5: Expanding trade may be essential for development, but it is hardly sufficient. Countries that have succeeded in transforming trade and economic growth into inclusive, sustainable and broad-based development—whether measured in terms of improving health, rising education, increasing opportunities for women, or decreasing poverty—have also pursued a range of policies that not only share the gains (and costs) of trade openness, but ensure that societies are equipped to benefit from global economic integration.82

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Second, the WTO is not a development agency. Hence, it can only do so much in the development context, where it must cooperate and coordinate with other institutions specialized for the task of development. By reason of its institutional mandate and the limits inherent in its content, the WTO can contribute toward the goal of development and poverty reduction only to a limited extent. 5.5.2.2 Capacity Building The WTO now devotes substantial resources toward capacity building. The Special Assistance Unit that was established in the GATT Secretariat back in 1979 was thought as the team of experts to deal with requests on technical issues. It was supposed to provide responses to technical issues, and help train the personnel of developing countries dealing with issues coming under the aegis of GATT. In the same year, it became the Technical Cooperation Division, which organizes regularly conferences in Geneva and missions in various developing countries. It is quite difficult to measure the success of similar initiatives. The WTO has, through the establishment of the Technical Cooperation Division Audit, attempted to estimate the impact of similar initiatives using a series of proxies. 5.5.2.3 Cooperation with Other Institutions The two most prominent initiatives aimed at providing technical assistance to developing countries are the Integrated Framework (IF) and the Joint Integrated Technical Assistance Programme (JITAP).83 The IF, or Enhanced Integrated Framework (EIF) as it became known beginning in 1997,84 is an interagency coordination mechanism for the delivery of technical assistance and promotion of economic growth and sustainable development, and more generally for helping lift LDCs from the poverty trap. It comprises five multilateral agencies—ITC, IMF, UNCTAD, the UN Development Programme (UNDP), and the World Bank (WB)—in partnership with bilateral donors and LDC beneficiaries. Note that only LDCs can take advantage of the IF facility. The WTO serves as coordinator of the IF and accommodates a secretariat with a view to taking maximum advantage of each agency’s expertise to ensure optimal coordination. Interagency coordination has been entrusted to the Inter-Agency Working Group (IAWG).85 The IF aims to place trade in the context of a wider development agenda. The revamped IF is currently under extension to the following countries: Cambodia, Madagascar, Mauritania, Burundi, Djibouti, Eritrea, Ethiopia, Guinea, Lesotho, Malawi, Mali, Nepal, Senegal, and Yemen. Almost all LDCs in total have benefited from it. The members of the WTO have approved the work of the IF. During the Doha Ministerial Conference, they decided to reinforce the IF, as illustrated by § 43 of the Doha Ministerial Conference Decision: We endorse the Integrated Framework for Trade-Related Technical Assistance to Least-Developed Countries (IF) as a viable model for LDCs’ trade development. We urge development partners to significantly increase contributions to the IF Trust Fund and WTO extra-budgetary trust funds in favor of LDCs. We urge the core agencies, in coordination with development partners, to explore the enhancement of the IF with a view to addressing the supply-side constraints of LDCs and the

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extension of the model to all LDCs, following the review of the IF and the appraisal of the ongoing Pilot Scheme in selected LDCs. We request the Director-General, following coordination with heads of the other agencies, to provide an interim report to the General Council in December 2002 and a full report to the Fifth Session of the Ministerial Conference on all issues affecting LDCs.86

More recently, echoing this decision and following active monitoring of its activities, the WTO decided to redirect the IF toward the preparation of poverty-reduction strategic papers and toward reducing the observed implementation gap (between IF prescriptions and follow-up at the national level).87 JITAP, on the other hand, is a multicountry capacity-building program implemented jointly by the ITC, UNCTAD, and the WTO. Following JITAP I, JITAP II was launched in February 2003, and originally covered 16 African countries,88 which included the original 8 JITAP countries plus an additional 8 countries selected on the basis of criteria determined jointly by the implementing agencies and the donors to the program. The 8 original JITAP countries89 have since graduated from the program as of December 31, 2005. JITAP aims at building capacity and strengthening the national knowledge base on the multilateral trading system. Its objective is to ensure: • More effective participation in trade negotiations • Better implementation of the WTO agreements • Informed formulation of trade-related policies • Improved supply capacity and market knowledge of exporting and export-ready enterprises to derive benefits from business opportunities resulting from better market access under the multilateral trading system In 2006, JITAP consolidated the implementation of the various modules in the remaining 8 countries.90 The JITAP Common Trust Fund Steering Group was to determine before the end of 2007 whether it was necessary to commission a future phase of JITAP. JITAP II ended in June 2007, with the nature and scope of its future phase not agreed between the agencies and the donors to the program. JITAP III never materialized. The donors felt that the IF and the new Aid for Trade initiative that was successfully negotiated during the Doha round would take care of the issues that JITAP was supposed to address. 5.5.2.4 Action for LDCs At the Doha Ministerial Conference in November 2001, trade ministers mandated the WTO CTD to identify which special and differential treatment provisions are mandatory, and to consider the implications of making mandatory those provisions that remained nonbinding. It is this meeting that gave birth to the Sub-Committee on LDCs. This body, in which all WTO members participate, focuses on the implementation of the WTO Work Programme for the LDCs, namely: • Market access for LDCs • Trade-related technical assistance and capacity-building initiatives for LDCs

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• Providing, as appropriate, support to agencies assisting with the diversification of the production and export base of LDCs • Mainstreaming into the WTO’s work, as appropriate, the trade-related elements of the LDC III Programme of Action, as relevant to the WTO’s mandate • Participation of LDCs in the multilateral trading system • Accession of LDCs to the WTO; and follow-up to WTO ministerial decisions/ declarations.91 The WTO Work Programme for the LDCs is the platform that essentially placed the WTO in the wider interinstitutional discussion on poverty reduction and development (where, notably, the WB participates). The presence of development-related issues in WTO negotiating documents multiplied. Indeed, a WTO document surveying the progress of the Doha round negotiations from a developing-countries angle states: … first, development issues suffuse all areas being negotiated, including in the market access and rule-making aspects of the negotiations. Second, a large number of proposals already on the table are aimed at addressing the development aspects of each subject. The possible gains to developing countries would largely depend on the outcome of the ongoing negotiations and manner in which the various proposals are operationalized after being adopted.96

At the Hong Kong Ministerial Conference (2005), the CTD adopted five decisions in favor of the LDCs, including a decision to grant duty-free and quota-free (DFQF) market access for at least 97 percent of LDC exports, which is discussed more later in this chapter. This decision was a milestone in improving market access opportunities for LDC exports. Most of the developed members of the WTO provide close to 100 percent DFQF market access to LDC products. Eventually, the number everyone agreed upon was 97 percent of all tariff lines. Of course, 97 percent is a meaningful number in principle, except that donors retain discretion to leave out the 3 percent of tariff lines that matter most to LDCs (and the corresponding domestic industry of the donor as well). Following the decision at the Sixth Ministerial Conference on Measures in Favor of Least-Developed Countries, the WTO CTD was mandated to annually review the steps taken to provide DFQF access to the LDCs. The first review was held on November 28, 2006. A number of developing countries, which are increasingly becoming key trading partners of LDCs, have either adopted or are in the process of granting a significant degree of DFQF access to LDC products.97 The CTD has also been quite active in implementing a number of development-related initiatives, such as the WTO Work Programme on Small Economies. The Doha Declaration mandated the WTO General Council to examine this issue and to make recommendations regarding measures that could improve the integration of small economies into the multilateral trading system. On 1 March 2002, the WTO General Council agreed that “[t]he question of small economies would be a standing agenda item

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of the General Council; The Committee on Trade and Development (CTD) would hold Dedicated Sessions on this question and report regularly to the General Council.”92 In a similar vein, § 55 of the Hong Kong Ministerial Declaration instructed the CTD to intensify its work on commodity issues in cooperation with other relevant international organizations and to report to the General Council with possible recommendations. Coordination with other (development) agencies in this area is also quite important. The UN (and its specialized agencies) adopted at the third UN Conference on LDCs (Brussels, 2001) the Brussels Programme of Action (BPOA) for the LDCs for the decade 2001– 2010.93 Among the various commitments, Commitment 5, entitled “Enhancing the Role of Trade in Development,” is most relevant to the WTO activities.94 The director-general (DG) of the WTO circulated a report explaining the WTO activities aimed at implementing Commitment 5.95 The WTO secretariat has been attaching special priority to LDCs when organizing technical assistance and training programs. During the period 2002–2009, LDCs have been associated with 40 to 45 percent of all trade-related technical assistance (TRTA) delivered by the Secretariat. An LDC Unit was established in the WTO Secretariat in early 2003, aimed at building more informed participation by LDCs in the multilateral trading system and in their effective participation in DDA negotiations. LDCs are being accorded a high degree of flexibility in all areas of negotiation, ranging from agriculture to nonagriculture, services, trade facilitation, rules, etc., which is expected to help them pursue their development objectives. LDCs are exempted from making any tariff-reduction commitments and are not expected to undertake any new commitments in service negotiations. Finally, the institutional dimension should not be neglected at all. The LDC Group, which was formed in 2001, has become an active constituency over the years and today represents an important player in the decision-making process of the WTO. Accession of LDCs to the WTO is being encouraged: there were already 30 LDC members of the WTO in 2001—that is, before the advent of BPOA. Since then, 6 LDCs have acceded to the WTO,98 and 9 LDCs are at various stages of their accession process. The LDC Accession Guidelines were adopted in 2002, aiming to facilitate the accession of LDCs to the WTO. The presence of all these initiatives notwithstanding, the situation regarding the participation of LDCs in world trade remains far from idyllic. Although the growth of LDC exports was already higher than the world average during 2000–2009, their share in world merchandise trade was just under 1 percent in 2009, which represents a 100 percent increase from 1999. The starting point that is, was very low indeed. Moreover, LDC exports continue to be characterized by concentration on a limited number of products, making them vulnerable to external shocks. Add to that that supply-side constraints constitute one of the major challenges for expansion of LDC trade, and the fact that market access opportunities have not been fully utilized due to certain nontariff measures (e.g., the difficulty for LDCs in meeting rules-of-origin requirements). Some steps have surely

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been taken, but a lot remains to be done if the objective is to contribute meaningfully to the development of LDCs. 5.5.3 Aid for Trade: Integrated, Not Simply Involved 5.5.3.1 The Jewel of the DDA The WTO webpage describes Aid for Trade as “part of overall development aid, but with the specific objective of helping developing countries, in particular the least developed, to play an active role in the global trading system and to use trade as an instrument for growth and poverty alleviation.” A WTO document reads: “Aid for trade is about assisting developing countries to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalised trade and increased market access.”99 Aid for Trade is thus about integrating developing countries into the WTO. It is probably the most solemn admission that developing countries have been involved but have not been integrated into the multilateral trading system. It concentrates on trade policy and regulation, economic infrastructure, productive capacity building, and adjustment assistance (“supply-side challenges”). It is individual donors and multilateral agencies that will assume the financing, with the WTO limiting itself to a monitoring and evaluation role. It is probably the most prominent illustration of the DDA (and the fact that the WTO is now part of the worldwide discussion on trade and development). Why has integration failed so far, and why was Aid for Trade a necessity? We have already stated the main reason, in our view. The instruments used by the WTO were tariff preferences (not necessarily in areas of priority interest for developing countries and LDCs), and longer transitional periods to implement agreed obligations. Together, they made WTO policy irrelevant for the majority of developing countries. More than twothirds of the current WTO members are developing countries. Only a few of them follow the day-to-day activities of the WTO, and even fewer have implemented the various disciplines imposed. There are, of course, many other reasons that have hampered integration or, at the very least, made it hard for many developing countries (and especially LDCs) to profit from the Uruguay-round package. These include internal barriers, lack of knowledge about trading opportunities, the occasional excessive red tape, inadequate financing of trading operations, and poor infrastructure, and they have all proved formidable obstacles for those aspiring to trade. Moreover, various studies, including Finger and Schuler (2000), supported the view that the implementation of the Uruguay round was costly for LDCs100. Aid for Trade was perceived as one of the means to redress the situation. Nevertheless, the trading partners did not proceed to abolishing GSP schemes. Aid for Trade has been thought as more of a complement to, rather than a direct substitute for, existing special and differential treatment.

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There are four main areas where Aid for Trade101 is relevant, and they will be examined one by one in the next sections. 5.5.3.2 Capacity Building in Aid for Trade Participation of developing countries in trade negotiations has been severely damaged by scarcity of negotiating resources and lack of expertise. While there is not much that can be done to address the former in the short run, a lot can be probably done with respect to the latter. The various initiatives discussed previously have been revamped and reinvigorated thanks to additional resources made available through Aid for Trade. 5.5.3.3 Infrastructure Construction of roads, ports, airports, and energy networks, as well as upgrading of the existing telecommunications infrastructure, emerge as key issues in expanding the current participation of developing countries in world trade. 5.5.3.4 Increased Productivity Very often, developing countries cannot compete in product markets. Some of the Aid for Trade money is meant to address this type of concern.102 5.5.3.5 Adjustment Assistance As a result of the reduction of MFN tariffs worldwide, developing countries have suffered from preference erosion; that is, the margin of preference that they previously enjoyed has been gradually curtailed. Aid for Trade money could provide some short-term relief. Most important, it could go some of the way toward avoiding the risk that those who have suffered from preference erosion turn into enemies of trade liberalization as a result.103 The general idea is that donors and beneficiaries participate in designing the various projects to be financed, and it is to be expected that the latter actively participate in designing them. In that, Aid for Trade stands in marked contrast to the GSP schemes that were designed solely by donors, where beneficiaries, if they had a choice at all, could only choose between complying with the various requirements and benefiting from them, or not complying and foregoing the benefits. The amount committed so far (according to OECD data) is estimated at $25–30 billion per year, of which capacity building absorbs roughly $0.9 billion (in 2005); infrastructure, roughly $9.5 billion (2005); increased productivity, $12.1 billion (2005); and adjustment assistance, between $3–6 billion (2005–2008). According to the WB, Aid for Trade has increased by 21 percent in real terms between 2002-2005 (the baseline period) and 2007.104 For 2009, Aid for Trade commitments105 reached approximately $40 billion, a 60 percent increase from the 2002–2005 baseline period. Other official flows106 doubled, reaching $51 billion in 2009, probably a reflection of the donor response to the global economic crisis. Disbursements have been increasing at a rate between 11 and 12 percent for each year since 2006, and reached $29 billion in 2009. In total, 269 case stories were received from more than 150 countries (ranging from

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the smallest states, such as the Solomon Islands and Comoros, to the largest, such as China). Priorities have changed as well, with competitiveness and export diversification becoming the top target areas when requests for grants and loans have been tabled by potential beneficiaries since 2009.107 Grants and loans are provided to recipients either through bilateral channels [say, from the US Agency for International Development (USAID) to Ghana], or through multilateral channels [say, International Development Assistance (IDA) from the WB to Ghana]. Roughly 50 percent of money dispersed is grants and the remainder is loans. 5.5.3.6 The WTO’s Involvement What is the WTO role in all this? As we have already stated a few times but is always worth recalling, the WTO is not a development agency108 and cannot provide substantial financial assistance. Conversely, the WTO can and will exercise monitoring activities. Its experience from running the Trade Policy Review Mechanism (TPRM), that we discuss in detail in chapter 12, volume 2, could be quite relevant here. It will aim to bridge the gap between the aspirations of donors and requests by beneficiaries. The WTO will be working hand in hand with other institutions in this context, as indeed it has been doing while participating in the JITAP and the IF, as discussed previously. Monitoring will take place at three levels: 1. Global monitoring, carried out by the OECD [note: OECD Aid for Trade statistics come from the Creditor Reporting System (CRS)] 2. Donor monitoring, in the form of self-evaluations 3. In-country monitoring, also in the form of self-assessments These various threads will be woven together in an annual report and an Aid for Trade debate in the WTO General Council. A WTO Aid for Trade task force has been established to assist this endeavor.109 Two declarations by the TNC, adopted at the end of the Uruguay round (December 15, 1993), provide the foundation for this collaboration: namely, the Decision on Contribution of the WTO to Achieving Greater Coherence in Global Economic Policymaking; and the Decision on the Relationship of the WTO with the IMF. 5.5.3.7 Aid for Trade: Early Evaluations Studies have emerged that have questioned the efficacy of this instrument. Cadot, Fernandes, Gourdon, and Mattoo (2011) survey the literature on this score. Their conclusion is that the shift from measures of general nature to focused interventions is quite welcome. Beneficiaries are quite diverse, and measures of generic nature might be counterproductive to some. Their second major conclusion is that the effect of Aid for Trade on export performance of beneficiaries has yet to be established. Their views are an accurate reflection of the view literature has adopted on this score. Aid for Trade is viewed as

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a step in the right direction, but a step that needs to be strengthened and improved. Gamberoni and Newfarmer (2009) have constructed an index for potential demand for Aid for Trade money based on ten indicators for trade performance and trade capacity. They conclude that those who score the lowest receive most of the money. They also conclude that some have received much less money in relation to their needs. Hoekman and Nicita (2010) point to the problems that might eventually be posed by the absence of a central entity or global financial coordination mechanism, since the whole enterprise builds on existing mechanisms and coordination might prove to be a formidable task. Delpeuch et al. (2011), while not denying that there is an impact (probably indirect) on poverty reduction, find no evidence supporting the thesis that Aid for Trade has had a beneficial effect on trade. In a nutshell, a number of commentators make more or less the same point: Aid for Trade is not a perfect substitute for domestic reform, and its contribution to development should be viewed and appreciated within its limits. 5.5.4 Trade, Poverty, and Inequality Earlier in this section, it was stated that the WTO is not a development agency, but also that trade can be a contributing factor toward development. In addition, we also explained the various initiatives that the WTO has undertaken, either alone or with other institutions, in this respect. The following discussion shifts the focus to the interplay between trade, poverty, and inequality. Combating poverty is, of course, a development objective in and of itself. Inequality is a concern for different reasons. Trade creates both winners and losers, as demonstrated in chapter 1. Trade liberalization is not Pareto superior to autarky, and efficiency is measured in terms of Kaldor-Hicks (e.g., gains outweigh losses). Losses, nevertheless, should not be overlooked. Losers could help erode the support for trade liberalization, and for this reason alone, a look into the effect of trade liberalization on inequality is warranted. Bhagwati (2004) has eloquently stated that the “trade and poverty” debate rests on a two-step argument: namely, that trade leads to growth and growth leads to reduction of poverty. There have been some refinements on this basic story, but few would doubt that the basic message here is correct. Conversely, the jury is still out when it comes to discussing the impact of trade on inequality. 5.5.4.1 Why the Question? The WTO contract does not contain specific obligations regarding the fight against poverty. Nonetheless, the Agreement Establishing the WTO recognizes in its preamble that: Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing

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volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development, Recognizing further that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development. (italics in the original)

The fight against poverty is, thus, somewhere in the equation, but it is definitely not the focus of specific disciplines assumed under the WTO. The fight against poverty, though, has a lot to do with the legitimacy of the WTO. Indeed, it would be paradoxical at best to claim on the one hand that trade liberalization promotes development, but on the other that it increases poverty. 5.5.4.2 Trade and Poverty Poverty-neutral growth is a theoretical possibility. Empirical work, however, conducted by Ravallion (2001) shows not only that the poor gain when an economy grows (as it does as a result of trade expansion), but, crucially, that the incomes of the poorer segments of the society do not grow at a slower pace than that of the overall economy. There are further papers that point to the same conclusion while controlling for reverse causation; e.g., they ask not only the question whether per capita income is raised as a result of trade liberalization, but also whether the opposite is true as well. Frankel and Romer (1999), and Irwin and Terviö (2002) strongly supported this conclusion. Mitra (2015), in a comprehensive survey of the literature on this score, found no dissident voices. 5.5.4.3 Trade and Inequality A somewhat related discussion is whether trade liberalization leads to income inequality within societies. The WTO is often criticized in some circles for contributing to income inequality (as measured by the Gini coefficient, or Gini Index, which measures the degree of concentration when distribution is unknown; hence, the higher the outcome—between 0 and 1—the more concentrated wealth is in the hands of a few). The relationship between per capita income and inequality has been graphically represented in the Kuznets curve. This is an inverted, U-shaped curve meant to depict the economist Simon Kuznets’s claim that as countries develop, income inequality worsens at first and then improves when countries reach a certain level of development. In John Rawls’s classic difference principle, inequality is compatible with justice only if it improves the lives of those at the bottom of the pyramid. The empirical papers discussed in the previous section strongly support this view. Goldberg and Pavcnik (2007) survey this issue. They conclude that one of the few uncontroversial insights of trade theory is that changes in a country’s exposure to international trade, and world markets more generally, affect the distribution of resources within the country and can generate

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substantial distributional conflict. Two trends emerge clearly from the data analysis. First, the exposure of developing countries to international markets as measured by the degree of trade protection, the share of imports and/or exports in GDP, the magnitude of capital flows (foreign direct investment in particular), and exchange rate fluctuations has increased substantially in recent years. Second, while inequality has many different dimensions, all existing measures for inequality in developing countries seem to point to an increase in inequality, which in some cases (pre–NAFTA Mexico, Argentina in the 1990s) is severe. This points to the need for accompanying measures, assuming of course willingness to promote social cohesion. This last point deserves an additional few words. The WTO does not take a particular stance on inequality. The fight against inequality can emerge, if at all, as a domestic social preference. Mitra (2015) reviewed both the theory and empirical papers concerning the relationship between trade and inequality a few years after the survey study by Goldberg, Koujianou, and Pavcnik, and concluded that the standard Stolper-Samuelson effects that benefit abundant factors and hurt the scarce factor are present in the context of trade liberalization (albeit mitigated). The abundant factors in developing countries are typically less skilled labor. Accepting $1.25/day of income as the poverty line, Mitra then asked the question of how many people India and China moved above the poverty line. India moved out of poverty a substantial part of the population, reducing the people below the poverty line from 59 to 32 percent between the 1980s and 2014. In the same time period, China moved even more people out of poverty, reducing the number of people earning less than $1.25/ day from 69 to 15 percent. The Gini coefficient at the same time moved in India from 32 to 34 in his calculation, whereas in China it moved from 28 to 42. Mitra, thus, concluded that China moved more people out of poverty while increasing inequality, whereas India moved fewer people out of poverty without increasing inequality in comparable terms to China. Both of them, nevertheless, respected the Rawlsian principle.110 The author did not assign a cause-and-effect relationship between trade and inequality, since the role of political institutions, for example, is difficult to quantify. Still, the time span of the research, as well as the sheer size of the economies involved, provide a good deal of food for thought on this score. 5.6

Institutions

In 1964, GATT undertook its first substantive initiative to provide an institutional infrastructure to its provisions regarding special and differential treatment: the GATT CONTRACTING PARTIES agreed on the establishment of the CTD. Its mandate was to review the application of the provisions of Part IV of the GATT. Article IV.7 of the Agreement Establishing the WTO, which describes the current mandate of the CTD, provides:

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The Ministerial Conference shall establish a Committee on Trade and Development … which shall carry out the functions assigned to them by this Agreement and by the multilateral trade agreements, and any additional functions assigned to them by the General Council. … As part of its function, the Committee on Trade and Development shall periodically review the special provisions in the multilateral trade agreements in favour of LDC members and report to the General Council for appropriate action.

The CTD is the depositary for all GSP schemes. It is also the forum where the notification of and the discussion about preferential arrangements under § 2(c) of the Enabling Clause take place.111 It supervises the implementation of provisions favoring developing countries (special and differential treatment). It issues guidelines for technical cooperation.112 It serves as a focal point for consideration and coordination of technical assistance work on development in the WTO and its relationship to development-related activities in other multilateral agencies. Finally, it adopts measures aiming to increase participation of developing countries in the trading system, paying particular attention to the position of LDCs. The CTD has thus evolved into a forum where the discussion on trade and development, in the widest possible connotation of the term “development”, takes place under the aegis of the WTO. Also, it has been active in promoting electronic commerce113 and Aid for Trade. 5.7

Concluding Remarks

In hindsight, we can safely conclude that the original measures in favor of developing countries were not properly designed. One-way preferences through GSP schemes were established through a political decision, with little support in economic theory. From a realpolitik perspective, it was quite feasible to bring similar measures under the aegis of GATT, since donors would be left alone to decide on the extent of preferences, and there was no need for them to undergo painful adjustments in sectors such as textiles and farm policies, where political economy did not promote liberalization. On the other hand, the binary distinction between developing countries and LDCs does not allow customized solutions, which are very necessary when it comes to addressing development-related issues. The AB report on EC–Tariff Preferences tried, in a way, to respond to this shortcoming by allowing for differentiation in GSP schemes beyond the statutory distinction between developing countries and LDCs. It did so, nevertheless, in a clumsy way, making it even easier for donors to advance their own agenda when designing or according preferences. What is missing, precisely, is coordination between donors and beneficiaries—some sort of basic agreement between them so that aid becomes effective. Aid for Trade is a first step in this direction since it provides a forum where donors and beneficiaries will meet and codecide, to some extent, the aid schemes.

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The passage from GSP only to GSP plus Aid for Trade is a step away from addressing the proximate cause and toward addressing the ultimate cause of lack of integration of developing countries in the multilateral trade order. It is, of course, an implicit acknowledgment that GSP schemes have failed, or, at the very least, that they have failed to do the job by themselves. The first evaluations of Aid for Trade point to a number of possible improvements that should be undertaken. Informed by similar research, the WTO will gain in institutional credibility if it understands the limits of its actions and ensures that its actions are in the right direction. Aid for Trade is also another bridge that the WTO has built to the Bretton Woods institutions and other institutions that deal with development policy. The WTO has, of course, a very limited mandate. It administers and promotes trade liberalization. This is, anyway, the WTO contribution to development. Trade, however, is one part—and not necessarily an important part—of overall development.

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Preferential Trade Agreements

6.1 The Legal Discipline and Its Rationale 6.1.1 The Legal Discipline WTO members can treat goods originating in one or more WTO members better than like goods originating in the remaining WTO membership, and thus deviate from their obligation to accord most-favored nation (MFN) treatment, provided that they have satisfied the requirements included in Article XXIV of GATT. To this effect, they must conclude a preferential trade agreement (PTA)1 with one or more trading nations. PTAs can take the form of either a customs union (CU) or a free trade area (FTA). Regardless of the form chosen, PTA partners must liberalize “substantially all trade” between themselves, without raising the pre-PTA level of protection applied to nonparticipants. 6.1.2 The Rationale for the Legal Discipline Article XXIV of GATT was not a provision that was heavily discussed during the negotiations that led to the advent of GATT. This might look like a paradox today since hundreds of PTAs exist nowadays. In fact, there is not one WTO member that is not party to at least one PTA; the last bastion, Mongolia, negotiated an FTA with Japan in 2014. This was not the situation back in the 1940s, though, when GATT was negotiated. There were only a few bilateral arrangements around, and it is actually debatable whether a genuine FTA existed at that time. Indeed, as explored in chapter 1, the preferences that mattered most when GATT was being negotiated were imperial preferences, which are a far cry from any reasonable understanding of PTAs. Negotiating efforts, thus, rationally focused on addressing imperial preferences, the actual problem, and not PTAs. The negotiating record leads to the following conclusions: • The US delegation was instrumental in proposing the draft of what became Article XXIV of GATT. The US delegate (usually Harry Hawkins) proposed the first comprehensive written version of the provision.

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• To some, the inclusion of this clause might have seemed a total paradox, since the whole purpose of GATT was to do away with discriminatory trade. A number of trading nations, though, were in favor of introducing a provision on PTAs, albeit for different reasons. Some saw it as natural complement to the discipline on “frontier traffic” (e.g., trade between adjacent countries, which is now regulated in Article XXIV.3(a) of GATT); others as a necessary tool to legalize preexisting arrangements; others as tool for development; and some even took the view that similar schemes could function as insurance policies in case the multilateral order broke down. Indeed, there was no guarantee at the time of inception of GATT that the twenty-three original signatories would stick together in times of adversity, much less that others would join in. We can, thus, legitimately conclude that negotiators did not see eye to eye on why a clause allowing for PTAs should be included in GATT. • They also did not see eye to eye on why PTAs should be formed in the first place. • Chase (2006) has persuasively claimed that the extension of the original drafting of Article XXIV of GATT to also cover FTAs was very much a reflection of “secret” talks between Canada and the United States, who were envisaging the conclusion of an FTA. • PTAs would be reviewed multilaterally in order to ensure that the legal conditions imposed had been met. The nature of the multilateral review would come close to that of a merger authority: no CU or FTA would be consummated absent multilateral clearance. Let us now look closer at some of the rationales advanced for including this provision in GATT. 6.1.2.1 Frontier Traffic For many, the idea was that frontier traffic and CUs were two sides of the same coin. They would occur across geographically adjacent countries, and the only difference between them would be the intensity of the integration process. Whereas frontier traffic would be limited to sporadic preferences, CUs would provide meaningful liberalization with respect to “substantially all trade.”2 Frontier traffic is now regulated in Article XXIV.3(a) of GATT, which makes it clear that advantages concerning frontier traffic should not be put into question by the GATT system. In Article XXIV.3(b) of GATT, the GATT framers mentioned specifically that arrangements made by Yugoslavia and Italy to facilitate trade with the Free Territory of Trieste could not be challenged. The Free Territory of Trieste was established with the Treaty of Peace signed on February 10, 1947, between Italy and the victors of World War II (WWII). It was meant to ensure the peaceful existence of the ethnically and culturally mixed population that lived in that part of the world (in and around Trieste, in northern Italy, and what is Slovenia today). De facto as of 1954, and de jure as of 1975 with the signature of the Treaty of Osimo, the Free Territory of Trieste was divided between Yugoslavia and Italy. As a result, Article XXIV.3(b) of GATT is now of historic interest only.

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6.1.2.2 Preexisting Arrangements Two CUs participated in the negotiation of the original GATT, the Syro-Lebanese customs union (Syria and Lebanon) and Benelux (Belgium, Netherlands, and Luxembourg).3 6.1.2.3 Development Tool Georges Hakim, the Lebanese delegate to the GATT negotiation, argued: In certain regions small nations might find it impossible to develop industries even with the aid of tariff protection. For the development of modern industry a large market is required, and many small nations do not have a sufficient population to provide such a large market. One method of securing this market would be for the small nations of a certain region whose economies are complementary to form Customs Unions among themselves …. Instead of removing all tariff barriers between themselves, a group of countries may perhaps decide to reduce tariffs between themselves to half their normal level, while maintaining the normal tariffs as against other more industrialized countries. If the object of such a system of tariff preference is to develop the industry of a group of less developed countries by providing a wider market for each country’s products, no harm to world trade will result.4

This view was typical of developing countries at that time. 6.1.2.4 Insurance Policy CUs were also thought of as an insurance policy for those developing countries interested in securing market access for their exports. Mr. Frusquet, the Cuban delegate, should be credited with this view:5 Cuba had so greatly suffered in the past from trade restrictions such as high tariffs, quotas and internal subsidies in other countries that the national income from exports had fallen to the level of thirty years previously. … Cuba could not lightly abandon her special trade relations without definitive assurance of an equal or better economic position in the future.6

6.1.2.5 US-Canada Rapprochement Chase (2006), drawing on a series of archival records, explains the extension of the original provision (which was limited to CUs) to cover FTAs as well. He demonstrates that the US negotiators designed this provision in order to accommodate the previously mentioned trade agreement that they had secretly reached with Canada. References to FTAs were thus included in Article 44 of the Havana Charter (the corresponding provision to Article XXIV of GATT) and appeared for the first time only in 1948.7 The US-Canada FTA, alas, was never ratified. It follows from this discussion, as well as the many explanations cited here, that the negotiating history of Article XXIV of GATT does not reveal a dominant explanation for its inclusion in GATT.8 This is a setback for the interpreter, for it will have no guidance regarding the object of similar arrangements when called to interpret the provision dealing with consistency of PTAs with the GATT. As will be discussed later in this chapter, though, WTO panels have been only sparingly called to interpret this provision, and, when this

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happened, they wisely chose to abstain from providing meaningful interpretations of the key concepts. This is an issue that continues to be mainly discussed among the “principals” (i.e., the WTO members). 6.1.3

Discussion

6.1.3.1 PTAs and MFN There is an obvious tension between PTAs and GATT, an agreement that was meant to promote nondiscriminatory trade. The initial carve-out from MFN was, of course, quite narrow, since only CUs were allowed. CUs are a rather demanding form of integration, in that they involve a common external trade policy, an integration step most likely too far for those who cherish sovereignty (although the membership of this club has diminished). It was the extension to FTAs that opened the floodgates to MFN exceptions, since FTAs proliferate incessantly. Before the Treaty of Rome establishing the European Economic Community (EEC) was signed in 1957, GATT had been notified of only three FTAs.9 Over 500 exist today. 6.1.3.2 FTAs, CUs, and Beyond Article XXIV of GATT distinguishes between two forms of PTAs: FTAs and CUs. For an FTA to be GATT-consistent, its members must liberalize trade between themselves, whereas, for a CU to be GATT-consistent, its members must also agree on a common trade policy vis-à-vis the rest of the WTO membership. This is how Article XXIV.8 defines CUs and FTAs: A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that (i) duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV, and XX) are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories, and, (ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union;10 A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV, and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

FTAs and CUs do not exhaust the forms of market integration, as indeed the EU experience shows. Balassa (1967) provided a classification of “stages of integration” where FTAs and CUs were the two “shallowest” forms of market integration; next would come the common market, where impediments to free movement of factors of production (and not

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only trade restrictions) would be eliminated; then the economic union, where some form of harmonization of economic policies would occur; and finally, a complete economic integration, which would entail unification of monetary, fiscal, and social policies and where a central authority entrusted with the capacity to issue binding rules would be established. Balassa saw a sequence across the various stages.11 Sapir (2011) does not. In his view, there is no reason to believe that there is some form of automaticity in the integration process that leads from FTAs to CUs to the common market, etc. Indeed, the numbers here tell a story since only a handful of CUs have been noted by the WTO, and, for some of them, there are legitimate doubts as to whether they have established a genuine common external tariff. Moreover, to cite one example, MERCOSUR was established as a CU right away, without tinkering with an FTA project beforehand.12 6.2 Why Go Preferential? PTAs come at a cost. Viner (1950) was the first to explain why PTAs are welfare reducing in light of the resulting trade diversion (deflection).13 When Home and Foreign form a PTA, they create trade since they dismantle preexisting protections between them. They also divert trade, though, since intra-PTA trade might displace extra-PTA trade (trade deflection). The classic Vinerian analysis would want to calculate the trade created through the establishment of a PTA (since intra-PTA trade would be liberalized) and compare it to the trade diverted (since trade, if it becomes relatively more efficient, should be deflected from the worldwide most efficient source of supply to the intra-PTA most efficient source of supply). Of course, one might cast significant doubt on the appropriateness of such measurement since it assumes the counterfactual. What if countries refused to make the same MFN cuts if they were deprived of the possibility to go preferential? What if they refused to participate in the WTO altogether if they could not enjoy the benefit of entering into PTAs? This is not meant to put into question the classic Vinerian analysis. Indeed, Viner was interested in measuring the allocational impact of discriminatory integration. Realpolitik would suggest that there is no reason to believe that MFN cuts would be the appropriate counterfactual to preferences,14 but this was not Viner’s concern.15 Influenced by Viner’s analysis, economists initially viewed regional integration with a lot of skepticism.16 Influential papers such as Grossman and Helpman (1995) and Krishna (1998) added to the early criticism, as they established the incentive for PTA partners to choose integration in those sectors where the possibility for preference (and thus trade deflection) is at its maximum. The GATT legal test does provide some insurance against this possibility (through the requirement to liberalize “substantially all trade,” as

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discussed later in this chapter). Worse, the legal test was almost never respected in the first place. And costs do not stop here. PTA partners are missing incentives to agree, following establishment of a PTA, on MFN tariff cuts for fear of “preference erosion.” Bhagwati (2002), Krishna (1998), and Limão (2006a) have all contributed theoretical and empirical papers in this vein. Besides trade diversion generated through the establishment of PTAs, members of PTAs behave like enemies of nondiscriminatory trade liberalization in the future as well, since they are unwilling to cut tariffs on an MFN basis for fear of eroding the margin of preference that they have already granted to their PTA partners. They thus become, as Bhagwati and Panagariya (1999) put it, “stumbling blocks” (as opposed to “building blocks”), opposing MFN trade liberalization and frustrating the achievement of the basic WTO objective. In other words, trade diversion is here to stay as a result of the incentives of PTA partners.17 Bhagwati (2008) goes so far as to state (p. 88): It is hard to contemplate the consequences of PTAs with equanimity. The most important item in our policy agenda has to be to devise an appropriate response to their spread and the damage they impose on the multilateral trading system.18

Note, nonetheless, that a group of NAFTA negotiators (Carla Hills, Jaime Serra Puche, Michael Wilson) that were gathered in the Hoover Institute of Stanford University to celebrate the 20 years of NAFTA concluded the exact opposite: that it is because of successful conclusion of NAFTA that the deadlock of the Uruguay round was undone. Carla Hills, the USTR at the time the NAFTA and the Uruguay round were being negotiated provided the most compelling evidence to this effect.19 Against this background, one might naturally be tempted to ask, why go preferential? The number of PTAs in place is staggering, and their increase in the post—Uruguay round era (when tariffs were cut as never before) dramatic. The answer is far from easy, since explanations could be idiosyncratic and quite often, information about the true motives for going preferential might be private. Indeed, economists and political scientists have advanced various explanations why one might opt to go preferential,20 and if there is one characteristic they all have in common, it is that they are all idiosyncratic. This discussion can begin with the EU, the most advanced integration form seen nowadays. The EU integration process can be viewed both in its “internal” and “external” dimensions. The internal dimension concerns the integration process of the European states. Trade was part of the integration process, and in fact it contributed a lot to realizing the overarching objective: political union. The EU has not achieved it yet, but it has taken decisive steps in this direction. The external dimension of the EU integration process concerns the overall presence of the EU in international relations, and its role in substituting gradually its member states in the international arena. The EU has been an early champion of preferential trade, recently copied by various eager beavers. Trade policy was for years the only genuine EU common policy, and one cannot resist the temptation to ask

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the question whether PTAs were not part of a wider “I sign, ergo I exist” strategy: with every PTA signed, the EU was affirming its international persona, becoming more of a figure in international relations.21 Many other plausible explanations for signing PTAs have been advanced. PTAs are close to natural integration schemes across geographically proximate partners. Tinbergen (1962) was the first to explain that the formation of PTAs was in some ways quite natural. He developed the “gravity equation,” aimed at predicting trade in the absence of distortion. Trade flows would depend on the economic size and distance22 between two countries. Trade is an increasing function of the gross national products (GNPs) of both the exporting and the importing countries, and is negatively influenced by the physical distance between the countries. Gravity models have been successfully used to explain the formation of PTAs, especially between partners in geographic proximity to each other. Krugman (1991) and Summers (1991) have gone one step further, arguing that PTAs among countries in proximity should be encouraged, whereas PTAs among countries that are not geographic neighbors should be discouraged. In their analysis, the former are more likely to avoid the adverse possibility of welfare reduction and to lead to a larger improvement in welfare.23 In a way, the GATT provision on frontier traffic that we discussed earlier echoes this view. Perroni and Whalley (2001) have argued that smaller (and often) developing countries have on occasion had recourse to PTAs (and were even prepared to pay a heavy price for this) in order to secure access to larger markets. Their aim is to achieve a safe haven, and thus, PTAs could be seen as insurance agreements. To this effect, they were prepared to assume the role of “spokes” and link through PTAs with the main “hubs” of international trade. Originally, they thought of PTAs as insurance policies against the collapse of the trading system, as we saw earlier. More recently, they also saw them as the means to get a “first mover’s advantage” and establish preferential trade with hubs before other spokes did.24 Baldwin (1995) argued that the signing of PTAs between a hub and a spoke might create a domino effect, in the sense that other spokes might be willing to follow suit and sign similar arrangements with the hub because if they were left out, they would miss out on important market opportunities. Although it is difficult to explain all PTAs through this view, there is certainly a lot of empirical support for it.25 Krugman (1991) observes that a trading bloc could be formed in order to improve the terms of trade for its participants. In this view, a similar arrangement: [A trading bloc] will normally have more monopoly power in world trade than any of its members alone. The standard theory of the optimal tariff tells us that the optimal tariff for a country acting unilaterally to improve its terms of trade is higher, the lower the elasticity of world demand for its exports. So for a trading bloc attempting to maximize the welfare of its residents, the optimal tariff rate will normally be higher than the optimal tariff rates of its constituent countries acting individually.26

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Meade (1955), in similar vein, writing on customs unions, noted that (pp. 64–65) “the larger the trading area which is negotiating as a single unit the better the commercial policy treatment which it can hope to exact in its bargains from other countries, and the better therefore its terms of trade with the rest of the world are likely to be.” Meade was, of course, one of the key UK negotiators of the original GATT, and his discussion. Kowalczyk (1990) has shown, employing terms-of-trade and volume-of-trade analysis, that trade creation and diversion do not necessarily equate with welfare gains and losses. WTO members might be deriving important political benefits by association with their preferential partners, and this is most likely the case when associating themselves with the two main hubs, the EU and the US. This observation might also explain why those originally left out might wish to join in subsequently.27 The North American Free Trade Agreement (NAFTA) was beneficial to Mexico not simply because the US lowered its tariff barriers to Mexican goods and services, but also because Mexico benefited from other dynamic benefits, such as increased investment over the years as a result of rationalization of its policies and other factors.28Jaime Serra Puche, a key Mexican negotiator for NAFTA, went on record stating that Mexico aimed at two objectives while negotiating NAFTA. First, it wanted to reenter the “map of world investment,” since, in the pre-NAFTA years, it had been attracting almost no investment at all. Second, because it wanted to undo the perverse effects of GSP. Mexico was an important beneficiary. Puche cites the example of microphones. Mexico was exporting a quota of 100,000 microphones at preferential rates to the US. The quota was being reached quite fast, though, and factories had to close down for the remaining part of the year since they could not be exporting one additional unit at preferential rates. NAFTA preferential rates would operate as the “substitute” for GSP preferences.29 In a similar vein, Baltagi et al. (2008) discussed the relationship between PTAs and foreign direct investment (FDI). They concluded in an empirical paper regarding the European Union Association Agreements that the removal of trade barriers has led to substantial flows of FDI for those participating. Recourse to PTAs thus could be privileged because a country sees a PTA as a way to get investment/access to foreign technology that can increase its income or access to low-cost production of inputs that can increase its ability to export certain products. It could also be that trade is a component of a wider public policy package.30 Dynamic (indirect) benefits can be of a different nature as well. It could be, for example, that PTAs serve as signaling mechanisms. Mexico, by joining NAFTA, not only enjoyed trade and investment benefits, as mentioned earlier, but also signaled to the world that it was abandoning its policies of the past and was espousing a different model. Association with this particular hub (the US) was a strong signal to this effect. This, in turn, might have eased Mexico’s relationship with international organizations, financial markets, etc.

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Becoming a preferential partner in trade might open the door to all sorts of political cooperation. Obtaining political perks, which might be indirect or uncertain, could on occasion be the key motivation why spokes decide to go preferential with hubs. PTAs are part and parcel of wider foreign policy and might be motivated only (or mainly) by concerns of a political order. Thanks to leaked documents, for example, we know that India was pursuing closer ties with the Association of Southeast Asian Nations (ASEAN) with the goal of balancing China’s growing clout in Asia.31 In a similar vein, China has not signed any PTA with WTO members that have recognized Chinese Taipei.32 In light of this discussion, one might naturally ask whether it is meaningful at all to attempt to discipline a phenomenon when we are unclear as to what has caused it. The GATT legal regime turns a blind eye to the rationales for going preferential and disciplines PTAs anyway.33 And at the very least, some disciplining was necessary; otherwise, as Grossman and Helpman (1995) have observed, MFN could have become an “empty shell.” 6.3 The Legal Requirements for GATT-Consistent PTAs The legal and economic tests for giving the green light to a PTA are like two ships passing in the night. What stems from the previous discussion is that economists care about the welfare implications of PTAs. This is the question that the legal test embedded in Article XXIV of GATT does not ask. This is not to suggest that the current legal discipline is totally nonsensical. Article XXIV of GATT aims at avoiding PTAs à la carte. Absent the “substantially all trade” requirement that is discussed later in this chapter, for example, PTAs on only one good would be imaginable. This would, of course, signal the death of MFN, the cornerstone of GATT.34 The GATT regime also aims to ensure that intra-PTA trade liberalization will not be accompanied by new protection vis-à vis the rest of the world, regardless of the welfare implications. While respecting the legal obligations, though, a GATT-consistent PTA could be very costly since it could create very substantial trade diversions. This could easily be the case as far as early PTAs in the 1950s and the 1960s were concerned, when MFN tariffs were quite high and tariff cuts only to inefficient sources of supply could be meaningful. Indeed, nothing in the GATT regime stopped a GATT contracting party from entering into a PTA with inefficient producers. If it played by the book and liberalized all its trade totally toward its new PTA partners, it would be diverting a lot of trade in their direction at a moment when the rest of GATT would be called to pay 30 percent and 40 percent duties to enter its market.35 Recall that this was the habitual level of duties in the early years of GATT integration. This is much less of a threat nowadays, of course.

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6.3.1 An Exception to MFN Article XXIV.4 of GATT leaves no doubt that there is room for PTAs under the aegis of the multilateral framework: The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.

The wording and the negotiating history make it clear that Article XXIV of GATT was meant to be an exception to Article I of GATT.36 The Appellate Body (AB) ruled in unambiguous terms that the party invoking Article XXIV of GATT to justify deviations from MFN trade carries the associated burden of proof (§ 58): First, the party claiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of subparagraphs 8(a) and 5(a) of Article XXIV. And, second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue.37

Nevertheless, the relationship between the two provisions (Articles I and XXIV of GATT) has proved to be a thorn of sizeable dimensions in GATT/WTO practice. In the words of the Panel on Turkey–Textiles (§ 2.2): The relationship between the most-favoured-nation (“MFN”) principle and Article XXIV of the GATT, which deals with free-trade areas and customs unions, has not always been harmonious.

Various issues have arisen in practice, and some of them have been responded to, whereas some have not. All of this will be explored later in this chapter. One thing is clear: the exceptional treatment is limited to PTA partners; it cannot be extended to nonparticipants in the PTA. To this effect, the Panel on Canada–Autos clearly stated (§ 10.55): In our view, Article XXIV clearly cannot justify a measure which grants WTO-inconsistent duty-free treatment to products originating in third countries not parties to a customs union or free trade agreement.

6.3.2

Notification Requirements

6.3.2.1 Who Notifies? Recall from the discussion in chapter 5 that it is the Committee on Trade and Development (CTD) that should be notified of arrangements across developing countries (south-south cooperation). We are consequently left with the following possible constellations for PTAs notified under Article XXIV of GATT:

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• Between developed countries, all of which are WTO members • Between WTO members, some of which qualify as developed and some as developing countries • Between a WTO member that qualifies as a developed country and a non-WTO member The Committee on Regional Trade Agreements (CTRA), of course, should be notified of PTAs in the first two categories. It is the last of these categories that legitimately raises issues. One would think that Article XXIV of GATT is a discipline to be observed between WTO members only. Article XXIV.5 reads: Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area … (emphasis added)

And yet, practice has developed in a different way. WTO members, whether developed or developing, notify the Committee on Regional Trade Agreements (CRTA), the CTD, or both about their PTAs with non-WTO members as well: EC–CARIFORUM (Bahamas is part of the agreement, but not a WTO member) is an example of the former, and Ukraine–Uzbekistan of the latter.38 One is tempted to argue that whenever a WTO member grants a benefit to a non-WTO member, it must immediately and unconditionally extend it to all WTO members. Article XXIV of GATT cannot be an exception to this rule since it exonerates only PTAs between WTO members from the obligation to observe MFN (Article XXIV.5 of GATT, cited earlier). Furthermore, review by the CRTA of similar arrangements (e.g., extension of benefits to non-WTO members that participate in a PTA) is not a watertight shield against eventual legal challenges by WTO members who have been denied similar benefits. Affected parties can always complain before a panel and request extension of benefits granted. This response would be all the more pertinent for schemes subjected to review after the advent of the Transparency Mechanism. No evaluation of the legal consistency of notified schemes has taken place since 2006. We will revert to this point later in this chapter. So far, though, no legal challenge against the legality of PTAs between WTO- and non-WTO members has been raised before a WTO panel. So what if a legal challenge is raised? Formally, it is still an open question whether, when signing PTAs with non-WTO members, WTO members have to automatically and unconditionally extend benefits to all other WTO members based on MFN, although the letter and the spirit of Article XXIV of GATT are, of course, violated through similar arrangements. The better arguments lie with an obligation to extend to the WTO membership all benefits granted to non-WTO members through the conclusion of PTAs. Still, the absence of legal challenges to this effect should not come as a shock. They are quite improbable since WTO members lack the incentive to challenge PTAs anyway, for the reasons explained later in this chapter. Moreover, the

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size of the problem is gradually diminishing. The WTO is becoming (if it is not already) a global institution, with a membership rivaling that of the UN. PTAs with non-WTO members is slowly becoming a sort of endangered species, on its way to extinction. 6.3.2.2 Notify Whom? The WTO must be notified of decisions by WTO members to enter into a PTA or of their intention to do so (Article XXIV.7 of GATT).39 Notifications will be submitted to the CRTA, where the compatibility of the notified scheme with the multilateral rules will be reviewed.40The CRTA41 is the successor to Article XXIV of GATT Working Parties, the organ that would examine the consistency of notified PTAs with the multilateral rules in the GATT years. Practice also evidences dual notifications simultaneously to the CRTA and the CTD. When MERCOSUR was established, only the CTD was notified of the scheme, since all participants (i.e., Argentina, Brazil, Paraguay, and Uruguay) considered themselves developing countries. It was later agreed between them and the rest of the WTO membership that the terms of reference of the Working Party should also include an examination of the consistency of MERCOSUR with Article XXIV of GATT as well: To examine the Southern Common Market Agreement (MERCOSUR) in the light of the relevant provisions of the Enabling Clause and of the GATT 1994, including Article XXIV, and to transmit a report and recommendations to the Committee on Trade and Development for submission to the General Council, with a copy of the report transmitted as well to the Council for Trade in Goods. The examination in the Working Party will be based on a complete notification and on written questions and answers.42

A number of developing countries raised concerns regarding the legality of this practice. In a joint communication, China, Egypt, and India pointed to the absence of a legislative framework enabling dual notifications and the ensuing uncertainty regarding both the impact of the various provisions and the role of the CTD and the CRTA should be acknowledged in this process.43 6.3.2.3 Notify What? The content of notification has been standardized for all PTAs, regardless of whether they are notified under the Enabling Clause or Article XXIV of GATT. An annex to the Transparency Mechanism explains the precise content of notifications and communications to the CRTA, while § 20 of the Transparency Mechanism makes it clear that cross-notifications are permissible. 6.3.2.4 Notify When? Article XXIV.7(a) of GATT addresses the timing of notification as well: Any contracting party deciding to enter into a customs union or free-trade area, or an interim agreement leading to the formation of such a union or area, shall promptly notify the CONTRACTING

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PARTIES and shall make available … such information … as will enable them to make such reports and recommendations to contracting parties as they may deem appropriate. (emphasis added)

The wording of Article XXIV of GATT suggests that the CRTA should be notified of any prospective action.44 The WTO Secretariat (the TPRM Division, Trade Policy Review Mechanism)45 will then prepare a factual presentation of the PTA to be circulated to all WTO members.46 It is quite common, however, for PTAs to be notified ex post facto—that is, after they have been officially signed, entered into force, or both. Indeed, the review typically takes place while the notified PTA is in force. For example, NAFTA was signed on December 17, 1992, entered into force on January 1, 1994, and a Working Party to examine its consistency with the GATT rules was established only on March 23, 1994. The EC–Visegrad Agreements (a former FTA between the EU on one hand and Hungary, Poland, and the Czech and Slovak Federal Republics on the other) entered into force on December 16, 1991, and the Working Party was established only on April 30, 1992. Consequently, Working Parties (and now the CRTA) have often been presented with a fait accompli. This is an important observation, especially in light of the de facto absence of retroactive remedies in the GATT/WTO legal system. Assume that a successful legal challenge (an unlikely occurrence, as explained later in this chapter) against a PTA. The remedy would be for the members of an FTA to bring their measures into compliance with their obligations under the WTO. This would not entail, though, compensation for past damages to affected WTO members (who paid the MFN rate when others did not). In practice, because of the belated notifications, the CRTA is de facto not understood by the WTO membership as the permission necessary for a PTA to lawfully enter into force. One WTO panel report at least (US–Line Pipe) has sided with this view. The General Council decision establishing the Transparency Mechanism47 regarding the content of notifications formally accepted that notifications can take place after the entry into force of the notified PTA: “The required notification of a PTA shall take place as early as possible; it will occur when practicable before the application of preferential treatment by the notifying member and, at the latest, three months after the PTA is in force.” The negotiating intent to notify prospective action thus has been officially defeated. One should not exaggerate the importance of this point, though. We have not experienced totally flimsy PTAs—such as preferential schemes in only one product market. There is some self-discipline, and discussions before the CRTA reveal that notified PTAs do liberalize a wide variety of product markets. While they might not always conform to the spirit of Article XXIV of GATT (indeed, it is almost impossible to make definitive statements regarding conformity with the letter of this provision, since, as we will see later in this chapter, key terms remain uninterpreted), PTAs typically are comprehensive in their coverage.

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6.3.3 Internal Requirement: Eliminate Duties with Respect to Substantially All Trade 6.3.3.1 Same Requirement for FTAs and CUs Recall from the definition of CUs and FTAs quoted earlier, that both preferential schemes must eliminate duties and other restrictive regulations of commerce (ORRC) with respect to substantially all trade (SAT) in products originating in the constituents of the PTA. 6.3.3.2 Substantially All Trade (SAT) It bears repetition that, as Grossman and Helpman (1995) have persuasively argued, the inclusion of this requirement serves a legitimate purpose: absent this requirement, WTO members might have an incentive to conclude preferential deals on commodities where the largest possible trade diversion could result. PTAs à la carte will thus be avoided (the “carte” here being, of course, finely customized to correspond to the maximum trade diversion across commodities of interest to the preferential partners). Roughly, this term should imply that comprehensive liberalization should take place for a PTA to be legally established. Nevertheless, the statutory language does not clarify how much should be liberalized for this legal requirement to be satisfied. This term, unlike other terms featured in Article XXIV of GATT, was not clarified through subsequent legislative action during the Uruguay round negotiations either.48 To make matters worse, it has not been interpreted by GATT/WTO panels. Inevitably, hence, we have to turn to practice, that is, the various Article XXIV Working Parties that have dealt with this issue, in order to discern its meaning. But even a cursory, helicopter view of practice leaves the impression that this is an area where trading partners found it impossible to agree on a particular meaning. In what follows, we provide an inventory of some representative views on this score. It has been suggested that the term SAT has a quantitative as well as a qualitative component, in the sense that it covers a certain percentage of trade and, at the same time, no major sector of a national economy can be excluded.49 During the deliberations before the EEC Working Party, the opinion was expressed to the effect that it is “inappropriate to fix a general figure of the percentage of trade which would be subjected to internal barriers.”50 In the same Working Party, various EU member states expressed the view that “a freetrade area should be considered as having been achieved for substantially all trade when the volume of liberalized trade reached 80 per cent of total trade.”51 The Working Party report on EFTA states that “the percentage of trade covered, even if it were established to be 90 per cent, was not considered to be the only factor to be taken into account.”52 Other Working Party reports reflect the view that the exclusion of a whole sector, no matter what percentage of trade is involved, is contrary to the spirit of both Article XXIV GATT and GATT itself.53

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Nothing has changed since these reports saw the light of day,54 and discussions in the context of the CRTA have hardly been illuminating. The GATT Analytical Index (vol. 2, p. 824, footnote 162) provides an exhaustive list of Working Party reports dealing with this issue. The inescapable conclusion is that trading partners did not manage to clarify this term. In a series of papers that the WTO Secretariat prepared for the CRTA,55 this conclusion has been reconfirmed: 50 years of practice notwithstanding, WTO members have failed to come up with a workable definition of SAT. Probably the most appropriate way to sum up practice in this field is offered by the Working Party report on EC–Agreements with Portugal,56 where the EU delegate noted that “there is no exact definition of the expression referring to the term ‘substantially all trade.’” After the conclusion of the Uruguay round, Australia tabled a proposal to clarify the term “substantially all trade.”57 Australia parted company with the oft-mentioned but nebulous idea that the term reflects both a quantitative and a qualitative element. Australia proposed that, to comply with this requirement, WTO members should be requested to liberalize 95 percent at the six-digit (tariff lines) level. In its response to questions from other WTO members,58 Australia accepted that the 95 percent figure was an arbitrary benchmark. In its view, nonetheless, coming up with a number was an appropriate device intended to move negotiations out of deadlock and provide a workable and reasonable rule of thumb. Australia was also mindful of the fact that in cases where trade is concentrated in only a few products, the 95 percent figure could exempt sizeable trade flows. This is why it also proposed an assessment of prospective trade flows under an arrangement at various stages. Australia did not manage to persuade enough WTO members.59 More recently, a General Council decision (implicitly, at least) suggests that the SAT requirement does not require liberalization of all trade involved.60 In its Annex 2, it requires that notifying WTO members provide information regarding the list of ineligible products, as well as the preferential trade volume affected in the last three years (prior to the notification). 6.3.3.3 Duties and Other Restrictive Regulations of Commerce Article XXIV.8 of GATT does not define this term any further, but, in a notorious parenthesis, it exempts from its coverage measures coming under the purview of Articles XI, XII, XIII, XIV, XV, and XX. There should be no doubt that the term “duties” refers to customs duties, and hence, interpretative issues arise only with respect to the term “other restrictive regulations of commerce.” Two issues arise: first, whether the list of measures mentioned in the parenthesis, and thus exempted, is exhaustive or not; and second, whether the exempted measures can help the interpreter define the full ambit of the term “other restrictive regulations of commerce.

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Practice suggests that inferences from the omission of Article XXI of GATT61 from the list reflected in the parenthesis can legitimately be drawn. The issue was discussed in the Working Party on EEC. The view of the EEC member states was that it would be difficult, however, to dispute the right of contracting parties to avail themselves of that provision which related, inter alia, to traffic in arms, fissionable materials, etc., and it must therefore be concluded that the list was not exhaustive.62

Similar voices have been raised in the context of other Working Party reports.63 The argument in favor of acknowledging the indicative character of the list has been reinforced by discussions regarding the exclusion of Article XIX of GATT. During the Uruguay round negotiations, a draft decision was tabled to clarify this issue: When an Article XIX action is taken by a member of a customs union or free-trade area, or by the customs union on behalf of a member, it [need not] [shall not] be applied to other members of the customs union or free-trade area. However, when taking such action it should be demonstrated that the serious injury giving rise to the invocation of Article XIX is caused by imports from nonmembers; any injury deriving from imports from other members of the customs union or free-trade area shall not be taken into account in justifying the Article XIX action.64

Had this proposal been accepted, it would have provided a much-needed clarification on this score and would have put to rest the relationship between Articles XIX and XXIV of GATT. The proposal was, alas, rejected. WTO adjudicating bodies have already faced the question whether a CU65 or an FTA66 could impose safeguards against their preferential partners. They responded in the affirmative, provided that they have respected “parallelism” between imports and injury. They can do so, that is, if they have counted preferential imports (e.g., imports originating in their PTA partners) when assessing injury. They cannot do this, however, if they have not counted preferential imports when assessing injury. Although the WTO adjudicating bodies explicitly declared that they were not influencing the relationship between the two provisions (Articles XIX and XXIV of GATT), de facto they did. Following these events, one can reasonably conclude that WTO practice supports the view that the list in the parenthesis of Article XXIV.8 of GATT is not exhaustive. Including the possibility for intra-PTA safeguards ipso facto suggests that the list featured in the parenthesis is of an indicative nature. Assuming that this is the case, the next question is what else should be included. The items included in the enlarged parenthesis should inform the interpreter about the other items that should be included. Yet, there is remarkable heterogeneity with respect to the subject matter of the provisions included in the parenthesis. Indeed, whereas the first five provisions mentioned deal with trade instruments, Article XX of GATT covers a wide range of domestic instruments. Should we understand the term “other restrictive regulations of trade” as extending to cover domestic instruments that restrict trade as well?

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The 1970 Working Party on EEC–Association with African and Malgasy States dealt with this issue. There, the opinion was raised that trade had not been substantially liberalized, in view of the continued imposition by certain parties to the convention (i.e., the Association of EEC with African and Malgasy States) of fiscal charges on imports from other members. In response, the members of the PTA argued that the provisions of Article XXIV, concerning the concept of a free-trade area, concerned only protective measures. The taxes referred to were of a fiscal character, not protective.67

Where should the line be drawn between “protective” and “fiscal”? Alas, this Working Party did not discuss (or explain) it any further. A series of PTAs now include standards on environmental protection, labor standards, human rights, and other issues.68 The question could arise whether members of a PTA could adopt, for instance, two sets of environmental policies: one applicable to its PTA partners and one applicable to the rest of the world. There are good arguments to support the thesis that the term “other restrictive regulations of commerce” should be confined to trade instruments. The purpose of Article XXIV of GATT is to reduce protection for a subset of the WTO membership; that is, WTO members participating in a PTA. Since quantitative restrictions (QRs) are illegal, and domestic instruments are nonnegotiable and have to abide by the nondiscrimination obligation as we saw in chapter 1, the only permissible (e.g., legal) protection in GATT is protection through tariff protection. Consequently, the only advantage that WTO members can give each other when forming a PTA should be a tariff advantage. For the rest, WTO members must respect the MFN obligation. Case law has repeatedly acknowledged that the very purpose of the discipline on domestic instruments is to safeguard the value of tariff concessions and not to protect.69 Since domestic instruments (policies) are not meant to protect, then it should be impossible for a member of a PTA to be allowed to give one subset of the WTO membership an advantage that it does not extend to the remaining membership.70 6.3.4

External Requirement: No New Protection

Broadly speaking, by virtue of the external requirement, WTO members should not raise their protection vis-à-vis the remaining WTO membership when entering a PTA. Contrary to what is the case with respect to the internal requirement, the conditions for meeting the external requirement are different for FTAs and CUs. 6.3.4.1 External Requirement That FTAs Must Meet With respect to FTAs, Article XXIV.5(b) of GATT reads that “… duties and other regulations of commerce … shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area …”

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Article XXIV.5(b) of GATT does not explicitly state that WTO members participating in an FTA cannot modify their external protection when joining the FTA. FTAs aim at liberalizing trade within their constituents only, without addressing external protection at all. FTA members continue to unilaterally define their foreign commercial policy, even after they have joined an FTA. Note that the obligation enshrined in this legal provision does not refer to duties and other regulations of commerce as a whole, but rather to individual instruments. FTA members retain no flexibility to raise some levels and reduce other levels while keeping the overall balance intact (e.g., pre-FTA level of duties should be equivalent to the post-FTA level). FTA members must ensure that each and every individual duty (and other regulation of commerce) will not be more restrictive following establishment of the FTA. What is the level of comparison, though? Should it be the level of applied duties practiced before establishment of the FTA, or bound duties? The Understanding on the Interpretation of Article XXIV of GATT clarifies that prospective members of an FTA can raise duties from the applied to the bound level (assuming, of course, a discrepancy between the two levels). Since their MFN trade will be conducted at the bound level, members of the FTA can provide each other with an extra margin of preference (that is, the difference between the bound and the applied level). Article XXIV.5(b) of GATT, in contrast to Article XXIV.8 of GATT, refers to “other regulations of commerce,” not to “other restrictive regulations of commerce.” Article XXIV.5(b) of GATT contains neither an indicative nor an exhaustive list of other regulations of commerce. However, it should not be in doubt that, in light of the analysis in chapter 3, “other duties and charges” (ODCs) should be covered by this provision. The question is, of course, what else should be? Rules of origin are of particular interest in the FTA context, and hence a candidate for inclusion in this list. In addition, they have on occasion been discussed in the context of Article XXIV.5 of GATT, without, however, ever resorting to legal challenges before panels regarding their consistency with the multilateral rules.71 During discussions in the WTO, the opinion has been expressed that (unilateral or mutual) recognition under Sanitary and Phyto-sanitary Measures (SPS) or Technical Barriers to Trade (TBT) should also come under Article XXIV.5 of GATT, and there was even a formal proposal that all measures relating to recognition must be notified.72 No decision, however, was made in this respect. The lack of a decision is a blessing since, for the reasons mentioned earlier, protection to PTA partners cannot be afforded through domestic instruments. 6.3.4.2 External Requirement That CUs Must Meet With respect to CUs, Article XXIV.5(a) of GATT reads: “… duties and other regulations of commerce … shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union …” (emphasis added).

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The words in italics mark the difference between the text of Article XXIV.5(b) of GATT and that of Article XXIV.5(a) of GATT: “on the whole,” and “general incidence” invite a comparison of the general (and not item-by-item) situation before and after the formation of the CU. This was the intention of the drafters as well: The phrase “on the whole”… did not mean that an average tariff should be laid down in respect of each individual product, but merely that the whole level of tariffs of a customs union should not be higher than the average overall level of the former constituent territories.73 The Sub-Committee recommended that the words “average level of duties” be replaced by “general incidence of duties” in paragraph 2(a) of the new Article. It was the intention of the SubCommittee that this phrase should not require a mathematical average of customs duties but should permit greater flexibility so that the volume of trade may be taken into account.74

Disagreements appeared often among members of Working Parties as to whether bound or applied rates should be used in the context of Article XXIV.5(a) of GATT.75 This issue has been clarified with the entry into force of the WTO Understanding on the Interpretation of Article XXIV of GATT: The evaluation under paragraph 5(a) of Article XXIV of the general incidence of the duties and other regulations of commerce applicable before and after the formation of a customs union shall in respect of duties and charges be based upon an overall assessment of weighted average tariff rates and of customs duties collected. This assessment shall be based on import statistics for a previous representative period to be supplied by the customs union, on a tariff-line basis and in values and quantities, broken down by WTO country of origin. The Secretariat shall compute the weighted average tariff rates and customs duties collected in accordance with the methodology used in the assessment of tariff offers in the Uruguay Round of Multilateral Trade negotiations. For this purpose, the duties and charges to be taken into consideration shall be the applied rates of duty. It is recognized that for the purpose of the overall assessment of the incidence of other regulations of commerce for which quantification and aggregation are difficult, the examination of individual measures, regulations, products covered and trade flows affected may be required. (emphasis added)76

It follows that applied rates matter when a CU is established. But then, the question arises regarding the ambit of the comparison. The report of the 1983 Working Party on Accession of Greece to the European Communities reflects the view expressed by the EU: “Article XXIV.5 required only a generalized, overall judgment on this point.”77 By the same token, the report of the 1988 Working Party on Accession of Portugal and Spain to the European Communities includes the view of the EU that “Article XXIV.5 only required an examination on the broadest possible basis.”78 This view, however, failed to convince other members of the Working Party. One member could not accept the Communities’ contention that the extension of the tariff of the EC/10 to the EC/12 was compatible with their obligations under Article XXIV. 5(a) regardless of the effect on the tariffs of Spain and Portugal. Article XXIV.5(a) required a comparison with the pre-accession tariffs of the constituent territories and the relative size of those territories was not a relevant factor.79

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It is questionable, however, whether all these discussions concern Article XXIV.5 of GATT at all. The points made here, to the extent that they concern duties,80 are intimately linked with the amount of compensation due when CUs are formed. This requirement is discussed in Article XXIV.6 of GATT: If, in fulfilling the requirements of subparagraph 5(a), a contracting party proposes to increase any rate of duty inconsistently with the provision of Article II, the procedure set forth in Article XXVIII shall apply. In providing for compensatory adjustment, due account shall be taken of the compensation already afforded by the reduction brought about in the corresponding duty of the other constituents of the union.

Recall, first, that Article XXIV.6 of GATT deals only with customs duties, not other regulations of commerce. Assume that Home, Foreign, and Third are WTO members and decide to enter into a CU, and that before the formation of the CU, the tariff protection (to avoid any unnecessary complications, assume equivalence between bound and applied rates) of the automotive sector in the three countries was the following: Home—20 percent Foreign—30 percent Third—40 percent Home, Foreign, and Third bind customs duties on cars at 30 percent at the CU level. Arguably, they have met their obligations under Article XXIV.5(a) of GATT. They have not, however, necessarily met their obligations under Article XXIV.6 of GATT. When Article XXIV.5(a) of GATT is violated, Article XXIV.6 of GATT will be ipso facto violated as well. Compliance with Article XXIV.5(a) of GATT, nevertheless, does not automatically lead to compliance with Article XXIV.6 of GATT. Compliance with Article XXIV.5(a) GATT is, in other words, a necessary but not sufficient condition for compliance with Article XXIV.6 of GATT. Article XXIV.6 of GATT comes into play any time a member of a CU (in our illustration, Home) has to raise its pre-CU duty to the higher CU level. In this case, Article XXVIII of GATT will kick in. This means that WTO members, which qualify for initial negotiating rights (INRs) or principal supplying interest (PSI), will participate in the negotiations with the members of the CU. Negotiations will aim to compensate those WTO members that will have more difficult access to Home’s market following the establishment of the CU. The second sentence of Article XXIV.6 of GATT makes it clear that built-in compensation will be taken into account. An obligation to compensate will exist only if the built-in compensation does not suffice to take care of the injury suffered as a result of Home’s new, higher duties. Let us go through two factually different scenarios to illustrate this point. First scenario: Home is a small country with a low per capita income, whereas Third is a large country with a high per capita income. Neither Home nor Third produces cars.81 The fact that Third lowers its duties from 40 percent to 30 percent will, in all likelihood,

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overcompensate for the fact that Home raised its own duties from 20 percent to 30 percent. This is the notion of built-in compensation. Third will increase its imports of cars to such an extent that exporters will be compensated for their losses resulting from fewer exports to Home. Second scenario: Home is a large country with a high per capita income, whereas Third is a small country with a low per capita income. In this case, the amount of trade lost because Home had to raise its duties will, most likely, not be compensated by the fact that Third lowered its own duties. In such cases, there is nothing like sufficient built-in compensation. Hence, something needs to be done. Article XXIV.6 of GATT calls for compensation to be offered to the WTO members following negotiations in accordance with the procedures established in Article XXVIII of GATT.82 6.3.5 The Nature of Review 6.3.5.1 A Merger Authority, In Principle Recall from the previous discussion that, in principle, WTO members entering into a PTA, are required to notify the WTO of prospective actions. Article XXIV.7 of GATT provides that the organs examining the consistency of notified PTAs have the power “to make such reports and recommendations to contracting parties as they may deem appropriate.” In principle, thus, one cannot exclude the possibility that the CRTA concludes that a notified PTA is WTO-inconsistent. This conclusion is underscored by the explicit wording of Article XXIV.7(b) of GATT, which explains the powers of the CRTA when it reviews an interim agreement leading to the establishment of a CU or an FTA: If … the CONTRACTING PARTIES find that such agreement is not likely to result in the formation of a customs union or of a free-trade area … the CONTRACTING PARTIES shall make recommendations to the parties to the agreement. The parties shall not maintain or put into force, as the case may be, such agreement if they are not prepared to modify it in accordance with these recommendations. (emphasis added)

The combination of the obligation to notify prospective action and the wide powers conferred to GATT leads to the inescapable conclusion that the regime established was meant to function as a merger authority: PTAs would not be consumed absent permission from the institution. This is not at all what happened in practice, though. PTAs have consistently been notified ex post facto; e.g., after they had been signed, entered into force, or both. Belated notifications would not be an issue even if the GATT/ WTO regime enforced retroactive remedies. How to break an omelet, and calculate compensation for affected parties, though? Sure, econometric models can provide a response (albeit, most likely, an approximation). It is highly doubtful that the CRTA is the forum to entertain similar discussions. Unsurprisingly, in display of pragmatism, an innate characteristic of GATT/WTO, as we saw in chapter 1, the CRTA has never recommended similar action (that is, to undo a notified PTA). Never in the history of GATT have

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CONTRACTING PARTIES reached a decision that a notified scheme was inconsistent with the multilateral rules. Nothing changed in the WTO era. GATT/WTO has been notified of over 300 PTAs, roughly three-quarters of which came under the jurisdiction of Article XXIV. Two-thirds of notified PTAs are currently in force, and the majority of PTAs have been concluded post-Uruguay.83 And still, none of the notified PTAs has been judged inconsistent with the multilateral rules. In fact, only on a handful of occasions have the WTO organs managed to unanimously decide at all on the consistency of the notified scheme, and in all of them they gave the notified PTA their approval. Schott (1989) identified four cases where PTAs were judged “broadly consistent” with GATT. Since his study, the CU between the Czech and the Slovak Republics emerges as the only notified PTA that has been judged GATT-consistent. This is a highly idiosyncratic case, though, since the establishment of the CU was the interregnum between the dissolution of a unitary state (Czechoslovakia) and the accession of its two constituent parts to the EU. Hence, one agreement has been judged consistent, four broadly consistent, and none GATT-inconsistent. We are simply in the dark as to the GATT-consistency of all other remaining PTAs. The overwhelming majority of reports by Working Parties and the CRTA simply reflects disagreement among its members. Why has this been the case? There are dozens of reasons that could explain this outcome, but one stands out: because of consensus-voting, the members of notified PTAs always managed to block adoption of a report criticizing their arrangement. Hudec (1972) noted: “The seeming collapse of the MFN rules is probably the single most important cause of the present day pessimism about the GATT substantive rules.” Then, a bit more than 20 years later, he remarked, “the GATT’s somewhat benign attitude toward RAs is merely one part of this larger tolerance toward departures from MFN in general” (Hudec, 1993a). Roessler (1993) agreed: “The record under the current procedures is not encouraging. During the past three decades about 50 working parties have been established to examine RIAs. None of them was able to reach a unanimous conclusion on the GATT-consistency of the agreement examined.” The end conclusion is this. Maybe in the mind of drafters no PTA would have entered into force absent the green light from the highest organ of the GATT, the membership. In practice, dozens of PTAs have entered into force without a green light. Affected parties can always litigate the consistency of a PTA with the WTO rules before a panel. In fact, following the adoption of the Transparency Mechanism that we discuss in what immediately follows, this is the only means available to contest the consistency of a PTA with the multilateral rules. 6.3.5.2 A Switch in Focus: the Transparency Mechanism The advent of the Transparency Mechanism has sounded the death knell for any attempt to perform a consistency review of notified schemes with the multilateral rules. Since its

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advent, no discussion regarding the consistency of particular aspects of the PTA with the multilateral rules will be reflected in the reports issued. The CRTA will circulate two documents: a factual abstract (an executive summary of the discussions held in the CRTA) and a factual presentation (the final report, which will provide factual information on various aspects of the notified PTA).84 Neither of these two documents includes a discussion regarding the legal consistency of the notified scheme with the multilateral rules. The Transparency Mechanism was originally supposed to complement the existing legal arsenal dealing with PTAs (Article XXIV of GATT; Understanding on Article XXIV of GATT; Decision on the Establishment of the CRTA), by clarifying the date of notification of a PTA; imposing the obligation to notify the WTO of any negotiations that might lead to a PTA; and, in general, providing information as to the kind of information that a notification was required to include.85 In practice, however, the Transparency Mechanism has not complemented but rather replaced the previous arsenal. The multilateral review has de facto been narrowed down to a mere exercise in transparency. Thus, the CRTA86 does not function as a merger authority that has to clear a merger before the latter can be lawfully consummated. Those who wish to challenge the consistency of notified schemes with the multilateral rules have only one option: litigation. If they decide to do so, they cannot count on the proceedings of the multilateral review. Section 10 of the Transparency Mechanism sums it up quite accurately: “The WTO Secretariat’s factual representation shall not be used as a basis for dispute settlement procedures or to create new rights and obligations for Members.” Neither panels nor the AB have yet decided on the legal impact of this provision. It seems highly unlikely, though, that they will disregard the explicit will of the WTO membership in this respect. 6.4 6.4.1

Litigating PTAs Litigation in the GATT Era87

The view that the consistency of PTAs with the GATT rules was justiciable was widespread in the GATT years. The EU delegate, for example, stated the following during the 1978 Working Party on the Agreement between the EEC and Egypt: … as regards the possibility of consultations with the contracting parties concerning the incidence of the Agreement on their trade interests … nothing prevented these countries from invoking the relevant provisions of the General Agreement, such as Articles XXII and XXIII.88

During the GATT years (1948–1994), three panels were established to examine claims relating to the consistency of a PTA with the multilateral rules. In one case, the parties reached a mutually agreed solution and no panel was ever established, whereas in the remaining two cases, two reports were issued that remain unadopted.89

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In EC–Citrus, the panel faced an argument to the effect that its review should be limited to individual measures. It agreed, and based on this position, it refused to pronounce on the overall consistency of the PTA with the multilateral rules. The panel did not see its role as a surrogate to Article XXIV of Working Parties (that is, the predecessor of the CRTA): The Panel noted that at the time of the examination of the agreements entered into by the European Community with certain Mediterranean countries, there was no consensus among contracting parties as to the conformity of the agreement with Article XXIV.5. … The agreements had not been disapproved, nor had they been approved. The Panel found therefore that the question of conformity of the agreements with the requirements of Article XXIV and their legal status remained open.90

The Panel on EEC–Bananas II decided on the inconsistency of the ACP91 Convention (an agreement between the EU and ACP countries, whereby the former would grant the latter unilateral tariff preferences) based on Article XXIV of GATT. It did not make a comprehensive evaluation of the agreement between the two partners. It limited itself to a negative finding: the ACP Convention was judged GATT-inconsistent on very narrow grounds. More precisely, the panel held that one-way preferential arrangements are per se inconsistent with Article XXIV of GATT. Obligations to liberalize must be assumed by all participants, and unless all parties have agreed to grant each other preferential treatment, the conditions of consistency with the multilateral rules will not have been met (§ 159): This lack of any obligation of the sixty-nine ACP countries to dismantle their trade barriers, and the acceptance of an obligation to remove trade barriers only on imports into the customs territory of the EEC, made the trade arrangements set out in the Convention substantially different from those of a free trade area, as defined in Article XXIV.8(b). (emphasis in original)

Unsurprisingly, thus, this panel went on to conclude (§ 164) that the Lomé Convention (the agreement between the EU and a series of African, Caribbean, and Pacific states) did not meet the requirements of Article XXIV of GATT. Although this report remains unadopted, this finding has been reproduced in subsequent panel practice.92 This panel did not go ahead and interpret contentious terms like “substantially all trade” or “other restrictive regulations of commerce.” In line, thus, with the Panel on EC–Citrus (which had explicitly stated that it was not the role of panels to provide an overall assessment of all institutional requirements of consistency of PTAs with GATT), the Panel on EC–Bananas II opted for a review of the issues before it, without embarking on a comprehensive assessment regarding the consistency of the Lomé Convention. It is, of course, speculative to draw meaningful conclusions from just two observations. On the other hand, one cannot disregard the fact that the two times that GATT panels were asked to examine an issue regarding the consistency of an FTA with the multilateral rules, they opted for a narrow review of specific instruments.

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6.4.2.1 Institutional Balance: Things Have Changed? During the WTO era, practice in this area continues to be scarce. Early on, the issue of whether panels could review the consistency of notified PTAs with the multilateral rules, and if so, what should be the breadth and width of the review, arose once again. The new institutional infrastructure that the WTO now was endowed with provided the impetus needed for the challenge to be relaunched. India–Quantitative Restrictions represents the first case where the question arose whether, because of the new institutional infrastructure, some decisions concerning the legitimacy of invocation of the balance of payments (BoP) exception were better left to legislative rather than adjudicating bodies. India had argued that the question of whether a restriction could be justified on BoP grounds was inherently political. Borrowing from the “political question doctrine,” familiar to some legal orders, India argued that a comprehensive review of the consistency of notified measures with the multilateral rules should be entrusted to the WTO Committee on Balance of Payments rather than to panels. The AB rejected India’s argument, essentially on textual grounds. It held that the fact that the WTO Committee on Balance of Payments was entrusted with the power to review the notifications coming under its mandate did not result in the elimination of panels’ authority to entertain disputes regarding the consistency of measures allegedly adopted in order to address problems associated with BoP.93 Notwithstanding that the dispute concerned measures adopted to address BoP, there should be no doubt that the outcome would mutatis mutandis apply in the PTA context as well. After all, the question is quintessentially the same—e.g., to what extent the institutional balance established with the advent of the WTO has removed from panels the authority to decide on issues coming under the aegis of WTO committees.94 The wording of the Understanding on Article XXIV of GATT does point in this direction (§ 12): The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding may be invoked with respect to any matters arising from the application of those provisions of Article XXIV relating to customs unions, free-trade areas, or interim agreements leading to the formation of a customs union or a free-trade area.95

If there were any doubts that a similar approach should also apply when the consistency of a PTA is in dispute, they were put to rest by the AB in its report on Turkey–Textiles. There, it introduced the same reasoning into the realm of a challenge regarding the consistency of a PTA with the multilateral rules. In short, the AB held that assuming a violation of the MFN clause had been established and that the defendant had claimed that its measures could be justified through recourse to Article XXIV of GATT, panels were fully competent to examine whether the defendant could prove that its PTA was consistent with the multilateral rules.

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The AB did not see how the submission of a PTA for review by a Working Party could block its review of the issue. We will discuss the relevant paragraphs later in this chapter. Hence, in theory, the consistency of a PTA could be simultaneously before a panel and the CRTA, and the two could reach divergent conclusions on the same issue unless some sort of coordination mechanism has been introduced. This has become a nonissue for all PTAs notified after the advent of the Transparent Mechanism since, as we saw, the CRTA will no longer discuss the consistency of PTAs. It is, nonetheless, an issue for past PTAs for which reports have been issued. The preliminary question that we need to ask is, of course, whether a challenge can be brought today against PTAs examined before 2006? The Panel on EEC–Imports from Hong Kong stated: “It would be erroneous to interpret the fact that a measure had not been subject to Article XXIII over a number of years, as tantamount to its tacit acceptance by contracting parties.” In the absence of statutory prescription, and in light of this ruling, it is worth examining this issue a bit further since it is very unlikely that panels will reject similar complaints holding that nonparticipants have acquiesced to the legality of the PTA by not challenging its consistency with the WTO the first few years after its advent. It is clear in case law that there is no obligation to suspend panel proceedings while an issue is being discussed before the CRTA (lis pendens).96 To this effect, the Panel on US–Line Pipe did not stop its review only because the CRTA had not issued its report at the time that the dispute was submitted to it (§ 7.144): Concerning Article XXVIII:8(b), we do not consider the fact that the CRTA has not yet issued a final decision that NAFTA is in compliance with Article XXIV:8 is sufficient to rebut the prima facie case established by the United States. Korea’s argument is based on the premise that a regional trade arrangement is presumed inconsistent with Article XXIV until the CRTA makes a determination to the contrary. We see no basis for such a premise in the relevant provisions of the Agreements Establishing the WTO.

However, had the CRTA concluded between 1995 and 2006,97 when it still retained the authority to do so, that a notified PTA was GATT-inconsistent, there is good reason to believe that panels would have followed the opinion reflected therein. The Panel on India– Quantitative Restrictions, which dealt with a similar issue,98 held in § 5.94: “we see no reason to assume that the panel would not appropriately take those conclusions into account. If the nature of the conclusions were binding … a panel should respect them.” There is, however, no legal compulsion for the panel to follow a CRTA decision. On the other hand, should the CRTA be bound by a panel’s or AB’s decision on the consistency of a PTA with the relevant WTO rules? The formal answer has to be, once again, no. Panel reports bind only their addressees (e.g., the parties to a dispute). It is, of course, highly unlikely that the CRTA (e.g., the WTO membership) will overlook panels’ findings in this respect, even if it is not bound to do so.

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6.4.2.2 The Ambit of Judicial Review The Panel on Turkey–Textiles records the most comprehensive discussion yet concerning the ambit of judicial review of a PTA by panels. India had argued before this panel that it had suffered damage as a result of Turkey’s decision to erect new barriers to its textiles exports, following the signature and the entry into force of the CU between the EU and Turkey. India argued that its MFN rights had been impaired as a result. Turkey did not deny that this had indeed been the case (that is, that it had erected new barriers), but invoked Article XXIV of GATT to justify its deviation from MFN. The panel first addressed the question whether it was competent to discuss the overall consistency of a PTA with GATT. Responding to an argument by the complainant, it held that WTO adjudicating bodies are competent to examine PTA-related issues but should stop short of providing an overall assessment regarding the consistency of a PTA with the WTO. This panel followed the findings in the panel report on EC–Citrus (§§ 9.52–53): As to the second question of how far-reaching a panel’s examination should be of the regional trade agreement underlying the challenged measure, we note that the Committee on Regional Trade Agreements (CRTA) has been established, inter alia, to assess the GATT/WTO compatibility of regional trade agreements entered into by Members, a very complex undertaking which involves consideration by the CRTA, from the economic, legal and political perspectives of different Members, of the numerous facets of a regional trade agreement in relation to the provisions of the WTO. It appears to us that the issue regarding the GATT/WTO compatibility of a customs union, as such, is generally a matter for the CRTA since, as noted above, it involves a broad multilateral assessment of any such custom union, i.e. a matter which concerns the WTO membership as a whole. … As to whether panels also have the jurisdiction to assess the overall WTO compatibility of a customs union, we recall that the Appellate Body stated that the terms of reference of panels must refer explicitly to the “measures” to be examined by panels. We consider that regional trade agreements may contain numerous measures, all of which could potentially be examined by panels, before, during or after the CRTA examination, if the requirements laid down in the DSU are met. However, it is arguable that a customs union (or a free-trade area) as a whole would logically not be a “measure” as such, subject to challenge under the DSU. (italics in the original)

On appeal, the AB distanced itself from the panel’s findings. In its view, it was incumbent upon the party invoking Article XXIV of GATT to explain why its PTA was GATTconsistent. Consequently, panels should always have the power to discuss the overall consistency of PTAs with the multilateral rules (§§ 58–59): First, the party claiming the benefit of this defense must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of sub-paragraph 8(a) and 5(a) of Article XXIV. And second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue. … We would expect a panel, when examining such a measure, to require a party to establish that both of these conditions have been fulfilled. It may not always be possible to determine whether the

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second of the two conditions has been fulfilled without initially determining whether the first condition has been fulfilled. (emphasis added)

As can be seen from the first part of the quoted passage, the requirements imposed on the party invoking Article XXIV of GATT to justify otherwise GATT-inconsistent measures are quite onerous. It must not only establish that its PTA is GATT-consistent (hence the ambit of judicial review is quite extensive), but also that the challenged measure is necessary for the GATT-consistent PTA to be established in the first place. It must show that the formation of the PTA would have been prevented absent the introduction of the challenged measure. It is clear that absent duties lower than MFN across its constituent parts, for example, no PTA can exist. The same might be argued with respect to ODCs. ODCs are a “restrictive regulation of commerce,” in the sense that it is an instrument designed to protect domestic production from foreign competition. We are in the dark, nonetheless, as to what else is necessary for a PTA to be formed in light of the lack of interpretation of terms such as “substantially all trade,” “other restrictive regulations of commerce,” and “other regulations of commerce.” This lack of precision notwithstanding, the very few panels that have been requested to pronounce on this score (i.e., Argentina–Poultry Antidumping Duties and Mexico–Taxes on Soft Drinks) have confirmed that they have the power to decide on the overall consistency of notified PTAs with the multilateral rules. One panel was satisfied that a GATT-consistent PTA had been formed even though there was little evidence. In US–Line Pipe, the panel faced an argument by the US claiming that, being a member of NAFTA, it was entitled to treat imports of NAFTA origin differently from imports of non-NAFTA origin. At stake were the in-quota duties imposed through a tariff quota. The panel repeated that the US had the burden of proof to show the consistency of NAFTA with Article XXIV of GATT (§ 7.142). It then addressed the issue of the quantum of proof (burden of persuasion) that the party carrying the burden of proof had to provide in order to establish a prima-facie case. It found that the US had indeed made a prima facie case (§ 7.144): In our view, the information provided by the United States in these proceedings, the information submitted by the NAFTA parties to the Committee on Regional Trade Agreements (“CRTA”) (which the United States has incorporated into its submissions to the Panel by reference), and the absence of effective refutation by Korea, establishes a prima facie case that NAFTA is in conformity with Article XXIV:5(b) and (c), and with Article XXIV:8(b).

The information that the US had provided was a statement to the effect that duties on 97 percent of the NAFTA parties’ tariff lines would have been eliminated within 10 years from the inception of NAFTA, whereas, with respect to other regulations of commerce, a reference to the principles of national treatment, transparency, and a variety of other market access rules had been made (§ 7.142). This is little evidence by any reasonable standard.

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The saving grace of the panel’s finding was the absence of refutation by the complaining party. 6.4.3 Why So Little Litigation? It emerges from our discussion here that only a handful of panels have so far been established to discuss the consistency of PTAs with the multilateral rules, and this is certainly not much when one takes into account the sheer number of PTAs and the absence of meaningful review by the CRTA over the years. Moreover, serious procedural hurdles have been removed with the advent of the WTO and the recent case law. Panels are now established at the sole request of the complainant, and the original burden of proof is easy to meet (the complainant would be required to demonstrate deviation from MFN, and upon such a demonstration, the burden of proof would shift to the defendant). It is the defendant that has to demonstrate the overall consistency of the PTA with the GATT rules. This sounds like conferring a very substantive advantage to the complaining party. So why have WTO members stayed out of this issue?99 If PTAs are the “termites” of the world trading system, why have not WTO members done more against them, employing the advantage conferred by case law? In the following sections, we try to come up with some plausible explanations of the members’ passivity on this score, without pretending that what follows is an exhaustive list. 6.4.3.1 The Original Sin Syria and Lebanon, both negotiators of the original GATT and members of the SyroLebanese Union, did not ultimately join GATT, and Belgium, Luxembourg, and the Netherlands joined the European integration process. It is the consistency of the European integration process with the GATT rules that became the first true test of reliability for the GATT rules in this realm. Alas, GATT failed the test, and although it would be far-fetched to argue that subsequent failures are due to the original sin, there is definitely something to the argument “do unto others what you would have them do unto you.” Historically, the first step in the quest for European integration was the European Coal and Steel Community (ECSC), which was a blatant violation of GATT rules since it integrated markets with respect to only two goods. No one, however, wanted to question the wider European integration process by bringing into question the GATT-consistency of ECSC. The fear was that challenges might unravel a well-planned process that, in the eyes of many, was the quintessential ingredient in establishing world peace after the turbulent first fifty years of the twentieth century. By integrating coal and steel, the ECSC member states did not pick two sectors where trade diversion would be significant (and thus would be compensating their preferential partners). They picked the two main forms of energy, and by integrating them, they removed the prospect of a new war on the European continent. That much was quite obvious, and readily understood by the other GATT contracting

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parties. The probable disproportional consequences of even innocent legal challenges against this process were a cost that no one was prepared to pay. Contracting parties, having committed the original sin (by demonstrating a benign attitude toward the European integration), had established a benchmark for not interfering lightheartedly with similar schemes, which could be the prelude to political integration. GATT contracting parties knew only too well that not every FTA was conceived as a means to political integration. The EU was indeed an outlier, but how easy would it be to distinguish between deep and shallow integration when reviewing the first steps of a notified integration process? Finger (1993) should be credited with the argument that the original sin committed when reviewing the EU integration process contributed to the subsequent attitude of the WTO membership toward PTAs.100 6.4.3.2 Other Plausible Explanations A WTO member may rationally choose not to challenge a PTA since: • There is a collective action problem. • Strategic reasons might argue against a challenge. • The agency design for WTO adjudicating bodies probably does not inspire challenges of this sort. • There is no reason to increase the size of the problem. • The size of the problem has decreased. These points are discussed next. 6.4.3.2.1 Collective Action A potential complainant will measure the cost of litigation against the probability of prevailing and the expected profits if it does prevail. The complainant will not benefit from the full cost of its investment since, through its complaint, it will be subsidizing all other WTO members that will profit (one way or the other) without having invested at all in the process. The cost of WTO litigation should not be underestimated. Bown and Hoekman (2005) provided some numbers in this regard and pointed to the fact that the numbers they cited in and of themselves might dissuade (some) potential complainants from launching complaints. Nordström and Shaffer (2007) concluded along the same lines, and this empirical study cautioned against those who tend to underestimate the cost of WTO litigation. This cost is, of course, not only monetary. Litigation could be perceived as unfriendly behavior. It is not, therefore, irrational to think in terms of “If I don’t do it, somebody else will.” 6.4.3.2.2 Strategic Reasons A WTO member might rationally decide to abstain from challenging the consistency of a PTA with the WTO rules since it might not only provoke negative reactions from those

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participating in the PTA that it attacks, but it might also close off its own future options by doing so. A legal challenge might provoke another legal challenge against the original complainant. Martin and Vergote (2008) find, for example, that antidumping (AD) is increasingly being used in strategic, retaliatory fashion. In the Martin-Vergote setting, retaliation actually occurs in equilibrium as part of a cooperative relationship among privately informed governments.101 On the other hand, today’s outsiders might be tomorrow’s incumbents. Challenging the consistency of a PTA might come at a cost since, in the event that today’s successful complainant might decide to go preferential tomorrow, it might face the music that it helped compose. Specifying the requirements of Article XXIV of GATT might make the test more difficult to meet. Any interpretation, in other words, could become the benchmark in any fresh discussion of the consistency of a member’s PTA with the multilateral rules. 6.4.3.2.3 Agency Design A panel is usually composed of trade delegates, who are career diplomats serving in Geneva.102 When facing a question relating to the consistency of a PTA with the WTO, they know that they are not prejudging just one transaction, since, through their decision, they are setting the legal benchmark for reviewing the consistency of other PTAs as well. They create, at the very least, expectations in the WTO membership as to the standard of evaluation of future PTAs. They also know that (1) no WTO adjudicating body before them ever moved to pronounce on the inconsistency of a PTA with the WTO, except in very obvious cases (such as the EC/ACP arrangement mentioned previously); (2) that they have little legislative guidance to draw on since the terms of Article XXIV of GATT, with the few notable exceptions mentioned earlier, have not been further elaborated on or interpreted, either through legislative activity or through subsequent (CRTA) practice; and (3) that there is probably a relationship between the first two points, in the sense that wisely previous panels chose to abstain from far-reaching pronouncements in the absence of clear legislative documentation. They further know that their own nations are implicated in PTA and might be implicated in many more. And they are finally aware that PTAs have long been tolerated in the WTO. As Schott (1989, p. 25) observes: Besides the ambiguity of its provisions, political considerations have often outweighed other factors in decisions to accede to the terms of the agreements. In addition, affected third countries have been reticent to criticize preferential deals because the majority of GATT members participate in such agreements.

To a large extent, WTO members have learned to live in a world where PTAs will not be challenged and, by now, they might rationally be expecting to receive a “no challenge” status when they enter into PTAs. Against this background, panels might decide to duck

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the issue. By backward induction, anticipating similar attitude, potential complainants might decide to duck the issue as well. 6.4.3.2.4 Why Increase the Size of the Problem? The less PTA partners integrate their markets, the less trade diversion will result. For example, the less members of a PTA liberalize their trade in cars, the better export opportunities that outsiders will have to export cars to the PTA. This should be the norm except for cases where outsiders are interested in exporting to the PTA complementary products. The more members of a PTA liberalize trade in cars, the likelier it would be for outsiders to sell wheels to the PTA market. Challenging a PTA, thus, is not necessarily the best way to receive compensation for trade diversion. This is because it might exacerbate the original trade diversion, if, for example, PTA partners decide to go the full nine yards and fully integrate their markets as a response. Doing nothing might work just as well. 6.4.3.2.5 The Size of the Problem Has Decreased The gradual decrease of the level of duties has reduced the size of the problem (trade diversion). PTAs, of course, have moved toward arrangements on domestic policy (instruments). As already briefly argued, though, and as will be seen in more detail in chapter 7, members of PTAs cannot discriminate against outsiders through their domestic policies. It is thus not irrational that WTO members have chosen to abstain from challenging PTAs en masse so far. No multilateral review and no challenges before panels inevitably have led to a tolerance policy toward PTAs. Is this a serious problem? We turn to this question in what immediately follows. 6.4.4

Is De Facto Tolerance of PTAs an Issue?

The story so far is that there is a proliferation of PTAs, the consistency of which with the multilateral rules remains unmonitored.103 For many years, the argument has been that one does not need to look very much into this picture, either because many PTAs were inconsequential (e.g., they did not involve important internal liberalization, and hence the corresponding amount of trade diversion was tolerable, or because they were the natural extension of existing schemes (the ever-expanding EU), or for other reasons. Nowadays, with the emergence of megaregionals, the tone of this discussion has changed. The TransAtlantic Pacific Partnership (TTIP) involves trade liberalization between two dominant players, the EU and the US, and includes an ambitious agenda as well. The Trans-Pacific Partnership (TPP) is quite similar in levels of ambition and participation: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam have been locked in negotiations aiming to liberalize trade in and around the Pacific region. Finally, as of 2012, the Regional Comprehensive Economic Partnership (RCEP) has been launched with similar objectives between ASEAN

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[i.e., Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam], and the six countries that had already signed individual FTAs with ASEAN (namely, Australia, China, India, Japan, Korea, and New Zealand). It is definitely a brave new world about to be shaped, as the policy impact of the WTO is being threatened by the emergence of these deals. To decide whether PTAs have been a threat to multilateralism—to decide, that is, whether they are stumbling or building blocks (as Bhagwati and Panagariya, 1999, put it)—one needs to undertake a more serious analysis and examine strategic interactions across PTA partners and outsiders, the incentive for outsiders to go preferential themselves, the interaction between the preferential and the multilateral agenda, and other issues. This is a very difficult exercise which often suffers from the difficulty in establishing the counterfactual. The starting point of the discussion has to be the original GATT. One cannot escape the conclusion that GATT framers, who could not live with GATT à la carte, could live with GATT-consistent PTAs that resulted in trade diversion. Indeed, especially in the 1950s and 1960s when MFN rates were high (and thus the potential margin of preference large), PTAs that would take the intra-PTA tariff rates to 0 percent could create substantial trade diversion if the PTA partners were relatively inefficient (i.e., uncompetitive). GATT would applaud, while Viner’s worst fears would be confirmed. There are reasons to believe, though, from a pure trade perspective, that PTAs are less of a threat than they used to be.104 Duties are at an all-time low.105 The ongoing liberalization of tariffs at the MFN level would argue in favor of the thesis that the problem is not of the magnitude that it used to be. Tariffs are not the mainstream vehicle for segmenting markets anymore. The changing subject matter of PTAs, a point to which we return later in this chapter, is the best evidence that this is a sound observation. Could the level of tariffs have been even lower, then? Scholarship, as mentioned previously, points to the missing incentives to agree on MFN tariff cuts following establishment of a PTA; Bhagwati (2002), Krishna (1998), and Limão (2006a) all contributed to making the point that, besides trade diversion generated through the establishment of PTAs, members of PTAs behave as enemies of nondiscriminatory trade liberalization since they are unwilling to cut tariffs on an MFN basis for fear of eroding the margin of preference that they have granted to their PTA partners. They behave like stumbling blocks; that is, they would cut tariffs less in areas that had preferential tariffs. Recent empirical studies provide only mixed evidence regarding preference erosion. On the one hand, studies like Karacaovali and Limão (2008), looking at the EU, and Limão (2006a), looking at the US, have provided empirical evidence that PTAs have acted as stumbling blocks. On the other hand, other studies have found the opposite. Estevadeordal, Freund, and Omelas (2008) and Freund (2011) examined the Latin experience with PTAs and find that Latin nations cut their MFN rates most in products where they had preferences in place. Baldwin and Seghezza (2010) used tariff data for twenty-three large trading

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nations and found that MFN cuts and preferences were complements, not substitutes: margins of preferences in the real world tend to be zero or close to zero where nations have high MFN tariffs. Intuitively, one would associate the stumbling-block thesis with large preferences in cases of high MFN tariffs, but the authors showed that this is not the case in practice. The authors thus discarded the stumbling blocks without supporting the building-block thesis. Acharya et al. (2011), in a similar vein, found that the impact of plurilateral PTAs on extra-PTA imports and exports is large and positive. Thus, recent empirical evidence lends little or no support to the conclusion that PTAs are stumbling blocks per se. Of course, trade diversion can result from instruments other than tariffs. Trade diversion can be due to other factors as well (such as regional technical standards), as the work of Chen and Mattoo (2008) shows. It can result from, say, convergent environmental or public health policies across PTA partners. Trade diversion can also result from, say, increased use of AD proceedings against non-PTA partners, as the work of Prusa and Teh (2011) shows.106 But domestic standards have to be applied on an MFN basis, whereas the only MFN obligation with respect to AD, as we shall see in the corresponding chapter, is to collect duties on an MFN basis. Perhaps the most threatening features of PTAs are that they run away with the trade agenda. PTAs show remarkable adaptation to the needs of the business community, and their flexibility emerges as their single most attractive feature. The WTO should reflect on why its own agenda does not look like that of the PTAs in order to be in a position to reclaim its predominance in trade matters. Horn, Mavroidis and Sapir (2010) examine the subject matter of PTAs concluded by two hubs (EU, US) with various spokes between 1992 and 2008 and divide it into WTO + (“WTO plus,” say tariff cuts beyond the MFN level), and WTOx (“WTO extra,” issues that do not come under the mandate of the WTO, say positive integration in fields such as environmental policy, fight against corruption, etc.). The WTOx part of the PTAs is quite substantial. Horn, Mavroidis and Sapir (2010) thus suggest that the rationale for going preferential could also lie in WTOx-type obligations.107 It is, thus, probable that PTAs are also the forum for those who want to integrate more, faster. Where will this integration occur? There is not much left to do on the tariff front. Unsurprisingly, Horn, Mavroidis and Sapir (2010) find that the content of the PTAs examined is overwhelmingly “regulatory.” The WTO instrument for integration of divergent regulations is nondiscrimination. As we saw briefly in chapter 1, nondiscrimination is a shallow integration instrument, that functions as an insurance policy for the trading nations with high levels of protection. They can rest assured that, the absence of tariffs notwithstanding, they will not be exposed to (environmental, public health, etc.) hazards since only goods that comply with their own regulation will be granted access to their market.108 Enter harmonization and regulatory equivalence.109 Those who want to go faster, deeper, will have to either harmonize their regulations or accept each other’s interventions as

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equivalent. Although they will have to extend whatever they agree on this score to all WTO membership, it is hard to see how they can negotiate it with 160 partners. Indeed, this type of negotiations is best suited for like-minded countries, for societies at comparable levels of development, which share similar anxieties and preferences. PTAs (like plurilaterals) provide a forum for similar negotiations. Those requesting MFN extensions of, say, regulatory equivalence agreed between Home and Foreign will have to show that they match their regulatory standards, which could be on occasion a tall order indeed. PTAs emerge also as forum for negotiations across like-minded countries. In a world where markets are segmented through regulatory barriers only, and assuming regulation in part at least aims to advance social preferences, it is easier to agree on trade liberalization across like-minded countries. The WTO is a sum of heterogeneous countries, and PTAs, like plurilateral agreements, allow for agreements among a subset of the membership. Unless institutional arrangements are taken in favor of plurilateral agreements, PTAs will emerge as a quasi inevitability for those aiming to go faster, deeper. Hoekman and Mavroidis (2015) have advanced arguments why recourse to plurilaterals should be privileged. So far similar arguments have fallen on deaf ears. A related issue is whether the proliferation of PTAs will lead to a reduction of the volume of disputes submitted to the WTO. Dispute settlement is a quintessential element of the WTO. Mavroidis and Sapir (2015) discuss the behavior of the EU and the US, two hubs that have signed numerous PTAs with various spokes, and are about to sign a PTA between themselves (TTIP)> They find that, despite appearances to the contrary, the EU and the US has also been involved in very few WTO disputes with its PTA partners. They also find though, that there is no forum diversion, that is, disputes have not migrated to PTA-forums. Huerta (2009), (2010) examines the NAFTA experience and concludes the same. Koremenos (2007) and Chase et al. (2013) provide the explanation for this: most PTAs do not include their own dispute settlement systems. So, while the volume of disputes between PTA partners falls, an observation supported by research by Li and Qiu (2014) for over 130 PTAs, there is no forum diversion. Table 6.1 PTAs notified under Article XXIV of GATT RTA Name

Coverage

Type

Date of Notification

Notification

Armenia–Kazakhstan

Goods

FTA

17 June 2004

Armenia–Moldova

Goods

FTA

17 June 2004

Armenia–Russian Federation Armenia– Turkmenistan

Goods

FTA

17 June 2004

Goods

FTA

17 June 2004

GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV

Date of Entry into Force 25 December 2001 21 December 1995 25 March 1993 7 July 1996

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Table 6.1 (continued) RTA Name

Coverage

Type

Date of Notification

Notification

Armenia–Ukraine

Goods

FTA

17 June 2004

ASEAN–Australia– New Zealand

Goods and Services

FTA and EIA

8 April 2010

ASEAN–China

Goods and Services

PSA and EIA

ASEAN–Japan

Goods

FTA

21 September 2005(G); 26 June 2008(S) 23 November 2009

GATT Article XXIV GATT Article XXIV and GATS V Enabling Clause and GATS Article V GATT Article XXIV

ASEAN–Korea, Republic of

Goods and Services

FTA and EIA

Australia–Chile

Goods and Services

FTA and EIA

3 March 2009

Australia–New Zealand (ANZCERTA)

Goods and Service

FTA and EIA

14 April 1983(G); 22 November 1995 (S)

Australia–Papua New Guinea (PATCRA) Brunei Darussalam– Japan

Goods

FTA

20 December 1976

GATT Article XXIV

Goods and Services

FTA and EIA

31 July 2008

Canada–Chile

Goods and Services

FTA and EIA

30 July 1997

Canada–Costa Rica

Goods

FTA

13 January 2003

Canada–Israel

Goods

FTA

15 January 1997

Canada–Peru

Goods and Services

FTA and EIA

31 July 2009

Caribbean Community and Common Market (CARICOM) Central American Common Market (CACM) Central European Free Trade Agreement (CEFTA) 2006 Chile–China

Goods and Services

CU and EIA

14 October 1974(G) 19 February 2003(S)

GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV and GATS V

Goods

CU

24 February 1961

GATT Article XXIV

Goods

FTA

26 July 2007

GATT Article XXIV

Goods and Services

FTA and EIA

20 June 2007(G) 18 November 2010(S)

GATT Article XXIV and GATS V

GATT Article XXIV and GATS V GATT Article XXIV and GATS V

Date of Entry into Force 18 December 1996 1 January 2010 1 January 2005(G); 1 July 2007(S) 1 December 2008 1 January 2010(G); 1 May 2009(S) 6 March 2009 1 January 1983(G); 1 January 1989(S) 1 February 1977 31 July 2008 5 July 1997 1 November 2002 1 January 1997 1 August 2009 1 August 1973 (G) July 1, 1997 (S) 1 August 1973 (G) 1 July 1997(S) 4 June 1961

1 October 2006(G) 1 August 2010(S)

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Table 6.1 (continued) Date of Entry into Force

RTA Name

Coverage

Type

Date of Notification

Notification

Chile–Colombia

Goods and Services

FTA and EIA

14 August 2009

8 May 2009

Chile–Costa Rica (Chile–Central America) Chile–El Salvador (Chile–Central America) Chile–Japan

Goods and Services

FTA and EIA

16 April 2002

Goods and Services

FTA and EIA

29 January 2004(G) 5 February 2004(S)

Goods and Services

FTA and EIA

24 August 2007

Chile–Mexico

Goods and Services

FTA and EIA

27 February 2001

China–Hong Kong, China

Goods and Services

FTA and EIA

27 December 2003

China–Macao, China

Goods and Services

FTA and EIA

27 December 2003

China–New Zealand

Goods and Services

FTA and EIA

21 April 2009

China–Singapore

Goods and Services

FTA and EIA

2 March 2009

Colombia–Mexico

Goods and Services

FTA and EIA

13 September 2010

Common Economic Zone (CEZ) Commonwealth of Independent States (CIS) Costa Rica–Mexico

Goods

FTA

18 August 2008

Goods

FTA

29 June 1999

GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV

Goods and Services

FTA and EIA

17 July 2006

1 January 1995

Dominican Republic–Central America–United States Free Trade Agreement (CAFTA-DR) East African Community (EAC) EC–Albania

Goods and Services

FTA and EIA

17 March 2006

GATT Article XXIV and GATS V GATT Article XXIV and GATS V

Goods

CU

9 October 2000

7 July 2000

Goods and Services

FTA and EIA

7 March 2007(G) 7 October 2009(S)

EC–Algeria

Goods

FTA

24 July 2006

Enabling Clause GATT Article XXIV and GATS V GATT Article XXIV

15 February 2002 1 June 2002 3 September 2007 1 August 1999 1 January 2004 1 January 2004 1 October 2008 1 January 2009 1 January 1995 20 May 2004 30 December 1994

1 March 2006

1 December 2006 (G) 1 April 2009(S) 1 September 2005

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Table 6.1 (continued) RTA Name

Coverage

Type

Date of Notification

Notification

EC–Andorra

Goods

CU

23 February 1998

EC–Bosnia and Herzegovina EC–Cameroon

Goods

FTA

11 July 2008

Goods

FTA

24 September 2009

EC–CARIFORUM States EPA

Goods and Services

FTA and EIA

16 October 2008

EC–Chile

Goods and Services

FTA and EIA

3 February 2004(G) 28 October 2005 (S)

GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV and GATS V

EC–Côte d’Ivoire

Goods

FTA

11 December 2008

EC–Croatia

Goods and Services

FTA and EIA

17 December 2002(G) 12 October 2009(S)

EC–Egypt

Goods

FTA

3 September 2004

EC–Faroe Islands

Goods

FTA

17 February 1997

EC–Former Yugoslav Republic of Macedonia EC–Iceland

Goods and Services

FTA and EIA

23 October 2001(G) 2 October 2009(S)

Goods

FTA

24 November 1972

EC–Israel

Goods

FTA

20 September 2000

EC–Jordan

Goods

FTA

17 December 2002

EC–Lebanon

Goods

FTA

26 May 2003

EC–Mexico

Goods and Services

FTA and EIA

25 July 2000(G) 21 June 2002(S)

EC–Montenegro

Goods and Services

FTA and EIA

EC–Morocco

Goods

FTA

16 January 2007; 22 February 2008(G) 18 June 2010(S) 13 October 2000

EC–Norway

Goods Goods

FTA FTA

13 July 1973 14 December 1970

Goods

FTA

29 May 1997

EC–Overseas Countries and Territories EC–Palestinian Authority

GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV of GATT Article XXIV

GATT Article XXIV

Date of Entry into Force 1 July 1991 1 July 2008 1 October 2009 1 November 2008 1 February 2003(G) 1 March 2005 (S) 1 January 2009 1 March 2002(G) 1 February 2005 (S) 1 June 2004 1 January 1997 1 June 2001(G) 1 April 2004(S) 1 April 1973 1 June 2000 1 May 2002 1 March 2003 1 July 2000(G) 1 October 2000(S) 1 January 2008(G) 1 May 2010(S) 1 March 2000 1 July 1973 1 January 1971

1 July 1997

Preferential Trade Agreements

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Table 6.1 (continued) Date of Entry into Force

RTA Name

Coverage

Type

Date of Notification

Notification

EC–South Africa

Goods

FTA

2 November 2000

1 January 2000

EC–Switzerland– Liechtenstein EC–Syria

Goods

FTA

27 October 1972

Goods

FTA

15 July 1977

EC–Tunisia

Goods

FTA

15 January 1999

EC–Turkey

Goods

CU

22 December 1995

EC (10) Enlargement

Goods

CU

24 October 1979

EC (12) Enlargement

Goods

CU

11 December 1985

EC (15) Enlargement

Goods and Services

CU and EIA

22 December 1994(S)

EC (25) Enlargement

Goods and Services

CU and EIA

26 April 2004

EC (27) Enlargement

Goods and Services

CU and EIA

27 September 2006(G) 6 June 2007(S)

EC (9) Enlargement

Goods

CU

7 March 1972

EC Treaty EFTA– Albania

Goods and Services Goods

CU and EIA FTA

24 April 1957(G) 10 November 1995 (S) 7 February 2011

EFTA–Canada

Goods

FTA

4 August 2009

EFTA–Chile

Goods and Services

FTA and EIA

3 December 2004

EFTA–Croatia

Goods

FTA

14 January 2002

EFTA–Egypt

Goods

FTA

17 July 2007

EFTA–Former Yugoslav Republic of Macedonia EFTA–Israel

Goods

FTA

11 December 2000

GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV

Goods

FTA

30 November 1992

1 January 1993

EFTA–Jordan

Goods

FTA

17 January 2002

EFTA–Korea, Republic of

Goods and Services

FTA and EIA

23 August 2006

EFTA–Lebanon

Goods

FTA

22 December 2006

GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV

1 January 1973 1 July 1977 1 March 1998 1 January 1996 1 January 1981 1 January 1986 1 January 1995 1 May 2004 1 January 2007 1 January 1973 1 January 1958 1 November 2010 1 July 2009 1 December 2004 1 January 2002 1 August 2007 1 January 2001

1 September 2006 1 September 2006 1 January 2007

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Table 6.1 (continued) Date of Entry into Force

RTA Name

Coverage

Type

Date of Notification

Notification

EFTA–Mexico

Goods and Services

FTA and EIA

25 July 2001

1 July 2001

EFTA–Morocco

Goods

FTA

20 January 2000

EFTA–Palestinian Authority EFTA–SACU

Goods

FTA

23 July 1999

Goods

FTA

29 October 2008

EFTA–Serbia

Goods

FTA

24 November 2010

EFTA–Singapore

Goods and Services

FTA and EIA

14 January 2003

EFTA–Tunisia

Goods

FTA

3 June 2005

EFTA–Turkey

Goods

FTA

6 March 1992

EFTA accession of Iceland EU–San Marino

Goods

FTA

30 January 1970

Goods

CU

24 February 2010

EU–Serbia

Goods

FTA

31 May 2010

Eurasian Economic Community (EAEC) European Economic Area (EEA) European Free Trade Association (EFTA)

Goods

CU

21 April 1999

GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV

Services

EIA

13 September 1996

GATS Article V

1 January 1994

Goods and Services

FTA and EIA

14 November 1959(G) 15 July 2002(S)

Faroe Islands– Norway Faroe Islands– Switzerland Georgia–Armenia

Goods

FTA

12 February 1996

3 May 1960 (G) 1 June 2002 (S) 1 July 1993

Goods

FTA

12 February 1996

Goods

FTA

8 February 2001

Georgia–Azerbaijan

Goods

FTA

8 February 2001

Georgia–Kazakhstan

Goods

FTA

8 February 2001

Georgia–Russian Federation Georgia– Turkmenistan Georgia–Ukraine

Goods

FTA

8 February 2001

Goods

FTA

8 February 2001

Goods

FTA

8 February 2001

GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV

Gulf Cooperation Council (GCC)

Goods

CU

1 December 1999 1 July 1999 1 May 2008 1 October 2010 1 January 2003 1 June 2005 1 April 1992 1 March 1970 1 April 2002 1 February 2010 8 October 1997

1 March 1995 11 November 1998 10 July 1996 16 July 1999 10 May 1994 1 January 2000 4 June 1996 1 January 2003

Preferential Trade Agreements

331

Table 6.1 (continued) Date of Entry into Force

RTA Name

Coverage

Type

Date of Notification

Notification

Honduras–El Salvador and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu Hong Kong, China– New Zealand

Goods and Services

FTA and EIA

6 April 2010

GATT Article XXIV and GATS V

1 March 2008

Goods and Services

FTA and EIA

3 January 2011

1 January 2011

Iceland–Faroe Islands

Goods and Services

FTA and EIA

10 July 2008

India–Singapore

Goods and Services

FTA and EIA

3 May 2007

Israel–Mexico

Goods

FTA

22 February 2001

Japan–Indonesia

Goods and Services

FTA and EIA

27 June 2008

Japan–Malaysia

Goods and Services

FTA and EIA

12 July 2006

Japan–Mexico

Goods and Services

FTA and EIA

31 March 2005

Japan–Philippines

Goods and Services

FTA and EIA

11 December 2008

Japan–Singapore

Goods and Services

FTA and EIA

8 November 2002

Japan–Switzerland

Goods and Services

FTA and EIA

1 September 2009

Japan–Thailand

Goods and Services

FTA and EIA

25 October 2007

Japan–Viet Nam

Goods and Services

FTA and EIA

1 October 2009

Jordan–Singapore

Goods and Services

FTA and EIA

7 July 2006

Korea, Republic of–Chile

Goods and Services

FTA and EIA

8 April 2004

GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V

Korea, Republic of–India Korea, Republic of– Singapore

Goods and Services Goods and Services

FTA and EIA FTA and EIA

1 November 2006 1 August 2005 1 July 2000 1 July 2008 13 July 2006 1 April 2005 11 December 2008 30 November 2002 1 September 2009 1 November 2007 1 October 2009 22 August 2005 1 April 2004 1 January 2010

21 February 2006

GATT Article XXIV and GATS V

2 March 2006

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Date of Entry into Force

RTA Name

Coverage

Type

Date of Notification

Notification

Kyrgyz Republic– Armenia Kyrgyz Republic– Kazakhstan Kyrgyz Republic– Moldova Kyrgyz Republic– Russian Federation Kyrgyz Republic– Ukraine Kyrgyz Republic– Uzbekistan Mexico–El Salvador (Mexico–Northern Triangle) Mexico–Guatemala (Mexico–Northern Triangle) Mexico–Honduras (Mexico–Northern Triangle) Mexico–Nicaragua

Goods

FTA

12 December 2000

Goods

FTA

29 June 1999

Goods

FTA

15 June 1999

Goods

FTA

15 June 1999

27 October 1995 11 November 1995 21 November 1996 24 April 1993

Goods

FTA

15 June 1999

Goods

FTA

15 June 1999

Goods and Services

FTA and EIA

23 May 2006

Goods and Services

FTA and EIA

3 July 2006

Goods and Services

FTA and EIA

10 July 2006(G) 20 June 2006(S)

Goods and Services

FTA and EIA

17 October 2005

New Zealand– Singapore

Goods and Services

FTA and EIA

4 September 2001

Nicaragua and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu North American Free Trade Agreement (NAFTA) Pakistan–China

Goods and Services

FTA and EIA

9 July 2009

GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V

Goods and Services

FTA and EIA

29 January 1993(G) 1 March 1995(S)

1 January 1994

Goods and Services

FTA and EIA

18 January 2008(G) 20 May 2010(S)

Pakistan–Malaysia

Goods and Services

FTA and EIA

19 February 2008

Pakistan–Sri Lanka

Goods

FTA

11 June 2008

Panama–Chile

Goods and Services

FTA and EIA

17 April 2008

Panama–Costa Rica (Panama–Central America) Panama–El Salvador (Panama–Central America)

Goods and Services

FTA and EIA

7 April 2009

Goods and Services

FTA and EIA

24 February 2005

GATT Article XXIV and GATS V GATT Article XXIV and GATS V Enabling Clause and GATS Article V Enabling Clause GATT Article XXIV and GATS V GATT Article XXIV and GATS V GATT Article XXIV and GATS V

19 January 1998 20 March 1998 15 March 2001 15 March 2001 1 June 2001 1 July 1998 1 January 2001 1 January 2008

1 July 2007(G) 10 October 2009(S) 1 January 2008 12 June 2005 7 March 2008 23 November 2008 11 April 2003

Preferential Trade Agreements

6.5

333

Institutions

The CRTA110 is the successor to Article XXIV of GATT Working Parties, the organ that would examine the consistency of notified PTAs with the multilateral rules. There is not much substantive difference between the two bodies, other than the fact that the CRTA is the consolidation of prior practice into a “permanent” organ. Participation in Working Parties was open to all GATT contracting parties, and this is the case with respect to the CRTA as well. The CRTA was established through a decision by the WTO General Council on 7 February 1996, which in part requests from the CRTA:111 to carry out the examination of agreements in accordance with the procedures and terms of reference adopted … and thereafter present its report to the relevant body for appropriate action; … to consider the systemic implications of such agreements and regional initiatives for the multilateral trading system.

The CRTA adopts its decisions by consensus as per Rule 33 of the Rules of Procedure for Meetings of the Committee on Regional Trade Agreements:112 Where a decision cannot be arrived at by consensus, the matter at issue shall be referred, as appropriate, to the General Council, the Council for Trade in Goods, the Council for Trade in Services or the Committee on Trade and Development. There is no reported case of referral to a higher body.

6.6

Concluding Remarks

PTAs have been criticized for generating trade diversion. It is true that especially in the early years of GATT, this has indeed been the case. A combination of high bound duties, selective intra-PTA tariff liberalization, and inadequate enforcement at the multilateral level were contributing factors.113 The lacking incentives to introduce complaints before WTO panels against discriminatory policies practiced by members of PTAs further cemented this outcome. This was not, nevertheless, the case for all PTAs. This is not meant to be an apology for PTAs for, as stated earlier, many PTAs have indeed caused substantial trade deflection and, probably, some of them might have behaved like stumbling blocks. There are two qualifications to this statement, though. First, this is not true for all PTAs; some of them did want to go faster and further. Second, in today’s world, where tariffs become gradually a nonissue, PTAs concentrate on regulatory issues, some of which do not even come under the mandate of the WTO. Some PTAs were indeed vehicles for deep integration aiming at the establishment of genuine common markets, even though originally this might have not been the prevailing

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view. The EU is a good example. The European Coal and Steel Community (ECSC) manifestly did not meet the requirements of Article XXIV of GATT. Yet the EU, as we now know it, is as close as it gets to a single market composed of different sovereign states. Would anyone subscribe to active enforcement of Article XXIV of GATT against the ECSC at the risk of threatening the emergence of the EU? PTAs are formed for many, often idiosyncratic, reasons. We cited some of the reasons earlier in this chapter, and there are many more: Winters and Schiff (1998) discussed the political benefits stemming from the formation of PTAs. Baldwin (1997, 2008) tried to explore the validity of some of the rationales and, more recently, Whalley (2008) attempted a similar endeavor. But we still lack a dominant explanation that can serve as a rationale across PTAs. Absent a look into the rationale for PTAs, it will be almost impossible to design the proper “medicine.” Not only that, but one medicine for all will most likely prove to be the wrong medicine.114 The search for medicine is further hampered by the fact that modern PTAs are a far cry from the PTAs that the GATT framers had in mind when designing Article XXIV of GATT. At the time, the idea was lower tariffs for members of a PTA. In today’s world, PTAs are largely occupied with the negotiation of regulatory issues, many of which totally escape the WTO review since they concern issues that do not come under the WTO mandate.115 It is for all these reasons that we have ended up with a “live and let live” scenario. The WTO and PTAs coexist without the former meddling too much into the affairs of the latter, the existence of its institutional mandate to do so notwithstanding. The proliferation of PTAs is evidence that there is an appetite for trade deals. The slow progress in this area during the Doha round evidences a lack of appetite for multilateral trade deals. In the absence of incentives to enforce the WTO against PTAs, the only realistic improvement to the current situation is to increase the transparency of PTAs. When the train leaves the station (e.g., following review by the CRTA), PTAs exist apart from the WTO. It is only through TPRM reviews that the multilateral community will find out what is going on at the PTA level. And for the reasons we explain in chapter 12 of volume 2, this is simply not good enough. It is in the interest of the WTO to reinvigorate the links to PTAs, review their trade agenda as it develops, and evaluate the institutional arrangements that make PTAs attractive in the eyes of trading nations. Information about their workings is the first necessary step in this direction. In short, instead of thinking in terms of disciplining PTAs through additional rule-making, litigation, or both, the WTO membership would be better served if it concentrated its efforts on increasing the transparency with respect to PTAs.

7

Domestic Policies/National Treatment

7.1 The Legal Discipline and Its Rationale 7.1.1 The Legal Discipline Article III of GATT reflects the obligation to observe national treatment (NT). Imported goods that have “paid their ticket to enter a market” (that is, the tariff duty) cannot be subjected to a burden, of whatever nature, that is higher than that imposed on domestic products with which they are competing in a given market. Article III.1 of GATT reproduces the basic idea behind NT: The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.1

An obligation of result is imposed, whereby WTO members remain free to unilaterally choose their domestic policies but must apply them in a nondiscriminatory manner to competing goods, domestic and imported. The obligation to apply policies in a nondiscriminatory manner is legal way for avoiding protection to domestic products through domestic, unilaterally defined policies. Thus, GATT is, with respect to domestic policies, a negative integration contract. For instance, WTO members do not have to follow a particular tax policy, but they must impose their unilaterally chosen tax regime in a nondiscriminatory manner on competing domestic and foreign goods.2 For some trading nations, it was unthinkable to transfer sovereignty regarding the substantive content of their behind-the-border measures. It is for similar reasons that the ITO, a rather intrusive construct into national sovereignty, never saw the light of day, as we saw in chapter 1. Quoting from Hudec (1990, p. 24): “Governments would have never agreed to circumscribe their freedom in all these other areas for the sake of a mere trade agreement.”

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Article III of GATT, consequently, is meant to equate conditions of competition within markets, but not across markets.3 7.1.2 The Rationale for the Legal Discipline Why was the NT discipline necessary? There is a substitution effect between trade and domestic policies: if no regulation of the latter exists, governments can easily circumvent commitments regarding the former. A government can use, say, a domestic tax to take back part of the market access that they promised in a tariff negotiation. This is how it works. You might recall from the discussion on equivalence propositions in chapter 1 that a tariff can be disaggregated into a domestic tax for consumers and a subsidy for producers. If tariffs were disciplined but subsidies and domestic taxes were not, then WTO members could easily circumvent their obligation not to impose tariffs beyond the agreed ceiling by taxing consumers (who would pay a higher tax any time they purchased foreign goods) and subsidizing domestic producers through the tax proceeds. Erosion of tariff concessions would, thus, be the natural consequence of similar policies. The panel on Italy – Agricultural Machinery captured to perfection this point on p.11 of its report where it stated: “...that the intention of the drafters of the Agreement [regarding Art. III GATT] was clearly to treat the imported products in the same way as the like domestic products once they have been cleared through customs. Otherwise indirect protection could be given.”

The negotiating record reveals,4 that trading nations were mindful of the substitution effect, although they did not express the rationale for this provision in these terms. They definitely wanted to ensure that no protection, in addition to tariff protection, would be afforded through domestic policies. They wanted to safeguard the value of tariff concessions since, absent this insurance, they would collectively be unwilling to continue to negotiate tariff reductions. Irwin, Mavroidis, and Sykes (2008) include a detailed discussion of all draft versions (from the London to the Havana Conference) of what became Article III of GATT.5 The key message throughout the negotiating history has been that no protection besides that imposed through tariffs should occur in favor of domestic products as a result of unilateral regulatory activity behind the border. Protection should be negotiable and not left to the discretion of those with the incentive to protect. The rationale for NT stated in this manner has found support both in practice, as well as in case law. A note by the GATT Secretariat summarizing the meetings of the Working Party (WP) on Border Tax Adjustments (BTA) on 18–20 June 1968 captures this point as follows: “In the case of Article III, the rules were designed to safeguard tariff concessions and to prevent hidden discrimination.”6 This does not mean, however, that NT has no role to play once tariffs have been eliminated. The GATT framers saw a permanent role for NT. It binds WTO members even after tariffs have been eliminated, since otherwise we could end up with perverse outcomes, whereby tariffs are brought down to zero, only to see discriminatory domestic policies

Domestic Policies/National Treatment

337

take their place after that moment. The Appellate Body (AB), in its report on Japan–Alcoholic Beverages II, captured this point to perfection when stating (p. 16): The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III “is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production.” Toward this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products.7

Nondiscrimination must thus be observed regardless of the level of tariffs, even when they have been eliminated altogether. One could, of course, argue that NT is necessary in this case to safeguard 0 percent tariffs, which are tariff concessions. The AB finding has a second property, though. By requesting that Article III of GATT should be understood as the anti-protectionism clause, it imposes on WTO members an obligation to respect it, even when no tariff concessions at all have been entered. The key, as noted in chapter 1, is that protection should be negotiable. Were one to allow “protection” through domestic measures, which are unilaterally defined, one would ipso facto make protection nonnegotiable. This is what the GATT framers wanted to avoid at all costs. “Protectionism” is hard to define. It corresponds roughly to wilful conferral of advantage to domestic (over foreign) production. Treating, say, imported apples (the duties of which have been bound) worse than domestic apples with respect to consumption taxes is one form of protectionism. There are many other forms of protectionism, of course. Law and case law sanction only discriminatory treatment of two like or competing goods. “Likeness,” or, more loosely defined, a “competitive relationship” between domestic and imported goods, is the frontier of protectionism that WTO will sanction. 7.1.3

Discussion

7.1.3.1 The Impact of the PPA Article III of GATT formed an integral part of Part II of GATT and, according to the terms agreed to when the Protocol of Provisional Application (PPA) was signed, had to be observed “to the fullest extent not inconsistent with existing legislation.” In Brazil–Internal Taxes, a de jure violation was tolerated because the law had to be amended and submitted to the Brazilian Congress, and, until that was done, trading partners had to live with the violation. This defense was only sparingly invoked in the proceedings.8 As we saw in chapter 1, though, WTO members must by now fully observe the obligation embedded in Article III of GATT.9 7.1.3.2 NT, Concession Erosion, and Uncertainty NT is the insurance policy that guarantees that the value of negotiated tariff concessions (for which consideration has been paid) will not be undone through subsequent unilateral action. In fact, during the negotiations, it was made clear that there was no room for preferential internal taxes, such as those previously practiced in some parts of the world

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(New Zealand, US).10 Agreeing on this insurance policy was necessary for trading nations to continue to have an incentive to negotiate tariff reductions and trade liberalization. In other words, what is the incentive for Home to negotiate tariffs on widgets with Foreign (and pay through reciprocal commitments), if Foreign can subsequently decide to set, for example, the level of value added tax (VAT) on domestic widgets at 10 percent, and that on imported widgets at 25 percent? NT emerges as an insurance policy against concession erosion. Recall also from chapter 1 that the design of GATT was meant to make protection negotiable, assuming a reasonable definition of the term “protection.”11 NT plays a crucial role in this grand design. The only disadvantage that goods originating in Home will suffer when exported to Foreign would be through the imposition of tariffs, and the level of this instrument is not unilaterally decided, as we have seen. Protection in the GATT world is strictly negotiable and not unilaterally decided.12 It is important to note that nondiscrimination does not guarantee knowledge about the level of internal impositions. There is certainty that imported goods will not be burdened more than domestic goods with which they compete. There is ignorance though about the precise level of impositions. If knowledge about the VAT levels was known ex ante, Home could have been asked to negotiate with Foreign the total amount of imposition (e.g., customs duties and internal taxes). This is true for all other domestic policies. Alas, future domestic policies are not known ex ante, since, as we stated previously, no one was willing to negotiate domestic instruments. It is, thus, the uncertainty regarding the differential taxation between domestic and imported goods (say, in the level of consumption or any other domestic taxes eventually imposed by Foreign) that Home is seeking to avoid. 7.1.3.3 Contract Incompleteness It is clear in economic theory that terms of trade can be affected not only through trade but also through domestic instruments. Indeed, a WTO member with substantial bargaining power on widgets could in theory affect terms of trade, either by imposing a customs duty or a consumption tax.13 If terms of trade was the basic rationale for concluding GATT, why did trading nations not move on and negotiate domestic instruments as well? The same is true if one were to adopt a rent-seeking framework as a rationale for trade agreements. The question remains the same: Why did trading nations not exchange concessions on domestic instruments in the same way as they did with respect to customs duties? We have already alluded that the political regime in various places could, in and of itself, be an obstructing factor to similar negotiations. Indeed, how many democratic societies would accept to lock in domestic policies, like environmental-, tax-, public health policy, in an international contract for many years to come? One can go one step further and ask how many societies would be prepared to allow their current leaders of today to set domestic policies for dozens of years to come?

Domestic Policies/National Treatment

339

There was neither will to negotiate domestic policies, nor to move to a more demanding form of integration. Moreover, when GATT was being negotiated, the ITO was far from dead. Commitments on domestic policies would be negotiated in more detail in the ITO. For the purposes of GATT, all that mattered was to come up with a discipline that would insure traders against erosion of tariffs concessions. Under the circumstances, nondiscrimination emerged as a natural discipline. The GATT framers, though, were not very happy with the terms chosen to reflect the discipline of nondiscrimination with respect to domestic policies. Terms such as “like products,” “applied so as to afford protection,” and “less favorable treatment” are prone to different interpretations.14 Ideally, one might have preferred some sort of list explaining the domestic policies that are covered by NT. Ideally, as well, one might have wished for an explanation of what these terms actually mean with regard to specific policies. Could the negotiators have done better? Could they have negotiated domestic policies one by one and included them in the GATT, instead of finding recourse in generic terms such as “like products” and “so as to afford protection” in detailing the NT obligation? Recall that, as per Will Clayton’s famous phrase, they had to “act before the vested interests put their vests on” (chapter 1). They were under some pressure to quickly finalize the deal. During those historic times, the quest for international cooperation could not have been put on hold until anything and everything was agreed upon. Time was of essence, but it is not the only reason explaining why the GATT reads as it does. In theory, assuming they had had the luxury of time, the GATT framers could have attempted to write a complete contract, where they would have enumerated each and every domestic instrument by each and every GATT member and decided on their fate as legal or illegal. Alas, this was (and is) not a realistic prospect. They would have faced diminishing returns had they attempted to do so. This point has been eloquently discussed in Horn, Maggi, and Staiger (2010). Negotiators would have to first catalog thousands of domestic instruments since, in equilibrium, any domestic policy could at least potentially and indirectly affect trade.15 They would then have to find a way to measure their impact on trade, assuming that they convened to make reciprocal commitments. And then they would have to be in a state of permanent negotiations as well, since social preferences change over time (as do perceptions about their legality/illegality).16 The GATT framers, thus, rationally decided to avoid this type of negotiation. They included a generic nondiscrimination obligation using the terms discussed supra, added the most egregious (at the time) practices, such as local content requirements, in a very short indicative list explaining how to behave with respect to similar policies, and they excluded the measures that no one wished to have included (subsidies, government procurement).17 In addition, they left it to the adjudicator to decide on specific instances, guided by the spirit of the provision, which was reflected in Article III.1 of GATT. This is a tall order, of course, since the GATT/WTO judge now must decide on both the

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coverage and the legal test18 for measures coming under the ambit of the provision based on little legislative guidance.19 This outcome was probably unavoidable. The chairman of the Technical Sub-Committee in charge of preparing the draft provision on NT during the London Conference (1946) summed it all up almost perfectly:20 Whatever we do here, we shall never be able to cover every contingency and possibility in a draft. Economic life is too varied for that, and there are all kinds of questions, which are bound to arise later on. The important thing is that once we have this agreement laid down we have to act in the spirit of it. There is no doubt there will be certain difficulties, but if we are able to cover 75 or 80 or 85 per cent of them I think it will be sufficient.

7.1.3.4 Reciprocity Reciprocity can be established with relative ease when tariff promises are being exchanged. National administrators will need to know the productive (or purchasing) capacity of their nation with respect to particular commodities, given a set of tariffs. They would need to respond to questions such as whether terms of trade would change if the US was to drop its tariff on wheat from 40 to 30 percent, or if the EU was to drop its tariff on almonds from 40 to 30 percent? Calculations are much more sophisticated when, instead of tariff promises, regulatory regimes are being exchanged. In this scenario, it will be prima facie harder to establish equivalence between a regime banning genetically modified organisms (GMOs) and a regime aiming at protecting consumers, even if both regimes are judged excessive. Bagwell and Staiger (2011a) provide an analytical framework to discuss similar issues, which, in principle, could be workable. There are still issues, though. For a start, regulatory regimes are not conceived to simply affect terms of trade (as tariffs could be by those with the power to do so). They are also meant to protect a social value: in the GMO example, it could be human health or environment. Reduction of the GMO regime would be accompanied by a greater risk of being exposed to a health or environmental scare. For good reason, trading nations might be opposed to a quid pro quo bargain in this context. Additionally, it is difficult to calculate ex ante the impact of similar regimes. Tariffs hit all imports. The GMO regime will affect only those that do not meet the standards established. This is so because unlike tariffs, where all those paying the ticket to entry will in principle gain market access, the GMO regime will have a binary function: those who comply access the market, and those who do not are kept out of the market. Because of these, and probably other reasons as well, it is difficult to establish reciprocity across regulatory policies. 7.1.3.5 Shallow Integration and Deep Integration Negative integration is an adequate insurance policy against concession erosion, but it is no guarantee for market access, unless the regulatory requirements in the exporting market

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have been met. In fact, as Costinot (2008) has argued, it is the insurance policy that countries with a high level of protection (environmental, public health, etc.) seek when entering an integration process. This is why this form of integration is termed “shallow integration.” Trading nations with higher levels of protection shift costs to those with lower levels of protection, which want to access their markets. Countries that wished to move their integration process faster have had recourse to harmonization or mutual recognition, the instruments for “deep integration.” The EU is an appropriate example of this. As more and more heterogeneous countries joined the GATT/WTO, shallow integration became a necessity de facto. True, subsequently concluded agreements like the Technical Barriers to Trade (TBT) (a Tokyo-round code initially, and later part of the Uruguay round single undertaking) do provide for mutual recognition, an instrument that we typically encounter in deep integration regimes. Typically, however, similar schemes are contracted between countries at more or less the same level of development, and outsiders, as we will see in chapter 5 of volume 2, will have a mountain to climb if they wish to accede to similar arrangements that have to respect most-favored nation (MFN) status. Shallow integration has served the world trading regime well, though, since it provided the necessary insurance policy in order to commit on the tariff front. It paved the way for deeper integration among those that wanted to integrate further. 7.2

Measures Coming under the Purview of Article III of GATT

Article III.5 of GATT mentions explicitly only one measure that comes under its aegis and is being colloquially referred to as “local content requirements.” It further exempts specifically two other measures, to which we will return infra. For the rest, it applies to all measures affecting trade. We explain. 7.2.1

Local Content Requirements

Article III.5 of GATT reads: No contracting party shall establish or maintain any internal quantitative regulation relating to the mixture, processing, or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources. Moreover, no contracting party shall otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1.

These measures are generally referred to as “local content requirements.”21 We discuss them in more detail in chapter 7 of volume 2, which is dedicated to the Trade-Related Investment Measures (TRIMs) Agreement, which, following its advent in 1995, addresses this issue in more specific manner.

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Similar measures were quite prevalent in practice in the 1940s, and this is the reason justifying their explicit inclusion in the body of Article III of GATT. There was unanimous agreement that they should be set aside, and negotiation of Article III.5 of GATT did not lead to acrimony. Unsurprisingly thus, this provision gave rise only to scarce litigation. An appropriate illustration is offered by the GATT panel report on EEC–Animal Feed Proteins. EU producers of oilseeds were compelled to buy milk powder of EU origin at fixed prices. Milk powder was an input to their final product, and the panel held that, by adopting this requirement, the EU had acted inconsistently with its obligations under Article III.5 of GATT (§ 4.8). Note that this provision outlaws “mixing requirements” that impose use of local added value. Does this mean that mixing requirements with no similar requirement are immune from challenge? Can a mixing requirement of any sort violate neither Article III nor Article I of GATT? This issue has gained interest with the multiplication of measures aiming to address climate change. One of the policy prescriptions recommended is “blending regimes,” whereby producers of energy are required to supply a mix of renewable and nonrenewable energy into the market, the former being costlier than the latter. Absent legal obligation to mix, producers would in all likelihood have had the incentive to supply the cheaper product only. It would appear prima facie that to the extent that access to either segment of the mix is not reserved to national producers, no violation of Article III.5 of GATT occurs. And yet, what if a foreign producer of nonrenewable energy requests a panel to rule that because of the requirement to mix, its nonrenewable good has been treated less favorably than domestic renewable energy? In other words, do mixing requirements as such (e.g., regardless of a local content requirement) amount to a violation of Article III of GATT? Article III.5 of GATT deals with a narrow category of mixing requirements, those accompanied by the requirement to use local value added. If local content is present, then Article III.5 of GATT comes into play. If not, nevertheless, there is no guarantee that the discipline embedded in Article III of GATT has been observed. The appropriate legal basis to entertain similar claims would be Article III.4 of GATT. We discuss the legal text applied to establish violations of Article III.4 of GATT in section 7.3 of this chapter.22 7.2.2 All Other Measures Affecting Trade §§ 2 and 4 also deal with the coverage of the obligation to accord national treatment. Unlike Article III.5 of GATT, though, they do not refer to any specific measure. Both fiscal (tax) and nonfiscal elements come under the ambit of Article III of GATT. Whereas the former paragraph (§ 2) deals with direct taxes on products, the latter (§ 4) covers indirect taxes, as well as policies of a nonfiscal nature; e.g., bans on sales of health-impairing goods, legislative requirements regulating distribution and sale of goods, etc.

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There should be no doubt that the intent of drafters, as expressed through the wording chosen, was to design Article III of GATT as an, in principle, all-encompassing provision. The GATT framers used the term “affecting” to circumscribe the ambit of Article III.4 of GATT. In this vein, even regulation of nontradables (say, distribution networks) might have an effect on trade in goods.23 Practice has confirmed the intent of the GATT framers in this respect. In Italy–Agricultural Machinery, for example, a GATT dispute in the early years of multilateral trade integration, the issue was whether credit facilities for the purchase of agricultural machinery were negatively affecting the competitive conditions between domestic and imported goods (tractors). The UK had submitted that the prevailing commercial rates for similar purchases in Italy were around 10 percent, whereas banks were routinely providing loans for the purchase of Italian machinery at a substantially lower rate. One of the questions before the GATT panel was whether similar measures came under the purview of Article III of GATT at all. In § 12 of its report, the panel noted that this paragraph covered: … not only the law and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market. (italics added)

The focus of the trading partners has been on excluding measures from the all-encompassing coverage of this provision (in principle, at least), rather than on enumerating what should be covered. This is a very sensible strategy in light of our previous discussion on contract incompleteness. During the negotiations, there were discussions as to which measures should be exempted from the coverage of this provision. Not all proposals were adopted. China, for example, wanted to limit the NT obligation to taxes (fiscal measures), but others thwarted this attempt.24 They agreed, at the time that GATT was negotiated, on two specific exclusions only (Articles III.8 and IV of GATT). They added to the exemptions through subsequent actions (the WP on BTA excluded direct taxation, social security, and payroll taxes). Case law added exemptions as well (investment protection). We discuss all this, as well as the other exemptions to NT, in what immediately follows. 7.3 7.3.1

Measures Exempted Government Procurement

Government procurement has been excluded from the coverage of Article III of GATT, by virtue of Article III.8(a) of GATT. A plurilateral agreement (that is, an agreement where participation is optional and where only a few WTO members have adhered to it) has been adopted, called the WTO Government Procurement Agreement (GPA). WTO members that have not adhered to the GPA do not have to observe it, and they can favor domestic suppliers for government procurement purposes. This is essentially what Article III.8 of

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GATT amounts to. The GPA was successfully negotiated during the Uruguay round, and we will discuss the agreement in detail in chapter 10 of volume 2. In Canada–Renewable Energy,25 the panel and the AB had the opportunity to discuss the conditions for application of Article III.8 of GATT. The Canadian measures that were challenged are described in §§ 4.20–21 of the AB report: An entity that enters into a FIT or microFIT Contract is required to, inter alia, build, operate, and maintain the approved generation facility in accordance with all relevant laws and regulations, and deliver the electricity produced into the Ontario electricity system. In return for performing these and other contractual obligations, such entity will be remunerated, over the term of the particular contract, in accordance with a formula that is based on a standard “Contract Price” established by the OPA. In addition to these obligations, the FIT Programme imposes “Minimum Required Domestic Content Levels” that must be satisfied in the development and construction of solar PV electricity generation facilities participating in both streams of the FIT Programme and of windpower electricity generation facilities taking part in the FIT stream. The Minimum Required Domestic Content Levels do not apply to qualifying projects using any of the other renewable energy sources covered by the FIT Programme. The applicable Minimum Required Domestic Content Levels prescribed under both streams of the FIT Programme are summarized in Table 1 at paragraph 1.4 of these Reports. (italics in the original)26

The panel and the AB concluded that the Canadian measure was a local content requirement and, thus, in violation of Article III.4 of GATT and Article 2.1 of TRIMs. In fact, the Illustrative List of Trade-Related Investment Measures featured in Article 2.2 of TRIMs includes local content requirements of this type. The question was whether the challenged measure was exempted from the obligation to respect NT because it constituted government procurement. In other words, could Canada justify the violation of Article III.4 of GATT by invoking Article III.8 of GATT? Canada had submitted this claim, arguing that the measure was government procurement and, for this reason, it escaped the discipline of Article III.4 of GATT. The AB first held that this provision (Article III.8 of GATT) is a derogation from the NT obligation, which could justifiably be invoked if certain conditions had been cumulatively met (§ 5.74): we consider that Article III:8(a) sets out a derogation from the national treatment obligation contained in Article III of the GATT 1994. The provision exempts from the national treatment obligation certain measures containing rules for the process by which government purchases products. Under Article III:8(a), the entity procuring products for the government is a “governmental agency.” We have found above that a “governmental agency” is an entity performing functions of government and acting for or on behalf of government. Furthermore, we have found that the derogation of Article III:8(a) must be understood in relation to the obligations stipulated in Article III. This means that the product of foreign origin must be in a competitive relationship with the product purchased. Furthermore, Article III:8(a) is limited to products purchased for the use of government, consumed by government, or provided by government to recipients in the discharge of its public functions. On the contrary, Article III:8(a) does not cover purchases made by governmental agencies with a view

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to reselling the purchased products in an arm’s-length sale and it does not cover purchases made with a view to using the product previously purchased in the production of goods for sale at arm’s length.

In particular, the WTO member invoking Article III.8(a) must show both of the following: • The products purchased by a government agency were intended to be directed at the government or be used for government purposes (§ 5.68).27 • The government did not purchase goods with the intent to resell them commercially (§ 5.69). “Commercial resale” should not be equated to “for profit resale.” What matters is that a resale is done at arm’s length. The AB noted, though, that even transactions aiming at cutting losses could be rational business decisions and, thus, be kept at arm’s length. The adjudicator should be reviewing the transaction from both the buyer’s and the seller’s perspective (§ 5.71):28 We see profit-orientation generally as an indication that a resale is at arm’s length. Profit-orientation indicates that the seller is acting in a self-interested manner. Yet, as the Panel noted, there are circumstances where a seller enters into a transaction out of his or her own interest without making a profit. There are different circumstances in which a seller may offer a product at a price that does not allow him or her to make a profit, or sometimes even fully to recoup cost. In such circumstances, it may be useful to look at the seller’s long-term strategy. This is because loss-making sales could not be sustained indefinitely and a rational seller would be expected to be profit-oriented in the long term, though we accept that strategies can vary widely and thus do not see this as applying axiomatically. The transaction must also be assessed from the perspective of the buyer. A commercial resale would be one in which the buyer seeks to maximize his or her own interest. It is an assessment of the relationship between the seller and the buyer in the transaction in question that allows a judgement to be made whether a transaction is made at arm’s length.

When applying this test to the specifics of the case, the AB underscored that this provision could be justifiably invoked only if the challenged measure concerned two goods that were in competitive relationship with each other (§ 5.63). In this case, the government was purchasing electricity, whereas the foreign product that was being treated differently than its domestic counterpart was generation equipment. Electricity and generation equipment are not in competitive relationship with each other (§§ 5.75ff.). The panel had noted this point but added that generation equipment was being used in order to produce electricity, and, because of the “close relationship” of the two, Article III.8 of GATT was applicable (§ 5.76). The AB disagreed (§ 5.79): In the case before us, the product being procured is electricity, whereas the product discriminated against for reason of its origin is generation equipment. These two products are not in a competitive relationship. None of the participants has suggested otherwise, much less offered evidence to substantiate such proposition. Accordingly, the discrimination relating to generation equipment

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contained in the FIT Programme and Contracts is not covered by the derogation of Article III:8(a) of the GATT 1994. We therefore reverse the Panel’s findings.

Article III.8 of GATT would have come into play only if Canada was procuring generation equipment (the product discriminated against, as per the challenged Ontario statute). It was not, and for this reason, the provision could not serve as a justification for the violation of Article III.4 of GATT. This is too restrictive a view, and we criticize it in chapter 10 of volume 2, when we discuss the ambit of the GPA. 7.3.2

Subsidies

Subsidies are excluded from the coverage of Article III of GATT by virtue of Article III.8(b) of GATT. We discuss their treatment in WTO law in chapter 3 of volume 2. 7.3.3

Film Quotas

Article III.10 of GATT announces that quotas for cinematographic films do not come under the purview of the obligation to accord NT. Article IV of GATT builds on this.29 Article IV of GATT allows screen quotas for domestic cinematographic films. Screen quotas are, thus, some sort of affirmative protection of national goods. Films from other WTO members must be treated in an MFN manner; hence, no quotas can be established for films originating in one or more WTO members.30 7.3.3.1 Negotiating History The working hypothesis explaining the inclusion of this provision in GATT must be that cinematographic films were considered goods and not services; otherwise, why bother to regulate this issue under GATT in the first place? It was the UK delegation that initially proposed the exclusion of films from the coverage of Article 15 of the London Draft (which later became the current Article IV of GATT). The UK delegate (Mr. Rhydderch) stated: he would prefer a note to the Article to say it did not apply to films. There were cultural, as well as commercial, considerations to be taken into account in the case of films.31

And the same UK delegate also remarked: In the case of films it is not merely an economic and not even material question; it brings in a very important cultural consideration such as does not come in the case of other commodities. We think it is quite clear that countries will not allow their own film production which affects their own culture and ideas, to be swamped by imported films simply because the latter happen to be better organised commercially. Some perfectly reliable method of safeguarding domestic film production is needed and will in fact be insisted on by a great many countries. The method of the screen quota is much the most effective, perhaps the only effective method of attaining this desired object. We must therefore preserve our right to use this method.32

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This is probably one of the first expressions in the world trading system in favor of “cultural exception,” since the UK delegation perceived films not only as economic but as cultural goods as well. The subsequent support for the UK position from Chile, Czechoslovakia, New Zealand,33 and eventually Norway and South Africa left only the US delegation opposing the UK view. The US saw no reason to treat films differently from other goods. In the view of its delegates, the preference of the audience should determine the amount of trade in films.34 It was clear, nonetheless, that the US delegation was fighting a losing battle on this issue. Eventually, a separate provision applicable only to films (the current Article IV of GATT) would be agreed upon. We quote from Wilcox (1949, pp. 44–45): Almost without exception, the changes that had been suggested in the United States were accepted and the draft was amended accordingly. Of particular importance was the inclusion of two new articles, one limiting the freedom of nations to discriminate against foreign motion-picture films and the other dealing with the treatment of foreign investment. The latter article, while unacceptable in substance, did serve to bring the subject of foreign investment within the scope of the Charter.

An unlikely nation (by today’s standards) was, thus, at the origin of Article IV of GATT.35 7.3.3.2 Film Quotas in the WTO World We stated earlier that the assumption underlying this provision must have been that cinematographic films are a good. Had the WTO never seen the light of day, there would have been no interest in pursuing this discussion any further. The advent of the WTO, however, signaled the advent of the General Agreement on Trade in Services (GATS) as well, and the issue of classification of cinematographic films as a good or service gained new interest. The question of whether it is GATT, GATS, or both that cover the audiovisual sector (and hence, films) occupied the minds of the negotiators during the Uruguay round.36 Choosing one or the other option (e.g., GATT over GATS) entails important consequences on the trade liberalization front, since GATT and GATS “liberalization recipes” differ substantially. Under GATS, WTO members incur, in principle, the MFN obligation only. They can decide, as some did, to make no specific commitments with respect to audiovisual services, such as films. In this case, they can treat all other WTO members alike (and thus respect MFN) by allowing an action such as no distribution at all of foreign films in their market. WTO members can, moreover, take an MFN exemption and, consequently, treat foreign suppliers in a distinct manner.37 This is, of course, not the case under GATT. If they are viewed as goods, films must observe all relevant GATT disciplines, including MFN and NT. Therefore, whether films are classed under GATT or GATS matters. Because of the sequential advent of the two agreements, there is an overlap between the coverage of Article IV of GATT, on the one hand, and obligations assumed with respect to films under GATS, on the other. The “Scheduling Guidelines” include the following example of a

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limitation under Article XVI.2(c) of GATS: “Restrictions on broadcasting time available for foreign firms.”38 This entry is synonymous to a “film quota.” The natural question to ask is why anyone who wishes to make a commitment in the audiovisual sector under GATS would need to add a “restriction on broadcasting time available for foreign firms” in its GATS schedule of concessions, if similar restrictions can lawfully be entered because of Article IV of GATT? This does not sound very coherent, but how did we end up with this mess? To respond to this question, it is quite appropriate to delve into the discussion regarding liberalization of audiovisual services following the advent of GATT. At the multilateral level, the US was the first trading nation to table, in the 1960s, a proposal to the effect that barriers to trade in television programming were technically a violation of GATT rules, accepting nonetheless that some of the principles of Article IV of GATT might well apply. The lukewarm reaction did not stop the US from raising, in 1961, the question of introducing new language into GATT that would address restrictions by a number of countries on trade in television programming. There was no unanimity across GATT contracting parties on this score, and they decided to set up a Working Party to examine the issue. This Working Party reached no final conclusion.39 The uncertainty persisted since Article IV of GATT continued to apply, but obviously not everyone was content with the situation. To make matters worse, the other great commercial power, the EU, had a totally different perspective on the issue. In the 1960s, it kept a low profile since it had not even acquired exclusive competence on trade issues. The US failed in its attempt to introduce a discussion on trade in services in the Tokyo round, but it secured the inclusion of this area in the negotiations of the Uruguay round. The EU was called on to reply to the voices asking for liberalization of audiovisual services. In a proposal that it tabled during the negotiation of the Uruguay round on audiovisual services, the EU left no one in doubt that it was not eager to immediately extend MFN and NT to foreign services suppliers: Article 3: Most favoured nation treatment As far as the origin of a work determines its cultural content, the Agreement shall not affect the right of a party not to accord a treatment as favourable as that accorded in like circumstances to services or providers of services of any other party. Article 4: National treatment Parties may apply or introduce measures providing for some requirements of origin applicable to audiovisual works for cultural reasons. The Agreement shall not affect the right of a party not to accord, on the basis of measures referred to in paragraph 1, a treatment as favourable as that accorded in like circumstances to its own services or providers of services.40

There is ample evidence that during the Uruguay round, there were discussions among the trading nations regarding the relevance of Article IV of GATT. The delegates of various WTO members (the EU, Hungary, Japan, Korea, Switzerland, the US, etc.) made extensive references to Article IV of GATT. They did not reproduce the GATT regime with respect

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to films in GATS, though. In fact, they negotiated a new agreement (GATS), where not only would film quotas be permissible (as in GATT), but also annotations on the principle of MFN would be allowed.41 This last point deserves attention. Article III.10 of GATT reflects an exception for film quotas from Article III of GATT in favor of national films. It does not allow deviations from MFN. Article IV of GATT does not alter this approach. GATS negotiators, nevertheless, did not feel constrained by the GATT regime and allowed deviations from MFN with respect to film quotas—an obvious violation of Article IV of GATT. It would seem, thus, that the advent of GATS should signal that from that moment on, films should be subjected only to the GATS disciplines, and that Article IV of GATT would lose its utility. Let us see whether this preliminary conclusion still holds after we have reviewed the relevant case law. 7.3.3.3 Distinguishing GATT from GATS: A Line in the Sand? The wider issue of the boundary between a good and a service42 has been addressed by WTO adjudicating bodies. The two agreements (GATT and GATS) were not negotiated simultaneously.43 The frontier between liberalization of trade in goods and services has occupied the minds of negotiators elsewhere as well, in other integration processes. The Treaty Establishing the European Community (ECT), the precursor of the Treaty on the Functioning of the European Union (TFEU), abolished any overlap between measures affecting trade in goods and measures affecting trade in services, without drawing a bright line between goods and services. Article 50 (previously, Article 60) of ECT reads: Services shall be considered to be “services” within the meaning of this Treaty where they are normally provided for remuneration, insofar as they are not governed by the provisions relating to freedom of movement of goods, capital and persons.

This is not very informative, and, unsurprisingly, disputes regarding the taxonomy of transactions were often brought before the adjudicating bodies of the EU. Classification of films (and film quotas), for example, has occupied the attention of EU courts (as it has occupied the courts in various other legal orders). In the EU, the Saachi jurisprudence clarified that trade in television transmission involved trade in services, whereas in Cinethèque, the European Court of Justice (ECJ) held that trade in videocassettes involved goods, not services.44 In the WTO, this issue arose in a dispute between the US and Canada. In Canada– Periodicals, the issue was whether the Canadian Excise Tax Act should come under the purview of GATT or GATS since, as Canada had argued, the tax (equal to 80 percent of the value of all the advertisements contained in the so-called split-run magazines) was imposed on a service (advertising) and was therefore only subject to the disciplines of GATS. Canada had further argued that the measure at hand could be reviewed only under

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the NT obligation of GATS (Article XVII)—under which, however, no specific commitments on advertising had been undertaken. Both the panel and the AB disagreed with the Canadian argument, stating that the measure at hand (a tax) was also a measure affecting trade in goods. On the wider issue regarding the frontier between GATT and GATS, the AB provided a rather noncommittal statement along the following lines (p. 19): The entry into force of the GATS, as Annex 1B of the WTO Agreement, does not diminish the scope of application of the GATT 1994. Indeed, Canada concedes that its position “with respect to the inapplicability of the GATT would have been exactly the same under the GATT 1947, before the GATS had ever been conceived.” We agree with the Panel’s statement: The ordinary meaning of the texts of GATT 1994 and GATS as well as Article II:2 of the WTO Agreement, taken together, indicates that obligations under GATT 1994 and GATS can co-exist and that one does not override the other. We do not find it necessary to pronounce on the issue of whether there can be potential overlaps between the GATT 1994 and the GATS, as both participants agreed that it is not relevant in this appeal. (italics in the original)

The AB then held that the Canadian measure at issue applied to trade in goods and subsequently examined the measure under Article III.2 of GATT. In short, in Canada– Periodicals, the AB held that the obligations of both agreements can coexist. This finding amounted to a nonfinding when it comes to clarifying the relationship between GATT and GATS. What if a measure affects trade in goods, but no commitments under GATS have been entered? It was no surprise, therefore, that the issue was brought before WTO adjudicators again before too long, in EC–Bananas III. There, the EU defended the view that GATT and GATS cannot overlap as a matter of principle. The panel disagreed because essentially, in the absence of overlap, WTO members would easily be in a position to circumvent their WTO obligations. The panel offered the following example to highlight its view at § 7.283: For example, a measure in the transport sector regulating the transportation of merchandise in the territory of a Member could subject imported products to less favourable transportation conditions compared to those applicable to like domestic products. Such a measure would adversely affect the competitive position of imported products in a manner which would not be consistent with that Member’s obligation to provide national treatment to such products. If the scope of GATT and GATS were interpreted to be mutually exclusive, that Member could escape its national treatment obligation and the Members whose products have been discriminated against would have no possibility of legal recourse on account that the measure regulates ”services” and not goods.

In § 7.285, the panel defined the scope of application of GATS in the following terms: [N]o measures are excluded a priori from the scope of the GATS as defined by its provisions. The scope of the GATS encompasses any measure of a Member to the extent it affects the supply of a

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service regardless of whether such measure directly governs the supply of a service or whether it regulates other matters but nevertheless affects trade in services.

Based on this interpretation of the scope of GATS, the Panel on EC–Bananas III concluded (§ 7.286) that there was no legal basis for an a priori exclusion of measures within the EC banana import licensing regime from the scope of the GATS.

The AB upheld this finding (p. 220). It reaffirmed that in certain circumstances, GATT and GATS may overlap (p. 221): there is yet a third category of measures that could be found to fall within the scope of both the GATT 1994 and the GATS. These are measures that involve a service relating to a particular good or service supplied in conjunction with a particular good. In all such cases in this third category, the measure in question could be scrutinized under both the GATT 1994 and the GATS. However, while the same measure could be scrutinized under both agreements, the specific aspects of that measure examined under each agreement could be different. Under the GATT 1994, the focus is on how the measure affects the goods involved. Under the GATS, the focus is on how the measure affects the supply of the service or the service suppliers involved. Whether a certain measure affecting the supply of a service related to a particular good is scrutinized under the GATT 1994 or the GATS, or both, is a matter that can only be determined on a case-by-case basis.

At the end of the day, the AB suggests that scrutiny under both agreements is warranted.45 This is hardly illuminating. We believe that commitments under GATS should take precedence for the reasons that we explain in what immediately follows. 7.3.3.4 GATS before GATT The narrower question discussed here concerns the relationship between GATT and GATS regarding film quotas. So far, it has been established that the GATS framers seem to have behaved as if they were unconstrained by the GATT regime on film quotas, but there is no proof that precedence should be given to GATS commitments on film quotas. Nevertheless, it should be commitments made under GATS that should matter, and not Article IV of GATT any longer. GATS is, for all practical purposes, the subsequent treaty and the most recent expression of contractual will. For this reason alone, it should take precedence. If negotiators wanted the opposite to be the case, they could have indicated the continuing relevance of Article IV of GATT in their agreement, their commitments, or both. They did not, however. The most recent expression should take precedence, and the more recent expression has been reflected in the GATS schedules of concessions. This is why, in the name of Article IV of GATT, WTO members should not be allowed to backtrack from commitments entered in the audiovisual sector. A WTO document46 provides an overview of the commitments entered (§ 69): Many Members (48) have scheduled one or more MFN exemptions pertaining to audiovisual services. Most of these Members have no specific commitments in the sector. Overall, 114 MFN

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exemptions have been listed for audiovisual services, making it the sector with most exemptions. These often relate to the conferring of national treatment to works covered by co-production agreements, support programmes, or, in the case of European countries, the Council of Europe Convention on Transfrontier Television. Some MFN exemptions also reserve the right to retaliate against adverse, unfair or unreasonable trading conditions abroad. MFN exemptions in the sector are often justified by the relevant Members on the basis of cultural policy purposes.

Tables 7.1 and 7.2 appear in the same document and explain in detail commitments entered into by WTO members in the audiovisual sector (p. 246):47 Table 7.1 Specific commitments in audiovisual services Members

02.D.a.

02.D.b.

02.D.c.

Armenia Cape Verde Central African Rep. China Dominican Republic El Salvador Gambia Georgia Hong Kong, China India Israel Japan Jordan Kenya Korea Kyrgyz Republic Lesotho Malaysia Mexico New Zealand Nicaragua Oman Panama Saudi Arabia Singapore Chinese Taipei Thailand Tonga United States Vietnam Total

X X X X

X

X X X

X X X X X X X X X X X X X X X X X X X X X X X X 28

X X X X

X X

02.D.d.

X

X X X X X X X X X 19

X X X X

X X X

02.D.f.

X X X

X X

X X X X X

02.D.e.

X

X X X X

X X X

X

X

X X

X X

X X X X

X X X X

X

14

9

X X X 16

X 6

Total 4 3 6 3 2 2 4 4 3 1 1 3 3 2 2 5 4 2 2 5 2 2 4 2 2 4 2 4 6 3 92

Note: D.a. corresponds to motion picture videotape production and distribution services; D.b. to motion picture projections; D.c. to radio and television services; D.d. to radio and television transmission services; D.e. to sound recordings; and D.f. to other audiovisual services.

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Table 7.2 Level of commitments Percentage of Entries per Level of Commitment (market access and national treatment columns)

Mode 1

Mode 2

Mode 3

Full commitments Partial commitments Unbound

66.7 11.1 22.2

87.3 3.7 8.9

66.8 22.6 10.5

All costs and charges must be reasonable (as per Articles V.3 and V.4 of GATT);

Where does this all lead us with regard to the wider issue, that is, the relationship between GATT and GATS? So, assume, for example, that Home makes commitments on distributors whereby it grants NT to a limited number of foreign suppliers. Foreign cannot challenge Home by arguing that its measure affects trade and has led to fewer goods being traded than if Home had opened up its market to a larger number of distributors of the said commodity. In a similar vein, Foreign cannot challenge private decisions by distributors in Home’s market to distribute only goods originating in Home. In other words, Home’s decision to allow a limited number of distributors of a commodity—or to make no commitments at all—should not be equated to a “measure” according to Article III of GATT. In the name of the term “affecting” that has been introduced into GATT, the interpreter should not adopt a liberal view and subsume services trade into the GATT discipline. When in doubt, the analysis should begin by asking whether a measure is covered by GATS. If the response is negative, then the interpreter should move to discuss it under GATT. In the opposite scenario, it should apply the GATS. 7.3.4

Income Taxes, Social Security, and Payroll Taxes

At the Havana Conference, the following view was reflected: “neither income taxes nor import duties fall within the scope of Article 18 (of the Havana Charter–Article III of the GATT) which is concerned solely with internal taxes on goods.”48 No definitive agreement was reached on this score at that time, though. A few years later, this issue was extensively rediscussed in the context of the WP on BTA that concluded its work and issued a report in 1971. 7.3.4.1 The WP on BTA The group was established following a request by the US. In the 1960s and 1970s, there was a lot of concern in the US about the impact of European indirect taxes, such as VAT, on international trade. European economies were becoming more competitive during this period, and the view gained ground in the US that their taxation schemes had contributed to growth by conferring an unfair advantage to those practicing them. The question was whether GATT neutrality toward tax systems (a natural consequence of the negative

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integration character of the GATT) was indeed the appropriate solution, or whether some sort of “corrective” action should be introduced. In this vein, tax differences should be somehow accounted for in the importing trading nation. GATT does not impose specific tax policies of course, and GATT contracting parties are left free to choose imposing direct taxes, indirect taxes, or a combination of the two. The US tax system is based on direct taxation (e.g., income tax), whereas most European economies opted for indirect taxation (e.g., consumption tax). GATT did not request trading nations to privilege direct over indirect taxes (or vice versa). The preference for direct taxes (just like the preference for indirect taxes) was an issue that had been decided only by national parliaments. GATT added a twist, though: direct taxes would observe the “origin” principle, whereas indirect taxes the “destination” principle. The argument was that the US had suffered as a result and the European economies had profited, since the former could not profit from lower taxes in the export markets worldwide, whereas the latter could. The fast growth of the European economies in the 1960s did not help pacify those arguing for some form of action at the GATT level. Voices were being raised in the US regarding GATT’s benign attitude toward indirect taxes, as opposed to its hostile stance toward direct taxes.49 What exactly did the benign stance consisted of? Article XVI of GATT underwent substantial revision during the GATT Review Session of 1955, when it was agreed that The exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued shall not be deemed to be a subsidy.

This was an implicit acknowledgment of the primacy of the destination principle50 when it comes to indirect taxes. Tax rebates, thus, for goods destined for consumption abroad would not be punished because of the acceptance of the destination principle. According to the destination principle, internationally traded commodities should be subjected to taxes in the importing country and should be exempted from similar taxes imposed by the exporting country (to avoid double taxation). This principle contrasts with the origin principle, whereby it is the country where the good originates (as opposed to the country of destination) that retains the right to tax it. What taxes can be rebated at the border, though? Only indirect taxes. It would be an awkward exercise to try to calculate which percentage of a property tax should be rebated for exported goods. So the heart of the US acrimony with EU taxation schemes was this: EU operators would profit from tax havens abroad because most of the taxation on EU goods was indirect. US companies could not profit the same way, because the taxation was direct. The US seemed to have two options: either reduce the level of domestic taxation or switch to indirect taxation. However, it chose to do neither; instead, it requested some corrective action at the GATT level.

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The US was not very happy with the GATT attitude on indirect taxes and, a few years later, in 1960, the Working Party on Subsidies was established,51 which was meant to reinforce the disciplines on subsidies and adopted a number of practices construed to be subsidies. Point 5 of its report referred, inter alia, to: (c) The remission, calculated in relation to exports, direct taxes, or social welfare charges on industrial or commercial enterprises; (d) the exemption, in respect of exported goods, of charges or taxes, other than charges in connexion with importation or indirect taxes levied at one or several stages on the same goods if sold for internal consumption; or the payment, in respect of exported goods, of amounts exceeding those effectively levied at one or several stages on these goods in the form of indirect taxes or of the charges in connexion with importation or in both forms;

Its report was adopted along with a Declaration Giving Effect to Article XVI.4 of GATT: The Working Party agreed that this list should not be considered exhaustive or to limit in any way the generality of the provisions of paragraph 4 of Article XVI. It noted that the governments prepared to accept the declaration contained in Annex A agreed that, for the purpose of that declaration, these practices generally are to be considered as subsidies in the sense of Article XVI:4 or are covered by the Articles of Agreement of the International Monetary Fund. The representatives of governments which were not prepared to accept that declaration were not able to subscribe at this juncture to a precise interpretation of the term “subsidies,” but had no objection to the above interpretation being accepted by the future parties to that declaration for the purposes of its application.52

This report, thus, confirmed the relevance and acceptance by trading nations of the origin principle with respect to direct taxes, and of the destination principle with respect to indirect taxes. There was, however, neither an agreement to endorse the destination principle across the board nor an agreement (in case it were endorsed) about its precise scope. The WP on BTAs was established against this background.53 The narrow question before the WP regarded the consistency of practices by the GATT contracting parties called “border tax adjustments.” This term referred to cases where the customs tariff had been adjusted by the amount of an internal tax already imposed on domestic production. The wider issue was the perceived imbalance regarding the attitude of GATT toward direct and indirect taxation. In the words of the drafters of the WP final report, the mandate was (§ 1): Acting under paragraph 1 of Article XXV and with a view to furthering the objectives of the General Agreement, and taking into account the discussions in the Council: 1. To examine: (a) The provisions of the General Agreement relevant to border tax adjustments; (b) The practices of contracting parties in relation to such adjustments; (c) The possible effects of such adjustments on international trade.

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2. In the light of this examination, to consider any proposals and suggestions that may be put forward; and 3. To report its findings and conclusions on these matters to the Council or to the CONTRACTING PARTIES.54

The term “border tax adjustment” was explained in § 4 of the final report:55 ... as any fiscal measures which put into effect, in whole or in part, the destination principle (i.e. which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enable imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products).

The final report, in § 5, makes it clear that, for a measure to be considered a BTA, the adjustment does not have to take place at the border (that is, at the moment a good goes through customs). It can take place at a later stage (that is, after the importation-related procedures have been completed)—assuming, of course, that the rationale for its imposition is the crossing of the border. The work of the WP, thus, concerned instruments that normally would have come under the purview of Article III.2 of GATT. However, that article is not the only GATT legal provision that is relevant when it comes to operating BTAs. The members of the WP agreed that five other GATT legal provisions were also relevant in the examination of the GATT consistency of BTAs: Articles I,56 II,57 VI, VIII, and XVI. 7.3.4.2 The Outcome The level of tax imposition could be adjusted by both the importing and the exporting state, at least in principle.58 The key question that occupied the minds of the negotiators was: Which taxes could be lawfully adjusted? The WP report reflects agreement on some measures and disagreement on many others. The extent of the agreement is reflected in the following paragraph: ... the Working Party concluded that there was convergence of views to the effect that taxes directly levied on products were eligible for tax adjustment. Examples of such taxes comprised specific excise duties, sales taxes and cascade taxes and the tax on value added. It was agreed that the TVA, regardless of its technical construction (fractioned collection), was equivalent in this respect to a tax levied directly—a retail or sales tax. Furthermore, the Working Party concluded that there was convergence of views to the effect that certain taxes that were not directly levied on products were not eligible for tax adjustment. Examples of such taxes comprised social security charges whether on employers or employees and payroll taxes.59

As a result, security charges and payroll taxes escape the purview of Article III of GATT, in the sense that the importing state (Foreign) could not do something like raise the level of payroll taxes applied by the exporter (Home) to its own. By the same token, Home (if its payroll taxes were higher) cannot adjust them to the level of Foreign when exporting there. The US worries were not addressed through this arrangement.

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There were divergent views regarding the eligibility for adjustment of “taxes occultes” and some other taxes, such as property taxes. The scarcity of complaints with respect to either of these two taxes, however, persuaded negotiators to stop negotiating them any further (§ 15 of the final report): The Working Party noted that there was a divergence of views with regard to the eligibility for adjustment of certain categories of tax and that these could be subdivided into (a) “Taxes occultes,” which the OECD defined as consumption taxes on capital equipment, auxiliary materials, and services used in the transportation and production of other taxable goods. Taxes on advertising, energy, machinery, and transport were among the more important taxes which might be involved. It appeared that adjustment was not normally made for taxes occultes except in countries having a cascade tax; (b) Certain other taxes, such as property taxes, stamp duties, and registration duties … which are not generally considered eligible for tax adjustment. Most countries do not make adjustments for such taxes, but a few do for the payroll taxes and employers’ social security charges referred to in the last sentence of paragraph 14. It was generally felt that while this area of taxation was unclear, its importance—as indicated by the scarcity of complaints reported in connexion with adjustment of taxes occultes—was not such as to justify further examination.60

Finally, there was agreement between negotiators that some taxes, such as cascade taxes,61 were eligible for adjustment, though the modalities for adjusting them were not clear (§ 16 of the final report): The Working Party noted that there were some taxes which, while generally considered eligible for adjustment, presented a problem because of the difficulty in some cases of calculating exactly the amount of compensation. Examples of such difficulties were encountered in cascade taxes. For adjustment, countries operating cascade systems usually resorted to calculating average rates of rebate for categories of products rather than calculating the actual tax levied on a particular product. It was noted, however, that most cascade tax systems were to be replaced by TVA systems, and that therefore the area in which such problems occurred was diminishing. Other examples included composite goods which, on export, contained ingredients for which the Working Party agreed in principle it was administratively sensible and sufficiently accurate to rebate by average rates for a given class of goods.

We can thus conclude that the WP on BTAs did not manage to resolve all ambiguities and disagreements regarding tax adjustability. Disagreements between trading partners regarding similar issues continued to persist, and some of them found their way into GATT/ WTO adjudication. Notoriously, many EU member states and the US were entangled in legal battles concerning the consistency of their tax regimes with the GATT. The US won sometimes, but it also lost some prominent battles. The most illustrative dispute was between the EU and the US concerning two US tax laws,62 both of which were condemned, the first by a GATT panel, the second by a WTO panel and the AB.63

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7.3.4.3 The Legal Value of the Report The GATT CONTRACTING PARTIES adopted the report of the WP on BTAs. It is unclear whether it is a decision by the CONTRACTING PARTIES, and thus comes under the purview of Article 1(b)(iv) of GATT 1994, or whether it is part of the “GATT acquis,” and thus comes under the purview of Article XVI of the Agreement Establishing the WTO.64 No matter how it is classified, the WP report has legal significance. If it comes under the former, it should be regarded as binding on all WTO members, whereas if it comes under the latter, it should be regarded as creating legitimate expectations that WTO practice will be guided by it.65 It seems that the better arguments lie with the view that the WP report should come under Article 1(b)(iv) of GATT 1994. After all, the WP was not convened to adjudicate a dispute between two GATT contracting parties. It was formed to discuss the treatment of tax adjustments in general. In subsequent practice, a number of WTO panel and AB reports have referred to this report—but without classifying it under Article 1(b)(iv) of GATT 1994 or under Article XVI of the WTO Agreement.66 The fact that it has been often cited in WTO case law leaves little room for doubt that recourse to it will be made again if, for example, the question comes up of whether payroll taxes can be adjusted.67 7.3.5

Investment Protection

GATT does not contain comprehensive disciplines on investment protection. In fact, it does not mention any similar measure explicitly. There is undeniably an intimate link, between trade and investment, though, and it should not come as surprise at all that a number of discussions on the interrelationship between trade and investment have taken place over the years, both in the GATT/WTO and in other forums. We will cover all this in chapter 7 of volume 2, where we discuss in detail TRIMs, the WTO agreement dealing with trade-related investment measures. For now, we limit ourselves to one issue: what is GATT’s relevance to investment laws/measures? The GATT panel on Canada–FIRA addressed this issue head on. In this case, the US had challenged the consistency of the Canadian Foreign Investment Review Act (FIRA) with various GATT provisions, including Article III.4 of GATT. The Canadian act had subjected approval of foreign investment into Canada upon demonstration that investment would have entailed “significant benefit to Canada.”68 In this vein, foreign investors were required to make specific undertakings, whereby they would promise, inter alia, to purchase Canadian goods (roughly, to ensure a certain level of Canadian added value in their production process). The panel explained in three different places the limits of the coverage of investment protection under GATT (§§ 5.1, 5.9, 6.5): In view of the fact that the General Agreement does not prevent Canada from exercising its sovereign right to regulate foreign direct investments, the Panel examined the purchase and export undertakings

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359

by investors subject to the Foreign Investment Review Act of Canada solely in the light of Canada’s trade obligations under the General Agreement. … The purpose of Article III:4 is not to protect the interests of the foreign investor but to ensure that goods originating in any other contracting party benefit from treatment no less favourable than domestic goods … … … the national treatment obligations of Article III of the General Agreement do not apply to foreign persons or firms but to imported products.

It follows that GATT is relevant to investment measures as they apply to goods and not to investors’ protection, an issue that is typically dealt with in bilateral investment treaties (BITs). We will return to this discussion in chapter 7 of volume 2. For now, it is enough to say that case law has extended the coverage of GATT to investment-related measures such as local content requirements and export performance requirements, where treatment of goods is conditioned on purchasing or using local added value and enhancing the overall export performance, respectively. This is all there is in terms of GATT’s relevance to similar measures. 7.3.6

Goods in Transit

Does NT cover transiting goods? It is Article V of GATT that condones the freedom of transit. According to Article V.1, a good is in transit if the passage through a territory is only a portion of the complete journey. Goods that are transiting are not destined for sale in the market of a transiting state. The wording and the negotiating record of this provision69 make it clear that, as a matter of WTO law, WTO members incur two obligations with respect to transit.70 First, they must allow transiting goods to use “the routes most convenient for international transit” (Article V.2 of GATT); second, they cannot discriminate across different foreign sources of supply when it comes to observing their obligations regarding transiting goods (Article V.5 of GATT, which, in fact, reflects the MFN obligation). On its face, therefore, Article V of GATT does not include an obligation to observe NT. The MFN obligation mentioned above is straightforward: WTO members cannot distinguish between products originating in other WTO members with respect to modes of transport. The first obligation mentioned, namely, the obligation to allow transiting goods to use “the routes most convenient for international transit,” was discussed in Colombia— Ports of Entry, where the panel concluded that Article V.2 of GATT required the extension of unrestricted access via the most convenient routes for the passage of goods in international transit, whether or not the goods at hand had been trans-shipped, warehoused, or break-bulked, or had changed the mode of transport. Accordingly, goods in international

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transit from any WTO member must, in principle, be allowed entry whenever they are destined for the territory of a third country. In the panel’s view, a WTO member is not required, by virtue of this provision, to guarantee transport on any or all routes in its territory, but only on the ones “most convenient” for transport through its territory (§ 7.401). Once again though, NT does not enter the realm of the picture. The assumption in Article V of GATT is that WTO members have the power to guarantee freedom of transit. This was probably a safe assumption back in the 1940s, but not necessarily today. What if, for example, highways and railroad tracks have been privatized? In similar cases, transiting goods will be at the mercy of private agents, and their situation could be delicate if form example these agents are not constrained by domestic law.71 The question recently arose whether transiting goods should be subjected to other laws and regulations as well, which are not intimately linked to customs procedures. For example, could counterfeit goods be subjected to domestic laws regarding protection of intellectual property rights, even if they are simply transiting through a WTO member? If yes, then the NT obligation would have to apply. The issue has been discussed in the TRIPs Council a few times since May 2009, but without WTO members being in a position to arrive at a common solution.72 Under the DSU, two requests for consultations were submitted: one by India (11 May 2010; DS/408/1), and one by Brazil (12 May 2010; DS/409/1), and the two cases are almost identical. They concern repeated seizures, on patent infringement grounds, of generic drugs originating in India but transiting through ports and airports in the Netherlands to third-country destinations, including Brazil. Brazil and India have alleged that the measures at issue (seizures) were, inter alia, inconsistent with the obligations of the EU under Article V of GATT. The argument that they raised was that, because the seized goods were transiting, they could not come under the disciplines of Article III of GATT. To date, no one has requested the establishment of a panel in either dispute.73 In the Doha round, an attempt was made to subject goods in transit to the laws of the transiting state and bring them within the four corners of NT. The negotiating document states: With respect to all regulations and formalities imposed on or in connection with traffic in transit, including charges for transportation, traffic regulations, safety regulations and environmental regulations, Members shall accord to traffic in transit treatment no less favourable than that accorded to [export or import traffic/domestic traffic/traffic which is not in transit]. This principle refers to like products on the same route under like conditions.74

Had this provision been adopted, it would have imposed NT on transiting goods as well. It was not, though, as it did not manage to gather any momentum. Thus, as things stand, the conclusion should be that goods in transit escape the purview of Article III of GATT.75 The treatment of transiting goods concludes our discussion on exemptions from NT.

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7.4 The Scope of National Treatment Two types of measures come under the aegis of Article III of GATT: direct taxes on goods and all other measures affecting trade (e.g., indirect taxes, as well as measures of a regulatory nature). There are four questions we need to address before we discuss the GATT discipline on measures coming under its purview, which are relevant in delineating its ambit, namely: 1. Does this provision cover only cases of de jure discrimination, or both de facto and de jure discrimination? 2. Is it applicable to goods for which duties have been bound, or to all goods, regardless of whether duties have been bound or not? 3. Does the locus of enforcement of the measure matter, that is, can measures enforced at the border still come under the purview of Article III of GATT, and, if so, under what conditions? 4. What are the limits imposed on the power of WTO members to regulate imports? Can they, for example, condition importation upon demonstration that a particular process of production has been followed? 7.4.1

De Jure, De Facto Discrimination

GATT panels and WTO adjudicating bodies have consistently held that Article III of GATT prohibits, not only de jure, but also de facto discrimination. Discussing MFN in the GATS context, the AB, in its report on EC–Bananas III, explained why the extension to de facto discrimination was necessary (§ 233): [I]f Article II [of GATS] was not applicable to de facto discrimination, it would not be difficult—and, indeed, it would be a good deal easier in the case of trade in services, than in the case of trade in goods—to devise discriminatory measures aimed at circumventing the basic purpose of that Article. (italics in the original)76

The same logic applies of course to NT in the goods-context: punishment of de facto discrimination as an insurance policy against the circumvention of NT. While de jure discrimination is easy to define (since by law, a measure confers an advantage on a class of goods because of their origin), it is not easy to define de facto discrimination. Indeed, definitions of this term are rare in case law, and the Panel on Canada—Pharmaceutical Patents emerges as a rare instance where a definition of de facto discrimination has been provided (§ 7.101): [d]e facto discrimination is a general term describing the legal conclusion that an ostensibly neutral measure transgresses a non-discrimination norm because its actual effect is to impose differentially disadvantageous consequences on certain parties, and because those differential effects are found to be wrong or unjustifiable. (italics in the original)

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In practice, the overwhelming majority of disputes brought before the WTO concern claims of de facto discrimination. WTO panels and the AB have originally employed the same standard of review, regardless of whether they have dealt with cases that included claims of de jure or de facto discrimination.77 Over the years, a change has occurred, and Panels and the AB have moved to differentiate between cases of de jure and cases of de facto discrimination, requesting a higher standards of proof in the latter cases. Citing prior case law established by the AB, the Panel on US–Tuna II (Mexico) (Article 21.5–Mexico) held that complainants claiming a case of de facto discrimination face the arduous task of showing why seemingly nondiscriminatory measures still discriminate in favor of domestic goods (§ 7.65), as we saw in chapter 4. Although thus case concerns a claim of de facto discrimination that ran counter the MFN obligation embedded in Article I of GATT, it should find application in the context of NT as well. After all, both provisions reflect the same obligation, namely, nondiscrimination. 7.4.2

Duties Bound and Unbound

WTO members must observe NT with respect to all competing goods, regardless of whether their import duties are bound or left unbound. The AB left no doubt in this respect in its report on Japan–Alcoholic Beverages II, (p. 17): The Article III national treatment obligation is a general prohibition on the use of internal taxes and other internal regulatory measures so as to afford protection to domestic production. This obligation clearly extends also to products not bound under Article II.

This understanding of the NT obligation has strong underpinnings in the wording of Article III of GATT, and it is in line with the interpretation of the provision as an antiprotectionism clause, as discussed earlier in this chapter when examining the AB report on Japan–Alcoholic Beverages II. A clarification seems necessary, though. Think of the following three scenarios depicting Home’s policies, as presented in table 7.3 below: Table 7.3 Concession erosion versus protectionism Customs Duty 1 2 3

Orange Apple Orange Apple Orange Apple

5% 10% 5%

Sales Tax

Concession Erosion

Protectionism

5% 10% 5% 10% 5% 10%

No issue

May be an issue

No issue

May be an issue

No issue

May be an issue

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363

In scenario 1, Home has not bound its duties in apples or oranges. It imposes a higher sales tax on apples. If the purpose of Article III of GATT were to simply safeguard the value of concessions, then there is no issue for Home to be accountable for, since no customs duties have been bound, and therefore nothing to safeguard. Conversely, if the purpose of this provision was to combat protectionism (assuming again a reasonable understanding of the term, as highlighted previously), then there may be an issue if Home produces oranges and no or only a few apples and its consumers treat the two products as substitutes. We obtain a similar outcome in the remaining two scenarios; that is, in the case where Home has bound the customs duties of both goods or just one of them. The objective of Article III of GATT, thus, matters a lot when it comes to defining its scope. The disciplining of domestic policies is more meaningful when we understand this provision not as just an instrument for safeguarding tariff concessions, but as a means to ensure that no advantage will be granted to domestic production through unilateral (e.g., not negotiable) measures. The AB report on Japan–Alcoholic Beverages II certainly sided with the wider role for Article III of GATT and put to rest any arguments in favor of constructing this provision as merely a vehicle aiming to safeguard tariff concessions. 7.4.3

Domestic Measures Enforced at the Border

Domestic measures enforced at the border come, according to the Interpretative Note ad Article III of GATT, under the purview of Article III of GATT. Thus, a sales ban, which is enforced at the border (and could be mistaken for a trade embargo), still is considered a domestic measure since it bans sales for both domestic and imported goods. Note that neither the objective nor the description of the measure in national instruments influences the classification. It is the panels’ evaluation of measures and their characterization as border or domestic policy that matters. This issue was raised before the GATT panel on EEC–Parts and Components. There, according to Article 5.1 of the EU regulation, antidumping (AD) duties could be imposed on goods assembled in the EU if the following conditions had been cumulatively met: 1.

EU had initiated an investigation in order to impose AD duties on a series of goods.

2. Subsequent to the initiation of investigation, exporters, instead of continuing to export the final goods at hand, had been shipping parts of the final product to the EU. 3. Parts were not like goods to the final product, and, because of this element, exporters believed that they would avoid paying onerous AD duties. 4. Exporters further arranged that parties related to them assembled the final good and sold it in its final form inside the EU market. The hopes of exporters did not materialize, as the EU decided that the goods at hand (parts and components of the final good) were like goods to goods already paying AD

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duties (the final good). As a result, the EU subjected the imported parts and components to the same AD duty that the final good had been paying. The question was whether the EU measure, which aimed at avoiding circumvention of AD duties, qualified as a border or an internal measure. AD duties are, of course, border measures since they are tariffs additional to those applied/bound and are imposed upon importation of goods. (AD duties will be discussed in chapter 2, volume 2.) The panel decided to review the consistency of the EU measure with Article III of GATT, not with Article II. In doing so, it held that neither the purpose nor the description of the measure in domestic law had any bearing on its legal qualification (§§ 5.6–5.7). It went on to ask whether goods of EU origin competing with the imported parts and components were being subjected to the same impositions. There is nothing wrong with panels developing their own reasoning when it comes to qualifying a measure as border or domestic. What matters is the legal standard for performing this test. In our view, the starting point should be the measures included in Articles II and VIII of GATT discussed in chapter 3, as well as the measures coming under the purview of Article XI of GATT, discussed in chapter 2. If a measure does not come under the aegis of these provisions, and if it has not been exempted from the coverage of Article III of GATT as discussed earlier, then it should qualify as domestic measure. As such, it should observe NT. 7.4.4

Jurisdictional Issues

Nowhere does Article III (or GATT in general) discuss the jurisdictional ambit of domestic measures. Customary, public international law is the area where this issue has been raised and addressed, but there is no explicit reference to this law anywhere in the WTO Agreements. In US–Shrimp, the AB came close to discussing in clear terms the relevance of customary international law in this respect. The AB discussed the jurisdictional ambit of national norms, holding that there was a need for a “nexus” between the regulating state and the regulated transaction. It fell short, nevertheless, of providing an explicit acknowledgment of the relevance of this body of law in the WTO.78 Still, this omission notwithstanding, the whole GATT edifice becomes unworkable absent some sort of recognition that trading nations have a precise jurisdictional ambit. How can NT function unless one sees a well-defined jurisdictional scope around it? Absent a jurisdictional clause, for example, one could imagine Home imposing consumption taxes on goods traded in Foreign. That would, of course, be absurd since it would make many GATT provisions, like Article III of GATT, totally unmanageable. One might argue that there is no need for similar discussions since WTO members always have competence to regulate imports in their national market. Their competence, nevertheless, stems from the territoriality principle, a rule of customary international law conferring jurisdiction, and not from GATT itself. So, although no direct reference to

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jurisdictional rules in public international law has been explicitly made in the body of GATT, these rules must have been the working hypothesis of negotiators.79 7.5

Direct Taxes on Products

Article III.2 of GATT covers “internal charges” (e.g., domestic taxes and other charges of pecuniary nature). VAT, consumption taxes, and other taxes would come under its ambit. In China–Auto Parts, the AB explained its understanding of the term “internal charge” as follows (§§ 163–165): ... a key indicator of whether a charge constitutes an “internal charge” within the meaning of Article III:2 of GATT 1994 is “whether the obligation to pay such charge accrues because of an internal factor (e.g., because the product was re-sold internally or because the product was used internally), in the sense that such “internal factor” occurs after the importation of the product of one Member into the territory of another Member.” We also observe that the Harmonized System does not serve as relevant context for the interpretation of the term “internal charges” in Article III:2. In sum, we see the Harmonized System as context that is most relevant to issues of classification of products. The Harmonized System complements Members’Schedules and confirms the general principle that it is “the ‘objective characteristics’ of the product in question when presented for classification at the border” that determine their classification and, consequently, the applicable customs duty. The Harmonized System, and the product categories that it contains, cannot trump the criteria contained in Article II:1(b) and Article III:2, which distinguish a border measure from an internal charge under the GATT 1994. Among WTO Members, it is these GATT provisions that prevail, and that define the relevant characteristics of ordinary customs duties for WTO purposes. Thus, even if the Harmonized System and GIR 2(a) would allow auto parts imported in multiple shipments to be classified as complete vehicles based on subsequent common assembly, as China suggests, this would not per se affect the criteria that define an ordinary customs duty under Article II:1(b). In any case, the Panel did not accept the broad interpretation of GIR 2(a) suggested by China. Rather, the Panel remarked that its findings on the meaning of “as presented” in GIR 2(a) did not appear to contradict its finding as to the meaning of “on their importation” in Article II:1(b). In our view, accepting that a charge imposed on auto parts following, and as a consequence of, their assembly into a complete motor vehicle can constitute an ordinary customs duty would significantly limit the scope of “internal charges” that fall within the scope of Article III:2 of the GATT 1994. We also share the concerns expressed by the Panel to the effect that the security and predictability of tariff concessions would be undermined if ordinary customs duties could be applied based on factors and events that occur internally, rather than at the moment and by virtue of importation, and that this, in turn, would upset the carefully negotiated and balanced structure of key GATT rights and obligations, including the different disciplines imposed on ordinary customs duties and internal charges.80

Article III.2 of GATT cares about internal charges applied to two classes of goods: “directly competitive or substitutable” (DCS) and “like goods.” What matters each time is the internal charge applied to a pair of goods (domestic, imported) that qualify as either DCS or like goods.

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A natural question to ask, is why limit NT to similar pairs of goods? Why for example allow Home to impose a 50 percent tax on domestic and imported butter and margarine, and 0 percent on imported and domestic textiles goods? Do not similar policies shift costs to foreign producers/traders? Undeniably, yes. What stops Home, in our example, from diverting the proceeds from taxes on butter/margarine to its producers of textiles goods? We will see in chapter 3, volume 2, that similar disbursement could be characterized as subsidies, and Home might be facing countervailing action against it. The major reason why drafters limited the scope of beggar-thy-neighbor policies punished by Article III of GATT to pairs of DCS or like goods is this: in the butter/textiles example above, it is plausible, but difficult to show that Home has in fact been pursuing a beggarthy-neighbor policy. Moreover, the incidence on the value of concessions on butter will not be that dramatic when proceeds from taxation are used to finance improvements in the textile industry. In the butter/butter example, the presumption that differential taxes aim to protect is more credible. Furthermore, the incidence on the value of tariff concessions is more direct in the latter case and GATT framers after all wanted to ensure that the value of all concessions would not be eviscerated through subsequent unilateral action. Case law has established that like goods are a subset of DCS goods (in the sense that sharing a DCS relationship is a necessary, but not sufficient, condition for likeness). The AB in its report on Korea–Alcoholic Beverages held as much (§ 118): “Like” products are a subset of directly competitive or substitutable products: all like products are, by definition, directly competitive or substitutable products, whereas not all “directly competitive or substitutable” products are “like.”

It follows that case law regarding the definition of “DCS products” is ipso facto relevant for the interpretation of the term “like products.” For this reason, we will start our discussion with an explanation of the discipline on DCS goods. 7.5.1

DCS Products

By virtue of Article III.2 of GATT (second sentence), a WTO member cannot tax an imported good so as to afford protection to the domestic DCS good. 7.5.1.1 Why Include DCS Products? What is the rationale for including a discipline on DCS goods? Yet again, an illustration seems appropriate. Suppose that Home agreed to bind its tariffs on butter at 5 percent. If butter originating in Foreign would then be subjected to the same level of VAT applied by Home to its own butter, Home would be treating domestic and imported butter in an evenhanded manner. What about foreign butter and domestic margarine? Should Home apply the same level of VAT on these two goods? Yes, is the response suggested by the inclusion of DCS products in the NT discipline. Here is why.

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The fear was that if DCS products were not included trading nations might find it easy to eviscerate the value of tariff concessions. Assume that Home produces coffee and chicory, whereas Foreign produces only chicory. Home agrees to impose a 5 percent tariff on imports of coffee. Home also imposes a 5 percent consumption tax on coffee, but a 50 percent consumption tax on chicory. If the pretax price of the two goods is symmetric, Foreign will soon realize that the tariff concession it managed to extract from Home on coffee (for which it has paid a consideration) does not mean much. Should it matter if Home produces equal volumes of coffee and chicory or butter and margarine for that matter? The records of the Havana Conference reveal some interesting discussions regarding the rationale for the inclusion of DCS products in the NT provision. It was stated, for example, that an internal law that might tax a domestic product (such as domestic margarine) lower than imported and domestic butter (a DCS product) would not violate NT if domestic production of butter were substantial.81 Moreover, during the first stage of negotiations, some had proposed that internal taxes, which afforded protection to DCS products in cases where there was no substantial production of the like product, could be maintained subject to negotiation for their elimination or reduction.82 Section 17 of the report of the WP on BTA reads: During the drafting of the Havana Charter, and thus the GATT, it was felt that this might occur where there was no, or negligible, domestic production of the imported product. Various examples were quoted; it was for instance suggested that a country which did not produce coffee could not impose tax on coffee, unless it placed a similar tax on chicory, a competitive product.

The intent behind this proposal was to ensure that, in the absence of domestic production of like products, taxes could not be used to favor domestic DCS products. After all, imported chicory would be competing with domestic coffee, and, unless it could do so on roughly equal terms, why pay consideration for the binding of import duties on chicory in the first place?83 Negotiators eventually agreed to drop references to “substantial production” and provide a blanket prohibition to use fiscal measures to afford protection to all domestic DCS goods, regardless of the amount of production involved, following a US proposal to this effect.84 This US proposal effectively closed the door to a narrow role for Article III of GATT: that is, merely safeguarding tariff concessions. It made out of this provision a discipline with wider scope: no protection to DCS products would be afforded at all through domestic policies, regardless of whether imported goods had been bound or not. Assume that Home produces in equal volumes coffee and chicory. Assume also that it imposes a 5 percent consumption tax on the former and a 50 percent consumption tax on the latter. Following its accession to the GATT, irrespective of whether it has entered tariff concessions regarding one or the other or both goods, it will have to amend its consumption taxes and ensure that taxes on coffee and chicory are not applied so as to afford protection to one or the

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other. If it wants to keep the tax differential in place, it will have to look for an exception in the body of Article XX of GATT, which we discuss in chapter 9. 7.5.1.2 Defining DCS Products The AB on Japan—Alcoholic Beverages II faced a challenge against a Japanese taxation scheme, which, while neutral on its face, subjected predominantly Western products to heavier taxation than predominantly Japanese products. As a result, sōchū (an alcoholic beverage predominantly produced in Japan) was subjected to less burdensome taxation than a host of so-called Western products, inter alia, whisky, gin, and genever (alcoholic beverages predominantly produced in Europe and the US). The EU and the US protested, arguing that the products concerned were at least DCS, if not like products. The panel had already accepted that all of the products concerned (with the exception of vodka, which was deemed to be a like product to sōchū) were DCS products. The AB upheld the panel’s findings in this regard. In its view, physical properties and characteristics, consumer preferences, end-uses, and tariff classification are appropriate elements to take into account when defining whether two products are DCS. Importantly, upholding the panel’s findings in this regard, the AB made it clear that the test to define whether two products are DCS is in the marketplace, in the sense that it is consumers who will ultimately decide whether two products are indeed in competition with each other. To this effect, econometric indicators (such as cross-price elasticity)85 are relevant when defining whether two products are indeed in competition with each other. The EU had submitted some consumer surveys to this effect, suggesting that Japanese consumers, in the absence of discriminatory taxation, would be prepared to substitute a host of Western drinks for sōchū. The AB held at p. 25: In this case, the Panel emphasized the need to look not only at such matters as physical characteristics, common end-uses, and tariff classifications, but also at the “market place.” This seems appropriate. The GATT 1994 is a commercial agreement, and the WTO is concerned, after all, with markets. It does not seem inappropriate to look at competition in the relevant markets as one among a number of means of identifying the broader category of products that might be described as “directly competitive or substitutable.” Nor does it seem inappropriate to examine elasticity of substitution as one means of examining those relevant markets. The Panel did not say that cross-price elasticity of demand is “the decisive criterion” (footnote omitted) for determining whether products are directly competitive or substitutable. The Panel stated the following: In the Panel’s view, the decisive criterion in order to determine whether two products are directly competitive or substitutable is whether they have common end-uses, inter alia, as shown by elasticity of substitution. We agree. And, we find the Panel’s legal analysis of whether the products are “directly competitive or substitutable products” in paragraphs 6. 28–6.32 of the Panel Report to be correct. (emphasis in the original)

In Korea–Alcoholic Beverages, the AB held that a decision that two goods were DCS could be based on either econometric or noneconometric indicators, the two methods being

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of equal value in the eyes of the AB. The facts were similar to those in Japan–Alcoholic Beverages II. Beverages predominantly produced in Korea (“soju” and “diluted soju”) were hit by a substantially lower tax burden than whiskey etc., e.g., alcoholic drinks, which were predominantly produced in the EU, Canada, and the US. The EU, Canada, and the US complained, arguing that the Korean regime was GATT-inconsistent. Korea had argued before the panel and the AB that the products concerned were not DCS in the first place, since the price of diluted soju was only a small fraction of the price of the Western drinks and consequently changes in the price of soju would not lead consumers to consumption of Western drinks. Korea insisted on the relevance of econometric indicators to establish DCS-relationship (as established in Japan–Alcoholic Beverages II), and argued that diluted soju and Western drinks were not competing in the same market because of the very substantial price differential between them. Complaining parties, on the other hand, claimed that the fact that the Western drinks hit by higher taxation were in a DCS relationship with a similar drink (sōchū) in a similar market (Japan) provided enough evidence that soju and Western drinks were in a DCS relationship in the Korean market as well. The panel upheld the complaining parties’ view. We discuss the relevance of latent demand in more detail later in this chapter. Suffice it to state here that, since the panel did not have before it evidence from the Korean market, it based its finding that soju was a DCS good to a host of Western drinks on the relationship between the drinks concerned in a foreign market; it had to satisfy itself on criteria other than econometric indicators, since the prices of all goods concerned in the Japanese market were not necessarily identical to those prevailing in the Korean market. The panel would employ criteria such as physical properties and end uses of the products concerned in order to decide whether they were indeed in a DCS relationship. The panel did not feel constrained by prior case law either. In its view, only a reading of the AB report on Japan—Alcoholic Beverages II whereby cross-price elasticity would be elevated to the decisive criterion conferring DCS status would have led it to rule otherwise. This reading, however, was unwarranted in the panel’s eyes. The AB upheld the panel’s findings, explaining that noneconometric indicators on their own (e.g., without recourse to econometric indicators) can help establish a DCS relationship across two goods (§§ 114ff., and especially pp. 133–138).86 Econometric indicators cannot, of course, always provide us with a solution, and recourse to noneconometric indicators might be warranted. It could be, for example, that because of a discriminatory tax scheme, no Western drinks were sold into the Korean market at all. It is quite daring, though, to state that the two classes of indicators are of equal value. The AB should have explained when recourse to noneconometric indicators is warranted as a secondary option, and whether this was the case in the present dispute. Alas, it did not. Nevertheless, although the decision was not rigorous in specifying the details of the test, the basic idea to define the DCS relationship by examining effects on consumers is correct.

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Why should recourse to noneconometric indicators be an option only on an auxiliary basis? Econometric indicators are a superior method. They ask all the questions that noneconometric indicators ask (physical characteristics/properties of goods concerned; end uses; consumer preferences) and add the single most important factor explaining consumer behavior: the price of goods. It is problematic that the relative price of the goods that are compared does not feature among the noneconometric criteria that panels use to define whether two goods are DCS. There are, of course, some goods with inelastic demand, as there are a few consumers with unlimited purchasing power. The overwhelming majority of consumers, though, base their purchasing decisions for the overwhelming majority of the goods they buy in the market on scarcity of financial resources since every purchase has an opportunity cost, and price decisively affects purchasing behavior.87 7.5.1.3 From Extant to Latent Demand Whether or not recourse has been made to econometric or noneconometric indicators, the DCS relationship will be established based on market evidence; that is, based on extant demand. What if, however, extant demand is misleading because of a distortion? What if, for example, Home imposes a 0 percent sales tax on its own alcoholic drink and a 100 percent sales tax on all imported alcoholic drinks? How can Foreign show that its own and Home’s drinks are substitutes under those circumstances? Most likely, Foreign will be exporting nothing, since it is highly unlikely that there is any demand for its products. What can be done, then, in cases where extant demand for imported goods is missing, but there are reasons to suspect that this is so because of a government measure aimed at achieving this effect? As explained in the last section, in Korea–Alcoholic Beverages, the panel used information from the Japanese market to decide whether soju and a series of Western drinks were in a competitive relationship. The panel held that soju and sōchū are almost identical drinks, and Western drinks were virtually absent from the Korean market. To justify its decision, the panel held that recourse to latent demand was necessary since otherwise, it would be easy for WTO members to avoid their obligation to respect Article III of GATT by adopting protectionist internal taxes, the result of which would be the exclusion of imported goods and the ensuing impossibility of showing a DCS relationship between them and the potentially competing domestic products. In § 114, the AB upheld this finding, stating “… the requisite relationship may exist between products that are not, at a given moment, considered by consumers to be substitutes but which are, nonetheless, capable of being substitutes for one another.” This seems like a reasonable approach, provided that latent demand is measured in a plausible manner (e.g., by choosing a market that strongly resembles the investigated market in terms of per capita income, consumer habits, etc.). Case law has also provided some precision regarding the issue of when recourse to latent demand should be made. In Philippines–Distilled Spirits, the AB held (§ 227):

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In addition, we do not agree with the Philippines that an analysis of potential competition under Article III:2, second sentence, is limited to an assessment of whether competition would otherwise occur if the challenged taxation were not in place. In our view, such a “but for” test reflects an overly restrictive interpretation of the term “directly competitive or substitutable” products, one which assumes that internal taxation is the only factor restricting potential substitutability. On the contrary, as noted by the Appellate Body, “consumer demand may be influenced by measures other than internal taxation,” such as “earlier protectionist taxation, previous import prohibitions or quantitative restrictions.”

It seems, thus, that WTO adjudicating bodies have kept their options open in this respect and will inquire into latent demand every time they are of the view that the emerging picture before them has been skewed as a result of government intervention. 7.5.1.4 Applied So As to ASATAP Demonstrating a DCS relationship is only the first step toward establishing violation of Article III.2 of GATT. The second step is to show that the challenged fiscal measure is applied so as to afford protection to domestic production (ASATAP). The Interpretative Note and Article III of GATT state that a taxation scheme operates ASATAP if a pair of products is not “similarly” taxed. The question arises whether dissimilar taxation and ASATAP constitute one and the same concept. In Japan–Alcoholic Beverages II, the AB provided its first comprehensive response to these questions when it held (p. 27): Unlike that of Article III:2, first sentence, the language of Article III:2, second sentence, specifically invokes Article III:1. The significance of this distinction lies in the fact that whereas Article III:1 acts implicitly in addressing the two issues that must be considered in applying the first sentence, it acts explicitly as an entirely separate issue that must be addressed along with two other issues that are raised in applying the second sentence. Giving full meaning to the text and to its context, three separate issues must be addressed to determine whether an internal tax measure is inconsistent with Article III:2, second sentence. These three issues are whether: (1) the imported products and the domestic products are “directly competitive or substitutable product” which are in competition with each other; (2) the directly competitive or substitutable imported and domestic products are “not similarly taxed”; and (3) the dissimilar taxation of the directly competitive or substitutable imported domestic products is “applied … so as to afford protection to domestic production.” (italics in the original)

To respond to the question, thus, the AB first established that Article III.1 of GATT is relevant for the interpretation of Article III.2 of GATT. Its impact on the interpretation of the first sentence (dealing with like products) is not, in the AB’s eyes, symmetric to its impact on the interpretation of the second sentence (dealing with DCS products). With respect to like products, taxation in excess of the imported like product ipso facto amounts to a violation of the ASATAP requirement. Any dissimilar taxation of like products, in

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other words, is a violation of Article III of GATT. With respect to DCS products, establishment of taxation in excess of the imported product is a necessary but not sufficient condition for finding that a measure operates so as to afford protection. Dissimilar taxation across sōchū and whisky was not, in its eyes, in and of itself enough to condemn Japan (as the panel had done). The AB wanted something more—but what exactly? It provided the response to this question on pp. 29ff. of its report: The Panel was of the view that also small tax differences could influence the competitive relationship between directly competing distilled liquors, but the existence of protective taxation could be established only in the light of the particular circumstances of each case and there could be a de minimis level below which a tax difference ceased to have the protective effect prohibited by Article III:2, second sentence. … To detect whether the taxation was protective, the panel in the 1987 case examined a number of factors that it concluded were “sufficient evidence of fiscal distortions of the competitive relationship between imported distilled liquors and domestic shochu affording protection to the domestic production of shochu.” … These factors included the considerably lower specific tax rates on shochu than on imported directly competitive or substitutable products; the imposition of high ad valorem taxes on imported alcoholic beverages and the absence of ad valorem taxes on shochu; the fact that shochu was almost exclusively produced in Japan and that the lower taxation of shochu did “afford protection to domestic production”; and the mutual substitutability of these distilled liquors. … Although it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure. The very magnitude of the dissimilar taxation in a particular case may be evidence of such a protective application, as the Panel rightly concluded in this case. Most often, there will be other factors to be considered as well. In conducting this inquiry, panels should give full consideration to all the relevant facts and all the relevant circumstances in any given case. Thus, having stated the correct legal approach to apply with respect to Article III:2, second sentence, the Panel then equated dissimilar taxation above a de minimis level with the separate and distinct requirement of demonstrating that the tax measure “affords protection to domestic production.” As previously stated, a finding that “directly competitive or substitutable products” are “not similarly taxed” is necessary to find a violation of Article III:2, second sentence. Yet this is not enough. The dissimilar taxation must be more than de minimis. It may be so much more that it will be clear from that very differential that the dissimilar taxation was applied “so as to afford protection.” In some cases, that may be enough to show a violation. In this case, the Panel concluded that it was enough. Yet in other cases, there may be other factors that will be just as relevant or more relevant to demonstrating that the dissimilar taxation at issue was applied “so as to afford protection.” In any case, the three issues that must be addressed in determining whether there is such a violation must be addressed clearly and separately in each case and on a case-by-case basis.

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… Thus, through a combination of high import duties and differentiated internal taxes, Japan manages to “isolate” domestically produced shochu from foreign competition, be it foreign produced shochu or any other of the mentioned white and brown spirits.

So what is the AB effectively saying here? It is not the case that any dissimilar taxation satisfies the ASATAP test. Tax differentials below a de minimis level fall short of the requirements. Alas, the de minimis level was not defined. It seems though that the context of the discussion in the AB report supports the idea that the tax differential must affect the competitive relationship across the two goods (domestic and imported). If the tax differential is of a certain magnitude, then, in and of itself, it suffices to prove that a measure satisfies the ASATAP requirement. The AB did not define what order of magnitude is necessary here. If the tax differential is not of a certain magnitude, but if it is still greater than the de minimis level, then recourse to other relevant factors and relevant circumstances is necessary in order to establish that the ASATAP requirement has been satisfied. Other relevant factors could be the design, the architecture, and the revealing structure of the measure. Relevant circumstances could include the import regime for the particular goods. This does not seem precise, and leaves ample room for discretion to WTO adjudicating bodies to manoeuver their way across different sets of facts without being accused for inconsistencies. In Chile–Alcoholic Beverages, the AB was called to apply the test that it had established. It was asked to pronounce on the GATT consistency of the Chilean tax system for alcoholic beverages. The scheme distinguished between two categories of alcoholic beverages, using alcoholic content as the distinguishing criterion: below 35° and above 39°.88 The complaining party (the EU) had argued that many Western products of slightly more than 39° were DCS products to Chilean products of less than 35° and that the tax differential operated ASATAP. In the view of exporters of Western alcoholic drinks, the Chilean tax regime favored predominantly locally produced alcoholic beverages (i.e., some categories of pisco). Chile responded that its scheme did not condition the payment of the higher tax on the origin of the product, and, moreover, that in the 39° and above tax category the majority of the products hit by high taxation were domestic. As a result, in Chile’s view, no protection could result from such a taxation scheme (§ 58). The AB, upholding the panel’s findings in this respect, condemned the Chilean fiscal scheme. It first held that the tax differential (27 percent and 47 percent) across the two categories of lower- and higher-alcoholic-content drinks was more than de minimis (§§ 44ff). It then asked the question whether the dissimilar taxation supported the conclusion that it was ASATAP to the domestic product (§§ 64–66): We note, furthermore, that, according to the Panel, approximately 75 per cent of all domestic production has an alcohol content of 35° or less and is, therefore, taxed at the lowest rate of 27 per cent

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ad valorem. Moreover, according to figures supplied to the Panel by Chile, approximately half of all domestic production has an alcohol content of 35° and is, therefore, located on the line of the progression of the tax at the point immediately before the steep increase in tax rates from 27 per cent ad valorem. The start of the highest tax bracket, with a rate of 47 per cent ad valorem, coincides with the point at which most imported beverages are found. Indeed, according to the Panel, that tax bracket contains approximately 95 per cent of all directly competitive or substitutable imports. Although the tax rates increase steeply for beverages with an alcohol content of more than 35° and up to 39°, there are, in fact, very few beverages on the Chilean market, either domestic or imported, with an alcohol content of between 35° and 39°. The graduation of the rates for beverages with an alcohol content of between 35° and 39° does not, therefore, serve to tax distilled alcoholic beverages on a progressive basis. Indeed, the steeply graduated progression of the tax rates between 35° and 39° alcohol content seems anomalous and at odds with the otherwise linear nature of the tax system. With the exception of the progression of rates between 35° and 39° alcohol content, this system simply applies one of two fixed rates of taxation, either 27 per cent ad valorem or 47 per cent ad valorem, each of which applies to distilled alcoholic beverages with a broad range of alcohol content, that is, 27 per cent for beverages with an alcoholic content of up to 35° and 47 per cent for beverages with an alcohol content of more than 39°. In practice, therefore, the New Chilean System will operate largely as if there were only two tax brackets: the first applying a rate of 27 per cent ad valorem which ends at the point at which most domestic beverages, by volume, are found, and the second applying a rate of 47 per cent ad valorem which begins at the point at which most imports, by volume, are found. The magnitude of the difference between these two rates is also considerable. The absolute difference of 20 percentage points between the two rates represents a 74 per cent increase in the lowest rate of 27 per cent ad valorem. Accordingly, examination of the design, architecture and structure of the New Chilean System tends to reveal that the application of dissimilar taxation of directly competitive or substitutable products will “afford protection to domestic production.”

In reaching this conclusion, the AB acknowledged the fact that most of the alcoholic drinks hit by the higher taxation were of Chilean origin. It dismissed the relevance of this observation for the interpretation of the ASATAP requirement in the following terms (§ 67): It is true, as Chile points out, that domestic products are not only subject to the highest tax rate but also comprise the major part of the volume of sales in that bracket. This fact does not, however, by itself outweigh the other relevant factors, which tend to reveal the protective application of the New Chilean System. The relative proportion of domestic versus imported products within a particular fiscal category is not, in and of itself, decisive of the appropriate characterization of the total impact of the New Chilean system under Article III:2, second sentence, of the GATT 1994. This provision, as noted earlier, provides for equality of competitive conditions of all directly competitive or substitutable imported products, in relation to domestic products, and not simply, as Chile argues, those imported products within a particular fiscal category. The cumulative consequence of the New Chilean System is, as the Panel found, that approximately 75 per cent of all domestic production of the distilled alcoholic beverages at issue will be located in the fiscal category with the lowest tax rate, whereas approximately 95 per cent of the directly competitive or substitutable imported products will be found in the fiscal category subject to the highest tax rate. (italics in the original)

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It seems that the sharp increase in the tax rate is what triggered the AB’s decision to find against Chile. In its view, the sharp increase was the quintessential element in establishing a prima facie case, a presumption that the design, structure, and architecture of the challenged measure violated GATT. Chile did not manage to rebut this presumption (§ 71): In the present appeal, Chile’s explanations concerning the structure of the New Chilean System— including, in particular, the truncated nature of the line of progression of tax rates, which effectively consists of two levels (27 per cent ad valorem and 47 per cent ad valorem) separated by only 4 degrees of alcohol content—might have been helpful in understanding what prima facie appear to be anomalies in the progression of tax rates. The conclusion of protective application reached by the Panel becomes very difficult to resist, in the absence of countervailing explanations by Chile. The mere statement of the four objectives pursued by Chile does not constitute effective rebuttal on the part of Chile.89

It follows that it was not the steep graduation per se that tilted the AB toward its decision, but rather the lack of explanation by Chile for it. Sharp increases, in the AB’s view, might be hiding protectionist behavior. What if, however, it is domestic goods that carry most of the higher burden? Chile did not explain why the tax increase was sharp, but it did offer a counterargument, claiming that it was Chilean producers who were called to shoulder most of the tax burden in the high alcoholic content category (§ 67): This provision, as noted earlier, provides for equality of competitive conditions of all directly competitive or substitutable imported products, in relation to domestic products, and not simply, as Chile argues, those imported products within a particular fiscal category. (italics in the original)

The quoted passage raises a number of questions. Why is the fact that Chileans shoulder the majority of the taxation not a countervailing factor to the prima facie case? It was the case that 25 percent of Chilean goods were in the highest alcoholic category, and so were 95 percent of the Western drinks. What if, volume-wise, the 25 percent of Chilean drinks vastly outnumbers the 95 percent of European drinks?90 If its objective were to confer an advantage on domestic production, would Chile impose such a heavy burden on its domestic producers?91 Why is it so clear, after all, that the design, structure, and architecture of the measure support the AB finding in this respect? The AB report did not respond to any of these questions. It reaffirmed that an inquiry into the “objective intent”92 of a measure is necessary in order to respond to the question whether the challenged measure is ASATAP, but it did not explicitly state the methodological steps that need to be taken. As such, this report is anything but helpful as a predictor of the AB’s approach to future disputes bearing similar facts. We can only hope that the test currently applied in order to honor the ASATAP-requirement will be refined in the future, and will offer our preferred approach to this effect infra in this chapter.

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Like Products

For a complainant to demonstrate that a violation of Article III.2 of GATT (first sentence), has occurred, it will have to demonstrate that domestic and foreign products are like and that the latter has been taxed in excess of the former. 7.5.2.1 Like Products: The Definition There are a plethora of GATT/WTO panels that have dealt with the interpretation of the term “like products,” and, as we will show later in this chapter, case law has yet to come up with a coherent framework of analysis for it.93 GATT case law evidences two trends. There are a number of cases that follow a “marketplace-test,” where likeness is defined by reference to consumers’ reactions.94 There are two cases that reveal a willingness to take into account regulatory intent when establishing likeness among domestic and foreign products. Let us start with the former. The WP on BTAs established four criteria to define likeness (§ 18): the properties, nature, and quality of the products; the end uses of the products; consumers’ tastes and habits (more comprehensively termed “consumers’ perceptions and behavior”) with respect to the products; and the tariff classification of the products. It did not assign a particular weight to any of them. It did not even explain whether all four criteria must be cumulatively met. Relying on these four criteria, the panel report on Japan–Alcoholic Beverages I held that alcoholic beverages (§ 5.6) “should be considered as ‘like products’ in terms of Article III:2 in view of their similar properties, end-uses, and usually uniform classification in tariff nomenclatures.” The AB endorsed this approach and explicitly stated that it would take into account all the criteria mentioned in the report on BTAs before deciding on likeness, again explaining neither whether all boxes must be ticked nor whether some boxes were more relevant than others. In a famous and oft-quoted passage, it used an accordion metaphor to explain its views on how likeness should be determined (p. 21): No one approach to exercising judgment will be appropriate for all cases. The criteria in Border Tax Adjustments should be examined, but there can be no one precise and absolute definition of what is “like.” The concept of “likeness” is a relative one that evokes the image of an accordion. The accordion of “likeness” stretches and squeezes in different places as different provisions of the WTO Agreements are applied. The width of the accordion in any one of those places must be determined by the particular provision in which the term “like” is encountered, as well as by the context and the circumstances that prevail in any given case to which that provision may apply. (italics in the original)95

It is true that overreliance on one of the criteria might lead to false conclusions. Lewis Carroll expressed this idea perfectly, in a wonderful passage from Alice’s Adventures in Wonderland: “Flamingos and mustard they both bite. And the moral of that is birds of a feather flock together.”

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It would be quite odd if panels were to rely solely on, say, properties of goods and end up with similar outcomes. On the other hand, this passage condones an approach whereby inevitably, judges are left with substantial discretion to decide on likeness. There are ways and means to narrow down discretion in this regard, and we will return to this discussion later in this chapter. For now, let us complete the picture. There are two cases that dismissed the marketplace as the relevant criterion to decide on likeness: the panel reports on US–Malt Beverages and US–Taxes on Automobiles (“Gas Guzzler,” as it is widely known).96 In US–Malt Beverages, the panel defined “likeness” in § 5.25 in the following manner: Consequently, in determining whether two products subject to different treatment are like products, it is necessary to consider whether such product differentiation is being made “so as to afford protection to domestic production.” While the analysis of “like products” in terms of Article III:2 must take into consideration this objective of Article III, the Panel wished to emphasize that such an analysis would be without prejudice to the “like product” concepts in other provisions of the General Agreement, which might have different objectives and which might therefore also require different interpretations.

In US–Taxes on Automobiles97 the panel had the opportunity to elaborate further on this proposition by introducing the “aims and effect” test (§§ 5.7 and 5.10): In order to determine this issue, the Panel examined the object and purpose of paragraphs 2 and 4 of Article III in the context of the article as a whole and the General Agreement. … The Panel then proceeded to examine more closely the meaning of the phrase “so as to afford protection.” The Panel noted that the term “so as to” suggested both aim and effect. Thus the phrase “so as to afford protection” called for an analysis of elements including the aim of the measure and the resulting effects. A measure could be said to have the aim of affording protection if an analysis of the circumstances in which it was adopted, in particular an analysis of the instruments available to the contracting party to achieve the declared domestic policy goal, demonstrated that a change in competitive opportunities in favour of domestic products was a desired outcome and not merely an incidental consequence of the pursuit of a legitimate policy goal. A measure could be said to have the effect of affording protection to domestic production if it accorded greater competitive opportunities to domestic products than to imported products. The effect of a measure in terms of trade flows was not relevant for the purposes of Article III, since a change in the volume or proportion of imports could be due to many factors other than government measures. (italics in the original)

According to this view, “likeness” will not be defined by referring to prevailing perceptions in the marketplace about the products concerned, but instead by referring to the regulatory aims pursued by the intervening government. Since the US objective was not to protect domestic producers, the “aim” part of the test had not been met. The “effects” part of the test was simply irrelevant, in the panel’s view, since Article III of GATT protected

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equality of competitive conditions and not actual trade volumes (US–Superfund). The EU lost then and there.98 What prompted the drafters of these two reports? Arguably, the automaticity in the sanction embedded in Article III.2 of GATT (first sentence): any tax differential across two like goods would ipso facto lead to a violation of Article III of GATT. If likeness was left totally to consumers to define, so the argument goes, then governments would have to justify their measures through recourse to Article XX of GATT. The idea behind it is that more often than not, consumers will determine likeness without taking into account issues of public policy. This is quite reasonable, since if consumers did take into account public policy when purchasing goods, why regulate in the first place? The list of Article XX of GATT, however, is narrow and exhaustive, and moving the discussion to this provision would be tantamount to understanding GATT as an instrument of deregulation, not as an instrument punishing only discrimination. “Aims and effect” was, in the eyes of these panels, the necessary device to understand likeness as originally designed; e.g., a term giving flesh to the obligation not to discriminate, not a term condoning deregulation.99 The basis for this approach is, thus, the awareness of the panel that consumers are guided by selfish concerns, and unless we provide some room for a policy perspective, we risk seeing this provision, a quintessential element in the GATT edifice, turn into an instrument that will put government intervention into a straitjacket. The report on US–Taxes on Automobiles was the last one to discuss a claim under Article III of GATT in the GATT era. The first report in the WTO era dealing with the same issue was Japan–Alcoholic Beverages II. The panel explicitly rejected, for various reasons, the relevance of the aims and effects test when deciding on likeness (§§ 6.15–19). The AB endorsed the panel’s approach (pp. 16ff), and ruled (pp. 19 ff.) that the term “like products” should be defined by reference to the marketplace, explicitly stating that it invites a narrow reading, and that customs classification is relevant to establish likeness (pp. 23–24): If sufficiently detailed, tariff classification can be a helpful sign of product similarity. … It is true that there are numerous tariff bindings which are in fact extremely precise with regard to product description and which, therefore, can provide significant guidance as to the identification of “like products.”

This would usually be the case with respect to six-digit classifications. Four-digit classifications are uninformative in the overwhelming majority of cases, and eight-digit classifications are a matter of national definition, not of worldwide acceptance.100 In a subsequent case (Philippines–Distilled Spirits), the AB faced the following facts (§ 98):101 distilled spirits produced from one of the following materials: sap of the nipa,

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coconut, cassava, camote, etc. (predominantly produced in Philippines), were subjected to a flat-rate tax, whereas distilled spirits produced from other materials (predominantly imported) were subjected to a higher excise tax. The AB suggested that DCS products are those with low substitutability among them, whereas like products have high, almost perfect substitutability (§§ 120–122, 148). In contrast with its prior case law (Japan–Alcoholic Beverages II), the AB did not condition a finding on likeness on common tariff classification across two products. It first held that a four-digit tariff classification was uninformative since it was not sufficiently detailed, and no conclusions on likeness could be drawn (§ 182). It then noted that two of the goods did not share the same six-digit tariff classification. It still found that they were like, though, overlooking the significance of tariff classification and satisfying itself that the goods were like since they were in an intense competitive relationship (§§ 236ff). So far, so good. But when the AB referred to studies that measured the cross-price elasticity coefficient, the range was between 0.01 and 0.07. This is quite low by any reasonable benchmark: a value of 0.01 would imply that a tax on imports that increases the price of imports by 50 percent would increase the volume for the domestic product by 0.5 percent, which is close to nothing. The products, hence, should have been considered almost independent goods and not market-like, as far as degree of substitution goes. If elasticity was only marginally smaller, and it equaled 0, the two products would be completely independent. But then the AB went on to state that this is only one of the criteria that panels can legitimately use to define likeness, and it repeated the list of noneconometric indicators mentioned previously. This is confusing, and it is why there is uncertainty as to how exactly to understand the term “like products” in WTO law. In principle, following this case law, two goods should be considered like so long as they are in an intense competitive relationship, even if they do not share the same tariff classification. In practice, the numbers provided in this case do not do justice to the test, as just stated. If this reading of the report on Philippines–Distilled Spirits proves correct, then this report did not reverse prior case law—it added to it. From then on, two products would be considered like even if they did not share the same tariff classification, provided that they were in an intense competitive relationship with each other.102 7.5.2.2 Taxation in Excess The AB has held that even a minimal tax differential will suffice to satisfy this criterion. It wrote in Japan–Alcoholic Beverages II (p. 23): Even the smallest amount of “excess” is too much. The prohibition of discriminatory taxes in Article III:2, first sentence, is not conditional on a “trade effects test” nor is it qualified by a de minimis standard.

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A complainant who has established that taxation on imported products is in excess of that on domestic like products does not also have to establish that the measure at hand meets the ASATAP requirement (pp. 18–19): Article III:1 informs Article III:2, first sentence, by establishing that if imported products are taxed in excess of like domestic products, then that tax measure is inconsistent with Article III. Article III:2, first sentence does not refer specifically to Article III:1. There is no specific invocation in this first sentence of the general principle in Article III:1 that admonishes Members of the WTO not to apply measures so as to afford protection. This omission must have some meaning. We believe the meaning is simply that the presence of a protective application need not be established separately from the specific requirements that are included in the first sentence in order to show that a tax measure is inconsistent with the general principle set out in the first sentence. However, this does not mean that the general principle of Article III:1 does not apply to this sentence. To the contrary, we believe the first sentence of Article III:2 is, in effect, an application of this general principle. The ordinary meaning of the words of Article III:2, first sentence leads inevitably to this conclusion. Read in their context and in the light of the overall object and purpose of the WTO Agreement, the words of the first sentence require an examination of the conformity of an internal tax measure with Article III by determining, first, whether the taxed imported and domestic products are “like” and, second, whether the taxes applied to the imported products are “in excess of” those applied to the like domestic products. If the imported and domestic products are “like products,” and if the taxes applied to the imported products are “in excess of those applied to the like domestic products, then the measure is inconsistent with Article III:2, first sentence. (italics in the original)

It follows that plaintiffs have a strong incentive to show that two goods are like rather than DCS. Assuming that they have succeeded in doing that, it is all downhill from that moment on since all they will have to establish will be a tax differential, even if it is minute. 7.6

Other Measures Affecting Trade

Article III.4 of GATT deals with a variety of domestic instruments (policies) without referring explicitly to any one of them. It covers “all laws, regulations, and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution, or use.” Public health, environmental, human rights, antitrust, and consumer protection laws, among others, could in principle fall under the aegis of this provision. Practice shows that this provision covers not only measures of a nonfiscal nature, but also measures of a fiscal nature; e.g., taxes to the extent that they are not covered by Article III.2 of GATT (that is, to the extent that they are not taxes imposed directly on products). The GATT panel report on Canada–Provincial Liquor Boards (US) found that a regime whereby beer (both domestic and imported) could not be sold below a certain price was in violation of Article III.4 of GATT, since it could prevent (in specific circumstances) imported beer from being supplied at a price below that of domestic beer (§§ 5.30–31). The GATT panel report on US–Malt Beverages examined the consistency of “price affir-

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mation requirements”; that is, the pricing level that out-of-state beer had to observe since it had to be sold to wholesalers first. As in-state beer did not have to be sold to wholesalers and could be marketed directly by producers, it escaped the price affirmation requirements. For this reason, the panel found that the measure constituted a violation of Article III.4 of GATT (§ 5.59). A complainant aiming to establish that this provision has been violated would have to demonstrate that, with respect to laws, regulations, or requirements affecting internal sale, offer for sale, purchase, transportation, distribution, or use, less favorable treatment (LFT) is afforded to an imported than to a domestic like good. 7.6.1

Laws, Regulations, or Requirements

GATT/WTO case law has understood the term “laws, regulations, and requirements” as equivalent to the term “measure” featured in Articles XXIII.1(b) and XI of GATT. Case law, in turn, has consistently understood the term “measure” in a wide manner.103 So far, there has been no case where a WTO adjudicating body has rejected a claim because the complainant failed to show that a “law, regulation, or requirement” was being challenged. The inclusion of the term “requirements” supports this construction. It was meant to extend the coverage of this provision and ensure that it is not restricted to formal laws only. There has been no case where an omission was judged inconsistent with Article III of GATT. Note, however, that omissions have been sanctioned in other legal contexts aiming at trade integration. In the EU context, for example, the court found that France was in breach of its obligations under the European Community Treaty (ECT, Article 28) by not taking measures sufficient to deter French farmers from emptying trucks and destroying Spanish farm products that had been cleared through customs.104 Recall from our discussion in chapter 1 that GATT regulates only government behavior. WTO case law addressed the issue of attribution in the context of Article III.4 of GATT,105 inspired by the approach followed in the context of Article XI of GATT. What matters is that a government has provided private parties with enough incentives to act in a particular way.106 The panel in US–FSC (§ 10.376) stated: A literal reading of the words all laws, regulations, and requirements in Article III:4 could suggest that they may have a narrower scope than the word measure in Article XXIII:1(b). However, whether or not these words should be given as broad a construction as the word measure, in view of the broad interpretation assigned to them in the cases cited above, we shall assume for the purposes of our present analysis that they should be interpreted as encompassing a similarly broad range of government action and action by private parties that may be assimilated to government action. In this connection, we consider that our previous discussion of GATT cases on administrative guidance in relation to what may constitute a “measure” under Article XXIII:1(b), specifically the panel reports on Japan–Semi-conductors and Japan–Agricultural Products, is equally applicable to the definitional scope of “all laws, regulations and requirements” in Article III:4. (italics and emphasis in the original)

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7.6.2 Affecting Sale, Offering for Sale Recall the previous discussion regarding the consequence of including the term “affecting” in the body of Article III of GATT. The AB, in its report on US–FSC, confirmed107 the wide interpretation of this term (§§ 208–210): ... the word “affecting” assists in defining the types of measure that must conform to the obligation not to accord “less favourable treatment” to like imported products, which is set out in Article III:4. The word “affecting” serves a similar function in Article I:1 of the General Agreement on Trade in Services (the “GATS”), where it also defines the types of measure that are subject to the disciplines set forth elsewhere in the GATS but does not, in itself, impose any obligation … . In view of the similar function of the identical word, “affecting,” in Article III:4 of the GATT 1994, we also interpret this word, in this provision, as having a “broad scope of application.” (italics in the original)

Unsurprisingly, there is not one single reported case where a panel found that the challenged measure was not affecting trade. 7.6.3

Like Products in Article III.4 of GATT

In contrast to Article III.2 of GATT, Article III.4 of GATT does not distinguish between like and DCS products. The question, hence, naturally arises whether this was a voluntary omission, or whether the term “like product” should not have the same meaning across the two paragraphs. The negotiating record does not offer much guidance on this score, and the AB had to eventually decided this issue. In its report on EC–Asbestos, the AB had to deal with a French decree that banned the sales of asbestos-containing construction material in the French market, regardless of its origin. We discuss the facts in more detail later. The question before the panel (and the AB) was whether all construction materials, regardless of whether it was asbestoscontaining or asbestos free, were like products. In order to respond to this question, the AB had to first define the scope of “like products.” It held that this term should be interpreted in light of the overarching purpose of Article III of GATT to punish protectionism with respect to both fiscal and nonfiscal measures. Absent some parallelism in the coverage across the two paragraphs (III.2 and III.4 of GATT), WTO members would be incurring obligations of different scope with respect to fiscal and nonfiscal instruments. A similar outcome, in the eyes of the AB, was supported neither by the negotiating record nor by the function that this provision is called to perform in the GATT context. The AB, consequently, held that the term “like products” in Article III.4 of GATT should be understood as covering products that are in a competitive relationship with one another; e.g., this term should be coextensive with the term “DCS products” appearing in Article III.2 of GATT (§§ 98–100).

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Next, the AB turned to the comparator (tertium comparationis) for “likeness” in Article III.4 of GATT. Should it be the marketplace or something else?108 France’s prohibition (administrative decree) of sales of asbestos-containing construction material109 was based on scientific evidence. Asbestos-containing construction material contributed to mesothelioma, a form of cancer.110 Canada had argued that, in the consumer’s eyes, there was no difference between construction material containing chrysotile fibers (asbestos) and construction material containing PCG fibers (which is an asbestos-free input to the final product). Construction material containing PCG fibers was being legally sold in France. Canada had argued that the French ban on imported construction material containing chrysotile fibers, while allowing sales of domestic construction material containing PCG fibers, amounted to LFT for imported goods than the treatment accorded to the French like good. The panel decided that the two products were indeed like and, consequently, held that Article III.4 of GATT had been violated. The panel paid particular attention to the end uses of the two products. Since both asbestos-containing and asbestos-free bricks were serving as construction materials, the products were considered to be like. The panel then held that, by allowing sales of domestic asbestos-free material and banning sales of imported asbestos-containing construction material, France was according imported products LFT than that accorded to domestic like products. Having established that Article III.4 of GATT had been violated, the panel moved on to examine the French (EU) defense under Article XX of GATT.111 On appeal, the AB reversed the panel’s findings with respect to likeness. In its view, the panel should have examined all four criteria mentioned in the WP on BTAs, not just one of them (end uses). It should have also discussed the other criteria conferring likeness, such as physical characteristics. Had it done so, the panel would, in the AB’s view, have observed the differences in physical characteristics between the two products. In the AB’s view, the composition of a product was very much part of the analysis concerning physical characteristics. Chrysotile fibers and PCG fibers are not the same. The first are carcinogenic, whereas the latter are not. This, in the AB’s view, most likely would have led reasonable consumers to stop purchasing construction material containing chrysotile fibers. The likelihood that the different composition, because of the danger it represented to human health, might affect consumers’ choices in this regard, was sufficient reason to raise a presumption that the two products were unlike (§§ 101–154). Consumers were, in the AB’s eyes, the constructors of houses, who would be purchasing construction material in order to use it for construction of houses. In the AB’s views, constructors would have taken into account the preferences of the final consumers (say, homeowners) when choosing between chrysotile and PCG fibers (§ 122): In this case especially, we are also persuaded that evidence relating to consumers’ tastes and habits would establish that the health risks associated with chrysotile asbestos fibres influence consumers’

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behaviour with respect to the different fibres at issue. We observe that, as regards chrysotile asbestos and PCG fibres, the consumer of the fibres is a manufacturer who incorporates the fibres into another product, such as cement-based products or brake linings. We do not wish to speculate on what the evidence regarding these consumers would have indicated; rather, we wish to highlight that consumers’ tastes and habits regarding fibres, even in the case of commercial parties, such as manufacturers, are very likely to be shaped by the health risks associated with a product which is known to be highly carcinogenic. A manufacturer cannot, for instance, ignore the preferences of the ultimate consumer of its products. If the risks posed by a particular product are sufficiently great, the ultimate consumer may simply cease to buy that product. This would, undoubtedly, affect a manufacturer’s decisions in the marketplace. Moreover, in the case of products posing risks to human health, we think it likely that manufacturers’ decisions will be influenced by other factors, such as the potential civil liability that might flow from marketing products posing a health risk to the ultimate consumer, or the additional costs associated with safety procedures required to use such products in the manufacturing process. (italics in the original; emphasis added)

The goods were unlike, therefore, because, in the AB’s view, construction companies would take into account the preferences of homeowners when purchasing construction material. Canada was called to rebut this presumption. The burden of proof for Canada, in light of the difference in physical characteristics, was, in the eyes of the AB, much higher. The AB effectively held that the presence of health risk in asbestos-containing construction material raised a presumption that the two products were unlike. As Canada did not manage to rebut the presumption, the challenge to the decree was rejected.112 Following this report, the test for likeness stays in the market in name only, since likeness will be defined through risk aversion of consumers. Note though, that it is a reasonable, and not an actual, consumer that will decide on likeness in this report.113 This finding in the report raises a number of issues. If reasonable consumers, as the AB asserted, would never treat the two products as like, then what was the need for France to impose the sales ban in the first place? Arguably, France had to act this way precisely because consumers did treat the two goods as substitutes. Indeed, depending on their risk aversion, and taking into account the price difference, some consumers might opt for asbestos-containing goods. There is nothing unreasonable about that. And what if Canada had conducted market surveys in France? Would similar evidence cast doubt on the finding of the AB regarding the reaction of reasonable consumers? There is good reason (i.e., the presence of French regulation) to suspect that the axiomatic distinction that the AB drew was probably not supported by facts.114 And the relative probative value of market evidence vis-à-vis the reasonableness standard employed by the AB in this case remains an open question. This is not to say that France should have lost this case. Indeed, what is more persuasive than the scientific studies that France produced linking exposure to asbestos-containing construction material and increased likelihood to contract mesothelioma? France should have prevailed, but on different grounds. It was treating two like goods differently, but it had not afforded LFT to the imported goods. Its objective was not to confer an advantage on domestic goods but to protect health. It was French producers, after all, who had to

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adjust their production of construction material by abandoning the relatively cheaper chrysotile for the more expensive PCG fibers.115 Similar behavior should not qualify as LFT. Alas, case law on this score, to which we will turn later in this discussion, has closed the door to similar arguments, leaving Article XX of GATT as the only viable option under the circumstances. There is room to note here that the French measure could not have been successfully challenged because it was too risk averse with respect to chrysotile fibers, and less so with respect to, say, mobile telephony. Article III of GATT does not contain a consistency requirement. A similar requirement makes eminent sense as a means to fight “protectionism” and is indeed used in the Sanitary and Phyto-sanitary Measures (SPS) Agreement, as discussed in chapter 6 of volume 2. 7.6.4

Less Favorable Treatment (LFT)

7.6.4.1 LFT Means No Protectionism The term “less favored treatment (LFT)” has been the subject of divergent interpretations over the years. We encounter the same problems that we observed when discussing the understanding of the term “applied so as to afford protection.” In fact, the parallelism between the two terms is well embedded in case law. In EC–Bananas III, the AB held that (§ 216): Article III:4 does not specifically refer to Article III:1. Therefore, a determination of whether there has been a violation of Article III:4 does not require a separate consideration of whether a measure afford[s] protection to domestic production. (italics in the original)

In EC–Asbestos, the AB added a nuance (§ 100): The term “less favourable treatment” expresses the general principle, in Article III:1, that internal regulations “should not be applied... so as to afford protection to domestic production.” If there is “less favourable treatment” of the group of “like” imported products, there is, conversely, “protection” of the group of “like” domestic products. However, a Member may draw distinctions between products which have been found to be “like,” without, for this reason alone, according to the group of “like” imported products “less favourable treatment” than that accorded to the group of “like” domestic products. (italics in the original)

Case law has struggled with the understanding of the last sentence of the abovementioned passage. Which distinctions across like products can be lawfully drawn?116 And who should carry the ensuing burden of proof to show that a distinction is permissible or not? This is an area where case law has not progressed smoothly and coherently, as we explain in what immediately follows. 7.6.4.2 De Jure and De Facto LFT We explained earlier in this chapter that the discipline embedded in Article III of GATT is relevant for cases of both de jure and de facto discrimination. We further stated

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that the standard of review applied when a claim of de facto discrimination is lodged is more onerous for the complainant (than when the claim concerns a case of de jure discrimination). There are some measures that de jure do not discriminate between domestic and imported goods, and it is difficult to establish de facto discrimination. Still, they are, probably legitimately, viewed with suspicion, even in the absence of analysis of trade effects. A natural candidate for this category is advertising. The question has arisen in GATT of whether an outright ban on advertising would be considered GATT-consistent. The GATT Panel on Thailand–Cigarettes explained why, in its view, a ban on advertising applied on both domestic and foreign cigarettes will always operate in favor of the domestic product (§ 78): A ban on the advertisement of cigarettes of both domestic and foreign origin would normally meet the requirements of Article III:4. It might be argued that such a general ban on all cigarette advertising would create unequal competitive opportunities between the existing Thai supplier of cigarettes and new, foreign suppliers and was therefore contrary to Article III:4. Even if this argument were accepted, such an inconsistency would have to be regarded as unavoidable and therefore necessary within the meaning of Article XX(b) because additional advertising rights would risk stimulating demand for cigarettes.

The rationale for this finding has to do with the idea that consumers are better acquainted with local goods, so a ban on advertising would always fall more heavily on imported goods. The validity of this proposition critically hinges on the assumption that the market at hand is segmented and only trades with the rest of the world. The market reality in countries with liberalized investment casts doubt on the validity of this proposition.117 7.6.4.3 Trouble in Korea The AB report on Korea–Various Measures on Beef discussed the interpretation of the LFT requirement in detail. The dispute between Korea and a host of beef exporters concerned the distribution of beef in the Korean market. Korea had enacted a law whereby traders at the retail level could only sell either domestic or imported beef. This was the notorious Korean “dual retail system.” The complainants argued that, as a result of the dual retail system, there were only 5,000 points of sale for imported beef, whereas there were over 45,000 points of sale for domestic beef. Therefore, they claimed, the dual retail system amounted to a violation of Article III.4 of GATT. Korea defended itself by arguing that the background to this dispute mattered and that, absent thorough examination of the background, the panel would risk committing a type I error, outlawing a scheme that neither intended to be protectionist nor had a similar effect. It pointed to its import quota for beef, the legality of which was not put into question during the proceedings. Indeed, Korea had invoked the balance-of-payments (BoP) provisions of GATT for the purpose of imposing a quota.

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Korea added that the quota had been absorbed in all years when the system was in place, with only one exception. Following the financial crisis in 1997, overall consumption (of both domestic and foreign beef) fell dramatically. Hence, in Korea’s view, complainants suffered trade damage in only one year since the dual retail system had been in place, and that was for a reason that had nothing to do with the existence of the distribution system. Korea also argued before the panel that the dual retail system was not discriminatory, in light of the fact that traders were free to choose whether they would sell domestic or foreign beef, and that there was no legal compulsion obliging them to choose one category of beef over the other. They could further subsequently switch from one category of beef to the other at no cost. Pointing to standing case law, Korea argued that the dual retail system established equality of competitive conditions for domestic and imported like goods.118 Not only that, Korea argued, the dual retail system and other measures were meant to guarantee that traders, through fraudulent practices, would not sell imported beef as Korean beef and pocket the price markup. There was a very substantial price differential between imported and domestic beef in Korea—the latter’s price was much higher than the former’s. Since the origin of beef is hard to distinguish, traders would have a strong incentive to sell imported beef as Korean. Korea further argued that the number of outlets should be immaterial, since, as it argued, there was no need to show trade effects for a claim under Article III of GATT to be successful. It claimed that legislation that establishes the equality of competitive conditions should pass the test of consistency with Article III of GATT, even if some trade effects might look harmful to exporters. Korea was effectively arguing that the complainants could not, on the one hand, claim that trade effects are immaterial and, on the other, base their complaint on trade effects. The panel rejected all of Korea’s claims and found in favor of the complainants. On appeal, the AB held that this system, although formally nondiscriminatory, still modified the conditions of competition to the detriment of imported products, and it found Korea’s practices to be inconsistent with Article III.4 of GATT. The modification of conditions of competition was evident, in the AB’s view, in the fact that fewer retailers decided to sell imported beef (§§ 143–151). The AB accepted that the choice to distribute domestic or imported beef was in the hands of private retailers. In a rather cryptic passage, though, it held that LFT resulted from Korea’s decision not to stick to the prior regime (§ 146): We are aware that the dramatic reduction in number of retail outlets for imported beef followed from the decisions of individual retailers who could choose freely to sell the domestic product or the imported product. The legal necessity of making a choice was, however, imposed by the measure itself. The restricted nature of that choice should be noted. The choice given to the meat retailers was not an option between remaining with the pre-existing unified distribution set-up or going to a dual retail system. The choice was limited to selling domestic beef only or imported beef only. Thus,

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the reduction of access to normal retail channels is, in legal contemplation, the effect of that measure. In these circumstances, the intervention of some element of private choice does not relieve Korea of responsibility under the GATT 1994 for the resulting establishment of competitive conditions less favourable for the imported product than for the domestic product. (italics in the original)

The AB was quick to highlight what it had not prejudged through its decision (§ 149): It may finally be useful to indicate, however broadly, what we are not saying in reaching our above conclusion. We are not holding that a dual or parallel distribution system that is not imposed directly or indirectly by law or governmental regulation, but is rather solely the result of private entrepreneurs acting on their own calculations of comparative costs and benefits of differentiated distribution systems, is unlawful under Article III:4 of the GATT 1994. What is addressed by Article III:4 is merely the governmental intervention that affects the conditions under which like goods, domestic and imported, compete in the market within a Member’s territory. (italics in the original)119

What exactly does the LFT test consist of in this case? Is it the fact that imported beef was previously being sold through the same channel as domestic beef, or is it the fact that only 5,000 outlets sold imported beef, whereas 45,000 outlets sold domestic beef? It cannot be the former, since the same requirement was imposed on domestic beef (i.e., it cannot be sold through the same channels as imported beef). Hence, no LFT could result from the modification of conditions of competition, in principle, since the same burden was imposed on both domestic and imported goods. If there were a burden at all, it had to be the number of outlets. However, trade effects, according to consistent case law, are immaterial—or are they? If trade effects do matter, though, how can we judge whether the availability of imported beef in 5,000 as opposed to 45,000 outlets operates to the detriment of imported beef unless we have information about the size of outlets, their location, and other points? What exactly did the AB mean when stating that the measure operates to the detriment of imported beef when the quota was absorbed in all years that it had been in place except for one, when extraordinary circumstances (by any reasonable account) occurred? We should add here that it cannot be the modification of conditions per se that constitutes a GATT violation. GATT is a negative integration contract, and trading partners retain the right to modify their laws whenever appropriate, so long as they observe the basic nondiscrimination obligation. Hence, it is the notion that the modification of conditions of competition was to the detriment of imported goods that must form the basis of the AB judgment. Since LFT equals ASATAP, should not the AB inquire into the design, structure, and architecture of the law? Well, it did so in the context of Article XX of GATT, and it did not cast doubt on the Korean justification that it was done for consumer-protection purposes. Recall that Korea had argued that the dual retail system was necessary to combat fraudulent practices. The AB agreed that the measure genuinely aimed at combatting fraudulent practices, although it pointed to less restrictive alternatives that could help Korea reach its objective. If this is acceptable (in the AB’s analysis under Article XX of GATT), how does the design, structure, and architecture of the measure support a finding of LFT? Or did the AB find

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that the measure was in violation of LFT simply because it was too onerous for international trade? This cannot of course, be the case since Article III.4 of GATT does not include a necessity-test.120 It seems that the panel and the AB were quick to find against Korea because the measure was origin based. Imported beef would be distributed through one channel, domestic through another. The distinction that Korea made, though, was origin based, simply because the imported good was less expensive and domestic traders might have had an incentive to pocket the price difference by selling imported beef as Korean. Arguably, Korea would have done the same thing if the price of Korean beef had exceeded that of imported beef.121 Alas, this erroneous analysis left its traces in subsequent case law, as we explain next. 7.6.4.4 Sultans of Swing I (Dominican Republic–Import and Sale of Cigarettes) In a subsequent case, the AB turned the tables. In order to define whether LFT had indeed resulted from a particular measure, it asked the question of whether the resulting detrimental effect for imported goods was due to their origin. If so, then LFT had been accorded, but, if not, then the NT provision had not been violated. In its report on Dominican Republic–Import and Sale of Cigarettes, the AB upheld the panel’s rejection of Honduras’s claim under Article III.4 of GATT. The challenged measure was a “bond requirement.” Cigarette importers had to post a bond to ensure payment of taxes. The level of the bond requirement depended on the market share in the Dominican market of the tobacco producer. It so happened that some foreign producers held a larger market share than their Dominican counterparts and were thus burdened with the payment of larger sums. The AB agreed with the panel that the existence of detrimental effect on a given imported product does not necessarily imply that the measure accorded LFT to imports, if the effect could be explained by factors unrelated to the foreign origin of the imported goods. In this case, the factor explaining the treatment was indeed the market share of the importer (§ 96): The Appellate Body indicated in Korea–Various Measures on Beef that imported products are treated less favourably than like products if a measure modifies the conditions of competition in the relevant market to the detriment of imported products. However, the existence of a detrimental effect on a given imported product resulting from a measure does not necessarily imply that this measure accords less favourable treatment to imports if the detrimental effect is explained by factors or circumstances unrelated to the foreign origin of the product, such as the market share of the importer in this case. In this specific case, the mere demonstration that the per-unit cost of the bond requirement for imported cigarettes was higher than for some domestic cigarettes during a particular period is not, in our view, sufficient to establish “less favourable treatment” under Article III:4 of the of GATT 1994. Indeed, the difference between the per-unit costs of the bond requirement alleged by Honduras is explained by the fact that the importer of Honduran cigarettes has a smaller market share than two domestic producers (the per-unit cost of the bond requirement being the result of dividing the cost of the bond by the number of cigarettes sold on the Dominican Republic market).

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In this case, the difference between the per-unit costs of the bond requirement alleged by Honduras does not depend on the foreign origin of the imported cigarettes. Therefore, in our view, the Panel was correct in dismissing the argument that the bond requirement accords less favourable treatment to imported cigarettes because the per-unit cost of the bond was higher for the importer of Honduran cigarettes than for two domestic producers. (italics and emphasis in the original)

The ruling in Korea–Various Measures on Beef was effectively overturned. A measure that operated to the detriment of imported goods is in violation of Article III.4 of GATT in the world of Korea–Various Measures on Beef. This was not necessarily the case in the world of Dominican Republic–Import and Sale of Cigarettes, where the challenged measure had an undeniable detrimental impact on imports but was justified, since the trade impact was not due to the origin of the goods involved. In this case, hence, the presence of detrimental effects for imported goods was not enough to condemn the challenged measure.122 The former approach would speed up recourse to Article XX of GATT.123 The latter would request that, besides proof of detrimental effect, an inquiry into the rationale for detrimental effect be undertaken and, depending on the outcome, recourse to Article XX of GATT might or might not be warranted. The approach followed in Dominican Republic–Import and Sale of Cigarettes was not a one-off incident. The AB held in a similar vein, in its report on US–FSC (Article 21.5– EC), that careful analysis of the implications of a measure in the marketplace must be performed in order to decide whether the LFT requirement has been met (§ 215): The examination of whether a measure involves “less favourable treatment” of imported products within the meaning of Article III:4 of the GATT 1994 must be grounded in close scrutiny of the “fundamental thrust and effect of the measure itself.” This examination cannot rest on simple assertion, but must be founded on a careful analysis of the contested measure and of its implications in the marketplace. At the same time, however, the examination need not be based on the actual effects of the contested measure in the marketplace. (italics in the original)

7.6.4.5 Sultans of Swing II (EC–Seal Products) In US–Clove Cigarettes, however, the AB added a twist. In footnote 372, the ruling stated: We disagree with the United States to the extent that it suggests that Dominican Republic–Import and Sale of Cigarettes stands for the proposition that, under Article III:4, panels should inquire further whether “the detrimental effect is unrelated to the foreign origin of the product”…In Thailand–Cigarettes (Philippines), the Appellate Body further clarified that for a finding of less favourable treatment under Article III:4, “there must be in every case a genuine relationship between the measure at issue and its adverse impact on competitive opportunities for imported versus like domestic products to support a finding that imported products are treated less favourably”… The Appellate Body eschewed an additional inquiry as to whether such detrimental impact was related to the foreign origin of the products or explained by other factors or circumstances. (italics in the original)

This was probably supposed to mean that, if a genuine and substantial relationship between the measure and the adverse impact on competitive opportunities had been estab-

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lished, there would be no need to also show that the intent was to disfavor imports.124 The content of the LFT requirement, however, was far from clear. Clarification of this point came in the AB report on EC–Seal Products. There, the EU provided its understanding of case law thus far, and claimed that, for the LFT requirement to be violated, the complainant must undertake an inquiry in addition to the demonstration that the challenged measure has had a detrimental impact on imports. It must inquire “into whether the detrimental impact on competitive opportunities for like imported products stems exclusively from a legitimate regulatory distinction.” (§ 5.100) Now, finally, the cards were all on the table. The AB would have to revisit its case law and respond to the question asked by the EU. It did so in §§ 5.109–110, in the following manner: The proposition that distinctions may be drawn between imported and like domestic products without necessarily according less favourable treatment to the imported products implies only that the “treatment no less favourable” standard, under Article III:4, means something more than drawing regulatory distinctions between imported and like domestic products. There is, however, a point at which the differential treatment of imported and like domestic products amounts to “treatment no less favourable” within the meaning of Article III:4. The Appellate Body has demarcated where that point lies, in the following terms: [T]he mere fact that a Member draws regulatory distinctions between imported and like domestic products is, in itself, not determinative of whether imported products are treated less favorably within the meaning of Article III:4. Rather, what is relevant is whether such regulatory differences distort the conditions of competition to the detriment of imported products. If so, then the differential treatment will amount to treatment that is “less favourable” within the meaning of Article III:4. In the light of the above, we do not agree with the European Union’s reading of the Appellate Body’s statement in EC–Asbestos. Specifically, we do not consider that the Appellate Body’s statement that a Member may draw distinctions between imported and like domestic products without necessarily violating Article III:4 stands for the proposition that the detrimental impact of a measure on competitive opportunities for like imported products is not dispositive for the purposes of establishing a violation of Article III:4.

Therefore, the presence of a detrimental impact in and of itself leads to a violation of Article III.4 of GATT. WTO members defending themselves against similar challenges will have to dig into the language of Article XX of GATT in order to justify their measures. Unlike EC–Seal Products, the AB effectively understood the LFT-requirement as synonymous not to ASATAP (which requires a look into the design, and architecture of the measure), but as synonymous to the “in excess” requirement. 7.6.4.6 Swinging in Echternach The dancing procession of Echternach, a small community in eastern Luxembourg, is an annual event that is quite well known around the world. Its particular connection to the discussion here is that dancers move quite slowly, taking one step forward and then a couple of steps back. This is what the AB managed to do with the case law presented in this section.

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It adopted a problematic construction of Article III.4 of GATT, since it strapped regulators into the straitjacket of Article XX of GATT.125 The presence of effects is almost inevitable whenever a regulation has been adopted. Complainants need to make a plausible case that they suffer from effects, and, because of the dislike of a test controlling for trade effects, it is quite likely that the AB will find violation of Article III of GATT. Is there a saving grace? Actually, there are two. When it comes to public health, because of EC–Asbestos, it is quite likely that the AB might find two goods unlike (one protecting health, and one not). There is no case law along these lines, though, when the hazard is not related to health but to something else, like the environment. The second saving grace is, of course, the list of exceptions mentioned in Article XX of GATT. We will return to this issue later in this chapter. Suffice it to state for now, that this list, absent imaginative interpretations, does not exhaust the realm of legitimate regulatory activity. The AB has been oscillating between a trade effects test and a full protectionism test in its case law regarding the understanding of the term “less favorable treatment (LFT).” Many thought that a page had been turned with the adoption of the report on Dominican Republic–Import and Sale of Cigarettes. Alas, that proved to be only the first step in the Echternach dancing procession. Two steps back were taken almost immediately thereafter: first, a timid one, with the issuance of the report on US–Clove Cigarettes; and second, a decisive step, with the adoption of the report on EC–Seal Products. 7.7

Exceptions

We will discuss Articles XX and XXI of GATT, which constitute the major exceptions to Article III of GATT, in chapter 8. 7.8

Institutions

The gamut of measures coming under the purview of NT is quite heterogeneous. This is why different committees are called to administer issues relating to different measures. For example, SPS measures are discussed in the SPS Committee, taxation of farm products in the Committee on Agriculture, and so on. The Market Access Committee is basically the default forum, where issues will be submitted if they escape the jurisdictional ambit of any of the other more specialized forums. 7.9 7.9.1

Concluding Remarks Nondiscrimination and Efficiency

NT is not a requirement relating to the quality of regulatory interventions, much less a requirement to adopt efficient regulations: all that matters is that regulation is applied in

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a nondiscriminatory manner. This construction of Article III is, of course, perfectly consistent with the negative integration character of GATT.126 Consequently, nondiscrimination does not request from WTO members the obligation to adopt efficient regulations.127 WTO members can use the second- or third-best instruments to address a distortion and still be found to be WTO-consistent if the (so far loosely defined) requirement of evenhandedness has been observed. Nondiscrimination is no surrogate for efficiency.128 And yet, efficient interventions (using the best instrument) should create a strong presumption that the intervening party is genuinely pursuing what it claims to pursue.129 This was definitely too much to ask, though, from negotiators in the 1940s, just as it is too much to ask from them nowadays. The move to the second- or third-best instrument to address a distortion, though, creates its own problems. It could, of course, be for realpolitik/feasibility reasons; e.g., a WTO member has budgetary constraints and cannot subsidize even when subsidies are the best response to a particular distortion. It could also be for reasons of political economy: in this scenario, a WTO member might be tempted to impose a tax (beggar-thy-neighbor) and shift costs to its trading partners, instead of reeducating the personnel of a declining industry. At the heart of disputes arising under Article III of GATT lies an informational problem, where the regulator (in possession of information) has little incentive to reveal its true intentions, as argued previously. Efficient regulations would diminish, if not eliminate altogether, the size of the problem. Alas, we are living in a second-best world. Second-best interventions present the WTO judge with a formidable test, as described next. 7.9.2 Asymmetric Information and Its Discontents Against this background, one can only sympathize with the WTO adjudicatory body and the enormity of the task that it faces when resolving disputes under Article III of GATT. At the end of the day, it is called upon to decide what “protection” is—a very demanding exercise, since there is nothing like a dictionary definition of the term. It will typically mean dealing with a scenario where there is private information (the regulator knows the rationale for the challenged measure). The party possessing private information has a strong incentive to act opportunistically since, if the regulator did intend to violate the ASATAP requirement when enacting the challenged measure and reveals the truth, it will be violating GATT and will have to pay the consequences. If, in the same constellation of facts, it pretends that its measure was enacted for a different (than protectionism) purpose, then it might get away with it. Recall, moreover, that there is nothing like a complete disciplining of each and every domestic policy. The icing on the cake is that the WTO body will have to interpret one incomplete contract, GATT, through another, the Vienna Convention on the Law of Treaties (VCLT).130 This chapter has pointed to weaknesses in case law interpretations of the provision, and chief among them is the extension of the test established in US–Superfund (a case

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involving de jure discrimination) to cases of de facto discrimination. This is, of course, what happened in the context of case law under Article XI of GATT as well, as noted in chapter 2. US–Superfund is not an isolated incident, though. In EEC–Oilseeds I, a GATT panel offered a very explicit statement to the effect that the risk of favoring domestic goods suffices for a measure to be considered in violation of Article III of GATT. In this case, the complainant challenged the consistency of an EU scheme where industrial users of oilseeds were being paid the price differential between the EU and the world price for this commodity. As a result, they would privilege consumption of the EU good at the expense of the imported good. In the eyes of the panel, there was no need for trade-effects analysis since, in its view, it was the risk of privileging consumption of the EU commodity that sufficed to establish the violation of Article III of GATT: … The Panel noted that the exposure of a particular imported product to a risk of discrimination constitutes, by itself, a form of discrimination. The Panel therefore concluded that the purchase regulations creating such a risk must be considered to be according less favourable treatment within the meaning of Article III:4. (§§ 140–141)

This test might make some sense when we are dealing with de jure violations, when regulatory distinctions are based on the origin—and only on the origin—of the goods concerned. In cases of de facto discrimination, though, the facts are different; there, challenged measures are prima facie origin neutral, and only following a sophisticated inquiry can a body understand to what extent they operate as protectionist measures. In US–Tuna II (Article 21.5–Mexico), as we saw previously, the panel followed a different route and effectively requested that, in cases of de facto discrimination, claimants face a higher burden of persuasion. Alas, this report is probably at odds with the AB report on EC-Seal Products, which found that a measure was in violation of Article III of GATT simply because of its detrimental impact on competitive conditions that imported goods would be facing. The AB did not explain whether its LFT-standard in this case was such because the measure was a de jure violation (since only seal products produced by the Greenland Inuit community would be lawfully marketed in the EU market). We are in the dark, therefore, as to whether the AB will be applying the same LFT-test in all cases, or, conversely, whether it will be applying two LFT-tests, one for claims of de jure and another, demanding for claims of de facto discrimination. At any rate, WTO panels and the AB would be well advised to check the standard of review adopted by courts dealing with competition disputes. For example, they could treat cases of de jure discrimination in a manner comparable to the “per se rule” established in competition jurisprudence, and de facto discrimination akin to the “rule of reason.” The reason for the dichotomy is that, in the former cases, (almost)131 always, an anticompetitive outcome will be produced, whereas in the latter, it might or might not be produced depending on facts that need to be examined carefully. Market evidence (trade effects)132

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is necessary for any court to establish a case of de facto discrimination; this should be the case for WTO panels as well. It is high time for the senseless “no effects cum no intent” test to be abandoned. The view expressed here is that the GATT framers got it right when opting for nondiscrimination; it is case law that failed to honor their insights. Could we do better? 7.9.3

In Search of a Smoking Gun

What follows advances the crux of the analysis in Grossman, Horn, and Mavroidis (2013), who have contributed a coherent framework to analyze disputes coming under Article III of GATT. The approach adopted in their work consists of asking sequentially two questions: does the law, as contemplated through case law, make sense (i.e., does it serve the intended purpose)? If not, is it because case law has not managed to provide the test that will properly (e.g., in accordance with the intended use) scrutinize submitted disputes, or is it the law itself that is the cause of concern? Their conclusion is that, although the law could have been formulated in clearer terms, it is case law that has caused major concerns. Think of this way. There are four key terms in Article III of GATT: “like,” “DCS products,” “in excess,” and “LFT/ASATAP.” DCS products can be defined with and without taking into account the price of the goods concerned. Like products are DCS goods in an intense competitive relationship, but the cross-price elasticity coefficient in the case mentioned is low by any reasonable benchmark. And there is no coherent understanding of LFT. Only the term “in excess” has been interpreted in a clear-cut manner. One out of four is disappointing. So what do Grossman et al. (2013) propose? The complainant should bring in evidence first.133 The WTO body will decide the quantum of evidence needed to resolve the dispute through questions that it can pose to both parties (Article 13 of DSU). It is inappropriate to change the present allocation, even though it may be desirable to allocate the burden to the party that is better informed. Assigning the bulk of the burden of proof to the regulator, though, might provoke a flurry of complaints. Assigning the burden to the better-informed party (i.e., the defendant) might increase the propensity to commit a false positive (a Type I error) and strike down an otherwise legitimate regulation,134 and might also lead to underregulation (“regulatory chill”).135 In short, in the absence of solid arguments in favor of viewing the allocation of burden of proof as a tennis match, there is no reason to discard the current system. Inviting parties to produce evidence and judging whether the burden has been met should be done against this background. Then comes the question of the standard of review. This is an area where Grossman et al. (2013) proposed a total rethinking of the current regime. This is what they proposed. Two goods should be considered “like goods” if they are alike in terms of both market and policy. Because of their shared properties, thus, there will be absolutely no reason to

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differentiate their treatments. One might, of course, legitimately ask why, in light of policy likeness, there is any need for market likeness as well? The main reason for including the market likeness criterion is to prevent the provision binding importers in instances where, by coincidence, the products would be treated equally despite not being in competition. For instance, there are many reasons why a country may apply a lower tax on domestically produced coffee cups (which are not imported) than on diesel trucks (which are only imported). It could be the case that the joint welfare of the exporting and importing country governments would increase if the importing country government were requested to tax the two products identically, the products thus being policy like purely by chance. But it is obviously highly unlikely that the differential taxation would reflect protectionism.136

Policy like Not policy like

Market like

Not market like

Like: no tax differential is allowed. DCS: some tax differential is allowed.

Article III not applicable; any tax differential is allowed. Article III not applicable; any tax differential is allowed.

The test for DCS goods should be in the marketplace (market-likeness), but the quantity (and quality) of information must be drastically improved. Recourse to econometric indicators should be the starting point of analysis inquiring into the DCS relationship between two goods: it is by far the most reliable tool we possess at this stage to discuss this relationship. On occasion, recourse to econometric indicators might be impossible: for example, in the case that one of the goods concerned is not physically present in the market under examination, recourse to noneconometric indicators will be warranted. This is where the various criteria first established in the WP report on BTAs could be used.137 The LFT test should be confined to the question of what is the rationale for a particular regulatory behavior. Recall that GATT punishes only discrimination. In the absence of common policies, any nondiscriminatory policy (coming under the purview of Article III of GATT) should pass the test of consistency in flying colors. In this vein, the question to ask when dealing with interventions to distinguish between two like/DCS goods in order to decide whether LFT has been afforded should be: Does the measure distinguish between two products (domestic/foreign) because of their origin (although explicitly not saying so)? If yes, then the measure should be judged GATT-inconsistent. The test should inquire into both the intent138 and the trade effects of the measure. Nevertheless, there is nothing like a “protection meter” to measure protection, so recourse to proxies is inevitable. Recourse to proxies, by definition, does not exclude the potential for error. There are two considerations that one should keep in mind, though, besides the intellectual necessity to have recourse to this technique. The first is the size of the problem that proxies can

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handle. Proxies are proxies. While we believe that the proxies mentioned next can help resolve the type of cases that have been brought so far to the GATT/WTO in a satisfactory manner, adjustments and additions might be required in the future. Second, that the system can probably adjust better to some type II errors (where some protectionist behavior is tolerated), rather than in a world filled with type I errors (where nonprotectionist behavior is punished). The latter provoke distrust toward the system that punishes them, and eventually might even provoke its collapse. With this in mind, here is the indicative list of proxies: 7.9.3.1 Origin Neutrality Even if, say, only domestic cars conform to the desired environmental standard today, there is no reason to ban foreign cars from the market in the future only because they are foreign. Sykes (1999) also observes in this vein that regulatory measures that raise the costs of foreign firms relative to domestic firms are exceptionally wasteful protectionist devices and also carry deadweight costs that can greatly exceed those of traditional protectionist instruments, such as tariffs and quotas. The presumption should be that WTO members wishing to protect their own market would rather use a trade than a domestic instrument.139 7.9.3.2 Use of the First-Best Instrument Recourse to the first-best instrument to address the perceived distortion should be taken into account as indicating absence of protectionist intent. 7.9.3.3 Scientific Evidence Measures based on scientific evidence are in general more likely to respond to a genuine need to intervene, at least in light of the best current knowledge about a particular issue.140 7.9.3.4 Necessity The choice of necessary measures (i.e., not more trade restrictive than warranted to achieve the objective sought) should indicate a lack of protection motives, at least in principle.141 7.9.3.5 Who Bears Adjustment Costs? In a similar vein, the question whether domestic producers have had to incur adjustment costs in order to conform to the new regulatory standard should be entertained as well. 7.9.3.6 Consistency If the same objective is disregarded in other industries, the differential treatment might indicate that the protection is intentional. 7.9.3.7 International Standards International standards represent the world consensus (as opposed to unilateral opinion) regarding which instrument best addresses a particular concern. This list is by no means exhaustive, and the proxies are not legal obligations. The adjudicating body cannot, for

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example, request WTO members to always perform a scientific risk assessment or punish them for not doing so. It can, however, if presented with similar evidence, reach a more informed judgment on the consistency of the challenged measure.142 One might legitimately ask the question: What does this approach entail as far as Article XX of GATT143 is concerned? It can continue to have a limited role,144 of course, but why is a more limited role warranted? There are at least three arguments in favor of limiting the role of Article XX of GATT. First, the two provisions share a nondiscrimination clause. How can a measure that has been found to be discriminatory under Article III of GATT be nondiscriminatory under Article XX?145 Second, Article XX of GATT contains an exhaustive list of policy objectives that might not capture all of the preoccupations of WTO members. For example, a WTO member distinguishing between “ordinary” and “luxury” items by taxing an imported luxurious product higher than a competing domestic ordinary product will have a hard time finding justification under Article XX of GATT. Domestic taxation that treats products originating from small and medium-sized enterprises more favorably than products of bigger players will encounter similar problems. Yet another policy would be the promotion of culture. Finally, because of the exhaustive nature of this provision, WTO members might opt for regulatory chill, fearing that policies that do not come under one of the listed exceptions might be rejected simply because they do not feature in the list. Article XX of GATT can still have a role as explained in the next chapter. The heart of the proposal by Grossman et al. (2013)146 is to reinstate a protectionism test in the heart of Article III of GATT.147

8

State Trading Enterprises

8.1 The Legal Discipline and Its Rationale 8.1.1 The Legal Discipline A substantial amount of trade, especially farm trade, takes place through marketing boards (that is, state trading enterprises), not between private traders. State trading enterprises (STEs) are bottlenecks on the import- or export side: (some) goods will be imported and/ or exported only through STEs. For historic and other reasons, even mainstream market economies like Canada keep in place similar organizations that administer trade for a number of commodities. State trading companies must respect the disciplines of Article XVII of GATT. This provision requests state trading enterprises (STEs) to behave in a nondiscriminatory manner when trading with foreign nations. 8.1.2 The Rationale for the Legal Discipline To understand the rationale for disciplining STEs, we need to take a brief look at the negotiating record. Irwin, Mavroidis, and Sykes (2008) reported that the inclusion of a provision on STEs was very much a request by the UK government, which, under the influence of John Maynard Keynes, as we saw in chapter 1, was unwilling to severely curb the role of the state within a context of liberalized trade policy. The role of state was quite visible in the realm of farm trade, where weather conditions for one thing could hit the crops and affect food supply and prices. While the impact of weather conditions on farm goods is a concern these days as well, it was a bigger factor in the 1940s when the state of sciencebased interventions, as well as insurance protection, was at a much lower level. Unsurprisingly, then, various marketing boards were in operation in the UK (and elsewhere) at the time GATT was negotiated, and dismantling them was not a realistic option. Something needed to be done, though, to discipline their operation, since negotiators legitimately feared that, unless disciplined, STEs could be used to circumvent concessions (i.e., concession erosion). The fear was that STEs being a state entity, and thus part and parcel of the domestic political economy, might have little incentive to act in accordance

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with commercial considerations, as they might be willing to advance national industrial policy goals. The idea, thus, was that Article XVII of GATT, by introducing the obligation not to discriminate, would provide a guarantee that trade would not be inhibited any further as a result of the operation of STEs. There should be no confusion between NMEs and STEs. There is no need for a finding that the whole economy is an NME. STEs can operate perfectly well within market economies. Indeed, the reason for addressing this issue is because market economies allowed for the establishment of STEs within their territory. The fear is that through the operation of STEs, market economies might be circumventing their obligation to avoid discriminating between domestic and imported goods. The fear was legitimate since STEs might have the incentive to favor domestic goods when intervening in international trade. The Appellate Body (AB), in its report on Canada–Wheat Exports and Grain Imports,1 confirmed that the rationale for this provision is to operate as an anticircumvention device that would guarantee that the nondiscrimination principle would not be eviscerated (§ 85): Subparagraph (a) seeks to ensure that a Member cannot, through the creation or maintenance of a State enterprise or the grant of exclusive or special privileges to any enterprise, engage in or facilitate conduct that would be condemned as discriminatory under the GATT 1994 if such conduct were undertaken directly by the Member itself. In other words, subparagraph (a) is an “anti-circumvention” provision.

8.1.3

Discussion

8.1.3.1 Negotiating Record In the London Conference, three provisions were dedicated to disciplining state trading. Two of them were of peripheral interest. Article 32 dealt with state monopolies of individual products. Article 33 dealt with the extraordinary case of complete state monopolies of import trade. And Article 31 of the London Draft, sponsored by various delegations, was the key provision. It reflected the original understanding upon which the current disciplines of STEs have been built. It addressed two questions, namely, the ambit of STEs, and the legal discipline that should be imposed on them: With respect to the former, it made it clear that state trading should be distinguished from government procurement, in that the latter concerned purchases for governmental use and not for resale, as the former did. It further defined STEs by using a “control” criterion, in the sense that any enterprise effectively controlled by the state, and not only enterprises that formally were state entities, should be considered an “STE.” It also imposed on STEs the obligation to respect the most favored nation (MFN) discipline when purchasing goods. To this effect, they should act in accordance with commercial considerations, such as price, quality, etc.2 The negotiators in the remaining part of the negotiation spent most of their time discussing the legal obligation imposed, having satisfied themselves that the ‘control’ criterion sufficed for the purposes of defining STEs. Alas, the ‘control’ criterion was not explicitly included in the body of what became Article XVII of GATT that now regulates STEs.

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The UK delegation continued to play a major role in the drafting of this provision, but it was the US delegation that, during the New York Conference, produced the first draft, which did not deviate substantially from the London Draft.3 The US delegation attempted to establish that what mattered was that STEs behaved in accordance with “commercial considerations,” even if their behavior could prima facie be regarded as discriminatory. For example, the following passage in its proposal stated: The charging by a state enterprise of different prices for its sales of a product in different markets, domestic or foreign, is not precluded by the provisions of this Article, provided that such different prices are charged for commercial reasons.4

Price differentiation could, in principle, give rise to claims that the obligation not to discriminate had been violated. And yet this is precisely what the US wanted to avoid through its proposal. It wanted to establish the preeminence of “commercial considerations” as the benchmark by which STEs’ actions would be judged. The idea was that, like private operators, STEs could occasionally price-discriminate, and to the extent that similar behavior was justified by the benchmark established, it should be tolerated as well. As we will see later, this benchmark did not resonate with GATT/WTO panels that dealt with the interpretation of Article XVII of GATT. The UK was, thus, not alone in pursuing its idea that STEs could coexist with private operators in a liberal trade order. The question was, of course, under what conditions this could or would be the case. The discussion so far suggests that the obligation to act with “commercial considerations” was thought as the discipline that would ensure that trading nations would not, through the establishment of STEs, take with one hand what they had given with the other (a nondiscriminatory, liberal trade order). During the Geneva Conference, Czechoslovakia, on the brink of a communist takeover, showed increasing interest in the negotiation on STEs. In its view, GATT should allow countries of “whatever political, economical, or social structure to collaborate peacefully in the attainment of the purposes of the Charter.”5 Thus, it was requesting a modification to ensure the necessary flexibility so that participation in GATT would not be reserved to market economies only. It did not want to see STEs “tamed” either, and this is why it omitted references to the obligation to behave in accordance with “commercial considerations.” So Czechoslovakia was aiming at swinging the pendulum the other way, creating a “safe harbor” within GATT for STEs, regardless of whether they were behaving in accordance with commercial considerations or not. This is, of course, not what the UK, the initial instigator, had in mind. The US and France led the chorus of countries opposing this idea.6 Czechoslovakia was isolated, and the ensuing discussions faithfully reproduced the spirit of the London Draft.7 Chile, for example, speaking for many delegations, repeated that the term “commercial considerations,” the key obligation imposed on STEs, should be understood to mean that STEs could not base their decisions on “political considerations.”8 This and

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similar pronouncements made it clear that the kind of discipline that Czechoslovakia had in mind would not fly with the majority of the GATT framers. What was still, unclear though, was the issue of whether commercial considerations would be the sole benchmark for evaluating the consistency of actions by STEs (as proposed by the US). Eventually, negotiators ended up drafting Article XVII of GATT in a rather convoluted manner: they kept the nondiscrimination obligations in the text, as they did the obligation for STEs to act in accordance with commercial considerations. It would be left to subsequent practice to decide the relationship between the two obligations. What was clear was that (the future) Article XVII of GATT was thought as an anticircumvention device. Trading nations should not, under the guise of trading through STEs, eviscerate the bite of such foundational GATT legal institutions as nondiscrimination, the quintessential element of GATT. Nondiscrimination was not the only obligation that negotiators wanted to ensure would not be circumvented through the use of STEs. The Interpretative Note with Articles XI, XII, XIII, XIV, and XVII of GATT suggests that STEs should not be used as a conduit to circumvent the obligation to impose quantitative restrictions (QRs): “Throughout Articles XI, XII, XIII, XIV and XVII, the terms ‘import restrictions’ or ‘export restrictions’ include restrictions made effective through state-trading operations.”9 The Interpretative Note with Article XVII.3 of GATT, in a similar vein, includes a reference to Article II.4 of GATT. This provision requires WTO members to ensure that any monopoly in the importation of a product will not result in protection that is, on average, in excess of the amount of protection provided for in the relevant schedule of concessions. In a similar vein, Article XVII.4 of GATT deals with import monopolies on products, which are not subject to concessions in accordance with Article II of GATT. It provides that WTO members shall, upon request, provide information on the import markup for any given product coming under their purview during a previous representative period.10 8.1.3.2 Subsequent Practice The discussions during the Review Session of the GATT (1954–1955) did not lead to any meaningful change of this provision. It was left thus, to adjudicators to decide on the relationship between the nondiscrimination obligation included in this provision, and the obligation imposed on STEs to act in accordance with commercial considerations. WTO adjudicating bodies, as we will see later, by insisting on the link between STEs and other GATT obligations, ended up understanding this provision more in terms of a negative obligation (e.g., “thou shall not discriminate”), rather than a positive one (e.g., “thou shall act in accordance with commercial considerations”), as the US had envisioned. 8.2

Defining STEs

Article XVII of GATT does not define STEs. As we saw earlier, negotiators spent much of their time discussing the nature of the obligation imposed, and little attention was paid

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to the definition of the term. It merely states that it applies to STEs, as well as to enterprises that have been granted exclusive or special privileges, either formally or in effect. Practice and case law have provided some clarifications in this context. The WTO webpage contains a definition, which, however, is not an agreed-upon definition by the membership of the WTO: “State trading enterprises are defined as governmental and non-governmental enterprises, including marketing boards, which deal with goods for export and/or import.” This is hardly illuminating. The Interpretative Note ad Article XVII GATT does provide for some clarifications, as does practice. Case law has done the same. 8.2.1 The Law We can start from the wording of the Interpretative Note ad Article XVII of GATT.11 This Note provides guidance in two respects. First, it states that “marketing boards” are covered by this provision and, as a result, one form of STEs is defined. No other entities that may qualify as STEs are explicitly mentioned. Second though, this note provides the criterion for classifying entities as STEs, when it states that standards aimed at ensuring quality or efficiency, or privileges granted for the exploitation of natural resources, which do not empower the government to exercise control over the trading activities of the enterprise in question, do not constitute “exclusive or special privileges” (and, consequently, entities enjoying similar privileges should not qualify as STEs). The conferral of “exclusive or special privileges” emerges thus, as one form of exercising control over an entity, and in this case, the entity enjoying similar privileges qualifies as STE. In line with the negotiating record thus, absence of governmental control emerges as the decisive criterion regarding the classification of an entity as STE or not. Practice offers a few instances where entities were considered to be STEs. The GATT panel on Korea– Beef (US), for example, held that a producer-controlled import monopoly for beef should be subjected to the discipline of Article XVII of GATT. In this case, it is the monopoly to import goods that was considered to amount to exclusive or special privilege. By the same token, the Canadian Wheat Board, entrusted with the exclusive right to purchase and sell western Canadian wheat for export and human consumption, was considered to be an STE by a WTO Panel (Canada–Wheat Exports and Grain Imports). Note also that Article XVII.2 of GATT clarifies the relevance of this provision with respect to government procurement: WTO members incur by virtue of Article XVII of GATT only an obligation to accord “fair and equitable treatment.” Two points are important here. First, the GATT framers decided in 1946 to have a carve-out for government procurement because of the nature of this activity. They stated in a London Conference document, “The Preparatory Committee is of the opinion that the awarding of public works contracts is more closely related to the question of the treatment of foreign nationals and corporations than to the treatment of trade in goods.”12 It is for this reason that, as we saw earlier when discussing the negotiating record for this provision, the GATT framers aimed

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at distinguishing between state trading and government procurement, in the sense that the nondiscrimination obligation would apply to the former but not the latter. Second, and in this vein, negotiators were clear that the term “fair and equitable treatment” did not have the same meaning as the MFN clause.13 In fact, as we saw in chapter 1 of this volume, some WTO members have agreed to liberalize their government procurement markets and have signed a plurilateral agreement to this effect [Government Procurement Agreement (GPA)], which is discussed in volume II. Case law has made it clear that parties to the GPA do not have to respect either the national treatment (NT) or the MFN obligation with respect to nonsignatories. It follows that STEs must be entities that buy and resell, not entities that buy for governmental use.14 Finally, the Understanding on the Interpretation of Article XVII of GATT, adopted during the Uruguay round, provides some additional clarification regarding the scope of this provision. § 1 provides the following definition of STEs: governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports.

The added value here is that it suffices that STEs, when exercising their exclusive of special rights or privileges, “influence” (as opposed to regulate) the level or direction of imports and exports, and that the form regarding their establishment is not prejudged at the WTO level. 8.2.2

Practice

Practice evidences various entities coming under different names and organizational forms that WTO members understand to be STEs in the sense of Article XVII of GATT. The WTO webpage, which reproduces notified entities,15 lists various types of STEs. We reproduce exhaustively the types of entities that have been notified so far in what follows. Note, nevertheless, that there is nothing like an exhaustive list of types of STEs. What matters for an entity to be considered an STE is that it is “controlled” by a government and that it engages in trade operations (that is, it does not make purchases for government consumption). It could be thus, that in future practice, entities beyond those mentioned in what follows, could qualify as STEs. With this in mind, here are the types of STEs notified so far: • Statutory marketing boards:16 These are quite common in the agricultural sector. They often combine a monopoly in international trade with management of domestic production and distribution of (farm) goods. • Export marketing boards: These are enterprises that manage exports of domestic goods.

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• Regulatory marketing boards: These look like statutory marketing boards, except that they do not participate in the conduct of international trade operations. Through their operation, nevertheless, they affect the manner in which trade is conducted. • Fiscal monopolies: These cover trade in goods for which domestic demand is (relatively speaking) price inelastic and foreign demand is (relatively speaking) price elastic, and with respect to which the government has an active public health policy in place (e.g., tobacco, matches, etc.). • Canalizing agencies: Developing countries use these in order to channel specific goods, particularly to domestic producers. • Foreign trade enterprises: This is the form that STEs take in nonmarket economies (NMEs). A “foreign trade enterprise” is typically owned and controlled by the state and engages in international trade operations (both import and export trade). • Boards of nationalized industries: A “nationalized industry” is not necessarily an STE. To the extent, however, that they get involved in the production/trade of goods, they come under the purview of Article XVII of GATT. At the moment of writing, the Working Party on State Trading Enterprises17 is developing what is hoped to be a more elaborate illustrative list of STEs. This is a bottom-up approach, in the sense that the Working Party is putting together the types of STEs notified and variations thereof. It can be very useful to adjudicators, especially since there is no agreed definition of STEs, and the control criterion leaves much to be desired in terms of precision.18 Finally, note that in the case of disagreement between two WTO members as to whether a particular entity should be regarded as an STE, it is WTO adjudicating bodies that will decide this issue. To this effect, they could be inspired by the indicative list, but also by the discussion that we gave before the list.19 8.3 The Obligations Assumed Article XVII of GATT requests WTO members to ensure that their STEs: 1. Observe the obligation not to discriminate 2. Behave in accordance with “commercial considerations” 3. Afford companies (with respect to their purchases or sales) “adequate opportunities to compete” Two important questions regarding the ambit of this obligation have arisen in practice. First, whether point (1) covers MFN only, or whether it covers NT as well. Second, whether (2) and (3) are mere illustrations of the nondiscrimination obligation, or,

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conversely, whether they should be understood as obligations additional to the obligation not to discriminate. It is this latter question that brings the debate squarely within the US proposal regarding the benchmark to evaluate the consistency of STEs with GATT. 8.3.1

Nondiscrimination

To the extent that an STE is acting as an importer only, respecting the nondiscrimination principle is tantamount to respecting MFN. Consequently, it should not discriminate across products because of their origin. To the extent, however, that an STE acts not only as an importer, but as a distributor as well, it must not only observe MFN, but also NT. The leading case addressing this issue is Korea–Various Measures on Beef, where, following the lawful imposition of a quota on imports of beef which it justified through balance of payments (BoP), Korea had established a producer-controlled import monopoly for the importation and distribution of beef. The monopoly was the sole importer and distributor of beef at a time when the price of imported beef was substantially lower than that of domestic beef. The Korean measure was under attack for various reasons (as discussed in chapter 7). What we care about here is the alleged inconsistency of the Korean import monopoly with Article XVII of GATT. The question arose before the panel whether the legal obligation not to discriminate included in Article XVII.1 of GATT covered both MFN and NT. The panel responded in the affirmative because the Korean monopoly operated not only as an importer but also as a distributor of beef (§ 7.53). 8.3.2

Commercial Considerations

The interpretation of the obligation to act in accordance with commercial considerations is an issue that has occupied the attention of both GATT as well as WTO panels. Case law has not been consistent. Recall that the issue is whether the obligation to act in accordance with commercial considerations is a mere illustration of the obligation not to discriminate or an independent (additional) obligation. If the former, then any time WTO members have respected their obligation to act in a nondiscriminatory manner, they would ipso facto have adhered to the obligation to act in accordance with commercial considerations. If the latter, then WTO panels would have to provide their understanding regarding the content of the obligation to act in accordance with commercial considerations. The proposal that the US had tabled during the negotiations (reviewed previously) sides with the latter approach. It is the GATT panel on Belgian Family Allowances that established the independence of the “commercial considerations” criterion from the obligation not to discriminate, when, in an oft-quoted passage, it held (§ 4): As regards the exception contained in paragraph 2 of Article XVII, it would appear that it referred only to the principle set forth in paragraph 1 of that Article, i.e., the obligation to make purchases in accordance with commercial considerations and did not extend to matters dealt with in Article III.20

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This panel, hence, concluded that an STE must act in accordance with commercial considerations anyway, and it did not incur a “broader” obligation to respect the obligation to afford NT to imported goods. A few years later, the GATT panel on Canada–FIRA reached the opposite conclusion. It held that the obligations embedded in Article XVII.1(b) of GATT (namely, the obligation to act in accordance with commercial considerations and to afford adequate opportunities to operators from other WTO members) are mere illustrations of the nondiscrimination obligation (§ 5.16). As a result, STEs did not incur any obligations in addition to the obligation not to discriminate. The discussion regarding the ambit of the obligations imposed on STEs continued in the WTO era. Panels that have dealt with cases in this context have found it hard to come to grips with the ambit of the obligations imposed on STEs. The panel on Korea–Various Measures on Beef seemed to place the two obligations (nondiscrimination and commercial considerations) on an equal footing, as opposed to treating one as an illustration of the other (§ 7.57): A conclusion that the principle of non-discrimination was violated would suffice to prove a violation of Article XVII; similarly, a conclusion that a decision to purchase or buy was not based on “commercial considerations,” would also suffice to show a violation of Article XVII.

Of course, acting on commercial considerations could allow discrimination. In this vein, one could, for example, understand why an import monopoly would like to favor goods originating in producers with whom it has entered into long-term contracts, offer better prices, etc. Trade exists largely after all because of the possibility for price arbitrage. The issue was finally resolved in the litigation on Canada–Wheat Exports and Grain Imports. The panel (§ 6.60) disregarded the approach advanced in Korea–Various Measures on Beef and treated the obligation to act in accordance with commercial considerations as an illustration of the obligation not to discriminate, not as an additional obligation. On appeal, the AB confirmed the panel’s approach, holding that not only the obligation to act in accordance with commercial considerations, but also the obligation to afford “adequate opportunities to compete” discussed in Article XVII.1(b) of GATT, were mere illustrations of the obligation not to discriminate (§§ 89–106). As a result, the AB was unwilling to extend its review to any issues beyond claims of discriminatory behavior (§ 145): The disciplines of Article XVII:1 are aimed at preventing certain types of discriminatory behavior. We see no basis for interpreting that provision as imposing comprehensive competition-law-type obligations on STEs, as the United States would have us do.21

It is doubtful whether this understanding of the obligations on STEs captures the negotiating intent. It is equally doubtful whether it is reasonable at all to understand this provision in this way.22 Let us use the facts of Canada–Wheat Exports and Grain Imports to illustrate this point. The Canadian Wheat Board, as the name suggests, was operating in the trade of wheat and grains. The panel dealt with claims by the US to the effect that a

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Canadian STE was not acting in accordance with commercial considerations. The privileges of the Canadian Wheat Board were the following: 1. The exclusive right to purchase and sell western Canadian wheat for export and domestic human consumption 2. The right to set, subject to government approval, the initial price payable for western Canadian wheat destined for export or domestic human consumption 3. The government guarantee of the initial payment to producers of western Canadian wheat 4. The government guarantee of its borrowing 5. The government guarantees of certain of its credit sales to foreign buyers The US advanced two claims. First, in its view, the Canadian Wheat Board was acting inconsistently with its obligation to act on commercial considerations because, when selling, it should not be selling below market rates. In its view, selling below market rates was not consonant with commercial considerations. Second, the US also argued that the Canadian STE’s behavior was GATT inconsistent, since it was seeking to maximize revenue and not profit and hence, was not acting like a private grain trader (a profit-maximizing firm). The panel rejected all US claims and arguments in this respect. It took the view that the Canadian STE could legitimately use its privilege to the disadvantage of commercial actors (§ 6.106), that selling below market prices was perfectly legitimate as well (§ 6.129), and that not selling for its own profit should not be equated with acting without respecting commercial considerations (§ 6.133). In the view of the panel (§ 6.60): In our view, the circumstance that STEs are not inherently “commercial actors” does not necessarily lead to the conclusion that the “commercial considerations” requirement is intended to make STEs behave like “commercial” actors. Indeed, we think it should lead to a different conclusion, namely that the requirement in question is simply intended to prevent STEs from behaving like “political” actors.

And, in a footnote, it added: “We use the term ‘political actors’ here merely to contrast our understanding of the first clause with that of the United States. Non-commercial considerations include, but are not limited to, political considerations.” In the panel’s eyes, thus, the obligation to act in accordance with commercial considerations was not necessarily captured by the obligation not to discriminate. It was nevertheless, a very narrow obligation, since all that was required from WTO members was to avoid behaving like “political actors,” as opposed to behaving like profit maximizers. Following an appeal by the US, the AB had the chance to explain its own understanding of the term “commercial considerations,” as we saw previously. A few additional words are in order here. Stating first the panel’s understanding of the term “commercial considerations” (§ 140), it went on to find that, so long as they do not discriminate, STEs can be deemed to have acted in accordance with commercial considerations. The AB further

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held that STEs may legitimately use their privileges, which they do not have to undo in order to be deemed to be acting consistently with Article XVII of GATT (§§ 146–51).23 One can hardly find fault with the latter part of the AB’s analysis, in the sense that it would be rather cavalier to read Article XVII of GATT as requesting STEs to prepare their own demise. And yet something is missing in this picture. For example, using the privileges could lead to abusive behavior. In the absence of world competition law punishing monopolization, similar behavior could undermine tariff negotiations. The only legal instrument that affected parties can lean on to address similar concerns is nonviolation complaints (NVCs), which are associated, nevertheless, with an important burden of persuasion for the complaining parties.24 Moreover, why is it that sales below cost, say, are necessary for an STE to continue to exist? Should we not also inquire about the necessity of similar actions? The AB did not have to go down this road, and yet by going halfway it opened up dozens of questions it left unanswered. On the other hand, the AB addressed in a definitive manner the wider question (the relationship between the obligation to observe nondiscrimination and the obligation to act in accordance with commercial considerations), but it failed to explain the rationale behind its finding. Does it really make sense to understand the obligation to act in accordance with commercial considerations as an illustration of the obligation not to discriminate? Is the US example offered during the negotiations misplaced? The AB clearly decided so, but isn’t MFN about origin only? What is wrong with price discrimination then if it does not hinge on the origin of imported goods? One could easily construct examples where nondiscriminatory behavior would be hardly justified by commercial considerations. Here are a few egregious cases. What if, for example, an import monopoly applies a lower duty on goods destined for industrial use, and a higher one for like-used goods destined for final consumption? What if a consumption tax is imposed in light of the use of the imported good (e.g., a lower tax threshold when goods are destined for industrial use, and a higher tax when used are destined for final consumption)? Similar behavior would be considered discriminatory, and yet, most people would agree that it is consonant with commercial considerations. It is clear that, following the AB’s ruling, a class of measures adopted by STEs that are not consonant with commercial considerations will be exonerated from liability under GATT if they have been adopted in a nondiscriminatory manner. This is so because nondiscriminatory in the case law developed by the AB is acontextual: nondiscriminatory presupposes a benchmark and the benchmark chosen by the GATT framers was origin. The AB (as some GATT panels before it) has understood this term as synonymous to nondiscriminatory irrespective of any benchmark. Any time two goods of different origin have been treated in a different manner, the AB presumes that the rationale for distinction is origin, and pushes regulators toward looking for an exception in the body of Article XX of GATT that we examine in the next chapter. The problem is particularly acute when discussing the discipline imposed through Article XVII of GATT since “commercial considerations” are not mentioned as grounds for justifying violations of obligations under the GATT. Indeed, it would be odd

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to see similar grounds in the body of Article XX of GATT, since “commercial considerations” constitute an obligation. Alas, the AB chose to ignore this issue. It is, therefore, less than clear that the AB findings are in line with the negotiating intent, and perhaps common sense. Anyway, following the AB ruling on this score, this discussion is by now moot, as the obligation not to discriminate is the overarching obligation imposed on STEs. We turn our attention now to an unappealed finding of the same panel (Canada–Wheat Exports and Grain Imports), which concerns the interpretation of the term “solely” appearing in the body of Article XVII of GATT: namely, STEs should not be simply acting in accordance with commercial considerations; they should be acting solely in accordance with commercial considerations. In the panel’s view, an STE would not be acting solely in accordance with commercial considerations if it were to make purchases or sales on any one or more of the following considerations: 1. The nationality of potential buyers or sellers 2. The policies pursued 3. The national, economic, or political interest of the member maintaining the STE (§ 6.88) Point (1) is a classic case of de jure discrimination, and hence in line with the case law described so far. Points (2) and (3), though, raise questions regarding the consistency of the approach followed by the panel with the overall AB ruling in this dispute. It is submitted that they do not represent “good law” anymore, since the AB ruled in the most categorical manner that the obligation to act in accordance with commercial considerations was a mere illustration of the obligation not to discriminate. 8.3.3 Adequate Opportunities to Compete There is no case law regarding the substantive content of the term “adequate opportunities to compete,” and the meaning that its constituent elements (“adequate,” “compete”) should have.25 In its report on Canada–Wheat Exports and Grain Imports, the AB held that this obligation also constituted an illustration of the obligation not to discriminate. This is all we know in terms of substantive content of the obligation. It should, thus, be understood as akin to ensuring that enterprises interested in supplying or purchasing from the STE are treated in a nondiscriminatory manner. We explain. In Canada–Wheat Exports and Grain Imports, the US also complained about the practices of the Canadian STE vis-à-vis other enterprises, arguing that it had not afforded other companies adequate opportunities to compete and was, thus, in violation of the second clause embedded in Article XVII.1(b) of GATT. The US was arguing that the obligation to afford adequate opportunities to compete to other enterprises extended to cover enterprises in competition with an STE; that is, enterprises that could substitute for the STE as a purchaser or a seller. So the question before the panel was: What was the class of

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enterprises that must be afforded opportunities to compete? The panel rejected the US claim, and the AB confirmed this finding (§ 157): In other words, the second clause of subparagraph (b) refers to purchases and sales transactions where: (i) one of the parties involved in the transaction is an STE; and (ii) the transaction involves imports to or exports from the Member maintaining the STE. Thus, the requirement to afford an adequate opportunity to compete for participation (i.e., taking part with others) in “such” purchases and sales (import or export transactions involving an STE) must refer to the opportunity to become the STE’s counterpart in the transaction, not to an opportunity to replace the STE as a participant in the transaction. If it were otherwise, the transaction would no longer be the type of transaction described by the phrase “such purchases or sales” in the second clause of Article XVII:1(b), because it would not involve an STE as a party. Thus, in transactions involving two parties, one of whom is an STE seller, the word “enterprises” in the second clause of Article XVII:1(b) can refer only to buyers. (emphasis in the original)

In § 161, it added: … we uphold the panel’s findings that the terms “enterprises of the other Members” in the second clause of paragraph (b) of Article XVII:1 includes “enterprises interested in buying the products offered for sale by an export STE” but not “enterprises selling the same product as that offered for sale by the export STE in question” (i.e., the competitors of the export STE).

For the rest, we noted earlier that the obligation to afford adequate opportunities to compete is simply an illustration of the obligation not to discriminate. This might sound counterintuitive since the term “adequate opportunities to compete” requires some action on behalf of the STE, whereas the obligation not to discriminate does not. Indeed, one could behave in a perfectly nondiscriminatory manner by affording no opportunities to compete. Eventually, the AB might have to revisit this case law. 8.3.4

Exceptions

Article XX(d) of GATT explicitly mentions STEs and states that nothing in GATT shall prevent the adoption of measures necessary to secure compliance, inter alia, with laws or regulations relating to the enforcement of STEs. This is, of course, not the sole ground for justifying violations of the obligation not to discriminate. All of Article XX, as well as Article XXI of GATT, could legitimately be offered as justification for a violation of Article XVII of GATT. To this effect, a WTO member could lawfully impose an embargo on imports of pork on religious grounds [and, thus, invoke Article XX(a) of GATT to this effect], while allowing trade of beef, chicken, and other similar products. 8.4 Transparency The WTO must be notified of all STEs. In light of the uncertainty regarding the definition of the term, it is highly likely that some notifications are deficient. The Understanding on

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the Interpretation of Article XVII of GATT (§ 4) allows the possibility to cross-notify STEs, but there is no record of cross-notifications so far. To facilitate notifications, the Council for Trade in Goods (CTG) has adopted a series of decisions relating to the periodic notifications requirement that WTO members must observe.26 The Working Party on State Trading Enterprises has revised the 1960 Questionnaire (which has been used for notification purposes)27 and, as stated previously, is in the process of elaborating an Illustrative List of STEs. Updated notifications for 1999 and 2000 were received from 47 and 44 members, respectively. New and full notifications were received from 54 members for 2001, and updating notifications for 2002 and 2003 were received from 42 and 33 members, respectively. New and full notifications for 2004 and 2006 were received from 34 and 22 members, respectively.28 Participation is open to all WTO members.29 8.5

Institutions

There is no committee on STEs. Instead, as previously mentioned, WTO members agreed to the establishment of a Working Party on State Trading Enterprises. This body was established following the advent of the Understanding on the Interpretation of Article XVII of GATT (§ 5), and it reviews all notifications by WTO members regarding STEs. It meets, at the very least, once a year, and reports to the CTG. 8.6

Concluding Remarks

The WTO framework regarding STEs leaves much to be desired. It seems that, with the exception of the agreement regarding the establishment of the Working Party, the current framework largely reproduces the reality of the 1940s, when GATT was negotiated. STEs can and do hinder international trade in various ways. Article XVII of GATT is the main, but not the only, provision aimed at disciplining their operations. The AG30 and the SCM Agreements (which will be discussed in volume II) impose additional disciplines. Seventy years after the entry into force of the WTO, it is high time that WTO members should agree on what the purpose of disciplining STEs is and should be. If they buy into the claim by the AB that all that matters is that they behave in a nondiscriminatory way, then the focus should be just on transparency. If, on the other hand, the objective is to ensure that STEs behave like “private operators,” then they would need to rethink the well-founded case law that assimilates nondiscrimination with acting in accordance with commercial considerations, and affording adequate opportunities to compete. Various nonmarket economies have already joined the WTO, and some are in the process of negotiating their accession. Instead of negotiating customized solutions in Protocols of Accession, it is probably worth rethinking the reinforcement of the current text of Article XVII of GATT.

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9.1

Exceptions and Deviations from Obligations Assumed under GATT

Exceptions and Deviations

In this chapter, we discuss the legal means available to WTO members to justify any violations of their obligations assumed under GATT. Our focus is on four instruments: • General exceptions (Article XX of GATT) • National security (Article XXI of GATT) • Nonapplication (Article XXXV of GATT and Article XIII of the Agreement Establishing the WTO) • Waivers (Article XXXV of GATT and Article IX of the Agreement Establishing the WTO) Their content is heterogeneous. Articles XX and XXI of GATT qualify as exceptions to assumed obligations, in the sense that the party invoking them bears the associated onus to demonstrate that it is in compliance with the substantive and procedural requirements embedded in these provisions. There are many other exceptions beyond these two provisions that have been included in GATT. To provide but an illustration, Article XIV of GATT, as we saw in chapter 2, exceptionally allows for discriminatory quantitative restrictions (QRs) if the conditions reflected in that provision have been met. The difference between Articles XX and XXI of GATT, on the one hand, and any other exception mentioned in the various agreements regulating trade in goods, on the other, is that the former offer an escape route with respect to any (as opposed to a specific) obligation assumed. In this chapter, we focus on exceptions of general character, so to speak. The nonapplication clause of GATT is not an exception to assumed obligations, in the sense that there is no shift in the burden of proof. Moreover, there is no legal test that the invoking party has to comply with in order to invoke this provision. To accentuate the distance between exceptions, as discussed above, and nonapplication even further, the country invoking this clause does not even have to justify its choice. Upon accession of

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a new member to the WTO, an incumbent can, by invoking this provision, indicate that it will not be observing the WTO contract vis-à-vis the acceding country. The end result, nevertheless, is the same. A WTO member is not bound by one or more provisions vis-àvis the acceding WTO member against which it has invoked the nonapplication clause. It was believed necessary to include this provision in the GATT era since, after World War II (WWII), it was not politically feasible to immediately request formerly fierce enemies to start behaving right away like good friends. Waivers represent an agreed deviation from WTO obligations. WTO members can be granted a waiver; that is, permission to deviate from their WTO obligations (or some of them) on a temporary basis if the WTO membership so agrees. A WTO member must explain the reasons for requesting a waiver, but the reasons could be highly idiosyncratic and specific to the requesting WTO member (as opposed to the “standard” grounds mentioned in Articles XX and XXI, which apply to all WTO members). The difference, thus, between nonapplication and waiver is that, whereas the former depends solely on the will of the invoking state and does not have to be temporary, the agreement of the WTO membership is necessary for the latter to come into force, and it can only be in force for a specific time. The two provisions share, nonetheless, an important common feature. They do not constitute exceptions in the sense discussed previously. It is for the complaining party to show that the terms, say, of a waiver have not been respected, and not for the party that has obtained a waiver to invoke it in order to justify a violation of a provision that the WTO membership has agreed to waive. This is why we refer to these two legal institutions as “deviations.” 9.2

General Exceptions

9.2.1 The Legal Discipline and Its Rationale WTO members can justify violations of any obligation assumed under GATT through seeking recourse in one of the grounds mentioned in Article XX of GATT. This list covers a variety of grounds ranging from the protection of public health to conservation of natural resources. WTO members can take trade measures to protect one of the objectives mentioned in the list if they have successfully met the associated burden of persuasion. The suitability of trade policies to achieve social preferences can, of course, be called into question. Trade policies are blunt and rarely, if ever, efficient when addressing market failures. They are not subtle enough to target the heart of the distortion that they aim to correct.1 In China–Rare Earths, for example, the panel approvingly referred to the expert opinion provided by Gene Grossman (§§ 7.169ff.), an economist expert witness, who explained why export taxes (used by China) are inferior means to achieve environmental goals (conservation of exhaustible natural resources, in this case). As he explained, export

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taxes increase the export price but divert sales toward the domestic market. Prices will fall in the domestic market, and the resulting increased domestic consumption will eviscerate the possibility of attaining the objective in question. Taken to its extreme, this and similar arguments would suggest that there is (almost) no room for using trade instruments in pursuance of social preferences. While this conclusion is probably correct from an economic-theory perspective, it is at odds with the WTO legal system. Article XX of GATT is, of course, the means to deviate from obligations assumed by utilizing trade instruments, since it is trade instruments that have been committed to GATT in the first place. There is, thus, dissonance between economic theory and GATT– Realpolitik explained by the reticence of the framers to oblige trading nations to use firstbest, efficient policies.2 Article XX of GATT was thought of not only as a flexibility clause, but also as the proof of the agreed hierarchy between trade commitments and (national) social preferences: public morals, protection of human health, and all the other grounds mentioned in the body of this provision did not have to be set aside in the name of trade liberalization commitments. It should not suffice, though, that a trading nation could simply invoke a ground mentioned in the body of this provision to lawfully deviate from its trade commitments. The idea is that a WTO member will justifiably deviate from an assumed obligation only if it has first met the conditions for pursuing a social preference that have been included in Article XX of GATT. Negotiators of the GATT were well aware of the danger that people might abuse invocations of the exceptions provision, and insisted on including specific conditions that a party should meet in order to avail itself of the possibility to deviate from its obligations. We read in a joint proposal by Belgium, Luxembourg, and the Netherlands: “Indirect protection is an undesirable and dangerous phenomenon.”3 The conditions included in each grounds mentioned in the body of Article XX of GATT were thus meant to serve as means to avoid indirect protection. The Appellate Body (AB) report on US–Shrimp, quoted at length later in this chapter, explicitly endorsed this point in § 157. The risk of moral hazard requests some insurance policy against it. Article XX of GATT wants to distinguish between WTO members that genuinely pursue a preference and WTO members that abusively invoke this provision. Students of the screening literature know that this is far from easy. The legal tests employed can help the judge somewhat, but a lot depends on how a judge exercises discretion in this realm. Article XX of GATT was modeled after the corresponding provision included in the 1927 International Convention for the Abolition of Import and Export Prohibitions and Restrictions (World Economic Conference of 1927) that we mentioned in chapter 1. The legal tests that had been agreed on in the 1927 Convention (“nondiscrimination,” “necessity,” “rational connection,” etc.) were carried over to GATT in an effort to help distinguish wheat from chaff. Still, the negotiation of Article XX of GATT was not easy.

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During the original GATT negotiation, delegates could not immediately agree on a definitive text and, hence, what was supposed to be Article 37 of the London Draft (the corresponding provision to Article XX of GATT) remained, early on, an open issue. There was, however, substantial agreement in principle as to the necessity for the provision and its basic content (probably because the provision had been modeled after the 1927 Convention). Negotiators unanimously held that Article 37 should be dedicated to permanent, rather than emergency, action.4 There were disagreements though about the list of exceptional grounds that would be included in the body of this provision. The grounds justifying deviation from general obligations assumed under GATT were modified after the London Conference, and one new paragraph, Article XX(j) of GATT, dealing with justifiable restrictions on products in short supply, was agreed to during the Review Session.5 The inclusion of the chapeau (that is, the introductory paragraph to Article XX of GATT), as it now stands, is a GATT “invention.”6 The UK delegation had originally proposed what became the current chapeau of Article XX of GATT. Through this addition, the UK negotiators aimed to ensure that a party invoking Article XX of GATT would be behaving in evenhanded manner They seemed to have in mind a provision that would operate as an exception to import and export restrictions only, but not to internal (domestic) measure: The undertakings in chapter IV of this Charter relating to import and export restrictions shall not be construed to prevent the adoption or enforcement by any member of measures for the following purposes, provided that they are not applied in such a manner as to constitute a means of arbitrary discrimination between countries where the same conditions prevail, or a disguised restriction of international trade.7 (emphasis added).

During the New York conference, Benelux (i.e., Belgium, the Netherlands, and Luxembourg) and French delegates proposed the inclusion of the expression “nothing in this agreement will be construed,” which was included in the chapeau of this provision and generalized the application of the list of exceptions included herein.8 This proposal was accepted without much discussion, and there should thus be no doubt that the framers’ intent was that all grounds mentioned in this provision trump any trade-liberalizing obligation reflected in the rest of GATT. Following agreement on these issues (inclusion of the chapeau; general exception), the provision as we now know it was agreed upon at the Geneva Conference. The scope of Article XX of GATT was thus widened to include domestic measures as well. GATT/WTO case law has by now accepted that recourse to Article XX of GATT can be made to justify violations assumed with respect to both border and domestic instruments. The GATT panel on Thailand–Cigarettes offers an example of the former. In this case, the United States challenged the consistency of the Thai Tobacco Act of 1966 with Article XI of GATT. According to this law, “the importation ... of tobacco [was] prohibited except by licence of the Director-General” (§ 63).

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The Thai Tobacco Act of 1966 defined tobacco to include cigarettes as well. There was no dispute between the parties that the measure at hand constituted a quota under Article XI of GATT (§§ 21, 65). Thailand attempted to justify the quota in place by invoking, inter alia, Article XX(b) of GATT, and the panel examined the legitimacy of this claim under this provision (§§ 72ff). EC–Asbestos is an example of a measure that had been successfully challenged before the panel under Article III of GATT, and justification was subsequently sought under Article XX of GATT. The AB held that Article XX of GATT could serve as a legal basis to justify measures that had been previously found to be inconsistent with Article III of GATT (§ 115).9 The Panel on China–Raw Materials first held that Article XX of GATT could serve as an exception not only to obligations assumed under the GATT, but also to obligations assumed under a Protocol of Accession. In this case, China was trying to justify violation of an obligation included in its Protocol of Accession (and not in GATT) by invoking Article XX of GATT. The panel agreed with China that this could very well be the case, but only if an explicit or even implicit reference to Article XX of GATT had been included in the Protocol (§§ 7.158–60). We discuss this issue in more detail later in this chapter. The list of grounds mentioned in Article XX of GATT is exhaustive. The AB, in its report on US–Shrimp, held that all exceptions appearing in Article XX of GATT are “limited” (§ 157): In our view, the language of the chapeau makes clear that each of the exceptions in paragraphs (a) to (j) of Article XX is a limited and conditional exception from the substantive obligations contained in the other provisions of the GATT 1994, that is to say, the ultimate availability of the exception is subject to the compliance by the invoking Member with the requirements of the chapeau. (emphasis in the original)

The word “limited” in the abovementioned passage makes it clear that the list of exceptions mentioned in Article XX of GATT is exhaustive. The AB, in its report on Brazil– Retreaded Tyres, eliminated any doubts on this score by holding the following (§ 139): “First, a panel must examine whether the measure falls under at least one of the ten exceptions listed under Article XX.” 9.2.2

Elements Common to All Listed Exceptions

The statutory conditions that must be satisfied for a WTO member to invoke Article XX of GATT successfully are not symmetric across all subparagraphs included in the provision. Some require that the adopted measures are “necessary” to achieve the stated ends (Article XX(b) of GATT), whereas others demand that they “relate to” the objective sought (Article XX(g) of GATT).

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There are, however, three “common” elements across all grounds: 1. A WTO member invoking Article XX of GATT must first demonstrate that it has complied with the subparagraph invoked before moving on to demonstrate that it has also complied with the chapeau of Article XX of GATT (“two-tier” test). 2. The party invoking one of the grounds must carry the associated burden of proof. 3. The task panels and the AB are limited to an inquiry on whether the means employed meet the statutory conditions. Ends are not justiciable. Before we turn to an examination of these features, there is one issue we need to discuss first. During the GATT years, two panels outlawed legislation aimed at protecting dolphins caught in the nets of tuna fishers simply because the measure had been unilaterally decided. These reports raised the question of whether unilateral measures are per se inconsistent with Article XX of GATT. The US had enacted legislation (the US Marine Mammal Protection Act) requesting fishers (domestic and foreign alike) wishing to sell tuna in the US market to observe a regulation that obliged them to fish for tuna without using “purse seine nets,” a fishing technique that led to the accidental taking of life of dolphins while fishing for tuna. The US had imposed a “primary” and “intermediary nation” embargo. It would block imports from countries that had not adopted fishing techniques similar to its own, as well as from countries that were importing from these countries (regardless of the shaping of their own policies). This led to two disputes between the US and Mexico (primary embargo), and the US and the EU (intermediary embargo).10 In § 2.1 of its report on US–Tuna (EEC), the panel described the technique of fishing with purse seine nets as follows: Tuna are commonly caught in commercial fisheries using large purse sein nets. A fishing vessel using this method sends a small boat carrying one end of the net around a school of tuna. The other end of the net remains attached to the fishing vessel. Once the boat has encircled the school of tuna and returned its end of the net to the vessel, the vessel winches in cables at the bottom and the top, thus “pursing” it and gathering its contents.

Now here comes the twist. Schools of tuna often swim in the eastern, tropical Pacific together with dolphins. Dolphins are visible since they often jump above the surface, but tuna are not. When trawling for tuna, fishers can locate and catch them by setting on dolphins with purse seine nets.11 According to US authorities, approximately 133,000 dolphins were killed in 1986.12 The setting on of dolphins through vessels using purse seine nets was to blame for this outcome, and the US requested that its fishers stop this fishing method. The number dropped to 27,500 by 1993 as a result of the US prohibition, or so the US claimed [§ 2.2 US–Tuna (EEC), panel report]. Encouraged by this result, the US expanded the mandatory ban to foreign fishers as well: no one would be in position to sell tuna in the US market unless the tuna had been caught without setting on dolphins using purse seine nets. Mexican fishers did not adapt to the new recommended fishing techniques and, as a result, were left out of the lucrative US tuna market.

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Figure 9.1 Purse sein nets

The government of Mexico protested that the US measure amounted to a violation of Article XI of GATT. The GATT panel that was asked to decide on Mexico’s challenge first established a violation of Article XI of GATT and then rejected the argument advanced by the US that the measure was consistent with Article XX of GATT. In its view, this could never be the case when measures had been enacted unilaterally. The panel on US– Tuna (Mexico) outlawed the US measure because of its unilateral character (§ 5.27): The Panel considered that if the broad interpretation of Article XX(b) suggested by the United States were accepted, each contracting party could unilaterally determine the life or health protection policies from which other contracting parties could not deviate without jeopardizing their rights under the General Agreement. The General Agreement would then no longer constitute a multilateral framework for trade among all contracting parties but would provide legal security only in respect of trade between a limited number of contracting parties with identical internal regulations.13

This decision provoked very negative reactions. Scholars and the wider civic community criticized the decision from different angles, which went against the very essence of GATT: “negative integration.” The AB overturned this case law in its landmark US–Shrimp jurisprudence. A sea change, to wit, indeed occurred. On this occasion, the US government had enacted legislation to prevent the accidental death of sea turtles. Various kinds of sea turtles are acknowledged as endangered species by the Convention on the International Trade of Endangered Species (CITES), a multilateral convention aimed at combating trade in endangered species.14 The US went one step further. It did not prohibit just the trade of sea turtles (as CITES did) but also the sale of shrimp that had not been caught with turtleexcluding devices (TEDs), a US technology that allowed sea turtles to swim out of the

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net where shrimp had been caught. Thus, the US did not merely ban trade in endangered species. It was regulating trade in shrimp in the name of protecting the life of sea turtles. The US submitted ample empirical proof to the panel to back up its allegations in this respect.15 Some producers/exporters of shrimp complained (with Malaysia and Thailand leading the way). In their view, the US measure was effectively denying them access to the US market since they would have to change their production methods and incur substantial adjustment costs to comply with the US standard. Referring to prior GATT case law, the complainants challenged the consistency of the US measure with GATT, arguing that it was inconsistent since it had been unilaterally defined. The panel followed the ruling on US–Tuna (Mexico) and condemned the US measure because of its unilateral character. The AB overturned the panel’s decision, holding that WTO members remained free to unilaterally regulate their market, provided that they respect the relevant GATT disciplines. In other words, a measure would not be GATTinconsistent, simply because it had been unilaterally defined (§ 121): ... conditioning access to a Member’s domestic market on whether exporting Members comply with, or adopt, a policy or policies unilaterally prescribed by the importing Member may, to some degree, be a common aspect of measures falling within the scope of one or another of the exceptions (a) to (j) of Article XX. Paragraphs (a) to (j) comprise measures that are recognized as exceptions to substantive obligations established in the GATT 1994, because the domestic policies embodied in such measures have been recognized as important and legitimate in character. It is not necessary to assume that requiring from exporting countries compliance with, or adoption of, certain policies (although covered in principle by one or another of the exceptions) prescribed by the importing country, renders a measure a priori incapable of justification under Article XX. Such an interpretation renders most, if not all, of the specific exceptions of Article XX inutile, a result abhorrent to the principles of interpretation we are bound to apply. (italics in the original)

This case law has been consistently reproduced and emphasized in subsequent case law.16 As a result, it is now uncontested that Article XX of GATT condones, and does not suppress, regulatory diversity.17 The AB, in its report on Korea–Various Measures on Beef, reached the same outcome (e.g., measures are not illegal simply because they are unilateral) using a different route. Judicial review has to be confined to the means used to achieve a particular objective and cannot extend to an examination of the legitimacy of the ends themselves (§ 176): It is not open to doubt that Members of the WTO have the right to determine for themselves the level of enforcement of their WTO-consistent laws and regulations. We note that this has also been recognized by the panel in United States—Section 337, where it said: “The Panel wished to make it clear that this [the obligation to choose a reasonably available GATT-consistent or less inconsistent measure] does not mean that a contracting party could be asked to change its substantive patent law or its desired level of enforcement of that law. … ” (italics in the original)

We will return to this issue and discuss it in more detail later in this chapter.

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9.2.2.1 Two-Tier Test The AB has constructed Article XX of GATT akin to a two-tier test. Assuming that a WTO member has invoked, say, Article XX(b) of GATT to justify an import embargo on toxic waste, a panel will first examine whether the measure is necessary to achieve the stated objective (protection of human health), before it examines whether the (provisionally justified under Article XX(b) of GATT) measure also has been applied in a manner consistent with the chapeau of the article. The two obligations (a paragraph of Article XX of GATT, Article XX(b) of GATT, on this occasion, and the chapeau) must be cumulatively met for the measure to be judged GATT-consistent. The AB stated as much in its report on US– Gasoline (p. 22): In order that the justifying protection of Article XX may be extended to it, the measure at issue must not only come under one or another of the particular exceptions—paragraphs (a) to (j)—listed under Article XX; it must also satisfy the requirements imposed by the opening clauses of Article XX. The analysis is, in other words, two-tiered: first, provisional justification by reason of characterization of the measure under XX(g); second, further appraisal of the same measure under the introductory clauses of Article XX.

In its report on US–Shrimp, the AB provided the rationale for the two-tier approach in the following manner (§§ 119–120):18 The sequence of steps indicated above in the analysis of a claim of justification under Article XX reflects, not inadvertence or random choice, but rather the fundamental structure and logic of Article XX. The Panel appears to suggest, albeit indirectly, that following the indicated sequence of steps, or the inverse thereof, does not make any difference. To the Panel, reversing the sequence set out in United States–Gasoline “seems equally appropriate.” We do not agree. The task of interpreting the chapeau so as to prevent the abuse or misuse of the specific exemptions provided for in Article XX is rendered very difficult, if indeed it remains possible at all, where the interpreter (like the Panel in this case) has not first identified and examined the specific exception threatened with abuse. The standards established in the chapeau are, moreover, necessarily broad in scope and reach: the prohibition of the application of a measure “in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail” or “a disguised restriction on international trade.” [italics added] When applied in a particular case, the actual contours and contents of these standards will vary as the kind of measure under examination varies. What is appropriately characterizable as “arbitrary discrimination” or “unjustifiable discrimination,” or as a “disguised restriction on international trade” in respect of one category of measures, need not be so with respect to another group or type of measures. The standard of “arbitrary discrimination,” for example, under the chapeau may be different for a measure that purports to be necessary to protect public morals than for one relating to the products of prison labour.

The panel on China–Raw Materials added that the legal consequence of the two-tier test is that, unless compliance with a subparagraph has been achieved, there is no need to examine the consistency of the challenged measure with the chapeau of Article XX of GATT (§ 7.469).

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The AB, in its report on US–Gasoline, held that the choice of terms used in the body of Article XX of GATT should imply that, while the legal test should not be identical across the various subparagraphs of this provision, the same test should always apply when discussing the conformity of a measure with the chapeau (pp. 17–18): In enumerating the various categories of governmental acts, laws or regulations which WTO Members may carry out or promulgate in pursuit of differing legitimate state policies or interests outside the realm of trade liberalization, Article XX uses different terms in respect of different categories: “necessary”—in paragraphs (a), (b) and (d); “essential”—in paragraph (j); “relating to”—in paragraphs (c), (e) and (g); “for the protection of”—in paragraph (f); “in pursuance of “—in paragraph (h); and “involving”—in paragraph (i). It does not seem reasonable to suppose that the WTO Members intended to require, in respect of each and every category, the same kind or degree of connection or relationship between the measure under appraisal and the state interest or policy sought to be promoted or realized.

9.2.2.2 Burden of Proof Case law has consistently held that, by virtue of the maxim that the party invoking an exception carries the associated burden of proof (quicunque exceptio invocat ejusdem probare debet), the party invoking Article XX of GATT carries the burden of proof to demonstrate that it has met its requirements. The AB, citing prior case law to this effect (US–Gasoline, pp. 22–3; US–Wool Shirts and Blouses, pp. 15–16; US–FSC (Article 21.5–EC), § 133) confirmed this view in its report on US–Gambling (§ 309): “It is wellestablished that a responding party invoking an affirmative defense bears the burden of demonstrating that its measure, found to be WTO-inconsistent, satisfies the requirements of the invoked defense.” 9.2.2.3 Means Are Justiciable, not Ends We referred to the list embedded in Article XX of GATT as “limited” (e.g., exhaustive), and “conditional” (e.g., members that satisfy the conditions therein can justifiably deviate from any obligation assumed under GATT). The term “limited” might, prima facie, be perceived as contradicting the quintessential element of GATT; that is, “negative integration.” Indeed, should “negative integration” not imply that WTO members are free to pursue any societal preference they deem worth pursuing, to the extent that when doing so, they do not impose an uneven burden on imported goods? “Negative integration” is, of course, best served were one to construct Article XX of GATT as an exception only to Articles II and XI of GATT. In this case, Article III of GATT is the “realm” of domestic policies, and this provision contains no list of objectives that can legitimately be pursued, so it is open-ended. This is, alas, not the construction of Article XX of GATT, which, as we saw earlier, includes an exhaustive list of reasons that can be offered to justify violations. What then happens with social preferences that have not been included in the body of Article XX of GATT? Can they not be offered as legitimate grounds to justify violations of obligations assumed under the GATT,

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even if they comply with the chapeau and apply in nondiscriminatory manner? Would we not be interpreting the GATT, thus, as an instrument for deregulation, as opposed to an instrument condoning negative integration? Case law, probably mindful of this risk, has attempted to enlarge the scope of Article XX of GATT. Most notably, though, as we will see later, the term “public morals” has been understood in practice as synonymous to “public order”; that is, to “standards of right or wrong” as they develop endogenously in national societies. It remains to be seen whether this construction amounts to understanding Article XX(a) of GATT as a catch-all provision that fits any regulatory aspiration that does not find shelter in any other subparagraph of Article XX of GATT. If this proves to be the case, then the worries regarding the “limited” scope of Article XX of GATT expressed in chapter 7 will have been handled. It will all depend, of course, on whether “standards of right and wrong” will be understood in future case law as referring to all issues of public order, or only to a few “important” ones like freedom of speech, animal health, etc. Case law has made it clear that the task of panels and the AB when interpreting the term “conditional” does not extend to asking questions regarding the rationale for invoking an objective under particular circumstances. All they can do is verify that the conditions for invoking an objective have been met: in other words, means are justiciable, not ends. Sykes (2015), therefore, got it right when characterizing case law under Article XX of GATT as deferential to members’ policy objectives, but considerably less deferential to their choice of policy instruments. 9.2.2.4 Pursuing Multiple Means and Ends (What Is a “Measure”?) Think about the following example that was cited in numerous blogs while the dispute on EC–Seal Products was being litigated. In some states, the sale of marijuana is prohibited (sales ban), but it is allowed for medical purposes. This is a case of an import ban with an exception, and the objective is arguably the same, whether we view it from the perspective of the rule or that of the exception. Both the ban and its exception aim to protect human health. There is, of course, a nuance, since use beyond what is necessary to address a medical condition might be harmful. In this case, one could plausibly make the argument that we are dealing with one instrument (an import quota, since some quantities will be allowed) justified through recourse to both Article XX(a) (public morals) and Article XX(b) of GATT (human health), or an import licensing regime allowing imports of marijuana by specialized agents who can guarantee that the imported good will be directed to controlled use only. Equally plausibly, one could claim that we are facing two “measures”: an import ban on marijuana justified on the same provisions, and, say, an import licensing regime limiting quantities of marijuana sold. Alternatively, recall the facts in Canada–Renewable Energy (which was discussed briefly in chapter 7 and will be discussed in more detail in chapter 3 of volume 2). In this

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case, Canada paid a subsidy to producers of renewable energy if they produced it using Canadian machinery (local content). Arguably, Canada was aiming at killing two birds (protection of the environment, industrial policy) with one stone (the measure described previously). Or, recall the facts in EC–Seal Products. The EU had imposed a ban on marketing of seal products within the EU market in an effort to stop the brutal harvesting of seals. In the same legislation, it allowed for exceptions to the in principle ban. One of them allowed the Inuit community of Greenland to market seal products within the EU market irrespective of the method used for harvesting seals. Furthermore, according to evidence provided by Canada and Norway before the panel, the Inuit community of Greenland was harvesting seals in a rather brutal manner. Are we in the presence of one or two measures in these cases?19 One is tempted to ask what the measure in these and similar cases was—a question, alas, that neither the Panel on EC–Seal Products nor the Panel on Canada–Renewable Energy asked. In a similar vein, we might ask as well whether the WTO adjudicatory body should be bound by the description of the measure in the submitted complaint [Article 6.2 of the Dispute Settlement Understanding (DSU)], or whether it should be bound by the description of the measure in the national statute that formed the subject matter of the dispute before it. And in addition, the careful reader might ask why we ask the question here, in chapter 9, when obviously it is a question that permeates the whole volume. Why haven’t we asked it earlier, then? “Measures” aim to achieve particular ends. Whereas in previous chapters, the intended rationale (intent) for the measure challenged is not a concern for the WTO judge (as case law has repeatedly confirmed), it is very much an issue in the context of Article XX of GATT. True, ends (the objective sought through regulatory interventions) are not justiciable, as we have argued already. Recall, nevertheless, that Article XX of GATT includes a “limited” and “conditional” list. WTO members invoking this provision must fit their regulatory objectives under one of those mentioned in this list. Regulatory interventions in modern democracies are often a compromise between competing goals. As a result, it is not unusual to encounter cases where a policy is used to achieve more than one objective. The targeting literature20 ranks instruments according to the degree to which they help achieve a particular policy objective. A first-best instrument fully counteracts any distortion from what can be maximally achieved given the objective and specified constraints (often in terms of preferences, technology, and available resources). Other available instruments can be ranked as second-, third-best, etc., according to the extent to which they can achieve the stated objective. Of course, the WTO contract does not request its members to pursue any particular policy, and it does not request them to use first-best instruments, either. It does request, though, through the disciplines imposed in Article XX of GATT, the use on some occasions of a necessary measure (e.g., the least restrictive on international trade, as we will see later in this chapter), whereas in others, that members simply adopt an instrument that has a rational connection with the objective pursued. In this latter case, it will be easier for members to adopt measures that relate to more than one objective, and it will be harder

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to do so when requested to adopt “necessary” measures; that is, the least restrictive option to reach a particular objective. Targeting literature, finally, uses the term “instrument” as opposed to the term “measure.” The two terms are not synonyms. Profit taxation, for example, is an “instrument,” while a “measure” could be the imposition of a particular tax level (especially in Article III of GATT cases). In practice, a measure could involve several instruments. In short, targeting literature scholars could be unhappy with the choice of governments to use the same means to attain several ends. With all this in mind, think of the EC–Seal Products dispute.21 Recall that the challenged EU measure, as described in the relevant EU statute and as understood by both the panel and the AB, was the “EU Seals Regime,” which consisted of a ban on sales in principle, with an exception made, inter alia, for Inuit hunts (IC hunts). The ban was adopted to promote animal welfare, whereas the exception was allowed because the subsistence of an indigenous community (Inuit) was heavily dependent on harvesting seals. Through this measure, thus, the EU was effectively addressing a social concern (the vicious killing of seals) while addressing the subsistence needs of the Inuit community of Greenland. There was a twist, though, and not an easy one to manage. The Inuit community of Greenland was harvesting seals using rather primitive—indeed brutal—methods.22 By accepting seals harvested by the Inuit community of Greenland while banning similar sales by others (including the Inuit community in Canada), the EU was effectively using one sauce for the goose and another for the gander. Under the circumstances, the complaint should not come as a surprise at all. The EC–Seal Products dispute raises the question whether the panel and the AB were in the presence of one or two measures. Panels have not questioned the definition of “measure” in requests for establishing a panel, where they have accepted descriptions operated by the complainant. They did question the delimitation of “measure,” though, when moving to examine justifications for violations of a provision, essentially in the context of Article XX of GATT. This is an area where GATT/WTO case law has been highly inconsistent. If we look at trends, then a phase in which a “narrow” understanding of the term was privileged was followed by a period where a “wide” understanding was preferred, only to be succeeded by confusion. We explain why in the following paragraphs. In the GATT years, the term “measure” had the same ambit when examined under Articles III or XX of GATT (GATT Panels, Canada–FIRA; US–Section 337; US–Taxes on Automobiles). Then comes the AB report on US–Gasoline, which explicitly disagreed with the prior case law. The AB criticized the Panel’s approach to adopt a “narrow” reading of the term “measure” when moving to review its consistency with Article XX of GATT, and held to this effect (p.16): One problem with the reasoning in that paragraph is that the Panel asked itself whether the “less favourable treatment” of imported gasoline was “primarily aimed at” the conservation of natural resources, rather than whether the “measure,” i.e. the baseline establishment rules, were “primarily aimed at” conservation of clean air. In our view, the Panel here was in error in referring to its legal

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conclusion on Article III:4 instead of the measure in issue. The result of its analysis is to turn Article XX on its head. … The chapeau of Article XX makes it clear that it is the “measures” which are to be examined under Article XX(g), and not the legal finding of “less favourable treatment.”

One might have thought that the matter was resolved once and for all, since it was the AB now speaking. As it has often happened though, the AB deviated from this case law without explaining the reason why. In Thailand–Cigarettes (Philippines) it held in a cryptic manner that a parallelism should be established between the measure reviewed under Article III of GATT, and under Article XX of GATT (§ 177). It is against this background that we are called to evaluate the soundness of the approach adopted by the AB in EC–Seal Products. In §5.190, the AB held: “At the same time, it may not be accurate to state that the analysis under Article XX(a) must focus on the EU Seal Regime ‘as a whole’ insofar as the measure consists of elements other than the prohibitive and permissive components of the EU Seal Regime.” In subsequent paragraphs, the AB limits its analysis in the prohibitive and permissive components of the EU regime. How did the AB end up with this outcome? The panel and the AB (§§ 5.141ff, and especially 5.145–146), drawing on the negotiating history of the measure (as opposed to its design and/or effects), found that the “main” aim of the EU Seals Regime was the protection of animal welfare and reviewed its consistency under Article XX(a) of GATT, as we will see later in this chapter. It was the AB that characterized “animal welfare” as the “main” objective of EU law, since no statement to this effect was present in the challenged EU regulation. The AB discussed IC hunts only in the context of their evaluation of the consistency of the measure with the requirements of the chapeau of Article XX of GATT. Subsistence of the Inuit community was, thus, not treated as a separate, or even ancillary, objective of the EU. It was treated as something that limited the scope of the main objective.23 Now, what if the AB had treated the measure as two measures? What if it had decided that it was facing an import ban on seal products as well as a most favored nation (MFN) violation since only some entities could export seal products? In this case, it would have found that the ban was probably justifiable under Article XX(a) of GATT. It would then probably also have found that, by allowing for imports of seal products produced by the Inuit community, the EU was violating Article I of GATT, since seal products (like products) originating elsewhere could not be imported into the EU market. This second measure could not have been justified by turning to Article XX(a) or any other provision of Article XX of GATT, since “subsistence of indigenous communities” is not featured anywhere in the body of this provision. Even a wide understanding of the term “public morals” cannot lead to similar results; otherwise, in the name of “public morals,” the GATT edifice could be in peril.24 As a result, the EU would have the de facto choice between rescinding the measure or keeping it and facing countermeasures by affected traders. It would, thus, be “paying” the Inuit community of Greenland through the reduced export income of other segments of EU society.

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The AB found against the “Inuit exception” under the chapeau, as we’ll see later in this chapter. This means that the EU law was judged GATT-consistent, but it was applied in a GATT-inconsistent manner. If the EU opens its doors to seals harvested by Inuit or other indigenous communities around the world, then it will have complied with the AB ruling. This is the solution to the dispute, since the AB held that it was dealing with one measure. Had it found that two measures were in force, then the “Inuit exception” would never have been legalized. The AB did not explain why the measure, as challenged, should be considered “one measure” either. We, thus, do not know what kind of nexus is necessary for the two measures in our example to be treated as one. And, obviously, it did not matter, in the eyes of the AB at least, that the rule and the exception were pursuing two different objectives (since two different objectives were assigned in the challenged EU statute). Intuitively, one would expect that some nexus must be present in similar cases (like the marijuana example mentioned earlier); otherwise, one could end up treating as a measure interventions that are hard to reconcile with each other. 9.2.3

Public Morals

9.2.3.1 The Scope of Public Morals WTO members can adopt measures necessary to protect their public morals. The term “public morals” is not defined any further in Article XX(a) of GATT, but it was heavily discussed during the GATT negotiations. Feddersen (1998) examined the preparatory work of GATT and took the view that the negotiating partners had in mind a narrow construction of the term (as opposed to some form of generic, public-order type of exception). He consequently argued that the term was meant to cover public morality (that is, trade restrictions against pornography, etc.) and was not intended to cover public order in its widest possible connotation. Charnovitz (1998) alluded to a wider understanding of the term and constructed examples where, through recourse to Article XX(a) of GATT, WTO members can promote public order in general. As a matter of negotiating record, Feddersen is probably closer to the truth. The various examples cited by the negotiators during the process point to a public-morality type of exception.25 There is a problem, however, with this construction of the term “public morals,” and this is what Charnovitz aimed to address. As we have mentioned earlier, the list of exceptions featured in Article XX of GATT could prove too narrow for comfort. If the regulating state pursues an objective other than those mentioned in its list (e.g., protection of small and medium-sized enterprises), it can find itself unable to defend its measures, even if it is not aiming to protect domestic goods/producers in the first place. One might wonder how this can be true, of course, since, absent protectionism, it should be impossible to establish violation of a GATT provision. After all, isn’t protectionism what GATT was designed to fight? Recall that Article XI of GATT has no

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protectionism test. So an import quota allegedly imposed on environmental grounds can only be justified through recourse to Article XX of GATT. In a similar vein, because of the construction of the less-favorable-treatment (LFT) test, as we saw in chapter 7, a sales ban, even if imposed on environmental grounds, can only be justified through Article XX of GATT. Charnovitz’s construction effectively amounts to an insurance policy against judicial errors that might condemn nonprotectionist policies only because the regulatory objective sought does not appear anywhere in the list of exceptions included in Article XX of GATT. By understanding public morals as public order, all regulatory distinctions on grounds other than those mentioned in the more specific paragraphs included in Article XX of GATT could be accommodated within the four corners of Article XX(a) of GATT (at least in principle). “Public order” is understood, thus, as a catch-all term that should be used whenever more specific terms (such as “human life” or “health”) are ill suited to address a social concern. In US–Gambling, a General Agreement on Trade in Services (GATS) case, the panel and the AB looked at a US measure ostensibly aiming to protect public order.26 The US had enacted laws concerning internet gambling. The laws, in the panel’s and the AB’s view, violated some GATS obligations, and the US sought justification for violations through Article XIV of GATS. This provision contains, among other exceptions, the possibility to justify violations of GATS for measures judged necessary to protect public morals. Actually, Article XIV(a) of GATS refers to measures “… necessary to protect public morals or to maintain public order.” A footnote defines “public order” as “the public order exception may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society.” In § 296 of its report on US–Gambling, the AB provided the panel’s understanding of the term “public morals” as follows: “In its analysis under Article XIV(a), the panel found that the term ‘public morals’ denotes standards of right and wrong conduct maintained by or on behalf of a community or nation.” The term “standards of right and wrong” falls short of setting interpretative issues aside once and for all. Disagreements might legitimately continue to persist against this background. It does, however, show the tendency to understand the term “public morals” in a broad manner.27 Reading between the lines, we could conclude that “standards of right and wrong,” when not posing a serious threat to one of the fundamental interests of society, still come under the term “public morals.” This case dealt, as stated before, with claims under Article XIV of GATS, not Article XX of GATT. Nevertheless, since the same term appears in the two provisions, and since the two provisions pursue the same objective, there are good reasons to believe that GATT case law could be inspired by this interpretation. In EC–Seal Products, this much was confirmed. Canada and Norway had challenged the consistency of a EU measure (the “Seals regime”) with the Technical Barriers to Trade

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(TBT) and GATT. As briefly mentioned in chapter 2 and earlier in this chapter, the Seals regime banned in principle all seal products from 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” (maritime resources management) 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. Following condemnation of the EU measure under Article III of GATT, the EU tried to justify it, arguing that it was necessary to protect public morals. The narrow issue before the panel was whether the concept of “public morals” covers moral concerns about seal welfare. The panel responded in the affirmative (§ 7.631).28 The AB confirmed this wide understanding of the term “public morals” in § 5.199 of its report. Following this report, “public morals” has been understood to cover concerns about animal welfare, an expression of a societal preference far removed from the narrow coverage that Feddersen (1998) had in mind. This report put the debate between Feddersen and Charnovitz to rest, and we can safely proclaim Charnovitz to be the winner. Of course, it remains to be seen, as we have already noted, whether standards of right and wrong will be confined in future case law to important societal choices, like protection of animal welfare, or expanded to cover mundane interventions, like luxury taxes. If the former, then the list of Article XX of GATT will continue to be limited. There is an issue, nevertheless, that the AB report on EC–Seal Products, for all practical purposes, sidestepped. “Subsistence” in the Inuit community is akin to protecting the domestic producer, as opposed to promoting the public-order concern that the drafters of Article XX of GATT had in mind. Standards of right and wrong cannot extend so far as to cover similar objectives. If this were the case, then the whole purpose of GATT would be defeated. GATT is a negative integration instrument, as we have maintained repeatedly in this volume. There is one objective, though, that cannot be pursued: protectionism. The “IC hunts” is hardly a matter of social policy whereby, say, a minimum salary is provided to workers. It is guaranteed market access to those Inuit who harvest seals. Probably anticipating this issue, the AB avoided discussing the consistency of the EU “Inuit subsistence” policy with Article XX(a) of GATT. In this particular case, there is reason to cast doubt as to whether the EU was genuinely pursuing protection of public morals. The likelier scenario is that the EU lawmakers were torn between those arguing for similar protection, and those caring more for the economic impact the measure would have on the Greenland Inuit community. Instead of introducing a new entry in the EU budget to this effect, the latter group managed to introduce late in the proceedings the exception in favor of the Greenland Inuit community. Conconi and Voon (2015) show that the original draft of the EU regulation contained no exception at all. Exceptions were introduced at a later stage in order to take care of concerns advanced by Germany and Finland (since both countries engaged in transshipping seal skins), as well as the processing industry mainly

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in Denmark and Italy. Denmark emerged as a key player in this discussion for another reason: because of its special ties to Greenland, it had a particular interest in protecting the income of the Inuit community of Greenland, which relies mainly on harvesting of seals. 9.2.3.2 Necessary to Protect Public Morals Only measures that are necessary to protect public morals will be deemed to be GATTconsistent. Measures are, as per consistent case law, judged “necessary” if they constitute the least restrictive means to attain the objective sought. We will cover all this in the next section, which will discuss Article XX(b) of GATT and provide an extensive analysis of the “necessity” requirement. 9.2.4

Humans, Animals, Plant Life, and Health

9.2.4.1 The Scope of the Provision WTO members can justify measures judged inconsistent with their WTO obligations if they are necessary to protect humans, animals, plant life, health, or any combination. In practice, Article XX(b) of GATT has been used to justify measures that aim to protect public health, the environment, or both, although the latter is not explicitly mentioned in the body of Article XX(b) of GATT. GATT/WTO panels have understood the terms “animal,” “plant life,” and “health” to be encompassing measures aimed at environmental protection as well. Many environmental measures are now also being discussed under Article XX(g) of GATT. Since the two provisions contain different legal tests for the consistency of measures submitted to their purview, a boundary needs to be drawn between them, for the drafters could not have intended that the same transaction be subjected to two different legal provisions reflecting different legal tests for consistency. Emerging practice suggests that Article XX(b) of GATT is understood as the fallback provision. Recourse to it will be taken only if a measure does not fall under Article XX(g) of GATT. For example, measures aiming at the protection of the sea turtle (an animal threatened with extinction) will come under Article XX(g) of GATT. On the other hand, measures aiming at protecting the life of the dolphin, an animal whose continued existence is not under threat at all, will come under Article XX(b) of GATT. 9.2.4.2

Necessity

A measure must be necessary to achieve the ends pursued to be consistent with Article XX(b) of GATT. The necessity requirement has been interpreted by various GATT/WTO panels to mean that WTO members must use the least restrictive measure in terms of burden on the volume of international trade.29 Pursuance of social preferences might encroach on trade liberalization, and necessity is one of the means employed to mitigate

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such effects. Necessity is not merely a mitigating factor, though. It is also a means to decide whether there is authentic will to pursue the stated aim—albeit, it is an imperfect proxy to this effect. This is a well-known test, at least since James Madison wrote in Federalist No. 41 that instead of focusing “… on the possible abuses which must be incident to every power or trust … [one should consider] … how far these powers were necessary means of attaining a necessary end.”30 The GATT framers had similar thinking in mind when they contracted this legal principle in their final agreement. The necessity requirement has been included in other listed exceptions as well [namely, (a), and (d)], and has been interpreted in a symmetric manner across all paragraphs appearing in the body of Article XX of GATT. The key points can be summarized as follows: a. “Necessary” should not be equated with “indispensable,” since the term “necessary” in Article XX(d) of GATT refers to a wider range of options. The AB explained that it understands “making a contribution to” to be at one end of a logical continuum, and “indispensability” to be at the other. Necessary measures are closer to the latter than the former. How much closer they are to “indispensability” depends on factors such as their contribution to realizing the objective sought and their relative impact on international trade. b. In similar vein, the necessity requirement should not be interpreted as requiring WTO members to employ the absolutely least restrictive measure to attain their objectives. What is required is to employ the least restrictive option among those reasonably available to the WTO member availing itself of this possibility. c. Given the choice between using a GATT-consistent and a GATT-inconsistent measure, assuming the two are equally efficient, a WTO member must use the GATT-consistent option. The assumption of equal efficiency is justified by the fact that, as stated supra, WTO panels and the AB, cannot put into question the ends sought (e.g., the level of efficiency) but only the means employed to this effect. d. Assuming that the regulating WTO member made a prima facie case31 that its measures are necessary, the burden will shift to the original complainant to demonstrate the existence of another equally efficient alternative measure that should have been used. If the original complainant is successful, then the burden will shift back to the WTO member invoking Article XX of GATT to show that the alternative invoked was not reasonably available to it. e. Finally, there are a few issues regarding the standard of review that WTO adjudicating bodies will adopt when reviewing compliance with the necessity requirement: (1) The right of WTO members to choose their desired level of enforcement cannot be questioned by a panel. In other words, WTO members cannot be requested to employ a less restrictive measure if that measure leads to a level of enforcement that does not correspond to the wishes of the regulating WTO member.32

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(2) WTO adjudicating bodies will, in principle, accept the most drastic trade measures (i.e., embargos) only under strict conditions. (3) The relative importance of the ends being sought matters and influences the degree of deference that WTO adjudicating bodies will show toward the regulator. Necessary Does Not Mean Indispensable This point was decided in the AB report on Korea–Various Measures on Beef in the following terms (§§ 161, 163, 164): We believe that, as used in the context of Article XX(d), the reach of the word “necessary” is not limited to that which is “indispensable” or “of absolute necessity” or “inevitable.” Measures which are indispensable or of absolute necessity or inevitable to secure compliance certainly fulfill the requirements of Article XX(d). But other measures, too, may fall within the ambit of this exception. As used in Article XX(d), the term “necessary” refers, in our view, to a range of degrees of necessity. At one end of this continuum lies “necessary” understood as “indispensable”; at the other end, is “necessary” taken to mean as “making a contribution to.” We consider that a “necessary” measure is, in this continuum, located significantly closer to the pole of “indispensable” than to the opposite pole of simply “making a contribution to.” There are other aspects of the enforcement measure to be considered in evaluating that measure as “necessary.” One is the extent to which the measure contributes to the realization of the end pursued, the securing of compliance with the law or regulation at issue. The greater the contribution, the more easily a measure might be considered to be “necessary.” Another aspect is the extent to which the compliance measure produces restrictive effects on international commerce, that is, in respect of a measure inconsistent with Article III:4, restrictive effects on imported goods. A measure with a relatively slight impact upon imported products might more easily be considered as “necessary” than a measure with intense or broader restrictive effects. In sum, determination of whether a measure, which is not “indispensable,” may nevertheless be “necessary” within the contemplation of Article XX(d), involves in every case a process of weighing and balancing a series of factors which prominently include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports. (emphasis in the original)

It follows that indispensable measures always qualify as necessary. Nonindispensable measures, though, might qualify as well. The absolute minimum threshold for similar qualification is that they “make a contribution” toward the realization of the objective sought. The more that measures contribute to the attainment of the objective sought, the likelier that they will be judged necessary. Furthermore, the less their impact on imports, the likelier it is that they will be judged necessary. This is quite reasonable. In fact, it echoes (albeit in vague terms) the discussion on the targeting literature that came earlier in this chapter. Recall that the recommendation of this literature is to opt for first-best measures (e.g., measures that address the distortion at its heart without creating (many) negative external effects). In this vein, the AB privileges measures that contribute to the attainment of objectives without negatively affecting imports.

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Reasonably Available Least Restrictive Means The question has arisen whether it is imperative that the regulating WTO member adopt the absolutely least restrictive measure, or, conversely, whether and under what conditions it can adopt a less necessary measure and still be judged in conformity with Article XX of GATT. The AB, in its report on Korea–Various Measures on Beef (§ 166), opted for the latter approach: In our view, the weighing and balancing process we have outlined is comprehended in the determination of whether a WTO-consistent alternative measure which the Member concerned could “reasonably be expected to employ” is available, or whether a less WTO-inconsistent measure is “reasonably available.”

It follows, however, that the WTO member will respect the necessity requirement when employing the least restrictive option that is reasonably available to it. What is reasonably available depends on endowments specific to the regulating state. It is, in other words, an endogenous requirement. In Brazil–Retreaded Tyres, the AB stated (§ 156): … an alternative measure may be found not to be “reasonably available” … where it is merely theoretical in nature, for instance, where the responding Member is not capable of taking it, or where the measure imposes an undue burden on that Member, such as prohibitive costs or substantial technical difficulties.33

In a similar vein, in China–Publications and Audiovisual Products, the AB clarified that a “hardship test” might be appropriate to decide on the reasonable availability of a specific option. In its view, a measure would be reasonably available if it did not impose an undue (as opposed to a marginal) burden on the regulating state (§ 327): We are not persuaded that the Panel erred in the above analysis. The Panel did not find that the proposed alternative measure involves no cost or burden to China. As the Appellate Body report in US–Gambling makes clear, an alternative measure should not be found not to be reasonably available merely because it involves some change or administrative cost. Changing an existing measure may involve cost and a Member cannot demonstrate that no reasonably available alternative exists merely by showing that no cheaper alternative exists. Rather, in order to establish that an alternative measure is not “reasonably available,” the respondent must establish that the alternative measure would impose an undue burden on it, and it must support such an assertion with sufficient evidence. (italics in the original)

Between Two Equally Efficient Means, Use the GATT-Consistent Means This issue was first debated in Thailand–Cigarettes, a GATT panel. This is a narrow point since it comes into play only under the assumption that the regulating WTO member can choose between two measures, which are perfect substitutes and each of which helps it reach its objective. Thailand had argued that its trade embargo on the importation of cigarettes, while restricting the overall quantity of cigarettes sold in its market, was justified by the fact that it aimed to ensure the quality of cigarettes imported. The panel felt that Thailand could

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have ensured its objective (good quality of cigarettes sold), through the use of nondiscriminatory, and hence GATT-consistent, measures (nondiscriminatory labeling, etc.) (§ 75): The Panel concluded from the above that the import restrictions imposed by Thailand could be considered to be “necessary” in terms of article XX(b) only if there were no alternative measure consistent with the General Agreement, or less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health policy objectives.

When the panel satisfied itself that Thailand could indeed have reached its objectives by employing GATT-consistent measures, it also found that Thailand had violated its obligations under Article XX(b) of GATT (§ 81). In a similar vein, the GATT panel on US–Section 337 held (§ 5.26): It was clear to the Panel that a contracting party cannot justify a measure inconsistent with another GATT provision as “necessary” in terms of Article XX(d) if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it. By the same token, in cases where a measure consistent with other GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably available to it, that which entails the least degree of inconsistency with other GATT provisions. The question arises whether it is the panel that ex officio will point to alternatives or whether it should be the other party to the dispute. We return to this issue in the next sections. Burden of Proof The leading case discussing the allocation of burden proof when a general exception has been invoked is US–Gambling, a GATS case, the findings of which have been reproduced in all subsequent reports dealing with this issue. The US had adopted federal legislation banning the remote supply of gambling services (“Internet gambling”). Some US states had adopted similar statutes at the state level as well. Antigua and Barbuda complained to the WTO that the US legislation (federal and state) was GATS-inconsistent since it amounted to a total prohibition on “remote gambling” (synonymous with “Internet gambling”), a service that the US had committed to liberalize. Both the panel and the AB agreed with the complainant that the US should have indicated in its schedule of concessions that it was banning remote gambling and that, in absence of an indication to this effect, it was in violation of Article XIV of GATS. The US had attempted to justify its measures under Article XIV of GATS, with the GATS provision corresponding to Article XX of GATT. The AB, overturning the panel’s findings in this respect, held that, with respect to the allocation of the burden of proof (§§ 309–311): It is well-established that a responding party invoking an affirmative defense bears the burden of demonstrating that its measure, found to be WTO-inconsistent, satisfies the requirements of the

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invoked defense. In the context of Article XIV(a), this means that the responding party must show that its measure is “necessary” to achieve objectives relating to public morals or public order. In our view, however, it is not the responding party’s burden to show, in the first instance, that there are no reasonably available alternatives to achieve its objectives. In particular, a responding party need not identify the universe of less trade-restrictive alternative measures and then show that none of those measures achieves the desired objective. The WTO agreements do not contemplate such an impracticable and, indeed, often impossible burden. Rather, it is for a responding party to make a prima facie case that its measure is “necessary” by putting forward evidence and arguments that enable a panel to assess the challenged measure in the light of the relevant factors to be “weighed and balanced” in a given case. The responding party may, in so doing, point out why alternative measures would not achieve the same objectives as the challenged measure, but it is under no obligation to do so in order to establish, in the first instance, that its measure is “necessary.” If the panel concludes that the respondent has made a prima facie case that the challenged measure is “necessary”—that is, “significantly closer to the pole of ‘indispensable’ than to the opposite pole of simply ‘making a contribution to’”—then a panel should find that challenged measure “necessary” within the terms of Article XIV(a) of the GATS. If, however, the complaining party raises a WTO-consistent alternative measure that, in its view, the responding party should have taken, the responding party will be required to demonstrate why its challenged measure nevertheless remains “necessary” in the light of that alternative or, in other words, why the proposed alternative is not, in fact, “reasonably available.” If a responding party demonstrates that the alternative is not “reasonably available,” in the light of the interests or values being pursued and the party’s desired level of protection, it follows that the challenged measure must be “necessary” within the terms of Article XIV(a) of GATS.

To evaluate the reasonable availability of a measure “factors such as the trade impact of the measure, the importance of the interests protected by the measure, or the contribution of the measure to the realization of the end pursued, should be taken into account in the analysis.”34 In US–Gambling, the AB also settled prior inconsistent case law concerning the issue of whether it was for the panel or for the complainant to come up with a reasonably available alternative. The panel on Canada–Wheat Exports and Grain Imports was an example of the former approach, and the AB report on Japan–Agricultural Products II (§§ 123–130) an example of the latter. The AB, in US–Gambling, found that it was the parties that had to propose the alternative, less restrictive measure. In Dominican Republic–Import and Sale of Cigarettes, the AB exported this test to GATT as well (§ 70).35 This is wise. Entrusting the initiative to a WTO panel, or the AB, can lead to all sorts of problems regarding the evidentiary standard associated with proving the counterfactual. Take Korea–Various Measures in Beef, for example. In §§ 180–181 of its report, the AB invoked two grounds to dismiss the Korean defense. First, it pointed to alternative means (other than the dual retail system we saw earlier in this chapter) for Korea to reach its objective, and combat fraudulent practices. It called for “selective, welltargeted controls,” aimed at detecting the traders selling US beef for domestic beef and thus pocketing the price differential. None of the complainants had invoked this possibility.

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It then found against Korea because it adopted a beggar-thy-neighbor policy and shifted enforcement costs to foreigners without adopting an even-handed attitude in this respect: We are not persuaded that Korea could not achieve its desired level of enforcement of the Unfair Competition Act with respect to the origin of beef sold by retailers by using conventional WTOconsistent enforcement measures, if Korea would devote more resources to its enforcement efforts on the beef sector. It might also be added that Korea’s argument about the lack of resources to police thousands of shops on a round-the-clock basis is, in the end, not sufficiently persuasive. Violations of laws and regulations like the Korean Unfair Competition Act can be expected to be routinely investigated and detected through selective, but well-targeted, controls of potential wrongdoers. The control of records will assist in selecting the shops to which the police could pay particular attention. There is still another aspect that should be noted relating to both the method actually chosen by Korea—its dual retail system for beef—and alternative traditional enforcement measures. Securing through conventional, WTO-consistent measures a higher level of enforcement of the Unfair Competition Act with respect to the retail sale of beef, could well entail higher enforcement costs for the national budget. It is pertinent to observe that, through its dual retail system, Korea has in effect shifted all, or the great bulk, of these potential costs of enforcement (translated into a drastic reduction of competitive access to consumers) to imported goods and retailers of imported goods, instead of evenly distributing such costs between the domestic and imported products. In contrast, the more conventional, WTO-consistent measures of enforcement do not involve such onerous shifting of enforcement costs which ordinarily are borne by the Member’s public purse. [italics in the original]

It is, of course, impossible to agree or disagree with the AB. How can anyone guarantee that “selective, well-targeted” interventions would be as efficient as the dual retail system, based on the passages cited previously? What if Korea though, by privileging this method, ended up with a higher number of fraudulent practices?36 What would the AB have to say in this case? We will never know the response to these questions. Korea lost the “wrong” case, and one can only hope that similar misfortunes will not be repeated in the future. Reducing the role of a panel to that of a weigher of submitted evidence is a step in the right direction. Standard of Review WTO adjudicating bodies have consistently held that their power of review extends only to means employed. The choice of ends (including the level of enforcement) is the exclusive privilege of WTO members. From this equilibrium point, WTO case law evidences two trends that go in opposite directions: on the one hand, WTO panels (and the AB) are reluctant to condone drastic measures like embargos unless if they make a material contribution to the objective being sought; on the other, the more important the objective pursued, the more deferential the applied standard of review will be. The end result is that WTO panels (and the AB) retain substantial discretion, since “weighing and balancing” has been extended on both sides. Let us now go through each one of these issues in more detail.

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Means Are Justiciable, Not Ends Recall that in Korea–Various Measures on Beef, the panel and the AB faced a challenge against Korea’s dual retail system. Retailers of beef and beef products could sell either domestic or foreign beef but, in principle, not both under the same roof. In Korea’s view, this practice was necessary to secure compliance with the Korean Unfair Competition Act, a law that was not inconsistent with GATT and, consequently, came under the purview of Article XX(d) of it. Korea wanted to eliminate fraudulent practices. The panel and the AB recognized that the dual retail system was “... established at a time when acts of misrepresentation of origin were widespread in the beef sector. (§ 158, AB report).” Misrepresentation was a recurring practice because of the difference between the world and the Korean prices for beef. Korean traders had huge incentive to sell, say, US beef as Korean beef and pocket the difference. It would be, of course, close to impossible even to the most expert consumer to detect the origin of beef by simply watching it displayed in packets in supermarkets. Through the dual retail system, imported beef would be sold through a particular chain of distribution from the moment of import onward, totally distinct from that available to Korean beef. The question before the AB was to what extent the dual retail system was necessary in light of the choice that Korea had made regarding the level of enforcement, which remained nonjusticiable (§ 176): It is not open to doubt that Members of the WTO have the right to determine for themselves the level of enforcement of their WTO-consistent laws and regulations. We note that this has also been recognized by the panel in United States—Section 337, where it said: “The Panel wished to make it clear that this [the obligation to choose a reasonably available GATT-consistent or less inconsistent measure] does not mean that a contracting party could be asked to change its substantive patent law or its desired level of enforcement of that law … (italics in the original)

There could be no clearer pronouncement to the effect that only means are justiciable. Keep in mind, though, that the level of enforcement sought (the nonjusticiable element) has undeniably a bearing on the choice of means (the justiciable element). Other things being equal, the more risk averse a society is, the narrower the class of measures that it can choose among to pursue its policies. Indeed, this scenario was present in EC–Asbestos,37 where the AB held (§ 174): In our view, France could not reasonably be expected to employ any alternative measure if that measure would involve a continuation of the very risk that the Decree seeks to “halt.” Such an alternative measure would, in effect, prevent France from achieving its chosen level of health protection. On the basis of the scientific evidence before it, the Panel found that, in general, the efficacy of “controlled use” remains to be demonstrated. Moreover, even in cases where “controlled use” practices are applied “with greater certainty,” the scientific evidence suggests that the level of exposure can, in some circumstances, still be high enough for there to be a “significant residual risk of developing asbestos-related diseases.” The Panel found too that the efficacy of “controlled use” is particularly doubtful for the building industry and for DIY enthusiasts, which are the most important

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users of cement-based products containing chrysotile asbestos. Given these factual findings by the Panel, we believe that “controlled use” would not allow France to achieve its chosen level of health protection by halting the spread of asbestos-related health risks. “Controlled use” would, thus, not be an alternative measure that would achieve the end sought by France.

Thus, it could be the case that only the most restrictive measure (e.g., a total embargo) can on occasion be appropriate to reach an objective sought. Should panels accept the use of similar measures without any additional inquiry? This question leads straight into the discussion of “material contribution,” next. Material Contribution The AB, in Brazil–Retreaded Tyres, held the line that it would accept embargos only under certain conditions. The facts are reproduced in § 118 of its report: Tyres are an integral component in passenger cars, lorries, and airplanes and, as such, their use is widespread in modern society. New passenger cars are typically sold with new tires. When tires need to be replaced, consumers in some countries may have a choice between new tires or “retreaded” tires. This dispute concerns the latter category of tires. Retreaded tires are used tires that have been reconditioned for further use by stripping the worn tread from the skeleton (casing) and replacing it with new material in the form of a new tread, and sometimes with new material also covering parts or all of the sidewalls. Retreaded tires can be produced through different methods, one of which is called “remolding.”38

In this report, the AB held that for a measure to pass the consistency test with Article XX(b) of GATT, there was no need to quantify the contribution of means to ends, since a qualitative analysis, by and large, sufficed (§ 146). There is a presumption, nevertheless, in the eyes of the AB, that recourse to extreme measures such as an import embargo should be allowed only in exceptional circumstances. The AB held that measures like this would be accepted only when it was proved that they have made a “material contribution” to the attainment of the objective (§ 150): As the Panel recognized, an import ban is “by design as trade-restrictive as can be.” We agree with the Panel that there may be circumstances where such a measure can nevertheless be necessary, within the meaning of Article XX(b). We also recall that, in Korea–Various Measures on Beef, the Appellate Body indicated that “the word ‘necessary’ is not limited to that which is ‘indispensable.’” Having said that, when a measure produces restrictive effects on international trade as severe as those resulting from an import ban, it appears to us that it would be difficult for a panel to find that measure necessary unless it is satisfied that the measure is apt to make a material contribution to the achievement of its objective. Thus, we disagree with Brazil’s suggestion that, because it aims to reduce risk exposure to the maximum extent possible, an import ban that brings a marginal or insignificant contribution can nevertheless be considered necessary.

The AB, following this reasoning, concluded (§ 210): In this respect, the fundamental principle is the right that WTO Members have to determine the level of protection that they consider appropriate in a given context. Another key element of the

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analysis of the necessity of a measure under Article XX(b) is the contribution it brings to the achievement of its objective. A contribution exists when there is a genuine relationship of ends and means between the objective pursued and the measure at issue. To be characterized as necessary, a measure does not have to be indispensable. However, its contribution to the achievement of the objective must be material, not merely marginal or insignificant, especially if the measure at issue is as trade restrictive as an import ban. Thus, the contribution of the measure has to be weighed against its trade restrictiveness, taking into account the importance of the interests or the values underlying the objective pursued by it.

The message that the AB wanted to convey here is that it would not lightly accept the most egregious cases of market segmentation, but it would be prepared to do so only when their contribution to the sought objective is meaningful. One would intuitively think that some sort of measurement of the contribution would be necessary, but, as we saw earlier, the AB thought that a “qualitative” assessment sufficed to decide the meaningfulness of the contribution. Qualitative assessment to decide meaningfulness looks like a Gordian knot. As had happened before, the next dispute that was called was used to untie it. The Panel on EC– Seal Products went on to review (§ 7.633) the contribution of the EU measure (the Seals regime) to the attainment of the objective pursued (animal welfare). Recall that the EU had an embargo on sales of seal products, allowing only for limited exceptions. The panel noted that it could use its analysis under the TBT Agreement as a source of inspiration in this context as well (§ 7.634), and it went on to state up front that it would find it hard to reconcile total bans on sales with the necessity requirement, absent a finding to the effect that the challenged measure had had material contribution to the attainment of the stated objective (§ 7.635). So far, we are in the realm of the analysis performed by the AB in Brazil–Retreaded Tyres. But then the panel used language that is hardly reconcilable with the “material contribution” language used by the AB in Brazil–Retreaded Tyres. It found that the challenged measure, for various reasons, “may have contributed to a certain extent” to the attainment of the objective. First, because the EU measure would reduce the overall demand for seal products (and thus would reduce the EU’s exposure to products of seals inhumanely killed); and second, because the three exceptions mentioned previously did not diminish the strength of its conclusions (§§ 7.637–638). The panel, thus, concluded that the EU measure was in fact necessary to protect public morals although, as we will see later, it ultimately found that it violated the chapeau of Article XX of GATT. The AB, in a lengthy passage (§§ 5.211 ff.), first repeated that the panel had stated that the EU measure “may have contributed to a certain extent” to the attainment of the objective (§ 5.218). By the standard adopted in Brazil–Retreaded Tyres, the Seals Regime would have fallen short of the requirements. It then went on to underscore that panels have discretion in setting out the approach to determine contribution (§ 5.221), and that in this case, it was only normal that the panel used qualitative and not quantitative analysis because of

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lack of evidence to this effect (§§ 5.222–223). It finally found nothing wrong with the panel’s conclusion that the measure may have contributed to the objective (§ 5.225). We do not know if this is the last word on this issue. The line adopted in EC–Seal Products is consonant with the overarching point that panels should not tinker with the level of enforcement sought at all. It is doubtful, though, that the standard was applied correctly in this case. Indeed, any violation of MFN can, in principle, contribute to fewer imports than if MFN had been respected, thus exposing a society to less risk. When assessing contribution, some quantification of the impact of the measure is unavoidable; otherwise, the overall conclusion risks being speculative. One needs to properly construct the counterfactual—e.g., what would have happened had the challenged measure not been adopted? Alas, this is what panels routinely avoid doing. The Importance of the Objective The question here is to what extent the importance of the objective being sought will affect the analysis of the standard of review when examining the consistency of the challenged measure with the necessity requirement? This question arises because it is often quite difficult—a quixotic test indeed—to quantify the trade restrictiveness of a measure employed to attain a certain objective. When in doubt, the standard of review will tilt the balance toward acceptance or rejection of claims of inconsistency. The panel in EC–Seal Products, borrowing from standing AB case law regarding the analysis of the necessity requirement, confirmed the EU claim that protection of public morals constitutes an important objective indeed (§ 7.632). This affirmation had consequences for the standard of review that it applied, in the sense that the more important the objective being pursued, the more deferential the standard of review should be. In prior case law, the AB had already established that panels should not be equally deferential to the ends invoked. It made it clear that it would be more deferential when human life and health was at stake, and less so when WTO members were pursuing other regulatory objectives mentioned in the body of Article XX of GATT. The AB initiated this line of thinking in its report on Korea–Various Measures on Beef (§ 162): It seems to us that a treaty interpreter assessing a measure claimed to be necessary to secure compliance of a WTO-consistent law or regulation may, in appropriate cases, take into account the relative importance of the common interests or values that the law or regulation to be enforced is intended to protect. The more vital or important those common interests or values are, the easier it would be to accept as “necessary” a measure designed as an enforcement instrument.

It followed this thinking in EC–Asbestos, where the AB held (§ 172): We indicated in Korea—Beef that one aspect of the “weighing and balancing process ... comprehended in the determination of whether a WTO-consistent alternative measure” is reasonably available is the extent to which the alternative measure “contributes to the realization of the end pursued.” In addition, we observed, in that case, that “[t]he more vital or important [the] common interests or values”

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pursued, the easier it would be to accept as “necessary” measures designed to achieve those ends. In this case, the objective pursued by the measure is the preservation of human life and health through the elimination, or reduction, of the well-known, and life-threatening, health risks posed by asbestos fibres. The value pursued is both vital and important in the highest degree. (italics in the original)

In Brazil–Retreaded Tyres, the AB reiterated its view on this issue as follows (§ 143): In US–Gambling, the Appellate Body addressed the “necessity” test in the context of Article XIV of the GATS. The Appellate Body stated that the weighing and balancing process inherent in the necessity analysis “begins with an assessment of the “relative importance” of the interests or values furthered by the challenged measure,” and also involves an assessment of other factors, which will usually include “the contribution of the measure to the realization of the ends pursued by it” and “the restrictive impact of the measure on international commerce.” (italics in the original)39

Consequently, panels will apply a different standard of review when evaluating the necessity of means employed to, say, protect plant life from the standard that they would apply when discussing the necessity of means employed to protect human life. Some “weighing and balancing,” a term favored by the AB but prone to misunderstandings,40 will thus take place. The problem with this approach is that, for good reason, GATT does not provide a hierarchy regarding the importance of stated objectives. Preferences are endogenously shaped in each society depending on per capita income, cultural values, tradition, and many other factors. On occasion, there might be international expression of, say, the “right to life,” but harmonization is always at the lowest common denominator. And even if we assume that the right to life is the most important objective (which would invite the most deferential standard), how would we rank the other objectives? Should, for example, protection of consumers rank higher or lower than combating fraud or corruption? And what about measures that directly aim at a “low-importance” objective but indirectly protect a “high-importance” objective? For example, why wouldn’t measures aiming at protecting the environment not also be considered as aiming indirectly at protecting human health? All these and many more similar questions remain unanswered. 9.2.5

Imports and Exports of Gold and Silver

According to this provision [Article XX(c) of GATT], measures must be “relating to” imports and exports of gold and silver; otherwise, they will not be covered. This is a looser standard than the necessity requirement, as we detail later in this chapter when we discuss Article XX(g) of GATT. The Panel on Canada–Gold Coins focused on this provision. Canada (specifically, the province of Ontario) had in place a retail tax on gold coins, which was applicable on the Krugerrand (a South African gold coin), but Maple Leaf gold coins, struck by the Canadian Mint, were exempted from this tax.

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The panel found that gold coins were not only means of payment, but also goods, and consequently covered by Article III of GATT. Since Canada was treating an imported good (Krugerrand) less favorably than a domestic like good (Maple Leaf gold coin), it was violating Article III of GATT. Canada did not manage to justify the violation of GATT through recourse to Article XX(c) in this case. The report remains unadopted.41 9.2.6

Compliance with Laws Not Inconsistent with GATT

9.2.6.1 The Scope of the Provision WTO members can justify their deviations from obligations assumed under GATT if they are necessary to secure compliance with laws or regulations that are not inconsistent with GATT. GATT does not contain an exhaustive list of the laws and regulations that come under its purview. Typically, Article XX(d) covers laws that escape the purview of GATT (e.g., investment protection, intellectual property, etc.). There is an indicative list of the type of measures envisaged: customs enforcement; enforcement of monopolies (state trading enterprises); protection of patents, trademarks, and copyrights; and the prevention of deceptive practices. From early on, panels have insisted on a narrow understanding of this provision. In this vein, the Panel on Japan–Agricultural Products I dismissed an argument by Japan to the effect that a GATT-inconsistent monopoly for the import of farm goods could be justified through recourse to Article XX(d) of GATT (§ 5.2.2.3). Another GATT panel, EEC–Parts and Components, reflects a similar attitude. It refused the application of Article XX(d) of GATT on the grounds that the measure it was called on to justify could not have been properly characterized as an enforcement measure (§ 5.18): The Panel noted that the general anti-dumping Regulation of the EEC does not establish obligations that require enforcement; it merely establishes a legal framework for the authorities of the EEC. Only the individual regulations imposing definitive anti-dumping duties give rise to obligations that require enforcement, namely the obligation to pay a specified amount of anti-dumping duties. The Panel noted that the anti-circumvention duties do not serve to enforce the payment of anti-dumping duties. The Panel could, therefore, not establish that the anti-circumvention duties “secure compliance with” obligations under the EEC’s anti-dumping regulations. The Panel concluded for these reasons that the duties could not be justified under Article XX(d).

This approach was carried over in WTO jurisprudence as well. In Mexico–Taxes on Soft Drinks, the key question was (§ 68 of the AB report): whether the terms “to secure compliance with laws or regulations” in Article XX(d) of the GATT 1994 encompass WTO-inconsistent measures applied by a WTO Member to secure compliance with another WTO Member’s obligations under an international agreement.

Mexico had raised its domestic taxes on some products (in this case, soft drinks) and was found to be violating Article III.2 of GATT since it was treating imported goods in a manner that afforded protection to domestic directly competitive or substitutable (DCS)

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products. Mexico was, in fact, taxing the process (inputs) of soft drinks in a manner that led soft drinks originating in the US to pay a higher tax burden than Mexican soft drinks, which contained different inputs. Mexico had claimed before the panel that its measures were necessary to enforce domestic laws covered by Article XX(d) of GATT. In Mexico’s view, the differential taxation was necessary to enforce its rights under the North American Free Trade Agreement (NAFTA). Mexico felt that the US had not complied with its obligations under NAFTA, and it was now retaliating, as, in its view, it had the right to do under the relevant NAFTA provisions. The panel dismissed Mexico’s defense. It held that the indicative list in Article XX(d) of GATT, as well as its preparatory work, pointed to an understanding of this provision as covering only domestic, not international, measures (§§ 8.162ff). On appeal, the AB upheld the panel’s findings, but it argued that its reason for doing so was that Article XX(d) of GATT was designed to cover enforcement measures of WTO members, not those of international organizations. Since US compliance with NAFTA was at stake, the measures at hand were found to lie outside the four corners of Article XX(d) of GATT. This is not a very satisfactory solution;42 it provided evidence of the continuing tendency of WTO panels to construe this provision in narrow terms. 9.2.6.2 The Test for Compliance Measures must be necessary to enforce otherwise GATT-consistent regulations to come under the purview of this provision. Our analysis of the necessity requirement earlier in this chapter applies here as well. It was in US-Section 337, a GATT panel, that the test for compliance with Article XX(d) of GATT was developed for the first time. In Thailand–Cigarettes (Philippines), the AB reproduced it in even clearer terms (§ 177): … when less favourable treatment is found based on differences in the regulation of imports and of like domestic products, the analysis of an Article XX(d) defense should focus on whether those regulatory differences are “necessary” to secure compliance with “laws or regulations” that are not GATT-inconsistent.43

The necessity requirement obliges WTO members to look for alternatives (to the eventually privileged) solution before adopting the final measure, as the GATT panel report on US–Spring Assemblies underscored (§§ 58ff.). 9.2.7

Prison Labor

The term “prison labor” can be understood either in a narrow sense (products originating in prisons), or in a wide one (products with inputs produced not only in prisons, but also in other “detention establishments”). There is total absence of practice in this area, so these questions remain unanswered. On the other hand, the rationale for this provision is clear: as prisoners receive no salary for their work, exports of similar goods would be benefiting

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from lower prices and the ensuing competitive advantage. There is, probably, on occasion, also a social preference not to make transactions involving goods made in prison.44 9.2.8

National Treasures

The qualification of an item as a “national treasure” depends on the satisfaction of one of the three criteria included in Article XX(f) of GATT: artistic, historic, or archeological value. Any measure imposed for protecting national treasures should be exonerated from liability. It does not have to be necessary, nor does it have to be “primarily aimed” at protecting national treasures. This should not be a difficult test to meet. There is an absence of dispute settlement practice before the WTO in this context. Tariff line 970600 HS specifically identifies “antiques of an age exceeding one hundred years,” making them a tradable item (in principle), unless a ban were in place. A United Nations Educational, Scientific, and Cultural Organization (UNESCO) convention adopted in 1970 (the Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and Transfer of Ownership of Cultural Property) is for all practical purposes best endeavors, with little, if any, practical impact. National measures have been imposed in different countries aiming to provide the necessary teeth where the UNESCO Convention failed.45 Kumar and Shepherd (2013) discuss the Indian ban on antiquities (over 100 years old), and the ineffectiveness of the legislative ban. Similar empirical evidence suggests that while WTO members retain the right to preserve their national treasures at home, and some timid international first steps have even been taken in this direction, antiquities markets are alive and well in various parts of the world. Goods will be traded through similar markets. This should not be a problem as far as this discussion goes. WTO members have the right, but not a legal obligation, to protect national treasures by virtue of this GATT provision. 9.2.9

Conservation of Exhaustible Natural Resources

Measures that relate to the conservation of “exhaustible natural resources” (the term appears in Article XX(g) of GATT) and are made effective in conjunction with restrictions on domestic production or consumption can justify violations of any obligation assumed under the GATT. Consequently, two requirements must be cumulatively met for a measure to be justified under Article XX(g) of GATT: • It must relate to the conservation of exhaustible natural resources. • It must have been made effective in conjunction with restrictions on domestic production or consumption. The negotiating record suggests that the rationale for this provision was the desire of the framers to provide for an exception from the basic obligations assumed that would not be open-ended, but that would strike a balance between preservation of natural resources

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and development aspirations. As we will see later in this chapter, this can be explained by the fact that minerals were thought of as exhaustible natural resources, and the negotiating of this provision centered around the issue of allowing trade-restrictive measures to ensure that national wealth would be preserved, not consumed in an unrestricted manner.46 Protection of national wealth became a big issue in the ‘70s when a series of UN resolutions espoused the principle of permanent sovereignty over natural resources, and set the tone for a series of nationalizations in the subsequent years. 9.2.9.1 Permanent Sovereignty over Natural Resources This principle forms part of customary international law and, following its adoption at the UN, has been recognized as such in numerous international treaties. The principle of “permanent sovereignty over natural resources” was acknowledged in the WTO legal order first by the Panel on China–Raw Materials (§ 7.380). This panel used the definition of the term that had been included in the Convention on Biological Diversity (CBD).47 The Panel on China–Rare Earths clarified this point even more. In this case, China had imposed both export taxes and export quotas on rare earths. The complaint argued that the trade measures adopted by China were in violation of its commitments under China’s Protocol of Accession (export taxes) and Article XI of GATT (export quotas). China sought to justify its measures by invoking Article XX(g) of GATT. “Rare earths” is the common name for a group of fifteen chemical elements. Once mined, they can be processed into concentrates, then salts, and then metals for industrial uses, such as smartphones, flat screens, etc. (§ 2.3 ff.). What is rare about them is that, in the typical case, the fifteen chemical elements are not found in the same geographic place. Mining them can be economically justified only if they can all be found in the same space, as is the case with China. The size of the Chinese exception becomes apparent when reading § 4.12 of the AB report: Worldwide, China plays a central role in the production and consumption of rare earths, tungsten, and, to a lesser extent, molybdenum. China also produces many of the finished products that use rare earths, tungsten, and molybdenum as inputs. Evidence submitted to the Panel suggests that China accounted for at least 90% of global production of rare earths in 2011. China is also the largest global consumer of rare earths. The Panel noted that more than 80% of rare earths extracted in China are consumed in China, and China itself submitted evidence that it accounted for nearly 70% of global demand for rare earths in 2012. Similarly, as regards tungsten, China is the largest global producer, accounting for over 80% of such production. Moreover, China consumes more than 60% of tungsten extracted domestically, and accounts for more than half of global consumption. In relation to molybdenum, the Panel referred to evidence submitted by China indicating that China produced over 35% of the world’s molybdenum supply. Additionally, the parties submitted evidence indicating that China accounted for approximately 28% of global molybdenum consumption.

By keeping rare earths to the exclusive use of Chinese producers, say, of smartphones or flat screens, China would be providing them with a considerable advantage over foreign producers of the same goods. This was the rationale for the complaint.

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In its report, the panel held that the principle of “permanent sovereignty over natural resources,” as well as the principle of “sustainable development,” are relevant for the interpretation of Article XX(g) of GATT (§ 7.261). It then quoted § 2 of the Rio Declaration on Environment and Development, which provides that (§ 7.2630) States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental and development policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction.

Since WTO members have property rights over their resources, the question is how much of these rights they have conceded by joining GATT/WTO. 9.2.9.2 Jurisdiction In US–Shrimp, the AB faced the question of whether Article XX(g) of GATT included a jurisdictional limit. Could WTO members, in other words, intervene to protect exhaustible natural resources only within their jurisdiction, or even beyond that? GATT nowhere defines the jurisdictional ambit of national measures. As discussed in chapter 7, though, absent a common understanding of the jurisdictional ambit, GATT institutions like national treatment cannot be properly implemented.48 In § 133, the AB, while avoiding a direct response to the question of whether the US measure respected the territoriality principle, did point to the necessity of a nexus between the subject matter and the US interest in prescribing legislation: We do not pass upon the question of whether there is an implied jurisdictional limitation in Article XX(g), and if so, the nature or extent of that limitation. We note only that in the specific circumstances of the case before us, there is a sufficient nexus between the migratory and endangered marine populations involved and the United States for purposes of Article XX(g).

This passage, however, suggests that WTO members must, at the very least, show, in addition to their legal “interest” to regulate a particular transaction, their legal “right” to do so as well. Jurisdictional issues could, but were not, comprehensively raised in US–Shrimp. Recall § 2 of the Rio Declaration, cited earlier in this chapter. To the extent that the term “exhaustible natural resources” covers nonliving organisms only (e.g., minerals), there is no doubt as to which state can exercise its jurisdictional right under Article XX(g) of GATT. Extending the coverage of the term to living organisms, as detailed later in this chapter, is not void of consequences on the jurisdictional front. For example, sea turtles swim in the sea, so they swim across various national jurisdictions. The protection of sea turtles was very much an issue in US–Shrimp. Was the US entitled to take measures to protect the life of an organism that only occasionally (and probably involuntarily) comes under its jurisdiction? Moreover, how effective can a US action ever be if sea turtles are not protected

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through similar measures in other jurisdictions as well?49 The panel and the AB saw a sufficient nexus between the US interest in regulating the trade of shrimp and protecting sea turtles, since many sea turtles are accidentally killed within the territorial waters of the US. 9.2.9.3 Exhaustible Natural Resources The term “exhaustible natural resources” is composed of two adjectives and an open-ended noun. At one extreme, all resources are “exhaustible,” in a way. Indeed, Robert Solow, the Nobel Prize–winning economist, used to colloquially suggest that we have been exhausting natural resources from the day the first human scratched a flint. Some precision is warranted, however; otherwise, this provision will become unmanageable. A look into the travaux préparatoires of GATT leaves the impression that the framers had in mind commodities such as gasoline and minerals (i.e., nonliving resources) when they drafted Article XX(g) of GATT.50 The examples used during the negotiation point in the direction of constructing this term as referring to nonliving organisms.51 The Indian delegate (Ganguli), for example, proposed that very idea.52 Subsequent discussions53 confirmed this impression, at least so far as some delegations were concerned. Charnovitz (1991) noted, though, that in a parallel negotiation concerning an international commodity agreement (fisheries and wildlife), the same term was used to cover living organisms as well. A remark by Eric Wyndham-White, the temporary chairman of the working group discussing the international commodity agreement, to the effect that the term “exhaustible natural resources” appearing in Article XX(g) of GATT covered fisheries as well (that is, living organisms), added to the emerging confusion as to the exact coverage of this term.54 The better arguments, however, rest with the understanding of the term as covering nonliving organisms only.55 The discussion about fisheries was within a different context— that of an international commodity agreement, which would come under the ITO, not GATT itself. Moreover, Wyndham-White’s remark remained inconsequential. Subsequent discussions during the Havana Conference confirm that negotiators treated fisheries and wildlife as special cases.56 In addition, remember that Article XX(b) of GATT was meant to cover living organisms. Case law distanced itself from this view, however. In the GATT years, first the Panel on Canada–Herring and Salmon decided that salmon and herring stocks were exhaustible natural resources (§ 4.4). This panel, nevertheless, did not spend much time thinking about the meaning of the actual term. It noted that parties to the dispute had agreed that herring and salmon came under the purview of this term and simply added its concurrence. In the WTO years, in US–Gasoline, the panel held that clean air was an exhaustible natural resource (§ 6.37). The dispute related to the consistency of the US Clean Air Act (CAA) of 1990 with the multilateral rules. More specifically, the dispute focused on regulation enacted by the US Environmental Protection Agency (EPA) pursuant to that act to

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control toxic and other pollution caused by the combustion of gasoline manufactured in or imported into the United States. The CAA had established two programs to ensure that pollution from gasoline combustion did not exceed the 1990 levels and that pollutants in major population centers were reduced. A preliminary question was raised by the US at the oral hearing concerning arguments made by Venezuela and Brazil in their respective appellees’ submissions on the issues of whether clean air was an exhaustible natural resource within the meaning of Article XX(g) of GATT. The AB agreed with the US that the issue was not properly before it (pp. 10ff). As a result, the AB did not rule on this issue, and the panel’s ruling stood. In US–Shrimp, the AB ruled in a most categorical manner that the term “exhaustible natural resources” should not be confined to nonliving resources. As discussed earlier in this chapter, at dispute was a US measure that banned the import of shrimp fished in a manner that led to the accidental taking of the life of sea turtles. The US argued that the measure at hand was in full conformity with the requirements of Article XX(g) of GATT, and if not, with the requirements of Article XX(b) of GATT. The complainants (India, Malaysia, Pakistan, and Thailand) argued that the negotiating history of the term “exhaustible natural resources” pointed to the conclusion that this term was meant to cover nonliving resources only (§ 127, AB report). The interest of the complainants in raising this point was this: if “exhaustible natural resources” came under Article XX(b) of GATT, the US would have to abide by a more stringent legal benchmark for consistency, since its measures would have to be necessary to achieve the stated means. The question, thus, arose whether the US measure should come under the purview of Article XX(b) or Article XX(g) of GATT. The AB disagreed with the complainants. In its view, the term had to be given a meaning in accordance with today’s perceptions (§ 130): “... the generic term ‘natural resources’ in Article XX(g) is not ‘static’ in its content or reference, but is rather ‘by definition, evolutionary.’” In the name of “evolution,” thus, the term should cover living organisms, even though negotiators might have felt otherwise. This was the first step toward recognizing that sea turtles are an exhaustible natural resource. In a second step, the AB had to provide a definition for the term “exhaustible.” The AB went on to state that sea turtles, a living organism, also should be regarded as an exhaustible natural resource. CITES, which had already classified sea turtles as an “endangered species,” and other international agreements, which used the term “natural resources” to cover both living organisms and nonliving resources (UNCLOS, United Nations Convention on the Law of the Sea), were cited (§§ 130ff, AB report) in support.57 The defining criterion (which distinguishes exhaustible from nonexhaustible natural resources) was, in the AB’s view, whether the item was being depleted faster than it was being reproduced (§§ 128, 130, and 153): Textually, Article XX(g) is not limited to the conservation of “mineral” or “non-living” natural resources. The complainants’ principal argument is rooted in the notion that “living” natural resources

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are “renewable” and therefore cannot be “exhaustible” natural resources. We do not believe that “exhaustible” natural resources and “renewable” natural resources are mutually exclusive. One lesson that modern biological sciences teach us is that living species, though in principle, capable of reproduction and, in that sense, “renewable,” are in certain circumstances indeed susceptible of depletion, exhaustion and extinction, frequently because of human activities. Living resources are just as “finite” as petroleum, iron ore and other non-living resources. … From the perspective embodied in the preamble of the WTO Agreement, we note that the generic term “natural resources” in Article XX(g) is not “static” in its content or reference but is rather “by definition, evolutionary.” It is, therefore, pertinent to note that modern international conventions and declarations make frequent references to natural resources as embracing both living and non-living resources. … The language [of the preamble of the WTO Agreement] demonstrates a recognition by WTO negotiators that optimal use of the world’s resources should be made in accordance with the objective of sustainable development. As this preambular language reflects the intentions of negotiators of the WTO Agreement, we believe it must add color, texture and shading to our interpretation of the agreements annexed to the WTO Agreement, in this case, the GATT 1994. We have already observed that Article XX(g) of the GATT 1994 is appropriately read with the perspective embodied in the above preamble. (italics in the original)

The AB was thus comparing two rates—that of reproduction to that of extinction, and, depending on their relationship, it would decide whether a living organism was exhaustible or not. The “evolutionary approach” that the AB explicitly invoked when providing its understanding of the term “exhaustible natural resources” certainly has strong underpinnings in Article 31 of the Vienna Convention on the Law of Treaties (VCLT), which includes “subsequent practice” and “subsequent agreements” among the elements that a judge can take into account when asked to interpret a given term in an international treaty between sovereign states. According to the tenet of Article 31 of VCLT, it should be WTO members that agree explicitly or implicitly to the new interpretation, and the judge’s decision should merely have declaratory effect. The judge should not be “creating” law. The AB applied the term “evolutionary interpretation” here in a lighthearted manner, without ensuring first that practice had developed so as to understand “exhaustible natural resources” to cover both living and nonliving organisms. The shortcomings of the approach notwithstanding,58 this is by now water under the bridge.59 Case law has also made it clear that the coverage of this provision is not infinitely elastic. In China–Rare Earths, the panel confirmed the negotiators’ understanding to the effect that it is not all natural resources that are covered by this provision, but only the exhaustible ones among them. To this effect, the panel recalled that negotiators had refused a proposal to add the words “or other” after the words “exhaustible natural” in the body of Article XX(g) of GATT (§ 7.249).

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9.2.9.4 Exhaustible Natural Resources and Endangered Species GATT refers to “exhaustible natural resources,” whereas CITES concerns “endangered species.” The two terms are not synonymous. Because of the test adopted by the AB in US–Shrimp to define the former term, we can safely conclude that the latter is a subset of the former. Hence, all endangered species are exhaustible natural resources, whereas the opposite is not necessarily true. Scientists establish the list of “endangered species,” and since they form a subpart of the wider term (“exhaustible natural resources”), a few words of explanation are necessary before the discussion continues any further. Species have become extinct since time immemorial. It is reported that about 250 million years ago, 90 percent of all species became extinct during the “Permian-Triassic” extinction.60 Species continue to become extinct over time and, as a result, there can be no static list of endangered species. The International Union for Conservation of Nature (IUCN) Red List keeps a most comprehensive list and classifies species as “extinct,” “extinct in the wild,” “critically endangered,” “endangered,” “vulnerable,” and “low risk.” Classification occurs according to the criteria embedded in the IUCN Red List. The underlying thinking is that, because the reservoir of resources is being reduced, and because there is uncertainty regarding the repercussions of reduction, some form of action is necessary. The first two categories are self-explanatory: “extinct” refers to species that existed in previous times but do not exist anymore, whereas “extinct in the wild” means species that exist only in captivity. Species are considered to be “critically endangered” if they meet any one of five criteria employed to this effect, ranging from absolute population numbers and population reduction to quantitative analysis demonstrating probability of extinction. Looser criteria along the same lines are used to define whether species are “endangered,” “vulnerable,” or “low risk.” Nordhaus (2013) reports that in 2012, the IUCN assessed a total of 63,837 species and found that 3,947 were critically endangered, 5,766 were endangered, and about 10,000 species were considered vulnerable (p. 342). There should be no doubt that all these categories of species should be accepted as “exhaustible natural resources” now that case law has understood the term as covering living organisms as well. Since, as we saw in chapter 7 and we will see in more detail in chapter 6 of volume 2, GATT does not prejudge the level of risk aversion of WTO members, one cannot a priori exclude that even “low-risk” (in the IUCN sense of the term) species could be considered “exhaustible natural resources” in the future, assuming that WTO panels forge a connection to the scientific world in this respect. 9.2.9.5 Conservation Policies Recall the previous discussion to the effect that the principles of permanent sovereignty over natural resources and sustainable development were relevant in the WTO legal order. The Panel on China–Rare Earths held that they were relevant in understanding Article XX(g) of GATT. It added that “conservation” is not limited to the mere preservation of

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natural resources. In its view, it included measures that regulate and control exploitation; that is, measures aiming at managing the available quantity of exhaustible natural resources within a jurisdiction (§ 7.266). 9.2.9.6 Relating To The Panel on Canada–Herring and Salmon understood the term “relating to” as tantamount to the term “primarily aimed at.” A measure would be relating to the protection of exhaustible natural resources if its primary aim, and not an ancillary or even accidental effect, was to protect similar resources. The Panel on Canada–Herring and Salmon reached this conclusion based on the following considerations. On the one hand, it noted, that the term “relating to” could not have been accidentally chosen, especially since it had been placed in a provision that used terms such as “necessary” and “essential” (§ 4.6): “This suggests that Article XX(g) does not only cover measures that are necessary or essential for the conservation of exhaustible natural resources but a wider range of measures.” In the same paragraph, though, it noted that “… the purpose of including Article XX(g) … was not to widen the scope for measures serving trade policy purposes but merely to ensure that the commitments under the General Agreement do not hinder the pursuit of policies aimed at the conservation of exhaustible natural resources.” Thus, a few lines below the cited paragraph, it reached the conclusion that “… while a trade measure did not have to be necessary or essential to the conservation of an exhaustible natural resource, it had to be primarily aimed at the conservation of an exhaustible natural resource to be considered as ‘relating to’ conservation within the meaning of Article XX(g).” “Primarily aimed,” in other words, was meant as a test to safeguard that measures with trade policy purposes, which might in an auxiliary manner have an impact on the protection of exhaustible natural resources, do not come under the purview of Article XX(g) of GATT. A few years later, the AB, when dealing with US–Gasoline, disagreed with this approach (which, we should note, had been adopted by the panel in the same dispute). It noted that, although past case law had construed the term in this way, the AB was not at ease with this understanding, even though the parties to the dispute seemed to endorse it (pp. 18–19): All the participants and the third participants in this appeal accept that a measure must be “primarily aimed at” the conservation of exhaustible natural resources in order to fall within the scope of Article XX(g). Accordingly, we see no need to examine this point further, save, perhaps, to note that the phrase “primarily aimed at” is not itself treaty language and was not designed as a simple litmus test for inclusion or exclusion from Article XX(g). … (emphasis added)

The AB, however, did not undo the parties’ understanding of the term. In its report on US–Shrimp, the AB went further, holding that “relating to” implied a “rational connection”

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between a measure and the conservation of exhaustible natural resources, and nothing beyond that (§ 141): In its general design and structure, therefore, Section 609 is not a simple, blanket prohibition of the importation of shrimp imposed without regard to the consequences (or lack thereof) of the mode of harvesting employed upon the incidental capture and mortality of sea turtles. Focusing on the design of the measure here at stake, it appears to us that Section 609, cum implementing guidelines, is not disproportionately wide in its scope and reach in relation to the policy objective of protection and conservation of sea turtle species. The means are, in principle, reasonably related to the ends. The means and ends relationship between Section 609 and the legitimate policy of conserving an exhaustible, and, in fact, endangered species, is observably a close and real one.

Arguably, the “rational connection” standard endorsed by the AB is more deferential toward the regulating WTO member than the previously employed “primarily aimed” standard, since even measures that do not “primarily aim” at, but simply “relate to” the conservation of exhaustible natural resources can thus be justified through Article XX (g) of GATT. The Panel on China–Rare Earths added that the “relating to” standard covers cases where a measure is not imposed directly on the resource but is related to its conservation, provided, of course, that it supports or contributes to its conservation (§ 7.250). WTO adjudicating bodies were conscious that they were relaxing the previously applied standard. Their intention was not to make a travesty of the test. The proof of this is that they understand the “rational connection” standard as tantamount to proof of a “substantial relationship” between the means utilized and the ends sought. Summing up prior case law to this effect, the Panel on China–Rare Earths stated in § 7.283: … while measures need not be primarily aimed at conservation, they must still bear a substantial, close and real relationship to the conservation objective; as the Appellate Body said in US–Gasoline, a merely incidental or inadvertent connection will not suffice.61

On appeal, the AB underlined and tightened this finding even more, as follows (§ 5.90) for a measure to “relate to” conservation in the sense of Article XX(g), there must be “a close and genuine relationship of ends and means” between that measure and the conservation objective of the Member maintaining the measure.

Thus, a “close and genuine” relationship between means and ends satisfies this standard.62 And yet panels and the AB consistently refuse to entertain a test whereby regulatory intent will matter. In light of this attitude, the only reasonable conclusion is that measures will pass the test of consistency with Article XX(g) of GATT if defendants can show that the impact on conservation was not the accidental by-product of policies aiming at objectives other than the conservation of exhaustible natural resources. Note that measures that pass the “rational connection” standard do not ipso facto meet the necessity requirement as well. The latter requires that the measure is the reasonably

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available, least-restrictive (on international trade) option, while the former does not care about the magnitude of restrictive effects. It bears repetition that some environmental measures can come under both Article XX(b) and Article XX(g) of GATT as a result of this case law. In the light of this analysis, measures aiming at protecting the life of some animals (those that qualify as exhaustible natural resources) will be more easily defended through recourse to Article XX(g) rather than to Article XX(b) of GATT. 9.2.9.7 Proximate and Ultimate Cause Think of the following scenario. Home blocks trade of fur produced from Arctic fox but does not take measures to combat climate change. Should its measures pass the test of Article XX(g) of GATT if it faces a complaint by Foreign? The answer depends on whether we should construe this provision to require WTO members to adopt measures that address not only the proximate, but also the ultimate, cause of reduction in the number of Arctic foxes. It is submitted that, for the reasons explained in what follows, Article XX(g) of GATT does not cover only measures that address the ultimate cause leading to exhaustibility of natural resources. It can also cover measures that address the proximate cause. Foreign’s claim would be that, if Home really cared about Arctic foxes, it should also stop things like its current cement production, which largely contributes to the reduction of the population of the species. Had Home adopted similar measures, the judge would, of course, have had little doubt that it was genuinely adopting measures relating to the protection of an exhaustible natural resource. The current test as explained previously, though, does not favor a demanding construction of Article XX(g) of GATT. All that is required is that the measure adopted contributes to the realization of an objective. There is not even a consistency requirement embodied in Article XX(g) of GATT, or in the chapeau of Article XX of GATT. In other words, WTO members can, in principle, adopt measures to protect, say, the life of the Arctic fox, but not of the sea turtle.63 There are some good reasons, beyond case-law construction, that support this conclusion. For one, addressing the ultimate cause might include substantial (opportunity) costs for regulators, who might be led to abandon all intervention in favor of exhaustible natural resources if stringent requirements have to be imposed. Crucially, however, challenges to the ecosystem constitute an area where knowledge is limited. Nordhaus (2013) put it aptly in the following terms (p. 133): The short summary on the valuation of impacts on species and eco-systems is that estimating these impacts is one of the most difficult tasks of all. We have insufficient understanding of the risks, and indeed we do not even know how many species exist in the world today. We cannot today value ecosystems in a reliable way, nor can we rank them in terms of their importance.

Under the circumstances, “purists” might be causing more harm than good by insisting on addressing the ultimate cause as well. In the name of a quixotic attempt to save the forest, we might end up failing to keep intact the first trees we could have saved.

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9.2.9.8 In Conjunction with Domestic Consumption or Production Article XX(g) of GATT requires that, when imposing trade restrictions64 to protect exhaustible natural resources, WTO members also adopt measures aimed at restricting domestic consumption or production (as the case may be). The rationale for this provision has to do with the agreement of the GATT framers to avoid the adoption of similar measures for industrial-policy purposes. The panel report on China–Rare Earths refers approvingly to this negotiating record (§ 7.272). There was some confusion regarding the issue of whether the rationale for this requirement was an obligation of even-handedness or not. In US–Gasoline, it is true the AB did explicitly refer to this term on p. 19: The clause is a requirement of even-handedness in the imposition of restrictions, in the name of conservation, upon the production or consumption of exhaustible natural resources. (italics in the original)

The AB in its report on China–Rare Earths explained that this requirement should not be understood as being additional to the same requirement included in the chapeau of Article XX of GATT, to which we will return later in this chapter (§ 5.124): The term “even-handedness” was used in US–Gasoline as a synonym or shorthand reference for the requirement in Article XX(g) that restrictions be imposed not only on international trade but also on domestic consumption or production. As we see it, “even-handedness” is not a separate requirement to be fulfilled in addition to the conditions expressly set out in subparagraph (g). Rather, and in keeping with the Appellate Body report in US–Gasoline, the terms of Article XX(g) themselves embody a requirement of even-handedness in the imposition of restrictions. (italics in the original)

The AB, in its report on US–Gasoline, explained that the requirement to demonstrate that import-restricting measures have been taken in conjunction with domestic measures aimed at the conservation of exhaustible natural resources did not require an “effects test” as a precondition for complying with Article XX(g) of GATT (pp. 20–21): In the first place, the problem of determining causation, well-known in both domestic and international law, is always a difficult one. In the second place, in the field of conservation of exhaustible natural resources, a substantial period of time, perhaps years, may have to elapse before the effects attributable to implementation of a given measure may be observable. … … the clause “if such measures are made effective in conjunction with restrictions on domestic product or consumption” is appropriately read as a requirement that the measures concerned impose restrictions, not just in respect of imported gasoline but also with respect to domestic gasoline. The clause is a requirement of even-handedness in the imposition of restrictions, in the name of conservation, upon the production or consumption of exhaustible natural resources. … if no restrictions on domestically-produced like products are imposed at all, and all limitations are placed upon imported products alone, the measure cannot be accepted as primarily or even substantially designed for implementing conservationist goals. The measure would simply be naked discrimination for protecting locally-produced goods.

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We do not believe … that the clause “if made effective in conjunction with restrictions on domestic production or consumption” was intended to establish an empirical “effects test” for the availability of the Article XX(g) exception. (italics in the original)65

In China–Rare Earths, the panel reaffirmed the even-handedness requirement, stating that, unless it had been met, the measures adopted could not be considered to “relate to” the conservation of exhaustible natural resources (§ 7.328). It further held that, to honor this requirement, the party invoking Article XX(g) of GATT must show that restrictions on domestic consumption or production “work together” with restrictions on international trade. This “work together” requirement will not be satisfied by simply showing that one (restrictions on domestic consumption or production) does not undermine the other (export restrictions); the WTO member concerned must show that domestic and international restrictions form together a rational system that aims at protecting the stated objective (§ 7.302). It also stated that the two sets of restrictions must be adopted concurrently. A major gap between the passage of, say, international restrictions and that of restrictions on domestic consumption and/or production could, in and of itself, raise questions as to whether the former had been applied in conjunction with the latter (§ 7.300). Finally, all restrictions imposed must be enforced; otherwise, the requirements of this provision would not have been met (§ 7.310). The AB underscored this last point. It held, however, that this does not mean that distribution of the burden of conservation must be identical. Logically, this should not be the case if, say, only a small percentage of a natural resource resides in the sovereignty of the regulating state. Moreover, the absence of a “trade effects” test does not allow judges to verify whether this has indeed been the case (§ 5.136): Just as GATT-inconsistent measures impose limitations on international trade, domestic restrictions must impose limitations on domestic production or consumption. Such restrictions must be “real” rather than existing merely “on the books,” particularly in circumstances where domestic consumption accounts for a major part of the exhaustible natural resources to be conserved. Moreover, such restrictions on domestic production or consumption must reinforce and complement the restriction on international trade. However, we have also clarified that Article XX(g) does not require a Member seeking to justify its measure to establish that its regulatory regime achieves an even distribution of the burden of conservation. Accordingly, we find that the Panel erred to the extent that it found that the burden of conservation must be evenly distributed, for example, between foreign consumers, on the one hand, and domestic producers or consumers, on the other hand.

Recall, finally, the discussion on production quotas in chapter 2. We stated there that production quotas do not violate Article XI.1 of GATT. Article XX(g) of GATT strongly supports this conclusion. The requirement to adopt measures in conjunction with domestic production or consumption should be seen in this vein. Respect for this requirement ensures that the domestic market does not profit from measures aimed to protect exhaustible natural resources and that the measures taken under Article XX(g) of GATT genuinely pursue the stated objective (e.g., protection of exhaustible natural resources).

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9.2.9.9 The Incidence of the Level of Development Environmental pollution appears first to worsen and later to improve as countries’ incomes grow. Because of its resemblance to the pattern of inequality and income described by Kuznets, this pattern of pollution and income has been labeled an “Environmental Kuznets Curve.”66 It is true that many pollutants exhibit this pattern. In China–Raw Materials (§§ 7.551ff.), China tried to justify its measures by arguing that its environmental awareness had risen as a result of its recent high growth rates. The panel dismissed the arguments by China as irrelevant to the adjudication of the dispute before it, and this finding was not appealed. We stated earlier that, during the negotiations, the argument was raised that this provision should be understood as striking a balance between protection of exhaustible resources and development. The underlying idea was that the pace of consumption of resources should be decided by the state having property rights in them. GATT was thus outlawing only two instruments: import and export quotas. WTO members remained free to control the pace of extraction of resources through production quotas. They could further dissuade exports of minerals through the imposition of export tariffs, which they could bind and lower if they had received reciprocal concessions from their trading partners. They could finally deviate from assumed obligations if they could show compliance with the criteria included in Article XX(g) of GATT discussed in this section. 9.2.10

Intergovernmental Commodity Agreements (ICAs)

9.2.10.1 The Function of Intergovernmental Commodity Agreements International Commodity Agreements (ICAs) were signed by governments to promote cooperation between producers and consumers of particular commodities. Initially, ICAs aimed at stabilizing international prices for commodities.67 Over time, only three of them were successful in doing so: the ICAs on coffee and cocoa through retention schemes and the ICA on natural rubber through a buffer stock. At present, none of the existing ICAs attempt to regulate markets by supply or price management. All ICAs now exhibit a pure administrative nature and serve as fora for producer-consumer cooperation and consultations, market transparency, development projects, and sources of statistical information. The following ICAs are currently in force: International Cocoa Organization (ICCO); International Coffee Organization (ICO); International Cotton Advisory Committee (ICAC); International Grains Council (IGC); International Olive Oil Council (IOOC); International Sugar Organization (ISO); International Tropical Timber Organization (ITTO). In practice, thus, ICAs have now a function very comparable to that of International Study Groups (ISGs), the other forum for cooperation between producers and consumers. The following ISGs are currently in place: International Rubber Study Group (IRSG); International Lead and Zinc Study Group (ILZSG); International Nickel Study Group (INSG); International Copper Study Group (ICSG); International Jute Study Group (IJSG).

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Take the example of IRSG. This is the forum where producers and consumers meet and discuss all matters affecting the supply and demand of natural and synthetic rubber. It is endowed with a Secretariat, the task of which is to prepare estimates and analyze future trends of supply and demand in this product market. All of the other study groups mentioned here have similar functions. ICAs and ISGs, as well as the Food and Agriculture Organization (FAO), intergovernmental groups and subgroups of individual agricultural commodities, have been designated by the Common Fund for Commodities (CFC) as International Commodity Bodies (ICB) eligible for CFC projects.68 The CFC has been financing development projects for over two decades in an effort to enhance social and economic development in commoditydependent developing countries, and especially, in least developed countries (LDCs). There have been some initiatives to reintroduce price stabilization schemes (coffee, natural rubber), but there is general unwillingness to proceed in this way. Participation in the various ICAs and ISGs varies, but, in general, both developed and developing countries participate.69 9.2.10.2 ECOSOC Resolution 30(IV) The Interpretative Note of Article XX(h) of GATT makes it clear that this exception extends to any ICA that conforms to the principles approved by the UN Economic and Social Council (ECOSOC) in its resolution 30(IV) of 28 March 1947. This resolution reads as follows: The Economic and Social Council, Noting that inter-governmental consultations are going forward actively with respect to certain internationally traded commodities, and Considering the significant measure of agreement regarding commodity problems and the coordination of commodity consultations already reached both in the First Session of the Preparatory Committee of the United Nationals Conference on Trade and Employment, and in the Preparatory Commission on World Food Proposals of the Food and Agriculture Organization of the United Nations. Recommends that, pending the establishment of the International Trade Organisation, Members of the United Nations adopt as a general guide in inter-governmental consultation or action with respect to commodity problems the principles laid down in chapter VII as a whole—i.e., the chapter on inter-governmental commodity arrangements of the draft Charter appended to the Report of the First Session of the Preparatory Committee of the United Nations Conference on Trade and Employment—although recognizing that discussion in future sessions of the Preparatory Committee of the United Nations Conference, as well as in the Conference itself, may result in modifications of the provisions relating to commodity arrangements, and Requests the Secretary-General to appoint an interim co-ordinating committee for international commodity arrangements to keep informed of and to facilitate by appropriate means such intergovernmental consultation or action with respect to commodity problems, the committee to consist of a chairman to represent the Preparatory Committee of the United Nations Conference on Trade and Employment, a person nominated by the Food and Agriculture Organization of the United

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Nations to be concerned in particular with agricultural primary commodities, and a person to be concerned in particular with non-agricultural primary commodities. (italics in the original)70

ICAs were included in chapter VI of the Havana Charter, which, as we saw in chapter 1, never entered into force. WTO members have, nevertheless, incurred an obligation, by virtue of Article XXIX of GATT, to “observe to the fullest extent of their executive authority the general principles of chapters I to VI inclusive and of chapter IX of the Havana Charter.” For the reasons developed in chapter 1, this provision has limited, if any, value. Conformity with the principles approved by the UN ECOSOC in its resolution 30(IV) of 28 March 1947 is one of the three ways in which an ICA can be legally relevant in GATT [and, consequently, a WTO member can invoke it by virtue of Article XX(h) of GATT]. An ICA also can be legally relevant if it conforms to criteria that have been submitted to the CONTRACTING PARTIES and not disapproved by them. It could also be legally relevant if the agreement itself is submitted to and not disapproved by the CONTRACTING PARTIES (now the WTO membership). The GATT panel on EEC (Member States)–Bananas I faced an argument to the effect that the Lomé Convention, an agreement between the EU and a series of developing countries, should be regarded as an ICA. The panel report, which remains unadopted and, hence, of limited legal value, did provide some clarifications as to the understanding of the obligation embedded in Article XX(h) of GATT. The panel stated that the Lomé Convention could not be regarded as an ICA since it had never been submitted for approval to the CONTRACTING PARTIES. It further underscored that, anyway, an agreement would be equated to an ICA if it conformed to the principles approved by the UN ECOSOC in its resolution 30(IV) of 28 March 1947. These principles required that participation in ICAs was open to trading nations and not limited to a select group of countries; and for this reason, the panel found that the Lomé Convention could not qualify as an ICA in the sense of Article XX(h) of GATT. Note the following, from § 166: Turning to the principles in the ECOSOC Resolution 30(IV), the Panel noted that this Resolution required, inter alia, that the negotiation of, and participation in, an international commodity agreement must be open to all interested countries and must avoid, as also stipulated in the requirements set out at the beginning of Article XX of the General Agreement, unjustifiable discrimination between countries. The Panel, noting the limited membership of the Lomé Convention and noting further that the EEC had never claimed the Lomé Convention to be a non-discriminatory commodity agreement open to all banana producer and consumer countries, found that the criteria of the ECOSOC Resolution 30(IV) had not been met. The Panel therefore concluded that Article XX(h) could not justify the inconsistency with Article I:1 of the EEC’s banana preferences. (italics in the original)

9.2.11

Government Stabilization Plans

By virtue of Article XX(i) of GATT, WTO members can legitimately impose export quotas and provide the domestic processing industry with essential quantities of material at prices

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held below the world price. Only measures that are parts of government stabilization plans can profit from this exception. New Zealand, one of the initiators of this provision, explained that, unless an exception were agreed on, those with government stabilization plans (of prices) in place would have been forced to dismantle either their domestic processing industry or their stabilization plan altogether. If, for example, the domestic price of leather were below the world price, then New Zealand producers would be selling all production abroad. This could be quite detrimental for the New Zealand leather goods industry, since it would be required to pay the higher world price, not the relatively lower domestic price, for inputs. On the other hand, any attempt by the government to stop exports of leather would run afoul of Article XI of GATT. This is where this exception enters the picture.71 For schemes to be judged GATT-consistent, the WTO member concerned must not use them to increase the volume of exports, and it must further respect nondiscrimination.72 If, say, leather is used as input for other goods, then all producers in the downstream industry using leather as an input (as opposed to producers of leather goods only) should profit from cheaper inputs. Of course, it will be a quixotic test to draw the line between measures aiming to secure the survival of the domestic industry, as opposed to measures aiming to increase exports. Absent a government stabilization plan, exports could have suffered dramatically. Although the provision is silent on this score, the test will be to draw the appropriate counterfactual to decide whether the measure is aimed at increasing exports. In the absence of practice, one can only speculate as to its parameters. It will be easy to draw conclusions if, for example, the quantity of a commodity has shrunk dramatically because of extreme weather and the world price has shot up as a result. In this case, it could be that, for some reason, supply was unaffected in one part of the world, and then we would see the situation that inspired New Zealand to propose this provision. In short, some distortion must be pointed to that gave rise to the government stabilization plan, and the task of the adjudicator, in the case of disputes, will be to compare the status quo with the situation resulting from the application of the stabilization plan. Government stabilization plans were in vogue when GATT was being negotiated but are far from being popular nowadays. Regulators are well aware of the negative externalities that price caps and price floors give rise to, and they generally avoid them. For other reasons as well, governments might have little incentive to pursue similar policies, and similar schemes have become rare today. 9.2.12

Products in General or Local Short Supply

This provision was meant to address the post–World War II (WWII) short supply of goods, and was supposed to be eliminated by 1 January 1951 at the latest.73 Following a series of meetings where trading nations found it impossible to decide this issue in a definitive manner, the Working Group on Other Barriers to Trade

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convened during the Review Session of 1954–1955 with the mandate to examine its necessity and decided to maintain it. The rationale for retaining it had to do with the awareness that this provision was considered relevant not only for the postwar period of short supply of various goods, but also for cases of natural disaster that could occur at any time.74 The WTO member invoking this provision must ensure that all other WTO members will be entitled to an equitable share of the international supply of products, the sale of which is being restricted, and that any measure which is GATT-inconsistent will cease to exist as soon as the conditions giving rise to it have ceased to exist. The AB interpreted the term “in short supply” in its report on China–Raw Materials. It struck a parallelism with the term “critical shortages” appearing in Article XI.2(a) of GATT. It noted (§ 325) that “shortages” referred to in Article XI.2(a) of GATT must be “critical” and, consequently, the coverage of this term is narrower than the “shortages” referred to in Article XX(j) of GATT. As a result, there is more leeway to justify measures under Article XX(j) of GATT than under Article XI.2(a) of GATT. 9.2.13

Complying with the Chapeau

The chapeau of Article XX of GATT75 requires WTO members to make sure that their measures do not discriminate between countries where the same conditions prevail and also do not constitute a disguised restriction of trade. In US–Gasoline, the AB reflected on the quintessential element of the analysis of a challenged measure under the chapeau (p. 25): “the fundamental theme—when interpreting the chapeau—is to be found in the purpose and object of avoiding abuse or illegitimate use of the exceptions to substantive rules available in Article XX.” In US–Shrimp, in similar vein, the AB reproduced the essence of this finding, adding nonetheless a few words and managing thus, to better explain how it understood the function of this provision (§ 159): The task of interpreting and applying the chapeau is, hence, essentially the delicate one of locating and marking out a line of equilibrium between the right of a Member to invoke an exception under Article XX and the rights of the other Members under varying substantive provisions (e.g., Article XI) of the GATT 1994, so that neither of the competing rights will cancel out the other and thereby distort and nullify or impair the balance of rights and obligations constructed by the Members themselves in that Agreement. The location of the line of equilibrium, as expressed in the chapeau, is not fixed and unchanging; the line moves as the kind and the shape of the measures at stake vary and as the facts making up specific cases differ.

9.2.13.1 Application, Not Substantive Consistency Recall that we described the test of consistency with Article XX of GATT as two-tier: the AB held in US–Gasoline that a WTO adjudicating body cannot review the substantive consistency of a national measure with Article XX of GATT under the chapeau of Article XX of GATT. When moving to the chapeau, assuming consistency of the challenged

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measure with a subparagraph as shown earlier, the only remaining question is to what extent the measure has been applied in a GATT-consistent manner (p. 22): The chapeau by its express terms addresses, not so much the questioned measure or its specific contents as such, but rather the manner in which that measure is applied. It is, accordingly, important to underscore that the purpose and object of the introductory clauses of Article XX is generally the prevention of “abuse of the exceptions.”

9.2.13.2 Application? Not Substantive Consistency? One would expect that the terms “the manner in which that measure is applied” appearing in the passage just quoted would suggest a formalistic check. Indeed, this is what happened in practice in an uninterrupted manner for years. In US–Shrimp, for example, the AB sanctioned the US because it negotiated agreements with some, but not all, WTO members, leading eventually to the conformity of their fishing techniques with US rules regarding sales of shrimp in the US market. The question before the AB was whether opportunities to negotiate had been offered to all WTO members. A negative response to this simple question would lead to inconsistency with the chapeau. Indeed, in this case, absence of an offer to negotiate led to the finding that the US was in violation of its obligations under the chapeau. Practice, however, has changed. In more recent case law, the AB has torn down the Chinese wall between “substantive consistency” on the one hand, and “application” on the other. Summing up this approach, it held in § 625 of its report on China–Rare Earths: In this vein, we note that, with respect to the chapeau, the Appellate Body has held that: Although … the focus of the inquiry is on the manner in which the measure is applied, the Appellate Body has noted that whether a measure is applied in a particular manner “can most often be discerned from the design, the architecture, and the revealing structure of a measure.” It is thus relevant to consider the design, architecture, and revealing structure of a measure in order to establish whether the measure, in its actual or expected application, constitutes a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail.

It follows that to ensure whether application has been GATT-consistent, panels will delve into the design, architecture, and revealing structure of the challenged measure. To ask this query is not unorthodox as such. Since the issue is whether WTO members have met the standard imposed by the regulating state, knowledge about the standard is, of course, necessary. The issue, however, is, how exactly does the test under the chapeau differ from that under the relevant paragraph of Article XX of GATT? Isn’t the test under the paragraph supposed to establish the authenticity of the pursuit of a particular objective? Of course it is. Then isn’t it in that context that the inquiry into the design and similar matters. should take place? The AB probably became aware of the shortcomings of an artificial distinction between “substantive consistency” and “application” and tried to anticipate the problems that might arise by relaxing the distance between the two tests. As things stand, it has not formally modified prior case law, but it has undeniably expanded the scope of review under the chapeau.

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9.2.13.3 Arbitrary Discrimination, Unjustifiable Discrimination, Disguised Restriction The terms used in the chapeau are open-ended and, as such, prone to various interpretations. Various questions arise even from a brief perusal of the chapeau, such as: What distinguishes each of the three terms from the others? How is the discrimination test here different (if at all) from the discrimination test embedded in Article III of GATT? If it is not different, how can Article XX of GATT be applied to violations of Article III of GATT? We try to respond to these questions by presenting a critical evaluation of the GATT/WTO case law on the chapeau in the next sections. Cumulative Requirement In US–Shrimp (Article 21.5–Malaysia), the AB explained the three conditions that must be cumulatively met for a measure to be chapeau-consistent (§ 118): The chapeau of Article XX establishes three standards regarding the application of measures for which justification under Article XX may be sought: first, there must be no “arbitrary” discrimination between countries where the same conditions prevail; second, there must be no “unjustifiable” discrimination between countries where the same conditions prevail; and, third, there must be no “disguised restriction on international trade.” The Panel’s findings appealed by Malaysia concern the first and second of these three standards. (italics in the original)

This finding suggests that the three terms are distinct, and yet some case law casts doubt on this issue.GATT/WTO case law has often examined the “arbitrary or unjustifiable discrimination” requirement in tandem, without distinguishing between its two elements (AB report on US–Shrimp, § 150). The reason for doing so is because, in the AB’s view, there is an overlap between the three terms (US–Gasoline, at p. 16). It has on occasion, though, proceeded the other way and examined the two elements separately, as the previously quoted passage from the AB report on US–Shrimp (Article 21.5–Malaysia) underscores. No Rational Connection Equals Violation In Brazil–Retreaded Tyres, the AB held that if the adjudicator concludes that the basis for the measure bears no rational connection with the objective pursued, then it has to find that the chapeau has been violated (§ 227). The “rational disconnect” standard appeared yet again in EC–Seal Products. There, Canada argued that the EU was not pursuing protection of animal welfare when it allowed the killing of seals by the Inuit community of Greenland. There was a rational disconnect between the means (imports of seal products from these brutally killed seals) and the objective (protection of animal welfare), as the AB understood the claim advanced by Canada in § 5.319 of its report. The AB did not respond to this claim directly. It found against the EU, holding that the EU was in violation of its obligations under the chapeau by not clarifying what “subsistence” of the Inuit community meant, by not distinguishing

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in satisfactory manner between IC and commercial hunts, and by not explaining why Canadian Inuit could not profit from commercial opportunities offered to the Greenlandic Inuit community (§ 5.338). It did not, nonetheless, find that there was a rational disconnect between allowing the commercialization of seal products produced by the Inuit community of Greenland (which was evidently killing seals in a brutal manner) and the overall objective to protect animal welfare. It probably should have found this to be the case, or found that the measures of the EU in dispute were, as argued elsewhere, two items (protection of animal welfare; and discriminatory treatment of products produced by the Inuit community), not one. Existence of Alternatives In US–Gasoline, the AB held that the existence of less restrictive alternatives will be examined in the context of the review of the consistency of measures with Article XX(b) of GATT. This is so because the “necessity” test embedded therein requires the adjudicator to review whether the chosen measure is indeed the reasonably available, least restrictive option. A similar exercise cannot be performed, though, when measures come under the aegis of Article XX(g) of GATT. In this case, the AB held that an evaluation of alternatives will take place in the context of the evaluation of the consistency of the measure with the chapeau. In its report on US–Gasoline, it reached the conclusion that the existence of measures that avoid or diminish the discriminatory treatment provided should lead to the conclusion that the chapeau has been violated (pp. 26ff.).76 On page 28 of its report, the AB held: We have above located two omissions on the part of the United States: to explore adequately means, including in particular cooperation with the governments of Venezuela and Brazil, of mitigating the administrative problems relied on as justification by the United States for rejecting individual baselines for foreign refiners; and to count the costs for foreign refiners that would result from the imposition of statutory baselines.

Based on this, the AB found that the US was in violation of its obligations under the chapeau (p. 29). This is a remarkable finding. The AB was not comparing the attitude of the US toward different WTO members and arguing that it was not even-handed. It found a violation because the US did not use a less costly measure than the one ultimately chosen. It did all this in the context of its analysis under the chapeau. This finding is not only remarkable but also unique so far. As such, it is worth keeping in mind, but, probably, one should not attach too much “precedential” value to this finding. Having said that, imposition of “unnecessary” (e.g., overly restrictive) measures, which come under the purview of Article XX(g) of GATT could be evidence of protectionist intent. The only way that they could be caught by GATT discipline is by understanding similar measures as disguised restriction of trade. This is probably what the AB had in mind in this case, and if our understanding is correct, then it is a very plausible outcome that should be endorsed in future case law. We discuss disguised restriction of trade in more detail later in this chapter.

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Flexibility Required In US–Shrimp, the AB held that the chapeau is violated when measures result in discrimination and the resulting discrimination is unjustifiable or arbitrary. It added that actively accounting for differences among various WTO members is a necessary component of the obligation imposed on WTO members not to discriminate in an unjustifiable or arbitrary manner. Flexibility becomes thus a necessary component for compliance to be achieved under the chapeau (§§ 164–165 and 177): It may be quite acceptable for a government, in adopting and implementing a domestic policy, to adopt a single standard applicable to all its citizens throughout that country. However, it is not acceptable, in international trade relations, for one WTO Member to use an economic embargo to require other Members to adopt essentially the same comprehensive regulatory program, to achieve a certain policy goal, as that in force within that Member’s territory, without taking into consideration different conditions which may occur in the territories of those other Members. We believe that discrimination results not only when countries in which the same conditions prevail are differently treated, but also when the application of the measure at issue does not allow for any inquiry into the appropriateness of the regulatory program for the conditions prevailing in those exporting countries. Section 609, in its application, imposes a single, rigid and unbending requirement that countries applying for certification … adopt a comprehensive regulatory program that is essentially the same as the United States’ program, without inquiring into the appropriateness of that program for the conditions prevailing in the exporting countries. Furthermore, there is little or no flexibility in how officials make the determination for certification pursuant to these provisions. In our view, this rigidity and inflexibility also constitute “arbitrary discrimination” within the meaning of the chapeau. (emphasis in the original)

Recall that the US had conditioned market access for shrimp upon a particular fishing method—namely, the use of TEDs. In the AB’s view, conditioning market access of imported shrimps on the use of TEDs was a requirement that violated the chapeau. The US measure should be modified to allow access for shrimp caught through other fishing methods of comparable effectiveness to TEDs.77 Subsequent to the original condemnation of its measure, the US modified its statute so as to allow access of shrimp caught through equally effective methods. The AB held that this amendment brought the US measure into compliance with its obligations in this respect (§§ 144 and 149–150). It is true that if market access were conditioned on the use of US TEDs, then the US would be effectively granting a local content requirement.78 For this reason alone, the AB finding is well founded. This finding is not totally unproblematic, though. The effectiveness of other methods will have to be assessed. Hence, some conformity assessment will inevitably be necessary. The costs for a conformity assessment should not be underestimated, and they will have to be borne by the exporter as well. So yes, the finding is correct and also promotes gains from innovation. At the same time, nonetheless, exporters might find it more profitable to simply mimic the US production process and avoid the ensuing costs of conformity assessment. The AB finding provided them with the possibility to make a choice depending on the circumstances of the case.

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Equal Opportunities In US–Shrimp, the AB held that the US was not in compliance with the requirements of the chapeau because it had offered international negotiations to resolve the problems encountered by the enactment of US Section 609 to a few Caribbean countries but not to all WTO members. The US had not justified why some were offered the chance to negotiate an agreement with it, and others were not. Subsequently, the US offered the same opportunity to all other shrimp exporters affected by the US measure (including Malaysia, the complainant in this case). The AB found that, in so doing, the US had effectively complied with its obligations in this respect. Wisely, the AB added in its report on US–Shrimp (Article 21.5–Malaysia) that the US could not have been asked to achieve, through international negotiations with Malaysia, an outcome comparable to that achieved with other WTO members (as Malaysia indeed had argued). Some were prepared to accept fishing using a particular technique, which minimizes the incidental taking of sea turtles, but others were not (§§ 122, 123, and 130). De facto Discrimination Covered In EC–Seal Products, the panel and the AB held that the EU was also in violation of the chapeau of Article XX of GATT. Recall that the EU had a sales ban in place but allowed three exceptions. The first was IC hunts (e.g., products made of seals harvested by the Greenland Inuit community that were necessary for the subsistence of this community). The EU clarified that it would allow imports of all seal products made by indigenous communities to the extent that proceedings from similar sales were meant to address subsistence requirements. It thus, banned imports of the Canadian Inuit community that were considered “commercial hunts.” Second, the “MRM” exception, whereby the EU would allow imports originating in countries with resource management programs, if similar sales were made on a nonprofit basis. Consequently, Norway, a country with arguably the most elaborate resource management program, could not export to the EU since its sales were for profit. Finally, imports for “personal use” were exempted. That meant products imported by travelers who had purchased seal products in one of their trips abroad were exempt. Canada protested that its own Inuit community could not de facto profit from this exception, and Norway joined the chorus, arguing that its resource management program was at least as efficient as that anywhere in the EU.79 Greenland Inuit were harvesting seals for individual subsistence purposes. Canadian Inuit, though, were commercially active in the hunting of seals. Thus, by limiting imports of seals products made by Inuit and other indigenous communities to those hunted for subsistence purposes only, Canadian Inuit were de facto excluded from the EU market. The panel agreed that the requirements of the chapeau had thus been violated (§§ 7.648ff.). The AB upheld this point, although following a different route, since it stated that Article 2.1 of TBT and Article XX of GATT reflect different legal standards and refuted all the findings of the panel in this respect.

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The AB found that the EU Seals regime was in violation of the chapeau because the term “subsistence” had been ill defined in the EU regulation. The boundaries between “subsistence” and “commercial hunt” were unclear, and moreover, the degree of commercialization that would tilt the balance from the former to the latter was irrelevant. It was incumbent on the EU certifying body to separate wheat from chaff, and the AB believed that the amount of discretion entrusted to this body was prone to mistakes (§§ 5.324ff., and especially the last sentence of § 5.324, as well as § 5.326). Without going so far as to describe it as “abusive,” the AB did cast doubt on the possibility to reconcile the distinction between “IC hunts” and “commercial hunts,” with the objective to protect public morals (§ 5.338). It did not find against the EU under Article XX(a) of GATT. It did so, under the chapeau, since the manner in which the whole regime was being administered did not guarantee that the same treatment was reserved to countries where the same conditions prevailed. De facto discrimination had occurred, in the AB’s view, under the circumstances. Abuse of Law (Abus de Droit) The GATT panel report on US–Canadian Tuna held that measures publicly announced could not, for this reason alone, be judged a “disguised restriction of trade” (§ 4.8).80 This is a rather unfortunate statement. What if the transparent measure endorses disguised restriction of trade? What if, for example, Home claims that it is blocking imports of tuna because of the depletion of resources, while allowing its own fishers to fish without any limitations? On p. 25 of its report on US–Gasoline, the AB rejected the interpretation that the term “disguised restriction” (of trade) is limited to concealed or unannounced restrictions only. In other words, the obligation to avoid disguised restrictions of trade is not a mere exercise in transparency: “Arbitrary discrimination,” “unjustifiable discrimination” and “disguised restriction” on international trade may, accordingly, be read side-by-side; they impart meaning to one another. It is clear to us that “disguised restriction” includes disguised discrimination in international trade. It is equally clear that concealed or unannounced restriction or discrimination in international trade does not exhaust the meaning of “disguised restriction.” (italics in the original)

That much should be obvious. On p. 25 of the same report, the AB went on and provided the framework for analysis of the term. In its view, through this term, the framers of GATT wanted to outlaw abusive invocations of Article XX of GATT: It is equally clear that concealed or unannounced restriction or discrimination in international trade does not exhaust the meaning of “disguised restriction.” We consider that “disguised restriction,” whatever else it covers, may properly be read as embracing restrictions amounting to arbitrary or unjustifiable discrimination in international trade taken under the guise of a measure formally within the terms of an exception listed in Article XX. Put in a somewhat different manner, the kinds of considerations pertinent in deciding whether the application of a particular measure amounts to

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“arbitrary or unjustifiable discrimination,” may also be taken into account in determining the presence of a “disguised restriction” on international trade. The fundamental theme is to be found in the purpose and object of avoiding abuse or illegitimate use of the exceptions to substantive rules available in Article (italics in the original)

This view is reminiscent of the French doctrine of abus de droit. It has been reproduced in the panel report on EC–Asbestos. The term “disguised restriction” was understood by that panel as outlawing interventions, which, under the guise of protection of one of the grounds mentioned in the subparagraphs of Article XX of GATT, aim at promoting other interests (§ 8.236): Referring also to the remark made by the Appellate Body in the same case according to which “the provisions of the chapeau [of Article XX] cannot logically refer to the same standard(s) by which a violation of the substantive rule has been determined to have occurred,” we consider that the key to understanding what is covered by “disguised restriction on international trade” is not so much the word “restriction,” inasmuch as, in essence, any measure falling within Article XX is a restriction on international trade, but the word “disguised.” In accordance with the approach defined in Article 31 of the Vienna Convention, we note that, as ordinarily understood, the verb “to disguise” implies an intention. Thus, “to disguise” (déguiser) means, in particular, “conceal beneath deceptive appearances, counterfeit,” “alter so as to deceive,” “misrepresent,” “dissimulate.” Accordingly, a restriction which formally meets the requirements of Article XX(b) will constitute an abuse if such compliance is in fact only a disguise to conceal the pursuit of trade-restrictive objectives. However, as the Appellate Body acknowledged in Japan—Alcoholic Beverages, the aim of a measure may not be easily ascertained. Nevertheless, we note that, in the same case, the Appellate Body suggested that the protective application of a measure can most often be discerned from its design, architecture and revealing structure. (italics in the original)

Where the Same Conditions Prevail The term “between countries where the same conditions prevail” has been consistently understood as prohibiting discriminatory behavior. In the GATT era, in US–Canadian Tuna, the panel examined a US prohibition on imports of tuna and tuna products from Canada, imposed on 31 August 1979, following the seizure by Canadian authorities of US fishing vessels and fishers in disputed waters (§ 4.8): The Panel noted the preamble to Article XX. The United States” action of 31 August 1979 had been taken exclusively against imports of tuna and tuna products from Canada, but similar actions had been taken against imports from Costa Rica, Ecuador, Mexico, and Peru and then for similar reasons. The Panel felt that the discrimination of Canada in this case might not necessarily have been arbitrary or unjustifiable.

The AB in US–Gasoline discussed the issue whether this requirement should be understood as referring only to exporting countries or, conversely, whether it should encompass the regulating country as well. Although the AB did not formally rule on this issue on this occasion, it saw no reason to deviate from the prevailing practice, which privileged the latter interpretation (pp. 23–24):

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It was asked whether the words incorporated into the first two standards “between countries where the same conditions prevail” refer to conditions in importing and exporting countries, or only to conditions in exporting countries. The reply of the United States was to the effect that it interpreted that phrase as referring to both the exporting countries and importing countries and as between exporting countries

At no point in the appeal was that assumption challenged by Venezuela or Brazil. we see no need to decide the matter of the field of application of the standards set forth in the chapeau nor to make a ruling at variance with the common understanding of the participants.

9.2.13.4 No Effects Test Required In Brazil–Retreaded Tyres, the AB clarified that there is no effects test in the chapeau and that, consequently, all WTO members must, in principle, be subjected to the same regulatory requirements, even if their respective volumes of trade are highly asymmetric. The question before the AB was whether, by allowing imports of retreaded tires from its MERCOSUR partners while banning similar imports from all other sources, Brazil was violating Article XX of GATT. Brazil’s response was that MERCOSUR countries exported a very small volume of retreaded tires to Brazil; hence, the embargo did not matter. Brazil had originally banned imports on an MFN-basis. It was forced to lift the ban with respect to tyres of MERCOSUR origin only following a decision by a Brazilian court. Complainants won the argument to the effect that the treatment of MERCOSUR tyres was discriminatory and inconsistent with the chapeau of Article XX of GATT, and Brazil attempted to justify its measure arguing that imports of MERCOSUR origin were anyway de minimis. The AB refuted the Brazilian claim, stating that the low volume of imports of MERCOSUR origin was immaterial. Brazil could not successfully pass the test of compliance with Article XX of GATT (§§ 228–229): In this case, the discrimination between MERCOSUR countries and other WTO Members in the application of the Import Ban was introduced as a consequence of a ruling by a MERCOSUR tribunal. The tribunal found against Brazil because the restriction on imports of remolded tires was inconsistent with the prohibition of new trade restrictions under MERCOSUR law. In our view, the ruling issued by the MERCOSUR arbitral tribunal is not an acceptable rationale for the discrimination, because it bears no relationship to the legitimate objective pursued by the Import Ban that falls within the purview of Article XX(b), and even goes against this objective, to however small a degree. Accordingly, we are of the view that the MERCOSUR exemption has resulted in the Import Ban being applied in a manner that constitutes arbitrary or unjustifiable discrimination. The Panel considered that the MERCOSUR exemption resulted in discrimination between MERCOSUR countries and other WTO Members, but that this discrimination would be “unjustifiable” only if imports of retreaded tires entering into Brazil “were to take place in such amounts that the achievement of the objective of the measure at issue would be significantly undermined.” The Panel’s interpretation implies that the determination of whether discrimination is unjustifiable depends on the quantitative impact of this discrimination on the achievement of the objective of the measure at issue. As we indicated above, analyzing whether discrimination is “unjustifiable” will

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usually involve an analysis that relates primarily to the cause or the rationale of the discrimination. By contrast, the Panel’s interpretation of the term “unjustifiable” does not depend on the cause or rationale of the discrimination but, rather, is focused exclusively on the assessment of the effects of the discrimination. The Panel’s approach has no support in the text of Article XX and appears to us inconsistent with the manner the Appellate Body has interpreted and applied the concept of “arbitrary or unjustifiable discrimination” in previous cases.81

The AB thus, distancing itself from the panel’s analysis in this respect, held that discrimination would be judged “unjustifiable” by using the cause or rationale for discrimination as a benchmark. In this case, nothing had been submitted before the AB to persuade it that imports from MERCOSUR countries should be treated differently from imports of the same goods originating in other countries. For this reason, a finding of violation of the chapeau was warranted, in the AB’s view. This finding might seem contradictory with the obligation to use the least restrictive means. How can one establish that an instrument is less restrictive than another unless one has quantified the trade impact of both? And yet, panels and the AB never engage in similar analysis; as is the case with Article III of GATT that we discussed in chapter 7, their analysis is abstract. 9.2.14 Article XX of GATT and Protocols of Accession 9.2.14.1 The Test The question has arisen whether Article XX of GATT can be also used as an exception to obligations assumed under a protocol of accession. Recall from chapter 1 that post-1995, lengthy protocols of accession are in vogue, and acceding countries have been requested to assume obligations above and beyond those reflected in the WTO Agreement. Intuitively, one would expect that the response to this question should always be in the affirmative. Article II.7 GATT reads: “The Schedules annexed to this Agreement are hereby made an integral part of Part I of this Agreement.” This provision covers schedules of accession for the original GATT contracting parties. Since their schedules were part of GATT, then of course, Article XX of GATT would be applicable since its cover sentence allows for deviation from any obligation assumed under GATT. Does the picture change with respect to the acceding country? It should not, since in the opposite case, acceding countries would be in unequal, less favorable position than original members. Nothing in the WTO Agreement suggests that this would be the case. Article XXXIII of GATT regulates accession and reads: A government not party to this Agreement, or a government acting on behalf of a separate customs territory possessing full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement, may accede to this Agreement, on its own behalf or on behalf of that territory, on terms to be agreed between such government and the CONTRACTING

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PARTIES. Decisions of the CONTRACTING PARTIES under this paragraph shall be taken by a two-thirds majority.

Article XII.2 of the WTO Agreement, which now regulates accession, did not change one iota in this formulation. The relationship between the two provisions was discussed in the AB report on China–Rare Earths, where the AB approvingly quoted a point raised by Japan in the following manner (§ 5.30)82: As Japan submits on appeal, “Article II:2 defines the scope of the application of the Multilateral Trade Agreements on existing Members, whereas Article XII regulates the process of acceding to ... the WTO Agreement by a prospective WTO Member.” These two provisions thus serve closely related, albeit distinct, functions; they are not merely duplicative of each other. Read together, they ensure that the fundamental principle of the single undertaking applies to both existing and newly acceded Members of the WTO.

Facts however changed. Post-1995, as we saw in chapter 1, a number of former communist countries joined the WTO. Does this fact in and of itself recommend that schedules of concessions should have a life of their own, and not be totally submerged into GATT via Article II? An official WTO publication states:83 One point they had very much in mind is that GATT 1947 was based on the assumption that is Members had, by and large, free market economies and that while access to their markets was governed by the measures dealt with in its agreements (for instance, tariffs, quantitative restrictions etc., in the goods area) access to the markets of applicants which did not necessarily have free market economies might be regulated by government decision. This point is equally valid for the WTO. (p. 48)

Additional commitments, it follows, were deemed necessary in order not to totally redress the situation,84 but to minimize the perverse effects that government decisions might have on the conduct of trade. The same official publication is unclear as to the status of similar additional commitments that have been incorporated in protocols (of accession). On p. 45, it states: “These commitment paragraphs are thus an integral part of the Protocol and have the same status and legal effect as the commitments in the Protocol itself.” This is hardly an illuminating statement. And to make matters worse, the document says on p. 50: Some Members have argued in the General Council/Ministerial Conference that new entrants should not be required to undertake Protocol commitments that are more stringent than those of original WTO Members at similar levels of economic development. … Other Members have replied that Article II places no limits on the terms of accession and that, in their view, the process is working well … while there has been relatively little discussion on this subject in the WTO, three main points have emerged: Article XII indeed sets no limits to the terms that may be agreed …

This last point seems to support the view that commitments in the various protocols of accession enjoy a life of their own. Acceding countries, thus, have been requested to

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assume obligations that market economies did not have to assume. Disputes arose whether they had respected similar additional obligations. WTO adjudicating bodies have developed a test whereby it is the wording of the additional obligation assumed that will decide whether Article XX of GATT can be offered as a defense in the case of a violation. This test was elaborated in the AB report on China–Rare Earths as follows (§ 5.51): As further discussed in the next subsection, the question as to whether a provision in China’s Accession Protocol has an objective link to China’s obligations under the GATT 1994, or whether the exceptions under the GATT 1994 may be invoked to justify a breach of such provision, cannot be answered on the basis of Paragraph 1.2 of China’s Accession Protocol alone, which is a general provision. Rather, to answer such specific and substantive questions, a thorough analysis is required regarding the relevant provisions, starting with the text of the relevant provision in China’s Accession Protocol and taking into account its context, including that provided by the Protocol itself, and by relevant provisions of the Accession Working Party Report, and by the agreements within the WTO legal framework. The analysis must also take into account the overall architecture of the WTO system as a single package of rights and obligations and any other relevant interpretative elements, and must be applied to the circumstances of each dispute, including the measure at issue and the nature of the alleged violation.

9.2.14.2 Cases Where the Defense Is Available In China–Publication and Audiovisual Products, the AB established that China could rely on Article XX(a) of GATT to justify an exception from obligations assumed under its Protocol of Accession (§§ 223ff. and especially § 233).85 The AB paid attention to the wording included in § 5.1 of the Protocol of Accession, which reads: “Without prejudice to China’s right to regulate trade in a manner consistent with the WTO Agreement …” The AB went on to find in favor of China (§ 233): we consider that the provisions that China seeks to justify have a clearly discernible, objective link to China’s regulation of trade in the relevant products. In the light of this relationship between provisions of China’s measures that are inconsistent with China’s trading rights commitments, and China’s regulation of trade in the relevant products, we find that China may rely upon the introductory clause of paragraph 5.1 of its Accession Protocol and seek to justify these provisions as necessary to protect public morals in China, within the meaning of Article XX(a) of the GATT 1994.

The AB reached this finding because the nature of the obligations assumed under its protocol provided China with the right to invoke Article XX of GATT in this case. It was not because Article XX of GATT is generally available to serve as an exception to obligations assumed under a Protocol of Accession. It is the reference to “the right to regulate” that tilted the balance toward a positive response to the Chinese claim. 9.2.14.3 Cases Where the Defense Is Unavailable Subsequent reports confirmed the view that the wording mattered, but they responded in the negative to the question whether Article XX of GATT was available to justify an obligation assumed under a Protocol of Accession.

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In China–Raw Materials (§§ 305ff.) and in China–Rare Earths, the AB was entertaining an appeal on whether China could legitimately invoke Article XX of GATT to justify its deviation from the obligation to abolish certain export taxes.86 The obligation, which China had assumed in this respect, reads under Article 11.3 of its Protocol Accession: “China shall eliminate all taxes and charges applied to exports unless specifically provided for in Annex 6 of this Protocol or applied in conformity with the provisions of Article VIII of the GATT 1994.” The AB in China–Raw Materials dismissed China’s claim, arguing that the provision of Article 11.3 of its Protocol of Accession did not allow exceptions other than those mentioned in the protocol itself (§ 307). In China–Rare Earths, a subsequent case, this finding was upheld (§ 7.117). This time, nevertheless, a panelist issued a separate minority opinion, arguing essentially that protocols of accession should be viewed as an integral part of GATT, by virtue of Article II.7 (§§ 7.118ff.). In his view, there should be a presumption that Article XX of GATT is applicable unless China “explicitly gave up its right to invoke” this provision (§ 7.138). On appeal, China argued that the panel had misconstrued paragraph 1.2 of its Protocol of Accession, which reads: “[t]his Protocol, which shall include the commitments referred to in paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement.” In China’s view, the reference to the “WTO Agreement” meant the “Agreement Establishing the WTO,” as well as all its annexes. It should be noted here that the AB has consistently understood the Agreement Establishing the WTO and its annexes as one agreement. In this vein, China was arguing that the obligations assumed in the protocol would live side by side with the rights and obligations reflected in the WTO Agreement, including Article XX of GATT as well. The AB followed neither the majority nor the minority opinion expressed at the panel stage. In § 5.46, it held that the term “WTO Agreement” was inconclusive: … the term “the WTO Agreement” in the second sentence of Paragraph 1.2 may refer to the Marrakesh Agreement, that is, to “the WTO Agreement” excluding the Multilateral Trade Agreements. At the same time, an examination of the term “the WTO Agreement,” as used throughout China’s Accession Protocol, indicates that the definition of “the WTO Agreement” contained in the preamble does not necessarily preclude the annexed Multilateral Trade Agreements from also falling within the scope of the term “the WTO Agreement” in some instances. This term may, depending on the specific context, include a reference to the annexed Multilateral Trade Agreements, or it may refer to the Marrakesh Agreement alone. For example, as the Appellate Body found in China–Publications and Audiovisual Products, the phrase “in a manner consistent with the WTO Agreement” in the introductory clause of Paragraph 5.1 of China’s Accession Protocol refers to “the WTO Agreement as a whole, including its Annexes.” In contrast, where a specific provision of “the WTO Agreement” is referred to, such as in the last sentence of Paragraph 18.1 (referring to “paragraph 5 of Article IV of the WTO Agreement”), the term is properly understood in its narrow sense as the Marrakesh Agreement. Therefore, the term “the WTO Agreement,” as used in China’s Accession Protocol, may have either a broad or a narrow connotation depending on the context in which it is used. (italics in the original)

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Of course, this view cannot be right. Paragraph 1.2 refers to all rights and obligations included in the Protocol of Accession. Why would China link it to only the Agreement Establishing the WTO, which concerns voting rights, and other institutional issues? Paragraph 18.1 of the Protocol of Accession refers to a particular provision, not to the “WTO Agreement” as such. Bond and Trachtman (2015) have criticized the approach by the AB for being overly legalistic. By focusing excessively on the wording in the Chinese Protocol of Accession, the AB was led to a result that should not have been condoned had it taken on board the object and purpose of this provision. Having committed this sin, the AB went on to provide in a hard-to-understand passage that the relevance of Article XX of GATT is a “matter of interpretation” in light of the customary rules of interpretation. What matters at the end of the day, in the eyes of the AB (§ 5.74), is the “objective link between an individual provision in China’s Accession Protocol and existing obligations under the Marrakesh Agreements and the Multilateral Trade Agreements” (italics in the original). Since it did not possess a sufficient factual basis, the AB could not conclude in any definitive manner whether an “objective link” actually existed between the provision in China’s Protocol of Accession on one hand, and Article XX of GATT on the other. The minority view expressed in the Panel on China–Rare Earths the correct view. Protocols of Accession make explicit the various terms and conditions for accession to the WTO. They complement the tariff promise that new WTO members make. Article II.7 GATT clearly states that schedules are integral parts of Part One of GATT. The minority view mentioned previously, to which we subscribe, leads to a construction of obligations included in Protocols of Accession akin to the obligations included in Parts One and Two of GATT. Article XX of GATT, which is in Part Two, mentions that “nothing in this Agreement” (and not simply in one part of GATT) will stop trading nations from invoking its provisions. 9.2.15 Article XX of GATT and Annex 1A Agreements The relationship between Article XX of GATT and Annex 1A Agreements is not explicitly discussed in the Agreement Establishing the WTO.87 The General Interpretative Note discusses only the relationship between GATT and Annex 1A Agreements and adopts, for all practical purposes, a lex specialis approach (as discussed in chapter 1). Lex specialis, nevertheless, presupposes that two bodies of law regulate the same specific transaction. What if only one does, or if one does so explicitly and the other in a rather implicit, unclear manner? This is roughly the situation when discussing the relevance of Article XX of GATT to justify violations of provisions included in Annex 1A Agreements. All Annex 1A agreements postdate GATT. Many of the Annex 1A Agreements keep, so to speak, the “umbilical cord” to GATT (either more or less explicitly). Some are lex specialis to a particular provision (e.g., the Agreement on Customs Valuation and Article VII of GATT). Others refer directly to Article XX of GATT, and yet others leave the matter unresolved. Under the circumstances, we are obliged to investigate the relevance of Article XX of GATT to each of the Annex 1A Agreements.

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9.2.15.1 Trade-Related Investment Measures (TRIMs) There should be no doubt that Article XX of GATT can serve as an exception to violations of Trade-Related Investment Measures (TRIMs). Article 3 of TRIMs explicitly states: “All exceptions under GATT 1994 shall apply, as appropriate, to the provisions of this agreement.” 9.2.15.2 Sanitary and Phytosanitary Measures (SPS) Article XX of GATT cannot serve as lawful exception to violations of the Sanitary and Phytosanitary Measures (SPS) Agreement, for various reasons. Article 2.4 of SPS reads: Sanitary or phytosanitary measures which conform to the relevant provisions of this Agreement shall be presumed to be in accordance with the obligations of the Members under the provisions of GATT 1994 which relate to the use of sanitary or phytosanitary measures, in particular the provisions of Article XX(b).

Two panels have confirmed in unambiguous terms that violations of the SPS Agreement cannot be healed through recourse to Article XX of GATT. The panel report on US–Poultry (China) includes the following passage, in § 7.482: where such an SPS measure has been found inconsistent with provisions of the SPS Agreement such as Articles 2 and 5, the disciplines of Article XX(b) cannot be applied so as to justify such a measure.88

9.2.15.3 Agriculture (AG) Article 21 of AG makes explicit reference to the application in principle of GATT 1994: 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. The Annexes to this Agreement are hereby made an integral part of this Agreement.

The question is whether, in light of this formulation, Article XX of GATT could be construed as an exception to obligations assumed under the AG Agreement? In Chile–Price Band, the question was raised whether Article XX of GATT could be construed as an exception to Article 4.2 AG, the provision explaining which measures should be “tariffied”; that is, be converted to tariffs as a result of the agreement reached in the Uruguay round.89 Article 4.2 of AG reads: Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties, except as otherwise provided for in Article 5 and Annex 5.

A footnote 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

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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 panel responded to the question asked here in the following manner (§ 7.68): In our view, therefore, footnote 1 was meant to exclude from the scope of Article 4.2 only those measures which are maintained on the basis of GATT 1994 provisions which allow Members, subject to certain conditions, to act inconsistently with their general obligations under GATT 1994. Article XIX regarding safeguard measures and Article XX regarding general exceptions, for instance, would in our view provide other examples of such “general, non-agriculture-specific provisions.”

It follows that measures maintained under Article XX of GATT are excluded from the scope of Article 4.2 of AG. Article XX of GATT thus, is not an exception to Article 4.2 of AG; it simply defines the limits of its coverage. The same should hold with respect to commitments regarding export subsidies. In fact, export subsidies are illegal, as the Subsidies and Countervailing Measures (SCM) Agreement makes clear. Farm subsidies are an exception to this prohibition, at least in principle. For the reasons mentioned later in this chapter, Article XX of GATT does not constitute an exception to the SCM Agreement. The same should hold with respect to the AG Agreement as well. 9.2.15.4 Agreement on Textiles and Clothing (ATC) The whole purpose of the Agreement on Textiles and Clothing (ATC) was to bring the field of textiles and clothing under the usual GATT disciplines following an agreed transitional period. The transitional period has lapsed, textiles products have been integrated into the WTO-system, and, as a result, the ATC is now defunct. The question of the applicability of Article XX of GATT thus, does not arise. 9.2.15.5 Technical Barriers to Trade (TBT) Nothing in the TBT Agreement explicitly discusses its relationship with Article XX of GATT. There are good reasons to believe, though, that Article XX of GATT cannot serve as an exception to violations of the TBT Agreement. The preamble to the agreement explicitly mentions all Article XX grounds that could be relevant to it: Recognizing that no country should be prevented from taking measures necessary to ensure the quality of its exports, or for the protection of human, animal or plant life or health, of the environment, or for the prevention of deceptive practices, at the levels it considers appropriate, subject to the requirement that they are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade, and are otherwise in accordance with the provisions of this Agreement. (italics in the original)

This explicit mention denotes that the framers of the TBT Agreement had in mind a construction where no recourse to Article XX of GATT would be possible.90

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In US–COOL, the panel held that the interpretation of the “necessity-requirement” featured in Article 2.2 of TBT should be symmetric to the interpretation of the same term under Article XX of GATT (§§ 7.667ff). In EC–Seal Products, the panel applied its analysis under Article 2.1 of TBT (the nondiscrimination requirement) as such when discussing the consistency of the EU measure under Article XX of GATT. Thus, it did not use Article XX of GATT as justifying grounds to a violation of Article 2.1 of TBT that it had already established anyway (§§ 7.648). The AB picked up from where the panel had left off. It did not explicitly state that Article XX of GATT could not serve as an exception to violations of obligations assumed under the TBT Agreement. It did everything but that, though, and its analysis should leave no doubt that in its view, Article XX of GATT could not serve as an exception to obligations assumed under the TBT Agreement. At stake was the interpretation of the term “likeness” (Articles I and III of GATT), and more precisely, the question whether detrimental impact on imported like goods could be justified if it stemmed from legitimate regulatory distinctions. The AB rejected arguments by the EU to this effect. It relied heavily on the fact that WTO members could invoke Article XX of GATT as a means to justify violating their obligations assumed under Articles I and III of GATT, whereas a similar possibility did not exist for the violation of Article 2.1 of TBT. In various paragraphs of its report (§§ 5.109, 5.110, 5.117, and 5.125), the AB underscored this point, holding that because of the possibilities offered through recourse to Article XX of GATT to justify detrimental impact, a narrow understanding of likeness in Articles I and III of GATT was warranted. In doing that, it juxtaposed the GATT provisions to Article 2.1 of TBT to which, implicitly at the very least and contextually anyway, Article XX of GATT could not serve as an exception. In US–Clove Cigarettes, the panel came close to discussing this issue, but in the end, it did not have to since the US (the defendant) had invoked Article XX of GATT only as an exception to Article III GATT, not as an exception to the TBT (§§ 7.305ff).91 The AB, without deciding the issue head on, drew some parallels between Article XX of GATT and the TBT Agreement, leaving us with the impression that the former could not serve as an exception to the latter (§ 317): A panel adjudicating a claim under Article 2.2 of the TBT Agreement must seek to ascertain to what degree, or if at all, the challenged technical regulation, as written and applied, actually contributes to the legitimate objective pursued by the Member. The degree of achievement of a particular objective may be discerned from the design, structure, and operation of the technical regulation, as well as from evidence relating to the application of the measure. As in other situations, such as, for instance, when determining the contribution of a measure to the achievement of particular objective in the context of Article XX of the GATT 1994, a panel must assess the contribution to the legitimate objective actually achieved by the measure at issue.

In two previous paragraphs, the AB had alluded to the conclusion that Article XX of GATT could not justify violations of the TBT Agreement (§§ 96, 101):

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The balance set out in the preamble of the TBT Agreement between, on the one hand, the desire to avoid creating unnecessary obstacles to international trade and, on the other hand, the recognition of Members” right to regulate, is not, in principle, different from the balance set out in the GATT 1994, where obligations such as national treatment in Article III are qualified by the general exceptions provision of Article XX. … Finally, we observe that the TBT Agreement does not contain among its provisions a general exceptions clause. This may be contrasted with the GATT 1994, which contains a general exceptions clause in Article XX. (italics in the original)

In a subsequent report (China–Rare Earths), the AB explicitly referred to these two paragraphs to find in the most categorical manner that WTO members could not justify their violations through Article XX of GATT (§ 5.56): For example, Article XX of the GATT 1994 has been found by the Appellate Body not to be available to justify a breach of the Agreement on Technical Barriers to Trade (TBT Agreement).

With this finding, the issue was resolved once and for all. 9.2.15.6 Customs Valuation (CV) The Customs Valuation (CV) Agreement is an elaboration of Article VII of GATT. As such, Article XX of GATT should, in principle, be applicable. Indeed, one could very well examine cases where Article XX(c) or (d) GATT could be potentially applicable in this context. 9.2.15.7 Preshipment Inspection (PSI) A similar response is warranted with the Preshipment Inspection (PSI) Agreement, especially since its preamble explicitly states that the principles and obligations of GATT 1994 apply here as well. 9.2.15.8 Rules of Origin (ROO) WTO members are free to decide on the origin of goods sold in their market and have to observe an obligation not to discriminate. As a result, we are squarely under the purview of GATT here. Consequently, Article XX of GATT should be applicable. 9.2.15.9 Import Licensing Agreement (ILA) The Import Licensing Agreement (ILA) explicitly states in its preamble that the provisions of GATT 1994 apply, in principle. One cannot exclude the applicability of various paragraphs of Article XX of GATT, such as paragraph (d), in the context of import licensing. 9.2.15.10 Antidumping (AD) The Antidumping (AD) Agreement is an elaboration of Article VI of GATT, and WTO panels (and the AB) have understood it to be a complement to, not a substitute for, Article VI of GATT.

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Claims regarding the possibility to justify a measure found to be inconsistent with the AD Agreement through recourse to Article XX of GATT have been raised in case law, albeit sporadically. In US–Customs Bond Directive, the AB entertained an appeal against a panel finding regarding the relationship between Article XX(d) of GATT and Article 18.1 of AD. The question before it was whether the former could serve as a justification for violating the latter (§§ 307, 310). The AB, for all practical purposes, avoided the issue by arguing that its response was assuming, arguendo, that a similar defense was available to the party invoking it (§ 318). In § 319, it explicitly stated that it was not prejudging this issue. The issue was also raised in EC–Salmon (Norway) where the EU argued that, in the context of an antidumping investigation, its system of fixed duties on imports of salmon from Norway was justified through Article XX(d) of GATT (§§ 4.94ff.). The EU was imposing minimum import prices (MIPs) on imports of salmon originating in Norway. It would add a “fixed price” if it feared that Norwegian exporters of salmon were attempting to circumvent the duties imposed. The EU had argued before the panel that, even if its system of MIPs and fixed rates was found be inconsistent with GATT, it was justified through Article XX(d) of GATT, since it was necessary to enforce an otherwise consistent measure (namely circumvention of lawfully imposed duties). The panel, mimicking the AB, sidestepped addressing the issue head on. The attitude of WTO members not to raise this issue more frequently is quite telling, although it provides no definitive response to the question that occupies us here. Still, the absence of dispositive case law notwithstanding, the better arguments lie with a negative response to this question, for the following reasons. Although its text does not say it in so many words, Article VI represents an exception to the basic principles set forth in GATT, particularly the MFN and the NT principles. Article VI does not oblige WTO members to have recourse to antidumping measures, but it does allow them to do so, and if they do, then they must observe a series of obligations (e.g., when calculating the dumping margin). Article VI, thus, is not an obligation assumed under GATT. This provision simply explains the conditions under which antidumping, a discretionary measure, may be used. Consequently, the AD Agreement also details a discretionary measure, not an obligation. On that basis, the applicability of Article XX of GATT to this agreement would ipso facto extend the limited discretion that WTO members enjoy when imposing AD measures beyond what had been contemplated by the framers of this provision. 9.2.15.11 Subsidies and Countervailing Measures (SCM) The SCM Agreement is one of the most complicated cases. The response provided in the previous subsection applies here too, in principle, and yet a number of additional points need to be made. The SCM Agreement regulates both countervailing duties and subsidization. With respect to the former, our response regarding antidumping duties finds application here as

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well. With respect to the latter, there is, of course, partial overlap between the list of Article XX of GATT and the list in Article 8 of SCM: “green” subsidies could come under Articles XX(b) and XX(g) of GATT.92 The negotiating record strongly indicates that the idea was to examine “green” subsidies in a self-contained manner in the SCM context. Documents by the Secretariat,93 the Chairman of the Negotiating Group on Trade Environment,94 as well as by various WTO members belonging to different alliances, such as New Zealand,95 India,96 and Austria on behalf of the European Free Trade Association (EFTA),97 strongly support the conclusion that Article 8 of SCM was not thought of as an add-on to Article XX of GATT, but rather as the only provision dealing with subsidies not bound by the disciplines embedded in the SCM Agreement. An affirmative response to this question (is Article XX of GATT an exception to the SCM Agreement?) would almost axiomatically fail the test of consistency with the chapeau of Article XX of GATT, which, as we saw earlier in this discussion, calls for the absence of discrimination across countries where similar situations prevail. It cannot have been the intent of WTO members to exclude payment of subsidies to foreigners through Article III.8 of GATT, only to reintroduce them through the back door (i.e., Article XX of GATT).98 9.2.15.12 Safeguards (SG) A negative response is equally appropriate in the case of the Safeguards (SG) Agreement, for the reasons developed in the previous two subsections. Were Article XX of GATT to be construed to allow, for example, higher duties or disproportionately large import quotas (in contravention of Article 5 of SG), then the limited ambit of the right itself to impose safeguards would have been altered. As we will see in chapter 4 of volume 2, case law has insisted that safeguards should be imposed only to the extent necessary to address a particular concern on a temporary basis and should be tailored to address that concern only, and nothing beyond that. Moreover, the absence of any practice to this effect suggests that WTO members have not understood Article XX of GATT as a legitimate exception to the imposition of safeguards. 9.3 9.3.1

National Security Balancing Trade Openness and Essential Interests

The title and the wording of Article XXI99 leave no room for doubt that it was intended to function as an exception to all obligations assumed under GATT. Indeed, participants found it unreasonable to request contracting parties to continue to do business with firms that transferred all or part of their profits from their sales to the so-called enemy. Rather, the discussions focused on the delineation of the exception, and they support the view that, through this provision, the GATT framers were performing a balancing act between their

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desire to achieve trade liberalization and their awareness that essential interests had to be safeguarded: We recognized that there was a great danger of having too wide an exception and we could not put it in the Charter simply by saying: “by any Member of measures relating to a Member’s security interests,” because that would permit anything under the sun. Therefore we thought it well to draft provisions which would take care of real security interests and, at the same time, so far as we could, to limit the exception so as to prevent the adoption of protection for maintaining industries under every conceivable circumstance… . It is really a question of balance. We have got to have some exceptions. We cannot make it too tight, because we cannot prohibit measures which are needed purely for security reasons. On the other hand, we cannot make it so broad that, under the guise of security, countries will put on measures which really have a commercial purpose.100

9.3.2

National Security in a Divided World

Trade policy, broadly defined, is in a way national security policy, as Schelling (1971, p. 737) observes, since it allows trading nations to have access to markets of goods that could be critical to advance national security concerns. This is not, though, what negotiators had in mind when drafting the security exception. Trade policy can be used either aggressively (export embargo) or defensively (import embargo) to promote national security concerns, with its effectiveness depending on the identity of the players and the circumstances of particular cases. Boycotts and economic sanctions do not seem to have functioned well, their extensive use (especially in the early post-WWII era) notwithstanding. Still, trading nations wanted to keep their options open in this regard and allow themselves maximum discretion in this respect.101 The world was coming out of WWII, and the alliances built during that time were quite recent, as was the diffidence to contract with nations from “the other side.” The rise of communism gave these feelings additional ammunition. The idea was that GATT should expand and eventually bring everyone under its auspices, but at the same time, an insurance policy against potential threats had been put in place. Western states established COCOM, an acronym for “Coordinating Committee for Multilateral Export Controls.” COCOM was established in 1947, during the Cold War, to put an embargo on various Western exports to eastern bloc countries, and numbered 17 member states: namely, Australia, Belgium, Canada, Denmark, France, Germany, Greece, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Turkey, the United Kingdom, and the US. In addition, there were a number of cooperating countries, such as Austria, Finland, Ireland, New Zealand, Sweden, and Switzerland. COCOM ceased to function on 31 March 1994, and the then-current control list of embargoed goods was retained by the member nations until the successor, the Wassenaar Arrangement, was established. The Wassenaar Arrangement (short for “Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies”) is an arms control convention with 33 founding states. It was established on 12 May 1996, in Wassenaar, the

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Netherlands. A Secretariat for administrating the agreement is located in Vienna, Austria. As of December 2006, 41 states participated.102 These arrangements were limited to exports of arms on which no tariff concessions had been contracted. Arms, nonetheless, are often produced through a variety of inputs of a purely commercial character, and the legal vehicle permitting COCOM (and later the Wassenaar Arrangement) countries to lawfully impose export restrictions on similar goods is Article XXI of GATT. Restrictions of this sort have never been challenged, arguably because of this article of GATT. 9.3.3

Practice

There have been a few instances where, although no panel was established, national security claims have been raised as a defense for trade-restricting measures. In 1949, Czechoslovakia complained that the US administration of its export licensing controls discriminated between destination countries, contrary to Articles I and XIII of GATT. The US delegate responded that the challenged measures were restrictions imposed for security reasons.103 The complaint was rejected by a roll-call vote of 17 to 1, with 3 abstentions.104 In 1961, when Portugal acceded to GATT, Ghana imposed an import embargo on Portuguese goods, arguing that it was justified by the situation in Angola, which posed (in the eyes of the government in Ghana) if not an actual, at least a potential, threat to its own national security. In Ghana’s view: “... under this Article each contracting party was the sole judge of what was necessary in its essentially security interest.”105 In 1970, the United Arab Republic (UAR) defended its boycotts involving Israel (both its primary boycott, against Israel itself, and its secondary boycott, against firms having relations with Israel) before the members of the Working Group on the Accession of the United Arab Republic by arguing that they were necessary to defend its national security, since otherwise, it would be contributing to the financing of Israel. Several members of the Working Group expressed sympathy for the view that the boycott was of a political and not a commercial nature.106 In November 1975, Sweden introduced an import quota for some footwear products. It sought to justify its measure through recourse to Article XXI of GATT, arguing that the country’s security policy necessitated the maintenance of minimum production capacity in vital industries. During the discussions that followed at the GATT General Council,107 many delegations expressed doubts as to the applicability of Article XXI of GATT in this context, and Sweden eventually notified the termination of its measures.108 In April 1982, the member states of the EU (then the European Economic Community/ EEC), Australia, and Canada suspended imports of products originating in Argentina into their territories. They all claimed that their measures were justified, invoking Article XXI of GATT to this effect. They all said that their actions were because of the situation addressed in UN Security Council Resolution 502—namely, the Falklands/Malvinas war between Argentina and the United Kingdom at the time.109

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Argentina complained that the measures violated a series of GATT provisions: namely, Articles I, II, XI, and XIII, and Part IV.110 During the discussions before the GATT General Council, the representative of the EU argued that it was the sole judge of the exercise of its rights under Article XXI of GATT. He added that the measures coming under the purview of this provision did not require notification, justification, or approval. The Australian delegate held similar views, adding that the CONTRACTING PARTIES, the highest GATT organ, had no powers to question that judgment. In the same vein, the Canadian delegate took the view that GATT had neither the competence nor the responsibility to deal with the political issue that had been raised.111 Argentina requested an interpretation of Article XXI of GATT. The decision was adopted in November 1982, five months after the challenged measures had been withdrawn. On 30 November 1982, the CONTRACTING PARTIES adopted a “Decision Concerning Article XXI of the General Agreement,” which read as follows: “Subject to the exception in Article XXI: a, contracting parties should be informed to the fullest extent possible of trade measures taken under Article XXI.” When action is taken under Article XXI, all contracting parties affected by such action retain their full rights under the General Agreement. The Council may be requested to give further consideration to this matter in due course.112 A dispute between the US and Nicaragua concerning the US import and export embargo against Nicaragua marked the first time that a dispute where national security was an issue was submitted to a panel.113 The US measure came as a response to the establishment of the Sandinistas government in Nicaragua and its overall attitude, which, in the eyes of the US government, was hostile to the US. Nicaragua was facing a two-way embargo from the US, which practically ended any trade relations between the two countries. Nicaragua complained that the US measure was in violation of Article XI of GATT. Even before the panel had been established, the US had argued that the measure was necessary to protect its national security interests. The US also claimed that an invocation of Article XXI of GATT was not justiciable. Before the panel, the US repeated the same arguments. The panel report on US–Nicaraguan Trade, which dealt with the complaint by Nicaragua, was never adopted; hence, it remains of limited legal value. It reveals, however, the opinio juris of an influential WTO member with respect to Article XXI of GATT. The motivation for the trade embargo is reflected in § 3.1 of the report, and in § 3.3, the impact that the US embargo had on trade between the two countries is discussed: 3.1 On 1 May 1985 the President of the United States issued an Executive Order which reads: … I, RONALD REAGAN, President of the United States of America, find that the policies and actions of the Government of Nicaragua constitute an unusual and extraordinary threat to the national security and foreign policy of the United States and hereby declare a national emergency to deal with that threat.

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I hereby prohibit all imports into the United States of goods and services of Nicaraguan origin; all exports from the United States of goods to or destined for Nicaragua, except those destined for the organized democratic resistance, and transactions relating thereto. I hereby prohibit Nicaraguan air carriers from engaging in air transportation to or from points in the United States, and transactions relating thereto. In addition, I hereby prohibit vessels of Nicaraguan registry from entering into United States ports, and transactions relating thereto. The Secretary of the Treasury is delegated and authorized to employ all powers granted to me by the International Emergency Economic Powers Act to carry out the purposes of this Order. The prohibition set forth in this Order shall be effective as of 12:01 a.m., Eastern Daylight Time, 7 May 1985 and shall be transmitted to the Congress and published in the Federal Register. … 3.3 According to calculations made by the GATT Secretariat almost all imports (more than 99 per cent) from Nicaragua into the United States are items for which the duties are bound under the General Agreement.

The parties agreed on special terms of reference for this panel (§§ 1.4–5): At the meeting of the Council on 12 March 1986, the Chairman announced that the following terms of reference of the Panel had been agreed: To examine, in the light of the relevant GATT provisions, of the understanding reached at the Council on 10 October 1985 that the Panel cannot examine or judge the validity of or motivation for the invocation of Article XXI:(b)(iii) by the United States, of the relevant provisions of the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (BISD 26S/211–218), and of the agreed Dispute Settlement Procedures contained in the 1982 Ministerial Declaration (BISD 29S/13–16), the measures taken by the United States on 7 May 1985 and their trade effects in order to establish to what extent benefits accruing to Nicaragua under the General Agreement have been nullified or impaired, and to make such findings as will assist the CONTRACTING PARTIES in further action in this matter (C/M/196, page 7). Following this announcement, the representative of the United States said the terms of reference had been drafted specifically for this case and would govern the Panel in this particular dispute. However, this should not imply that panels in other cases would not have to determine whether nullification or impairment existed. Only in this case did the United States not dispute the effects of a two-way trade embargo. Furthermore, the above terms of reference should not be interpreted to mean that any further action by the CONTRACTING PARTIES in this matter was necessary or appropriate. The representative of Nicaragua replied that, in his view, this Panel was not an exception; its functions would be those described in the 1979 Understanding (BISD 26S/211–218). Consequently, the CONTRACTING PARTIES would have to take appropriate action on the Panel’s report (C/M/196, page 8).

This panel was, consequently, lame from the moment of its birth. The main arguments of the parties focused on the standard of review to be applied by the panel. The parties presented radically opposing views. Nicaragua argued for a substantive review of the case, whereas the US argued for the opposite (§§ 4.5–7):

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Nicaragua stated that the United States could not properly rely on Article XXI: (b)(iii) in this case. This provision could be invoked only if two conditions were met: first, the measure adopted had to be necessary for the protection of essential security interest and, second, the measure had to be taken in time of war or other emergency in international relations. Neither of these conditions were fulfilled in this present case. Obviously, a small developing country such as Nicaragua could not constitute a threat to the security of the United States. The embargo was therefore not necessary to protect any essential security interest of that country. Nor was there any “emergency” in the sense of Article XXI. Nicaragua and the United States were not at war and maintained full diplomatic relations. If there was tension between the two countries, it was due entirely to actions by the United States in violation of international law. A country could not be allowed to base itself on the existence of an “emergency” which it had itself created. In that respect, Article XXI was analogous to the right of self-defence in international law. This provision could be invoked only by a party subjected to direct aggression or armed attack and not by the aggressor or by parties indirectly at risk. Nicaragua added that it must be borne in mind that GATT did not exist in a vacuum but was an integral part of the wider structure of international law, and that the General Agreement must not be interpreted in a way inconsistent with international law. The International Court of Justice had found that the embargo was one element of a whole series of economic and military actions taken against Nicaragua in violation of international law and that it was not necessary for the protection of any essential security interest of the United States, and it had declared that the United States must make reparation for the damage caused. The Security Council (Resolution 562) and the General Assembly (Resolution 40/188) of the United Nations had also condemned the embargo for infringing the principles of free trade and had explicitly demanded its rescinding. Consequently, Nicaragua held that the United States could not base itself on Article XXI in the particular case, and that the trade measures under consideration constituted coercive measures applied for political reasons in contravention of paragraph 7(iii) of the Ministerial Declaration of November 1982, which obliged contracting parties to abstain from taking restrictive trade measures, for reasons of a non-economic character, not consistent with the General Agreement. The United States said that Article XXI applied to any action which the contracting party taking it considered necessary for the protection of its essential security interest. This provision, by its clear terms, left the validity of the security justification to the exclusive judgment of the contracting party taking the action. The United States could therefore not be found to act in violation of Article XXI. In any case, the Panel’s terms of reference made it clear that it could examine neither the validity of, nor the motivation for, the United States” invocation of Article XXI:(b) (iii). The United States” compliance with its obligations under the General Agreement was therefore not an issue before the Panel. The United States added that it disagreed with Nicaragua’s assessment of the security situation but it did not wish to be drawn into a debate on a matter that fell outside the competence of the GATT in general and the Panel in particular. Nicaragua, while recognizing that it was not within the competence of the Panel to examine or judge the validity of or motivation for the invocation of Article XXI:(b)(iii), nevertheless felt that the Panel had sufficient legal material and other information before it to arrive at a conclusion on the consistency of the embargo with the provisions of the General Agreement. (emphasis in the original)

The panel, as already noted, was prevented by its terms of reference from addressing the justification for the embargo. It must have realized that a recommendation to the effect that the US withdraw the embargo would have had little effect in practice, given the clear indication by the US (repeated a number of times before and during the panel proceedings) that it would not comply with similar recommendations.

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Even if the panel had opted for a recommendation in favor of Nicaragua and the latter had requested authorization to impose countermeasures, this would have achieved little, given the two-way embargo by the US, which essentially insulated one country from the other. The presence or absence of countermeasures by Nicaragua would have had no effect under the circumstances. The panel report is of particular interest when discussing the standard of review that panels should employ in similar cases. Should they adopt a totally deferential standard, or could they legitimately sanction invocations of this provision that they view as abusive? The relevant passage says the following (§§ 5.16–18): ... The Panel recognized that the General Agreement protected each contracting party’s essential security interests through Article XXI and that the General Agreement’s purpose was therefore not to make contracting parties forego their essential security interests for the sake of these aims. However, the Panel considered that the GATT could not achieve its basic aims unless each contracting party, whenever it made use of its rights under Article XXI, carefully weighed its security needs against the need to maintain stable trade relations. The above considerations and the conclusions to which the Panel had to arrive, given its limited terms of reference and taking into account the existing rules and procedures of the GATT, raise in the view of the Panel the following more general questions: If it were accepted that the interpretation of Article XXI was reserved entirely to the contracting party invoking it, how could the CONTRACTING PARTIES ensure that this general exception to all obligations under the General Agreement is not invoked excessively or for purposes other than those set out in this provision? If the CONTRACTING PARTIES give a panel the task of examining a case involving an Article XXI invocation without authorizing it to examine the justification of that invocation, do they limit the adversely affected contracting party’s right to have its complaint investigated in accordance with Article XXIII:2? Are the powers of the CONTRACTING PARTIES under Article XXIII:2 sufficient to provide redress to contracting parties subjected to a two-way embargo? The Panel noted that in 1982 the CONTRACTING PARTIES took a “Decision Concerning Article XXI of the General Agreement” which refers to the possibility of a formal interpretation of Article XXI and to a further consideration by the Council of this matter (BISD 29S/23–24). The Panel recommends that the CONTRACTING PARTIES, in any further consideration of this matter in accordance with that Decision, take into account the questions raised by the Panel above.

The essence of the panel’s approach is captured in § 5.17, quoted previously. Although not explicitly stating it, the panel seemed opposed to the view that the invocation of Article XXI of GATT was not justiciable. In 1991, the EU, and then a host of other countries, withdrew preferential benefits from Yugoslavia in light of the civil war going on there, invoking Article XXI of GATT to justify these measures.114 Yugoslavia reacted by arguing that the measures could not be justified under that article. A panel was established to resolve the dispute,115 but due to the decision to freeze Yugoslavia’s membership of the WTO, it was discontinued.116 The notorious US Helms/Burton Act (known formally as the “Cuban Liberty and Democratic Solidarity Act”)117 emerges so far as the only dispute in the WTO era where Article XXI of GATT has been invoked. Through this act, the US imposed trade sanctions on

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products of Cuban origin, but also on products of other than Cuban origin, a percentage of the value added of which was Cuban (primary embargo). Eventually, the US, through a secondary embargo, stopped trading with nations that traded with Cuba. The EU complained that the US measure violated a series of GATT provisions. The official description of the EU complaint is reproduced here: The European Community and its Member States wish to convey to you a request for consultations with the United States of America pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), Article XXIII:1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994) and Article XXIII:1 of the General Agreement on Trade in Services (GATS) concerning the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996, other legislative provisions consolidated therein, and any implementing measures taken thereunder. The European Community and its Member States wish to express their profound concern about the apparent lack of conformity of certain aspects of this Act, including other legislative provisions consolidated therein and any implementing measures taken thereunder, to the international obligations of the United States under GATT 1994 and GATS. This concern relates in particular, but not necessarily exclusively, to the following aspects: The Cuban Democracy Act and its companion the Cuban Liberty and Democratic Solidarity Act contain a number of provisions which have the intent and effect to restrain the liberty of the EC to export to Cuba or to trade in Cuban origin goods, as well as to restrict the freedom of EC registered vessels and their cargo to transit through US ports. In addition, there are provisions which require the provisions of certificates in respect of trade in Cuban sugar. If such certificates are not provided, access to the US sugar quota is denied. Finally, there are measures which may lead to the refusal of visas and the exclusion of non-US nationals from US territory in a way which may contravene US commitments under GATS. The European Community and its Member States are of the view that these and comparable measures taken under the two laws mentioned above may not be in conformity with at least the following provisions: Articles I, III, V, XI, and XIII of GATT 1994 and Articles I, III, VI, XVI, and XVII of GATS and in particular in relation to the Annex on Movement of Natural Persons Supplying Services under the Agreement.118

Following inconclusive consultations, a panel was established to adjudicate the EU complaint. Subsequent to the establishment of the panel, the EU requested, in accordance with Article 12.12 DSU, the suspension of the panel’s work, to allow it to reach a mutually acceptable solution with the US.119 The panel suspended its work on 21 April 1997, and since no request was tabled to reconvene within one year, the authority of the Panel, as per Article 12.12 DSU, lapsed on 22 April 1998.120 The WTO was never notified of any mutually acceptable solution. Nor has the EU resurrected the original panel. The key question remains what is the standard of review that panels will employ in similar cases? Recall that the panel report on US–Nicaraguan Trade on the one hand opposed the view that Article XXI GATT was not justiciable, but on the other, did not reveal much about the standard of review it would be applying, precisely because of the idiosyncratic elements involved in this dispute. Moreover, this report remains unadopted, and is consequently of limited legal value.

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Recently, the panel on China–Raw Materials suggested that a very deferential standard is appropriate in national security cases (§ 7.276). This seems to be in line with the AB line of thinking that the degree of deference toward decisions by national authorities increases with the importance of the value pursued. Nothing, of course, is more valuable to a state than its own existence. Indeed, there are many instances where even investment decisions are being scrutinized on national security grounds. The Committee on Foreign Investment in the United States (CFIUS) routinely reviews attempts by Chinese companies to acquire or merge with US companies, or even simply invest in the US market.121 CFIUS was enacted in 1975 with the task to monitor the impact on foreign investment in the US. Following infrequent meetings in the early years where its members, as Wang (2015) has argued, could not decide whether they were supposed to deal with economic or political aspects of proposed mergers, CFIUS became the instrument to scrutinize proposed acquisitions of US companies by foreign investors thanks to the Exon-Florio provision of the Omnibus Trade and Competitiveness Act of 1988. This provision authorized the president to investigate whether acquisitions of US companies by foreign investors represented a risk for US national security. The advent of the Foreign Investment and National Security Act (FINSA) in 2007 further reinvigorated the review by CFIUS of the impact of acquisitions on national security. This act broadened the scope of ‘national security’ by subjecting to it ‘homeland security’ including its application to critical infrastructure. Wang (2015) explains how the widening of the mandate of CFIUS led to increased litigation. She also reports that following a landmark litigation (Ralls Corp. v. CFIUS), CFIUS decisions are now in part justiciable. Even within a domestic legal order though, like the US, judicial authorities will not second-guess the substantive aspects of the decision to act on national security. Under the circumstances, it seems reasonable to conclude that the findings of the Panel on China–Raw Materials echo a very reasonable standard of review, and most likely the predominant view of the WTO members as well. 9.4 Waivers 9.4.1 A Transitional Arrangement A WTO member may, under exceptional circumstances, request to be exempted from its obligations under the WTO. To this effect, such a member must submit a request for a waiver to the WTO membership. Article IX of the WTO Agreement sets out the procedure that must be followed: 3. In exceptional circumstances, the Ministerial Conference may decide to waive an obligation imposed on a Member by this Agreement or any of the Multilateral Trade Agreements, provided that any such decision shall be taken by three fourths of the Members unless otherwise provided for in this paragraph.

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(a) A request for a waiver concerning this Agreement shall be submitted to the Ministerial Conference for consideration pursuant to the practice of decision-making by consensus. The Ministerial Conference shall establish a time-period, which shall not exceed 90 days, to consider the request. If consensus is not reached during the time-period, any decision to grant a waiver shall be taken by three fourths of the Members. (b) A request for a waiver concerning the Multilateral Trade Agreements in Annexes 1A or 1B or 1C and their annexes shall be submitted initially to the Council for Trade in Goods, the Council for Trade in Services or the Council for TRIPS, respectively, for consideration during a timeperiod which shall not exceed 90 days. At the end of the time-period, the relevant Council shall submit a report to the Ministerial Conference. 4. A decision by the Ministerial Conference granting a waiver shall state the exceptional circumstances justifying the decision, the terms and conditions governing the application of the waiver, and the date on which the waiver shall terminate. Any waiver granted for a period of more than one year shall be reviewed by the Ministerial Conference not later than one year after it is granted, and thereafter annually until the waiver terminates. In each review, the Ministerial Conference shall examine whether the exceptional circumstances justifying the waiver still exist and whether the terms and conditions attached to the waiver have been met. The Ministerial Conference, on the basis of the annual review, may extend, modify, or terminate the waiver. 5. Decisions under a Plurilateral Trade Agreement, including any decisions on interpretations and waivers, shall be governed by the provisions of that Agreement.

A footnote to § 3 reads: “A decision to grant a waiver in respect of any obligation subject to a transition period or a period for staged implementation that the requesting Member has not performed by the end of the relevant period shall be taken only by consensus.” It follows that a waiver is a transitional multilateral authorization to deviate from agreed obligations. Its transitional character is underlined by the fact that all waivers will be reviewed annually, regardless of whether they have been granted for a multiyear period. WTO members must satisfy themselves during the review that the rationale for granting the waiver remains very much alive. As briefly alluded to previously, waivers can be granted for any reason that the requesting state finds appropriate. For example, the EU requested a waiver that would allow it to provide humanitarian assistance to Pakistan. The EU’s declared motive was humanitarian assistance, since Pakistan had suffered floods, and the EU was willing to accord Pakistan trade preferences as a means to help alleviate the crisis. Many developing countries initially opposed it because of the consequential preference erosion for their goods, but eventually conceded to its adoption.122 Waivers can also be requested on pure economic motives. In 1955, the US requested and obtained a waiver that allowed it to massively subsidize its farmers. We will be discussing it in more detail in chapter 8, volume 2. Waivers nevertheless, cannot be granted unless the statutory majority takes the view that the prevailing circumstances are genuinely exceptional. If that does not happen, no waiver is granted. In 1970, Greece requested a waiver from its obligation under Article I of GATT. It was running a $6.2 million credit in its trade balance with Russia (then the USSR) and was

Exceptions and Deviations from Obligations Assumed under GATT

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requesting a waiver that would allow it to introduce tariff quotas that would enable Russia to export goods to Greece at favorable rates. Greece stated that it was facing difficulties with its efforts to develop its economy, but it was still running basically liberal trade policies. It also argued that the trade effects would be minimal (since what it could import at favorable rates could not exceed its credit limit). The GATT CONTRACTING PARTIES rejected the Greek request. In Greece–USSR Tariff Quotas, the panel held that there was nothing exceptional in the situation as described by Greece (§ 13), and that at any rate, the waiver would create a dangerous precedent: it would be a deviation from Article I of GATT, the cornerstone of the agreement, and the tariff preferences would have been accorded to a nonmember (the USSR), thus inciting others to copy this example; the limited trade effects were not a mitigating factor in the panel’s view (§ 11).123 9.4.2 Waivers Are Justiciable Practice has led to conflicts across WTO members as to the overall justiciability of decisions to grant waivers, as well as the terms under which waivers have been granted. Case law has provided some answers in both respects. The Panel on US–Sugar Waiver dealt with this issue. The US had in place restrictions on raw and refined sugar, and had requested and obtained a waiver that would allow it to keep its restrictions in place. The waiver provided the US with substantial discretion without prescribing the specific measures that it would have to adopt (§ 5.9). The panel proceeded to examine the terms of the waiver and held that in effect, in light of the substantial discretion that the US enjoyed, it had not violated the terms of the waiver (§ 5.16). The Panel on EC–Bananas III was also called upon to address the EU argument that waivers124 cannot form the subject matter of a dispute before WTO adjudicating bodies. In rejecting this argument, the panel held that it had the requisite jurisdiction to interpret the contents of a waiver granted by the WTO members (§ 7.97). On appeal, the AB upheld this finding in the following terms (§ 167): The European Communities asserts that the Panel should not have conducted an objective examination of the requirements of the Lomé Convention, but instead should have deferred to the “common” EC and ACP views on the appropriate interpretation of the Lomé Convention. This assertion is without merit. The Panel was correct in stating: We note that since the GATT CONTRACTING PARTIES incorporated a reference to the Lomé Convention into the Lomé waiver, the meaning of the Lomé Convention became a GATT/WTO issue, at least to that extent. Thus, we have no alternative but to examine the provisions of the Lomé Convention ourselves in so far as it is necessary to interpret the Lomé waiver. We, too, have no alternative.

Having clarified that waivers are justiciable, the same panel went on to provide its understanding on the manner in which the terms of a waiver should be interpreted. This

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panel was requested to review whether the EU had respected the terms of the waiver that it had requested (and obtained) to treat imports of bananas from some WTO members [namely, the African, Caribbean, and Pacific (ACP) countries, a group of nations with which it had signed the Lomé Convention] better than imports from the rest of the world, in contravention of Article I of GATT. The precise question before the panel was whether Article XIII of GATT, a provision that had not been explicitly included in the waiver granted to the EU, was covered by the terms of the waiver. Although the panel held the view that a waiver should be construed narrowly, it went on to state that despite the fact that Article XIII of GATT had not been explicitly mentioned in the waiver, that provision nevertheless should be covered the same in light of the “effet utile” of the waiver (§§ 7.105–108). On appeal, the AB reversed the panel’s findings and held that the terms of a waiver cover only what has been explicitly reflected to in the decision (§§ 182–188). 9.4.3 Waivers in Force Table 9.1 provides a list of the waivers that have been granted since the advent of the WTO.125 Table 9.1 Waivers granted since 1 January 1995 Document

Title

Document Date

WT/L/932

General Council—Decision on Waiver Relating to Special Treatment for Rice of the Philippines—Waiver Decision of 24 July 2014 Ministerial Conference—Ninth Session—Bali, 3–6 December 2013— Operationalization of the Waiver Concerning Preferential Treatment to Services and Service Suppliers of Least-Developed Countries— Ministerial Decision of 7 December 2013 General Council—European Union—Application of Autonomous Preferential Treatment to Moldova—Extension of the Waiver—Decision of 26 November 2013 Extension of Waiver Concerning Kimberley Process Certification Scheme for Rough Diamonds—Decision of 11 December 2012 General Council—European Union Preferences for Pakistan—Waiver Decision of 14 February 2012 Introduction of Harmonized System 2012 Changes into WTO Schedules of Tariff Concessions—Waiver Decision on 30 November 2011 Cape Verde—Implementation of Article VII of GATT 1994 and of the Agreement on Customs Valuation—Decision of 3 May 2011 General Council—United States—Caribbean Basin Economic Recovery Act—Renewal of Waiver—Decision of 27 May 2009 General Council—United States—Andean Trade Preference Act— Renewal of Waiver—Decision of 27 May 2009 General Council—Preferential Tariff Treatment for Least-Developed Countries—Decision on Extension of Waiver—Adopted on 27 May 2009

25 July 2014

WT/L/918 ; WT/ MIN(13)/43 WT/L/903 WT/L/876 WT/L/851 WT/L/834 WT/L/812 WT/L/753 WT/L/755 WT/L/759

11 December 2013 27 November 2013 14 December 2012 22 February 2012 5 December 2011 4 May 2011 29 May 2009 29 May 2009 29 May 2009

Exceptions and Deviations from Obligations Assumed under GATT

491

Table 9.1 (continued) Document

Title

Document Date

WT/L/735

General Council—Senegal—Waiver on Minimum Values in Regard to the Agreement on the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 31 July 2008 General Council—Senegal—Waiver on Minimum Values in Regard to the Agreement on the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 28 July 2006 Senegal—Waiver on Minimum Values in Regard to the Agreement on the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 17 May 2004 Introduction of Harmonized System 1996 Changes into WTO Schedules of Tariff Concessions—El Salvador—Schedule LXXXVII—Decision of 24 July 2003 Waiver Concerning Kimberley Process Certification Scheme for Rough Diamonds—Decision of 15 May 2003 Introduction of Harmonized System 1996 Changes into WTO Schedules of Tariff Concessions—El Salvador—Schedule LXXXVII—Decision of 15 October 2002 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 15 October 2002 Côte d”Ivoire—Waiver on Minimum Values in Regard to the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 8 July 2002 El Salvador—Waiver on Minimum Values in Regard to the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 8 July 2002 El Salvador—Agreement on Implementation of Article VII of the GATT 1994—Decision of 13 May 2002 Introduction of Harmonized System 1996 Changes into WTO Schedules of Tariff Concessions—El Salvador—Schedule LXXXVII—Decision of 13 May 2002 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 13 May 2002 Haiti—Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 20 December 2001 Cuba—Article XV:6—Extension of Waiver—Decision of 20 December 2001 Dominican Republic—Minimum Values under the Agreement on Implementation of Article VII of the GATT 1994—Decision of 20 December 2001 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 31 October 2001 Thailand—Extension of the Transition Period for the Elimination of Trade-Related Investment Measures Notified under Article 5.1 of the Agreement on Trade-Related Investment Measures—Request for a Waiver—Decision of 31 July 2001 Madagascar—Agreement on Minimum Values in Regard of the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Request for a Waiver—Decision of 18 July 2001 Cameroon—Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Request for a Waiver—Decision of 8 May 2001 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 8 May 2001

6 August 2008

WT/L/655 WT/L/571 WT/L/525 WT/L/518 WT/L/486 WT/L/493 WT/L/475 WT/L/476 WT/L/453 WT/L/456 WT/L/470 WT/L/439 WT/L/440 WT/L/442 WT/L/428 WT/L/410

WT/L/408 WT/L/396 WT/L/399

2 August 2006 7 June 2004 4 August 2003 27 May 2003 18 October 2002 18 October 2002 12 July 2002 12 July 2002 17 May 2002 17 May 2002 17 May 2002 10 January 2002 10 January 2002 10 January 2002 7 November 2001 7 August 2001

26 July 2001 10 May 2001 10 May 2001

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Table 9.1 (continued) Document

Title

Document Date

WT/L/380/ Corr.1

European Community Preferences for Albania, Bosnia-Herzegovina, Croatia, the Federal Republic of Yugoslavia, and the Former Yugoslav Republic of Macedonia—Request for a Waiver for the Application of the EU Autonomous Preferential Treatment to the Countries of the Western Balkans—Decision of 8 December 2000—Corrigendum Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 8 December 2000 European Community Preferences for Albania, Bosnia-Herzegovina, Croatia, the Federal Republic of Yugoslavia, and the Former Yugoslav Republic of Macedonia—Request for a Waiver for the Application of the EU Autonomous Preferential Treatment to the Countries of the Western Balkans—Decision of 8 December 2000 Turkey—Preferential Treatment for Bosnia-Herzegovina—Request for a Waiver—Decision of 8 December 2000 EC/France—Trading Arrangements with Morocco—Extension of the Waiver—Decision of 17 July 2000 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 3 May 2000 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 4 November 1999 Peru—Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994—Decision of 15 July 1999 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 15 June 1999 Preferential Tariff Treatment for Least-Developed Countries—Decision on Waiver—Adopted on 15 June 1999 EC/France—Trading Arrangements with Morocco—Extension of Waiver—Decision of 9–11 and 18 December 1998 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 14 October 1998 Sri Lanka—Establishment of a New Schedule LXXVIII—Extension of Time-Limit—Decision of 24 April 1998 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 24 April 1998 EC/France—Trading Arrangements with Morocco—Extension of Waiver—Decision of 10 December 1997 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 22 October 1997 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 24 April 1997 Cuba—Article XV.6—Extension of Waiver—Decision of 14 October 1996 EC—The Fourth ACP—EC Convention of Lomé—Extension of Waiver—Decision of 14 October 1996 France—Trading Arrangements with Morocco—Extension of Waiver— Decision of 14 October 1996 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 18 July 1996 Guatemala—Establishment of a new Schedule LXXXVIII—Extension of Time-Limit—Decision of 18 July 1996 Malawi—Renegotiation of Schedule LVIII—Extension of Time-Limit— Decision of 6 February 1996

8 January 2001

WT/L/378 WT/L/380

WT/L/381 WT/L/361 WT/L/350 WT/L/337 WT/L/307 WT/L/302 WT/L/304 WT/L/294 WT/L/280 WT/L/266 WT/L/267 WT/L/250 WT/L/242 WT/L/213 WT/L/182 WT/L/186 WT/L/187 WT/L/171 WT/L/172 WT/L/131

13 December 2000 13 December 2000

13 December 2000 19 July 2000 8 May 2000 8 November 1999 23 July 1999 17 June 1999 17 June 1999 1 February 1999 20 October 1998 29 April 1998 29 April 1998 16 December 1997 29 October 1997 29 April 1997 18 October 1996 18 October 1996 18 October 1996 25 July 1996 25 July 1996 16 February 1996

Exceptions and Deviations from Obligations Assumed under GATT

493

Table 9.1 (continued) Document

Title

Document Date

WT/L/116

Guatemala—Establishment of a New Schedule LXXXVIII—Extension of Time-Limit—Decision of 13 December 1995 Trinidad and Tobago—Establishment of a New Schedule LXVII— Extension of Time-Limit—Decision of 13 December 1995 Zambia—Renegotiation of Schedule LXXVIII—Extension of TimeLimit—Decision of 13 December 1995 Malawi—Renegotiation of Schedule LVIII—Extension of Time-Limit— Decision of 15 November 1995 Caribbean Basin Economic Recovery Act—Renewal of Waiver— Decision of 15 November 1995 Guatemala—Establishment of a New Schedule LXXXVIII—Extension of Time-Limit—Decision of 31 August 1995 Trinidad and Tobago—Establishment of a New Schedule LXVII— Extension of Time-Limit—Decision of 31 August 1995

16 January 1996 16 January 1996 16 January 1996 24 November 1995 24 November 1995 15 September 1995 15 September 1995

WT/L/121 WT/L/123 WT/L/103 WT/L/104 WT/L/81 WT/L/87

9.5

Nonapplication

9.5.1 The GATT Regime and Its Rationale Article XXXV of GATT reads: 1. This Agreement, or alternatively Article II of this Agreement, shall not apply as between any contracting party and any other contracting party if: (a) the two contracting parties have not entered into tariff negotiations with each other, and (b) either of the contracting parties, at the time either becomes a contracting party, does not consent to such application.

To facilitate accession to (and thus, enlargement of) GATT, Article XXXV of GATT provided flexibility, in that it allowed acceding countries not to enter into contractual arrangements at all with some incumbent CONTRACTING PARTIES (Article XXXV of GATT). Article XXXV of GATT was added to GATT when the voting requirements for accession to GATT were lowered from unanimity to two-thirds of the incumbents (Article XXXIII of GATT).126 Initially, it had been drafted as part of Article XXXIII of GATT. It became an independent provision to underscore that a trading nation should not be obliged “to enter a trade agreement with another country without its consent.”127 Two countries could thus both acquire the status of a GATT contracting party without being bound by GATT at all in their inter se relations. Alternatively, the agreement, with the exception of Article II of GATT (tariff concessions), would be applicable between them.128 Without stating so, the hope must have been that the walls between states would eventually crumble as a result of common participation in the GATT proceedings and daily administration. The rationale for the inclusion of nonapplication in GATT has to do with the fact that the world was emerging from WWII and, except for the neutral countries,

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many potential candidates to accede to GATT had not yet healed the wounds from that war. It would have been politically unacceptable for them to have “business as usual” with yesterday’s enemies. Neither Germany nor Japan (the Axis powers) were original GATT contracting parties. Germany joined on 1 October 1951, and Japan only on 10 September 1955. Still, the original contracting parties wanted to keep their options open, and to this effect, contracting the nonapplication clause in GATT was meant to provide them with the insurance policy necessary to allow the expansion of GATT on the one hand, without obliging them to enter into trade relations against their will with the newcomers on the other. A number of contracting parties invoked Article XXXV of GATT against Japan: Australia (in 1964), Austria (1976), Barbados (1967), Belgium (1964), Benin (1972), Brazil (1957), Burundi (1972), Cameroon (1974), Central African Republic (1974), Chad (1971), Congo (1973), Cuba (1961), Cyprus (1962), France (1964), Gabon (1973), Gambia (1971), Ghana (1962), Guyana (1966), Haiti (1958), India (1958), Ireland (1975), Ivory Coast (1970), Jamaica (1972), Kenya (1977), Kuwait (1970), Luxembourg (1964), Madagascar (1969), Malaysia (1963), Maldives (1988), Mali (1993), Malta (1968), Mauritania (1968), Netherlands (1964), New Zealand (1962), Niger (1970), Nigeria (1975), Portugal (1972), Rhodesia and Nyasaland (1963), Rwanda (1970), Senegal (1975), Sierra Leone (1975), South Africa (1985), Spain (1971), Trinidad and Tobago (1966), Uganda (1970), the United Kingdom (1963), and Upper Volta (1970).129 9.5.2

Nonapplication in the WTO

During the Uruguay round of negotiations, it was judged that the rationale for the continued inclusion of the nonapplication clause still existed; consequently, it was decided that Article XIII should be included in the Agreement Establishing the WTO: This Agreement and the Multilateral Trade Agreements in Annexes 1 and 2 shall not apply as between any Member and any other Member if either of the Members, at the time either becomes a Member, does not consent to such application. Paragraph 1 may be invoked between original Members of the WTO which were contracting parties to GATT 1947 only where Article XXXV of that Agreement had been invoked earlier and was effective as between those contracting parties at the time of entry into force for them of this Agreement. Paragraph 1 shall apply between a Member and another Member which has acceded under Article XII only if the Member not consenting to the application has so notified the Ministerial Conference before the approval of the agreement on the terms of accession by the Ministerial Conference. The Ministerial Conference may review the operation of this Article in particular cases at the request of any Member and make appropriate recommendations. Non-application of a Plurilateral Trade Agreement between parties to that Agreement shall be governed by the provisions of that Agreement.

As we see, thus, the WTO regime includes two innovations: first, the possibility to invoke nonapplication only with respect to tariff concessions no longer exists; second,

Exceptions and Deviations from Obligations Assumed under GATT

495

Article XIII distinguishes between cases where nonapplication is invoked among original WTO members and cases where only one of the two is an original member. In the former case, the right to invoke this provision exists only for those WTO members that had invoked Article XIII of GATT and had not disinvoked it before the entry into force of the WTO on 1 January 1995. In the latter case, the invocation should take place before the approval of the protocol of accession of the new WTO member. The nonapplication clause, thus, goes far beyond a classic reservation to a treaty. Reservations, in the VCLT sense of the term, are meant to vary the legal force of particular provisions for those introducing them (the WTO Agreement does not allow reservations to be entered at all). 9.5.3

List of Instances of Nonapplication

Table 9.2 lists the members that have invoked the nonapplication clause under Article XIII of the WTO Agreement as of the entry into force of the WTO. Table 9.2 Instances of application of Article XIII of the WTO Agreement

Invoked By

In Respect Of

Date of General Council Decision on Accession

United States

Romania

N/A

United States

Mongolia

United States United States

Kyrgyz Republic Georgia

18 July 1996 WT/ ACC/MNG/10 14 October 1998 WT/ACC/KCZ/28 6 October 1999 WT/ACC/GEO/32/

United States

Moldova

El Salvador

China

Turkey

Armenia

United States

Armenia

10 December 2002 WT/L/ARM/23

United States

Viet Nam

7 November 2006 WT/L/662

8 May 2001 WT/ ACC/MOL/39 10 November 2001 WT/ACC/CHN/49 and Corr.1 10 December 2002 WT/L/ARM/23

Date of Invocation

Withdrawal

WTO document dated 27 January 1995 indicates that the United States informed the directorgeneral on 30 December 1994 WT/L/11 Communication dated 11 July 1996 WT/L/159 Communication dated 9 October 1998 WT/L/275 Communication dated 30 September 1999 WT/L/318 Communication dated 2 May 2001 WT/L/395 Communication dated 5 November 2001 WT/L/429 Communication dated 29 November 2002 WT/L/501 Communication dated 3 December 2002 WT/L/505 Communication dated 3 November 2006 WT/L/661

WT/L/203

WT/L/306 WT/L/363 WT/L/385 Still in force Still in force Still in force WT/L/601 WT/L/679

496

9.6

Chapter 9

Concluding Remarks

There is not much to add to the discussion in this chapter of national security, waivers, and nonapplication: national security is de facto nonjusticiable; nonapplication is de jure nonjusticiable; and waivers are ultimately a question of alliances that can be formed to support the request. At any rate, practice with respect to these three instruments is by now scarce, by any reasonable benchmark. There is a lot that can be said about Article XX of GATT, though. The previous chapter argued that legal standards employed in the body of Article XX of GATT (e.g., “necessity”) could usefully find application in the context of Article III of GATT as proxies aiming to distinguish wheat from chaff. Here, we have asked the more general question whether Article XX of GATT should continue to be construed as an exception to Article III of GATT and, if so, under what circumstances. The reason for asking that question is this: Both provisions have a nondiscrimination clause. How can a measure that has been found to be discriminatory under Article III of GATT be justified through Article XX of GATT then, the chapeau of which includes a nondiscrimination test, as already discussed here? In US–Gasoline, the AB addressed this issue directly and found that the legal tests for consistency with the two provisions (Articles III and XX of GATT) are not identical (p. 21): The enterprise of applying Article XX would clearly be an unprofitable one if it involved no more than applying the standard used in finding that the baseline establishment rules were inconsistent with Article III:4. That would also be true if the finding were one of inconsistency with some other substantive rule of the General Agreement. The provisions of the chapeau cannot logically refer to the same standard(s) by which a violation of a substantive rule has been determined to have occurred. To proceed down that path would be both to empty the chapeau of its contents and to deprive the exceptions in paragraphs (a) to (j) of meaning. Such recourse would also confuse the question of whether inconsistency with a substantive rule existed, with the further and separate question arising under the chapeau of Article XX as to whether that inconsistency was nevertheless justified. One of the corollaries of the “general rule of interpretation” in the Vienna Convention is that interpretation must give meaning and effect to all the terms of a treaty. An interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility. (italics in the original)

Where exactly lies the difference between the two tests? This is the response by the AB, from the same report (p. 26): We have above located two omissions on the part of the United States: to explore adequately means, including in particular cooperation with the governments of Venezuela and Brazil, of mitigating the administrative problems relied on as justification by the United States for rejecting individual baselines for foreign refiners; and to count the costs for foreign refiners that would result from the imposition of statutory baselines. In our view, these two omissions go well beyond what was necessary for the Panel to determine that a violation of Article III:4 had occurred in the first place.

Exceptions and Deviations from Obligations Assumed under GATT

497

A closer look at this paragraph, nevertheless, raises more questions than answers. Why would the first grounds invoked necessarily lie beyond Article III of GATT? Assume that this claim had been discussed in the context of Article III.4 of GATT. Would the outcome have been any different? For example, suppose that in Venezuela, some producers meet the US standard, and some do not. Would the US be justified under Article III.4 of GATT in adopting a countrywide baseline? This would hardly be so, in light of the case law discussed in the previous chapter. More generally, what is the basis for this statement? Is it a question of degree? In this vein, some discrimination would be allowed under Article XX of GATT—namely, discrimination that is justified or is not arbitrary—whereas none would be tolerated under Article III of GATT. This cannot be the case, for it is the same AB that in Brazil–Retreaded Tyres held that there is no effects test in the chapeau, as there is no effects test in Article III of GATT (US–Superfund). In short, case law has failed to explain the difference between the two discrimination tests. Let us look now at the cases where Article XX of GATT has been raised as defense to a violation of a GATT provision. The only instance so far where the defendant prevailed is US–Shrimp. In this case, nevertheless, the US did not advance arguments under Article III of GATT. It did so in US–Tuna (Mexico), but the panel refuted the arguments. Arguing that Article III of GATT covers only measures that regulate products directly and not its production process methods (PPMs), the panel held that it was inapplicable in the present dispute (§§ 5.8–16).130 All this, to state that in all cases where a violation of Article III GATT had been established, no successful justification through Article XX of GATT has been possible. We will never know what the outcome in US–Shrimp would have been had the dispute been argued under Article III of GATT (as it should have done). One can legitimately speculate, nevertheless, that the US would have prevailed under Article III.4 of GATT, and thus, there would have been no need to refer to Article XX of GATT. Does this mean that there can never be a case where a violation of Article III GATT can be justified under Article XX of GATT? The short answer is no. There are cases where Article XX could serve as an exception to Article III of GATT. One such example is when like/DCS goods are treated asymmetrically because the importing state wants to punish goods not exported to its market. An illustration is warranted in this context. Assume that Home imports watches from Foreign that are like products to its domestic watches. Foreign also produces cement in an environmentally unfriendly manner but does not export cement products to Home. Home respects high environmental norms when producing cement, and it suffers from the environmental pollution in Foreign. It decides to impose a 150 percent VAT on Foreign’s watches, when the tax on its own watches (as well as watches originating in countries that produce cement in a similarly environmentally friendly manner) is only 15 percent. Home

498

Chapter 9

will undeniably be violating Article III of GATT. It will seek justification for its measure in Article XX of GATT. In light of the previous discussion, it will easily pass the test of substantive consistency of its measure with Article XX(g) of GATT, and will then have to show compliance with the chapeau. Per the construction of our example, Home treats in a symmetric manner products originating in countries where similar conditions prevail. It treats Foreign differently, but the conditions prevailing there are different from the conditions prevailing in Home. In other words, there is room to construct Article XX of GATT as an exception justifying violations of Article III of GATT when the basis for discriminatory treatment is not the imported item, but another good that is not exported to the WTO member adopting measures to this effect.

Notes

Introduction 1. New York: Farrar, Straus, and Giroux (2014), at p. 9.

Chapter 1 1. See Aaronson (1999). 2. Bernstein (2008) offered in a few hundred pages an excellent and eminently readable account of the history of trade. 3. This treaty was aimed at reducing the potential of war between the two frequently belligerent nations at that time by liberalizing trade between them. It was named after its originators, Richard Cobden and Michel Chevallier. 4. The official name was the “International Convention for the Abolition of Import and Export Prohibitions and Restrictions.” Cho (2015) discussed the evolution of trade issues since the 1920s and their influence in the shaping of GATT. 5. The US participated even though it had not signed the Charter of the League of Nations, since nonmembers had been invited as well. It signed the final document. 6. Quoted in Runciman (1927, p. 472). For details on the 1927 World Economic Conference, see also Charnovitz (1991). 7. Colijn (1927, p. 140). 8. Foreign Relations 1933, vol I, p. 784: the UK withdrawal is reflected on p. 783, and the US withdrawal on pp. 784ff. 9. There are dozens of accounts regarding the Great Depression in the US following 1929. Kindleberger (1986b) stands out as probably the leading work in this area. Eichengreen (2015) draws parallels between the Great Depression of 1929 and the “Great Recession” of 2007–2008. 10. In Keynes (1919), the eminent British economist who participated in the Versailles Conference that followed the end of WWI as a delegate for the UK government, argued for a “generous” peace, predicting that the downfall to which Germany was condemned as a result of the adverse terms of peace that it had to accept would have nefarious consequences for Europe and the world. (He turned out to be right, unfortunately.) In a similar vein, President Wilson was calling for “peace without victory.” Howe (1998) discusses in considerable detail the history of UK trade policy from the repeal of the Corn Laws (1846)—a measure in force in the UK from 1815 to 1846, which imposed restrictions and tariffs on imported grain in order to favor domestic producers—to 1946, the beginning of the GATT negotiation. 11. Ahamed (2009), in his excellent account, reported that Roosevelt’s decision was not unanimously agreed to within his administration either. As he stated (pp. 461–462): “With a chuckle, Roosevelt turned to his aides and said “Congratulate me. We are off the gold standard” … “At that moment hell broke loose in the room,”

500

Notes

remembered Robert Moley. Herbert Feis, the economic adviser to the State Department, looked as if he was about to throw up. Warburd and Douglas were so horrified that they began to argue with the president, scolding him “as if he were a perverse and particularly backward schoolboy. Warburd declared that the legislation was completely hare-brained and irresponsible and would lead to “uncontrolled inflation and complete chaos. Impertubable as ever, Roosevelt bantered good-naturedly with them, insisting that going off gold was the best way to lift prices and that unless they did something to reflate, Congress would take matters in its own hands.” 12. The US delegation had not entered the conference with a resolve to go out of its way in order to make a meaningful agreement happen. Runciman (2013) put it very well when he stated that the US delegation were instructed “to reach whatever agreements were possible and not those that were impossible” (p. 98). 13. Remarkably, as Dam (2004) explained, the majority of US congressmen considered tariffs to be a domestic issue as late as 1916. Similar views, of course, would not lend support to an international negotiation on trade liberalization. 14. US Department of State, Pub. No 1660, Commercial Policy Series 71 (1941). 15. See Dam (1970), Gardner (1956), Hoekman and Kostecki (2009), Hudec (1975), Jackson (1969), Matsushita et al. (2006), Trebilcock and Howse (2005), Van den Bossche (2005), Wilcox (1949), and Zeiler (1999). 16. The UN (or a form of it, at least) was in place before the end of WWII, of course, but nations, wanting to signal the beginning of a new era, celebrated its advent in 1945 at the end of WWII; see Plesch (2011). 17. Henry Cabot Lodge used to say that the UN system was designed to avoid hell, but it was no guarantee of heaven. 18. The IMF was inspired, but it did not correspond exactly to Keynes’s idea for a Clearing Union, which was aimed at ensuring that countries ran neither deficits nor surpluses; see Steil (2013), and Eichengreen (2011), who discussed various aspects of the negotiation and the personalities involved. 19. Two proposals were discussed at Bretton Woods: Harry Dexter White’s International Stabilization Fund, and Keynes’s International Clearing Bank. Both plans envisioned a reduction of tariffs and trade barriers, but not the establishment of a multilateral trade institution, and included elimination of export subsidies: White’s plan requested specific commitments from countries, and Keynes’s the elimination of only egregious, discriminatory practices; for more details, see Steil (2013, pp. 147ff). Jackson (1969). Diebold (1993, p. 335) mentions that at the time, it was common to refer to the ITO as “the third leg of the Bretton Woods stool.” In his classic study, Musgrave (1959) suggested that government activity had three functions: achieving macro-stabilization, income redistribution, and efficient resource allocation. In a way, the Bretton Woods system complemented by the ITO corresponds to this idea: the IMF stabilizing, the WB aiming to ensure equity, and the ITO encouraging efficient resource allocation. 20. In neither the ITO nor GATT was there any mention of “free trade”: the term was politically untouchable at the time; see Diebold (1993, p. 336). 21. This was, of course, far from being an original idea. Montesquieu already had expressed similar thoughts, affirming: “… the natural effect of commerce is to lead to peace. Two nations that trade together become mutually dependent: if one has an interest in buying, the other has one in selling; and all unions are based on mutual needs” (quoted in Hirschman (1977, p. 80). Montesquieu went so far as to state that “… commerce … polishes and softens (adoucit) barbarian ways as we can see every day” (quoted in Hirschman (1977, p. 60). Curiously, it was Smith who, while agreeing (implicitly) with Montesquieu, held in his pre–Wealth of Nations work that similar tendencies were not welcome, arguing that commerce led to debilitating luxury and corruption [Hirshman (1977, p. 106)]. This was a very lively debate, as Hirschman (1977, pp. 56ff.) narrates in an exemplary manner. Freedom of trade, featured as Point 3 in the Woodrow Wilson’s “Fourteen Points,” is discussed by Runciman (2013, pp. 46ff.). 22. Hull (1948, pp. 81ff). 23. What follows in this subsection draws on Irwin et al. (2008). Tooze (2014, pp. 15ff.) traced these ideas in the three “Notes” written by Secretary of State John Hay. The “Open Door” policy endorsed by Hay effectively meant equality of access to goods and capital, and was thus running against the essence of the inherently discriminatory imperial preferences. 24. This was the 1940s, and investment was far from liberalized around the world. The term “supply chains” did not appear in any policy dictionary: US companies could not easily delocalize in a Commonwealth country and profit from the imperial preferences.

Notes

501

25. This is so because, as will be described in more detail later in this chapter as well as in chapters 3 and 4, a pair of countries negotiates each time a particular tariff concession (e.g., Home promises to reduce its tariffs in widgets, if Foreign does the same with respect to a different good), and the outcome of the agreed reductions is extended to all trading nations participating in the overall negotiation. Institutional mechanisms mitigating free riding, such as reciprocity and the principal supplier rule, were introduced in the GATT system. It is plausible to argue, nevertheless, that they did not exhaust the potential for free riding, which was very much a possibility for these countries that could not affect the terms of trade. 26. Hawkins (1951, pp. 81ff); Miller (2000, pp. 10ff). 27. Other delegates that did not have as much as the US to lose from unconditional MFN expressed sympathetic views. The Belgian delegate Mr. Suetens was quoted as stating that “a conditional clause would hamper the restoration of a multilateral trade system,” UN Document E/CONF.2/C.3/SR.5, at pp. 3–4. As the subsequent chapters of this book will describe in more detail, a number of mitigating factors (such as the principal supplier rule) reduced the potential for free riding. 28. Through the 1932 Ottawa Agreements (between the UK on the one hand and Australia and New Zealand on the other), and the 1937 bilateral UK-Canada Agreement, the UK undertook to give preferential treatment to imports from the Dominions, essentially through tariffs. For some meat products, preferences were not tariffary, but exemptions from quantitative restrictions imposed by the UK: the UK secured eventually provisions in Article XIV.5 of GATT to cover for these arrangements; see also GATT Document MTN.TNC/LD/W/1 of December 18, 1992, at pp. 2ff. 29. Quoted in Gardner (1956, p. 19). 30. Irwin et al. (2008) reported that this draft impressed UK administrators in high positions, who requested and obtained Meade’s move to the Trade Department to work with them on the upcoming trade negotiation (as envisaged in the Atlantic Charter). Meade’s contribution to economics have been heralded by Johnson (1978). Robbins (1934), the other leading member of the UK delegation, also advocated reduction of trade restrictions as the proper recipe to address the problems encountered in the post—Great Depression era; see also Burgin (2012, pp. 25ff.). 31. There were in fact three 1938 agreements, since Canada also participated. Two new agreements were signed (UK-US; Canada-US), whereas the 1937 agreement between Canada and the UK was substantially amended. They did not manage, nonetheless, to go very far in terms of establishing a comprehensive framework to negotiate trade issues. Drummond and Hillmer (1989, pp. 124ff.) took the view that this meeting was meant to show Nazis in particular that democratic states could cooperate. Because of the shallowness of the commitments entered, the three agreements did not manage to prevent or even delay the war. The two authors juxtapose these events to the post-WWII cooperation on the trade front, and argue that having experienced WWII, nations would be prepared to go much further a few years later when negotiating GATT. Through these agreements, Canada became even more integrated into the North American market, the presence of an Anglophile prime minister in Mackenzie King notwithstanding. 32. Steil (2013, p. 14). 33. In Churchill’s inimitable expression, Lend Lease was “the most unsordid act in the whole of recorded history,” quoted in Steil (2013, p. 107). Wolman (2011) discusses the US trade policy in the 19th and early 20th century and how the foundations of the modern liberal system were laid. 34. Steil (2013, pp. 116ff.). 35. See Discussions Regarding Post War Economic and Financial Arrangements, Foreign Relations, 1942, vol. 1, at pp. 163ff., and especially at p. 168. 36. The official name of this document was “Joint Declaration by the President and the Prime Minister”; “Atlantic Charter” is the colloquial name that made the agreement between Roosevelt and Churchill famous. The Atlantic Charter had a content that went well beyond trade: it endorsed self-determination for all nations, promoted global economic cooperation, and reflected a commitment by the two governments to avoid territorial gains following WWII. 37. Quoted in Wilson (1991, p. 164). Churchill boasted, “I am glad that it should be on the record that the substance and spirit of what came to be called the ‘Atlantic Charter’ was in the first draft a British production cast in my own words” [quoted in Steil (2013, p. 119)]. 38. Quoted in Irwin et al. (2008, p. 17).

502

Notes

39. Irwin (2005) explained that, prior to the late 1940s, there was no generally held view (at least in the US) that the government was responsible for maintaining full employment and for avoiding recessions. However, the idea that the government should take steps in this direction was not unknown, as this discussion also evidences. It was the Council of Economic Advisors (CEA), established by the US Employment Act of 1946, that provided the watershed: the government was explicitly assuming responsibility for macroeconomic management. 40. Steil (2013, pp. 122ff.). 41. Both quoted by Steil (2013, p. 123). 42. “Proposals for the Expansion of World Trade and Employment Developed by a Technical Staff within the Government of the United States in Preparation for the International Conference on Trade and Employment and Presented for Consideration by the Peoples of the World,” Department of State, Publication 2411, 1945. 43. The official title of the publication was “Suggested Charter for an International Trade Organization of the United Nations,” Department of State 2508, 1946. The subtitle was “An Elaboration of the Proposals for the Expansion of World Trade and Employment Developed by a Technical Staff within the Government of the United States in Preparation for the International Conference on Trade and Employment and Presented for Consideration by the Peoples of the World.” The subtitle, thus, makes the link to the 1945 Proposals explicit. Echoing the Proposals, the Suggested Charter did not reproduce the Atlantic Charter verbatim; rather, it was based on it. The UK reacted strongly to the Suggested Charter; in the words of the UK delegate, Mr. Shackle, “it was well known that his country had expressed basic agreement with the United States proposals for expansion of World Trade and Employment. The draft charter was based on that document, but deviated from it in some respects, and therefore he would have some amendments to make.” UN Document E/PC/T/C.II/3 at p. 11. 44. Documents on Australian Foreign Policy (DAFP) 10, 174–6. 45. After reading the draft US charter in September 1946, Meade (1990, p. 327) wrote: “A grand sign of the intention, at least of the Truman Administration, really to take this all seriously; and I personally confess that I am rather glad to hear that they propose next week to publish the whole draft charter, though the official view here is that this is dangerous since it will frighten off a number of countries. On the contrary, I believe now that anything which brings it all nearer to finality is to the good.” 46. Foreign Relations Series of the United States (FRUS) 1946, I, 1349. 47. UN Document E/PC/T/C.II/3 at p. 5. 48. The RTAA was met with a lot of skepticism in some quarters: Aaronson (1999) reported that many held the view that trade protectionism protected US jobs: to facilitate its adoption, RTAA was thus portrayed as a merely temporary measure, not as a permanent feature in the US legal arsenal. 49. The experiences from the 1927 World Economic Conference, where it was felt that the process, its eventual success notwithstanding, was slowed down by the number of invitees, must have had an influence on this development. Irwin et al. (2008) discussed this issue in detail. 50. The USSR was, of course, hardly a like-minded country. It was felt, though, that an invitation had to be issued—or, probably, it was issued because no one thought the Soviets would accept—which turned out to be correct [Irwin et al. (2008)]. 51. The full name of this body was the Preparatory Committee for the UN Conference on Trade and Employment. 52. See Charnovitz (1995) and Drache (2003). 53. Diebold must have been right. In his foreword to Wilcox (1949, pp. vii–viii), Clayton stated: “… we might have decided to postpone our proposals until things got back to normal. But we knew, if we did so, that nations might set up a whole series of new restrictions that the world might never succeed in bringing down.” 54. “Summary Report of the Work of the Interim Drafting Committee of the Preparatory Committee of the International Conference on Trade and Employment,” of March 7, 1947 (on file with the author). 55. On pp. 16ff., it said that the UK delegation was “much more cooperative at the London meeting,” and that “the Indian delegation did not, as at London, press for destructive amendments.” He was caustic when describing the Brazilian and Chilean delegates being unfamiliar with the subject matter of the negotiations, while stating that “the attitude of Brazilians was at times hostile.” 56. §2 of the Drafting Committee of the Preparatory Committee of the UN Conference on Trade and Employment, Draft GATT, E/PC/T/C.6/85 of February 15, 1947. 57. See 55 United Nations Treaty Series (UNTS) 187 (1947). 45,000 tariff concessions were negotiated in the context of 123 bilateral tariff negotiations—that is, roughly $10 billion worth of trade; see Drache (2003),

Notes

503

Williams (2014). In Geneva, negotiations on substantive issues continued, since some matters continued to remain unresolved, as will be discussed later in this chapter. 58. See UN Document E/PC/T/33. 59. On the origin of reciprocity in the GATT negotiations, see Irwin (2002). Reciprocity for some delegates was the paramount principle governing negotiations—even more important than nondiscrimination. The Brazilian delegate, Mr. Parangua, is quoted stating that “reciprocity should be considered more important than non-discrimination”; nevertheless, mindful that bargaining power matters in bilateral negotiations, he urged that “tariffs should be negotiated on a multilateral rather than bilateral basis” (see UN Document E/PC/T/C.II/3 at p. 7). 60. Steil (2013, p. 314). 61. In principle, reservations to the PPA were possible, although, as US delegate John Leddy remarked, they would fly against the very nature of the PPA, a transitional arrangement par excellence, E/PC/T/TAC/PV/22 of September 17, 1947. The UK managed to grandfather its imperial preferences by virtue of Article I.2 of GATT: the term “grandfathering” suggests that preexisting legislation trumps any obligations assumed under GATT. 62. See UNTS 308, 1 (a) and (b) (1947). 63. A good example is the US countervailing duty law, which did not require a determination of material injury as required by Article VI of GATT. The US agreed to include an injury requirement in its domestic legislation when the so-called 1979 Tokyo round Subsidies Code was agreed; see Graham (1979). 64. “Havana Charter” was the official name of the ITO Charter that, as explained later in this chapter, never saw the light of day. However, this clause has no legal relevance today, as trading nations are required to fully observe the obligations included in Part II of GATT. 65. Williams (2014) mentions that eight among them were considered “key” players, namely: Australia, Belgium, Canada, France, Luxembourg, the Netherlands, the US, and the UK. This was because these nations represented 85 percent of trade of parties to the agreement and roughly 50 percent of world trade at the time. 66. Summary Report of the Work of the Interim Drafting Committee of the Preparatory Committee of the International Conference on Trade and Employment,” of March 7, 1947 (on file with the author). 67. See the discussion on this issue later in this chapter. 68. Hawkins was the head of the State Department’s Division of Commercial Policy. 69. Penrose (1953, pp. 12ff and 90ff) highlights the role that eminent economists played in drafting GATT. 70. Remarkably, they also produced a brief text that took into account the number and the difficulty of the issues involved, as explained later. Probably inadvertently, negotiators echoed the creed of James Madison, as expressed in Federalist Paper no 62 (The “Federalist Papers,” The Senate for the Independent Journal, Wednesday February 27, 1788): “it will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.” The brevity of the GATT text definitely contributed to its coherence. 71. Irwin et al. (2008) provided a comprehensive data of similar sources. 72. Hart (2002, pp. 133ff). 73. Irwin (2011). Reed Smoot was a Republican senator from Utah, and Willis Hawley, a Republican member of the House of Representatives from Oregon, was chairman of the House Ways and Means Committee from 1928 to 1931. Smoot was an apostle in the Mormon Church and was known as the “apostle for protection,” since he was one fo the two instigators of the bill that introduced the highest tariffs ever in US economic history; see Irwin (2011, p. 44). 74. The Fordney–McCumber Tariff Act (named after its proponents, Joseph Fordney, chair of the House Ways and Means Committee, and Porter McCumber, chair of the Senate Finance Committee) was a pro-business measure, whereby the US would impose tariffs on imported goods in order to help domestic factories and farms. Signed into law by President William G. Harding in 1921 (and entered into force in 1922), the act raised duties on average by 60 percent. Harding was thus adopting a trade policy that was hardly consonant with the policy of low tariffs practiced previously by President Wilson. The act also included a threat of punitive tariffs to extract promises and concessions from major trade partners. France was singled out to this effect, a country that not only had a trade deficit vis-à-vis the US, but that also owed $3 billion to the US borrowed during WWI, see Tooze (2014, pp. 348ff.). 75. Irwin (2011, pp. 150ff.) discusses in detail the various reactions to Smoot–Hawley. 76. Miller (2000) agrees. So do Gardner (1956), Jackson (1969), Dam (1970), and Zeiler (1999).

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77. In a separate study, Irwin (2011) makes a very strong case that the Smoot–Hawley Tariff Act was hardly responsible for the Great Depression; he concludes that nevertheless, it did provoke retaliation against the US by a host of nations. 78. Miller (2000). 79. The provisions on cartels [restrictive business practices (RBPs)] were included in chapter V of the ITO Charter. The nonadvent of the latter meant that the only legal relevance of this provision was through the rather innocuous Article XXIX of GATT. 80. Gardner (1956) underscored this point. Modern research casts doubt on the usefulness of trade instruments to solve unemployment problems; see, inter alia, Krugman (1995) and Dewatripont et al. (1999). Jansen and Lee (2007) offered a survey of the most recent empirical literature on this score that questions some of the orthodoxies of the past. 81. Article XVI of the New York Draft, entitled “Maintenance of Domestic Employment,” recognized the right of every government to aim to achieve full employment and imposed an obligation on states striving for full employment to avoid creating BoP problems for their trading partners. According to the companion provision (Article XVII), governments that aimed at promoting the establishment or reconstruction of particular industries would be free to do so, provided that they negotiated a settlement with the affected states; see UN Economic and Social Council Document E/PC/T/C.6/85 of 15 February 1947. 82. Keynes cared a lot about short-run effects and tended to pay less attention to the long run: for example, a drop in tariffs could lead to domestic unemployment in the short run, and such effects preoccupied him. It was he, after all, who famously used to say, “In the long run we are all dead.” One should not, however, overestimate his influence on the drafting of GATT. 83. See Irwin et al. (2008). 84. In Smith’s view, the “invisible hand” was effective because of the ensuing division of labor and gains from specialization (since private agents would move to the industry where they would be most effective and become more effective through practice). Gains from trade stem from the exchange of specialization in producing goods. 85. Economic historians have long quarreled about whether the law of comparative advantage should be attributed to Ricardo or to Torrens (1815). There are dozens of writings regarding the law of comparative advantage and its limits. Deardorff (1980), in a very elegant piece, relaxed the rigidity of many propositions that had been previously presented, and presented a model where the law of comparative advantage holds for an appropriate average rather than for each individual commodity itself. For a clear explanation of the gains from trade, see Krugman and Wells (2005) and Helpman (2011). The eminent economist Paul Samuelson was asked by mathematician Stanislaw Ulam to name one proposition in social sciences that was both true and nontrivial, and Samuelson mentioned the law of comparative advantage, stating, “that it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them,” Samuelson (1969, p. 1). 86. Economists use the term “autarky” to refer to a situation where countries do not trade with each other—that is, when an economy is “closed.” Nations gradually moved to trade liberalization, and China was a late convert to international trade, a decision hailed by former premier Zhao Ziyang (2009) with these words (p. 137): “… only under conditions of an open-door policy could we take advantage of what we had, and trade for what we needed. Each place and its society has its strengths; even poor regions have their advantages, such as cheap labor. That is a great advantage in international competition. The result of doing everything ourselves was that we were not doing what did best. We suffered tremendous losses because of this. I now realize more and more that if a nation is closed, is not integrated into the international market, or does not take advantage of international trade, then it will fall behind and modernization will be impossible.” 87. The intuition behind the theorem is, yet again, opportunity cost: the value that a factor would generate in alternative uses is low in a country that produces this factor in abundance. Romer (1994) added an angle of particular interest to developing countries. By importing goods, developing countries would make the first step toward imitating a new technology invented elsewhere. 88. The new new trade theory suggests that gains from trade are larger than before, but the policy implications are different: transfer prices are important, as are rules of origin, standards, and conformity assessment. It thus challenges the current design of the world trading system.

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89. For an excellent discussion of Balassa’s many contributions in this field, see Sapir (2011). Grubel and Lloyd (1975) developed the “Grubel-Lloyd Index,” which is a measure of the importance of intraindustry trade within a given industry. 90. Subsequent research, notably by Broda et al. (2008), has empirically confirmed that there are sizeable gains in increased varieties. Economists are becoming increasingly sophisticated in measuring gains from trade, as recent research by Arkolakis et al. (2012) shows. And yet, they continuously underscore the basic conclusion that trade liberalization is not a zero sum game. 91. In subsequent research, Krugman (1980) showed that, for example, if trade is costly, production may be concentrated in the larger market (the “home country effect”); Ethier (1982) provided a variant with trade in intermediate goods. The new trade theory does not aim to explain trade based on endowments, as is the case, for example, in a Hecksher-Ohlin model (which does not dispute the law of comparative advantage so long as comparative advantage is measured by relative autarky prices). 92. See the survey on the accomplishments in economic theory by Helpman (2006). In this volume, we do not discuss the policy implications of the new theories explaining gains from trade liberalization. Indeed, the purpose of our discussion is to explain why trade liberalization makes good sense, and, building on this understanding, ask the additional question why it does not happen unilaterally, and what is the role of the GATT/WTO. There is of course the additional question of whether, in light of refinements in economic theory, the design of the multilateral trading system should continue to be as is, or whether institutional improvements are necessary. To some extent Antras and Staiger (2012a), and (2012b) address this question, and we refer to their work infra. More directly, Ciuriak et al. (2014) ask the question what are the policy implications of the new new trade theory, and what kind of changes we should introduce in the GATT/WTO system in order to better address the concerns of firms and help the realization of additional gains from trade. 93. Bown (2014) offered a concise, elegant survey of the economics literature on this score. 94. In a footnote to this quote, Krugman acknowledged that large countries might have an incentive to limit imports and exports by imposing tariffs, but he went on to state that “this optimal tariff argument, however, plays almost no role in real-world disputes over trade policy.” 95. See Bagwell and Staiger (2002, pp. 32–34). 96. Irwin (1996), Maggi (1999), and Maggi and Rodriguez-Clare (1998) all discuss the “time-inconsistency” issue; that is, how, by committing to an international regime, governments avoid acting inconsistently over time (assuming, of course, that the regime itself does not change either). What do domestic producers’ lobbies care about? They would critically be driven by the motto “Exports are good, imports are bad.” For example, look at tariffs: what producers would typically care about would be flexibility when making tariff concessions, the possibility of reneging on the commitment when necessary, etc. This is precisely what governments would like to buy insurance against: they would ideally like to make inflexible tariff commitments. Compare Downs and Rocke (1997). 97. Economic theory distinguishes between Pareto efficiency and Kaldor-Hicks efficiency. Trade liberalization is Kaldor-Hicks efficient; that is, while overall society gains from market opening, some of its segments (domestic producers facing foreign competition) might—and often do—lose. Overall, however, when the losses are measured against the gains of other segments of society (users of cheaper inputs, consumers), society usually benefits. 98. Tumlir (1985); Maggi and Rodriguez-Clare (1998); Staiger and Tabellini (1987) and (1999); Tang and Wei (2009). 99. Brou and Ruta (2011), and Potipiti (2006) made a good case for commitments on subsidies, but not necessarily for international negotiations that would lead to similar commitments. 100. There is a flip side here: small countries often making concessions in areas other than tariffs (say, in intellectual property rights or investment protection) might support the terms-of-trade theory to some degree since they do not have much to give in terms of tariff concessions if such concessions do not affect world prices. But in terms of protection of intellectual property rights and investment, their policies can have a large effect on rents earned by foreign firms in their markets. This is how they get tariff concessions from large countries. This is, of course, the flip side of letting small countries retaliate by means other than tariffs since tariff retaliation is often not in their interest. See Tang and Wei (2009). 101. Early on, Graham (1948) insisted that trade took place between firms, and the fact that they were in different states was irrelevant so long as economic policy was appropriate. Since states have the power to treat

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firms located in different countries differently through the use of tariffs, embargos, exchange rates, and other means, there is the need for an agreement. 102. Krugman (1991) summarized GATT-think in three sentences: (1) exports are good; (2) imports are bad; (3) other things equal, an equal increase in imports and exports is good. In Krugman’s explanation, there is not enough empirical evidence to support optimal tariff theory. A government needs to be mercantilist to behave in the manner he describes. Broda et al. (2008) provided some of the empirical support that Krugman was looking for. Compare also Kindleberger (1984) and (1986). Governments may further wish to impose “politically optimal” tariffs if their benefits outweigh the costs. The costs of protection are clear: they include deadweight losses associated with too little domestic consumption, and too much production by inefficient domestic industries. Political benefits, on the other hand, can, on occasion, overcome similar costs. Grossman and Helpman (2001), (2002) show how the benefits arising from tariffs can outweigh efficiency costs when governments value campaign contributions as well (e.g., beyond the economic welfare of producers and consumers). 103. Absent extraordinary circumstances, the country setting the tariff level will have little incentive to internalize this externality. In Bagwell and Staiger’s terminology, similar tariffs will not be politically optimum tariffs—that is, tariffs that take adequately into consideration the interests of domestic producers and consumers; the tariff-setting nation imposes no external effect on foreign producers. Johnson (1972) includes a simpler definition of “protection” (p. 121): “I confine the term ‘protection’ to policies that create divergence between the relative prices of commodities to domestic consumers and producers, and their relative prices in world markets.” 104. As Blanchard (2013, p. 9) put it: “Because all large countries have the unilateral incentive to impose those ‘cost-shifting’ tariffs, the treaty-less trading system is characterized by a terms-of-trade driven prisoner’s dilemma.” Fudenberg and Tirole (1991, pp. 9–10 and 110–12) provide an explanation of the Prisoner’s Dilemma and how to get out of it by changing the payoffs. See also Axelrod (1984). 105. Bagwell and Staiger (2002) note that this assumption holds when governments maximize national income, as well as in the leading political economy models of trade policy. 106. Indeed, the classic work of Edgeworth (1894) and Bickerdike (1907) suggested that so long as a foreign country’s offer curve is not perfectly elastic, a country can gain from a tariff (the offer curve shows the quantity of one product that an agent will export for each quantity of another product that it will import). Countries with large import markets will be in a position to affect terms of trade in a more meaningful manner than those with small import markets and thus will have more to gain through tariff imposition. Economists have viewed the arguments on optimal tariffs with considerable skepticism: Krugman and Obstfeld (1997) observe that at any rate, this argument is of little practical importance since small countries (which constitute the majority of the WTO membership) cannot affect terms of trade anyway. Feenstra (2004) further noted that there was little empirical knowledge about the elasticity of foreign export supply. Empirical evidence came first from the work of Broda et al. (2008), which showed that countries that are not members of the WTO systematically set higher tariffs on goods that are supplied inelastically. This paper supplies considerable empirical evidence for the optimal tariff theory. 107. By relying on these two assumptions only, as Bagwell and Staiger (2002) have elegantly shown, the termsof-trade theory is robust to a wide range of government preference specifications, including those that allow political motivations and constraints. The authors examined the political economy of the whole endeavor, in which governments have an enlarged (and probably more realistic) objective function in order to include political considerations. 108. Export duties are not widely used, probably for political economy reasons, since export lobbies might object to their use (at least in the short run). This is why there are no widespread negotiations aimed at taming this instrument. There are, nevertheless, increasingly instances of commitments on export duties both at the multilateral level (Annex 6 of the China Protocol of Accession) and at the bilateral level (Morocco, in its free trade agreement with the US, agreed not to impose export taxes on phosphates, a commodity where Morocco accounts for a sizeable percentage of the world production). 109. There is no mystery about why small (developing or otherwise) countries would want to join GATT, as they would enjoy a terms-of-trade benefit from gaining access to the reduced tariffs of large countries like the US. The more interesting question is why large countries would want small countries to join GATT, given that the tariff reduction by a small country offers no terms-of-trade gain to other members. It is in this spirit that this discussion addresses the question.

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110. In the same paper, Regan forcefully argued that the very purpose of GATT (and the WTO) is to counterattack protectionism. In this view, absent GATT, trading nations have an incentive to continue protecting domestic producers. His view is not the classic commitment story: to him, there is a divide between government and country preferences. Trade agreements aim to bridge this gap and make governments act in accordance with the country interest. Hence, in his perspective, the game is not between government and the private sector. There is, however, an important overlap: both in the commitment and the protectionism stories, the role of trade agreement is essentially to address a domestic problem, not an international externality. The problem with this explanation for GATT, which has some undeniable merits, is that it remains unclear why governments would negotiate such an agreement in the first place unless their true aim was to maximize social welfare (in which case the country— government divide does not exist). 111. More recently, Hillman (2015) claimed that rent-inclusive models explain why private benefits are more important in influencing policy than the tariff revenue required for consumer benefit through terms-of trade improvement. Trade negotiators, in this view, make it clear that terms of trade are not a primary influence in trade negotiations. 112. Still, there are various terms of trade—based theories of safeguards, such as that of Martin and Vergote (2008), that provide possible explanations for AD. 113. Chapter 3 will discuss how even the technique used to reduce tariffs affects the relevance of the terms-oftrade theory. It is hard to reconcile, for example, linear tariff cuts, where WTO membership reduces tariffs by a predefined percentage, with the terms-of-trade theory. 114. This probably explains why, with respect to NTBs, ex ante disciplines are being contracted with the aim of curbing regulatory activity (“necessity” will oblige WTO members to adopt the least restrictive means to reach an objective; “nondiscrimination,” will require from regulators to place domestic and imported goods on equal footing; “consistency” demands that regulators keep a similar level of protection across comparable situations), instead of negotiating item by item specific policies. The cost of completing the contract is the single most important impediment in such an endeavor, of course, and chapter 7 will continue this discussion on that point. 115. This result does not always hold. It could be, for example, that what matters most is not capital ownership of a company, but the effects of investment (e.g., its contribution to the labor market). A classic case is Brother Industries v. US and Smith Corona Corporation (US Court of International Trade, September 3, 1992, 801 F. Supp. 751, 1992). Brother Industries, a Japanese company that had invested in the US (Tennessee), requested that the US impose AD duties against Smith Corona, a US company that had dislocated in Singapore. 116. In two companion papers, Antras and Staiger (2012a, 2012b), showed that when prices are determined by bargaining, cooperative agreements over market access cannot guarantee efficient outcomes even in the absence of international ownership. This is most important for global supply chains, and this work will be discussed further in chapter 4. 117. Of course, there could be other externalities that travel outside the price mechanism, but so far, no one has made a persuasive case for it. Ossa (2011), for example, explained the role of GATT in dealing with the production relocation effect of trade policy. Focusing on the major players in recent negotiations, the author found that the production relocation effect implies noncooperative tariffs, as well as moderate gains from negotiations. In his model, shipping costs and trade in similar but differentiated goods occurs in a monopolistically competitive market (new trade theory). International cost shifting can be incentive-compatible under the circumstances since governments might have an incentive to encourage the world’s firms to enter their own market in order to save on shipping costs. These are cost-shifting effects other than terms of trade. 118. See also Irwin (2005). Compare Steil and Hinds (2009). 119. The sheer volume of legal obligations entered into and the need to explain the obligations to users of the system are probably the best explanations for why the agreement was made in writing. 120. See Irwin et al. (2008) for details. 121. See Wilcox (1949, pp. ix—x), which supports the view that what Clayton had in mind when referring to “vested interests” was not an agreement to resolve domestic issues (something akin to what the commitment theory suggests), but an agreement to resolve international external effects stemming from unilateral definition of trade policies. 122. There is international relations research that views the creation of GATT as a shield aimed at advancing political goals: Eichengreen (2006), for example, views GATT as the continuation of the Bretton Woods regime, which established a liberal order and thus curbed Soviet expansionism. Compare Irwin (1996, 1998b).

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123. Compare Schelling (1960). 124. BISD Volume IV/77. 125. See, for example, the GATT panel report on Norway—Apples and Pears at §§ 5.5–5.6. 126. GATT Document PC/12, L/7583. 127. By virtue of the equivalence propositions, different instruments can achieve the same objective: chief among them are the Lerner theorem, establishing the equivalence between import and export duties; customs duties can be decomposed into domestic taxes (to consumers) and subsidies (to producers); and through devaluation of the national currency, national exports can be boosted. 128. Export subsidies are negative tariffs, and, since they are applicable to domestic goods only upon exportation, they are often classified as trade instruments as well. The GATT regime, nevertheless, had rather soft disciplines in remedies, as will be detailed in the following chapters of this book. 129. This is the case essentially because nondiscriminatory trade liberalization, the foundational objective of GATT would be easier to achieve through tariff exchanges, rather than through exchanges of quotas. 130. And, of course, as the number of signatories increases, so does the size of the carrot. 131. This point merits some more discussion. If GATT participants were to bind all their tariff duties, then national treatment would serve as a safeguard of the value of tariff concessions only. They did not, either in the first round or in subsequent rounds. The national treatment provision prohibits protectionist treatment of imported goods regardless of whether duties on those goods have been bound or not. At the very least, this is how this provision has been understood in case law, as shown in chapter 7. In doing that, it goes beyond merely protecting the value of tariff concessions. It is for this reason that the consequence of including the national treatment provision in GATT is that protection can take one form only (namely, customs duties). 132. See the findings of the panel report on Japan-Film in this respect. Staiger and Sykes (2013) discuss the economics and law of nonviolations. 133. See, for example, Australia-Ammonium Sulfate, a GATT case dating from the 1950s. 134. From a terms-of-trade perspective, these instruments aimed to secure that those with the incentive and the possibility to do so would not undermine terms of trade through unilateral actions. As chapter 7 will demonstrate, these instruments also constitute an admission that it is impossible to write a complete contract. Negotiators somehow threw their hands up and admitted as much, contracting national treatment and NVCs in in their attempt to ensure circumvention of commitments on instruments (like tariffs) that had been explicitly mentioned in the contract. 135. Tariff concessions and the MFN clause are the only two provisions that come under Part 1 of GATT. National treatment, the prohibition of quantitative restrictions, and all other substantive obligations imposed on trading nations come under Part 2. By including nondiscriminatory tariff liberalization in Part 1, the framers obviously wanted to underline the importance of this endeavor. 136. An official US document (Committee on Finance, United States Finance, Summary and Analysis of HR 10710—The Trade Reform Act of 1973, February 26, 1974, US Government Printing Office, Washington, DC, 1974) states that it was the view of the US Subcommittee on International Trade that the focus would shift on NTBs only after the conclusion of the Kennedy round (p. 1). The term “NTB” carries a negative undertone, in that regulatory interventions are equated to barriers. Staiger (2011) and others use the term “nontariff measures (NTMs),” a more neutral term to convey the same point. Yet, its shortcomings notwithstanding, we prefer the use of “NTBs” throughout this volume because it is the most-widely-used term. 137. This term was coined by Ruggie (1982) to denote the quintessential element of the post-WWII construction of the world economic order. Building on prior work by Polanyi (1944), Ruggie used the term to mean that countries in that era would be assumed to pursue social welfare policies at home, while adopting free trade policies between them. For a recent reevaluation, see Lang (2011). 138. Note, nonetheless, that a few market economies knew of similar institutions back in the 1940s, and some (e.g., Canada) continue to do so. 139. Congress never got beyond early hearings. The Truman administration withdrew the submission to approve the ITO Charter from Congress when it was clear that there was not going to be congressional support for it. Brown (1950, p. 10) stated: “On April 28, 1949, President Truman submitted the Charter to the two houses of congress for their approval in the form of a joint resolution authorizing United States membership and participation. No action was taken by either house during the first session of the Eighty-first Congress.” Both Brown

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(1950) and Wilcox (1949), two prominent US negotiators, published their written versions of GATT/ITO negotiations in an effort to persuade the US public to support the multilateral endeavor. Their efforts were not, alas, terribly successful. Commentators do not agree on the reason why the US Congress failed to ratify the ITO Charter. Gardner (1956) argued that protectionist forces in the US were at least a contributing factor: many lobbies requested that President Truman draw back from asking the Senate to ratify. The wide (and probably too ambitious) coverage of the Havana Charter, including a full range of economic issues ranging from commodity agreements to economic development and even employment, and the threat it represented to national sovereignty were probably the other important contributing factors. On this score, see also Dam (2004). Diebold (1952, pp. 20ff) floated a different explanation: the US Council of the International Chamber of Commerce (ICC), a powerful lobby by any standard, opposed the ITO because it did not go far enough: many policies of economic nationalism were left intact. Odell and Eichengreen (1998) offered support for the thesis that the reason why the ITO project failed was that the Truman administration did not mobilize public support on its behalf. At any rate, the ITO could not have realistically entered into force without the participation of the US, the leading trading nation at that time. Irwin (1995) takes the view that, independent of the reasons leading to it, failure was probably a blessing in light of the many arcane provisions in the ITO Charter. What is definitely true is that the early GATT experience did not do the eventual ratification of the ITO any favors. Leddy (1958) reported that the overarching feeling was that this was a document that people could happily live with. He reported that, in the eyes of Congress, GATT “was not repulsive, but neither was she fair.” 140. Diebold (1993, p. 337). 141. Diebold (1952, 1993) took the view that the investment chapter was one of the key elements that led to the demise of the ITO. 142. Diebold (1952), (1993) explains the wide potential of the GATT to achieve trade liberalization, and the lack of realism in the ITO project. Irwin et al. (2008) insist on the first point and underscore how the change in personnel affected the overall US attitude. 143. Odell and Eichengreen (1998, p. 183). 144. Wilcox (1949, pp. x–xi). 145. Wilcox (1949, p. 131). 146. By virtue of this provision, trading nations made their best effort to observe several provisions of the Havana Charter until the entry into force of the ITO. 147. Eric Wyndham White was the first executive secretary of GATT, heading a small secretariat. Eventually, in subsequent years, his post was renamed director-general of GATT. The change in the title occurred through the decision of the Contracting Parties of March 23, 1965, published in GATT Document BISD 13S/19. 148. The highest decision-making body in GATT is the CONTRACTING PARTIES (in capital letters), which refers to the entire GATT membership adopting decisions by consensus. In many ways, this term is appropriate since it was governments (and customs territories) that signed on to a contract liberalizing trade (i.e., GATT), rather than becoming members of an institution. Evidently, the latter would have been the case had the ITO been established. 149. DG Olivier Long was designated as chairman. 150. EU stands for European Union, as of December 2009. Throughout the two volumes, we will refer to the previous official name, “European Communities (EC),” only to the extent that it is historically necessary. See WTO Documents WT/L/779 and WT/Let/679, which explain that the EU assumes all the rights and obligations of the EC in respect of all agreements for which the director-general of the WTO is depositary and to which the EC is a signatory or contracting party. 151. L/4204 of July 15, 1975, GATT Document BISD 22S at pp. 15ff, and GATT Document C/M/107. 152. See GATT Document L/4048. On the role of CG18 in general, see the excellent account of Blackhurst and Hartridge (2005). 153. GATT Document L/4189. 154. This narrative about the GATT years borrows heavily from Palmeter and Mavroidis (2004). 155. Hudec (1998b). 156. Germany afforded differential treatment to three types of sardines: clupea pilchardus, clupea harengus, and clupea spratus. Years later, Peru would complain about the treatment of its exports of sardines in the EU market (see chapter 5 of volume 2 for more on this topic).

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157. GATT Document SR.7/5 of 13 October 1952, cited the account by Wyndham White, which stated that “it had been agreed … to establish a panel to hear the various complaints that might be refered to it during the present session.” Williams (2014) casts doubt on whether a formal agreement to this effect was ever reached, attributing the shift to panels to the initiative of Wyndham White. His account of what happened next is as astonishing as it is amusing: “The Norwegians held a drinks party, served all of these different types of sardines on canapés, and won the case, drink in hand, when the panel could not tell the difference between them.” It was a matter of common sense (quite elusive in subsequent years), as is expressed in the subsequent chapters of this book, especially when the WTO dispute EC-Sardines is discussed. 158. GATT Document SR.7/7 of 18 October 1952. Mr. Isbister of Canada was appointed chairman of the panel. 159. GATT Document L/392/Rev. 1 of 6 October 1955; GATT BISD Document 3s/179 and 247. 160. Trading nations continued to request “authoritative” resolutions for their disputes for many more years. The DG of the GATT, Arthur Dunkel, was requested by Canada and the EU to provide an “advisory opinion” on whether a tariff concession that had been granted by Portugal to Canada applied to wet salted cod as well. This issue was raised during the negotiations regarding the compensation to be paid to trading partners by the EU following its “Southern enlargement” (see GATT Doc. C/M/225 of 2 November 1988). Nowadays, Article 5 DSU introduces the possibility for the DG of the WTO to mediate, upon request, in order to resolve disputes among WTO Members. 161. In 1962, Uruguay introduced complaints against no less than fifteen contracting parties (Austria, Belgium, Canada, Czechoslovakia, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, and the US). Following the issuance of the panel report (Uruguay-Recourse to Article XXIII), Uruguay managed to negotiate settlements with some of the defendants (GATT Document BISD 13S/35, 1965). This case was hailed by some as a turning point in dispute adjudication. It proved to be the last major dispute for a decade. 162. Departing from the past, GATT panels were on occasion filled by experts in the issues discussed. The DISC and related disputes (discussed in chapters 7 of this volume, and 3 of volume 2) were about the consistency of the fiscal regime of the US and many European countries with the relevant GATT disciplines. They were staffed with tax law professors who, according to Williams (2014), dominated the discussions. 163. Agreed Description of the Customary Practice of the GATT in the Field of Dispute Settlement (Art. XXIII:2), GATT Document BISD 26S/215, 217, ¶ 6 (iv). 164. Ministerial conferences were convened periodically throughout the GATT years to inaugurate and conclude a trade round. Sometimes they were also convened to unblock stalled negotiations. In practice, ministers almost never conducted the day-to-day negotiations themselves. 165. See GATT Document BISD 29S/13, 15, (viii). 166. See GATT Document BISD 31S/9. 167. Essentially, the right to establish a panel and the move toward compulsory third-party adjudication was introduced through these procedures, along with other modifications of less importance. 168. See Hudec (1998b). Two lawyers, besides the Director of the Legal Affairs Division, served this body: Ernst-Ulrich Petersmann and Frieder Roessler. Roessler became in 1989 the first director of the Legal Affairs Division, the new name of the office. 169. GATT Document MTN/W/8 of 25 February 1975 at p. 1. 170. Idem. 171. There was some uncertainty across negotiators during the GATT negotiation regarding the level of duties. The Indian delegate, for example, Mr. Nehru, is quoted stating that “India’s average tariff (33 percent) was among the lowest in the world,” UN Document E/PC/T/C.II/3 at p. 9. 172. GATT went even beyond what Bastiat had dreamed of when in the nineteenth century, he recommended a 5 percent duty for goods of prime necessity, 10 percent for goods of secondary necessity, and 15–20 percent for luxury goods; see Bastiat (1996). 173. The World Trade Report, 2007, The GATT: Geneva at p. 207; https://www.wto.org/english/res_e/booksp_e/ anrep_e/world_trade_report07_e.pdf. 174. This lent some support to proponents of terms-of-trade theory since it would be senseless, in this view, to request concessions from countries that cannot affect the world price. In the Hullian view, they would benefit from MFN reductions. Lack of interest in some developing countries’ markets (and especially the LDCs) help

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explain in part why this has been the case. As a result, nowadays developing countries almost always exhibit higher tariffs than developed countries. Some researchers have cast doubt on the idea that high tariffs are universally detrimental to growth, arguing that policy prescriptions (such as low tariffs) designed to promote growth within developed economies may not be appropriate for universal adoption. See, on this score, Rodriguez and Rodrik (2001), and more recently, de Jong and Ripoli (2006), who used a panel data set comprising 60 countries and spanning 1975–2000. 175. Diakantoni and Eskaith (2009) noted that, with respect to commitments entered by LDCs during the Uruguay round, their bound level was higher than the de facto applied level in practice. That is, the binding of their duties did not generate any trade liberalization. It simply removed the possibility of tariff volatility above the bound level. WTO members increased their absolute number of tariff bindings over the years: in percentage terms (out of 100 total tariff bindings), developed countries moved from 78 (pre-Uruguay round) to 99 percent (following the successful conclusion of the Uruguay round), developing countries from 21 to 73 percent, and economies in transition from 73 to 98 percent. The insight in Diakantoni and Eskaith (2009) is that these numbers may simply correspond to crystallization of prior practice, and sometimes even less than that. 176. On this issue, see Kemp (1966), and Jones (1967). The case for trade liberalization was also helped by the fact that the negotiation of the Uruguay round—in which generous cuts were agreed to a wide variety of goods— coincided with the fall of the Berlin Wall, the burying of the interventionist New International Economic Order (which is discussed in more detail in chapter 5 of this volume), and the predominance of free market politics. It was a honeymoon period for an endeavor like the Uruguay round. 177. Graham (1979) noted that the process verbal signaling the end of the Tokyo round was signed by 25 countries, with reservations by Argentina and Spain; see GATT Document MTN/28 of April 11, 1979; see also GATT Document GATT/1234 of April 12, 1979. See also Curzon and Curzon (1976). 178. GATT Document L/5517/Add. 16 of 13 May 1985. 179. During round intervals, lower bodies (e.g., committees such as the Antidumping Committee) could step in and address specific issues. And indeed, as Mavroidis (2008) reports, some did just that, and there is the emergence of secondary law, although in official GATT/WTO documents, the term has so far been refuted. Most of it, nonetheless, occurs during the WTO years, the GATT experience in this respect being rather limited. Compare Delimatsis (2012). 180. The Doha round has produced some concrete results: the Aid for Trade (discussed in chapter 5) is one of them; the “Bali package,” which included an agreement on Trade Facilitation (chapter 1, volume 2), stockpiling of farm goods (chapter 8, volume 2), and LDCs (chapter 5), is another [see Narlikar and Van Houten (2010)]. The negotiations continue following the success in Bali (December 3–6, 2013). Successfully negotiating an agreement is one thing; faithfully implementing it is another. We can only agree with Graham (1979) when he notes (p. 159) that no nation wants gains won in hard negotiations to be nullified by the way that the other nations implement those negotiated results. To this effect, the US (to cite one example) has adopted “fast-track procedures” (Trade Promotion or Authority, or TPA), whereby the US Congress will adopt or reject as such a trade agreement, being thus deprived of the possibility to introduce amendments. In this vein, the US Trade Act of 1974, §§ 102 and 151, and 19 USC §§ 2112 and 2191 (1976) provided that the Tokyo round agreements would be considered a “revenue bill,” and hence the whole package would be voted up or down within 90 congressional working days, with no modifications allowed. Similar procedures were followed when the Uruguay round package was submitted to Congress for a vote. 181. Some things have come from this round, though (Aid for Trade, discussed in chapter 5; and the Bali package, discussed later in this chapter), which coincided with the greatest shift in economic activity in the last hundred years from the big two (EU and US) to a series of high- and middle-income countries. 182. Benedek (1991) described GATT practice as akin to a customary right to a panel. 183. See Hudec (1993b, p. 278). 184. The weak point in Hudec’s study in this respect is probably that it does not control for the disincentive for GATT contracting parties requesting the establishment of a panel of anticipating a possible block by the eventual defendant. In other words, the overall number of disputes would probably be higher if positive consensus disappeared from the face of GATT. However, it is very difficult to measure this disincentive: Under certain assumptions, the potential defendant would go ahead anyway, and under others, this would not be the case. Much of the information to properly research this area is private and not easily discernible.

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185. GATT Document BISD 4S/31 said that the CONTRACTING PARTIES authorized the Netherlands to apply a limit of 60,000 metric tons on imports of wheat flour from the United States during 1956. 186. This term indicates that GATT, in its latter days, and the WTO, as of day 1, have effectively moved to compulsory third-party adjudication, where there is no need for the complainant to invest in establishing a panel: this will be the case regardless of whether the defendant agrees—an oddity in international relations where the paradigmatic dispute adjudication is a function of the will of both parties to see their dispute adjudicated by a tribunal/arbitral body. On the issue of judicialization (or proceduralization) of the WTO, see von Bogdandy (2003). 187. The ICITO was established through a decision by the UNCTAD (E.CONF.2/78; ICITO/I/4). Hart (1998), among many others, explains how “the Havana Conference in its closing days established the Interim Commission for International Trade Organization (ICITO), composed of most members of the conference, to prepare a program for the ITO when it came into being, and to carry out related functions. Canada’s Dana Wilgress was elected its □rst Chairman. The Commission appointed as its executive secretary, Eric Wyndham-White” (pp. 51–52). The executive secretary had the power to hire the secretariat that served GATT over the years. The ITO never came into force, so the ICITO remained in place until the last days of GATT. On December 8, 1994, “Transitional Arrangements: Transfer Agreement Between GATT 1947, ICITO, and the WTO” (GATT Document L/7580) was signed, whereby all assets and liabilities of the ICITO were transferred to the newly established WTO. 188. Quoted in Williams (2014), who mentions that the US could not make a specific request to the Congress for a contribution to GATT. As a result, it was paying its GATT contribution through the budget of the Department of State and eventually had to reduce it by 25 percent. This cost the GATT secretariat, since some of its best officials (Julio Lacarte-Muro, the deputy executive secretary, among others) had to look for new career opportunities. 189. This loosening process has some undeniable benefits, as practitioners are “liberated” from sometimes esoteric thinking, but it also comes at a price since important input might be overlooked. 190. De Souza Farias (2013) supplied a fitting tribute to the many contributions of Eric Wyndham White. 191. Washington Post, February 2, 1980, quoted in Williams (2014). 192. The establishment of a new institution was a Canadian proposal, anxious to constrain, through the adoption of more elaborate procedures especially in the area of dispute settlement, US unilateralism, see Preeg (1995) at pp. 133f. and at p. 208. The negotiation of the WTO is a totally different ball game compared to GATT. The number of participants increased, and their interests were quite varied. Members of the Organisation of Economic Cooperation and Development (OECD) members still managed to leave the development issues for a later round (what eventually became the Doha round) and concentrated on a serious tariff-cutting enterprise, in mutlilateralizing the Tokyo round codes, and bringing farm and textile trade under the aegis of the WTO for the first time. The corresponding chapters of this volume will discuss the negotiating history of each agreement. On negotiating tactics, especially of the US, see also Stiglitz (2003). 193. The waivers covered by this provision are listed in Document MTN/FA of 15 December 1993 (Part II, pp. 11–12 n. 7), and in MTN/FA/Corr.6 of 21 March 1994 (where the Ministerial Conference, the highest WTO organ, established at its first session a revised list of waivers covered by this provision and added those waivers that were granted under GATT 1947 after December 15, 1993 and before the date of entry into force of the WTO Agreement, and deleted the waivers that had expired by that time). 194. With the advent of the WTO, the AB was established, a second instance adjudicating body where appeals against panel reports can be submitted. 195. Stare decisis is the means to achieve consistency of course. Consistency, of course, is not in and of itself a virtue, for one can be consistently wrong. Recall that in Lagado, one of the lands that Gulliver visited in his travels, all citizens followed a theory without asking any questions about whether it was well founded, with consistently disastrous results. Bhala (1998) should be credited for making the first distinction between de jure and de facto stare decisis. There are a few cases where panels did not adhere to opinions previously expressed by the AB. The most notorious such example is offered by the panel report on US—Zeroing, which refused to sanction “zeroing,” a practice whereby positive dumping margins are discounted altogether in AD investigations (as discussed in chapter 2 of volume 2). The practice of zeroing had been already been outlawed in a prior AB report. The panel on US-Zeroing stated (§ 7.31): “In our view, there is not a system of precedent within the

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WTO dispute settlement system and panels are not bound by Appellate Body reasoning.” Pelc (2014) correctly observed that it is difficult to distinguish between sincere appeals to precedent and opportunistic ones. Even in the latter case, though, the fact is that a judicial preference remains constant over time (albeit for reasons that might not have much to do with the precedential value of a prior ruling). 196. In this vein, the panel report on US—Lamb looked at both adopted and unadopted GATT reports to support one of its findings (§ 7.78). 197. Technically, it is meant to be amending Articles V, VIII, and X of GATT. This should mean that, as with other Annex 1A Agreements, it will cover its subject matter in tandem with these provisions. 198. The VCLT is not explicitly referred to in any covered agreement by the WTO. Article 3.2 of the WTO DSU, the agreement that administers dispute adjudication in the WTO, nevertheless requests panels to interpret the WTO agreements in line with principles of customary international law. The AB, in its very first report (US—Gasoline), acknowledged that WTO adjudicating bodies are required, by virtue of Article 3.2 DSU, to use the VCLT rule when interpreting the covered agreements. 199. The AB, in its report on US—Upland Cotton, requested, for example, WTO members to simultaneously observe the disciplines of the AG and the SCM Agreements; see the relevant discussion in chapter 8 of volume 2. There is often nothing like a bright line between GATT and an Annex 1A Agreement. For example, the TRIMs Agreement explicitly acknowledges the relevance of GATT. The discussion on the conflict as previously developed provides a response to the question of precedence: which agreement should be the preferred forum for deciding on the consistency of challenged measures with the multilateral trading rules? It does not respond to the question of relevance, even on an ancillary basis, of other than the priority agreement. For example, the question might arise whether Article XX of GATT can be used to justify violations of the SCM Agreement. This issue is explored further in chapter 8. 200. GATT Document L/5517/Add. 16 of 13 May 1985. 201. GATT Document L/5424 of 29 November 1982, BISD 29s pp. 9ff., at p. 18. 202. GATT Document PREP. COM. (86)W/19 of 28 April 1986. 203. GATT Document L/5832/Rev. 1 of 17 August 1995. See also the discussion in Markel (1993) at pp. 1022ff. 204. A series of provisions included in the WTO Agreement make it clear that the terms of participation in plurilateral agreements are the privilege of such agreements: accession (Article XII of the Agreement Establishing the WTO); acceptance and entry into force (Article XIV.4 of the Agreement Establishing the WTO); inclusion of reservations (Article XVI.5 of the Agreement Establishing the WTO); decision-making process (Article IX.5 of the Agreement Establishing the WTO); amendments (Article X.10 of the Agreement Establishing the WTO); nonapplication (Article XIII of the Agreement Establishing the WTO); and withdrawal (Article XV.2 of the Agreement Establishing the WTO). 205. Some EU member-states have not ratified the GPA, and thus can be considered only “signatories” of the GPA, in the sense that they have signed that treaty. According to the WTO Status of Legal Instruments, several EU member-states have signed GPA 1994 “subject to ratification.” Pursuant to Article 2.1(b) of the VCLT, “ratification,” “acceptance,” “approval,” and “accession” mean in each case the international act whereby a state establishes on the international plane its consent to be bound by a treaty. Under Article XXIV.1 of GPA, consent to be bound by the GPA can be expressed on the international plane either (1) by mere signature; or (2) by ratification following signature “subject to ratification.” In the absence of subsequent ratification, by its very terms, signature subject to ratification should not be considered as establishing consent to be bound. According to the WTO Status of Legal Instruments cited here, several EU members have not ratified the GPA. Therefore, they have not become “parties” to the GPA in the terms of the VCLT: Article 2.1(g) of VCLT provides that “‘party’ means a State which has consented to be bound by the treaty and for which the treaty is in force.” Nevertheless, the EU is a party to the GPA, so the GPA is applicable to the EU, including with regard to the EU member-states that have not ratified it. Indeed, the EU’s GPA coverage in regard to those EU member-states is included in the EU’s GPA schedules; that is, the schedules that bind all EU members (). 206. See GATT Document BISD 34S/22. 207. There are references in specific agreements as well; see, for example, §24 of the Doha Ministerial Declaration, which links agriculture with NAMA (Non-Agricultural Market Access). 208. See WTO Document WT/MIN(13)/DEC/W/1/Rev.1 of 7 December 2013.

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209. Wolfe (2009) provided a great overview of “single undertaking” and how it has found application across rounds. 210. For a recent paper on this score, see Conconi and Perroni (2012). 211. This issue will be discussed in detail in chapter 7, and in chapters 5 and 6 of volume 2. For now, it suffices to state here that nondiscrimination is, as discussed previously, an insurance policy against tariff concessions’ erosion. It is also, though, an insurance policy against those who want to access a market without satisfying conditions to entry. Thus, an exporter cannot export to a market goods that have a negative impact on the protection of the environment in that market, if the importer has in place a regime that obliges domestic producers to respect these standards. 212. Costinot (2008) discusses the theoretical underpinnings of this issue. Marchetti and Mavroidis (2012) have provided some empirical support for this statement. 213. Czako et al. (2003, pp. 34–5). 214. Article XVII of GATT takes care of state trading (often, but not necessarily always, encountered in centrally planned economies). This provision nonetheless often finds application in disputes involving market economies as well (Canada and its marketing boards, for example, have often appeared in disputes involving application of this provision). For more, see the discussion in chapter 8. 215. See Spadi (2000). 216. See also the accession protocol of Hungary (GATT Document BSID 20S/3 at §4). Several formerly centrally planned economies were requested to increase trade with the incumbents. 217. WTO Document WT/L/432 of 23 November 2001 at p. 4. One often hears the claim that China accepted a disproportionate burden when acceding to the WTO. However, there is little research regarding whether China has performed as well as it did in recent years as a result of the commitments reflected in its Protocol of Accession. 218. WTO Document WT/ACC/SAU/61 of November 1, 2005 at pp. 97ff. 219. Charnovitz (2008) offers an excellent account. 220. See the Report of the Working Party on the Accession of Lithuania to the WTO (WTO Document WT/ ACC/LTU/52 of November 7, 2000 at §66). 221. Even unlikely fellows had to go through turbulent times before securing accession; see Gay (2005) on the problems faced by Vanuatu. 222. The Ministerial Conference is referred to in WTO-speak as “MC,” and is accompanied by a number identifying the specific meeting (e.g., MC1, MC2, etc.). 223. The Market Access Committee, for example, was established through a decision of the General Counci; see WTO Document WT/L/47 of 17 February 1995. 224. Dunkel’s contribution to the success of the Uruguay round cannot be overstated, and we will return to the Dunkel draft a few more times in both volumes of The Regulation of International Trade. The conclusion of rounds was very much due to some strong personalities, delegates who pushed ahead when necessary in order to succeed when failure was imminent. Michael Blumenthal (US) and Theodorus Hijzen (EU) monopolized the scene during the Kennedy round; Robert Strauss (US) and Wilhelm Haferkamp (EU) did the same during the Tokyo round; and then Mickey Kantor (US) and Sir Leon Brittan (EU) emulated their example during the Uruguay round. The EU/US diarchy gave way to more comprehensive negotiating schemes in the Doha round, as we explain later. 225. As chapter 3 will demonstrate, the Harmonized System is the common description of goods traded across WTO members. 226. WCO stands for World Customs Organization, the institution responsible inter alia for updating the Harmonized System. Chapter 3 discusses its role in more detail. 227. Chapter 3 will cover in more detail, the ITA is the outcome of sectoral negotiations between a subset of the WTO members that managed to reduce (if not eliminate altogether) duties on products coming under the heading “IT products.” 228. This Working Party was foreseen in §5 of the Understanding on the Interpretation of Article XVII of GATT. 229. See Lang and Scott (2009), and Mavroidis and Wijkström (2013) in this context. 230. The possibility to establish relations with other organizations that had a related mandate, such as the IMF and the International Bank for Reconstruction and Development (IBRD), was debated already during the first year following the negotiation of GATT; see ICITO/EC.2/2/AW.5 of 13 July 1948.

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231. See WTO Document WT/L/195. 232. See WTO Document WT/L/196 and Addendum 1.

Chapter 2 1. E/PC/T/C.6/14 of 24 January 1947, and E/PC/T/C.6/W.4 at pp. 3ff. 2. The imposition of statutory conditions and the ensuing allocation of the burden of proof aim at establishing separating equilibria. Absent these two mechanisms, WTO members of different types (some facing critical shortages, and some not) would be in a position to circumvent the prohibition of import quotas. In this scenario, we would be facing a “pooling equilibrium,” where different types of trading nations would all send the same signal (that they are facing critical shortages), regardless whether there was genuine need to act this way. Facing so-called critical shortages, in other words, would be the excuse for naked protectionist behavior. This would be unacceptable since it would defeat the very purpose of establishing the prohibition in the first place. 3. E/PC/T/C.6/W/43 at p. 13. The same document lays out a very sensible proposal (this time by BelgiumLuxembourg), which, unfortunately, did not make it to the final text: “Restrictions imposed under this exception should be strictly limited to the period during which the aforementioned circumstances occur, and should not be imposed on seasonal commodities at a time when like domestic products are not available.” 4. E/PC/T/141 of 1 August 1947. 5. Australia proposed the carve-out (from abolition of QRs) for temporary restrictions applied to prevent critical shortages of foodstuffs; see E/PC/T/W/223 at p. 3. 6. Cuba expressed its support for inclusion of a carve-out in favor of promoting the domestic infant industry, a proposal originally tabled by India, and it is his discussion that led to the redrafting of Article XVIII of GATT; see E/PC/T/A/PV/40(1) at p. 18. 7. Committee Reports Havana (CRH) at pp. 86–87. 8. E/PC/T/33 at p. 28. 9. CRH at p. 81. 10. Trading nations might have a strong incentive to do that: scarcity of the imported or exported good will push its prices up (other things being equal), and through auctioning of import or export licenses, governments will be effectively dividing rents with the private operator. Stedman (2012, pp. 200–201) reports that Milton Friedman, a staunch supporter of doing away with any trade barriers, when pushed for an answer on whether tariffs or quotas were better, he would opt for tariffs, as they were “impersonal and fixed, and therefore required no bureaucratic interference.” 11. According to this principle, one should not overinterpret one provision so as to render redundant another provision in the same treaty. 12. This rests on the assumption that panels will review the consistency of import licensing schemes by using the more specialized agreement as a benchmark (the ILA, hence, and not Article XI of GATT). Panels have adopted this approach by now, although not always. For example, later in this chapter discusses Argentina– Imports Restrictions, where the panel should have evaluated (but did not) the consistency of the challenged measures under the ILA, but under Article XI of GATT. 13. EC-Seal Products emerges as a paradox against this background. In this dispute, which are examined in more detail in chapter 9 of this volume and chapter 5 of volume 2, the EU had, in principle, imposed a ban on imports of seal products unless one of three exceptions had been met. For example, the regulation required leather goods to carry a compulsory labeling that mentioned their composition. If these goods were made of seal skin, their entry into the EU market would be prohibited. Complainants attacked the measure under the TBT Agreement, but also Articles III and XI of GATT. With respect to the latter, the panel accepted that the measure amounted to a ban but refused to adjudicate it under Article XI of GATT. In its words (§ 7.661), “… it is the implicit prohibitive aspect of the measure the scope of which is informed by the exceptions that restricted imported seal products rather than the exceptions considered individually.” Thus, it seems that the panel refused to entertain the claim under Article XI of GATT only because the parties had formulated their claim in a manner that did not allow it to do so, since they had challenged the consistency of the exceptions with the multilateral rules (although a different reading seems prima facie plausible). Anyway, this aspect of the report was not appealed.

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14. MITI was in charge of monitoring the behavior of private agents. In 2001, this ministry was folded into a new entity, the Ministry of Economy, Trade, and Industry (METI). 15. This is a form of variable levy that the EU practiced a lot before 1995: a variable component would be levied on all imports in order to equate their price to the EU price, which was almost always higher than that of the world price for farm goods. 16. This regime resembles the “variable levies”; e.g., a system of equating the world price to the internal EU price, practiced by the EU on a wide range of farm goods, and aiming at dissuading imports, since exporters to EU could no longer profit from their price advantage. This is discussed further in chapter 8 of volume 2. 17. The “limiting condition,” along with some other restrictive measures, was allegedly part of an Argentine strategy aiming to reduce imports. The panel was asked to discuss the consistency of individual specific measures referred to as “Restrictive trade-related requirements” (RTRR), as well as on the consistency of the “underlying” measure (§ 6.126), noting that “the overarching measure implies the existence of a single unwritten measure whereby Argentina seeks to impose certain trade-restrictive actions on economic operators with a view to achieving two specific objectives, i.e., eliminating trade balance deficits and achieving the substitution of imported products by domestic products.” The panel held that only five measures had been adequately specified, and it decided on the consistency of those. The limiting condition was one of them, and the rest are discussed later in this chapter. 18. Article XI.2 of GATT focuses on restrictions of farm goods. The advent of the Agreement on Agriculture in 1995 changed the picture to some extent. Chapter 8 of volume 2 discusses the relationship of this provision (and more specifically, of its first and third paragraph) with the Agreement on Agriculture. 19. Bergsten (1978) should be credited for being one of the first who argued that the GATT post-Tokyo round need to complete its legislative arsenal by introducing disciplines not only on export taxes, but in general on export controls. 20. GATT Document MTN.GNG/NG2/W/40 of 8 August 1989. 21. See pp. 35ff of the report of the US Special Committee on Relaxation of Trade Barriers (Report of 8 December 1943, International Trade Files, Lot File 57D-284). See also Dam (1977), discussing the opposition of US southern states to export taxes. 22. Report of December 8, 1943, International Trade Files, Lot File 57D-284, p. 34. 23. This point is discussed in more detail later in this chapter. 24. See §184 of the Working Party Report on the accession of Saudi Arabia to the WTO (WTO Document WT/ ACC/SAU/61 of 1 November 2005); see also the Australian Uruguay round schedule of concessions, available at the WTO webpage (www.wto.org). 25. WTO Document WT/L/432 of 23 November 2001. See also WTO Document WT/ACC/SAU/61 of 1 November 2005, and the Protocol of Accession of Saudi Arabia. 26. The only domestic quota explicitly discussed in GATT is film quotas: WTO members can impose them if they wish to favor the screening of domestic films (Article IV of GATT). The historic rationale for this provision is described in chapter 7, but for now, it is enough to say that it is not accidental that this provision immediately follows Article III of GATT (which regulates domestic instruments), and not Article XI of GATT: its placement in GATT supports the view that the GATT framers viewed production quotas as a domestic and not a border instrument. 27. WTO Document WT/ACC/SAU/61 of 1 November 2005 at §§ 179ff. Bhala (2004, pp. 799ff) agrees that OPEC participation was not a major issue during the accession of Saudi Arabia to the WTO. The author advances a different legal argument to make the same point—that is, that OPEC practices do not violate GATT. 28. This provision includes a list of exceptions to all GATT provisions, as shall be discussed later in this chapter. 29. And they definitely operate as such if the out-of-quota tariff rate is prohibitively high. 30. See WTO Document TN/AG/S/22 of 27 April 2006. 31. GATT Document BISD 21S/3ff. For a concise discussion of this legal instrument, see Trebilcock and Howse (2013) at pp. 482ff. 32. No formal challenge against the consistency of the MFA per se with the GATT rules was ever lodged. 33. The US had raised a series of claims against Japan in this dispute, the most important of which was an NVC: by adopting laws that condoned a series of restrictive business practices (RBPs), Japan was denying the US benefits accruing to it under GATT. More specifically, the US could not effectively distribute film products in the Japanese market as a result of laws regulating the wholesale and retail sale of film in Japan.

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34. On attribution of measures to government, see also the discussion later in this chapter on EEC–Dessert Apples. 35. The opposite cannot be excluded either: by collaborating on the export front, economic operators will be exchanging information that they could use in order to increase collusion in their domestic market as well. If they behave in this way, though, they run the risk of antitrust persecution, a risk they do not run if they limit collusive behavior to export markets. One thing is clear: following the de facto acceptance of the “effects doctrine,” an export cartel can be prosecuted in the market that it cartelizes, the argument being that, although the cartel practice has been designed outside the jurisdiction of the prosecuting state, its effects (e.g., higher prices) are felt within it. 36. See Fox (1997). 37. The Panel on US–Superfund is discussed later in this chapter. 38. Smith and Venables (1991) explain that “monopoly rents” (which Japanese producers will pocket when they face less competitive foreign producers in a given market and have to observe a sales quota) might be the reason under certain assumptions why, in the past, Japan had accepted voluntary export restraints (VERs), which were actually far from voluntary since they had been requested by its trading partners (most frequently by the US). 39. To be fair to the drafters of the report on Japan–Semiconductors, they might have thought that such a request would be totally unnecessary since, other things being equal, the impact of price hikes on volumes exchanged is “automatic” (assuming elasticity of demand); the impact on volumes exchanged in the presence or absence of representatives of the downstream industry during customs clearance (as in Argentina–Hides and Leather) is debatable. It could be, for example, that it will have no effect at all if producers of upstream goods have established links in place and sell exclusively to foreigners. 40. A nexus was warranted even more so in Argentina–Hides and Leather because of the fact that the sanctioned behavior was essentially “private.” The Argentine law opened the door to presence of the industry at the port of exportation. It did not incentivize earmarking. Earmarking could be an eventual but not necessary outcome of presence. It could be, for example, that the Argentine law was conceived as a means to allow presence in order to gather statistical information regarding the quantity of hides exported. The panel, nevertheless, did not go down this road. It is in this scenario, nevertheless, that the “nexus” requirement is easier to justify. Absent a demonstration of nexus, it could be presumed that the government measure might not have provided traders with incentives to “earmark” willing exporters of raw materials. 41. Actually, earlier practice reveals numerous cases where countries have had recourse to QRs without invoking an exception to this effect. In Japan–Silk Yarn, for example, the GATT panel was asked to review the consistency of the “prior permission system” practiced by Japan, which restricted imports of yarn in the Japanese market. This was an undeniable QR, and Japan invoked no policy justification for it. The US complained, and the two parties managed to reach a negotiated settlement. 42. The Working Party on Organizational and Functional Questions held that, if an exception cannot be invoked (that is, if a QR has been imposed that cannot be justified), the WTO member concerned should withdraw the measure; see BISD 3S/250ff. 43. See, for example, the panel reports on EEC–Import Restrictions (§ 26), and on Japan–Leather II (§ 44). 44. Compare Jackson (1969), and Irwin et al. (2008). 45. See also the Committee Reports Havana at p. 89. 46. This test has been repeated almost verbatim in other cases dealing with the same issue; see, for example, EEC–Dessert Apples at §12.3. 47. Japan–Agricultural Products I (§ 5.4.1.4). 48. Japan–Agricultural Products I (§ 5.1.3.2). 49. See §(e) of the London Conference report, cited in Irwin et al. (2008). 50. GATT Document L/332/Rev. 1, adopted on 5 March 1955, BISD 3S/170 at §§ 67ff. On its legal value, see the discussion on GATT decisions in chapter 1. 51. See also the GATT panel reports on Japan–Agricultural Products I (§§ 5.3.1.2ff) and EEC–Dessert Apples (§ 12.5). 52. Committee Reports Havana (CRH) p. 89. 53. §4.10. A second panel was instituted on the same issue, the GATT panel on EEC–Apples II (Chile), but on June 13, 1994, the parties reached a settlement.

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54. It was also very much a demand raised by the UK, as detailed in chapter 1. 55. As import restrictions (in conjunction with export subsidies) are equivalent to a nominal devaluation, allowing temporary import barriers to deal with a BoP problem can make some sense—depending, of course, on the satisfaction of the Marshall-Lerner condition. According to this condition, for a currency devaluation to have a positive impact on a trade balance, the sum of the price elasticities of exports and imports (in absolute value) must be greater than 1. The principle is named after economists Alfred Marshall and Abba Lerner. As a devaluation of the exchange rate means a reduction in the price of exports, demand for them will increase. At the same time, the price of imports will rise and their demand diminish. The net effect on the trade balance will depend on price elasticity. If goods exported are price-elastic, their quantity demanded will increase proportionately more than the decrease in price, and total export revenue will increase. Similarly, if goods imported are price-elastic, total import expenditure will decrease. Both will improve the trade balance. Empirically, it has been found that goods tend to be inelastic in the short term, as it takes time to change consumption patterns. Thus, the MarshallLerner condition is not met and devaluation is likely to worsen the trade balance initially. In the long term, consumers will adjust to the new prices and the trade balance will improve. This is called the J-curve effect. 56. Unsurprisingly, thus, the bulk of litigation concerns cases from years ago, like the GATT panel report on Japan–Leather (1980), which evidences an amicable settlement between the parties in a case where Japan had invoked BoP in order to justify its QRs. 57. GATT Document BISD 18S/45. 58. GATT Document L/4904, adopted on 28 November 1979; GATT Document BISD 26S/205. 59. The opening sentence of Article XII of GATT provision makes it clear beyond a doubt that it was meant to function as an exception to Article XI of GATT. 60. As noted previously, the term “essential products” appearing in Article XII of GATT does not have the same meaning with the same term appearing in Article XI of GATT. 61. The GATT Analytical Index (6th edition, 1994) contains information about the invocations of Article XII of GATT at p. 361. Vincke (1972) refers to seven cases. Except for the US, the other notable case is Israel. The GATT Council requested from Israel to remove surcharge within a set deadline [GATT Document L/3624, p. 8 (1971)]. Israel complied. One could very well imagine QRs being imposed in order to address “Dutch disease.” The term “Dutch disease” was in vogue when the Dutch discovered natural gas. Demand for natural gas was quite high, and thus demand for the Dutch national currency was high as well. This demand led to an overvaluation of the Dutch currency. Dutch exports of manufacturing products suffered as a result. QRs were one way to address this imbalance. Measures relating to currency exchange rates, of course, can justify deviations from the obligations assumed under Article XI.1 of GATT. As stated, however, in today’s world trading nations would be better off by simply devaluing their currency in similar cases. 62. The panel report on India–Quantitative Restrictions explicitly acknowledged that Article XVII (b) of GATT constitutes an expression of special and differential treatment reserved for developing countries (§ 5.155). On this issue, see also the Ministerial Decision adopted during the Ministerial Conference that launched the Doha round; WTO Document WT/MIN(01)/17 of 20 November 2001, at §1.1. 63. Van den Bossche (2005, pp. 667–74). See also the AB report on India–Quantitative Restrictions at §§ 125fff. 64. GATT Document BISD 20S/47. The WTO Understanding on BoP restrictions refers to this document as “simplified consultation procedures.” 65. Barfield (2001), Roessler (2000), and Mavroidis (2002) have expressed different views on this score. In Mavroidis (2002), we espoused the thrust of the argument developed by the AB in the case discussed here. Roessler takes the opposite view (arguing that the AB undid the institutional balance as struck by the WTO framers), whereas Barfield believes that there is overreliance in the adjudicating process. 66. The US carried the burden of proof with respect to Article XI of GATT, and India then carried the burden of proof with respect to its Article XVIII of GATT defense, an exception to the former provision. The panel also held (and the AB upheld in §138 of its report) that the burden of proof shifted back to the US with respect to the Interpretative Note to Article XVIII.11 of GATT. This note concerns the conditions under which a WTO member should progressively relax import restrictions that have been in place. It is highly unlikely that a WTO member affected by such restrictions adequately knows the facts mandating similar behavior. The panel probably relied on the solemnity accompanying the IMF involvement on this score. Still, it would have been on safer grounds had it imposed the burden of proof on India.

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67. As opposed to a discussion before the relevant committee; see Eglin (1987). 68. We will return to this question when we discuss “exchange restrictions” later in this chapter. 69. WTO Document WT/L/194 of 18 November 1996. Note that, according to 4(a) of this agreement, IMF experts participate as observers in DSB meetings. 70. The GATT Panels on Korea–Beef (Australia), (New Zealand), (US) paved the way by consulting with the IMF authorities. 71. GATT Document L/3567. 72. GATT Document L/3573 of 13 September 1971, Report of the Working Party on United States Temporary Surcharge. 73. See the excellent narrative by Irwin (2013) in this respect. Through the import surcharge and export subsidies, the US had operated a de facto currency evaluation. 74. The surcharge was eventually lifted through Pres. Proc. 4098, Termination of Additional Duty for Balance of Payments Purposes, 36 Fed. Reg. 24201 (1971). By that time, the realignment of currencies had been agreed. 75. The discussion of the relationship between GATT/WTO and the IMF will continue in the next chapter, which covers the impact of depreciation of national currencies on tariff commitments. 76. Many have written on this score; none as lucidly as Gardner (1956). 77. GATT Document BISD 20S/19ff at §7. 78. Auboin (2007) provides a comprehensive account of the cooperation among the three institutions. It is not at all the purpose of this book to enter into a detailed discussion of the link between monetary issues and trade liberalization. For an informative recent account, see Pettis (2013). 79. BoP and exchange restrictions could be related in different ways. It could be the case, for example, that a BoP restriction is complemented by an exchange restriction, where there is increased speculation about the exchange rate of the country imposing the restriction. It could also be that a WTO member imposes only an exchange restriction and thus could be opening the door to barter trade; if it does not want to practice barter trade, it will have to contemplate imposing a BoP restriction as well. In general, whether a measure is an exchange restriction has to do with the question of whether it involves a direct governmental limitation on the availability or use of foreign currencies. §7.132 of the panel report on Dominican Republic–Import and Sale of Cigarettes said as much. Exchange restrictions do not have to be recorded in the schedules of concession because they are a contingency that could not have been anticipated when concessions were scheduled. 80. This issue is covered in detail in chapter 3 of volume 2. 81. The authors identify a situation where acting consistently with GATT and inconsistently with the IMF is possible, but they fail to see functional consequences in their example. 82. Macroeconomic events may reduce the expected gains from a given trade concession, but at the same time, they may increase the gains expected elsewhere. Assume, for example, that China devalues its currency. Yes, it will boost its exports, but it will also do disservice to the amount of debt that it owes the world (assuming there is any). A rational government would calculate the trade-off before deciding to embark on a devaluation of its own currency. 83. The facts of the case are reflected in §§ 7.135–7.137 of the report. 84. With the passage from a system of fixed parities to a world of fluctuating parities, the IMF’s mandate to ensure exchange rate stability became even more of an arduous task; an agreement was signed between the WTO and the IMF that provides for the establishment of a steady channel of information between the two institutions, and the WTO has invited the IMF to participate as an observer in meetings related to its areas of competence, and vice versa; see WTO Document WT/L/195 of November 18, 1996. 85. The first case concerning “multiple currency practices” recorded is Greece–Import Taxes (1952). The GATT panel recommended that the IMF be consulted on whether the Greek measure (a tax imposed at the border in order to finance imports) could qualify as “multiple currency practice” (§ 10). 86. See also §7.150 of the panel report, which states, “In fact, the reply of the IMF General Counsel concludes that since the foreign exchange commission does not constitute an exchange restriction, ‘the issue of its consistency or inconsistency with the Funds Articles for purpose of paragraph 8 of the Co-operation Agreement does not arise.’ The panel fully agrees with this statement.” 87. An example of a typical notified exchange restriction is provided here: Iceland maintains exchange restrictions subject to IMF jurisdiction under Article VIII, Section 2(a), arising from the capital control regime that

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restricts the transfer of: (1) interest on bonds; and (2) the indexed portion of amortized principal on bonds. In the circumstances of Iceland, the IMF granted approval for the retention of these exchange restrictions for a period of twelve months from the date of this decision or the completion the next Article IV consultation with Iceland, whichever is earlier; WTO Document WT/TF/IMF/53 of 12 November 2009. Almost identical language has been included in the document allowing Colombia to avail itself of this possibility; WTO Document WT/ TF/ IMF/49 of 26 January 2009. 88. See the discussion in chapter 5. 89. The criticism to infant industry protection and import substitution is covered in more detail in chapter 5. 90. WTO Document G/C/7 of 16 January 2002. The United States first (WTO Document G/C/8 of 18 February 2002) and the EU subsequently (WTO Document G/C/9 of February 20, 2002) requested consultations with the government of Bangladesh. No subsequent notification took place. 91. Dumping is a price differentiation scheme, whereby the export price is lower than the price practiced by economic operators in their home market. Dumping is not prohibited, but it is condemned. This issue is discussed in detail in chapter 2 of volume 2. 92. Jackson (1969) succinctly points to the sequence between Articles XI, XII, and XIII of GATT. 93. This dispute is one of the longest standing ones that exist, and eventually the EU agreed to move to a single tariff applied to all its bananas imports following a transitional period; see Guth (2012). This is explained in more detail in chapter 4, which also describes how domestic EU political economy influenced the international trade issue. 94. The group is composed of numerous countries that are former colonies of some members of the EU and had concluded agreements to grant them preferential access in the EU market (successively, the Arusha, Lomé, and Cotonou Agreements). 95. This was the explanation offered by the US delegate Harry Hawkins when this provision was being negotiated. It was the US that proposed it; UN Document E/PC/T/C.II/PV/4 at p. 31 (see also pp.32ff. of the same document that provide a flavour of the discussion of this provision. 96. UN Document E/PC/T/C.II/PV/4 at p. 31. 97. This is the period usually observed in practice. The negotiating record mentions the possibility for longer periods (e.g., six years); UN Document E/PC/T/C.II/PV/4 at p. 32. 98. Various schedules of concessions include TRQ allocations. 99. UN Document E/PC/T/C.II/PV/4 at p. 32. 100. Report of the Working Party on Quantitative Restrictions; GATT Document BISD 3S/170ff at §26. 101. WTO Document G/L/59/Rev.1 of 3 July 2012. According to paragraph 1 of this decision, WTO members should notify the WTO of all QRs in place and all subsequent changes. Notifications should include description of the QR, tariff line of products covered, legal justification for the QR, date of its entry into force and date it ceased to be in force, the legal basis for the QR under domestic law, and other appropriate comments. A database on QRD was simultaneously launched, which can also be accessed through the Integrated Trade Intelligence Portal (I-TIP), a single entry point for information on trade policy measures (https://www.wto.org/english/res_e/ statis_e/itip_e.htm). As of May 2015, 27 members had submitted information about QRs in place, and only 3 had submitted information regarding subsequent changes (WTO Doc. G/MA/W/114 of 22 May 2015). According to this information, 731 QRs were in place in May 2015, 66.5% of which concern import-, whereas 33.5% concern export measures. 334/731 measures notified concern nonautomatic import- and export licensing (that we discuss in chapter 1, volume II). 593/731 QRs are justified through invocation of Article XX of GATT, whereas a further 89 QRs are justified through recourse to Article XXI of GATT. We discuss these two provisions in chapter 9 of this volume. 102. Collins-Williams and Wolfe (2010). This issue will be explained in more detail in chapter 12 of volume 2. 103. In Annex 2, the decision classifies QRs as follows: “P” (Prohibition); “CP” (Prohibition except under defined conditions); “GQ” (global quota); “GQC” (Global quota allocated by country); “BQ” (bilateral quota; i.e., anything less than a global quota); “NAL” (nonautomatic licensing); “STR” (quantitative restriction made effective through state-trading operations); “MXR” (mixing regulations); “MPR” (minimum price, triggering a quantitative restriction); “VER” (“voluntary” export restraint). The following suffixes to this classification may be added when appropriate: “-S” (seasonal restriction); “-X” (export restriction). 104. WTO Document G/MA/QR/1 of 23 September 2013.

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105. See, for example, WTO Documents G/MA/QR/N/GEO/1 of April 4, 2014 (Georgia); G/MA/QR/N/IND/1 of 10 June 2014 (India); G/MA/QR/N/CHE/1 of 2 May 2014 (Switzerland). 106. Mattoo and Mavroidis (1995) discuss a similar case, the EU/Japan VER on cars. They ask the question whether Japanese producers would have had the incentive to behave in a VER-consistent manner even in the absence of a VER.

Chapter 3 1. This process is known in WTO jargon as “binding” or “consolidation” of tariffs. 2. Palmeter (2003) correctly takes the view that the “placement” of this provision is “unorthodox” and explains why this has been the case: GATT’s core constitutional provisions are contained in the first three articles: Article I’s MFN requirement; Article II’s binding of tariffs at existing levels; and Article III’s national treatment requirement. This is an unconventional progression—tariff binding is sandwiched between the two non-discrimination requirements. Logically, GATT should begin with Article II’s commitment to hold protection at existing levels, then move to MFN and then to national treatment. The unconventional progression of GATT’s first three articles is due largely to the influence of the United States, which focused on MFN as its overriding concern in the years leading up to the negotiation of the GATT. When the United States eventually could claim victory on this point, MFN was put at the head of the GATT parade. 3. This refers to the literature supporting the view that GATT is also explained by the desire to curb uncertainty in chapter 1. 4. Trade Profiles, 2014, World Trade Organization: Geneva, Switzerland, https://www.wto.org/english/res_e/ booksp_e/trade_profiles14_e.pdf. See also WTO Document TN/MA/S/14 of 25 January 2005, which provides information on this score regarding nonfarm products. 5. In Document E/PC/T/30 (p. 4), it is explained that it is only the unjustifiable refusal to negotiate that will be punished. 6. E/PC/T/30, at p. 10. 7. E/PC/T/C.6/9 of January 23, 1947, /13 of 24 January 1947, and E/PC/T/C.6/W.4 of 3 February 1947. Note that, although export taxes did figure high on the US wish list, they were considered to be an NTB barrier and were not originally discussed under this provision, which concerned import tariffs only. Export taxes are detailed later in this chapter. 8. Some additional very noteworthy proposals were submitted. For instance, the UK delegation proposed the addition of a paragraph that would call for negotiations any time an ITO member changes its method of tariff valuation or its tariff classification so as to increase the duty payable. This proposal did not make it to the final text. (E/PC/T/C.6/W.15 of 23 January 1947). Had this provision been enacted, it would have been quite pertinent for the resolution of Argentina—Footwear, a WTO dispute discussed later in this chapter. 9. Feenstra (2004) explains the economic effects of tariffs in pertinent terms. 10. Economists often refer to the “effective rate of protection,” that is, a measurement of the effect of tariffs on the value added, when both intermediate and final goods are imported. The original prediction in Grubel and Johnson (1967) was that effective rates would attract a lot of interest in international trade negotiations. Ethier (1977) first showed why this concept is practicable only under very strict conditions, and its impact in international negotiations has not justified the original predictions. What matters in trade negotiations is the “nominal rate.” On this issue, see also the various contributions in Grubel and Johnson (1971). 11. Nothing legally stops WTO members from applying a duty that is lower than the agreed ceiling (the difference between the two numbers is known as “water” or “tariff overhang”), provided that they adhere to the MFN discipline. 12. There are hundreds of similar rulings that can be searched in the Customs Rulings Online Search System (CROSS), an Internet database compiling rulings on customs issues from various national jurisdictions. 13. This institution used to be known as the Customs Cooperation Council (CCC). 14. At this time, work on HS 2017 is under way. The WTO Committee on Tariff Concessions has established simplified procedures to implement these changes and any future changes in the HS relating to GATT

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concessions since, as will be discussed later, WTO members have agreed to implement the HS Convention. GATT Document BISD 39S/300. 15. Universal serial bus (USB) keys entered the market to replace floppy disks. 16. As explained later in this chapter, WTO members can adopt national subclassifications beyond the common six-digit level, provided that they have respected the disciplines of the HS Convention. Elaborate classifications and subclassifications have been known in customs practice for many years. Irwin (2011, p. 35) refers to the following entry in the Smoot–Hawley Tariff Act: “bottle caps of metal, collapsible tubes, and sprinkler tops, if not decorated, colored, waxed, lacquered, enamelled, lithographed, electroplated, or embossed in color, 45 per centum ad valorem.” 17. There is a specific GIR for composite goods—namely, GIR 3(b). 18. WTO Document TN/MA/W/103 Rev. 1 of 20 May 2008. 19. GATT Document MTN.GNG/NG3/W/8 of 13 November 1987. 20. See GATT Documents MTN.GNG/NG3/W/4 of 13 November 1987, MTN.GNG/NG3/W/4 of 9 July 1987, MTN.GNG/NG3/W/1 of 18 May 1987, and MTN.GNG/NG3/W/7 of 5 November 1987, respectively. The attitude of Australia is remarkable: it has not implemented the “optional heading” but supported the inclusion of energy products in the negotiating mandate of the group. It seems thus, that for Australia at least, nonimplementation of the “optional heading” did not ipso facto lead to exclusion of the products coming under it from all GATT disciplines. 21. See GATT Documents MTN.GNG/NG3/7 of 30 June 1988 (Mexico, Chile), MTN.GNG/NG3/W/14 of 5 December 1989 (African Sub-Saharan countries). 22. See for example, GATT Doc. MTN.GNG/NG3/6 of 29 February 1988. 23. The classification of a commodity as good or service is far from a walk in the park. Economists used to insist on the “intangibility” of services as their defining criterion; technological advances have cast doubt on the legitimacy of this distinction. Hill (1976), (1999) discusses this issue in detail, and argues for a distinction between tangible-, intangible goods, and services. 24. As shall be explored later in this chapter, the process of certification of schedules of concessions does not at all immunize them from subsequent legal challenges. The AB EC—Bananas III report made this point abundantly clear. 25. Before requesting the establishment of a panel, WTO members must consult with each other if a product has been misclassified as a result of an order by a domestic court. Article II.5 of GATT states as much, and this provision is covered later in this chapter. 26. It is unclear whether WCO members (who are WTO members as well) have to submit their dispute to the WCO organs before submitting them to the WTO. So far, this issue has not been raised in the WTO context. There are good reasons to believe, though (judging by the attitude of panels toward disputes between members of PTAs), that WTO panels would discuss submitted disputes under WTO law, regardless of any other consideration. They might still request the view of the HS competent organ, but there is no legal obligation to this effect. 27. Remarkably, in this case, as in EC—Computer Equipment before it, the parties to the dispute defended before the panel the view that their dispute did not concern a classification issue (although this is precisely what this case was all about). Curiously, the panel did not disagree with the parties. In EC—Chicken Cuts, the outcome is probably indefensible: why would salted chicken have been introduced in the first place if preservation of the good had not been intended? If the panel (and the AB) were right, then one might legitimately ask why other forms of seasoning had not been introduced in the corresponding tariff classifications as well? It seems that the EU was right in insisting that the only reasonable way to understand the term “salted” as “salted for preservation purposes.” Alas, the panel and the AB followed a highly textual understanding of the classification. 28. The AB took a slightly different view on the use of the interpretative elements, but it did not disturb the panel’s findings on the proper classification of salted meat at all. The parties to the dispute could have submitted it to the settlement procedures explained earlier in this chapter, but they did not. On the other hand, the panel itself could have used its powers under Article 13 DSU to request an expert testimony from HS officials. It did not do that either. It did address questions to the HS Committee but exercised its own discretion when evaluating the responses granted. 29. All schedules of concessions are reproduced in the series WTO Document G/MA/23/Rev. 1, 2, etc. 30. This was the first dispute concerning products covered by the Information Technology Agreement (ITA), discussed in more detail later in this chapter.

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31. Van Damme (2007) did not agree with this view. She argued that, although schedules of commitments are undeniably treaty language (and, consequently, it is only appropriate that the starting point of interpretation is the VCLT), some adjustments are called for in light of the special characteristics encountered in schedules of concessions. She pays attention to the negotiating record. She is probably right in that adjustments (in the sense of placing some additional weight on the negotiating record) are warranted in this context. As it stands, the VCLT does not include a coefficient for each of the elements reflected in Articles 31–32 VCLT. It is well known that recourse to preparatory work is optional (hence, Article 32 VCLT is secondary to the elements included in Article 31 of VCLT), and that a conscious attempt was made during the negotiation of the VCLT to downplay the importance of object and treaty; see Jimenez de Arréchaga (1978). The remaining elements of Article 31 of VCLT (text, context, subsequent treaty/practice, and other relevant public international law) are prima facie at par, although good arguments can be made in favor of contextual interpretations: words are not acontextual, and context (not only so-called historic context) is informative about the rationale for signing a particular agreement. 32. The AB did not explain at all how one could establish the common intentions of the WTO membership. It should be noted that the parties to the dispute, by insisting that their dispute was not a tariff classification issue (which it actually was), deprived the WTO adjudicating bodies of the opportunity to address the heart of the claim. 33. Trebilcock (2015) offers a very succinct discussion on this issue, pp. 5ff. 34. Interim Commission for the International Trade Organization (1952, p. 9). One can, of course, take issue with the term “concession” here, which might be totally inappropriate for use by those who cannot affect terms of trade. Be that as it may, trading nations have typically viewed tariff reductions as concessions. 35. On this issue see Bhagwati and Irwin (1987). 36. Recall the discussion in chapter 1 on the role of reciprocity during the original negotiation of GATT (E/ PC/T/33, Annexure 10). 37. Reciprocity fits well in both the terms of trade and the protectionism scenarios. With respect to the former, see Bagwell and Staiger (2002). Hillman, Van Long, and Moser (1995) explain that one way to look at reciprocity is by assuming that domestic firms have “property rights” on the domestic market, as a result of political favor, for example. This is a very reasonable assumption, especially in a world of nonliberalized investment. Reciprocity there operates as follows: for the share of domestic market made available to foreigners, domestic firms can capture a share of the export market. 38. GATT Press Release 1312, 5 March 1982. 39. GATT Document MTN/W/8 of 25 February 1975, at p. 3. 40. We will be discussing this Panel in more detail in chapter 8 of volume 2. 41. See Bagwell and Sykes (2007a), who argue why the Chilean PBS could be construed as a proliberalization device. 42. GATT Document MTN.GNG/NG7/W/53 of 2 October 1989. 43. The argument, however, could be made that unbound ODCs must observe the transparency requirement laid down in Article X of GATT. Assuming that this view is upheld in case law, it does not necessarily eliminate all problems that might arise in practice. Interested traders will have to inquire into national laws (which are sometimes arcane and hard to localize), instead of simply checking the national schedule of concessions given to the WTO. 44. ODCs are featured under column 6 of the Uruguay-round schedules. Only Botswana, Côte d’Ivoire, Namibia, Swaziland, and South Africa have used compound ODCs. 45. GATT Document BISD 3S/225 at § 14. See also the 1961 Working Party report on “Operation of the Provisions of Article XVI,” and, more specifically, the discussion on “Subsidies in Negotiation”; GATT Document BISD 10S/201 at §§ 24ff. 46. On this issue, see Bond and Park (2002). 47. WTO Document WT/L/374 of 30 September 1998. 48. WTO Document WT/L/907 of 11 December 2013. 49. World Trade Profiles, 2014, The World Trade Organization: Geneva, Switzerland. 50. A totally different issue is that presented by Special Economic Zones (SEZ). Typically, an SEZ will be established in a WTO Member in order to attract investment and boost trade. In this vein, it could be that imports of inputs are duty free, while the normal duty is imposed when exporting to the sovereignty where the SEZ belongs. SEZs exist in various parts of the world, in Bangladesh, Belarus, China (where Shenzhen, the most famous SEZ,

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was established), Congo, Oman, etc. For a typical example, see pp. 46ff of the Jordanian Trade Policy Review report (WTO Documents WT/TPR/S/206). SEZs might raise issues of consistency with the MFN rule, the SCM Agreement, etc. There has never been a litigation regarding their consistency with the WTO so far. 51. Mavroidis (2012) expressed similar thoughts. 52. GATT Document MTN/W/8 of February 25, 1975, at p. 3. 53. As chapter 5 will discuss, some developing countries and all LDCs (e.g., WTO members with little bargaining power) do not care much about the lowering of tariffs taking place in these negotiations. They are more interested in the benefits they can receive through preferential tariffs. Actually, on occasion, they might even become hostile to MFN liberalization because of its impact on the margin of tariff preferences that they enjoy. 54. Mathematically, linear reduction would look like this: T* = C x T, where T* is the new final rate, C the coefficient for agreed reductions (e.g., 80 percent), and T the base rate; the Swiss formula, in turn, would look like this: T* = C x T/C + T. 55. In linear reductions and the harmonized formula, a formula is applied on a tariff line-by-line basis; in tiered cuts, it is not. In this latter case, through simple average reduction, one aims at reducing on average the tariffs of various tariff lines; through reduction in the average, one compares the average base rates, the average final rates, and then determines the reduction of the latter vis-à-vis the former; and through a target average, a specific average that must be met by new bindings is agreed. 56. The WTO Secretariat has issued a very informative document discussing extensively all sectoral agreements and cataloguing them in its Annex 1; see WTO Document TN/MA/S/13 of 24 January 2005. 57. WTO Document TN/MA/S/13 of 24 January 2005. 58. GATT Document BISD 5S/26. 59. WTO Document TN/MA/S/13 of 24 January 2005, pp. 4ff. 60. GATT Document BISD 11S/174. 61. GATT Document BISD 15S/74. In the Kennedy round, the Group on Cereals, Meat, and Tropical Products, as well as the Pilot Group on Dairy Products, were established; see WTO Document TN/MA/S/13 of 24 January 2005, at p. 5. 62. GATT Document BISD 33S/171. 63. GATT Document 30S/15. 64. Actually the WTO document cited previously (TN/MA/S/13 pp. 5ff) suggests that there is no information regarding sectoral negotiations in the pre—Kennedy round era, but does not exclude that similar negotiations took place even then. 65. WTO Document TN/MA/S/13 of 24 January 2005, pp. 6ff. 66. GATT Document INF/190. 67. MTN.TNC/W/113. See also Annex 3 to WTO Document TN/MA/S/13 of January 24, 2005. 68. According to Article IV of the Agreement Establishing the WTO, a Ministerial Conference is composed of representatives of all members and meets at least once every two years. The Ministerial Conference can make decisions on all matters under any of the multilateral trade agreements. Santana (2012) mentioned that sectoral initiatives were initiated as early as the Tokyo round. A negotiating group called “Sectoral Approach” had been instituted with the aim of discussing the liberalization of trade in electronics and chemicals, among other products. In the Uruguay round, the US followed up with a “zero for zero” initiative on electronics, the aim of which was to reduce tariffs in selected goods to 0 percent. 69. It was still unclear at that time whether the provisions of the declaration would come into effect, as it stipulated that participants representing approximately 90 percent of world trade would have to notify their acceptance by April 1, 1997, otherwise the agreement would not enter into force. The original 29 signatories did not reach the 90 percent trade coverage criterion since they collectively accounted for only 83 percent of world trade in IT products. In the ensuing months after the Singapore Ministerial Conference and leading up to April 1, 1997, a number of other countries expressed an interest in participating in the ITA and notified their acceptance. Thus, the 90 percent criterion was met, and the ITA entered into force, with the first staged reduction in tariffs occurring on July 1, 1997. 70. There have been many drivers for participation, including the unilateral decision to join. The US insists that countries that wish to join the Central America Free Trade Area (CAFTA) or potentially the Trans-Pacific Partnership (TPP), currently being negotiated, must join the ITA as a prerequisite.

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71. Prices have dropped, which explains the drop in percentage. In terms of volume of trade, it has been increasing steadily. 72. Calls to conclude an ITA III estimated an additional $800 billion of gains to be added to the staggering $4 trillion already created through prior liberalization; see, for example, the estimations offered in Conconi and Howse (2012). See “New ITA Talks Would Face Challenge of Building ‘Critical Mass’ of Support,” Inside US Trade, 17 June 2011. Feenstra et al. (2009) measure the remarkable productivity growth as a result of the ITA. 73. The distinction between Attachments A and B was borrowed from the Pharma Agreement, to be discussed next. 74. WTO Document WT/MIN(96)/16 of 13 December 1996; WTO Document G/L/160 of 2 April 1997. 75. GATT Document L/580 of 9 November 1956. 76. For an illustration, see the discussions reflected in WTO Document G/IT/W/33 of 18 May 2011. 77. Disputes do not arise only before the WTO, but before the WCO as well: Japan and the EU disputed the classification of compact disks–read-only memory (CD-ROMs) before the WCO. Similar disputes are quite reasonable to expect: CD-ROMs are parts of personal computers and high-fidelity systems, as they are parts of such items as PlayStation games. Classification under one or the other categories might have important consequences when it comes to defining the level of customs duties because personal computers are covered by the ITA, whereas the other two goods are not. 78. Uncertainty about the tariff treatment could undermine investment, and ultimately innovation might be negatively affected; see Arrow (1962). 79. This dispute occurred while the ITA was being negotiated. 80. Conconi and Howse (2012). See also “New ITA Talks Would Face Challenge of Building ‘Critical Mass’ of Support,” Inside US Trade, 17 June 2011. Feenstra et al. (2009) measured the remarkable productivity growth as a result of the ITA. 81. A number of other initiatives to negotiate sectoral agreements failed; see Hufbauer et al. (2010). Note, finally, that in ITA II, negotiators have added discussions on NTBs to their agenda; see WTO Document G/IT/W/17/ Rev. 2 of 18 June 2014. 82. Since then, of course, Austria, the Czech Republic, Finland, the Slovak Republic, and Sweden all joined the EU. 83. See L/7430 of 25 March 1994, and also L/7430/Add. 1 of of 25 March 1994, L/7430/Add. 2 of of 25 March 1994, L/7430/Add. 3 of 30 June 1994, and L/7430/Add. 4 of 3 August 1994. 84. There is correspondence between the subject matter of the Pharma Agreement and HS classifications established through WCO NC0688E1 of 14 March 2003. 85. WTO Documents G/MA/W/10 of October 11, 1996; G/MA/W/18 of 13 November 1998; G/MA/W/85 of 19 March 2007; and G/MA/W/102 of 2 August 2010. 86. There are dozens of writings on this subject, and Narlikar and Odell (2006) offer one of the most thoughtful examples. 87. WTO Document G/MA/TAR/RS/18, Corr. 1, 2, and 3; WTO Document G/MA/TAR/RS/30. 88. This process is covered later in this chapter. 89. The Legal Affairs Division will issue a WT/LET/… document to this effect any time a new schedule has been certified. See also Jackson (1969, pp. 211ff). 90. GATT Document BISD 16S/16ff. 91. It could be that a circulated rectification or modification has not been certified because of opposition by another WTO member. In this case, if the WTO member notifying it decides to practice it, the absence of certification notwithstanding, it risks getting a legal challenge. Indeed, this is what happened in Spain—Unroasted Coffee, a GATT dispute discussed later in this chapter, along with the legal value of certification. 92. Decision of 26 March 1980, L/4962; GATT Document BISD 27S/25–6. 93. See, for example, GATT Document L/7463 of 24 May 1994, reflecting the Geneva Protocol to GATT (1994) to which the schedules of concessions made during the Uruguay round were annexed. See also GATT Document PC/M/2 of 2 June 1994, at p. 3. Hoda (2001, pp. 227ff) includes all protocols signed at the end of each GATT round since the inception of GATT until (and including) the Uruguay round. 94. This was the third time the EU banana regime was being challenged before GATT/WTO. Until 1992, the EU was not a unified market with respect to bananas: France was importing from its former colonies, and so

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was the rest of the membership except for Germany, which was importing cheaper “dollar zone” bananas (originating in Central and Latin America), refusing to pay the markup associated with bananas from the former French colonies. To this effect, nevertheless, a “Chinese wall” had to reemerge between Germany and the other EU members to ensure that dollar zone bananas would not be reexported to the rest of the EU. In 1992, the Chinese wall had to give way to the new internal market legislation. The EU system that emerged post-1992 was very much like the French system; e.g., it favored the importation of bananas originating in former colonies. Five exporters (Colombia, Costa Rica, Guatemala, Nicaragua, and Venezuela) complained about the new system. The GATT panel report on EEC–Bananas II was not adopted, but following its issuance, the EU signed the Banana Framework Agreement (BFA) with each of them except for Guatemala. In its new regime (Regulation 404/1993), the EU established a tariff quota and provided for a tariff rate in favor of the four signatories. The BFA was reflected in the Uruguay round schedule of commitments of the EU. Guatemala and other nations that did not sign the BFA complained against the new regime, and this is what led to EC–Bananas III, the third dispute between the EU and a series of banana-exporting countries concerning the EU import regime for bananas. 95. The case concerned consistency with Article 4.1 AG, which deals with farm goods only and echoes the basic idea established in Article II of GATT. There should be no doubt, though, that, in light of the symmetric expression adopted in the two provisions and their identical function, the AB decision is relevant for the understanding of Article II of GATT. 96. This is how the GATT Panel on US–Sugar Waiver is known. 97. The AB confirmed this ruling in its report on EC–Poultry (§§ 98–99). A formal argument in favor of the AB approach would be that certification does not take place within a forum, such as the Ministerial Conference, with the powers to confer legality on the outcome of negotiations. 98. GATT Document BISD 28S/102ff. 99. A case similar to Spain—Unroasted Coffee arose in 2005: Panama eliminated from its schedule item 1901.10.10 (modified milk), to which it applied a 5 percent duty. It then created two new tariff items: 1901.10.11 (infant milk formula), with an import tariff of 0 percent, and 1901.10.19 (other), with an import tariff of 65 percent. Mexico complained since, in its view, this unilateral modification violated, inter alia, Article II of GATT (WTO Document WT/DS329/1). The parties to the dispute reached a mutually agreed solution (MAS) that they communicated to the WTO, whereby Panama agreed to reduce the tariff on item 1901.10.19 to 5 percent (WTO Document WT/DS329/2). 100. WTO Document WT/L/225 of 18 July 1997. 101. WTO Document G/MA/IDB/1/Rev. 1 of 27 June 1997. 102. Additionally, Argentina overlooked a best-endeavors commitment that it had undertaken by virtue of the Decision on Notification Procedures “to notify, to the maximum extent possible, adoption of trade measures affecting the operation of GATT 1994,” which came out during the Uruguay round. A change in the type of duty imposed arguably falls squarely within the class of measures that should be notified. 103. WTO Document MTN.GNG/MA/W/25 of December 25, 1993. In 2009, the WTO issued a substantial booklet explaining the content of schedules of concessions, entitled A Handbook on Reading WTO Goods and Services Schedules (Geneva: WTO and Cambridge University Press). 104. There is one exception: the US preference for Cuban origin goods, discussed in chapter 4. 105. As discussed in chapter 2, Russia’s schedule of concessions contains a Part V, where bindings on export duties are included. 106. For example, Canada’s Uruguay round schedule includes the following headnote: “Unless otherwise specified in column 5, the reductions in tariffs provided for in Section IA shall be implemented in equal annual installments beginning in the year 1995 and ending in the year 2000, with the exception of tariff items. …” 107. Examples include the Special Agricultural Safeguard (SSG), the Special Safeguard Mechanism (SSM), and Special Products (SP), which are covered in chapter 8 of volume 2. 108. See the discussion on renegotiating tariff commitments later in this chapter. 109. This international treaty entered into force on 28 July 1953, and was reproduced in 171 UNTS 307 (15 December 1950). The provision on “normal price” is included in Annex I. 110. The negotiating record clarifies that this provision binds not only monopolies before GATT, but also those established in subsequent years; EPCT/TAC/PV/10, at pp. 35ff. 111. The GATT Panel on Japan—Agricultural Products I confirmed the relevance of the Havana Charter; GATT Document BISD 35S/163 at § 5.2.2.1.

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112. GATT Document BISD 35S/86 at §§ 4.9ff. 113. GATT Document BISD 35S/229 at §§ 104ff. 114. GATT Document BISD 39S/27 at §§ 5.17ff. 115. The GATT Analytical Index, pp. 92–93. 116. The current draft of the provision was agreed during the Review Session of 1954–1955. 117. GATT Document EPCT/TAC/PV/24, at pp. 43–44. 118. 2 UNTS 39 (1947), as amended on 1 April 1978. 119. They were adopted on 29 January 1980, GATT Document BISD 27S/28–29. 120. Here, the discussion is of cases of de jure increase of the level of duty, not of (allegedly) de facto increase as in Argentina—Textiles and Apparel. Recall that in that dispute, Argentina formally changed the form of duty from ad valorem to specific. The impact of the change in form to the level of duty was a factual issue. 121. Tariff flexibility can help induce more meaningful commitments in the first place, as already noted earlier in this chapter. Other things being equal, a trading nation will be more willing to make a deep tariff cut (and benefit from the corresponding tariff cuts that its partners will make) if it knows that it can always return to another, less trade-liberalizing equilibrium, than if it makes only rigid tariff cuts that it can never revise upward. 122. For example, for political economy reasons, a WTO member might be willing to redistribute wealth among its constituencies by overexposing some producers to international competition (which is what the Article XXVIII of GATT compensation essentially amounts to), while sheltering others from it (which is what the increase in the level of tariff protection leads to). 123. In the WTO era, “applicant contracting party,” the term used in Article XXVIII of GATT, should be replaced by the term “applicant member.” Since, however, the original term was not repealed or modified, this section refers to the “applicant contracting party” to avoid confusion. 124. WTO Document G/L/138, of 14 January 1997. 125. Recommendation adopted on 16 November 1967, GATT Document BISD 15S/67. Although the term “recommendation” was privileged, there should be no doubt that this is a decision by the GATT CONTRACTING PARTIES and part of GATT 1994. As Mavroidis (2008) explained, contracting parties used different names when adopting decisions without ever clarifying why this had been the case. 126. One may wonder what explains the inclusion of INRs in the negotiation. Trade patterns change fast, and there are good reasons to cast doubt on the presumption that INRs continue to be big players in the market of the applicant contracting party. Indeed, the fact that the number of PSIs is limited to one or two per negotiation, as explored in what immediately follows, suggests that WTO members with a bigger interest than INRs will not be allowed to participate in a negotiation, the outcome of which might have more of an impact on them than on the INR holders. 127. WTO Document G/MA/111. 128. WTO Document G/MA/M/23 of 12 May 2000. 129. WTO Document G/MA/M/24 of 20 July 2000. 130. Hence, for nonparticipants, compensation might be a useless gift. 131. GATT Document TAR/M/16. 132. Article XXVIII of GATT states that the CONTRACTING PARTIES would be entrusted with this task; following the advent of the WTO, this task was entrusted to the CTG. 133. Some might indeed have a trade interest that supersedes that of the INR holder since the number of PSIs participating in a negotiation is limited in practice to a maximum of two. It could also be the case that WTO members with market shares less than that of the INR care a great deal about this product market since it might represent a substantial percentage of their gross domestic product (GDP) or of their export income. 134. It is, of course, to be expected that the smaller the number of participants, the higher the likelihood that PSIs and SIs are also INRs. 135. GATT Analytical Index (1995, p. 947). 136. The amount of compensation can, of course, be an issue in the context of a renegotiation of duties in cases where no customs union is enlarged. The standard is the same. In a GATT case dating from 1978, Canada–Lead and Zinc, the issue was whether the compensation paid was adequate. The EU had raised its duties on lead and zinc. It then concluded an agreement on compensation with Australia but failed to do so with Canada. The latter subsequently increased its duties on a series of goods, including canned meats, liqueurs, and vermouth. The EU complained that the Canadian retaliation had “overshot” the amount of injury suffered. The panel agreed with the EU view and asked Canada to avoid calculating its damage based exclusively on the amount of trade that it

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had enjoyed under the previous tariff. Canada should take into account the amount of trade that it would continue to enjoy with the EU on the basis of the new tariff and adjust the level of compensation accordingly (§19). 137. WTO Document G/SECRET/1 of 1 March 1995. 138. WTO Documents G/SECRET/1 Add. 1 of 7 March 1995 and Add. 2 of 5 February 1998. 139. UN Document E/PC/T/TAC/PV/18 of 12 September 1947, where the originally submitted text was agreed, and E/PC/T/TAC/PV/14 of 9 September 1947. 140. Voices of this type have already been raised. During the Uruguay round, Switzerland, in a communication to GATT (GATT Document MTN.GNG/NG7/W/65 of 23 December 1989), proposed “the introduction of an interpretative note to paragraph 3 of Article XXVIII explicitly authorizing contracting parties to take retaliatory action on a bilateral basis against the contracting party which originally withdraws its concession. To avoid possible misuse, the implementation of retaliatory measures should be subject to the prior approval of the CONTRACTING PARTIES.” Its proposal, unfortunately, was not met with enthusiasm by its trading partners. 141. According to case law, for an NVC to be successfully launched, the following conditions must be cumulatively met: (1) a concession must have been negotiated; (2) a subsequent action has occurred that (3) could not have been reasonably anticipated by the affected WTO members and which (4) reduces the value of the tariff concession. Case law (Japan–Film) has clarified that it is the complainant that must prove point (3) if the action occurs before the negotiation of the concession, whereas the burden shifts to the defendant in the opposite case. 142. It is immaterial if compensation, for example, is paid in commodities of no interest to the state at hand. 143. Grenada, for example, withdrew its request, arguing that it could not be present during the discussions (see WTO Document G/C/M/59 of 22 March 2002). Subsequently, it reintroduced its request and managed to conclude the negotiations (see WTO Document G/SECRET/16 and Add. 1). 144. E/PC/T/C.II/50 at p. 1; E/PC/T/C.II/4, at p. 20; E/PC/T/C.II/64, at p. 5. 145. See E/PC/T/C.6/W.20, at p. 3. 146. E/PC/T/C.II/54, at pp. 16ff. 147. E/PC/T/C.II/54, at p. 21. 148. E/PC/T/C.II/12, at p. 4. 149. E/PC/T/C.II/50, at p. 1. 150. E/PC/T/C.II/54, at p. 22. 151. E/PC/T/C.II/54, at p. 23. The list comprises items such as consular fees, licensing, exchange regulations, statistical evidence, inspection, quarantine sanitation, and fumigation (plant, animal, and human). 152. E/PC/T/33, at p. 28. 153. There is, however, some dubious precedent in this context: Honduras bound all its customs duties during the Uruguay round at 35 percent ad valorem, and also included an additional 3 percent ODC. In its schedule, Honduras explained that the ODC will be reduced to 1.5 percent by December 31, 1995, and then modified further in order to comply with the requirements of Article VIII of GATT. An ODC was thus transformed into an imposition under Article VIII of GATT. 154. The panel report on US–Certain EC Products is yet another illustration along these lines (see especially §6.69). 155. GATT Document C/M/257 of 10 July 1992. 156. Subsequently, Montenegro seceded, and Serbia and Montenegro are currently negotiating their accession to the WTO; both have achieved observer status at this time. Croatia (2000), the Former Yugoslav Republic of Macedonia (2003), Montenegro (2011), and Slovenia (1995) have all joined the WTO since the dissolution of the Yugoslav Federation. 157. For a technical explanation of what the two dataset do, see WTO Document G/MA/156 of 24 March 2005. GATT’s core constitutional provisions are contained in the first three articles: Article I’s MFN requirement; Article II’s binding of tariffs at existing levels; and Article III’s national treatment requirement. This is an unconventional progression—tariff binding is sandwiched between the two non-discrimination requirements. Logically, GATT should begin with Article II’s commitment to hold protection at existing levels, then move to MFN and then to national treatment. The unconventional progression of GATT’s first three articles is due largely to the influence of the United States, which focused on MFN as its overriding concern in the years leading up to the negotiation of the GATT. When the United States eventually could claim victory on this point, MFN was put at the head of the GATT parade.

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Chapter 4 1. It is also legalese for nondiscrimination, as is “national treatment”: under MFN, this term refers to treatment of foreign goods that provides the comparator for the treatment of other foreign goods, whereas under “National Treatment,” it is the treatment of domestic goods that provides the comparator for the treatment of foreign goods. 2. Arguably, this risk was progressively reduced as participation in GATT increased over the years. At the same time, because of increased participation, the size of advantage conferred through the MFN clause increased for those aspiring to join the club. 3. Club members, of course, were also certain about a host of other issues (e.g., the level of tariffs they would face in foreign markets) that had been contractually agreed between them. Outsiders did not enjoy similar privileges. 4. E/PC/T/C/33, at p. 9. For a concise discussion of the historical underpinnings of MFN, see Horn and Mavroidis (2009). 5. The formulation of the MFN clause became more and more elaborate as US negotiators gained experience from signing treaties and observing them in practice. Article I of the 1942 reciprocal trade agreement with Mexico, one of the very last treaties the US signed before the negotiation of GATT began, reads: “With respect to customs duties and charges of any kind imposed on or in connection with the importation or exportation, and with respect to the method of levying such duties and charges … any advantage, favor, privilege, or immunity which has been or may hereafter be granted by the United States of America or the United Mexican States to any article in or destined for any third country shall be accorded immediately and unconditionally to the like article originating in or destined for the United Mexican States or the United States of America, respectively.” 57 Stat. 835. 6. Government procurement and buy national policies would not be covered by the MFN; see E/PC/T/C/33, at p. 1. 7. Irwin, Mavroidis, and Sykes (2008). 8. The GATT Analytical Index, 3rd revision, GATT: Geneva, 1970 at p. 3ff. 9. Committee Reports Havana (CRH) at pp. 47–49. 10. A recent paper by Ludema and Mayda (2013) supports this conclusion. 11. See, on this score, Schwarz and Sykes (1998). A related concept to preference erosion is bilateral opportunism, advanced by Bagwell and Staiger (2002). The role of MFN to prevent concession erosion (diversion) is the focus of Ethier (2004): governments are assumed to initially form reciprocal bilateral agreements, which include MFN, to avoid concession diversion; as more and more bilateral agreements are formed, the incentives to participate in further agreements gradually diminish since each agreement, through the partner’s MFN commitment, must be shared with more and more other countries, and more and more market access has to be given away through a country’s own MFN commitments; a process of liberalization through bilateral agreements, therefore, will eventually come to a halt. It will become necessary to internalize the external effects of any further agreements by making the agreements multilateral. Hence, MFN causes multilateralism, not the other way around. This study can also be seen as an illustration of the more general point that bilateral negotiations conducted under MFN generally are associated with externalities, since the outcome of such negotiations affect parties who are not present in the negotiations. In this paper, Ethier adds that the role of MFN becomes all the more important as the number of participants in trade deals increases: any newly acceding country to the WTO will profit from access to a wider world market. 12. Olson (1965) should be credited with the idea of collective action; that is, the reason behind the impossibility for heterogeneous agents to come together and agree on an issue. See also Sebenius (1983) on this score. Ludema (1991), in one of the few studies that employs a noncooperative sequential bargaining model to study the impact of MFN on multilateral bargaining, shows how negotiators may find it optimal to devise equilibrium offers so that free riding does not occur, despite there being incentives and possibilities to do so. In support, note that, following tariff cuts, resources will be reemployed in other sectors—those with export potential. Those that have not made tariff cuts will be facing more competition than they had imagined. 13. The original exchange of concessions in GATT took place among principal suppliers. Incidentally, Hawkins (1951, pp. 81ff.) reports that the unwillingness to compensate free riders is what motivated the US government to grant MFN under the RTAA only to the countries that it considered principal suppliers of a particular

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commodity. Recall also from chapter 1 that, in Hull’s view, MFN was the price that developed nations had to pay to developing countries as a token for reestablishing world peace. Compare Bagwell and Staiger (2005b) on the institutional responses to free riding. 14. Several arguments in this vein were made by Viner (1924). 15. See, inter alia, Sapir (1998a), Schott (1989), and compare with more recent studies such as Limão (2006c). 16. We discuss the test applied to de facto discrimination in detail in chapter 7. The analysis there applies mutatis mutandis here as well. Sometimes it is quite easy to prove de facto discrimination. The Panel on EEC–Imports of Beef dealt with a similar case. The EU had adopted a law that was all but de jure discriminatory, providing beef originating in the US and approved by the US Department of Agriculture (USDA) with a considerable advantage. From § 2.4: “Carcasses or any cuts from cattle not over 30 months of age which have been fed for 100 days or more on a nutritionally balanced, high energy feed concentration ration containing no less than 70 per cent grain and at least 20 pounds total feed per day. Beef graded USDA ‘choice’ or ‘prime’ automatically meets the definition above.” The panel had no trouble finding that the measure described here constituted a violation of Article I of GATT (§ 4.3). 17. §§ 121ff. The panel did not formally rule on this issue since no claim had been made to this effect before it and, consequently, any ruling would be ultra petita. In § 123 of its report, the panel left no doubt that it considered that exemptions also could come under the purview of Article I of GATT. 18. GATT Panel report on Cuba–Consular Taxes, GATT Document BISD II/12. 19. On the reaction of European courts to this decision, see Snyder (2003). The bananas saga ended on 15 December 2009. The EU agreed to gradually cut its import tariff on bananas from Latin America from €176/ton to €114/ton. The Latin American banana exporters promised not to make any additional demands for tariff cuts on bananas during the Doha round. ACP exporters continued to enjoy duty- and quota-free access to the EU market, while the EU mobilized up to $200 million from the EU budget to support the main ACP exporters’ adaptation to the changing conditions of competition in the EU market. 20. See, on this score, Jackson (1969) and Irwin, Mavroidis, and Sykes (2008). 21. Quoted in Gardner (1956), at p. 19. 22. See Zeiler (1999) and Toye (2003) for details on the conclusion of the negotiations. 23. E/PC/T/C/30, at p. 3. 24. Italy had requested this issue be expressly taken as an exception to Article I of GATT in 1948 (Havana Charter), and its request was approved; see E/CONF.2/C.3/SR.44, at p. 3. 25. The beneficiaries were Jordan, Syria, Iraq, Lebanon, Libya, Saudi Arabia, and Yemen: the margins waived were those in effect on 13 November 1962; see GATT Document MTN.TNC/LD/W/1 of 18 December 1992, at p. 2. See also GATT Analytical Index, 3rd revision, GATT: Geneva, 1970, at pp. 3ff. 26. An interesting case is reported in the GATT panel report on Jamaica–Margins of Preference. The UK had accepted GATT in the name of Jamaica on 1 January 1948, but failed to notify GATT until 1 August 1972. Jamaica became independent on 6 August 1972, following the procedure established under Article XXVI.5(c) of GATT. The question was whether it would inherit the margins of preference of the UK (established on 10 April 1947, like all other original GATT contracting parties), or whether those applicable on 1 August 1972, would prevail. The panel decided that, from a purely legal perspective, the former was the correct response to the question asked. For equity reasons, nevertheless, in light of the very particular situation surrounding Jamaica’s accession to GATT, it recommended that a waiver be granted that would allow Jamaica to apply the margins of preference prevailing on 1 August 1972 (§§ 13ff). 27. See Article 24 of the Preparatory Committee reflected in pp. 24 and 25 of E/PC/T/174 of 15 August 1947. 28. GATT Document MTN.TNC/LD/W/1 of 18 December 1992. The Cuban preferential regime has been expressed in Spanish, which is reflected in this language in the Cuban schedule of concession: “El régimen de preferencias vigente exclusivamente entre los Estados Unidos de América y la República de Cuba establecido en el artículo I:2:c) del Acuerdo General sobre Aranceles Aduaneros y Comercio no se aplica en virtud de la Proclama Presidencial 3447 de los Estados Unidos de América en vigor desde el 7 de febrero de 1962 que prohibe el comercio con Cuba.” 29. On this score, see Bhagwati and Irwin (1987) at pp. 177ff. 30. Culbertson (1921) discusses, inter alia, how Hawaii benefited from preferential treatment in US. 31. Hamilton presented this report to Congress in 1791. It was a series of recommendations regarding economic policies that would provide the necessary stimulus to the US and would guarantee that the hard-fought

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independence from Britain would not be risked. A strong economy was in Hamilton’s view the necessary guarantee to serve this purpose. 32. Culbertson discusses all this in a magnificent book, which was published in 1937. 33. Bhagwati and Irwin (1987) take the view that the switch to conditional MFN is evidence of the diminishinggiant syndrome and draw parallels in the political discourse in the US at the end of the twentieth century with that in the UK fifty and sixty years earlier. 34. Report adopted on 30 July 1973; see GATT Document BISD 20S/34. 35. The official title of the statutes providing for duty-free treatment were “Motor Vehicle Tariff Order” (MVTO), and “Special Remission Orders” (SRO); see §§ 7ff. of the AB report. 36. See the corresponding analysis in chapter 3. 37. As will be explored in chapter 9 in the discussion of this provision, the requirement not to discriminate applies only with respect to countries where the same conditions prevail. 38. Allocation of burden of proof is not a value-neutral exercise: were one to aim at avoiding regulatory freeze (i.e., underinvestment), then the approach in Canada–Autos should prevail; were one to reduce the potential for beggar-thy-neighbor policies, then the orthodox view should remain intact. In the author’s view, it is the former approach that should be privileged in future practice for the reasons mentioned in chapter 7, when the issue of discrimination is discussed again, this time in the context of domestic policies. 39. The facts of this case are given in more detail in chapter 5 of volume 2, since one of the claims submitted was that the EU measure (referred to as the “EU Seal Regime”) was in fact a technical regulation, an argument that the AB ultimately rejected. 40. Hoekman (1993), Krishna and Krueger (1995), and Krueger (1999) have all provided persuasive analyses to this effect. 41. WTO Document WT/DS151/10 of 31 July 2000. 42. E/PC/T/33, at p. 28. 43. E/PC/T/C.II/W.30, E/PC/T/C.II/48 at pp. 21 ff., and E/PC/T/C.II/54, at pp. 23ff. 44. Irwin, Mavroidis, and Sykes (2008). 45. See, for example, the proposals of the French delegation at E/PC/T/C.II/12 of 26 October 26, at p. 5. 46. E/PC/T/C.II/12, at p. 6. 47. E/PC/T/C.II/50, at pp. 13ff. The current Article 23 of the TRIPs agreement addresses this issue. 48. E/PC/T/C.6/30 of 31 January 1947, at p. 4. France, in this document, proposed the introduction of an obligation similar to those recorded in the Madrid Convention, whereby Spain and Portugal, for example, would be precluded from selling “Bordeaux” wines, whereas France would be precluded from offering “Madeira” wines. 49. E/PC/T/C.6/55, at pp. 33ff. 50. WTO Document WT/DS151/10 of 31 July 2000. 51. GATT Document G/92 of 21 March 1955 at p. 5. 52. Jackson (1969) at pp. 467ff., and Vermulst and Waer (1990) at pp. 92ff. have a detailed discussion of this issue. 53. Vermulst and Waer (1990) at pp. 94ff. 54. GATT Document L/595 of 15 November 1956. 55. GATT Document BISD 7S/117ff. 56. GATT Document CG.18/W/48 of 6 March 1981. 57. The same document notes that, in addition criteria used, origin rules contain provisions concerning cumulation (that we discuss later)—minimum processing (defined as simple operations that are considered inadequate to confer origin); direct consignment (for products, in particular bulk cargos, for a product to be eligible for origin treatment its transport must be effected directly from the place of production to its destination); and documentation (proof of origin). 58. To decide whether change has occurred, transformation must be substantial. It is usually substantial if the transformation leads to a change in the tariff classification, say from one six-digit classification to another. This is the notorious “substantial transformation” criterion that has been used for 100 years now by the US, as Palmeter (1990) explains, and, in the account offered by Vermulst and Waer (1990) for long periods in some product categories by the EU. 59. Brenton (2011) laid out in a convincing manner the pros and cons of each method. They are all quite clear methodologies that leave little uncertainty as to the outcome. See also Palmeter (1990), Vermulst (1992), and Vermulst and Waer (1990).

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60. Some of the most notorious disputes are reported in Vermulst and Waer (1990). The speed of the process before specialized domestic courts must be one contributing factor to explain why private traders might prefer to adjudicate disputes there instead of taking the long and winding road of trying to persuade their government to argue their case for them before a WTO panel in Geneva. 61. For a survey of the literature, see Krishna (2005). Inama (2009) and Puccio (2012) provided more recent, albeit less complete, accounts. 62. Vermulst (1992) offers a very comprehensive comparative study in this respect, with examples from state practice across various jurisdictions. 63. Note that the US has officially cast doubt on the idea that an eventual agreement on a WTO ROO should automatically entail that the final outcome must be applied in AD investigations; WTO Document G/RO/W/65 of 18 May 2001. 64. This is not the first multilateral initiative to this effect. The Kyoto Convention of 1977 pursues the same objective but has had very little impact so far in WTO practice. WTO members did not wish to add preferential rules of origin to the agenda. 65. As is the case with all WTO committees, all WTO members are represented. 66. See, for example, some of the discussions reflected in WTO Document WT/GC/M/109 of 24 October 2007. 67. Discussions are ongoing on other issues as well, such as on the so-called dual-rule approach, whereby, although each product must have one rule of origin (especially for machinery), a WTO member shall be allowed to choose either a value-added rule (where a fixed percentage of value confers origin) or a tariff-shift rule (where, because of value added, a product changes its tariff line). 68. WTO Document WT/GC/M/126 of 22 June 2010. 69. WTO Document G/RO/M/55 of 17 December 2010 and WTO Document G/RO/W/111/Rev. 6 of 11 November 2010 reflect the current agreed text so far. Vermulst and Imagawa (2005) discuss the main themes of the negotiation. The US, the original enthusiast as per Palemeter’s (1990) account, seems to be nowadays more skeptical about the merits in harmonizing rules of origin, see WTO Document G/RO/M/62 of 19 June 2014. 70. Vermulst (1995). 71. Notifications appear in the G/RO/N series. G/RO/N/1 for example, dated 9 May 1995, reflects the notification of Thailand to this effect. 72. Post Bali, preferential rules of origin were discussed in the HWP. In the name of LDCs, Uganda submitted a very comprehensive proposal—a wish list of items that LDCs would like to see included in the negotiation, WTO Document G/RO/W/148 of 28 October 2014. To what extent this will be an isolated incident—or whether post-Bali preferential rules of origin will be discussed in the HWP—remains to be seen. At any rate, the current malaise surrounding the HWP negotiations does not leave much room for hope. 73. During the Doha round, some initiatives have been undertaken to streamline preferential rules of origin although, as stated earlier, they do not figure in the HWP. A Draft Decision regarding Preferential Rules of Origin for LDCs states that “… it is desirable to keep the level of value addition threshold as low as possible, while ensuring that it is the LDCs that receive the benefit of the preferential trade arrangements. It is noted that the LDCs seek consideration of allowing foreign inputs to a maximum of 75% of value in order for a good to qualify for benefits under LDC preferential trade arrangements,” see WTO Document JOB/TNC/24. 74. See Abreu (2013) for a comprehensive discussion of similar schemes. 75. A good illustration is offered in an European Court of Justice (ECJ) judgment (C-386/08, Brita GmbH v Hauptzollamt Hamburg-Hafen; judgment of 25 February 2010), where the ECJ refused to accept that there is an obligation for customs authorities to accept the origin of goods as declared by the exporter. 76. Serra et al. (1997). 77. Infrequently, there is also partial cumulation. If an FTA comprises more than two constituents, only a subset of its members would profit from cumulation under this regime. 78. See Brenton (2011). 79. GSP schemes are discussed in detail in chapter 5. Suffice it to state for now that, through similar schemes, donors offer beneficiaries (developing countries) unilateral tariff preferences. 80. http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_origi%3En/p%3Ereferential/article _783_en.htm.

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81. Abreu (2013) mentions yet another example of preferential rules of origin: in PTAs among Asian developing countries, the minimum value added for products originating in LDCs is reduced by 10 percent. 82. See Inama (2003) and Krueger (1997) on this issue. 83. EFTA comprised northern European countries, which were eventually reduced to one, Norway, as a result of the successive accessions of the UK and the Scandinavian countries to the EU. 84. Cadot et al. (2005). Compare the analysis by Inama (2009), who arrives at similar conclusions. 85. Similar evidence concerning US trade with other American countries is provided in Estevadeordal and Garay (1996). 86. As we will see in chapter 5, where we discuss this initiative in more detail, through “Everything But Arms” the EU has provided products other than arms originating in LDCs with duty free access to its market. 87. The new EU GSP (Commission Regulation EU 1063/2010, in force as of 1 January 2011) includes a simplification of rules of origin, especially for LDCs: a uniform local content rule of 30 percent is applied, and this threshold confers LDC origin for most manufactured goods (the percentage being 50 percent for developing countries which are not LDCs). The percentages are calculated on the basis of the ex-works price (including profits and general expenses). The term “ex-works price” means the price to be paid for the product obtained to the manufacturer in whose undertaking the last working or processing is carried out. The same regulation divides LDCs into four groups (based on geographic-proximity considerations; Article 85), and allows for “regional cumulation” if the working in the beneficiary country goes beyond minimal operations (defined in Article 78.1 and in Annex 16 of the regulation). Still, there are some features that continue to be debated, such as “double jumping,” whereby a country that produces a garment from imported fabric from imported yarn can be the country of origin of the final exported good. As explained in detail in chapter 5, a UN list reflects all LDCs, whereas non-OECD countries are usually considered to be developing countries. LDCs have tabled their own proposal in this respect (WTO Document TN/MA/W/74/Rev. 1 of 10 February 2011), where they advocated even lower percentage thresholds for conferring LDC origin. 88. WTO Document WT/MIN(13)/W/14 of 5 December 2013. 89. Although a definition of “wholly obtained” would be warranted anyway, as Article 9 of ROO exemplifies. 90. In a way, GVCs is a response to what Easterly (2013) describes as the “Aleppo disease” (pp. 233ff.). Aleppo prospered when it was an integral part of a production chain, and failed miserably when state, regulatory, and other barriers were raised around it. 91. The terms “outsourcing” and “offshoring” refer to different activities but have not been used in the same manner across the literature: a recent WTO study uses “outsourcing” to denote activities that a company outsources in general, whereas “offshoring” is used for activities outsourced in a foreign country; see “Trade Patterns and Global Value Chains in East Asia: From Trade in Goods to Trade in Tasks,” the WTO, Geneva, 2011; Helpman (2011, p. 127) uses “outsourcing” to refer to the acquisition of goods or services from an unaffiliated party, regardless of whether the unaffiliated party is located at home or abroad, and “offshoring” to refer to the sourcing of goods or services in a foreign country, either from an affiliated or from an unaffiliated party. 92. Value chains were originally being formed within PTAs that achieved a certain level of integration, before they became global as a result of the dismantling of barriers at global scale. There is no more apposite example than the EU, the first PTA that opted for “deep integration.” Similar cases are not confined in the European continent, though. The “North American Supply Chain,” the outcome of integration of the Canadian and US markets is another fitting illustration. It started with the 1965 “Auto Pact,” a sectoral agreement that managed to integrate the US and Canadian auto markets, see Boskin (2014) pp. 7ff. See also Baldwin and Martin (1999). 93. Ron Tempest, “Barbie in the World Economy,” The Los Angeles Times, 22 September 1996. See also Friedman (2005). Preeg (1995) argues that vertical integration between high wage industrialized countries and the low wage newly industrialized countries in Asia provided much of the impetus for the negotiation of the Uruguay round. In contrast to today’s world, though, value chains were not global, as they were constituted between firms in three parts of the world, namely Western Europe, North America, and East Asia. The “Trilateral Commission” (INDEX) of distinguished leaders and scholars was formed in 1973 in order to foster economic cooperation between the three constituents (pp.12ff.). 94. Grossman and Rossi-Hansberg (2008) introduce a “productivity-effect” and provide the theoretical framework to explain gains from trade thanks to offshoring. Before their contribution, analysts focused on the labor supply and relative price effects. Grossman and Rossi-Hansberg show that the productivity effect can dominate

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the other two factors: put simply, improved opportunities for offshoring low-skilled jobs will raise wages for domestic workers performing similar jobs. This is so because the companies that profit from offshoring are those companies that perform similar tasks intensively. Their increased profitability will enhance their labor demand, some of which will be satisfied by domestic workers who perform tasks that cannot easily be done from a long distance away. Johnson and Noguera (2012) provide numbers regarding the size of production and trade that goes through GVCs. 95. Park, Nayyar, and Low (2013) offer a comprehensive literature review on GVCs. 96. World Trade Organization. 2014. World Trade Report 2014; https://www.wto.org/ENGLISH/res_e/ publications_e/wtr14_e.htm. 97. Economists have struggled with the concept of a participation index to measure the degree of participation of trading nations in GVCs. Using a sophisticated index, the WTO’s Trade Report (2014) (pp. 77ff.) estimates that participation in GVCs for the world has moved from 39.8 percent in 1995 to 48.5 percent in 2009, whereas the corresponding numbers for developing countries were 40.5 and 50.9 percent for those years. Singapore, Malaysia, and Hong Kong, China were the three WTO members with the highest involvement in GVCs in 1995, only to be succeeded by Chinese Taipei, Singapore, and the Philippines in 2009. Developing countries have a lot to gain from similar participation in terms of worker training, close cooperation with advanced suppliers, reverse engineering, and other benefits. Many studies have also identified risks associated with the choice to jump onto GVCs, such as “narrow learning”; e.g., acquiring skills that cannot be transferred to other activities. 98. Antras and Staiger (2012a) show that whereas only trade policies get distorted in Nash equilibrium (terms of trade), both trade and domestic policies get distorted because of offshoring. They thus contemplate that the rise in offshoring may necessitate a reorientation from shallow market access to deep integration. 99. In a recent speech (available at www.wto.org), former DG Pascal Lamy publicly stated: “… we have not yet figured out how to deal with the interdependent world economy we have created. This (GATT) system was initially designed to tackle problems specific to the mid-twentieth century. … The basic architecture of the system reflected its origins in an Atlantic-centric world of shallow integration. The question now is what is needed to manage a globalized world of deep integration.” 100. Chapter 7 will return to this topic and discuss it in considerably more detail. 101. Ramsey pricing (or Ramsey-Boiteux pricing) concerns the issue of the price a monopolist would set in order to maximize social welfare, and distinguishes between pricing policies on goods with elastic demand as opposed to goods with inelastic demand. When applied here, it would suggest that it makes sense to impose the higher tax on goods with inelastic demand. Home, by adopting similar taxation, could be increasing its tariff income. 102. As chapter 2 established, there is no discrimination test in the context of Article XI of GATT: to prove that a violation has occurred, it suffices that a quota has been imposed; there is no need to also show that a quota has not been established with respect to like products of different origin. 103. As chapter 7 discusses, substitutability is a key criterion to decide likeness in the context of the legal discipline (national treatment) applied to domestic instruments. 104. For more on this issue, see the comprehensive analysis of Davey and Pauwelyn (2000). 105. This is in part also because Article III of GATT refers to “like,” and also “directly competitive or substitutable” goods, a class of goods that is, roughly speaking, in a looser competitive relationship than like goods. 106. Bagwell and Staiger (2012) advance some very interesting thoughts in this context.

Chapter 5 1. This is how the Lebanese delegate put it: Members recognize that the development of industry in small nations is hampered by the lack of a sufficiently large market for manufactured goods. Consequently, the Organization shall give the most favorable consideration to any proposal for preferential tariff arrangements presented to it by small Member nations belonging to one economic region, aiming at the development of that region, with a view to releasing from their obligations under chapter V. This proposal did not concern North-South preferences, but rather, South-South preferences aiming at developing industries within regional blocks; see E/PC/T/C.6/W/25, at p. 14.

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2. Trade, of course, is only part of a development strategy, and there are inherent limits to how much development can be achieved through trade liberalization. This much should be obvious. Tupy (2005), for example, commenting on how much the Doha round can do to alleviate the problems that African states are facing, eloquently stated that “trade liberalization as a cure for African poverty is often over-emphasized. The main causes of African impoverishment are internal.” 3. There are dozens of accounts on this issue, and Hudec (1987) figures prominently among them. Graham (1978) discusses the origins of the US system. 4. GATT (1958), Trends in International Trade, Geneva. Gottfried Haberler, of Harvard University, was one of the best-known trade economists of his time. His many contributions have been lauded by Baldwin (1982). 5. The US waiver is discussed in more detail in chapter 8 of volume 2. The EU barely existed in 1958 when Haberler issued his report. In subsequent years, nevertheless, the EU farm market remained hermetically closed to exports from developing countries: by adopting the notorious “variable levies,” whereby any imported product, when imported into the EU, would be burdened with a customs duty which equaled the difference between the world and the EU, exports to the lucrative European market were discouraged. As a result, the two most attractive markets were at the mercy of their domestic producers and not open to world competition. The subsequent enactment of the Multifibre Agreement (MFA) ensured that trade in textiles, yet another labor-intensive industry, would be restricted. Farm and textile goods represented most of the production by developing countries. 6. Their position has become known as the “Singer-Prebisch thesis”. The two authors developed their point separately. By looking at examined data over a certain period of time, they concluded that the terms of trade for primary commodity exporters (the commodities where developing countries had comparative advantage) had a tendency to decline. The explanation for this was that, for manufactured (industrial) goods, the income elasticity of demand is greater than it is for farm goods: as incomes rise, the demand for the former increased more rapidly than did demand for the latter. Consequently, the argument goes, it is the structure of the market that creates inequality in the world system, see Prebisch (1950), Singer (1950), and (1950a), and Toye and Toye (2003). 7. The recent, insatiable demand for foodstuff and raw materials (China being the game changer) has pushed their prices up and cast doubt on the solidity of the Prebisch-Singer thesis, sixty years after it had been first expressed. 8. A related idea was what became known as “elasticity pessimism”: Devaluation will improve the trade balance assuming that the Marshall-Lerner condition holds; that is, the sum of import and export demand elasticities exceeds 1 in absolute value. If elasticities are too low, other means (possibly quantitative restriction) are needed to change an adverse trade balance. There is almost no evidence that the elasticities are so low, but that was the postwar fear of many developing countries: see Lal (2000). 9. Kemp (1960) pointedly notes that firms must pass not only the “Mill,” but also the “Bastable” leg of the test. The test might seem simple and intuitive, but is not so easy to practice. Melitz (2005) explains this issue, and he also points to ways to make it workable in the hands of national administrations entrusted with similar endeavors. For an early criticism of the infant-industry claim, see Baldwin (1969). 10. NBER is an American nonprofit institution conducting research in the realm of economics. 11. Krueger and Tuncer (1982), for example, discuss the Turkish experience in this area. 12. But see the criticism of Rodriguez-Clare (2009) as well. 13. See Noland and Pack (2003), who discuss the experience of southeast Asian countries including, notably, Korea. A few years later, another initiative akin to the Prebisch-Singer thesis saw the light of day: the New International Economic Order (NIEO). Supported mainly by legal scholars, it recommended a policy mix of trade measures and aid in order to help the development of less affluent states. Its quintessential element was some sort of central planning that would design the activities to be followed. It led to UN resolutions (regarding transfer of monetary resources from “North” to “South”), as well as to many “soft” recommendations as to what needed to be done. The NIEO was criticized early on; see, for example, the excellent analysis of Kreinin and Finger (1976). It led to nothing much and was abandoned almost in its totality. 14. GATT Document L/1656 of 4 December 1961, published in GATT Document BISD 10S/83ff, at p. 93. During the 1955 review of the GATT, Article XXVIII of GATT was redrafted to assist in the quest for import substitution policies, which was largely reflected in Article XXVIII(c) of GATT. 15. GATT Document COM.TD/W/101 of 2 June 1969. 16. GATT, COM.TD/W/37, p. 9.

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17. Henrik Horn first made this point orally to the author. 18. More on this will be found in the corresponding chapters later in this volume. 19. Patterson and Afilalo (2008) argue that the advent of these changes has not solved the problem: many developing countries are in a phase of development (in the wide sense of the term) that makes it hard for them to profit from the multilateral trading system absent customized solutions. This point will be explored further later in this chapter. 20. The Enabling Clause is a decision by the GATT CONTRACTING PARTIES, which was integrated into the WTO as of January 1, 1995. Recall the discussion of GATT 1994 in chapter 1. Note that there had been some incidents before the passage of the Enabling Clause to the effect that preferences for developing countries had displaced the exports of developed countries. The US complained to this effect, arguing that the UK “Dollar Area Quota” was contravening Articles XI and XIII of GATT since it introduced a preference for exports of certain farm goods originating in several Caribbean countries. The parties arrived at a negotiated solution eventually; see the GATT Panel report on UK–Dollar Quotas. 21. See, inter alia, Inama (2003), Keck and Low (2003), Michalopoulos (2001), Rodrik (1999), Srinivasan (1998), Wang and Winters (2000), and Whalley (1989). 22. Graham (1978). 23. GSP schemes abound. The EU has its own, discussed in Candau and Jean (2009); the US, discussed in Dean and Wainio (2009); Japan, discussed in Komuro (2009); Canada, discussed in Kowalski (2009); and Australia, discussed in Lippoldt (2009). Many others have less comprehensive schemes. 24. Decision on Differential and More Favorable Treatment Reciprocity and Fuller Participation of Developing Countries of 28 November 1979 (GATT Document L/4903), GATT BISD 26S/203ff. 25. Article XXIV of GATT will be covered in the next chapter. 26. The terminology is a bit confusing in this respect, since the Enabling Clause here refers to “less-developed,” whereas previous references were to developing countries and LDCs. The fact that in § 7, it refers to “lessdeveloped” in the same context with developed countries should leave no doubt that the terms “less-developed” and “developing” are used alternatively. Regulation 978/2012 of the EU has excluded high- and upper-middleincome developing countries (as defined by the WB) from the class of beneficiaries. 27. See the discussion in chapter 1. 28. See, for example, GATT Document C/M/152. 29. WTO Document IP/C/M/8 of 14 August 1996, pp. 58ff. 30. WTO Document WT/DSB/M/96 of 22 February 2001, p. 14. 31. See the discussion in chapter 8 of volume 2. 32. The website http://www.unohrlls.org/en/ldc/related/62/ reflects these criteria. The UN updates the list every three years. 33. UN GA Resolution A/Res/59/210 of 20 December 2004. Donors followed suit: the EU, for example, removed Cape Verde from its list of LDC beneficiaries of preferences through Regulation 1547/2007 of 21 December 2007, OJ L337/70. 34. In theory, today’s donors could become tomorrow’s beneficiaries. There is no reason why this could not be the case. 35. Low (2007) very sensibly argued that preferences should be tailor-made for each developing country since it is a mistake to treat them as one homogeneous group. In a way, this is what the Enabling Clause aimed to do as well, but in Low’s view, additional subclassifications are warranted. 36. For example, the EU GSP Regulation applicable as of 2012 (Regulation 978/2012, OJEU L303/1) provides for benefits if beneficiaries protect human, labor, or environmental standards. This will be discussed in more detail later in this chapter. 37. WTO Document WT/L/579 of 29 May 2009. 38. WTO Document WT/L/851 of 22 February 2012. 39. Most of the LDCs are in Africa; hence, the focus on the Africa programs of the various donors is quite legitimate. In addition to the EBA, the EU has a comprehensive design for African growth, the so-called Economic Partnership Agreements (EPAs): the idea is to divide Africa in various free trade areas (FTAs), before moving to a pan-African FTA, and eventually, an FTA between Europe and Africa. China has also divided Africa into five EPAs; see Sambaugh (2013) at pp. 109ff. and 156ff.

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40. The current EU GSP is reflected in Regulation 732/2008 (22 July 2008) OJ L211/1. 41. The panel accepted that LDCs could be benefit from additional preferences in light of the unambiguous wording of the Enabling Clause in this respect. 42. The AB suggests that the drafters could easily have inserted the term “all” before “developing countries” if they had really wanted to drive home the point that no discrimination across developing countries was permitted. Grossman and Sykes (2005) take issue with this statement, arguing that the AB has treated silence in a very inconsistent manner in its case law. They argue that, by the same token, the drafters could have inserted the term “certain” before “developing countries” if they had wanted to allow discrimination. The fact that they did not is probably equally relevant to their intent. They take the view that, based not on silence but on actual expression, the Enabling Clause makes one distinction only between developing countries and LDCs. This is the only relevant distinction, in their view. Howse (2003) defended the view that neither the panel nor the AB should have entered into any discussion of the issue at all since, in his view, the Enabling Clause is not justiciable to start with. 43. The US, for example, does not grant preferences to developing countries that refuse to enforce arbitral awards in favor of US citizens. Compare Bartels (2007). 44. Diverging views have been expressed on this score; see, inter alia, Brenton (2003), Hoekman et al. (2004), Rodrik (2002), and Stevens (2002). 45. If, for example, a country exports 75 percent of its total exports in its seven largest product sectors to the EU, then it is considered “vulnerable.” 46. See http://trade.ec.europa.euindex.cfm. 47. It is interesting to note the discussions during the Trade Policy Review of Sri Lanka in this respect. They reveal the opinion of both beneficiary and donor regarding the withdrawal. Sri Lanka protested the withdrawal, arguing that it serves EU foreign policy goals totally unrelated to development aid criteria (WTO Document WT/TPR/M/237, at pp. 6ff.). The EU replied that the GSP scheme “aims at encouraging developing countries to comply with international standards relating to human and labor rights … trade and investment can only reach their full potential in a conductive environment. This is where economic progress needs to be complemented by progress in areas such as the rule of law, individual freedoms and security” (WTO Document WT/TPR/M/237 at pp. 23ff.). The EU did not go so far as to state that the removal was based on an “objective criterion” (as per EC–Tariff Preferences), but this is the gist of the argument, it seems. 48. Commission Regulation (EU) 1127/2010 of 3 December 2010, OJ L318/15. 49. Azurix Corp v. Argentine Republic, Award ICSID, ARB/01/2012, 14 July 2006. Suspension pursuant to 19 USC §§ 2462(b)(2)(E) published in Proclamation 8788, 77 Federal Register 18899, of 29 March 2012. 50. 2012 OJ (EU) 978/2012 L(303). 51. Of course, this is quite understandable, since donors have substantial discretion to this effect in light of the case law of the AB cited previously: human rights violations could be accepted as an “objective criterion” justifying exclusion. 52. This very successful title is borrowed from Grossman and Sykes (2005). 53. In his survey of the literature, Rodrik (2006) concluded that there is nothing like a well-established theory that can safely be put into place in order to aid those in need in their development aspirations. There is nothing like quick-fix solutions. 54. See Limão (2006c). 55. See van der Mensbrugghe (2009). 56. There is anecdotal evidence that similar patterns are observable in AGOA. 57. Harrison and Rodriguez-Clare (2010) examine whether there is proof that the mix of higher tariffs, subsidies to producers and tax breaks, that they qualify as ‘industrial policy’, has helped producers in developing countries increase their competitiveness. They find little if any support for this proposition. See also Sapir and Lundberg (1984); Karsenty and Laird (1986); MacPhee and Oguledo (1991); and Brown (1987, 1989). 58. Similar conclusions were drawn in Joshi (2011). 59. Things have changed, of course, especially with the advent of DFQF. 60. Hudec (1987) made one additional point. He asked the question of why, every time a legal provision was made for developing countries, it took the form of best endeavors, and not a binding obligation. Hudec did not suggest that best endeavors were inconsequential. His point, nevertheless, is worth reflecting upon.

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61. This rests on the very safe assumption that donors are democracies and lobby power cannot be neglected. Indeed, this is true of the major donors (EU, Japan, Korea, US). Bagwell and Staiger (2014) go a step further and provide theoretical support for the argument that, even if concessions are made on products of export interest to developing countries, the “free pass” that they receive puts them in a disadvantaged position vis-à-vis those who paid for the concession. Their argument goes like this: the free pass (in the form of unilateral tariff reductions) offered to developing countries “to greater export volume is thwarted by the fact that, while the home country … offers a more open market on a non-discriminatory basis to all comers, foreign country 2 [NB: the beneficiary developing country] must compete for sales in that market with a more high-export-performing foreign country 1 [NB: the country that exchanged concessions with home country]. This is so because, following trade liberalization, productive resources in foreign country 1 will shift from the import good (which foreign country 1 will now be importing from home country) to the export good.” See the argument in more detail in Bagwell and Staiger (2014, pp. 7ff). 62. Rodrik (2011) builds his argument around this issue: in his view, the world trading system is no longer subservient to domestic policy objectives, but to some extent dictates policies to its participants. One might legitimately question the sweeping character of this view, but has to agree that this conclusion is accurate when confined to the four corners of GSP schemes. 63. The point here is not that the EU scheme causes, in and of itself, the undoing of legitimate policy priorities; the point is that EU preferences might be a facilitating factor. 64. See 19 USC §§ 2461 and 2462 and the discussion in Grossman and Sykes (2005). 65. In the literature, one often sees references to Korea and Chile as the two most prominent examples of countries which, post-exclusion from GSP schemes, unilaterally liberalized trade and boosted their growth rates. 66. The equivalence between import tariffs and export taxes was first established by the economist Abba Lerner; it is now known as the “Lerner symmetry theorem.” Based on the assumption of a zero balance of trade (that is, the value of exported goods equals the value of imported goods for a given country), Lerner showed that an ad valorem import tariff would have the same effects as an export tax. Thus, the effect on relative prices is the same, regardless of which policy—import duties or export taxes—has been privileged. 67. Recall the previous discussion about cumulation, diagonal cumulation, etc. 68. To paraphrase Spence (2011, p. 5), it seems that the “Inclusiveness Revolution,” leading to convergence between the OECD and some fast-developing countries, is taking place anyway, and the WTO is at best playing a catch-up game. WTO members negotiated a DFQF regime for all products originating in LDCs (as will be discussed later in this chapter), their token way to help the “bottom billion,” as Collier (2007) put it. The chances of success were slim, and the efforts went nowhere. Helping the bottom billion out of its doldrums is not an exclusively government operation: Prahalad (2010) has made a forceful argument in favor of private sector involvement. 69. WTO Document WT/L/304 of 17 July 1999. The waiver has been extended until June 30, 2019 (WTO Document WT/L/759). This waiver was necessary for preferences to be granted; otherwise, donors would be violating their MFN commitments. 70. GATT Document BISD 25S/109. 71. De Melo (2007). 72. On the legal status of the provisions on special and differential treatment, see Kessie (2007). 73. Conconi and Perroni (2012) developed a good model that explains longer transitional periods for developing countries. The capacity of developing countries’ industry depreciates slowly, the government cannot commit to transition in a single step, and providing its industry with some rents during the transition enables it to make a firm commitment for change post-transition. 74. See Nordström (2007). 75. WTO Document WT/COMTD/W/77/Rev.1 of 21 September 2001. 76. WTO Document WT/MIN(13)/W/17 of 5 December 2013. 77. Meagher (2007) discusses its mandate. The WTO also provides similar services, albeit in a more limited manner, by making two legal experts available to developing countries on a part-time basis (Article 27.2 of DSU). 78. WTO Document WT/L/806 of 16 December 2010.

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79. The name chosen (“Decision”) and the forum where it was adopted (General Council) leave little doubt that this document was intended to be binding on all WTO members. Subsequent practice has confirmed this point, since WTO members have been respecting it when granting advantages to beneficiaries; see Mavroidis (2008). 80. WTO Document TN/C/1 of 4 February 2002. 81. Subramanian and Wei (2007) have provided empirical support for this finding. The GATT suffered from similar criticism. Its very existence was threatened. In 1981, a meeting was held in Cancun that both industrialized as well as many developing countries attended. The idea was to launch negotiations under the auspices of the UN that would lead to what Preeg (1995, p. 19) describes as “statist Third World program.” Concrete steps were envisaged in order to increase prices of commodities of interest to developing countries. Preeg (1995) supplies evidence showing the “deepened resentment and frustration” of developing countries vis-à-vis the “Washington consensus,” that is, the GATT, the IMF and the WB. He cites Portillo, then president of Mexico, calling the three institutions “mere sounding boards” of the industrialized world. The US did not abandon the “GATT project,” though, and a few years later with the demise of the Soviet Empire similar thoughts were put to rest for some time. 82. It is well-established in economic theory that trade can, of course, affect growth in various ways: by affecting the return to capital accumulation, by affecting the incentive to innovate, by enhancing knowledge spillovers (through access to knowledge embedded in goods produced and traded), etc. There is a positive relationship between trade and growth; see, for example, the tables in the WTO World Trade Report (2014), at pp. 22ff. It is difficult, however, to state with absolute certainty whether it is GDP growth that caused trade to grow faster, or, conversely, whether it is trade that caused GDP to accelerate. In fact, it is probably the case that causation works both ways. 83. For details concerning the operation of these programs, see WTO Document WT/COMTD/W/ of 16 July 2002. 84. The change of the name from IF to EIF signaled a wider portfolio for the established entity and substantial “ownership” by the beneficiaries (i.e., LDCs), who would now have more of a say in shaping the agenda and the programs that should be financed. 85. IF coordination further rests with the Integrated Framework Steering Committee (IFSC) and National IF Steering Committees. The IFSC consists of representatives of the agencies, all donors and LDC beneficiaries, and provides overall policy guidance on the functioning of the IF. It meets, in principle, three times a year. The task of coordination at the country level rests with the beneficiary country itself through the establishment of a national IF Steering Committee and with the support of a lead donor. 86. WTO Document WT/IFSC/1 of 28 February 2002. 87. WTO Document WT/IFSC/W/15 of 29 June 2006. 88. Benin, Botswana, Burkina Faso, Cameroon, Cote d’Ivoire, Ghana, Kenya, Malawi, Mali, Mauritania, Mozambique, Tanzania, Tunisia, Uganda, Senegal, and Zambia. 89. Benin, Burkina Faso, Cote d’Ivoire, Ghana, Kenya, Tanzania, Tunisia, and Uganda. 90. Botswana, Cameroun, Malawi, Mali, Mauritania, Mozambique, Senegal, and Zambia. 91. WTO Document WT/COMTD/LDC/11 of 13 February 2002. This Work Programme was adopted shortly after the kick-off of the Doha round and was thought to be one of the main pillars of the ongoing negotiations since the round aimed to address on a priority basis development-related issues; hence the designation “Doha Development Agenda (DDA).” There is, of course, only so much that one can do through trade, and its overall contribution to development should not be exaggerated. 92. The CTD issued a report to this effect; see WTO Document WT/COMTD/SE/5 of 29 September 2006. 93. WTO Document WT/COMTD/32 of 8 August 2001. 94. The fourth UN Conference on LDCs (LDC IV) was held in Istanbul and evaluated for, inter alia, the implementation of BPOA. 95. WTO Document WT/COMTD/LDC/17 of 14 December 2010. 96. WTO Document WT/COMTD/LDC/17 of 28 October 2010. 97. A decision was adopted in Bali (December 2013) on “Duty-Free and Quota-Free (DFQF) Market Access for Least-Developed Countries” (WTO Document WT/MIN(13)/W/16 of 5 December 2013). It calls for those developed countries that did not manage to attain the 97 percent target to do so within the briefest possible deadline, and also asks developing countries to provide DFQF to products originating in LDCs, even if no

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numeric target is set for them. The WTO should be notified of all DFQF schemes (via the Transparency Mechanism; see chapter 6). Many developing countries (e.g., China, India, Korea, and Chinese Taipei) have notified their DFQF regimes, and the Russian Federation followed suit, as well; see WTO Document WT/COMTD/ LDC/W/58 of September 10, 2013 at pp. 40ff. 98. Recall that, as of December 2007, Cape Verde has graduated and is not considered an LDC anymore. 99. WTO Document WT/AFT/1 of 27 July 2006. 100. Stiglitz (2000) joins many others when arguing that the final compromise has been quite unbalanced as well, in the sense that priority issues for developing countries did not find their way into the final compromise, whereas the opposite is true for priority issues of developed countries. 101. OECD members, when participating in Aid for Trade schemes, have to abide by the criteria of the Development Assistance Committee (DAC) as well; see Development Assistance Committee, Principles for Evaluation of Development Assistance, OECD: Paris, France, 1991. Non-OECD members, like China, do not have to do this. 102. Various contributions in Maskus, Otskuki, and Wilson (2001) show the welfare implications of product standards for developing countries, especially LDCs. According to Wilson and Abiola (2003), standards rank as the most important factor blocking exports, right behind freight and transport charges. The creation of the Standards and Trade Development Facility (STDF), a joint venture between the Food and Agriculture Organization (FAO), the Organisation International des Epizooties (OIE, whose name translates to “World Organization for Animal Health”), the WB, the World Health Organization (WHO), and the WTO, aims to assist developing countries to implement sanitary and phytosanitary standards. 103. See Hoekman and Prowse (2009). Prima facie, at least, the approach taken here seems to endorse arguments advanced by Sachs (2005) that an original down payment is necessary to get LDCs (the bottom billion) out of their poverty trap. There are serious counterarguments against this thesis, notably by Easterly (2001). For an overview and critical appraisal of this discussion, see Banerjee and Duflo (2011). 104. World Bank. 2009. Unlocking Global Opportunities: The Aid for Trade Program of the World Bank Group, The World Bank: Washington, DC. 105. “Commitments” are forward-looking payments (e.g., money committed over the next three-year period), as opposed to “disbursements,” which are actual payments. 106. This is how the OECD glossary defines “other official flows”: “Transactions by the official sector with countries on the List of Aid Recipients which do not meet the conditions for eligibility as Official Development Assistance or Official Aid, either because they are not primarily aimed at development, or because they have a Grant Element of less than 25 per cent.” 107. Aid for Trade at a Glance 2011, Showing Results, OECD, WTO: Paris, France. 108. This is of course, the role of the WB. 109. WTO Document WT/AFT/1 of 27 July 2006. See Hoekman and Nicita (2010). 110. Picketty (2014) focuses on the reasons for increasing inequality in the 21th century. 111. WTO Documents WT/L/671 and 672 of 14 December 2006. 112. To this effect, it supervises the agreed Trade-Related Technical Assistance (TRTA) program, which consist of trade courses; internship programs; the so-called WTO Chairs Programme (WCP), and others. 113. WTO Document WT/L/274 of 30 September 1998.

Chapter 6 1. Throughout this volume, we prefer the use of the term “PTA” over the term “regional integration agreements” or “RTAs (regional trade agreements)” that even the WTO website prefers: the former captures the essence of these schemes, since participants in such arrangements will be treated better than outsiders; and the latter term reflects a historical feature. Not all such schemes are regional in the sense of geographic proximity anymore. One-third of PTAs currently under multilateral review are among countries that are not in geographic proximity: the number of cross-regional schemes has risen from six in 1995 to eighty in 2008. The FTAs between the EU and Mexico, Australia and Chile, and Mexico and Japan underscore this point. Moreover, as Sapir (2011) points out, the origin of the term “regional integration” is uncertain, as the term does not appear in the body of Article XXIV of GATT. He notes that this term was first used in an official GATT document in February 1996, when

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the WTO established the Committee on Regional Trade Agreements (CRTA) to examine the consistency of FTAs and CUs with the WTO. Dam (1963) is credited by Sapir as the first author to use the term “regional trade agreements,” probably because in the early 1960s, all preferential schemes were across regional partners. While the rest of the world calls similar schemes PTAs, the WTO continues to call them RTAs. The WTO distinguishes between “reciprocal agreements RTAs,” which corresponds to PTAs and the discussion in this chapter, and “unilateral preferences PTAs,” which corresponds to special and differential treatment and the discussion in the previous chapter. 2. See the views expressed by various negotiators in UN Document E/PC/T/C.II/PV/7. 3. Belgium and Luxembourg had signed the Belgium-Luxembourg Economic Union in 1921, establishing parity between their respective currencies. The success of this agreement persuaded them to expand and deepen their integration: the Netherlands joined in and the three governments signed in 1944 the London Customs Convention (since this is where they were in exile during WWII). Later, in 1958, the three signed the Benelux Economic Union in Hague. 4. E/PC/T/PV/3, at p. 29; see also E/PC.T/C.II/3, at p. 10, and E/PC/T/C.II/PV/4, at p. 22. 5. See also Perroni and Whalley (2001). 6. E/PC/T/C.II/3, at pp. 8ff. 7. Compare Viner (1950), at pp. 113ff. 8. However, it is clear that the view held by many, that the inclusion of a provision was meant to accommodate the European integration process, is wrong. Acheson (1969) states that Jean Monnet revealed his plans on European integration after the Havana Conference took place. 9. Panel on Turkey–Textiles, at § 2.4. 10. § 9 refers to preferences included in Article I.2 of GATT (“imperial preferences,” etc.). It is of mere historic interest and has no legal consequence today. 11. He was not alone: Viner (1950, pp. 3ff) took the view that a sequence across the various forms of market integration corresponded to sound intellectual criteria; in his view, political unions should come before customs unions and the German Zollverein, that is, the customs union, where the customs union preceded the political union, was quite idiosyncratic. 12. The WTO has been notified of only the following CUs: the Caribbean Community and Common Market (CARICOM); the Central American Common Market (CACM); the Eurasian Economic Community (EAEC); the European Union (EU); the EU CUs with Andorra, San Marino, and Turkey; and the South African Customs Union (SACU). 13. It is not the case that trade diversion is a necessary evil stemming from the creation of PTAs: the Kemp-Wan theorem posits that trade diversion can be eliminated by reducing external tariffs so as to keep trade with nonmembers unchanged (in other words, keeping prices constant). The result in the Kemp-Wan theorem applies in a set of given circumstances. The Kemp-Wan theorem, nonetheless, is not the necessary pathway in order to support a claim that PTAs can be welfare improving; see Kemp and Wan (1976), and for an extension to FTAs, Panagariya and Krishna (2002). 14. There are not many papers to date that discuss this issue. In two recent papers, Saggi and colleagues have designed models with endogenous cuts in order to ascertain whether MFN cuts are a counterfactual to preferential cuts: Saggi and Yildiz (2011) found that when countries have asymmetric endowments, or when governments value producer interests more than tariff revenue and consumer surplus, there are circumstances where global free trade is a stable equilibrium only if countries are free to pursue bilateral trade agreements. Saggi, Woodland and Yildiz (2013) argued that if the players have asymmetric endowments, Article XXIV of GATT (regionalism) might, on occasion, help further the cause of multilateral liberalization. 15. And there is a lot of empirical evidence in this context: Sapir (2001), for example, examines trade deflection as a result of the deepening of the EU integration process following the single market project. He finds substantial negative welfare implications for European Free Trade Association (EFTA) exporters to the EU, which he attributes to the “quality” of market integration at the EU level. It is similar data that lends support to Baldwin (1995), who argues that EU integration had a domino effect and led EFTA members to knock on the door in Brussels and request full accession to the EU. 16. Baldwin and Venables (1995), Panagariya (2000), and Winters (2011) have contributed excellent surveys on the economics of PTAs.

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17. Note that theory is not unanimous in this respect. See the work of Saggi and Yildiz (2011), and Saggi, Woodland and Yildiz (2013) referenced previously. 18. Baldwin (1992, 1993) correctly suggested that it is an onerous exercise to estimate the dynamic effects of PTAs. Some of them, for example, might be shielded within the realm of private information that is never revealed to the rest of the world (e.g., side payments in the form of support for a permanent or temporary seat on the UN Security Council). Baldwin noted that the difficulty of calculating similar benefits is no intellectual reason to exclude them outright from any calculation. 19. Boskin (2014) at pp. 19ff. 20. Schiff and Winters (2003). 21. This is not to say that this is the only reason why the EU signed PTAs. For a start, PTAs have been used as an antechamber for EU accession. Cremona (2010) and Mattli (1999) provide a very comprehensive and analytical account of European regionalism in its historical dimension. 22. The term “distance” refers not only to geographical distance (e.g., transportation costs), but also to other associated obstacles, such as the cost of information on the export market due to, for example, language differences, historical and cultural factors, and other elements. The term “gravity” was chosen in reference to Newton’s law describing the force of gravity as a function of the product of the masses of the two objects and the distance between them. 23. It is questionable how strong this claim is since there is empirical evidence that there are substantial border effects. Anderson and van Wincoop (2003), for example, have estimated that national borders reduce trade between industrialized countries by moderate amounts of 20–50 percent. 24. They include Canada–US, NAFTA, and EU’s expansion to Eastern European countries to this category. 25. The recent initiation of negotiation of the Transatlantic Trade and Investment Partnership (TTIP) brought a number of “spokes” to Brussels and Washington, DC, requesting the conclusion of a PTA. 26. Winters and Won Chang (2000), for example, find that non-EU countries experienced terms-of-trade losses when Spain and Portugal joined the EU in 1986. 27. On the point that one might come close to being able to predict accurately who will join, see Baldwin (1995, 1997). See also Ethier and Horn (1984), who argued that a limited agreement could be Pareto improving under certain limited conditions. 28. Caliendo and Parro (2009). 29. Boskin (2014) at pp. 19ff. 30. One might legitimately ask the question whether a PTA is the necessary vehicle for this kind of perk. As things stand, we know that PTAs have proved to be the vehicle for comparing the ex ante situation with the ex post situation, without asking the additional question whether similar perks would have been obtained in a non-PTA scenario (a difficult, if not altogether impossible, counterfactual). 31. Baru (2014), at pp. 70ff. 32. On a different note, Ethier (1998a, 1998b), while taking issue with the arguments that recourse to PTAs is insurance that developing countries might seek in case the multilateral regime collapses, advances additional arguments in favor of going preferential. 33. This attitude could be problematic, as lack of disciplining could be problematic as well. As will be shown later in this chapter, we live in a world where there is disciplining in name only, and trading nations are essentially free to go preferential, regardless of whether they have complied with the legal test for consistency. 34. As noted by Grossman and Helpman (1995), though, the result is also that good-faith WTO members will not integrate only those sectors where the maximum trade deflection is possible. 35. Dam (1970) ever the pragmatist, was very unhappy with this solution. He went so far as to suggest that all PTAs would have to pass a simple test: Is there net trade creation? If yes, they should be declared GATT-consistent. In his view the “essential error” was the GATT “conception of a legal institution as largely a set of substantive prohibitions rather than a largely a set of procedures” (p. 291). Villaverde and Maza (2015) show that the TTIP (transatlantic Trade and Integration Partnership) negotiations between the EU and US will create trade but only for the most productive regions in Spain, like Madrid and Catalunya. They will not create trade for the less productive regions in that country. Their focus is Spain, but they contemplate that, in light of the tools used for their analysis, similar results should be obtained when measuring trade creation effects in other EU members as well. This analysis reminds us of the points advanced by Melitz (2003) that we have discussed in chapter 1: it is the most productive companies that profit most in a trade liberalization context. The analysis

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also opens up research regarding trade and inequality but this time across regions, and not necessarily between private agents. 36. Gantz (2009) offers a comprehensive account in this respect. 37. The same report held that this provision could justify deviations from Article 2.4 of ATC as well. Ceylon had earlier advanced the thesis that a narrow interpretation of Article XXIV of GATT was in order, in light of the fact that it was designed to be an exception to Article I of GATT; see GATT Document BISD 6S/104 Appendix A (1958). There is no evidence that this view has been followed in case law. 38. The WTO was also notified of the FTAs between Turkey–Syria, and EFTA–Lebanon, although neither Syria nor Lebanon is a WTO member. 39. WTO members will notify a CU, an FTA, or an interim agreement leading to an FTA or a CU. In this latter case, there is a requirement to report in set periods the implementation of the PTA; WTO Document TN/RL/W/8/ Rev. 1 of 1 August 2002. 40. There have not been many complaints regarding absence of notification of PTAs. Still, the issue has been raised, and a proposal has been tabled to eventually introduce the possibility of cross-notification of PTAs that had not been previously notified; WTO Document TN/RL/W/8/Rev. 1 of 1 August 2002. There is a standard notification format for PTAs regardless of under which provision (i.e., GATT, GATS, or Enabling Clause) they are notified; WTO Document G/L/834 of 8 November 2007. 41. For a more detailed discussion on the inception of the CRTA, see Mavroidis (2006). 42. Both the CTD and the CRTA were also notified of the CU established by the members of the Gulf Cooperation Council (GCC), the India—Korea and Korea—ASEAN FTAs. 43. WTO Document WT/COMTD/W/175 of 30 September 2010. 44. According to the Transparency Mechanism (discussed later in this chapter), all PTAs should be notified as early as possible and, in any case, immediately following their ratification by participants. 45. We discuss the TPRM in chapter 12 of volume 2. It is sufficient to state here that the WTO, through this instrument, evaluates periodically national trade policies of its members. 46. WTO Document TN/RL/18 of 13 July 2006. 47. See “Transparency Mechanism for Regional Trade Agreements,” WTO Document WT/L/671 of 18 December 2006. There should be no doubt that it is binding on WTO members, in light of the forum where the decision was adopted (the General Council), the wording used, and the subsequent practice. This decision was adopted on a provisional basis. As with everything else, definite adoption has been tied into the “single undertaking” approach decided in the Doha round. Its review that should have led to its definitive adoption started in 2011, but it stopped because everything else stopped. In practice, nevertheless, it has been observed ever since its inception. 48. Mathis (2002). 49. GATT Analytical Index, pp. 824–825. 50. Working Party report on EEC, GATT Document BISD 6S/100, § 34. 51. GATT Document BISD 6S/70, § 30. 52. GATT Document BISD 96/83, § 48. 53. Working Party report on EEC–Agreements with Finland; GATT Document BISD 29S/79, § 12. 54. Working Party report on the Free Trade Area between Canada and the US; GATT Document BISD 38S/73, § 83. 55. WTO Documents WT/REG/W/17 of October 31, 1997; WT/REG/W/17/Add 1 of 5 November 1997; WT/ REG/W/17/Corr. 1 of December 15, 1997; WT/REG/W/17/Rev. 1 of 15 February 1998. 56. GATT Document BISD 20S/171, § 16. 57. WTO Document WT/REG/W/18 of 17 November 1997. 58. WTO Document WT/REG/W/22/Add. 1 of April 24, 1998. 59. WTO Document JOB/RL/3 of January 25, 2011. As stated earlier, WTO members have little incentive to do that. Australia has not come up with a similar proposal in subsequent years, and in the meantime, it has negotiated a few PTAs itself. 60. WTO Document WT/L/806 of 16 December 2010. 61. This provision contains the “national security” exception, which will be discussed in chapter 8. 62. GATT Document BISD 6S/70, p. 97. 63. The GATT Analytical Index, pp. 820ff. 64. WTO Document WT/REG/W/17/Rev. 1, p. 4.

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65. Argentina—Footwear (EC). 66. US—Wheat Gluten. 67. GATT Document BISD 18S/133, pp. 135–137. 68. Horn, Mavroidis, and Sapir (2010). 69. We discuss the AB report on Japan–Alcoholic Beverages II, which has explicitly confirmed this point, in chapter 7. 70. Compare Mathis (2006), who expressed similar thoughts on this score, as well as various other contributions in Bartels and Ortino (2006) that do not necessarily share this view. Kim (2011) reaches the same outcome based on the necessity requirement, as explained by the AB in Turkey–Textiles: in this view, two sets of domestic instruments, one for PTA partners and another for outsiders, are not necessary for a PTA to be formed in the first place (necessity being the criterion for allowing deviations from MFN, as we will see later in this chapter). It is probably striking that after all these years of intense practice, WTO members have not managed to agree on a more precise definition of the term “substantially all trade.” The explanation probably lies in the missing incentives to do so: from a pure trade perspective, the less PTA partners liberalize trade between them, the better off outsiders are, since the resulting trade diversion will be less important than it would have been had PTA partners integrated their markets in more meaningful way. Moreover, specifying the requirement might prove to be a sword of Damocles for outsiders, since they can profit from the current “fuzziness” only if they want to go preferential in the future. Consequently, for both trade and strategic reasons, outsiders are better off with the current situation. If one takes into account that the “last Apache”—that is, the only WTO member that had not signed a PTA, Mongolia—entered into negotiations and signed a PTA with Japan, one can even better understand the strategic reasons for doing nothing. 71. See the discussion on preferential rules of origin in chapter 4. See also WTO Document TN/RL/W/8/Rev. 1 of 1 August 2002, which is a comprehensive compilation of preferential rules of origin. 72. WTO Document JOB/RL/3 of 25 January 2011. 73. GATT Document EPCT/C.II/38, at p. 9, reproduced in the GATT Analytical Index: Guide to GATT Law and Practice, 6th ed. (1995), at p. 803. 74. Havana Reports, reproduced in the GATT Analytical Index, at p. 803. 75. See, for example, the discussions of the Working Party examining the compatibility of the EEC with Article XXIV, GATT Document SR.18/4, pp. 46–54, and also in C/M/8, SR.19/6–7; see the Working Party report on “Accession of Greece to the European Communities,” op cit., p. 175; see also the 1991 Working Party report on “Free Trade Agreement between Canada and the United States,” BISD 38S/47, p. 66. 76. It is interesting that the Understanding focuses on applied as opposed to bound duties. By adopting this focus, it is going further than simply stating that WTO members cannot use a CU to undo tariff obligations that were previously bound; it is also stating that WTO members cannot use a CU to jointly raise applied tariffs. This is interesting because one prediction of the theory would be that a CU would have the incentive to set higher external tariffs than the members would acting individually (i.e., before the CU), and that this would be one negative feature of the CU in terms of its multilateral effects. So, from the multilateral perspective, this rule makes sense. 77. GATT Document BISD 30S/168, p. 184. 78. GATT Document BISD 35S/293, pp. 295–6. 79. Idem, p. 311. 80. To the extent that they do not, it is the general incidence that matters, and in the absence of guidance by legislators, it will be hard to make the argument that comparison should take place at a particular level. 81. If one of them does, then there might be diversion (deflection), but this is not an issue of questioning the consistency of the CU with the WTO rules. 82. Hoda (2001) discussed practice in this context. A typical illustration is offered by the 1963 negotiation between the US and the EU in the GATT panel report on US/EEC–Poultry. 83. According to the WTO 2011 World Trade Report dedicated to PTAs (“The WTO and Preferential Trade Agreements: From Coexistence to Coherence”), 300 PTAs were in force in 2010, whereas there were only 70 in 1990. 84. For a typical illustration, see the CRTA report on the FTA between Thailand and New Zealand; WTO Document WT/REG207/3 of 3 January 2007. 85. There was dissatisfaction with the amount of information provided by those participating in the notified PTA. There are many reasons explaining why, and dispute settlement awareness figures, according to official

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WTO documents, are among the most important: the fear that information provided might lead to dispute settlement cases against them. As we discuss later in this chapter, similar fears are probably exaggerated. 86. § 6 of the Transparency Mechanism states that the review should normally not extend beyond one year, a deadline that is usually not respected in practice. 87. In what follows, we discuss litigation concerning claims regarding the consistency of PTAs with the WTO. We are not interested in the relationship between dispute settlement provisions in PTAs and the WTO dispute settlement. This latter issue is discussed in De Mestral (2013). 88. GATT Analytical Index, p. 781. 89. Following a request by Canada in 1974 in connection with the accession to the European Community of Denmark, Ireland, and the United Kingdom (GATT Document C/W/250), the panel was not activated because the parties to the dispute reached an agreement (GATT Document C/W/259). The two disputes that led to unadopted are EC–Citrus GATT (Document L/5776), and EEC–Bananas II (GATT Document DS38/R of 11 February 1994). 90. GATT Document L/5776, dated 7 February 1985, at §§ 4.6 and 4.10. 91. “ACP” stands for “African, Caribbean, and Pacific,” and denotes the former colonies of EU member states that continued to profit from preferential access to the EU market through successive agreements signed to this effect between the two partners. 92. In the WTO era, the AB report on EC–Bananas III reproduced this view almost verbatim. 93. India–Quantitative Restrictions at §§ 98ff. 94. Roessler (2000) responded in the affirmative. 95. Roessler (2000) argued that the terms of the Understanding lean toward a restrictive understanding of its scope: the reference made here is to the application of Article XXIV, not to Article XXIV of GATT as such. It is nonetheless quite difficult to distinguish between the two. And as we shall see later in this chapter, the AB rejected this view in Turkey–Textiles. 96. Article 12.12 of DSU allows the complaining party to request suspension of panel proceedings. This is a right bestowed upon the complainant, not an obligation to behave in this way, assuming that certain contingencies (e.g., discussions of the issue before a WTO committee) have been satisfied. 97. It bears repetition that no discussion on the substantive consistency of PTAs has taken place within the CRTA after 2006. 98. The issue in this case was to what extent a panel dealing with an issue that had already been decided by the WTO Balance of Payments Committee should follow the decision reached by this committee. 99. This part is largely based on Mavroidis (2006), and Mavroidis (2011). See also Limão (2006b) on this score, as well as Levy and Srinivasan (1996). 100. To be sure, challenges against specific measures intimately connected with the EU integration process were introduced time and again, as GATT panel reports like EEC–Poultry show. Allen (1961) explained that the EEC never got the green light from GATT due to its farm policy and absence of evidence regarding common tariffs. GATT had been notified of the plan to integrate the market, and not the final product (e.g., the Treaty Establishing the European Economic Community). This probably explains the point why the contracting parties did not have sufficient evidence regarding common tariffs. The EEC did not officially get the green light when reviewed at GATT, but no challenges against it for violating Article XXIV of GATT were mounted either. 101. However, check Zanardi (2004). 102. Nordström (2005). The WTO webpage has a very informative data set on PTAs: http://rtais.wto.org/UI/ PublicMaintainRTAHome.aspx. 103. See the data set on PTAs, which is regularly updated: http://rtais.wto.org/UI/PublicMaintainRTAHome. aspx. 104. The following discussion builds on Mavroidis (2011). 105. Still, there are papers like Flamm and Nordström (2011) that show how much MFN trade is affected by even the shallowest of preferences. This may be true, but even they cannot deny that the size of the problem is not what it used to be (at least in terms of trade diversion resulting from tariffs). 106. See Gantz (2011). 107. Compare Limão (2011), Trachtman (2011), and Kenner (2011) on this score. Bartels (2005) discusses human rights clauses in PTAs signed by the EU and, more specifically, the enforceability of similar clauses.

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108. Costinot (2008). 109. Sabel (2011). 110. For a more detailed discussion on the inception of the CRTA, see Mavroidis (2006). 111. WTO Document WT/L/127. 112. WTO Document WT/REG/1 of 14 August 1996. 113. Bhagwati (2008). 114. Davey (2011), Mathis (2011), and Srinivasan (2011) have all expressed skeptical views regarding the realism of the proposals to redesign Article XXIV of GATT. 115. Hafner-Burton (2005), for example, examined the human rights records of 177 countries between 1972 and 2002 and concluded that human rights enforcement has been seriously aided by including clauses to this effect in PTAs. 116. Article XXIV.3 of GATT regulates frontier traffic: it states that nothing in the agreement should prevent countries from according advantages to adjacent states aiming to enable frontier traffic. In a second paragraph, it covers an issue of historical interest: namely, trade between the Free Territory of Trieste and the adjacent countries.

Chapter 7 1. §§ 2, 4, and 5 constitute the operational arm of Article III.1 of GATT. 2. Indeed, both paragraph 2 as well as paragraph 4 of Article III of GATT, the operational provisions as we will see in what follows, are drafted in negative manner. They request from WTO members not to do certain things. For many commentators, this is the only feasible form of integration in light of the heterogeneity across the various WTO players, which, as the argument goes, is an impediment to a deeper form of integration in and of itself. Yet even an NT agreement should not be taken for granted: in a two-country model, Saggi and Nese (2008) asked whether and how each country’s incentive to enter into an NT agreement with the other depends upon the relative quality of their production, as well as on the relative size of their markets. They showed that if market size is identical across countries, the high-quality country benefits from NT, whereas the low-quality country does not; an NT agreement fails to arise in equilibrium even when it yields higher aggregate global welfare. However, when market size also differs across countries, a welfare-improving NT agreement can arise in equilibrium: asymmetry in market size helps counterbalance the asymmetry in production quality. They found that an NT agreement occurs only when the quality gap between goods is itself not too large; i.e., goods are sufficiently “like.” 3. Palmeter (1993, 1999) has argued that WTO members do not usurp each other’s sovereignty by signing the WTO agreement. They agree only to limit the exercise of their own sovereignty when they believe that limitation is to their advantage. 4. Irwin et al. (2008) and Jackson (1969). 5. The term “so as to afford protection” replaced the originally used term “for the purpose of affording protection.” NT was incorporated in Article 9 of the London Conference; it became Article 15 in Lake Success (New York); and, eventually, in the Havana Conference, it became Article 18. This last transformation is the current Article III of GATT. 6. GATT Document L/3039 of 11 July 1968. 7. Petersmann (2002) questioned the continued legitimacy of NT as an instrument that accepts, if not altogether promotes, negative integration in today’s world. In his view, NT should be understood as a “constitutional” provision (using this term to denote hierarchy across the various GATT provisions) and should be anchored in human rights; that is, it should be interpreted in the light of jurisprudence in the field of protection of human rights, and not in mechanistic marketlike manner. Otherwise, it might be creating more problems than it purports to solve. 8. Hudec (1993). 9. By virtue of § 3 of GATT 1994 (see chapter 1), the US Jones Act (its official name is “Marine Merchant Act,” 1920, P.L. 66–261) is still exempted from the obligation to accord national treatment. This act deals with maritime commerce in US waterways. 10. UN Document E/PS/T/W/179, at p. 3.

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11. “Protection” is, of course, hard to define: Bagwell and Staiger (2002) have developed an intellectually appealing (politically optimal) definition, which, nevertheless, is difficult to translate into a specific obligation and thus transform it into a workable tool in the hands of the WTO adjudicating body. GATT understands protection as a subset of “beggar-thy-neighbor” policies: it aims to outlaw policies that provide an advantage to domestic over foreign like and directly competitive or substitutable goods (DCS), as we will see later in this chapter. 12. Hudec (1990) took the view that nondiscrimination as such was considered an unsatisfactory discipline to apply to domestic instruments. It was a necessary but not sufficient condition to safeguard the value of tariff concessions. He referred to pre-GATT/ITO discussions across trading nations that reveal that nonviolation complaints (NVCs) were thought to be the necessary complement to the contracted obligation not to discriminate in order to safeguard the value of tariff concessions. NVCs go beyond nondiscrimination, as discussed in chapter 1. 13. Staiger and Sykes (2010) provided an explanation of this effect. 14. Irwin et al. (2008) reported a discussion in which Brazil mentioned the existence of a national committee (Comisão de Similares) established to deal with determinations of “like products,” precisely because the term was hard to define. It was felt that similar action should be undertaken at the multilateral level as well. It was decided, however, not to overburden the GATT negotiations with this task. Since GATT would eventually come under the aegis of the ITO, and the ITO would possess sufficient institutional structure to deal adequately with similar concerns, it was decided to leave it to the ITO to determine; see also UN Document E/PC/T/A/PV/40(1), at p. 14. The nonadvent of the ITO left GATT panels first, and WTO adjudicating bodies subsequently, with yet another “hot potato.” 15. There have been some attempts to classify them. An official US document, for example (Committee on Finance, United States Finance, Summary and Analysis of H.R 10710—The Trade Reform Act of 1973, 26 February 1974, US Government Printing Office, Washington, DC, 1974), classifies NTBs under five broad areas (p. 2): government participation in trade; customs and administrative entry procedures; standards; specific limitations to trade; and charges on imports. Similar classifications never became relevant to policy, however. 16. Contractual incompleteness, of course, can take many forms: undertakings may not be conditioned on changes in the environment; they can be rigid. Undertakings can also leave to individual governments the discretion to determine their policies unilaterally. The problem, of course, is that in this scenario, when discretion is permitted, there are good reasons to believe that governments have incentives to use such discretion for protectionist purposes as a substitute for the border instruments that have been bound: this is essentially where the political economy literature kicks in. Contractual incompleteness by itself is not necessarily a problem; governance problems are posed when incomplete contracts are combined with opportunism (Williamson, 2005). GATT does not eliminate the potential for such behavior: WTO members will usually have private information when regulating that they only have to reveal in part (by virtue of the transparency obligation), as well as a strong incentive to cheat (by pretending, for example, to be internalizing environmental externalities when acting solely, or predominantly, in the interest of their domestic producer, and thus imposing costs on their trading partners through beggar-thy-neighbor policies). Ex post detection is not guaranteed, and suspicion of cheating might lead trading nations to uncooperative behavior (e.g., fewer commitments than otherwise to liberalize trade), see also Maskin and Tirole (1999). 17. In chapter 10 of volume 2, when we revisit the negotiating record of GATT, we will see that originally, the idea was to impose an obligation of fair treatment of bids by foreigners relating to “public works.” Exclusion of this obligation was the natural consequence of absence of agreement on this score. 18. And then there is more: Horn and Mavroidis (2008) have argued that, although not explicitly mentioned, the public international law rules regarding allocation of jurisdiction must be read into GATT and on occasion provide a jurisdictional halt. Indeed, the WP on BTA was established in order to address the question: for which class of measures can a GATT contracting party adjust its taxes? This is an eminently jurisdictional issue, and the establishment of the Working Party was probably decided because of the contractual certainty that a bargaining solution entails. The AB explicitly referred to the jurisdictional nexus that must be present whenever a WTO member exercises jurisdiction in US–Shrimp. So far, we have avoided disputes on this score, but recent climate change initiatives might be challenged, and then panels might have to address yet another issue that has not been explicitly regulated in the body of Article III of GATT head on. There are many accounts of how public international law addresses jurisdiction, and the contributions in Meessen (1996) must rank among the most complete.

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On the limits of jurisdiction, see the divergent views of Kramer (1995), Lowenfeld (1995), Raustiala (2006), and Vagts (2003). 19. Maggi and Staiger (2011), and Saggi and Trachtman (2011) discussed the role of the WTO adjudicating body from this perspective. 20. UN Document E/PC/T/C.II/PRO/PV/7. 21. § 5 is of an indicative nature; indicative lists help the adjudicating body avoid a type II error (false negative): every time a challenged measure is judged to be a local content requirement, it must be outlawed. Bagwell and Sykes (2007b) have taken issue with the “sweeping” drafting of this provision. They note that the prohibition of local content requirements makes sense only when markets are not competitive (say, because we are in the presence of market power); when markets are competitive and the domestic country imposing the requirement is small, local content requirements may cause a redistribution of surplus from domestic consumers to the domestic input industry with no associated international (negative) externality. 22. In US–Tobacco, the AB clarified that panels should first examine the conformity of a measure with Article III.5 of GATT and move to do the same with respect to Article III.4 of GATT only if necessary. 23. The advent of GATS alters the balance. A measure coming under the purview of GATS (e.g., a restrictive regulation of persons allowed to act as distributors) affects trade in goods. We will return to this discussion later in this chapter. 24. UN Document E/PC/T/W/181, at p. 3. In China’s view, hence, there should be no NT obligation with respect to regulatory (nonfiscal) domestic instruments. 25. Two separate disputes (i.e., Canada–Renewable Energy and Canada–Feed-In Tariff) gave rise to two panels, but at the end, a joint report was drafted. 26. OPA stands for Ontario Power Authority, the entity procuring solar and wind electricity. 27. The AB explained, in the same paragraph, that a “rational relationship” between the products and government purposes must exist. 28. The AB seems to suggest, without saying so explicitly, that selling not at arm’s length would not remove a measure from the ambit of the exemption granted through Article III.8 of GATT. 29. Ehring (2011, p. 114) has argued that this provision should be considered as lex specializ and not as an exception to Article III of GATT. This understanding of the provision is not void of legal consequences since in the former case (lex specializ), it is still the complainant that carries the burden of proof, whereas in the latter, it is the defendant (the WTO member imposing the film quota). This position is akin to the position we defend here (e.g., to understand film quotas as an exemption from the coverage of Article III of GATT). Article III.10 of GATT provides support for this view. 30. The rationale for this extension could be that two countries share common cultural factors such as language, and in this vein, it would be appropriate for Canada to keep screen quotas for French-speaking films originating in France. 31. E/PC/T/C.II/E.14 of 4 November 1946, at p. 5. 32. E/PC/T/A/SR/10. 33. New Zealand insisted on an arrangement that would take care of its film hire tax; see E/PC/ T/C.6/8 of 23 January 1947. The film hire tax was a delayed customs duty levied at the point where the real value of the film had become apparent. The New Zealand delegate eventually conceded that this imposition could form the subject matter of tariff negotiations under Article 24 of the London Draft. New Zealand was not, at the time, producing films, other than educational and newsreels; see E/PC/T/C.6/55/Rev. 1, at pp. 7–8. 34. E/PC/T/W/181, at pp. 7–8. 35. Originally, it was Article 19 of the Havana Charter; see Wilcox (1949), at pp. 76ff. 36. MTN.GNS/AUD/1 of 27 September 1990; MTN.GNS/AUD/2 of December 2010; MTN.GNS/W/1 of 4 October 1990. 37. A WTO member can list a source of supply in its list of exemptions and thus not extend MFN to services originating in it, as it should have to under Article II of GATS. 38. WTO Document S/L/92. This document was meant to help WTO members schedule their commitments under the GATS. On its legal value, see Mavroidis (2008). 39. Report of the Working Party, Application of GATT to International Trade in Television Programmes, in GATT Document L/1741 of 13 March 1962; see also MTN.GNS/AUD/W/1, at pp. 2ff. Jackson (1969, p. 294) discussed this issue.

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40. MTN.GNS/AUD/W/2 of 4 October 1990. 41. MTN.GNS/AUD/1, at pp. 2ff, and MTN.GNS/AUD/2, at pp.1ff. 42. Article IV of GATT covers quotas for imported films and not cross-border transmission of audiovisual works through satellites. 43. Unlike the Treaty Establishing the European Community (ECT), the predecessor to the Treaty on the Functioning of the European Union (TFEU), which abolishes any overlap between measures affecting trade in goods and measures affecting trade in services, there is no provision in the WTO Agreement regulating the relationship between GATT and GATS. Article 50 of the ECT reads: “services shall be considered to be ‘services’ within the meaning of this Treaty where they are normally provided for remuneration, insofar as they are not governed by the provisions relating to freedom of movement of goods, capital and persons.” 44. Cases 155/73 (1974), and 60–61/84 (1986), respectively. See Acheson and Maule (2001), at pp. 58ff. 45. See also §§ 192ff. of the AB report on China–Publications and Audiovisual Products, and the analysis in Conconi and Pauwelyn (2011). 46. WTO Document S/C/W/310 of 12 January 2010. 47. WTO Document S/C/W/310 of 12 January 2010. See also S/C/W/40 of 15 June 1998, the background note prepared by the WTO Secretariat that helped streamline the negotiation on audiovisuals. 48. § 12 of the annex to the WP report on BTAs, op cit. These were the words of the UK delegate, one of the key delegations in the drafting of Article III of GATT; see Irwin et al. (2008) and the corresponding discussion on “property rights on the GATT.” 49. The distinction between direct and indirect taxes was probably acceptable in economics three generations ago, but since then it has been widely questioned. In practice, indirect taxes are not fully shifted to product prices, and certain direct taxes (in particular, corporate profits taxes) may be shifted into product prices, although the degree of shifting may vary from country to country. Classification of some taxes is questionable as well: VATs are classified as indirect taxes, but they fall on both the costs and profits of the producer (“value” being defined as the difference between the value of a firm’s purchases and sales), and to the extent that they fall on profits, how can they be distinguished from a profit tax in effect? 50. The destination principle was taken over from bilateral agreements negotiated in the 1930s, such as the agreement of 6 May 1936 between the US and France; see § 10 of the Annex to the WP on BTA, op. cit. See also Irwin et al. (2008). Economists have used more or less the same definition for the term “BTA.” This is, for example, how Johnson and Krauss (1970) described BTAs (pp. 596–597): A border tax, properly interpreted, is a tax imposed when goods cross an international border, and as such must be inimical to international trade and therefore to the achievement of the economic benefits of international specialization and division of labor. A border tax adjustment, on the other hand, is an adjustment of the taxes imposed on a producer when the goods he produces cross an international border … Under the origin principle, a tax is imposed on the domestic production of goods, whether exported or not, and under the destination principle, the same tax is imposed on imported goods as on domestically-produced goods destined for consumption by domestic consumers, while domestically-produced goods destined for consumption by foreigners enjoy a rebate of the tax. The origin principle involves no tax adjustment, but the destination principle involves a border tax adjustment to the full extent of the tax. Compare with Meade (1974). 51. GATT Document L/1381, adopted on 19 November 1960, GATT Document BISD 9S/185. 52. Seventeen governments adhered; GATT Document MTN.GNG/NG10/W/4 of 28 September 1987. 53. Horn and Mavroidis (2011) discussed the history of the Working Group. 54. The success of GATT in dismantling tariff protection made nations more aware of the bite of domestic measures. On the other hand, whereas there was no doubt that direct taxes imposed on imported goods were covered by Article III.2 of GATT anyway, doubts (as the quoted discussion from the proceedings of the Havana Conference evidences) continued to persist as to what else was covered by Article III of GATT. Practice shows that the ambit of Article III.4 of GATT extends to cover both fiscal and nonfiscal measures: the question, thus, although couched in terms of direct versus indirect taxation, de facto was how expansive the understanding of the term “affecting” appearing in Article III.4 of GATT should be. 55. GATT Document BISD 18S/97ff. 56. Article I of GATT also comes into play because, unless respected, trading partners could afford a trade advantage by, for example, adjusting taxes for goods of a certain origin and not for others. Article XVI of GATT

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allows trading partners to exempt from taxation goods destined for consumption abroad without qualifying similar practices as subsidies. Article VI of GATT comes into play, because, unless otherwise specified, the lower price of a good that is being exported (resulting from nontaxation) could qualify as dumping. Finally, Article VIII of GATT was also relevant since a BTA should not be equated to a customs fee or formality for service rendered: no service is rendered in the first place when BTAs are imposed. 57. Recall the discussion in chapter 3 of the AB report on India–Additional Import Duties, and see the analysis of the report offered by Conconi and Wouters (2010). Pauwelyn (2007) has argued that a textual reading of Article II.2(a) of GATT suggests that regulatory distinctions based on nonincorporated production process methods (PPMs) are illegal. Roessler (1996 and 2003) has expressed similar views. Were these views to be upheld, a lot of policies aimed at addressing climate change would be ipso facto inconsistent with the GATT. Horn and Mavroidis (2010) have explained why similar views should be dismissed: briefly, Article II of GATT deals with bound tariffs on agreed classified goods. Classification does not exhaust the realm of policies that a WTO member can legitimately undertake. Note that the overwhelming majority of tariff classifications included in the HS do not include distinctions based on nonincorporated PPMs. It is through measures coming under the aegis of Article III of GATT that WTO members will adopt similar policies. Howse and Eliason (2009) followed a different route but ended up with similar results. See also Hufbauer, Charnovitz, and Kim (2009). 58. Various paragraphs in the report (§§ 4, 10, 20) make it clear that it is both the exporter an the importer that can decide and perform the tax adjustment. 59. § 14 of the final report. 60. On the extent of disagreement, see also Genasci (2008). 61. A “cascade tax” is a turnover tax that is applied at every stage of the production process. 62. Both of these cases are discussed in more detail in chapter 3 of volume 2. Suffice it to state for now that the US and various European countries were embroiled in legal battles concerning the consistency of their fiscal regime with the relevant GATT rules. US–DISC, for example, was adjudicated during the GATT years. At stake was US tax legislation on domestic international sales corporations (DISCs). In brief, a US company that qualified as a DISC company would not be subjected to US federal income tax on its current or retained export earnings. Following a complaint, the panel found that the US tax legislation constituted an export subsidy and was thus inconsistent with Article XVI of GATT. See GATT Document BISD 23S/98, and 28S/114. See also the very thorough analysis of the case by Jackson (1978). 63. On the overall stance of adjudicating bodies with respect to BTAs, see Bhagwati and Mavroidis (2004) and Demaret and Stewardson (1994). 64. For a detailed discussion of this issue, see Mavroidis (2008). 65. See the relevant discussion in chapter 1. 66. See, for example, the panel and AB report on Japan–Alcoholic Beverages II. 67. Grossman (1980) examined to what extent indirect taxes, like the VAT, were origin neutral. He asserted the trade neutrality of uniform indirect taxes under both the origin and destination principles and reexamined its validity in the context of a world with trade in intermediate goods. He showed that a uniform general sales tax is trade-neutral under the destination principle, but trade-distorting under the origin principle; a “stage of processing” VAT is nondistorting under either border tax adjustment principle. 68. § 2.2 of the report. 69. Irwin et al. (2008). Article V.1, as well as the second sentence of Article V.2 of GATT, is based on the corresponding provisions (Articles 1 and 2) of the Convention and Statute on Freedom of Transit, signed in Barcelona, on 29 April 1921; see UN Document E/PC/T/C.II/54/Rev.1. 70. Article V.6 of GATT applies to WTO members whose territory is the final destination for goods in international transit and not to WTO members through which goods are transiting. The Panel on Colombia–Ports of Entry concluded that much (§ 7.475). The rest of the provision concerns transiting goods. 71. Recently, this issue was discussed in the WTO Negotiating Group on Trade Facilitation (since, as we will see in chapter 1 of volume 2, improvements on Article V of GATT were integral part of the Agreement on Trade Facilitation). The question arose, for example, as to whether pipelines carrying energy (e.g., petroleum or gas) came under the aegis of Article V of GATT. Pipelines of course can be private property, and then transit obligations would escape the discipline imposed on Article V of GATT. At any rate, various WTO Members presented

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differing views on this issue, the EU submitting that pipelines come under Article V of GATT (to the extent of course that governments control access), whereas Egypt and Turkey holding the opposite view, see WTO Document TN/TF/W/179 of 4 June 2012. 72. There is a record of these discussions in the respective TRIPs Council Minutes, originally under “Public Health Dimension of the TRIPs Agreement,” and later under “Enforcement Trends.” 73. The issue is whether a WTO member can impose its public order on transiting goods, or whether this provision imposes a jurisdictional halt (except for the measures explicitly mentioned in the body of this provision). For one, freedom of transit can be denied when invoking Article XXI of GATT (national security). Article XX of GATT is also an exception to any provision under GATT, including Article V. In light of this discussion, it seems that, while WTO members do not have to afford NT to transiting goods, they can deny freedom of transit to goods not conforming, say, with their environmental norms [e.g., they can block the transiting of toxic waste and invoke Article XX(b) of GATT to justify the measure]. 74. Negotiating Group on Trade Facilitation, Draft Consolidated Negotiating Text, WTO Document TN/ TF/W/165/Rev. 15 of 27 March 2013, at p. 20 (Article 11.5). 75. This does not mean, though, that WTO members cannot take measures to avoid “leakage” (e.g., block transiting goods from entering their market without paying customs duties); see Arvis (2011). 76. Similar thoughts have been expressed by Jackson (1989, 1998, 2006) and Jackson and Aldonas (2003). 77. See the discussion on US–Superfund in chapter 2. 78. See the discussion in chapter 9. Horn and Mavroidis (2008) provided an extensive discussion of the jurisdictional ambit of internal (domestic) measures coming under the purview of Article III of GATT. 79. Benedek (1991) was the first to provide a comprehensive discussion of the relationship between customary international law and GATT, followed by Pauwelyn (2003). Whereas the former takes an outside-in look and attempts to review GATT from a public international law perspective, the latter takes an inside-out look, asking the question how much of public international law is relevant when interpreting GATT. 80. Following this reasoning, the panel and the AB found that a 25 percent duty imposed by China on auto parts was an internal charge in violation of Article III.2 of GATT; see the discussion in Wauters and Vandenbussche (2010). 81. Havana Reports, at pp. 61–7. The Havana Conference signals the end of the negotiation on NT: Article III of GATT has remained unchanged since the last negotiations in the early months of 1948 in Havana. 82. UN Document E/PC/T/186. 83. UN Document E/PC/T/174, at p. 6. 84. UN Document E/PC/T/W7150, at p. 5. 85. Cross-price elasticity of demand provides information about the demand relationship between two products by capturing how a price increase for one product increases the demand for another product. (Formally, it is defined as the percentage change in quantity demanded of a good, X, divided by the percentage change in price for good Y.) Adjudicating bodies have not so far provided any guidance on what values of cross-price elasticity would normally be necessary for two products to be considered DCS. 86. In the case at hand, the argument was made that demand in Korea was latent because of the regulatory barriers that impeded access for Western drinks. Hence, evidence from third-country markets was necessary to establish whether soju and Western beverages were indeed DCS products. 87. Horn and Mavroidis (2004) did not agree with the methodology the AB used in its report on Korea–Alcoholic Beverages to define whether the products concerned were like/DCS. In particular, in their view, the AB does not seem to recognize that the characteristics that it considers to assess the extent of consumer likeness (end uses, physical characteristics, etc.) are reflected in cross-price elasticity estimations. In the authors’ view, statistical analysis should be the primary method of establishing consumer preferences for the products at stake. These other indicators are imperfect substitutes to employ in cases where there is not enough data, or its quality is too poor, to undertake statistical analysis. In contrast, the AB seemed to view neither of the two approaches as conceptually superior. In a subsequent case, EC–Asbestos, which is discussed in detail later in this chapter, the AB diluted its test even further: it held that likeness (and the DCS relationship) can be defined by asking whether a “reasonable” consumer would have treated two goods as competing with each other. The test is still in the marketplace, but only in name: there is no need to use econometric indicators, and there is no need to conduct consumer surveys since it is the opinion of reasonable consumers that matters.

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88. These numbers refer to degrees Gay Lussac. Throughout this volume, we will be using Gay Lussac degrees when referring to alcoholic content since the WTO panel and AB adhere to this way of measuring alcoholic content. In US common usage this would be 35 and 39 percent alcoholic content respectively. 89. Chile invoked four grounds to explain its measure, including revenue collection, but did not elaborate on any of them (§ 69). In § 72 of its report, the AB held that there was not a necessity requirement in Article III.2 of GATT: Chile did not have to demonstrate that its measures were necessary (e.g., least restrictive) in order to be consistent with Article III of GATT. 90. This is in essence what Ehring (2002) complained about. 91. Similar thoughts have been expressed by Ehring (2002). 92. The AB probably meant when using this term that it is the perception of intent that matters (by those affected by the measure), and not the nonobservable, subjective intent of the legislator. 93. Hudec (2000), Davey and Pauwelyn (2000), and Mavroidis (2000a) have contributed papers discussing the differences in the understanding of the term depending on the provision of GATT where it appears. 94. So far, there has not been a single case where supply-substitutability has been accounted for when defining likeness or the DCS relationship. 95. In EC–Asbestos (§ 109), the AB underscored this point when it ruled that panels that are called to pronounce on likeness must examine “the evidence relating to each of those four criteria and, then, weigh all of that evidence, along with any other relevant evidence, in making an overall determination of whether the products at issue could be characterized as ‘like.’” 96. This report remains unadopted and is, hence, of limited legal value. In fact, as shall be discussed later in this chapter, it was totally rejected by a subsequent WTO panel dealing with the same issue. 97. In this case, the EU had challenged the consistency of a US tax scheme, the Corporate Average Fuel Economy (CAFE), applicable to cars, according to which the total fleet of passenger vehicles produced by an individual producer would be taken into account in order to decide on the tax that would be imposed on specific items. Producers with a fleet that consisted of large, more powerful cars (so-called gas guzzlers) would suffer most as a result, and many European producers belonged to this category. Note that the US regime was enacted at a time when those suffering most were US producers: it was a legislative effort to dissuade consumers eager to buy gas guzzlers. So this is a case of a law being challenged because of “unintended consequences.” Europeans ended up exporting large, luxury cars (true gas guzzlers) also because of the “babysitter effect”: transport costs are the same for small and big cars alike, but their relative incidence on the price of large cars is less drastic than on smaller cars. Mattoo and Subramanian (1998) focused on different issues in the panel report, asking the question whether the test as applied by the panel could provide a response to questions of private information regarding the aims pursued through regulation. 98. Anecdotally, we should add that this case provides a great illustration of the distance between nondiscrimination and efficiency. A US research institute, Resources for the Future, evaluated the effectiveness of the CAFE legislation. In its estimation, “the CAFE standards were much more expensive than a first-best, efficient carbon tax or cap and trade. The cost was $85 per ton of CO2 removed from CAFE standards compared to $12 per ton for the economically efficient policies,” Nordhaus (2013, p. 263). 99. Hudec (1988, 1998) and Roessler (1996) should be credited with the original formulation of this approach. Howse and Regan (2000), Petersmann (2000), Regan (2002, 2003), and Marceau and Trachtman (2002) have elaborated on it further. 100. Charnovitz (1996) took issue with the rejection of the “aims and effect” test. Noting first how two GATT panels had interpreted Article III.2 of GATT (first sentence) “narrowly in order to reduce interference with national tax sovereignty,” he warned that the decision “has important implications for the autonomy of national governments” and explained that with the door to Article III of GATT closed, environmental regulations will be reviewed under the restrictive rules of Article XX of GATT. 101. See the analysis by Neven and Trachtman (2013). 102. Remarkably, panels have paid little attention to the fact that the term “like products” appears both in Article I and in Article III of GATT. This, in and of itself, is the best proof that the rationale for including Article III of GATT in the first place was to avoid concession erosion. 103. See, for example, the panel report on Japan–Trade in Semiconductors (discussed in chapter 2), which has been cited in every single case dealing with Article XI of GATT ever since. See also the panel report on

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Japan–Film (widely known as the “Kodak/Fuji” dispute) on this score. We will return to this discussion in chapter 9, since case law uses the term “measure” comprehensively when dealing with exceptions to the obligations assumed under the GATT. 104. C-265/95, Commission of the European Communities v French Republic (1997) ECR I-6959. 105. Although this point has not been discussed thoroughly in case law, the discussion here is most likely interesting only as far as the term “requirements” is concerned, a term which leaves some doubt as to its origin. The terms “laws” and “regulations” are exclusively government actions. 106. Note that the issue of attribution is a nonissue in the context of Article III.2 of GATT: fiscal impositions can be imposed only by governments, or by nongovernmental organs following delegation of authority by governments. 107. Already in 1958, the Panel on Italy–Agricultural Machinery had ruled: “the selection of the word ‘affecting’ would imply, in the opinion of the Panel, that the drafters of the Article intended to cover in paragraph 4 not only the laws and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market” (§ 12); see also the GATT panel report on US–Section 337 at § 5.10. 108. See the excellent discussion of the AB report in Horn and Weiler (2007), which forms the basis for the analysis here. 109. Chrysotile fiber (an input to the final product) was the asbestos-containing material, and it was heavily produced in the province of Quebec in Canada. 110. The ban on asbestos-containing construction material was decided following scientific evidence to this effect. It all started when it was observed in the 1980s that an abnormally large number of victims had been working for the Berlaymont, the building housing the Commission of the EU, and a hallmark of the European institutions. Subsequent research led to the establishment of link between exposure to asbestos-containing material (used in the construction of the Berlaymont), and an increased probability of constracting mesothelioma. The building was vacatated for years and became available to host the Commission again only after all the asbestos had been removed. 111. Article XX of GATT is discussed in chapter 9. 112. In a separate but concurring opinion, an unnamed member of the AB held the view that the scientific proof cited in this case was sufficient to conclude that the two products were unlike. One way to understand the need for a separate opinion is probably that, in this member’s eyes, the difference in physical characteristics and the ensuing consumers’ reaction do not merely raise a presumption but amount to a home run: Canada could never rebut such evidence. 113. The AB found additional support for its overall finding in the fact that chrysotile fibers and PCG fibers do not share the same tariff classification, as well as the fact that scientific evidence was cited in support of the carcinogenic nature of chrysotile fibers. 114. Lydgate (2011) reached similar conclusions. Palmeter (2006), citing Hudec, argued that tribunals frequently decide the case as best they can by making a snap judgment about whether the defendant government is behaving correctly or incorrectly—a process of judgment known in some circles as the “smell test.” The decisions of panels and the AB in disputes involving health and safety measures suggest, in Palmeter’s view, that the smell test is alive and well in the WTO. 115. The report has received mixed reactions. At one end of the spectrum, Yavitz (2002) criticized this case law for not interpreting the key terms in this provision in a manner that would honor its agreed function—that is, to keep WTO members from using instruments in a way that affords advantages to their domestic production. In contrast, Howse and Türk (2001) agreed with the basis of the reasoning of the AB report and disagreed vehemently with the panel approach. The authors defended a comprehensive discrimination test that should take place within the four corners of Article III of GATT (instead of moving the discussion to Article XX of GATT). They thus saw the AB report as a positive step in this direction. 116. Sometimes, the issue is quite straightforward: for example, as discussed in Howse and Neven (2007f), in US–Section 211 Appropriations Act, US law imposed one additional administrative hurdle on foreigners when requesting registration of a trademark, and it is this additional step that made the law inconsistent with Article III of GATT.

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117. Compare the view expressed here with that of the Advocate General and the European Court of Justice (ECJ) in their judgment of 9 February 1995, on Leclerc-Siplec/TF1 et M6, C-412/93, ECJ Reports 1995, p. I-179. 118. Korea did not contest before the panel the assertion of complainants that domestic and imported beef were like goods. 119. Therefore, the AB did not go so far as to outlaw exclusivity contracts signed between suppliers and retailers. Did it outlaw similar contracts if they benefit from government authorization? Arguably, assuming market power in the upstream (or even, in some legal orders, in the downstream) market, exclusivity contracts will be judged illegal under many national antitrust statutes and, unless they have benefited from antitrust exemption, cannot lawfully take place. Is this degree of government intervention sufficient for the AB to outlaw similar practices? Probably yes, if exclusivity contracts concern domestic goods and are denied when imported like goods place similar requests, although the comparability across transactions might be too high a hurdle for the complainant to overcome. This is, nonetheless, a side issue. 120. In §§ 172ff of its report, the AB held that Korea had violated its obligations under Article XX(d) of GATT, not because the measure was not authentically pursuing consumer protection, but because it was unnecessary, in the sense of being more trade restrictive than necessary. We discuss this aspect of the report in chapter 9. Suffice it, nonetheless, to mention here that there is no necessity requirement in Article III of GATT: if the measure did indeed modify conditions of competition to the detriment of imported goods (a highly doubtful proposition, for the reasons mentioned previously), and was not origin-based (as the panel and the AB accepted), then it should have passed the test of consistency under Article III of GATT, as the AB report on Dominican Republic–Import and Sale of Cigarettes, which is discussed later in this chapter, held. 121. Interestingly, antitrust, where the distinction between per se (a practice is illegal because of its inherent characteristics) and rule of reason (the antitrust authority will weigh the pros and cons of a challenged scheme) comes from, is moving undeniably toward a restriction of the former standard and an expansion of the latter. The US Supreme Court, probably the most influential court in this context, has accepted that even a naked restriction of trade across competitors might on occasion be more appropriately dealt with under a “truncated rule of reason” standard of review; see California Dental Association v Federal Trade Commission (976–1625) 576 US 759 (1999), 128 F.3d 720. 122. The word “however” in the fourth line of the quoted passage should leave little room for doubt that the AB was reversing its previous report on Korea–Various Measures on Beef. 123. This is the provision regrouping all general exceptions to obligations assumed under GATT. This topic is discussed further in the next chapter. 124. The continuous references to Korea–Various Measures on Beef, though, in the body of the report leave the question open as to whether Dominican Republic–Import and Sale of Cigarettes has been reinforced or sidelined. The author takes the optimistic view, but only future practice will tell. 125. This is less of an issue in the GATS context because of the built-in flexibilities in the formulation of NT in that context; see Hoekman and Meagher (2014). 126. Efficiency might, on occasion, be an illusion. For one thing, the best solutions might be too costly. It could also be that for good reason, it will be difficult to precisely determine the best intervention. Take the example of cap-and-trade regimes, or carbon taxes. Some countries have adopted cap-and-trade schemes to raise the price of CO2 emissions, also known as greenhouse gases (GHG). The idea is that by making them scarce commodities, their price will rise. But how exactly should one calculate carbon content? The tax burden (or the price of allowances), of course, will be calculated using carbon content as input. Nordhaus (2013, p. 256) pertinently asks whether, if cars have been subjected to the measure, we should count CO2 “that comes from coal that goes into steel that goes into cars?” Nondiscrimination sidesteps this type of question, of course. 127. Compare Horn (2006). 128. Staiger and Sykes (2010) dealt with the limits of the current draft of Article III of GATT. They observed that WTO rules and disputes center on complaints about excessively stringent regulations. Employing the international externalities (terms-of-trade) framework for the modeling of trade agreements, they showed how large nations may have an incentive to impose discriminatory product standards against imported goods once border instruments are constrained, and how inefficiently stringent standards may emerge under certain circumstances even if regulatory discrimination is prohibited. They then assessed the WTO legal framework in light of their

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results, arguing that it does a reasonably thorough job of policing regulatory discrimination, but that it does relatively little to address excessive nondiscriminatory regulations. 129. For a theoretical understanding of the “targeting literature” (addressing distortions through the appropriate instrument), see Bhagwati and Ramaswami (1963); for an application in WTO case law, see Mattoo and Mavroidis (1997). 130. Good arguments can be made in favor of contextual interpretations, where the adjudicating body tries to understand the rationale for a measure, as well as the means that the principals have agreed to use to achieve a particular objective. WTO adjudicating bodies, though, pay traditionally disproportionate attention to textual elements and have adopted a “compartmentalized” approach, where a conclusion reached by interpreting the ordinary meaning of terms is subsequently confirmed by checking boxes (e.g., asking whether the remaining elements of VCLT put it into question); see Mavroidis (2008). 131. Especially in US case law, the distinction is somewhat blurred through the emergence of the “truncated rule of reason”; see Hovenkamp (2011). 132. One might wonder why trade effects matter with respect to findings of injury resulting from a subsidy, rather than from measures coming under the purview of Article III of GATT. After all, were it not for their exclusion under Article III.8 of GATT, subsidies would have come under the purview of this provision. 133. Gantz and Schropp (2009) offered an excellent account of the discussion on burden of proof in Turkey–Rice and sum up prior case law as well. 134. Sykes (2003b) noted that the standard of review is not symmetric across cases: case law is more deferential to the proffered justifications of regulators in cases where human life is at stake (EC–Asbestos) than in cases involving small-stakes consumer fraud (Korea–Various Measures on Beef), to cite just one example. § 172 of the AB report on EC–Asbestos reads: We indicated in Korea–Beef that one aspect of the “weighing and balancing process … comprehended in the determination of whether a WTO-consistent alternative measure” is reasonably available is the extent to which the alternative measure “contributes to the realization of the end pursued.” In addition, we observed, in that case, that “[t]he more vital or important [the] common interests or values” pursued, the easier it would be to accept as “necessary” measures designed to achieve those ends. In this case, the objective pursued by the measure is the preservation of human life and health through the elimination, or reduction, of the well-known, and lifethreatening, health risks posed by asbestos fibers. The value pursued is both vital and important in the highest degree. The remaining question, then, is whether there is an alternative measure that would achieve the same end and that is less restrictive of trade than a prohibition. (emphasis added) This would suggest that WTO panels are more sensitized toward avoiding false positives in some areas (when they fear that they might be putting into question important regulatory choices) than in others. The problem, of course, is that adjudicators, in the absence of information to this effect, might find it hard to decide what is more important than what. Hence, it seems that the current approach gives priority to public health over everything else, without deciding on the relative importance of other social preferences. On this issue, see Petersmann (2000). 135. Already, Neyman and Pearson (1933, p. 296) had written about type I and type II errors: Is it more serious to convict an innocent man or to acquit a guilty? That will depend on the consequences of the error; is the punishment death or fine? What is the danger to the community of released criminals? What are the current ethical views on punishment? From the point of view of mathematical theory all that we can do is show how the risk of errors may be controlled or minimized. The use of these statistical tools in any given case, in determining just how the balance should be struck, must be left to the investigator. Compare this with Stein (2005), at pp. 214ff. 136. This understanding of the key terms does not require redrafting of either § 2 or § 4 of Article III of GATT: recall that following EC–Asbestos, “like” in Article III.4 covers both like and DCS goods as the two terms are understood in Article III.2 of GATT. One can thus distinguish between cases where like or DCS goods are being discussed in litigation under Article III.4 of GATT. 137. The mere presence of regulation should alert the WTO adjudicator to the possibility that the goods concerned are market-like (DCS). The natural question to ask here would be: why regulate if goods are already (in the eyes of consumers) market-unlike? We say presumption, because even if consumers have “internalized” the externality via their behavior, there might still be reason to regulate: it could be, for example, that some

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consumers continue to behave in the opposite way to the majority of consumers, and their behavior might comport negative external effects for society; it could also be that the regulator wants to buy an insurance policy against uncertainty since future behavior of consumers is not given; or, even, for political economy reasons, a government might want to be perceived as doing the right thing. 138. Zhou (2012) supported the view that the negotiating history of Article III of GATT suggests that the intent of the regulator was considered relevant in an evaluation of the consistency of a policy with Article III of GATT. 139. Compare with Di Mascio and Pauwelyn (2008). 140. Of course, this does not mean that measures based on the precautionary principle (a concept discussed in more detail in chapter 6 of volume 2) are necessarily protectionist: for similar measures, recourse to some or all of the criteria mentioned previously might be warranted. 141. Those interested in protecting would rather impose a measure that restricts international trade. The US Supreme Court, in a segregation case called US Willie S. Griggs et al. v. Duke Power Company, 401 US 424, 91, S. Ct. 849 (1971), held that good intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as “built-in headwinds” for minority groups and are unrelated to measuring job capacity (§ 6). Article III of GATT, even if intent were to be accounted for, does not contain any discipline to tame the effect of “built-in headwinds.” Article XX of GATT does, though, since § ii reflects in some of its subparagraphs the necessity-principle. 142. This approach differs from the aims-and-effects test: likeness is not only policy likeness, but market likeness as well; effects matter, but they are irrelevant in the aims-and-effects test. 143. We discuss this provision in detail in chapter 9. 144. In EU law, the ECJ has adopted a more expansive understanding of the exceptions to free movement of goods (the provisions in the EU legal order corresponding to Articles III/XX of GATT): in C-112/00, “Schmidberger,” the ECJ found nothing wrong with the fact that Austrian citizens had blocked a highway and thus made free movement of goods more onerous, since it found that this action was an exercise of freedom of speech and thus a legitimate restriction on trade; in C-265/95, Commission v France, though, it found that France was in violation of its obligations because it did not take adequate measures to stop rioters from destroying strawberries imported from Spain. In this latter case, no defense other than the desire to protect domestic production was at stake. Freedom of speech is not explicitly mentioned in the body of EU law as a legitimate defense against free movement of goods; the Court was interpreting the term “public order.” 145. WTO case law tried to respond to this question, quite unsuccessfully in the author’s view, as will be explored in the discussion of US–Gasoline in chapter 9. 146. Critical voices in the literature have multiplied over the years. Bronckers and McNelis (2000) took the view that, in light of the experience so far, it is probably too risky to leave it to adjudicating bodies to continue interpreting terms such as “like products.” Porges and Trachtman (2003) used a legal-realist methodology and hypothesized that tribunals will, when examining domestic regulation under Article III of GATT, always look at aim and effects (no matter what they say). In a similar vein, Ortino (2003) argued that, while it is clear that WTO adjudicating bodies have rejected the aims-and-effects test, it remains unclear what they have replaced it with. Verhoosel (2002) and Bartels (2009) advanced more or less the same argument: they call for the application of an “integrated necessity test” (the term first coined by Verhoosel), whereby the WTO adjudicator will decide whether de facto discrimination has occurred by engaging in a two-pronged test: first, ask whether a measure specifically affects imported products, and if the response to this question is affirmative, then check whether the measure is necessary to achieve a legitimate policy goal. Choi (2003) concluded that the key term in the NT provision, “like products,” has been interpreted inconsistently. Trebilcock and Fishbein (2007) and Giri and Trebilcock (2005) argued that WTO adjudicating bodies have not managed to successfully distinguish cases of the legitimate exercise of regulatory autonomy from cases of regulatory protectionism, precisely because of their incapacity to design the proper standard of review to be applied in similar cases. Dunoff (2009) pointed to the difficulties that might arise for regulators as a result of the manner in which WTO adjudicating bodies have understood the key terms that appear in the body of Article III of GATT. Melloni (2005) claimed that the test in Article III of GATT has been misapplied, largely because the WTO adjudicating bodies (and especially the AB) have refused to entertain any analysis grounded in economics. Eeckhout (2010) took the view that WTO law has yet to mature on this issue. Charnovitz (2002) expressed disagreement with the manner in which WTO adjudicating bodies have, by applying an erroneous standard of review that does not inquire into the intent of

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the challenged measure, de facto subjected the pursuit of social preferences (often pursued in nondiscriminatory terms) to trade concerns. 147. They make a choice, of course. There are many beggar-thy-neighbor policies that are not sanctioned by GATT. Home, for example, produces strawberries, but not cars. It imposes nondiscriminatory taxes of 1% on the former and 100% on the latter. Tariff income might finance all sorts of public works in Home, but Foreign will be the one financing it. Similar beggar-thy-neighbor policies do not violate GATT.

Chapter 8 1. Hoekman and Trachtman (2008) discussed this case in detail. 2. The negotiating history suggests that it was meant to operate as the opposite of purely political considerations. 3. E/PC/T/C.6/W.22 of 27 January 1947; E/PC/T/C.6/W.69, at pp. 7ff.; and E/PC/T/C.6/W.81, at pp. 14ff. 4. E/PC/T/C.6/27 of 30 January 1947, at p. 5. This proposal eventually found its way into the Interpretative Note of Article XVII of GATT as we know it today. 5. E/PC/T/W/198 of 16 June 1947. 6. E/PC/T/W/239 of 10 July 1947, at p. 2. 7. Ibid., at p. 5. 8. Ibid., at p. 6. See also E/PC/T/160 of 9 August 1947. 9. The WTO website (http://www.wto.org/english/tratop_e/statra_e/statra_e.htm) mentions one example of a law that would run afoul of this provision: “a law which granted a state trading enterprise exclusive import rights in a certain product, and a decision by that enterprise to refuse to import at all, would appear to be a violation of article XI.” Although it is neither a WTO statute nor a panel/AB finding, the inclusion of this example on the WTO website strongly supports the view that similar practices would be judged illegal in cases of litigation before WTO adjudicating bodies: the WTO website is compiled by the WTO Secretariat, and its content does not bind subsequent panels. It is, nonetheless, the official WTO website and represents the WTO Secretariat’s point of view. 10. Drebentsov and Michalopoulos (1998) discussed STEs in Russia; Wood (1998), STEs in the United States; Sapir (1998b), STEs in the European Union; Matsushita (1998), STEs in Japan; Martin and Bach (1998), STEs in China; and Howse (1998), STEs in Canada. Davey (1998) raised questions regarding the adequacy of current disciplines to deal with Chinese and eventually Russian STEs. China has entered the WTO since his paper appeared, and the consistency of Chinese STEs with the multilateral rules has been challenged in the SCM context, as we saw in chapter 11. Petersmann (1998) advanced a very comprehensive set of proposals aimed at disciplining STEs and obliging them to behave like all other economic operators in a given market. 11. All Interpretative Notes are, of course, treaty language. They provide agreed interpretations of the terms featured in the various GATT provisions. 12. GATT Document EPCT/C.II/PV/13, at p. 51. 13. GATT Document EPCT/C.II/25, at p. 5. 14. See, on this issue, Blank and Marceau (1997). 15. As we will see later in this chapter when we discuss transparency, WTO members must notify the WTO of their STEs. 16. Also referred to as “statutory marketing authorities” or “control boards.” 17. As we explain in more detail later in this chapter, there is nothing like a “committee” on STEs. The Working Party is the ersatz committee. 18. In chapter 3 of volume 2, we discuss how the control criterion has been applied in the context of the SCM Agreement in order to decide whether an entity is a “public body.” While there is no guarantee that the test developed there will be applied in every case in the STE context as well, it could still provide useful guidance. 19. The usefulness of an indicative list in this context cannot be overstated. Take the term “special privileges,” which is prone not only to use, but also to abuse: for example, would you consider two economic operators who have received clearance by a domestic antitrust authority (e.g., their joint venture is cleared, its anticompetitive

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effects notwithstanding, because it is expected to yield technological advances) to be enterprises with special privileges? What if similar practices contravene all prior practice in this respect? One can reasonably assume that such was not the intent of the drafters, and yet one cannot outright exclude similar transactions from entering the equation. 20. There were a fair number of cases dealing with Article XVII of GATT in the GATT years. Very often, though, panels had condemned challenged measures under other provisions of GATT and, exercising judicial economy, did not pronounce on claims under Article XVII of GATT; see, for example, Canada–FIRA at § 5.16 and Canada–Provincial Liquor Boards (EEC) at § 4.27. 21. Hoekman and Trachtman (2008) discussed this dispute: in their view, it is not unthinkable that private operators could behave in a similar manner to the Canadian STE. 22. The Interpretative Note of Article XVII of GATT provides an illustration of a practice that should be considered consonant with the obligation to act solely on commercial considerations: “A country receiving a ‘tied loan’ is free to take this loan into account as a ‘commercial consideration’ when purchasing requirements abroad.” 23. The corresponding provision in EU law is more demanding and is discussed in Mavroidis and Messerlin (1998). 24. Petersmann (1991); Bagwell and Staiger (2002). 25. Petersmann (1998) believed that additional regulation is necessary in this respect, and his proposals were inspired by the corresponding EU regime. 26. WTO Documents G/C/M/1, G/STR/N/1, and all subsequent numbers in this series. 27. WTO Document G/STR/3/Rev. 1 of 14 November 2003. 28. WTO Document G/L/829 of 10 October 2007. An annex to this document contains information about all STEs notified so far. Notifications are often lacking, but cross-notifications of STEs have reduced the size of the problem: the EU took the initiative, for example, to alert the Working Group of the lack of notification of Gazprom by the Russian Federation, which promised to comply; see WTO Document G/STR/M/24, at p. 3. 29. The most recent notifications appear in WTO Document G/L/223/Rev. 18 of 9 March 2011, at pp. 66–67. 30. Recall that a substantial number of STEs engage in farm trade.

Chapter 9 1. Bhagwati and Ramaswami (1963) discuss the ordering of policies addressing distortions in what became known as the “targeting” literature. 2. As we will see later in this chapter, some provisions request to minimize the trade burden on imports, but not beyond what is reasonably available to the intervening WTO member. 3. E/PC/T/C.II/31 of 30 October 1946. 4. E/PC/T/C.II/50, at p. 4. Those interested in tracing the roots of this provision could further check Article 4 of the Preliminary Draft for the International Agreement for the Abolition of Import and Export Prohibitions and Restrictions (1927 World Economic Conference), League of Nations, Economic and Financial, 1928.II.7, and the ensuing discussion. 5. L/334 of 1 March 1955, at p. 10. 6. E/PC/T/C.6/41, at p. 3, and E/PC/T/C.6/55, at pp. 48ff. Canada, on the very last day of negotiations, stated a reservation requesting the addition of a paragraph that would make it possible for an ITO member to prohibit a commodity, the domestic production of which was also prohibited; see E/PC/T/C.6/W.85 of 20 February 1947. This addition was probably unnecessary anyway, but it was meant to provide some ex ante clarity. 7. E/PC/T/C.II/50, at pp. 7ff., and E/PC/T/C.II/54, at pp. 32ff. 8. E/PC/T/103, at p. 43. In fact, the delegates of Benelux and France were reinserting the language that was used in the corresponding provision of the International Agreement for the Abolition of Import and Export Prohibitions and Restrictions, op. cit. 9. For confirmation, see the AB report on Korea–Various Measures on Beef at §§ 152ff. 10. The dispute with Mexico continued into the WTO years. Since it concerned a labeling scheme that the US had introduced to distinguish between dolphin-safe and dolphin-unsafe tuna, we will be discussing the subsequent dispute in chapter 5 of volume 2, where we discuss the Agreement on Technical Barriers to Trade (TBT).

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11. They can of course be using different fishing methods and avoid the accidental taking of the life of dolphins. In fact the choice of fishing method largely determines whether tuna can be sold as dolphin-safe tuna in the US market, as we will see in chapter 5 of volume 2, where we will be reviewing US–Tuna II (Mexico). 12. Shaffer (2013) puts the number at above 100,000. A number of international initiatives followed the enactment of the US Marine Mammal Protection Act, aimed at providing agreed labeling and certification schemes for dolphin-friendly tuna (e.g., tuna fished in a manner that did not contribute to the incidental killing of dolphins). The US first enacted its 1990 Dolphin Protection Consumer Act, and then, along with Mexico and other neighboring countries, it signed the 1992 the La Jolla Agreement, the 1995 Panama Declaration, and the 1998 Agreement on the International Dolphin Conservation Programme (AIDCP), which besides labeling and certification, also contained binding fleetwide mortality limits apportioned into individual vessel limits. Shaffer (2013) reports, that mortality has declined by over 99 percent when compared to the situation in the late 1980s. These initiatives, however, did not succeed in resolving all disputes across the neighboring nations. Mexico challenged the US labeling practices before the WTO: we discuss the ensuing US–Tuna II (Mexico) litigation in chapter 5 of volume 2. 13. This ruling sparked a discussion as to whether GATT allows PPM-based distinctions; that is, regulatory distinctions based on process and production methods. The literature discussed in the previous chapter largely addresses this issue as well, since regulatory distinctions will typically be made through domestic instruments. 14. Actually, for the sake of accuracy, a number of categories of sea turtles have been acknowledged as endangered. 15. See the discussion in Howse and Neven (2007a), Sykes (2003b), and Mavroidis (2000b). 16. See, for example, the AB report on US–Shrimp (Article 21.5–Malaysia) at §§ 137–138. 17. See, on this score, Howse and Türk (2001), and Mavroidis (2000a). 18. In this case, the AB faced a US measure banning sales of shrimp that had been caught in a way that led to the accidental killing of sea turtles, an endangered species featured on the list of CITES, a multilateral convention banning trade in similar commodities; see Howse and Neven (2007a). We will discuss it in more detail later in this chapter. 19. WTO case law has often dealt with the issue of what is a measure, but not from this perspective. The question that it has consistently asked is whether, and under what conditions, a “practice,” a “policy,” or even a “methodology” can be considered a measure, and when is it attributed to a government. The responses have not always been coherent, as the Panel on US–Countervailing Measures (China) has itself explicitly acknowledged; see the discussion in §§ 7.96ff., and especially in § 7.99. 20. For an excellent exposé, see Bhagwati and Ramaswami (1963). 21. Conconi and Voon (2015) provide an excellent analysis of all issues discussed in the AB report. 22. We could also have used the MRM exception (resource management) to illustrate the same point. 23. Admittedly, the whole discussion of what constituted a measure in this case was far from clear. The AB dedicated two paragraphs (5.185–186) to explain how it understood the term “measure,” and for the rest, we are called to read between the lines to detect the attitude of the AB members. 24. There is a fine line between “subsistence of indigenous communities” and “competitiveness” concerns. The AB did its level best to avoid confusing the two terms, but several questions remain unanswered. We will return to this point later in this chapter, in the section entitled “Public Morals.” 25. See also Irwin et al. (2008). 26. The WTO Secretariat will reflect in its periodically conducted trade policy reviews (TPRM) national measures that have been imposed, allegedly on public morals grounds. A look at this list would support the argument advanced by Wu (2008), to the effect that the GATS understanding of “public order” should guide the understanding of the term “public morals.” Wu points to all similar measures that the WTO has been notified of prior to 2008. 27. Sykes (2014) argued that, on occasion, there is an international dimension to public morals as expressed in international covenants. This is possible, and this statement does not in any way contradict the fact that, in principle, it is individual WTO members that will decide on standards of right and wrong in their suzerainty. 28. In the EU legal order, the question has arisen to what extent public morals can provide an exception not only to import-, but also to export-related measures: the United Kingdom had refused to grant export licenses to producers interested in exporting livestock to Spain since, in its view, Spain had not eliminated the potential

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for cruel treatment of animals in its slaughterhouses. The dispute was resolved on technical grounds, C—5/94, The Queen v Ministry of Agriculture, Fisheries and food ex p Hedley Lomas (Ireland) Ltd., ECJ, 23 May 1996. 29. The necessity requirement is also included in other subparagraphs of Article XX of GATT; e.g., in Article XX(a) and (d) of GATT. We reproduce here all of the case law regarding this requirement, regardless of the subparagraph invoked. Although there is no guarantee that case law under Article XX(d) of GATT will be reproduced in its entirety in case law regarding Article XX(b) of GATT, case law so far suggests that adjustments might be warranted only in light of the relative importance of the objective sought. With this caveat, case law under Article XX(d) of GATT regarding the necessity requirement is legally relevant for the understanding of the same requirement in Article XX(b) of GATT. In fact, the GATT Panel on Thailand–Cigarettes held that it saw no reason why case law under the two subparagraphs should not be identical (§ 74). 30. Independent Journal, Saturday, 19 January 1788. 31. In GATT/WTO case law, this term should be understood as equivalent to a preponderance of evidence standard, and not a standard akin to proving something beyond reasonable doubt. 32. Recall, however, that the importance of the objective sought will weigh in the standard of review employed by WTO adjudicating bodies. In domestic constitutional law and practice, necessity constitutes the second step of a three-level analysis: first, the question is raised whether a measure can appropriately serve the stated objective; if no, the measure would be considered inappropriate and dismissed altogether, but if yes, the next question would be whether it constitutes the least restrictive option in the hands of the regulating entity. If not, it will be judged unnecessary, but if so, the last question would be whether achieving the requested value would put into question the achievement of other values equally or more important (in the eyes of the judge) to the society at large. The Swiss constitutional judge could, thus, in the name of proportionality, request from a specific canton to abandon its pursuance of specific necessary policies for endangering policies that affect the whole of the Swiss confederation. The WTO judge cannot perform this last leg of the test. 33. For confirmation of this point, see EC–Seal Products at §§ 5.272ff., and especially at §§ 5.2725.276–277. 34. See Conrad (2011), at pp. 330ff., who discussed in detail “absolute” and “relative” necessity. 35. During the Uruguay round of negotiations, the US had tabled a proposal according to which, whenever recourse to Article XX(b) of GATT was being made to protect human health, the ensuing measures would have to be based on scientific evidence; GATT Document MTN.GNG/NG5/W/118 of 25 October 1989, at p. 11. Its proposal did not get the approval of the other trading nations. Later, the AB held in § 178 of its report on EC– Asbestos that WTO members can, but do not have to, have recourse to scientific expertise to justify a regulatory intervention through Article XX(b) of GATT. 36. The AB report on Korea–Various Measures on Beef is troublesome for one more reason: in § 172, the AB sees a “consistency-requirement” in Article XX(d) of GATT that is simply missing in the text of this provision: The application by a Member of WTO-compatible enforcement measures to the same kind of illegal behaviour— the passing off of one product for another—for like or at least similar products, provides a suggestive indication that an alternative measure which could “reasonably be expected” to be employed may well be available. The application of such measures for the control of the same illegal behaviour for like, or at least similar, products raises doubts with respect to the objective necessity of a different, much stricter, and WTO-inconsistent enforcement measure. The Panel was, in our opinion, entitled to consider that the examples taken from outside as well as within the beef sector indicate that misrepresentation of origin can indeed be dealt with on the basis of basic methods, consistent with the WTO Agreement, and thus less trade restrictive and less market intrusive, such as normal policing under the Korean Unfair Competition Act. (italics in the original) 37. The facts of this case have been discussed in chapter 7. 38. Bown and Trachtman (2009) discuss this case in detail. 39. See the relevant discussion in Charnovitz and Hoekman (2013). 40. This term might give the impression that the WTO judge can go as far as prohibiting a WTO member from pursuing an objective if, regardless of the means employed to this effect, the costs for international trade are disproportionate. This view is wrong. As we show in the next subsection, it is only means that are justiciable, not ends. WTO members can pursue any objective they wish, regardless of the costs imposed on international trade, if they have employed the least restrictive means to this effect. There is no “full proportionality” test in the WTO legal order, in other words. Only a national/federal judge has similar powers.

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41. GATT Document L/5863 of 17 September 1985; see especially §§ 50ff. 42. This is an odd statement, to say the least: what if Mexico had invoked a Mexican law incorporating its rights and obligations under NAFTA? Would the panel and AB still hold the same opinion? Be that as it may, it is highly implausible that this is the last word of the AB on this score. 43. Davey and Maskus (2013) note that here, the AB had deviated from prior rulings (and notably US–Gasoline) where it called for a test reviewing the contested regulation as a whole; see also Carlsson (2013). 44. During the negotiation, Cuba wanted to propose an amendment “designed to promote the denial of mostfavored-nation treatment to goods produced by exploited labor.” It was rejected. In the words of the US delegate (Harry Hawkins), “this apparently means that most-favored-nation treatment could be denied by a country having higher labor standards to products coming from countries having lower labor standards. We are very much afraid that instead of helping to raise labor standards, such an exception might make bad working conditions even worse by destroying the market for the products of countries where wages are low. The exception might result in widespread discrimination, international friction and lower standards of international trade,” UN Document E/PC/T/C.II/PV4, at p. 10. 45. Greenfield (2007, pp. 368ff) discussed the various factors (ranging from pure legal reasons, such as lack of implementation, to pure business reasons, such as the size of antiquities markets in wealthy OECD countries) that explain the practical irrelevance of the UNESCO Convention. 46. The Panel on China–Rare Earths visited the negotiating record, and its report contains an extensive discussion of this point in §§ 7.271ff. 47. It held that this treaty is a relevant rule of public international law by virtue of Article 31.3(c) of VCLT. 48. Nationality and territoriality are the two most common bases, in public international law, for exercising jurisdiction: under the former, a state can regulate the behavior of its nationals; under the latter, a state can regulate transactions taking place in its territory. Public international law gives the edge to the latter when a conflict between the two arises. On the other hand, one can further distinguish between “objective” and “subjective” territoriality: the former captures activities occurring within national frontiers, while the latter captures activities that occur in Home, but that affect Foreign. For example, Foreign could legitimately, by virtue of subjective territoriality (effects doctrine), punish Home’s export cartels, which cartelize its own (e.g., Foreign’s) market. Indeed, except for some extreme cases, Home would have little incentive to regulate the behavior of an export cartel operating from its market but affecting the rest of the world. Antitrust advocacy usually attributes such inactivity to the fact that domestic antitrust laws are there to protect domestic (as opposed to foreign) consumers’ welfare. On this issue, see the various contributions in Meessen (1996) regarding the status of these principles in public international law; Mavroidis and Neven (1999) for a discussion on antitrust; and Bagwell, Mavroidis, and Staiger (2002), Bartels (2002), Charnovitz (1998 and 2002), and Horn and Mavroidis (2008) for a discussion regarding the status of these principles in WTO law. 49. Since there are probable gains from cooperation here, shouldn’t the US strive to conclude multilateral environmental agreements (MEAs) instead of adopting unilateral measures? WTO case law has, in general, kept a cautious attitude toward the relevance of MEAs in the WTO legal order. Anyway, it is simply irrelevant whether a measure is unilateral or based on an MEA when it comes to evaluating its consistency with WTO law. At most, a measure that has been included in an MEA might “sensitize” a panel/AB about its relative importance. It still has to meet the legal test of the relevant provision. Horn and Mavroidis (2014) explain why the cautious approach as evidenced in EC–Approval and Marketing of Biotech Products might be justified. 50. E/PC/T/C.II/50, at pp. 5ff. 51. Charnovitz (1991) observes that this is not a watertight observation since some references might argue for a wider understanding of the term; see also Matsushita et al. (2006), and Vranes (2009). 52. E/PC/T/C.II/50, at pp. 5ff. In US–Shrimp, the AB held the opposite view, as we will see later in this chapter. 53. E/PC/T/C.II/50, at pp. 34ff. Only a few of them, however, (those mentioned in 2.3.2) concerned GATT. 54. See E/ PC/T/B/SR/27, at p. 14 and the discussion in Charnovitz (1991). 55. This is a conclusion that Charnovitz (1991) does not exclude. 56. See E/CONF.2/C.5/9, at p. 21; E/CONF.2/C.5/SR.7, at p. 2; and the corresponding discussion in Charnovitz (1991). In light of this record, it should come as no surprise that the AB avoided references to the travaux préparatoires of the term “exhaustible natural resources” in its judgment on US–Shrimp.

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57. Although the AB did not prescribe in a definitive manner the precise legal relevance of similar instruments in the WTO legal order, it used them to support an opinion that it had already reached; hence, extra-WTO international treaties were used in this case as supplementary means of interpretation. For a more extensive analysis of this point, see Mavroidis (2008). 58. The consequence of this case law is that, as a result of the AB report on US–Shrimp, the standard of review when a claim regarding public health is discussed under Article XX of GATT is more stringent than when a claim regarding animal health is discussed (at least with respect to some animals), since the former arguably continues to come under the purview of Article XX(b) of GATT and the ensuing necessity requirement. 59. The puzzle in both the US–Tuna (Mexico) and US–Shrimp disputes is why didn’t the panels and the AB decide the claims under Article III.4 of GATT? Both cases concerned the consistency of domestic policies enforced at the border with GATT. It should be the complaining party that carries the burden of proof to demonstrate that the treatment for imports was less favorable than that reserved to domestic tuna and shrimps, and the US should not have to justify its measures. 60. Nordhaus (2013), at pp. 122ff. 61. This panel was echoing the standard established by the AB in Brazil–Retreaded Tyres (§§ 145–147). 62. Bond and Trachtman (2015) wonder whether the AB has not de facto made a reversal and returned to its “primarily aimed” standard. It is remarkable that in this case China was using an export tax and export quota next to a domestic production quota to achieve its aim. The question legitimately arises whether it was genuinely pursuing a conservation policy, under the circumstances: If China cared about conservation of its minerals why was an export tax and an export quota necessary? Why didn’t the production quota suffice? Alas, neither the panel nor the AB delved into these and similar questions. 63. That said, the better arguments lie with construing Article XX(g) of GATT to require WTO members to avoid adopting contradictory measures. It would be odd, for example, for a panel to accept that Home can ban the sale of fur made of Arctic fox for dresses, but not for coats. In other words, consistency within the productcategory (“internal consistency”) should be required; consistency across product categories (Arctic foxes or sea turtles; e.g., “external consistency”) should not. The Panel on EC–Seals effectively dealt with a case of internal consistency, albeit under a different subparagraph of Article XX of GATT. 64. In one of its most self-referential definitions ever, the AB understood the term “restriction” in the following manner in § 5.91 of its report on China–Rare Earths: “the AB has described a “restriction” as “[a] thing which restricts …” Luckily, this is an inconsequential finding. 65. The Panel on US–Canadian Tuna outlawed US measures restricting imports of some tuna because similar measures had not been adopted with respect to domestic tuna of the same kind (§§ 4.5ff). In China–Raw Materials, the AB held (§§ 360–361) that Article XX (g) of GATT requests that WTO members take measures restricting imports in conjunction with measures restricting domestic production; it does not also request that the measures adopted be of such a nature that they render effective measures aimed at restricting domestic production. 66. Recall the discussion of the “Kuznets curve” in chapter 5. 67. Commodity agreements were largely pro-producer instruments. The Agreement on Agriculture, which entered into force in 1995, aims at liberalizing farm trade worldwide, and there is inevitably tension between the two instruments. We discuss the relationship of commodity agreements with the Agreement on Agriculture in chapter 8 of volume 2. 68. The CFC provides assistance to commodity producers to enable them to strengthen the quality of their production systems and to develop new products, which will enable them to effectively compete with these synthetic products. For example, a recent CFC project concerns the promotion of exports of organic bananas from Ethiopia and Sudan. The CFC has 105 member states, as well as institutional members, such as the EU, the African Union/African Economic Community (AU/AEC), the Common Market for Eastern and Southern Africa (COMESA), and most recently, the Caribbean Community (CARICOM). The Agreement Establishing the CFC was adopted on 27 June 1980 in Geneva by the United Nations Negotiating Conference on a Common Fund under the Integrated Programme for Commodities. The Agreement entered into force on 19 June 1989. 69. See UNCTAD/ITCD/COM/11. 70. The text has been reproduced on p. 588 of the GATT Analytical Index, The GATT: Geneva, 1995. 71. EPCT/A/PV/36, at pp. 22ff, and Irwin et al. (2008). 72. GATT Document GATT/CP.4/33.

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73. EPCT/A/PV/30, at p. 20. 74. GATT Document BISD 3S/249 at § 42. 75. Gaines (2001) offers a comprehensive analysis of the case law regarding the chapeau. 76. The Panel on China–Rare Earths cited this passage approvingly (§ 7.354). This is additional proof that the distinction between the substantive consistency of a measure with a paragraph of Article XX of GATT and the consistency of its application with the chapeau of this provision has been blurred in recent case law. 77. We discuss conformity assessment in chapter 5 of volume 2. 78. This assumes that only the US produces TEDs, or that TEDs have been patented. 79. The MRM hunts raised a very interesting issue that the panel, alas, ducked. Finns had in place a system whereby they were administering the population of seals to ensure that the population of fish would not be negatively affected. They thus proceeded to occasional killings of seals when the population of various fish categories was being depleted, as a result of the seals’ eating habits. Norway had in place a more sophisticated system of protection of the ecosystem, which focused not only on the population of fish, but also on the population of seals as such. The EU Seals Regime, alas, had been drafted in such a manner that whereas Finns could sell seal products under the MRM exception, Norwegians could not (the implicit reason for it being that the Norwegian system was not targeted enough toward the protection of seals, although probably equally if not more efficient altogether); see the panel report at §§ 7.648ff. Compare the contrasting views expressed on this score by Perisin (2013) on the one hand, and Howse and Langille (2012) on the other. 80. The Canadian delegate expressed his disappointment with this interpretation during the discussion regarding the adoption of the report; see GATT Document C/M/155. 81. In the same report, the AB held that although Brazil’s import ban of some retreaded tires had been ordered by Brazilian courts, this fact in and of itself did not exonerate the country from responsibility (§§ 232–233, 246). 82. See the analysis in Valles (2015). 83. Williams (2008). 84. After all, nonmarket economies (NMEs) can happily live within the WTO, as we will see in chapter 2 of volume 2 where we discuss the imposition of antidumping duties on goods originating in NMEs. 85. See the discussion in Conconi and Pauwelyn (2011). 86. Bronckers and Maskus (2014) discussed this report in detail. 87. We will discuss the Annex 1A Agreements in volume 2. 88. This panel dealt with a US measure that allowed imports of poultry only to the extent that the exporting country had in place a safety regime equivalent to that of the US: this is what the US Poultry Products Inspection Act (PPIA) requested. In the eyes of the US agency, China’s slaughtering processes were not equivalent to those practiced in the US. Regan (2011) distanced himself from the panel’s reasoning regarding the relationship between Article XX(b) of GATT and SPS, although he concurred with the ultimate finding; e.g., that violations of the SPS Agreement cannot be justified through Article XX(b) of GATT. Bohanes (2012) explained why both the reasoning and the outcome of the panel in this respect is reasonable. See also the panel report on EC–Hormones at §§ 8.31–32. 89. As we explain in more detail in chapter 8 of volume 2, the Agreement on Agriculture imposes obligations with respect to export subsidies, domestic support measures, and the overall volume of trade. Domestic support measures, which used to take all sorts of forms, should be converted to tariffs, as per Article 4.2 of AG. 90. Some of the featured objectives, like “quality of exports,” were not included in the body of Article XX of GATT. There is evidence that negotiators did reflect seriously on the precise drafting of the preamble, not only during the Uruguay round, but during the negotiations that led to the conclusion of the Tokyo round agreement on TBT; see GATT Document MTN/NTM/W/12 of 10 July 1975, at p. 1. 91. Perhaps the US attitude here is telling in and of itself: had the US taken the view that recourse to Article XX of GATT was possible, it would have done so. 92. There is no case law, though. 93. GATT Document L/6896 of 18 September 1991. 94. GATT Document Spec (91)21 of 29 April 1991. 95. GATT Document Spec (91)36 of 8 July 1991. 96. GATT Document Spec (91)40 of 9 July 1991. 97. GATT Document Spec (91)27 of 12 June 1991.

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98. Howse (2010) and Rubini (2010) both advanced arguments in favor of constructing Article XX of GATT as an exception to the disciplines imposed by the SCM Agreement. Compare Lester (2011), who also advanced arguments in favor of constructing the SCM Agreement as a means of fighting “protectionist” subsidies only; that is, subsidies void of a public policy rationale other than to increase the income of producers. 99. The term “exception” is used in the title of two provisions only: Articles XX and XXI of GATT. 100. EPCT/A/PV/33, at pp. 20–21, and also EPCT/A/SR/33, at p. 3. 101. See Schelling (1971). 102. Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Norway, Poland, Portugal, Republic of Korea, Romania, Russia, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, Ukraine, the United Kingdom, and the United States. 103. GATT CP.3/SR.22, at pp. 4ff. 104. See the decision of 8 June 1949 published in GATT Document II/28. The roll-call vote was a system whereby the secretary to a meeting would call those present in a meeting individually to cast their vote. Like voting in general, it has been discontinued in the GATT/WTO context, since the early 1950s. 105. SR.19/12, at p. 196. 106. GATT Document BISD 17S/40, at pp. 22f. 107. GATT Document C/M/109. 108. GATT Document L/4250/Add. 1. 109. GATT Document L/5319/Rev. 1. 110. See the discussions before the GATT General Council reflected in GATT Documents C/M/157 and C/M/159. 111. Idem. 112. GATT Document BISD 29S/23. 113. On this issue, see the excellent analysis offered in Hahn (1991), who discussed the case law and pays particular attention to the standard of review employed in national security cases. The author further advanced his own framework for the analysis of such issues. 114. GATT Document L/6948. 115. GATT Document C/M/255, at p. 18. 116. GATT Document C/M/264, at p. 3. 117. This legislation is also sometimes referred to as LIBERTAD. 118. See WTO Document WT/DS38/1 of 13 May 1996. 119. WTO Document WT/DS38/5 of 25 April 1997. 120. WTO Document WT/DS38/6 of 24 April 1998. 121. CFIUS was enacted through Executive Order No. 11,858, and was published at 40 Federal Register 20263 (1975). Shambaugh (2013) offered several notoriously well-known cases where Chinese attempts to penetrate the US market have been thwarted by CFIUS, pp. 200ff. In 1988, the US enacted the Exon Florio Amendment (2.50 U.S.C. app. § 2170), and the president of the United States gained broad authority to investigate and block mergers, takeovers, and acquisitions that could result in foreign control of domestic companies. Several factors (ranging from favorable exchange rates to lower production input prices in the US) had contributed to increasing the takeover activity, and the act was meant to enable the US Executive stop entry to investment threatening the US national security; see Greidinger (1991). 122. WTO Document WT/L/851 of 22 February 2012. A number of sensitive import-competing products, nevertheless, were largely excluded, and as a result, the efficacy of this measure was judged highly questionable by Khorana et al. (2012), who also cast doubt on the effectiveness of trade measures as a response to humanitarian crises. 123. A waiver from Article I of GATT was accorded to the requesting state in a subsequent case that we discuss later in this chapter (i.e., EC–Bananas III). 124. The facts of this case, which are reproduced in other parts of this volume, are immaterial here and hence are omitted: the EU claimed that waivers, as a general matter, regardless of the reasons underlying the granting of the request, are not justiciable. 125. WTO Document WT/GC/W/629 of 8 February 2011.

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126. This happened in 1946; see GATT Documents GATT 1/21 and 42; and GATT/1 SR.6, 7. 127. See GATT Document GATT/1/Sr.7, at p. 5. 128. This possibility was not retained in the WTO-era as we will see later in this chapter. The question could thus arise whether a GATT party that had invoked nonapplication could participate in the voting for a waiver if the latter had been requested by the party against which nonapplication had been invoked. The answer seems to be yes, if nonapplication was restricted to Article II of GATT (and the request for waiver did not concern this provision), and no in any other case. 129. See the GATT Analytical Index, at pp. 1034ff. Japan was the most frequent target of invocations of the nonapplication clause. Eventually, the GATT contracting parties starting disinvoking Article XXXV of GATT against Japan. However, it took some time and often persuasion as well: Japan, for example, had to threaten developing countries that it would not be providing them with tariff preferences since they had invoked Article XXXV of GATT against it (GATT Document 2ss/SR.2, at p. 7). 130. The panel’s view has implicitly been refuted, of course, in subsequent case law. In EC–Asbestos, it was an input to a final product that was at the heart of the regulatory distinction operated by France. This is a very unfortunate finding since no requirement of consistency has been included in Article XX(d) of GATT. This requirement exists only in the SPS Agreement, as we will see in chapter 6 of volume 2.

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Index

AB. See Appellate Body (AB) Absolute advantage, 24 Abuse of law, 466–467 ACP. See African, Caribbean, and Pacific (ACP) Convention Actual value, 170 ACWL. See Advisory Centre for WTO Law (ACWL) AD. See Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (AD); Antidumping (AD) Adjustment costs, 397 Administrative guidance, 83 Ad valorem duty, 150 Advisory Centre for WTO Law (ACWL), 274 AfDB. See African Development Bank (AfDB) Affecting sale, 382 African, Caribbean, and Pacific (ACP) Convention, 314 African Development Bank (AfDB), 194 AG. See Agriculture (AG) Agreement Agency design, 321–322 Aggregate Measurement of Support (AMS), 251 AGOA. See US African Growth and Opportunity Act (AGOA) Agreed Description of the Customary Practice of the GATT in the Field of Dispute Settlement, 48 Agreement Establishing the WTO, 60–62, 122, 143, 191, 238, 285, 287, 358, 472–473, 494 Agreement on Customs Valuation, 171 Agreement on Government Procurement (GPA), 53, 64–65, 67 Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade and Protocol on the Agreement (CV), 53, 170, 477 Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (AD), 32, 52, 477–478 Agreement on Import Licensing Procedures (ILA), 53, 477

Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Tariffs and Trade (SCM), 53, 478–479 Agreement on Preshipment, 171 Agreement on Rules of Origin (ROO), 223–224, 226–227, 232–233, 477 Agreement on Safeguards, 166 Agreement on Subsidies and Countervailing Measures, 166 Agreement on Technical Barriers to Trade (TBT), 52–53, 64, 71, 477 Agreement on Textiles and Clothing (ATC), 91, 475 Agreement on the Application of Sanitary and Phyto-sanitary Measures (SPS), 52–53, 64, 119, 474 Agreement on Trade Facilitation (TF), 63, 65–66 Agreement on Trade in Civil Aircraft (CA), 53, 64–65 Agreement on Trade in Pharmaceutical Products, 162. See also Pharma Agreement Agricultural Committee, 70 Agriculture (AG) Agreement, 70, 166–167, 233, 474–475 Aid for Trade, 65, 249, 266, 276, 282–287, 288–289 adjustment assistance of, 283–284 capacity building for, 283 DDA and, 282–283 early evaluations of, 284–285 inequality and, 285–287 infrastructure of, 283 poverty and, 285 productivity of, 283 trade and, 285–287 WTO’s involvement in, 284 Alice’s Adventures in Wonderland, 20–21, 376 Alternative duty, 150 American Revolution, 9 AMS. See Aggregate Measurement of Support (AMS) Andean Community, 229 Animal health, 87

592

Annex 1A GATT Agreements conflict between, 63 on exceptions, 474–478 Annex 10 of the London Draft, 16–17 Annex 6 of the Protocol of Accession, 89 Annex on Movement of Natural Persons Supplying Services under the Agreement, 486 Antidumping (AD), 18, 67–68, 175, 188, 190, 203, 248, 321, 324 EU and, 363–364 Antidumping Practices Committee, 71 Antitrust prosecution, 94 Appellate Body (AB), 61, 62–64, 77, 81, 92, 97, 144 on Argentina–Textiles and Apparel, 168–169, 171 on Brazil–Retreaded Tyres, 438–441, 462, 468–469 burden of proof and, 103, 120, 300 on Canada–Autos, 201, 206 on Canada–Renewable Energy, 344 on Canada–Wheat Exports and Grain Imports, 400, 410–411 on Chile–Alcoholic Beverages, 373–375 on Chile–Price Band System, 148–149 on China–Rare Earths, 454–455, 460–461, 470–472, 477 on China–Raw Materials, 472 critical shortage and, 100–101 DCS and, 379 on Dominican Republic–Import and Sale of Cigarettes, 389–392, 435–436 on Drug Arrangements, 263–264 on EC–Asbestos, 382–385, 440–441 on EC–Bananas III, 127, 170, 385, 489–490 on EC–Poultry, 203 on EC–Salmon, 478 on EC–Seal Products, 212–213, 390–391, 462–466 on EC–Tariff Preferences, 250, 264–265, 288 India–Additional Import Duties and, 188 India–Quantitative Restrictions and, 116–117 on Japan–Agricultural Products II, 435 on Japan–Alcoholic Beverages II, 337, 363, 368, 371, 379 on Korea–Alcoholic Beverages, 368–369 on Korea–Various Measures on Beef, 251, 386–390, 420, 432–433, 437 likeness and, 383 other products and, 101 on Philippines–Distilled Spirits, 370–371, 378–379 temporarily applied, 102 on Thailand–Cigarettes, 443 on Turkey–Textiles, 315 on US–Clove Cigarettes, 390–391 on US–Gambling, 428, 433–435, 441 on US–Gasoline, 421–422, 451, 454, 460–463, 466–467, 496 on US–Shrimp, 415, 417–421, 448–452, 460–462, 464–465 on US–Tuna II, 201, 362, 394, 420

Index

Appellations of origin, 218 Applicant contracting party, 176 Applied rates, 140 Applied so as to afford protection to domestic production (ASATAP), 371, 373–375, 380, 388, 391, 393 DCS and, 371–375 Appraisal of GATT, 57–59 Arbitrary discrimination, 466 Argentina–Hides and Leather, 82, 96–98, 132 Argentina–Import Measures, 77, 82, 100 Argentina–Import Restrictions, 85 Argentina–Textiles and Apparel, 168–169, 171 Aribratry discrimination, 462–468 Articles of Agreement of the IMF, 173 Article VII of Lend-Lease Act, 11–12 ASATAP. See Applied so as to afford protection to domestic production (ASATAP) ASEAN. See Association of Southeast Asian Nations (ASEAN) Assault to sovereignty, 15 Association of Southeast Asian Nations (ASEAN), 229–230, 299, 322–323 ATC. See Agreement on Textiles and Clothing (ATC) Atlantic Charter, 11–12 Atlas method, 251–252 Automatic data processing machines, 160–161 Automatic licensing, 80 Bagwell-Staiger framework, 32 Balance of payments (BoP), 18, 22, 101, 112–120, 122, 126–127, 130, 315 commodities and, 111 Balance trade openness, 479–480 Bali Ministerial Conference, 63 Bali Ministerial Declaration, 65, 232, 274 Bali package, 153 Banana Framework Agreement (BFA), 166 Bangkok Agreement, 271 Bastable, C. F., 245 Bastiat, F., 27 BDV, Brussels Definition of Value (BDV) Beggar-thy-neighbor policies, 2–3, 35, 235 Behind-the-border instruments, 37 Belgian-Family Allowances, 204, 406–407 Benelux customs union, 293 Berlin Wall, 41 Best-endeavors clauses, 246 BFA. See Banana Framework Agreement (BFA) Bidwell, P., 21 Boards of nationalized industries, 405 BoP. See Balance of payments (BoP) BoP Committee. See Committee on Balance of Payments (BoP Committee) Border instruments, 37 Border tax adjustment, 356

Index

Bound duties, 362–363. See also Tariffs coalitions on, 162–163 conditions for, 151–152 Information Technology Agreement and, 158–162 nontariff barriers and, consolidating, 152 ordinary customs duties and, 148–150 other duties and charges and, 148, 150–151 Pharma Agreement and, 162 process for, 136–145 qualifications for, 151–152 reciprocity and, 145–148 sectoral agreements on, 156–157 tariff concessions and, 152–153 terms of, 151–152 trade rounds on, 153–156 types of, 145–152 unilateral action and, 163 BPOA. See Brussels Programme of Action (BPOA) Brazil-Internal Taxes, 337 Brazil-Retreaded Tyres, 417, 438–441, 462, 468–469 Bretton Woods conference, 6–7, 117, 121–122, 289 Britain, 9–10. See also United Kingdom (UK) Broad residual category, 82 Brussels Convention on Nomenclature for the Classification of Goods in Customs Tariffs (BTN), 138, 167 Brussels Definition of Value (BDV), 171 Brussels Programme of Action (BPOA), 281 BTAs, 353–356, 355–358, 367, 376 BTN. See Brussels Convention on Nomenclature for the Classification of Goods in Customs Tariffs (BTN) “Bumpers and Parts Thereof,” 138–139 Burden of proof Apellate Body and, 103, 120, 300 commodities and, 104, 111, 120 critical shortages and, 102–103 exceptions and, 422 exchange restrictions and, 125 humans, animals, plant live, and health and, 434–436 infant industry protection and, 126 “But for” test, 92, 128 “Buy National” policies, 74–75 Byrnes, J. F., 13 CA. See Agreement on Trade in Civil Aircraft (CA) CAA. See US Clean Air Act (CAA) CACM. See Central American Common Market (CACM) Cairns group, 163 Cambridge, 244 Canada, 21–22 Canada–Autos, 201, 206 Canada–FIRA, 358, 407 Canada–Periodicals, 349–350 Canada–Provincial Liquor Boards, 380–381

593

Canada–Renewable Energy, 344, 423–424 Canada–Wheat Exports and Grain Imports, 400, 407–408, 410–411 Canadian Communities–Article XXVIII Rights, 184 Canadian tariff concession, 175 Canadian Wheat Board, 407–408 Canalizing agencies, 405 CAP. See Common agricultural policy (CAP) Capacity building, 273, 278, 283 Capital contribution, irrevocable, 85 Carroll, L., 20–21, 376 Castro, F., 206 CAT. See Convention against Torture (CAT) CBD. See Convention on Biological Diversity (CBD) CCC. See Customs Cooperation Council (CCC) Nomenclature CCCMC. See Chinese Chamber of Commerce of Metals, Minerals, and Chemicals Importers and Exporters (CCCMC) Central American Common Market (CACM), 229 Certificate of origin, 215, 217 CFIUS. See Committee on Foreign Investment in the United States (CFIUS) CG18. See Consultative Group of Eighteen (CG18) Charges. See also Customs duties; Duties bound Charter of the United Nations, 446 Chile–Alcoholic Beverages, 373–375 Chile–Price Band, 474 China–Publications and Audiovisual Products, 433, 471–472 China–Rare Earths, 414, 449, 454–455, 460–461, 470–472, 477 China–Raw Materials, 77–78, 84–85, 100–103, 421, 456, 472, 487 Chinese Chamber of Commerce of Metals, Minerals, and Chemicals Importers and Exporters (CCCMC), 81, 92 Chinese Ministry of Commerce (MOFCOM), 78 Chinese Protocol of Accession, 251 Chinese Taipei, 191, 299 Churchill, W., 11–12, 35 CIT. See US Court of International Trade (CIT) CITIES. See Convention on International Trade in Endangered Species (CITES) Civil Aviation, 67 Clayton, W., 16–18, 20, 35, 42–43, 339 Club of rich countries, 252 Cobden-Chevalier treaty, 2, 196 COCOM (Coordinating Committee for Multilateral Export Controls), 480 Colijn, 3 Collective action, 135, 320 Colombia–Ports of Entry, 77 Commerce regulations, 305–307 Commercial resale, 345 Commission of the EU (DG Trade), 265

594

Commitment theory, 27–28 Committee of Rules of Origin, 225 Committee of the Participants on the Expansion of Trade in Information Technology Products, 71 Committee on Agriculture, 157, 392 Committee on Balance of Payments (BoP Committee), 69, 112–117, 129 Committee on Civil Aircraft, 71 Committee on Foreign Investment in the United States (CFIUS), 487 Committee on Government Procurement, 71 Committee on Legal and Institutional Framework of GATT in Relation to Less-Developed Countries, 246 Committee on Market Access, 130, 179 Committee on Regional Trade Agreements (CTRA), 228, 271, 301–302, 305, 311–313, 316–319, 333 Committee on Rules of Origin, 70 Committee on Trade and Development (CTD), 69, 271, 277, 280–281, 288, 300–301 Committee on Trade and Environment, 277 Committee on Trade Facilitation, 70 Committee on Trade in Industrial Products, 157 Commodities balance of payments and, 111, 115–119 burden of proof and, 104, 111, 120 compensation for, 111 dispute settlement on, 115–119 exceptions to, 104–120 governmental measures on, 106–108 institutional issues on, 112–113 invocations on, 114–115 measures adopted for, types of, 113–114 procedural issues on, 112–113 product coverage on, 108 public notice regarding, 111 rationale for, 105–106, 111–112 temporary surplus of, 110–111 terminology for, 104 testing, 105 Common agricultural policy (CAP), 107 Common language commonality of, 142 concept of, 137 need for, 137–138 Commonwealth, 6, 8, 9–10, 17 Comparative advantage, 24, 26 Compensation for commodities, 111 Compliance of exceptions, 442–443, 460 Compound duty, 150 Computers, 160–162 Concealed restriction, 466–467 Concession erosion, 197–198, 399 national treatment and, 337–338 PTA and, 198 Conditional exceptions, 422–423

Index

Conflict rules, 139 Consolidated Tariff Schedules (CTS), 140, 178 Consular invoices, 217 Consultative Group of Eighteen (CG18), 44–46 Contingency, 147 Contract incompleteness, 338–339 Convention against Torture (CAT), 265 Convention on Biological Diversity (CBD), 445 Convention on International Trade in Endangered Species (CITES), 264, 419 Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and Transfer of Ownership of Cultural Property, 444 Convention on the Regulation of Whaling, 156 Convention on the Rights of the Child (CRC), 265 Convention on the Valuation of Goods for Customs Purposes, 171 Cotounou Agreements., 215–216, 229 Council, 43–44, 46 Council for Trade in Goods (CTG), 69, 130, 177, 179, 181, 186–187, 412, 488 Council for Trade in Services, 488 Council for TRIPS, 488 Council of Europe Convention on Transfrontier Television, 352 Countervailing duties (CVDs), 67, 188, 190, 247–248 Covenant of the League of Nations, 196 CRC. See Convention on the Rights of the Child (CRC) Cripps, S., 17, 20 Critical mass agreements, 135 defined, 156 Information Technology Agreement and, 158 PTA and, 158 sectoral agreements vs., 156–157 Critical shortages, 100–101 burden of proof and, 102–103 essential products and, 101 exceptions to, 100–101 foodstuff or other products and, 101 temporarily applied, 102 CTD. See Committee on Trade and Development (CTD) CTG. See Council for Trade in Goods (CTG) CTRA. See Committee on Regional Trade Agreements (CTRA) CTS. See Consolidated Tariff Schedules (CTS) CU. See Customs union (CU) Cuba dispute settlement against, 46 tariffs between US and Cuba, 21–22 Cuba–Consular Taxes, 203 Cuban Democracy Act, 486 Cuban Liberty and Democratic Sokidarity Act (LIBERTAD), 485–486 Culbertson, W., 207

Index

Cultural exception, 347 Currency devaluing, 111 manipulations of, 122–124 undervalued, 123 Customs. See Tariffs Customs Cooperation Council (CCC) Nomenclature, 108, 138, 167, 171, 221 Customs duties, 86–87. See also Duties bound Customs union (CU), 38, 291 Benelux, 293 PTA and, 294–295, 304, 308–311 Customs user fee, 190 Customs Valuation Committee, 70–71 CV. See Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade and Protocol on the Agreement (CV) CVDs. See Countervailing duties (CVDs) DCS. See Directly competitive or substitutable (DCS) DDA. See Doha Development Agenda (DDA) Decision on Dispute Settlement Procedures, 49 Decision on Notification Procedures for Quantitative Restrictions, 130 Decision on Preferential Rules of Origin for Least-Developed Countries, 232 Decision on Procedures for Modification and Rectification of Schedules of Tariff Concessions, 165 Decision on the Establishment of Loose-Leaf Schedules, 177 Decision on the Relationship of the WTO with the IMF, 284 Declaration Giving Effect, 355 Declaration of Independence, 9 Declaration of Ministers, 122 Declaration on the Contribution of the WTO to Achieving Greater Coherence in Global Economic Policymaking, 72 Declaration on Trade Measures taken for Balance-ofPayments Purposes, 113–114 Deep integration, 340–341 De facto discrimination, 200–201, 465–466 De facto export, 82–83 De facto tolerance, 322–332 De facto treatment, 361–362, 385–386 Deference, 119, 124 De jure discrimination, 200–201 De jure treatment, 361–362, 385–386 Developing countries, 50–51. See also Special and differential treatment for developing countries Deviations. See Exceptions DFQF. See Duty-free and quota-free (DFQF) DG Trade. See Commission of the EU (DG Trade) Dillon round, 50, 157

595

Dingley Tariff, 208 Directly competitive or substitutable (DCS), 365–372, 379, 380 ASATAP and, 371–375 defined, 368–370 extant to latent demand for, 370–371 purpose of, 366–368 Direct taxes on products, 365–380 Discrimination arbitrary, 462–468 de facto, 200–201, 465–466 de jure, 200–201 unjustifiable, 462–468, 466 Discriminatory QRs, 130, 413 Disguised restriction, 466–467 exceptions to, 462–468 Dispute settlement on commodities, 115–119 exchange restrictions on, 124 GATT institutionalization and, 46–49 infant industry protection and, 125 Information Technology Agreement and, 159–161 against Netherlands, 46 Dispute Settlement Body (DSB), 251 Dispute settlement regarding classification and Harmonized System, 143–145 Dispute Settlement Understanding (DSU), 60, 65, 117, 144, 167, 251, 360, 424, 486 DJAI (“Declaración Jurada Anticipada de Importación,” translated in English as “Advanced Sworn Import Declaration”), 80, 100 Doha Declaration, 280–281 Doha Development Agenda (DDA), 65, 153, 276, 277–282 Aid for Trade and, 282–283 capacity building and, 278 cooperation with other institutions, 278–279 LDCs and, 279–282 mandate for, 277–278 Doha Ministerial Conference, 278–279 Doha Ministerial Declaration, 65 Doha round, 49–50, 53, 65, 153, 159 Domestic border measures, 363–364 Domestic consumption, 454–455 Domestic goods, like or substitutable, 108–110 Domestic instruments, 37 Domestic policies. See National treatment (NT) Domestic production, 454–455 Dominican Republic–Import and Sale of Cigarettes, 123–125, 150, 189, 389–392, 435–436 Dominion goods, 204 Draining of the swamp effect, 40, 48 Drug Arrangements, 262, 263–264 DSU. See Dispute Settlement Understanding (DSU) Dunkel, A., 49, 70, 148 Dunkel draft, 70

596

Duties, 305–307. See Customs duties; Duties bound ad valorem, 150 alternative, 150 compound, 150 countervailing, 67, 190, 247–248 customs, 86 free trade, 50 mixed, 150 technical, 150 unbound, 362–363 Duty-free and quota-free (DFQF), 254, 268, 280 EC. See European Council adopted Regulation (EC) EC–Agreements, 305 EC–Asbestos, 64, 237, 382–385, 417, 440–441, 467 EC–Bananas III, 63, 127, 165–167, 170, 203, 361, 385, 489–490 EC–Chicken Cuts, 143–144 EC–Citrus, 314 EC–Computer Equipment, 160 EC–Fasteners, 68 Echternach, 391–392 EC–IT Products, 161 ECJ. See European Court of Justice (ECJ) EC–LAN Equipment, 238 Econometric indicators, 369–370 Economic and Social Council, 457–458 Economic theory, 23 Economic Vulnerability Index (EVI), 252 ECOSOC. See UN Economic and Social Council (ECOSOC) ECOSOC Resolution 30(IV), 457–458 EC–Poultry, 203 EC–Salmon, 478 EC–Sardines, 64 ECSC. See European Coal and Steel Community (ECSC) EC–Seal Products, 212–213, 390–391, 423–424, 428–429, 440, 462–463, 462–466, 465 ECT. See European Community Treaty (ECT) EC–Tariff Preferences, 211–212, 250, 262, 264–265, 269, 288 EC–Visegrad Agreements, 303 EEC. See European Economic Community (EEC) EEC–Animal Feed Proteins, 236, 341 EEC–Apples I, 110–111 EEC–Dessert Apples, 109–110 EEC–Imports of Beef, 210 EEC–Minimum Import Prices, 80, 108 EEC–Newsprint, 169 EEC–Oilseeds I, 394 EEC–Parts and Components, 363, 442 EEC Working Party, 304 Effects doctrine, 94 EFTA. See European Free Trade Association (EFTA) EIF. See Enhanced Integrated Framework (EIF) Electronic commerce (e-commerce), 153

Index

Enabling Clause, 57, 68, 238, 241, 248–250, 248–273, 253, 262–271, 302 birth of, 248–249 donors and beneficiaries of, 250–253 GSP and, 253–271 legal nature of, 250 main features of, 249 Endangered species, 450 Enhanced Integrated Framework (EIF), 278 Enhancing the Role of Trade in Development, 281 Environmental Kuznets Curve, 456 EPA. See US Environmental Protection Agency (EPA) Equal opportunities, 465 Equivalence, 147 Erga omnes, 183–185 Essential interests, 479–480 Essential products, 100 critical shortages of, 101 EU. See European Union (EU) European Coal and Steel Community (ECSC), 319, 334 European Communities–Article XXVIII Rights, 184 European Communities–Measures Affecting the Importation of Certain Poultry Products, 97–98 European Community Treaty (ECT), 381 European Council adopted Regulation (EC), 254 European Court of Justice (ECJ), 349 Europe and US relationships financial development of, 43 Great Depression, impact on, 4, 21 Marshall Plan and, 43 New Deal and, 22 Smoot–Hawley Tariff Act and, 21 tariffs between, 21–22 trade between, 58 TTIP between, 66 European Economic Community (EEC), 50, 294, 306, 313, 481 European Free Trade Association (EFTA), 227, 229, 231, 304, 479 European Union (EU) antidumping and, 363–364 antitrust prosecution in, 94 CAP adapted by, 47–48 importing in, license for, 80 PTA of, 47 schedules of concessions in, 166 semiconductors in, use of, 82 European Union Association Agreements, 298 EU Seals Regime, 425 Everything But Arms (EBA), 232, 254–255 EVI. See Economic Vulnerability Index (EVI) Exceptions, 100–127, 413–479. See also specific topics on Annex 1A Agreements on, 474–479 aribratry discrimination and, 462–468

Index

burden of proof and, 422 on commodities, 104–120 compliance of, 442–443, 460 conditional, 422–423 on critical shortages, 100–101 cultural, 347 disguised restriction and, 462–468 elements common to all, 417–421 exchange restrictions, 121–125 on exemptions vs., 86 to exhaustible natural resources conservation, 444–456 general, 414–479 on gold and silver imports and exports, 441–442 on government stabilization plans, 458–459 on humans, animals, plant live, and health, 430–441 on infant industry protection, 125–126 on Intergovernmental Commodity Agreements, 456–458 legal discipline and rationale for, 414–417 limited, 422–423 measures on, 423–427 on MFN, 238–239 MRM, 465 national security and, 479–487 on national treasures, 444 under national treatment and GATT, 392 no effects test required for, 468–469 nonapplication and, 493–495 on prison labor, 443–444 on products, general and local short supply, 459–460 Protocols for Accession on, 469–473 to PTA, 300 public morals and, 427–430 substantive consistency of, 460–461 on tariffs, 193 two-tier test and, 421–422 on unjustifiable discrimination, 462–468 waivers and, 487–493 Exchange restrictions, 121 burden of proof, 125 currency manipulations, 122–124 dispute settlement, 124 exceptions and, 121–125 global coherence to, 121–122 Exemptions customs duties and charges, 87 exceptions vs., 86 on export taxes, 87–89 for MFN, 204–206 under national treatment and GATT, 343–360 under NT, 343–360 on production quotas, 89–90 from QRs, 86–87 on trade in textiles, 91 on TRQ, 90–91

597

Exhaustible natural resource conservation, 444–456 in conjunction with domestic consumption or production, 454–455 conservation policies on, 450–451 jurisdiction on, 446–447 level of development of, 456 permanent sovereignty and, 445–446 proximate and ultimate cause and, 453 Export marketing boards, 404 “Export Quota Administrative Measures,” 78 Exports de facto, 82–83 exemptions on taxes on, 87–89 gold imports and, 441–442 licensing of, 81–82 minimum pricing on, 84 nonobjectionable, 88 objectionable, 87–88 surplus in, 80 trade balancing condition and, 84 trade rights and, in China, 85–86 Extensive margin, 101 Fair and equitable treatment, 403–404 False products, 220 Farm products, 91 FCN. See Friendship, Commerce and Navigation (FCN) treaties FDI. See Foreign direct investment (FDI) Federalist No. 41, 431 Federal Register, 483 Federal Republic of Yugoslavia, 193 Fees and charges for services rendered, 188 Film quotas, 346 in GATS, 349–353 in GATT, 349–353 negotiating history and, 346–347 in WTO, 347–349 Financial contribution, 123 Financial crisis of 2008, 85 FINSA. See Foreign Investment and National Security Act (FINSA) First-best instrument, 397 Fiscal monopolies, 405 Fixed parities, 117–118 Flash guns, 173 Floating exchange rates, 173–174 Floating INRs, 178 Food shortages, 86, 101 Fordney-McCumber Tariff, 208 Foreign direct investment (FDI), 298 Foreign Investment and National Security Act (FINSA), 487 Foreign Investment Review Act of Canada, 359 Foreign trade enterprises, 405 For profit sale, 345 Fourteen Points, 9

598

France, 6, 60 France–Compensatory Tax, 174 Free Territory of Trieste, 292 Free Trade Agreements, 229–230 Free trade area (FTA), 38, 57, 68, 215–216, 229, 291 duty-, 50 policies on, 41 PTA and, 294–295, 304, 307–308 Friendship, Commerce and Navigation (FCN) treaties, 6, 42 Frontier traffic, 292 Frustrate, defined, 121, 124 FTA. See Free trade area (FTA) Full binding, 139 Full consultation procedures, 112 Functional institutionalization of GATT, 43–49 GABB. See General Agreement for Better Bargaining (GABB) Gas Guzzler, 377 GATS. See General Agreement on Trade in Services (GATS) GATT. See General Agreement on Tariffs and Trade (GATT) GATT 1947, 61 GATT 1994, 61, 63 GATT acquis, 62 GATT à la carte, 53, 64 GATT Analytical Index, 173, 305 GATT institutionalization, 42–43 CG18 and, 44–46 dispute settlement and, 46–49 functional, 43–49 ‘GATT or GABB,’ 57 GATT Part I, II, III, and IV, 16, 18, 36, 57 GATT Review Session, 57, 354 GATT tariffs, 40. See also Tariffs barriers on, 40, 51 concessions on, 38–41 liberalization of, 49 negotiation of, 16, 21–22, 29, 34, 39–41, 42–43, 50 NTBs on, 40–41 NVCs and, 38–39 quotas on, 37–38, 40 reduction in, 50–51 GATT-think, 26 GATT Working Party on Quantitative Restrictions, 108 GCC. See Gulf Cooperation Council (GCC) GDP. See Gross domestic product (GDP) General Agreement for Better Bargaining (GABB), 57 General Agreement on Tariffs and Trade (GATT), 313–319. See also National treatment and GATT; Tariffs and GATT accession to, 69 adherence to, 34

Index

appraisal of, 57–59 BoP and, 57, 61 CAP and, 48 CG18, role in, 44–46 challenges faced by, 57 commitment theory on, 27–28 consular taxes and, 46 contracting parties of, 36, 38, 41, 43–49, 51, 53, 57, 59, 61–62, 64 core disciplines of, 50 creation of, 1 dispute settlements and, 46–49 economic interpretation of, 26 embedded liberalism and, 41–42 entry into force of, 18–19 Executive Committee for, 45 existing legislation clause of, 36–37 film quotas in, 349–353 flexibility clause of, 39 function of, 57 as Gentlemen’s Club, 60 grandfathering of legislation and, 18, 36–37, 204–206 Havana Charter and, 18–19, 62 humans, animals, plant live, and health and, 433–434 ICITO Secretariat for, 59–60, 70 IMF and, 44 institutional balance and, 315–316 institutional structure of, 333 Interim Drafting Committee, establishment of, 16 as international institution, 43–44, 60 ITO and, 1, 7, 15–16, 18–19, 42–44, 57 judicial review and, 317–319 legalism, adoption of, 48 legal requirements for consistency in, 299–313 legislation, adoption of, 37 long-term objective of, 8 margins of preference in, 36 Marshall Plan and, 43 MFN and, 9, 29, 36, 38, 41 as negative integration contract, 39–41 negotiation of, 16–18, 20–23, 34–35, 40–41 NMEs and, 41 nonapplication clause of, 413 NVCs in, 38–39 other decisions of, 62 PPA and, 18–19, 37 pragmatism and, 58 prepatory work of, 21 procedural rules of, 46 property rights on, 19–20 Protocols of Accession and, 67–69, 469–473 purpose of, 15, 26, 35, 58 rationale for, 27, 34–35 reciprocity, principle of, 29, 35

Index

as “relational contract,” 60 relationship with QRs, 99–100 shallow integration in, 41 special and differential treatment for developing countries, 246–248, 287–288 structure of, 40 subsidies and, 39 success of, 1–2, 43, 59 Suggested Charter proposed to, 14, 19–20 terms of trade theory on, 28–34 trade liberalization and, 37–40, 49–57, 65–67 transformations of, 57 unwritten foundation of, 41 US and, 36, 48 WTO and, 57, 59 General Agreement on Trade in Services (GATS), 68, 137, 141, 347–351, 381, 434 film quotas in, 349–353 General Council, 69, 112–115, 193, 274, 281, 303 General Council Decision, 168–169 General Elimination of Quantitative Restrictions, 76–78, 106 General exceptions, 87. See also Exceptions to infant industry protection, 126 General Interpretative Note to Annex 1A, 63 General Interpretative Rules (GIR), 139–140, 144 Generalized System of Preferences (GSP), 57, 185, 229–231, 253–271, 288–289 beneficiaries excluded from, 265–266 evaluating, 266–271 obligations of, 253–254 preferences for developing countries, 262–265 preferences for LDCs, 254–262 preferences requiring waiver and, 254 PTAs and, 271–273 South-South preferences for, 271 special and differential treatment for developing countries, other than, 273–276 tariff preferences for, 271 Genetically modified organisms (GMOs), 340 Geneva, 2, 15–16, 45 Marrakesh Agreement and, 59 tariff negotiations in, 17–18 trade negotiations in, 34 Geneva Convention, 189 Geneva Final Act, 18 Geneva Nomenclature (GN), 138 Gentlemen’s Club, 60. See also General Agreement on Tariffs and Trade (GATT) Germany Great Depression, impact on, 4 Norway and, dispute settlements between, 46 trade with, 6 United States, treaty with, 6 Gini coefficient, 286–287 Gini Index, 286 GIR. See General Interpretative Rules (GIR)

599

Global coherence, 72, 117, 122 to exchange restrictions, 121–122 Globalization, 15 Global value chains (GVCs), 214–215, 233–235 GN. See Geneva Nomenclature (GN) GNI. See Gross national income (GNI) G-90, 163 GNPs. See Gross national products (GNPs) Gold imports and exports, 441–442 Gold Standard, 122 Goods. See also Products domestic , like or substitutable, 108–110 dominion, 204 history of classification of, 138 industrial, 51 like, 365 multifunctional, 160 tariff concessions, 173 in transit, 359–360 Governmental measures, 105 Governmental measures on commodities, 106–108 Government procurement, 343–346 Government Procurement Agreement (GPA), 343–344 Government stabilization plans, 458–459 GPA. See Agreement on Government Procurement (GPA) Grandfathering imperial preferences, 204–205 Great Britain, 5–6 Great Depression, 4 Great Society, 118 Greece–Import Duties, 174 Greece–Phonograph Records, 160, 173 Green room meetings, 163 Green subsidies, 479 Gross domestic product (GDP), 101, 252, 287 Grossman, G., 414 Gross national income (GNI), 251–252 Gross national products (GNPs), 297 Group of Ten, 118 Group on Quantitative Restrictions and Other Non-Tariff Measures, 157 Groups on Cereals, Meat, Tropical Products, 157 GSP. See Generalized System of Preferences (GSP) GSP Council Regulation, 254 G-20, 163 Guidelines for Decisions Under Article II.6 of the General Agreement on Tariffs and Trade, 174 Gulf Cooperation Council (GCC), 68 GVCs. See Global value chains (GVCs) Haberler, G., 243–245 Haberler report, 243–245 Hague Arrangement, 218 Hakim, G., 293 Hamilton, A., 207

600

Harmonized System (HS), 70, 136–139, 137–145, 140, 142, 145, 157, 159, 222, 237–238 common language and, 137–138, 142 dispute settlement regarding classification and, 143–145 goods, history of classification of, 138 role of, 138–141 HS 8708, 139 HS Committee, 138, 143 HS Convention: the Harmonized System Explanatory Notes (HSEN), 139–140, 144 Harmonized Working Programme (HWP), 224–228, 232 Havana Charter, 18, 172, 293, 367 Havana Conference, 57, 74, 205, 336, 353, 447 Hawkins, H., 20, 291 Heads of Dels meetings, 163 Heckscher-Ohlin theorem, 24–25 Hillary, E., 76 Historical preferences, 205–206 Holy Roman Emperor, 196 Hong Kong Ministerial Conference, 280 Hoover, H., 4 HS. See Harmonized System (HS) HSEN. See HS Convention: the Harmonized System Explanatory Notes (HSEN) Hull, C., 3–5, 7–9, 135, 195, 204 GATT, contributions in establishing, 7–9, 20, 22, 30 ITO and, 42 Lend-Lease Act and, 10–12 reciprocity and, 207 Humans, animals, plant live, and health, 430–441 exceptions, 430–441 necessity of, 430–441 scope of provisions on, 430 HWP. See Harmonized Working Programme (HWP) IAWG. See Inter-Agency Working Group (IAWG) IBM. See International Arrangement Regarding Bovine Meat (IBM) ICAC. See International Cotton Advisory Committee (ICAC) ICAs. See International Commodity Agreements (ICAs) ICC. See International Chamber of Commerce (ICC) ICCO. See International Cocoa Organization (ICCO) ICCPR. See International Covenant on Civil and Political Rights (ICCPR) ICITO. See Interim Commission for the International Trade Organization (ICITO) ICJ. See International Court of Justice (ICJ) ICO. See International Coffee Organization (ICO) ICSG. See International Copper Study Group (ICSG) IDA. See International Dairy Arrangement (IDA); International Development Assistance (IDA) IDB. See Integrated Database (IDB)

Index

IDB/CTS. See Integrated Data Base, Consolidated Tariff Schedules (IDB/CTS) IF. See Integrated Framework for Trade-Related Technical Assistance to Least-Developed Countries (IF) IGC. See International Grains Council (IGC) IJSG. See International Jute Study Group (IJSG) ILA. See Agreement on Import Licensing Procedures (ILA); Import Licensing Agreement (ILA) ILO. See International Labour Organization (ILO) ILZSG. See International Lead and Zinc Study Group (ILZSG) IMF. See International Monetary Fund (IMF) Imperial preferences, 10–11, 204–206 Import duties. See Tariffs Import Licensing Agreement (ILA), 80–81, 477 Import Licensing Committee, 70–71 Imports EU, license for, 80 gold, 441–442 irrevocable capital contribution (investment) and, 85 licensing of, 79–81, 130 local content and, 84–85 minimum pricing on, 83–84 monopolies on, 171–172 price on, 170 prohibition to repatriate profits on, 85 substitution for, 245 surcharges on, 118, 188 tariffs on (See Duties bound) trade rights and, in China, 85–86 Inadequate monetary reserves, 115 In-built compensation, 185 Income taxes, 353–358 India–Additional Import Duties, 188 India–Autos, 84 India–Quantitative Restrictions, 116–117, 120, 315 India–Tax Rebates, 204 Indigenous community (Inuit), 425 Industrial goods, 51 Industrialization, 241–242 Inequality, 285–287 Infant industry protection burden of proof and, 126 dispute settlement and, 125 exceptions to, 125–126 national security and, 126 rationale for, 125 safeguards for, 126 Information technology (IT), 234 Information Technology Agreement (ITA), 156, 158–162 critical mass agreements and, 158 dispute settlement and, 159–161 negotiations on, 159

Index

Information Technology Association of Canada (ITAC), 159 Initial negotiating rights (INRs), 155, 310 floating, 178 INNs. See International Non-proprietary Names (INNs) In-quota tariff, 90 INR holder, 177–178 INRs. See Initial negotiating rights (INRs) INSG. See International Nickel Study Group (INSG) Institutional balance, 113, 315–316 Instruments. See also Policies Insurance policy, 293 Integrated Database (IDB), 140 Integrated Data Base, Consolidated Tariff Schedules (IDB/CTS), 194 Integrated Framework for Trade-Related Technical Assistance to Least-Developed Countries (IF), 278–279, 284 Intensive margin, 101 Inter-Agency Working Group (IAWG), 278 Intergovernmental Commodity Agreements, 456–458 Interim Commission for the International Trade Organization (ICITO), 59 Interim Coordinating Committee for International Commodity, 157 Internal charges, 365 Internal institutional balance, 117 Internal taxes and charges, 187–188 International Arrangement Regarding Bovine Meat (IBM), 53, 64–65 International Bank for Reconstruction and Development, 122 International Chamber of Commerce (ICC), 220–221 International Cocoa Organization (ICCO), 456 International Coffee Organization (ICO), 456 International Commercial Union, 9–10 International Commodity Agreements (ICAs), 456–457 International Convention for the Abolition of Import and Export Prohibitions and Restrictions, 415 International Convention on the Rights of the Child, the Freedom of Association and Protection of the Right to Organize Convention, 264 International Convention relating to the Simplification of Customs Formalities, 216 International Copper Study Group (ICSG), 456 International Cotton Advisory Committee (ICAC), 456 International Court of Justice (ICJ), 46 International Covenant on Civil and Political Rights (ICCPR), 265 International Dairy Arrangement (IDA), 53, 64–65 International Development Assistance (IDA), 284 International Emergency Economic Powers Act, 483 International Grains Council (IGC), 456 International Jute Study Group (IJSG), 456

601

International Labour Organization (ILO), 265 International Lead and Zinc Study Group (ILZSG), 456 International Monetary Fund (IMF), 1 Articles of Agreement of the, 124, 130, 173 balance of payments (BoP) and, 72 Bretton Woods conference, birth of, 7 Committee of Twenty (C-20) of, 45 currency devalue, role in, 111 deference and, 119, 124 dispute settlement and, 72 exchange restrictions and, 121 global coherence and, 122 import surcharges and, 118 India–Quantitative Restrictions and, 117 par value and, 173 purpose of, 7 WTO, agreement signed with, 72, 117 International Nickel Study Group (INSG), 456 International Non-proprietary Names (INNs), 162 International Olive Oil Council (IOOC), 456 International Rubber Study Group (IRSG), 456–457 International standards, 397–398 International Study Groups (ISGs), 456 International Sugar Organization (ISO), 456 International trade, 297 International Trade Centre (ITC), 194, 276 International Trade Organization (ITO), 1, 122 commercial leg of, 6–7 factors contributing to demise of, 42 GATT and, 1, 7, 15–16, 18–19, 42–44, 57 Havana Charter and, 18–19, 62 ICITO Secretariat, role in, 59 Marshall Plan and, 43 nonestablishment of, 43–44 Preparatory Committee for, 15 procedural rules of, 46 Suggested Charter and, 14–15, 41 tariffs and, 134 US and, 42 International Tropical Timber Organization (ITTO), 456 International Union for Conservation of Nature (IUCN), 450 International Whaling Convention, 156 Interpretative Note, 41, 67 Intraindustry specialization, 25 Inuit hunts (IC hunts), 425–426, 429, 466 Investment foreign direct, 298 liberalization of, 51 protection of, 358–359 Invocations on commodities, 114–115 IOOC. See International Olive Oil Council (IOOC) Irrevocable capital contribution, 85 IRSG. See International Rubber Study Group (IRSG)

602

ISGs. See International Study Groups (ISGs) ISO. See International Sugar Organization (ISO) IT. See Information technology (IT) ITA. See Information Technology Agreement (ITA) ITA Committee, 71 ITA II, 161–162 Italy–Agricultural Machinery, 336 ITC. See International Trade Centre (ITC) ITCA. See Information Technology Association of Canada (ITAC) ITO. See International Trade Organization (ITO) ITO Charter, 42, 46 ITTO. See International Tropical Timber Organization (ITTO) IUCN. See International Union for Conservation of Nature (IUCN) Japan, 6 Japan–Agricultural Products, 111, 381 Japan–Agricultural Products II, 435 Japan–Alcoholic Beverages I, 219, 220, 376 Japan–Alcoholic Beverages II, 62–63, 337, 362, 363, 368, 369, 371, 378–379 Japan Electronic Industries Development Association (JEIDA), 159 Japan–Leather II, 95–96 Japan–Semiconductors, 82–84, 93–94, 97–99, 126, 131–132, 381 Japan–SPF Dimension Lumber, 142 JEIDA. See Japan Electronic Industries Development Association (JEIDA) JITAP. See Joint Integrated Technical Assistance Programme (JITAP) JITAP Common Trust Fund Steering Group, 249 Johnson, H., 28 Johnson, L., 118 Joint Integrated Technical Assistance Programme (JITAP), 278–279, 284 Judicial review, 317–319 Jurisdictional issues, 364–365, 446–447 Kennedy round, 50, 52–53, 157, 246–247 Keynes, J. M., 4–5, 9, 11, 399 imperial preferences and, 10–11 tariffs and, 22 UK, impact on, 22–23 King, M., 20 King George III, 9 Kojève, A., 20 Korea, 386–389 Korea–Alcoholic Beverages, 366, 368–369 Korean Unfair Competition Act, 436–437 Korea–Various Measures on Beef, 251, 386–390, 403, 406, 407, 420, 432–433, 437 Krugman’s monopolistic competition model, 25–26 Kuznets, S., 286 Kuznets curve, 286 Kyoto Protocol, 221

Index

LAN. See Local area network (LAN) dispute Laws, 381, 466–467 LDC Group, 281 LDCs. See Least developed countries (LDCs) League of Nations, 2, 192, 196 Least developed countries (LDCs), 51, 115, 134, 153, 159, 163, 232, 249, 251–271 DDA and, 279–282 Generalized System of Preferences for, 254–262 origin of products for, 232 Least favored nation (LFN), 199 Leddy, J., 16, 19–20, 60 Legal Affairs Division, 49, 59, 164 Lend-Lease Act, Article VII of, 11–12 Less favorable treatment (LFT), 339, 381, 384–385, 385–392 de jure and de facto, 385–386 Dominican Republic–Import and Sale of Cigarettes, 389–390 Echternach, 391–392 EC–Seal Products, 390–391 in Korea, 386–389 protectionism and, 385 Lex specialis, 130 LFN. See Least favored nation (LFN) LFT. See Less favorable treatment (LFT) Liability rules, 39 LIBERTAD. See Cuban Liberty and Democratic Sokidarity Act (LIBERTAD) Like goods, 365 Likeness, 376–377, 383, 476 Like products, 196, 339, 376–380, 382–385 beggar-thy-neighbor policies and, 235 defined, 376–379 excess taxation on, 379–380 tariff classification and, 235–238 Limited exceptions, 422–423 Limiting condition, 84 Lindén, A. S., 49 List of commitments, 164 Local area network (LAN) dispute, 144, 160–161 Local content requirements, 341 Lomé Convention, 314 London Conference, 4–5, 74, 134, 197, 205, 340, 400, 416 London Draft, 73–74, 134, 188, 196, 218, 346, 400–401, 416 Annex 10 of the, 16–17 London Gold Pool, 118 Long, O., 45 Long-playing records (LPs), 160 LPs. See Long-playing records (LPs) Lunatic proposals of Mr Hull, 11 MAcMap (Market Access Map), 194 Madison, J., 431 Madrid Agreement for the Repression of False or Deceptive Indications of Source on Goods, 219–220

Index

Madrid Convention, 218 Management Group, 45–46 Mantua, 2 Market Access Committee, 71, 392 Market preservation rule, 38–39 Marrakesh Agreement, 472–473 Marrakesh Protocol, 61, 63 Marvel, 137–138 McKinnon, H., 20 Meade, J., 9–12, 20, 22 Measures commodities, adopted for, 113–114 covered under MFN, 201–202 domestic border, 363–364 on exceptions, 423–427 governmental, 105 national treatment, exempted under, 343–361 necessary, 397 other, 82 MERCOSUR. See Southern Common Market Agreement (MERCOSUR) Mexico–Taxes on Soft Drinks, 442–443 MFA. See Multifiber Arrangement (MFA) MFN. See Most favored nation (MFN) MFN Clause, 241 MFN Tariff, 211 Mill, J. S., 28, 245 Mills-Bastable, 125, 245 Minimum capital requirements, 85–86 Minimum import prices (MIPs), 478 Minimum pricing, 83–84 Ministerial Conference, 48, 69, 288, 487–488 Ministerial Declaration, 49, 64–65, 277, 484 Ministry for International Trade and Industry (MITI), 131–132 MIPs. See Minimum import prices (MIPs) MITI. See Ministry for International Trade and Industry (MITI) Mixed duty, 150 Modification of schedules, 164–165 MOFCOM. See Chinese Ministry of Commerce (MOFCOM) Monitoring Mechanism on Special and Differential Treatment, 274 Monopoly rents, 84 Montreal Rules, 49, 59 Most favored nation (MFN) concession erosion, as insurance policy against, 38 conditional, 8, 135, 158, 207–209 consular taxes and, 46 customs duties and charges for, 202–204 de jure vs. de facto discrimination and, 200–201 in developing countries, waiver from, 57 economic cost of, 8 economics of, 197–199 exceptions on, 238–239 exemptions for, 204–206 at GATT negotiations, 196–199

603

historic dimension of, 196 legal discipline for, 195–204 measures covered under, 201–202 preferential trade and, 199 principle aspects of, 2 products in, 229–238 tariffs and, 38, 134 trade liberalization and, 38, 159, 267, 296 unconditional, 207–214 WTO and, 206–214, 223–224 Mount Everest, 76 MRM exception, 465 Multifiber Arrangement (MFA), 50, 91 Multifunctional goods, 160 Multilateralism, 323 Multilateral trade, 2 Multilateral Trade Agreements, 472–473, 487, 488, 494 in Annex 1A, 69 Multilateral trade order. See also General Agreement on Tariffs and Trade (GATT); World Trade Organization (WTO) establishing, 1–20 Multiple currency practice, 124 Mutatis mutandis, 315 NAFTA. See North American Free Trade Agreement (NAFTA) NAMA. See Nonagricultural market access (NAMA) National Bureau of Economic Research (NBER), 245 National security exceptions on MFN and, 238 exceptions to, 479–487 infant industry protection and, 126 National treasures, 444 National Treasury, 135 National treatment (NT), 39, 147. See also National treatment and GATT concession erosion and, 337–338 contract incompleteness and, 338–339 DCS products and, 366–375 deep integration and, 340–341 de jure vs. de facto, 361–362 direct taxes on products and, 365–366 domestic border measures and, 363–364 duties bound and unbound and, 362–363 exemptions under, 343–361 institutions involved in, 392 jurisdictional issues with, 364–365 legal discipline for, 335–341 like products and, 376–380 PPA and, impact of, 337 reciprocity and, 340 scope of, 361–365 shallow integration and, 340–341 uncertainty and, 337–338

604

National treatment and GATT direct taxes on products and, 365–380 exceptions under, 392 exemptions under, 343–360 institutional structure of, 392 legal content requirements of, 341–342 measures coming under purview of, 341–343 other measures affecting trade under, 342–343, 380–392 Natural resources, 448. See also Exhaustible natural resource conservation NBER. See National Bureau of Economic Research (NBER) Necessary measures, 397 Negative consensus, 59 Negotiating Group on Framework, 248 Negotiating Group on Nature Resource-Based Products (NRBP), 140–141 Negotiation economics of, 34–35 of GATT, 16–18, 20–23 of history, 346–347 on Information Technology Agreement, 159 MFN at, 196–199 on QRs, 73–75 with state trading enterprises, 400–402 of tariffs, 40–41, 134–135 (See also Tariff renegotiation) Netherlands, 46 Network equipment, 161 New generation agreements, 41 New new trade theory, 25–26 New trade theory, 24–26 New York Conference, 74, 401, 416 New York Draft, 74–75, 135 New York Times, 18 Nexus, 132 Nixon, R., 118 Nixon shock, 118 NMEs. See Nonmarket economies (NMEs) No-effects-cum-no-intent test, 95, 132 No effects test, 468–469 Nonagricultural market access (NAMA), 140, 155, 163 Nonapplication clause, 493–495 exceptions on MFN and, 239 of GATT, 413 GATT and, 493–494 instances of, 495 in WTO, 494–495 Nondiscrimination, 39–41, 128 efficiency and, 392–393 in practice, 128 in principle, 127–128 trade liberalization and, 131 Non-Discriminatory Administration of Quantitative Restrictions, 90

Index

Nonmarket economies (NMEs), 14, 41, 400, 405 antidumping in, 67–68 Nonobjectionable exports, 88 Nontariff barriers (NTBs), 32, 40–41, 152, 194 bound duties and, consolidating, 152 “draining of the swamp” effect and, rise of, 48 economic costs of, 48 negotiations of, 52–53 trade restrictions and, 52 Nonviolation complaint (NVC), 38, 123, 171, 186, 409 Normal price, 171 North American Free Trade Agreement (NAFTA), 227, 230, 296, 298, 303, 318, 325, 443 Notification requirements, 300–303 NT. See National treatment (NT) NTBs. See Nontariff barriers (NTBs) NVC. See Nonviolation complaint (NVC) Objectionable exports, 87–88 OCD. See Ordinary customs duties (OCD) ODC. See Other duties and charges (ODC) OECD. See Organisation for Economic Cooperation and Development (OECD) OEEC. See Organisation for European Economic Cooperation (OEEC) Offering for sale, 382 Official Journal of Chile, 149 Optimal tariff theory, 28 Optional heading code, 140–142 Ordinary customs duties (OCD), 148–151, 162, 202 Organisation for Economic Cooperation and Development (OECD), 163, 252, 284, 356 Organisation for European Economic Cooperation (OEEC), 1 Origin appellations of, 218 certificate of, 215, 217 neutrality, 397 preferential rules of, 227 of preferential trade agreement litigation, 319–320 Origin of products, 214–234 compliance with complicated rules on, 230–231 efforts to harmonize, 220–223 false, 220 GATT and, 216–217 global value chains and, rise of, 233–235 for LDCs, 232 marks of, 217–220 preferential rules of, 225–229 utilization rate and, 231–232 ORRC. See Other restrictive regulations of commerce (ORRC) Other duties and charges (ODC), 148–151, 202, 308, 318 Other historical preferences, 205

Index

Other measures, 82 Other products, 101 Other restrictive regulations of commerce (ORRC), 304, 305–307, 308, 318 Ottawa Agreements, 9 Out-of-quota tariff, 90 Panel on Argentina–Footwear, 190 Panel on Argentina–Hides and Leather, 97 Panel on Argentina–Import Measures, 84 Panel on Belgium–Family Allowances, 209–210 Panel on Canada–Autos, 210–212, 300 Panel on Canada–Eggs, 106–107 Panel on Canada–FIRA, 99 Panel on Canada–Gold Coins, 441–442 Panel on Canada–Herring and Salmon, 104, 447, 451 Panel on Canada–Ice Cream and Yoghurt, 105 Panel on Canada–Provincial Liquor Boards (EEC), 172 Panel on Canada–Renewable Energy, 141 Panel on Chile–Price Band System, 148–149 Panel on China–Rare Earths, 445, 450–452, 473 Panel on China–Raw Materials, 89, 102, 417, 445 Panel on Dominican Republic–Import and Sale of Cigarettes, 117 Panel on EC–Bananas II, 314 Panel on EC–Bananas III, 351, 489 Panel on EC–Citrus, 314 Panel on EC–Tariff Preferences, 210, 248 Panel on EEC–Dessert Apples, 105–109 Panel on EEC–Imports from Hong Kong, 316 Panel on EEC–Minimum Import Prices, 83–84 Panel on France–Import Restrictions, 78 Panel on Germany Starch Duties, 60 Panel on India–Autos, 99 Panel on India–Quantitative Restrictions, 117, 125 Panel on Indonesia–Autos, 210 Panel on Japan–Agricultural Products, 105–106 Panel on Japanese Measures on Imports of Leather, 96 Panel on Japan–Semiconductors, 95–96 Panel on Japan–SPF Dimension Lumber, 235 Panel on Korea–Beef, 116, 120, 172 Panel on Spain–Unroasted Coffee, 236 Panel on Thailand–Cigarettes, 108, 386 Panel on Turkey–Textiles, 317 Panel on US–Canadian Tuna, 109 Panel on US–Sugar, 151 Panel on US–Sugar Waiver, 489 Panel on US–Superfund, 95–96 Panel on US–Tuna II (Mexico), 201, 362 Panels on Complaints, 46–47, 46–48, 58–59 Panels on India–Quantitative Restrictions, 123 PanEuroMed system, 227 “Parts and Accessories of the Motor Vehicles of Headings 8701 to 8705,” 139

605

Par values, 173–174 Payment of compensation, 91 Payne-Aldrich Tariff, 208 Payroll taxes, 353–358 PBS. See Price band system (PBS) People’s Republic of China, 68 Percentage criterion, 222 Permanent sovereignty, 445–446 Permissible QRs, for avoiding dumping, 126–127 Pharma Agreement, 156, 158, 162 Philippines–Distilled Spirits, 370–371, 378–379 Pilot Group on Dairy Products, 157 Plurilateral agreements, 61, 494 Poland, 41 Policies. See also Instruments beggar-thy-neighbor, 2–3, 35, 235 “Buy National,” 74–75 common agricultural, 107 conservation, 450–451 on free trade, 41 insurance, 293 on trade, 480–481 Portugal, 25 Poverty, 285 PPA. See Protocol of Provisional Application (PPA) PPMs. See Production or process methods (PPMs) Prebisch, R., 243–245 Prebisch-Singer hypothesis, 244–245 Prebisch-Singer thesis, 244–245 Preference erosion, 296 Preferential rules of origin, 225–229 Preferential trade agreement (PTA), 38, 47, 57, 67, 153–154, 291–292. See also Preferential trade agreement litigation concession erosion and, 198 critical mass agreements and, 158 CU and, 294–295, 304, 308–311 as development tool, 293 exceptions on MFN and, 238 external requirements for, 307–311 frontier traffic and, 292 FTA and, 294–295, 304, 307–308 GATT and, 299–313, 333 Generalized System of Preferences and, 271–273 institutions incorporating, 333 insurance policy and, 293 internal requirements for, 304–307 international trade and, 297 legal discipline for, 291–295 legal requirements GATT for, 299 MFN and, 199, 294, 300 notification requirements for, 300–303 preexisting, 293 purpose of, 295–299 reasons for choosing, 295–299 US-Canada Rapprochement and, 293–294

606

Preferential trade agreement litigation, 313–332 agency design and, 321–322 collective action and, 320 consistency of, 319 de facto tolerance and, 322–332 GATT and, 313–319 origins of, 319–320 problems with, 322 strategic reasons and, 320–321 Preparatory work, 188–189 Preshipment Inspection (PSI) Agreement, 477 Price band system (PBS), 149 Prices affirmation requirements, 380–381 import, 170 minimum, 83–84, 478 normal, 171 withdrawal, 107 Primarily concerned parties, 176, 183 Principal-agent slack, 42 Principal supplier rule, 17 Principal supplying interest (PSI), 176, 310, 477 Prisoner’s Dilemma, 29, 132 Prison labor, 443–444 Procedural issues on commodities, 112–113 Procedures for Modification and Rectification, 165 Pro-competitive effect, 26 Production or process methods (PPMs), 236 Production quotas, 89–90 Products commodities, coverage on, 108 cumulation of, 229–230 direct taxes on, 365–366, 365–380 essential, 100–101 farm, 91 general and local short supply, 459–460 like, 196, 235–238, 339, 382–385 in MFN, 229–238 origin of, 214–234 other, 101 Western, 368 Prohibition, 77, 85 Property rights on GATT, 19–20 Property rules, 39 Protectionism, 337, 385 Protocol of Provisional Application (PPA), 18, 61, 337 Protocols of Accession, 67–69, 89, 152, 412, 417, 469–473, 471–473 Proximate cause, 453 Pruce, pine, and fir (SPF) lumber, 142 PSI. See Preshipment Inspection (PSI) Agreement; Principal supplying interest (PSI) PSI country, 178–179 PTA. See Preferential trade agreement (PTA) Public morals, 427–430 Public notice regarding commodities, 111 Puche, J. S., 298

Index

QRs. See Quantitative restrictions (QRs) Quantification, 33 Quantitative restrictions (QRs) applying, 127–130 discriminatory, 130, 413 on domestic goods, like or substitutable, 108–110 economics of, 75–76 for enforcing governmental measures, 105 exceptions to prohibition to, 100–127 exemptions from, 86–87 on exports, 81–86 GATT, relationship with, 99–100 general elimination of, 76–78 on imports, 79–86 institutional issues with, 130–131 legal discipline for, 73–100 negotiations on, 73–75 permissible, for avoiding dumping, 126–127 quotas and, 78–79, 82–83 standard of review on, 94–99 to WTO, attributions to, 91–94 Quotas, 78–79. See also Film quotas de facto export, 82–83 global, 128 licenses/permits without, 129 origin-specific, historical shares and, 128–129 production, 89–90 tariff, 90–91 Ralls Corp. v. CFIUS, 487 Rawl, J., 286 Rawlsian principle, 287 Reagan, R., 209, 482 Reasonable amount of profit, 172 Reasonably available least restrictive means, 433 Reciprocity bound duties and, 145–148 defined, 146 diffuse, 147 free rider problem and, 199 Hull and, 207 national treatment and, 340 specific, 147 “Reciprocity and Commercial Treaties,” 207 Rectification, 164–165 Refusal to reevaluate, 123 Regional Comprehensive Economic Partnership (RCEP), 322–323 Regulation of International Trade, The (Volume 2), 19 Regulations, 381 Regulatory marketing boards, 405 Reichsbank, 6 “Report on Manufactures,” 207–208 “Request and offer” approach, 33 Requirements, 381 Resolution 2235, 97

Index

Restrictions concealed, 466–467 disguised, 466–467 exchange, 121–125 unannounced, 466–467 Reverse notifications, 131 Review Session of the GATT (1955), 75, 125 Review Working Party on Other Barriers to Trade report, 152 RIAs, 312 Ricardian model of trade, 24–26 Ricardo, D., 24 Rio Declaration on Environment and Development, 446 RMB, 123 Robbins, L., 9, 20 Robertson, N., 20 ROO. See Agreement on Rules of Origin (ROO) Roosevelt, F. D., 4–5, 7–8 Atlantic Charter and, 11 beggar-thy-neighbor policies and, 35 New Deal policies of, 8 Roosevelt administration, 16 Royer, J., 59 Rule of reason test, 99 Rules of Origin Committee, 71 Rules of Procedure for Meetings of the Committee on Regional Trade Agreements:, 333 Runciman, W. L., 3, 5 SAARC. See South American Association for Regional Cooperation (SAARC) Safeguards (SG) Agreement, 126, 479 Safeguards Committee, 71 San Francisco conference, 7 Sanitary and Phyto-sanitary Measures (SPS) Agreement, 150, 225, 308, 385, 474 SAT. See Substantially all trade (SAT) Saudi Arabia, 68 Scale effect, 26 Schacht, H., 6 Schachtian view of the world, 6 Schedules of concessions, 164–171, 166 centralized process for, 164–167 certification of, 164 content of, 169–170 legality of, 165–167, 169–170 modification of, 164 rectification of, 164 tariff value, customs valuation and, 170–171 uncertified actions and, 167–169 Scheduling Guidelines, 347–348 Scientific evidence, 397 SCM. See Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Tariffs and Trade (SCM); Subsidies and Countervailing Measures (SCM) Agreement

607

SCM Committee, 71 Sectoral, defined, 156 Sectoral agreements, 156–157 Semiconductors, 82 SFRY. See Socialist Federal Republic of Yugoslavia (SFRY) SG. See Safeguards (SG) Agreement Shallow integration, 340–341 SI. See Substantial interest (SI) country Silver imports and exports, 441–442 Simplified consultation procedure, 115 Singapore Ministerial Conference, 159 Singer, H., 243–245 Singer-Prebisch thesis, 246 Sixth Ministerial Conference on Measures in Favor of Least-Developed Countries, 280 Sixth Special Session, 37 Smith, A., 24, 233 Smithsonian Agreement, 118 Smoot, R., 208 Smoot–Hawley Tariff Act, 6, 21 Socialist Federal Republic of Yugoslavia (SFRY), 193 Social security, 353–358 South American Association for Regional Cooperation (SAARC), 229 Southern Common Market Agreement (MERCOSUR), 295, 302, 468–469 South-South cooperation, 51, 271 Sovereignty assault to, 15 permanent, 445–446 Spain, 6 Spain–Unroasted Coffee, 167–168, 202 Special and differential treatment for developing countries background on, 243–245 Enabling Clause on, 248–273 GATT and, institutional structure of, 287–288 import substitution and, 245 institutions involved in, 287–288 legal discipline of, 241–245 MFN and, 242–243 moving towards, 246–248 other than GSP, 273–276 trade and development and, 276–287 Special Assistance Unit, 278 Special Committee on Relaxation of Trade Barriers, 87 Special Group on Trade in Tropical Products, 157 Special Working Parties, 113 SPS. See Agreement on the Application of Sanitary and Phyto-sanitary Measures (SPS); Sanitary and Phyto-sanitary Measures (SPS) Agreement SPS Committee, 70, 392 Standard of review, 94–99, 190, 436

608

State trading enterprises (STEs) defining, 402–405 institutions involved in, 412 law of, 403–404 legal discipline for, 399–402 negotiation with, 400–402 obligations assumed by, 405–411 adequate opportunities to compete, 410–411 commercial considerations for, 406–410 exceptions, 411 nondiscrimination, 406 transparency, 411–412 transparency of, 411–412 Statutory marketing boards, 404 Sterling area, 11 STEs. See State trading enterprises (STEs) Stevenson, A., 1–2 Stolper-Samuelson effects, 287 Strategic reasons, 320–321 Strategic trade theory, 25 “Stream Turbines and other Vapor Turbines,” 237 Subsidies, 123, 346 Subsidies and Countervailing Measures (SCM) Agreement, 123, 475 Substantial interest (SI) country, 180 Substantially all trade (SAT), 158, 304–305, 318 Substantially equivalent concessions, 146 Substantial production, 367 Substantial transformation, 220–221 Substantive consistency, 460–461 Suggested Charter, 12–14, 242 Article 28 of, 41 GATT, proposed to, 14, 19–20 Surplus in exports, 80 Swatch, 216 Sweden, 6 Swiss formula, 155, 157 Switzerland, 6 Syro-Lebanese Union, 293, 319 Tariff. See also Bound duties; Duties bound; Tariff concessions bound, 133–134 charges on, exemptions from, 187–190 in developing countries, 50–51 economics of, 135 exceptions on, 193 GSP, preferences for, 271 Harmonized System and, 137–145 in-quota, 90 institutions involved in, 194 International Trade Organization and, 134 legal discipline for, 133–136 low, 135 negotiation of, 40–41, 134–135 NTBs and, differentiating between, 33 out-of-quota, 90

Index

promises on, legal obligations of, 136–145 rationale for, 135–136 renegotiation of protection of, 174–187 rigid, 136 schedule of concessions on, 164–171 unilateral, 28–29 welfare effects of, 31 WTO and, 191–194 zero-for-zero reductions in, 157 Tariff ceiling, 133–134, 136 Tariff Commission, 207–208 Tariff concessions, 171–174 bound duties and, 152–153 Canadian, 175 forum on, 152–163 goods, disputes regarding classification of, 173 import monopolies and, 171–172 methods for determining dutiable value of, 171 par values, reduction in, 173–174 safeguarding the value of, 171–174 schedules of, 164–171 tariff renegotiation and, maintaining levels of, 175–176 Tariff Conferences, 49 Tariff lines, 138–139 Tariff quotas (TRQ), 90–91, 127 Tariff renegotiation, 174–187 approval for procedures and, 183–187 compensation agreements, 182–183 INR holder and, 177–178 participants in, 176–177 PSI country and, 178–179 substantial interest country and, 180 tariff concessions and, maintaining levels of, 175–176 various procedures for, 181–182 Tariffs and GATT charges exempted from Article II of, 187–190 exceptions and, 193 withdrawal from, implications on, 191–193 Taussig, F., 207 Taxes border adjustment on, 356 income, 353–358 on like products, 379–380 payroll, 353–358 Taxes occultes, 356 TBT. See Agreement on Technical Barriers to Trade (TBT) TCRO. See Technical Committee on Rules of Origin (TCRO) Technical assistance, 273 Technical Barriers to Trade (TBT), 70, 120, 214, 225, 308, 341, 428–429, 475–477, 476–477 Technical Committee on Rules of Origin (TCRO), 70, 225 Technical Cooperation Division, 278

Index

Technical criterion, 222 Technical duty, 150 Technical Group on Customs Administration, 162, 221 Technical Sub-Committee, 340 Technological convergence, 160 TEDS, 464 Temporarily applied, 100, 102 Temporary surplus of commodities, 110–111 Temporary Trade Barriers Database (TTBD), 194 Terms-of-trade elasticity pessimism, 244 Terms-of-trade manipulation, 31 Terms-of-trade negotiation, 33 Terms-of-trade pessimism, 244 Terms of trade theory, 27, 28–34 assumptions of, 29–30 commitment theory vs., 28 historical basis of, 28 limitations of, 33–34 national treatment obligation and, 32 negotiation and, 33 NTBs and, 32–33 proponents of, 30 protectionism and, 31–32 tariffs and, 30 terms-of-trade theorists and, 31–32 trade agreements and, 29–31 trade manipulation and, 30–31 unilateral trade and, 28–31 validity of, 33 weaknesses of, 32 Tests “but for,” 92, 128 commodities, 105 no effects, 468–469 no-effects-cum-no-intent, 95, 132 rule of reason, 99 trade effects, 455 two-tier, 421–422 TF. See Agreement on Trade Facilitation (TF) Thailand–Cigarettes, 416, 426, 433–434, 443 Thai Tobacco Act of 1966, 416–417 Theories commitment, 27 economic, 23 new trade, 24–26 optimal tariff, 28 strategic trade, 25 Theunis, 3 Theunis, G., 2 Time-schedule, 112 TNC. See Trade Negotiations Committee (TNC) TNT. See Transparency in Trade Initiative (TNT) Tokyo round, 52–53, 79, 80, 122, 138, 155, 171, 248 Torquay round, 146

609

Torrens, R., 28 Toy Biz vs. United States, 137–138 TPP. See Trans-Pacific Partnership (TPP) TPRM. See Trade Policy Review Mechanism (TPRM) Trade. See also Trade agreements; Trade rounds agreements for, 26–34 Aid for Trade and, 285–287 with Austria, 6 before Bretton Woods, 6–7 with Britain, 9 commitment theory on, 27–28 duty-free, 50 excitement in, 1–2 free, 41, 50 impact on, 34 instruments affecting, categories of, 37 instruments (policies) of, 37, 40 integration of, 41 international, 297 negotiation of, 21–23, 34–35, 41 nondiscriminatory, 7–9 policy on, 480–481 quotas on, 37–38, 40 regulation of, 57 rights to, 85–86 special and differential treatment for developing countries, 276–287 state, 41 terms of trade theory, 28–34 in textiles, 91 unilateral policies on, 31 Trade agreements, 29 necessity of, 29 protectionism through, 31–32 tariff negotiations and, 29 terms of trade through, 30 trade manipulation and, elimination of, 31–32 Trade balance, 80 Trade balancing condition, 84 Trade deflection, 295 Trade effects test, 455 Trade Facilitation, 141 Trade in Services Agreement (TISA), 209 Trade liberalization, 23–26, 34, 37–40, 58 gains from, 25 GATT and, 37–40 Hullian view of, 38 legislative framework for, 52–57 multilateral trade, attempts at, 2 necessity of, 27 unilateral, 26–29 Trade Negotiations Committee (TNC), 44, 65, 153, 277 Trade Policy Review Mechanism (TPRM), 61, 284, 303 Trade Profiles, 134

610

Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement, 60, 251, 360 Trade Related Intellectual Property Rights (TRIPs), 220 Trade-Related Investment Measures (TRIMs), 71, 341, 358, 474 Trade-related technical assistance (TRTA), 281 Trade rounds, 49–57, 49–60, 153–156. See also specific rounds Dillon, 50, 157 Doha, 49–50, 53, 65–66, 153, 159 harmonized formula and, 155 Kennedy, 50, 52–53, 70, 157, 246–247 on linear reductions, 155 public good of, 153–154 request-offer during, 154–155 single-undertaking approach of, 64–67 tariff elimination, 49–52 tiered cuts and, 155 Tokyo round, 52–56, 64–66, 69 trade terms and tariff-cutting techniques, 155–156 Uruguay round, 19, 37, 46, 57, 64, 67 Trans-Atlantic Trade and Investment Partnership (TTIP), 66, 322 Transformations of GATT, 57 “Transitional Co-existence of the GATT 1947 and the WTO Agreement,” 37 Transition economies, 151–152 Trans-Pacific Partnership (TPP), 322–323 Transparency, 130–131 mechanisms of, 274–276 of state trading enterprises, 411–412 Transparency in Trade Initiative (TNT), 194 Transparency Mechanism for Preferential Trade Advantages, 271, 274–275, 301–302, 312–313, 316 Travaux préparatoires, 129, 150, 447 Treaty Establishing the European Community (ECT), 349 Treaty of Amity and Commerce, 208 Treaty of Osimo, 292 Treaty of Rome, 294 Treaty on the Functioning of the European Union (TFEU), 349 Treaty with Chile (1832), 6 Treaty with Germany (1932), 6 Treaty with Siam (1937), 6 TRIMS. See Trade-Related Investment Measures (TRIMs) Tripartite Agreement, 6 TRIPS. See Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement TRQ. See Tariff quotas (TRQ) TRTA. See Trade-related technical assistance (TRTA) Truman, H., 42 Truman administration, 42 TTBD. See Temporary Trade Barriers Database (TTBD)

Index

TTIP. See Trans-Atlantic Trade and Investment Partnership (TTIP) “Turbines of Marine Propulsion,” 237 Turkey, 61–62 Turkey-Textiles, 315 Two-tier test, 421–422 UAR. See United Arab Republic (UAR) UK. See United Kingdom (UK) Ultimate cause, 453 UN. See United Nations (UN) Unannounced restriction, 466–467 Unbound duties, 362–363 Uncertainty, 337–338 UNCLOS. See United Nations Convention on the Law of the Sea (UNCLOS) Unconditional MFN in case law, 209–214 US attitude towards, 207–209 UNCTAD. See UN Conference on Trade and Development (UNCTAD) Understanding on Article XXIV of GATT, 315 Understanding on Notification, Consultation, Dispute Settlement, and Surveillance of 28 November, 48, 61 Understanding on the BoP Provisions of the GATT 1994, 101, 112, 114, 150–151 Understanding on the Interpretation of Article XVII of GATT, 404, 412 Understanding on the Interpretation of Article XXVIII of GATT, 91, 178–179 Undervalued currency, 123 UNDP. See UN Development Programme (UNDP) UNESCO. See United Nations Educational, Scientific, and Cultural Organization (UNESCO) Unfair Competition Act, 436 Unilateral action, 163 Union Agreement of Paris/Brussels, 218 Union of Soviet Socialist Republics (USSR), 14–15, 41 United Arab Republic (UAR), 481 United Kingdom (UK) Atlantic Charter and, 11 balance of payments (BoP) in, 22 bargaining power with, 30 cartels in, 22 France and, 2, 4 gold standard currencies of, 4–5 imperial preferences of, 8–12, 17–18 manufacturing industry in, 9 margins of preference in, 36 quotas in, 22 state trading in, 22 trade with, 6, 22–23 World Economic Conference (1927), withdrawal from, 3–4

Index

United Kingdom and United States Atlantic Charter between, 11–12 GATT, influence on negotiations of, 19–21 imperial preferences of, 8–12, 17–18, 22 Lend-Lease Act between, 10–12 tariffs between, 10–11, 17–18, 22 trade between, 10–11, 22–23 United Nations (UN), 1, 7 United Nations Convention on the Law of the Sea (UNCLOS), 448 United Nations Educational, Scientific, and Cultural Organization (UNESCO), 444 UN Charter, 164 UN COMTRADE, 194 UN Conference on LDCs, 281 UN Conference on Trade and Development (UNCTAD), 194, 248–249, 276 UN CPC (Central Product Classification), 136–137 UNCTAD TRAINS (Trade Analysis Information System), 194 UN Development Programme (UNDP), 278 UN Economic and Social Council (ECOSOC), 457 UN Human Rights Conventions, 265 UN Security Council Resolution 502, 481 United States (US). See also Europe and US relationships; United Kingdom and United States constitutional process of, 21 FCN treaties and, 42 Fordney-McCumber Tariff on, 21 GATT, goals of, 21 gold standard currencies of, 5–6, 57 Great Depression in, 4, 21 Greece and, dispute settlement between, 46–47 Lend-Lease Act and, 10–12 London Conference, initiation of, 4–5 as MFN, economic cost of, 8 “Proposals for an International Trade Organization (ITO)” proposed by, 13 Reciprocal Trade Agreements Act (RTAA) enacted by, 14 Smoot-Hawley Tariff Act by, 6, 21 Suggested Charter proposed by, 13–14, 22 tariffs on, 6, 21–22 trade with, 6, 21–23 World Economic Conference (1927), withdrawal from, 3–4 United States Tariff Commission (USTC), 33 United States Treaties Series 880, 156 US African Growth and Opportunity Act (AGOA), 231, 254 US Agency for International Development (USAID), 284 US-Canada Rapprochement, 293–294 US–Canadian Tuna, 466–467 US Clean Air Act (CAA), 447–448 US–Clove Cigarettes, 390–391, 476 US Commerce Department, 16

611

US–COOL, 476 US–Corrosion Resistant Steel Sunset Reviews, 92 US Court of International Trade (CIT), 137 US Customs Service, 190 US–Customs User Fee, 190, 203 US–CVD, 203 US Environmental Protection Agency (EPA), 447–448 US–FSC, 62, 381 US–Gambling, 428, 433–435, 434, 441 US–Gasoline, 421–422, 447, 451, 454, 460–463, 466–467, 496 US Helms/Burton Act, 485–486 US–Japan Semiconductor Pact, 82 US–Line Pipe, 303, 318 US–Malt Beverages, 377, 380–381 US–Margins of Preference, 163 US Marine Mammal Protection Act, 418 US–Nicaraguan Trade, 486 US–Non-Rubber Footwear, 202, 203 US Reciprocal Trade Agreements Act (RTAA), 14 US–Shrimp, 415, 417–421, 448–452, 460–462, 464–465 US State Department, 13, 16 US–Superfund, 394, 497 US–Tariff Commission, 50 US–Taxes on Automobiles, 377–378 US–Textiles Rules of Origin, 225 US–Tuna, 218–219, 418 US–Tuna II, 394, 420 US–Webb-Pomerene Act of 1918, 93–94 US–Wool Shirts and Blouses, 422 Unjustifiable discrimination, 462–468 Uruguay Agreement on Agriculture, 106 Uruguay round, 19, 37, 46, 57, 64, 67, 156 Agreement on Agriculture, 32 Agreement on Preshipment and, 171 Agreement on Rules of Origin and, 223–224 Agreement on the Application of Sanitary and Phyto-sanitary Measures (SPS) and, 52 farm policy and, 59 INR holder and, 177 multilateral vs. plurilateral agreements and, 53 nonapplication clause and, 494 sectorial negotiations during, 157 tariffs and, 51–52 trade in textiles and, 91 US. See United States (US) USAID. See US Agency for International Development (USAID) USSR. See Union of Soviet Socialist Republics (USSR) USTC. See United States Tariff Commission (USTC) Utilization rate, 231–232 Value added tax (VAT), 222, 338, 365–366 Variety effect, 26

612

VAT. See Value added tax (VAT) “Vehicles Other than Railway Rolling-Stock, and Parts and Accessories Thereof,” 139 Vienna Convention on the Law of Treaties (VCLT), 63, 143–145, 393, 449, 495 Vietnam War, 118 Vinerian analysis, 295 Waivers exceptions and, 487–493 exceptions on MFN and, 238 forcing, 490–493 Generalized System of Preferences and, 254 justifying, 489–490 transitional arrangement, 487–489 Washington, G., 9, 207 Washington Arrangement, 218 Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, 480–481 WB. See World Bank (WB) WCO. See World Customs Organization (WCO) WCO Committee, 160 Wealth of Nations, The, 24 Weimar Republic, 6 Wells, H. G., 5 Wells, S., 6 Western bloc, 14 Western products, 368 White, E. W., 46–47, 60, 70 WHO. See World Health Organization (WHO) Wide area network (WAN), 161 Wilcox, C., 42–43 Wilgress, D., 20, 47 Wilson, W., 9 Withdrawal price, 107 WITS. See World Integrated Trade Systems (WITS) Working Group on Other Barriers to Trade, 459–460 Working Group on Problems of Trade in Certain Natural Resource Products, 157 Working Group on the Accession of the United Arab Republic, 481 Working Party (WP), 46, 64, 118–119, 124, 303–312, 353–356 on Accession of Hungary, 210 on Accession of Portugal and Spain to the European Communities, 309 on Border Tax Adjustments, 336 on Certificates of Origin, Marks of Origin, and Consular Formalities, 220 on Commodities, 246 on EEC-Association with African and Malgasy States, 306–307 on Specific Duties, 173 on State Trading Enterprises, 71, 405, 412 on Subsidies, 355

Index

on Valuation, Nationality of Goods and Consular Formalities, 220 Working Party Report, 90, 472 Work Programme for Electronic Commerce, 152–153 World Bank (WB), 1, 7, 72, 122, 194, 278 World Customs Organization (WCO), 70, 138, 143, 173, 225 World Economic Conference of 1927, 2–4, 189 World Economic Conference of 1933, 4–6 World Health Organization (WHO), 162 World Integrated Trade Systems (WITS), 194 World Trade Organization (WTO), 26. See also Agreement Establishing the World Trade Organization (WTO) 1947 (“old”), 61–63 1994 (“new”), 61–63 adherence to, 34 Agreements on Trade in Goods and, 69–72 Aid for Trade and, 284 Annex 1A Agreements of, 63–64, 69 China and, safeguards against, 68 “clubs” approach to, 66 committees of, 70–72 corporate governance of, 71 creation of, 2 dispute settlement and, 123–124 divisions of, 72 Enabling Clause and, 68 entry into force of, 19 film quotas in, 347–349 global coherence and, 124 IMF, agreement signed with, 117 internal organization of, 72 ITO and, 19, 42–43 MFN and, 66, 206–214, 223–224 NMEs and, 41–42, 67–68 nonapplication in, 494–495 obligations for membership into, 68 Panels of, 62–64 plurilateral agreements of, 64–65 Protocols of Accession and, 41–42, 67–69 QRs and, 91–94 secretariat of, 70 tariffs, negotiation of, 34, 191–194 trade, 30–31, 34, 60–61 trade liberalization, contributions by, 34 World Trade Report, 71 WP. See Working Party (WP) WTO. See World Trade Organization (WTO) WTO Annual World Trade Report, 233 WTO Appellate Body Division, 72 WTO Committee on Balance of Payments, 315 WTO Committee on Rules of Origin, 225 WTO General Council, 280–281 WTO Legal Affairs Division, 72 WTO Research Division, 71 WTO Safeguards Agreement, 68

Index

WTO to Achieving Greater Coherence in Global Economic Policymaking, 284 WTO Work Programme on Small Economies, 280 WTO World Trade Report, 234, 251, 277 WTO World Trade Report (2007), 50 Wyndham-White, E., 145–146, 447

613

X-Men, 137–138 Yoshida, 118 Yugoslav Federation, 193 Zero-for-zero tariff reductions, 157