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By
Prabhash Ranjan,
LLM Scholar, School of Oriental and African Studies (SOAS), University of London, UK
In 2002, a dispute arose between India and the European Commission (EC) regarding the conditions under which the EC accorded tariff preferences to developing countries under the scheme of generalised tariff preferences.
Before one analyses the dispute, it is pertinent to understand the Generalised System of Preferences (GSP) scheme. GSP, initiated under the auspices of the United Nations Conference on Trade and Development (UNCTAD) in 1968, allows developed countries to grant preferential tariff treatment to the goods of developing countries. Each developed country is free to give these preferences to developing countries, and these preferences are not bound by the General Agreement on Tariffs and Trade ( GATT ) and hence can be modified by the concerned developed country at any time.
Such a preferential tariff scheme could violate the Most Favoured Nation (MFN) rule (Article I of GATT), which obligates countries to extend equal treatment to all like products coming into their territory irrespective of the country of origin. In order to avoid violation of the MFN rule, a waiver was granted to the GSP scheme in 1971.
The GSP scheme, initially, was perceived as a temporary scheme and was suppose to expire in 1981. However, in 1979, the contracting parties to GATT made the GSP scheme a permanent basis for providing tariff preferences to developing countries. This decision is known as the ‘enabling clause'.
The enabling clause provided a waiver from the obligations of the MFN rule (Article I.1 of GATT ). In other words, by virtue of the enabling clause, developed countries could grant preferential tariffs to developing countries without undermining the MFN rule.
The dispute between India and the EC related to additional tariff preferences granted by the EC to countries for combating drug production and trafficking. In 2001, the EC extended tariff preferences to Pakistan for its alleged role in combating drug production and trafficking. However, the extension of tariff preferences to Pakistan by the EC was a reward for distancing itself from the Taliban regime.
India complained to the Dispute Settlement Body (DSB) of the World Trade Organisation that the EC's GSP scheme was in violation of Article I.1 of GATT (MFN rule) and was also not justified under the enabling clause. For its part, the EC argued that the drug arrangements fall under Paragraph 2 (a) of the enabling clause and not under Article I.1 of GATT, and therefore the panel should dismiss India 's case. The EC also maintained that the enabling clause is an autonomous right and not an affirmative defence, and it excludes application of Article I of GATT.
Report of the panel
The panel looked at the all the issues arising in the dispute. They are discussed below:
Nature of the enabling clause
An important issue that arose in this dispute was regarding the nature of the enabling clause itself. The EC, as mentioned above, argued that the enabling clause is an autonomous right. Hence, the panel had to determine whether the enabling clause is a positive obligation on developed countries or an exception to the MFN rule. The panel argued that in order to establish the nature of the enabling clause, it is necessary to examine the legal function of the enabling clause in the context of GATT as a whole.
In determining the nature of the enabling clause, the panel referred to WTO jurisprudence in the US-Wool Shirts and Blouses case. This case determined the two necessary criteria for a rule to be an exception: first, the rule must not be of the type that establishes legal obligation; second, the rule must authorise a limited derogation from the positive rules that lay down the obligations.
The panel argued that the enabling clause fulfils both these criteria and hence is an exception. Regarding the first criterion, the panel held that the enabling clause does not create a positive obligation on developed countries to extend tariff preferences to developing countries. In other words, it is not mandatory for developed countries to extend tariff preferences to developing countries. The presence of the word ‘may' in the enabling clause brings out the non-obligatory nature of the enabling clause. It is up to developed countries whether they want to extend these preferences or not.
This nature of the enabling clause is similar to other exception rules such as Article XX (the general exceptions clause that allows countries to derogate from GATT obligations to pursue certain non-trade objectives), or Article XXIV (allows countries to form regional trade agreements where they could offer tariffs less than the MFN level). Just as Article XX does not impose a positive obligation on countries to take measures to pursue non-trade objectives, or Article XXIV that does not impose obligations on countries to form regional trade agreements, the enabling clause also does not impose an obligation on developed countries to extend tariff preferences to developing countries.
Regarding the second criterion, the panel argued that the enabling clause starts with the phrase ‘Notwithstanding the provisions of Article I of GATT' . This, according to the panel, allows derogation from the MFN rule in Article I of GATT. It allows the enabling clause to function in spite of the MFN rule, which is a positive obligation (MFN rule in Article I makes it mandatory for countries to treat like products entering their territories equally). Hence, the enabling clause is an exception to GATT.
Relationship of Article I.1 with the enabling clause
The next important issue that arose in the dispute was whether the application of the enabling clause completely excludes Article I.1 (EC's stand) or is Article I.1 applicable to the enabling clause when it is implemented by developed countries (India's stand).
India 's stand in this regard was that although the enabling clause may operate as an exception to the MFN rule, that is, developed countries may extend preferential tariff preferences to developing countries, this does not allow developed countries to discriminate between developing countries. In other words, the tariff preferences that developed countries extend should be extended to all developing countries. It also means that application of the enabling clause should follow the MFN rule, although the rule itself is an exception to MFN.
The panel argued that the word ‘notwithstanding', as discussed above, allows derogation of the enabling clause from the MFN rule. However this, according to the panel, does not exclude the applicability of Article I.1 of GATT to the enabling clause. The panel held that Article I.1 and the enabling clause apply concurrently and the enabling clause prevails over Article I.1 only to the extent of conflict between the two provisions.
Burden of proof
Another issue related to the two issues discussed above is regarding burden of proof. The EC had argued that the enabling clause is an autonomous right and hence the burden of proving that it is not compatible with the enabling clause is on the complaining party ( India , in this case). However, as discussed above, the panel held that the enabling clause is an exception and hence the burden of proof also shifts accordingly from India to the EC. In other words, the panel held that India has to show that the EC's measure is inconsistent with Article I.1 of GATT. Once India does this, the onus shifts to the EC to show that the measure is consistent with one of the exceptions to MFN (enabling clause in this case). The panel held that it is not the task of the complaining country to show further inconsistencies of the measure with other exceptions to MFN. Provisions that exist in the form of exceptions should be invoked and justified by the defending party.
After having determined these issues, the panel went on to examine the specific issues in this case, that is, whether the tariff preferences under the drug arrangements are consistent with Article I.1 of GATT and with the enabling clause.
Consistency with Article I.1
The panel held that the tariff preferences under the drug arrangements were not consistent with Article I.1. In other words, the panel held that these tariff preferences were in violation of the MFN rule. These tariff preferences, in the form of lower MFN tariff rates, were being provided to 12 beneficiary countries, which included Pakistan and excluded India . Hence India 's complaint that these tariff preferences were in violation of the MFN rule. The panel held that since these preferential tariff rates were not being accorded to like products originating in other countries, including India , it was a violation of Article I.1 of GATT.
Consistency with the enabling clause
After having determined that the tariff preferences were in violation of the MFN rule, the next issue for the panel was to determine whether these preferences were in accordance with the enabling clause (See Box 1 for the text of the enabling clause).
Box 1
The relevant text of the enabling clause provides:
- Notwithstanding the provisions of Article I of the General Agreement, contracting
parties may accord differential and more favourable treatment to developing countries1,
without according such treatment to other contracting parties.
- The provisions of Paragraph 1 apply to the following 2 :
- Preferential tariff treatment accorded by developed contracting parties to
products originating in developing countries in accordance with the Generalised
System of Preferences3.
- Differential and more favourable treatment with respect to the provisions of
the General Agreement concerning non-tariff measures governed by the provisions
of instruments multilaterally negotiated under the auspices of the GATT.
- Regional or global arrangements entered into amongst 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 non-tariff measures, on products imported from
one another.
- Special treatment of the least developed among the developing countries in the
context of any general or specific measures in favour of developing countries.
- Any differential and more favourable treatment provided under this clause
- 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;
- shall not constitute an impediment to the reduction or elimination of tariffs
and other restrictions to trade on a most-favoured-nation basis;
- 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.”
1(footnote original) The words “developing countries” as used in this text are to
be understood to refer also to developing territories.
2 (footnote original) It would remain open for the CONTRACTING PARTIES to consider
on an ad hoc basis under the GATT provisions for joint action any proposals for
differential and more favourable treatment not falling within the scope of this
paragraph.
3 (footnote original) As described in the Decision of the CONTRACTING PARTIES of 25
June 1971, relating to the establishment of “generalised, non-reciprocal and
non-discriminatory preferences beneficial to the developing countries.”
(BISD 18S/24)
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In determining the consistency of tariff preferences with the enabling clause, the important issue is to determine consistency with Paragraph 2 (a), in particular Footnote 3 (see Box 1 ). Paragraph 2 (a) states that developed countries may accord preferential tariff treatment to products originating in developing countries in accordance with the GSP. GSP is further referred to in Footnote 3 to Paragraph 2 (a) as the decision of the contracting parties (that is, the countries) relating to the establishment of the generalised, non-reciprocal and non-discriminatory preferences beneficial to developing countries.
The panel argued that it is only possible to give full effect to Paragraph 2 (a) and Footnote 3 after determining whether Paragraph 3 (c) allows differentiation among developing countries in responding positively to the development, financial and trade needs of developing countries (Paragraph 3 (c) states that any differential and more favourable treatment provided under the enabling clause shall be designed, and if necessary be modified, to respond positively to the development, financial and trade needs of developing countries).
Interpretation of Paragraph 3 (c)
The main issue in this case was whether responding positively to the needs of developing countries means responding positively to the needs of ‘all' developing countries or to the needs of ‘individual' developing countries. It is important to understand the difference that reading ‘all' and ‘individual' in Paragraph 3 (c) will make. If developing countries are read as ‘all developing countries', then it means that no developing country can be left out of the tariff preferences (India's argument, which will favour India as it will be included in the tariff preferences). On the other hand, reading ‘developing countries' as ‘individual developing countries' means that developed countries can discriminate between developing countries to fulfil their trade and development needs based on an objective criterion (EC's argument). It is important to bear in mind that the text of Paragraph 3 (c) only states ‘developing countries' without qualifying whether it is ‘all' or ‘individual' developing counties.
The panel held that there is nothing in the text of the enabling clause or in the drafting history to show that Paragraph 3 (c) allows developed countries to respond to the individual needs of developing countries using objective criteria. In other words, the panel rejected the EC's argument and held that upholding this argument would mean that the panel will have to determine what constitutes an ‘objective criterion'.
The panel held that it cannot discern any ‘objective criterion' according to which developed countries could distinguish between developing countries differently. Hence, the panel held that given this difficulty in determining the ‘objective criterion', no such criterion could be envisaged in Paragraph 3 (c). In sum, the panel held that there could not be differentiation between developing countries under Paragraph 3 (c). The only permitted differentiation under GATT is the special and differential treatment that could be accorded to Least Developed Countries (LDC).
‘Non-discriminatory' in Footnote 3
After interpreting Paragraph 3 (c), the panel went on to interpret the phrase ‘non-discriminatory' in Footnote 3. The core issue here was whether ‘non-discriminatory' in Footnote 3 allowed developed countries to discriminate between developing countries by according preferential tariffs to some developing countries and not to other countries. The panel held that ‘non-discrimination' in Footnote 3 does not allow developed countries to discriminate between developing countries. It argued that although the enabling clause in an exception to the MFN rule, the MFN rule is still applicable in the implementation of the enabling clause. Hence, Footnote 3 requires that identical tariff preferences be accorded to all developing countries without any differentiation except for the implementation of a priori limitations.
Paragraph 2 (a)
The panel held that developing countries in Paragraph 2 (a) of the enabling clause meant ‘all' developing countries. Developed countries could not discriminate between developing countries except for a priori limitations.
Report of the Appellate Body
The EC was not happy with the findings of the panel and hence challenged many aspects of the panel's ruling in the Appellate Body (AB). The AB considered each of these issues. These issues are discussed below:
Nature of the enabling clause
The AB agreed with the panel that the enabling clause is an exception to the substantive MFN obligation. The AB also gave the same analysis as the panel to come to the decision that the enabling clause is an exception.
Relationship between Article I.1 of GATT and the enabling clause
The AB held that the MFN principle is undoubtedly the cornerstone of the multilateral trading regime. However, the AB also said that countries are entitled to adopt special and differential measures towards developing countries, and the enabling clause facilitates such a measure. Therefore, challenges to measures that are consistent with the enabling clause cannot succeed under GATT Article I.1. The AB also held that to the extent there is a conflict between the enabling clause and the MFN provision, the enabling clause being the more specific provision prevails over the MFN clause. The AB held that in order to determine whether such a conflict exists, a two-step process needs to be followed.
- Examine the consistency of the measure with Article I.1.
- If the measure is inconsistent with Article I.1, then its consistency with the enabling clause needs to be examined.
Hence, the AB concluded that, in this sense, the enabling clause does not exclude the applicability of Article I.1.
Burden of proof
One of the important findings of the AB, where it differed from the panel, was on the issue of burden of proof. The AB held that it is not the EC that bears the burden of proof to invoke the enabling clause. On the contrary, the AB held that India should have raised the enabling clause while showing that the EC's measure was inconsistent with Article I.1 of GATT . After this, the EC bore the burden of proof to show that the drug arrangements justified the enabling clause.
Interpretation of ‘non-discriminatory' in Footnote 3
After this, the AB went on to interpret ‘non-discriminatory' in Footnote 3. The EC had challenged the panel's finding that the term ‘non-discriminatory' in Footnote 3 required that no difference should be made between developing counties, and that identical tariff preferences be extended to all developing countries. The issue before the AB was: does ‘non-discrimination' entail providing identical tariff preferences to all developing countries, or is discrimination between developing countries to be allowed?
The AB held that ‘non-discriminatory' in Footnote 3 does not mean that a preference-granting country should provide identical tariff preferences to all developing countries. In order to substantiate this finding, the AB interpreted Paragraph 3 (c) of the enabling clause that provided the context for the interpretation of Footnote 3.
The AB held that Paragraph 3 (c) imposes an obligation on developed countries to respond positively to the development, financial and trade needs of developing countries. The AB further held that responding to the needs of developing countries does not mean that developed countries have to respond to the needs of all developing countries, or have to respond to the needs of developing countries collectively.
The AB also argued that different countries may have different development needs and these needs may not necessarily be shared. Hence, there is no obligation on developed countries to extend the same treatment to all developing counties.
The AB also held that under Paragraph 3 (a) not all kinds of needs are covered; only needs related to trade, development and finance are covered. Further, the AB held that the existence of a trade, development or financial need must be assessed according to an objective standard. Also, the response to the need should be positive. In other words, there should be a sufficient nexus between the preferential treatments offered to the developing country and the needs of that country.
On the basis of this conclusion, the AB held that ‘non-discriminatory' in Footnote 3 did not mean that a developed country has to grant identical tariff preferences to all developing countries. A developed country could discriminate between developing countries, provided identical treatment is given to countries that are ‘similarly situated', that is, those counties that have trade, development and financial needs that are sought to be addressed by the measure taken by the developed country.
The other important related finding of the AB was that the term ‘developing countries' in Paragraph 2 (a) does not mean all developing countries.
However, the AB found that the drug arrangements regime followed by the EC was inconsistent with the enabling clause because it does not clearly set out the objective criterion that, if met, would allow a developing country to be included by the drug panel in the list of beneficiaries that are affected by the problem. The lack of objective criterion clearly identified by the drug arrangements programme pursued by the EC made the AB finally conclude that the drug arrangements programme of the EC was inconsistent with Paragraph 2 (a) of the enabling clause.
References:
WTO Panel Report, India – Patent Protection for Pharmaceutical and Chemical Products ( India - Patent) , WT/DS50/R, adopted 5 September 1997
WTO Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products ( Turkey – Textile) , WT/DS34/AB/R, adopted 22 October 1999
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