S1030310 21 March 2011

EXAM WTO & EU External Trade Relations Law 1. The EU Commission is thinking hard on how it can support and encourage the new rgimes emerging in the Arab countries. Trade not aid is a slogan gaining currency again. Yet opening fully our borders to agricultural imports from these countries will likely be opposed by the powerful agricultural lobbies in the EU. A different concern is raised by the European chemical industry: if we fully open our borders to chemical imports, this will likely create competitive distortions as several Arab countries have easy access to oil, a key input to local petrochemical companies. EU Trade Commissioner De Gucht is looking to you for advise: is it problematic under WTO law for him to propose a new series of free trade agreements with those Arab countries which have instituted more democratic processes, offering 0% customs duties on all imports except agricultural and chemical products?

DISCUSSION The proposed measure to be taken by the EU under its common commercial policy will be problematic as it violates the most favoured nation (MFN) principle.
1

The MFN Principle As a WTO Member,2 the EU must comply with its obligations under the GATT 1994.3 Article I:1 of GATT 1994 contains the MFN principle, which states: With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product
1 2

Articles 206-207, TFEU. The EU (formerly the European Communities) was a founding member of the WTO. For a brief summary on the EUs participation in the WTO, see The European Union and the World Trade Organisation (WTO), at http://www.europarl.europa.eu/ftu/pdf/en//FTU_6.2.2.pdf, last viewed on 20 March 2011. 3 The GATT 1994 is an integral part of the WTO Agreement (1994), as stated in Article II of the WTO Agreement. See P. Van den Bossche, The Law and Policy of the World Trade Organization (2008) at 42-43.

originating in or destined for the territories of all other contracting parties. The MFN principle is one of equality: members should not discriminate amongst their WTO-member trading partners.4 It requires that any advantage granted by any WTO Member to any product from or for another country be granted to all like products from or for all other Members.5 All countries that are WTO Members are automatically entitled to MFN trading status with other countries.6 In the instant case, the EU is proposing, with the exception of agricultural and chemical products, 0% customs duties for Arab countries that have instituted more democratic processes. The abolition of customs duties will result in cheaper importation costs. Hence, such a proposal confers a trade advantage to this select group of countries, violating Article I:1 of GATT 1994. A trade preference for particular groups of countries runs counter to one of the central pillars of the GATT, namely the principle of non-discrimination expressed in the MFN clause, which requires importers to accord all suppliers the same treatment as the most-favoured nation among the suppliers. 7 Although some Middle Eastern states are not WTO members such as Afghanistan, Algeria, Iraq, Iran, and Libya, the abolition of EU customs duties on their products may still be challenged by a WTO Member. Article I:1 of GATT 1994 requires that any advantage, favour, privilege or immunity given by any contracting party to any product originating in any other country must likewise be granted to WTO Members. Hence, the provision does not allow a WTO member to raise the defense that the advantage is given to a non-WTO member. According to one commentator, there are three principal ways a WTO Member can offer preferential tariff treatment to a select group of countries without violating the MFN principle.8 A preference-granting WTO Member may employ the Enabling Clause to grant additional preferential treatment. Alternatively, a preference-granting country may obtain a WTO waiver. Finally, under the provisions providing for the creation of a customs union or free-trade area (FTA), a Member may temporarily grant preferential treatment with the aim of creating a regional trade agreement (RTA).9

M. Lewis, The Prisoners' Dilemma Posed By Free Trade Agreements: Can Open Access Provisions Provide An Escape?, 11 Chi. J. Int'l L. 631 (2011) at 634. 5 P. Van den Bossche, The Law and Policy of the World Trade Organization (2008) at 327. 6 R. Schaffer, F. Agusti, and B. Earle, International Business Law and Its Environment (2008) at 306. 7 S. Tangermann, The Future of Preferential Trade Arrangements for Developing Countries and the Current Round of WTO Negotiations on Agriculture, at http://www.fao.org/docrep/004/Y2732E/y2732e08.htm, last viewed on 20 March 2011. 8 K. Moss, The Consequences of the WTO Appellate Body Decision in ECTariff Preferences for the African Growth Opportunity Act and Sub-Saharan Africa, 38 N.Y.U. J. Int'l L. & Pol. 665 (2006) at 693. 9 Id.

The Enabling Clause Paragraph 1 of the Enabling Clause allows WTO Members to give differential and more favourable treatment to developing countries in spite of the MFN obligation under Article I:1 GATT 1994.10 It enhances market access for developing countries as a means of improving their economic development by allowing preferential treatment, notwithstanding Article I:1 GATT 1994.11 In European Communities Conditions for the Granting of Tariff Preferences to Developing Countries (EC Tariff Preferences),12 the limits of the Enabling Clause as an exception to the MFN principle were discussed. EC Tariff Preferences involved a claim by the Government of India against the EC. India alleged that the EC's special tariff preference arrangement given to 12 countries13 to combat drug production and trafficking violated the MFN principle, and that the scheme was not justified under the Enabling Clause.14 Under the said arrangement, the 12 countries were granted greater tariff reductions than those offered to other developing countries pursuant to the EC's General System of Preferences (GSP). India argued that such disparate treatment was a violation of the EC's WTO obligations. 15 Recognizing the Enabling Clause as an exception to the MFN principle, the WTO Appellate Body qualified the exception by holding that only preferential treatment that is generalized, non-reciprocal and non-discriminatory can be justified. 16 It concluded that the preferential arrangements given by the EC were not justified under Paragraph 2(a) of the Enabling Clause, finding that the arrangements did not set out any objective criteria that, if met, would allow for other developing countries similarly affected by the drug problem to be included as beneficiaries. 17 Although the WTO Appellate Body found a violation of the MFN principle in this case, the ruling is significant as it instructs that not every difference in tariff treatment necessarily constitutes discriminatory treatment. Imposing different tariff preferences is allowed provided that the tariff preferences respond positively to a particular development, financial or trade need and are made available on the basis of an objective standard to all beneficiaries that share that need. 18
10

WTO Appellate Body Repertory of Reports and Awards 1995-2006 (2007) at 258, citing Paragraph 90, European Communities Conditions for the Granting of Tariff Preferences to Developing Countries (EC Tariff Preferences), WT/DS246/AB/R (2004). 11 Id. at 259, citing Paragraph 110. 12 WT/DS246/AB/R (2004). 13 Brazil, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Paraguay, Peru, Sri Lanka, and Venezuela. See EC Tariff Preferences at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds246_e.htm, last viewed on 20 March 2011. 14 K. Moss, supra note 8 at 665. 15 Id. at 665-666. 16 WTO Appellate Body Repertory of Reports and Awards, supra note 10 at 259-260, citing Paragraph 145. 17 A summary of the WTO Appellate Bodys ruling in EC Tariff Preferences can be found at http://www.wto.org/english/tratop_e/dispu_e/cases_e/1pagesum_e/ds246sum_e.pdf, last viewed on 20 March 2011. 18 Id.

Thus, in enacting the proposed policy of abolishing tariffs for goods coming from Arab countries with more democratic processes, the EU is required, by virtue of the term non-discriminatory, to ensure that identical treatment is available to all similarlysituated WTO Members that have the same development, financial and trade needs. 19 It may be noted that the EC Tariff Preferences case involved a closed list of beneficiaries and contains no criteria or standards that developing countries must meet to qualify for the special tariff arrangements.20 Thus, if the EU goes forward with the proposed measure, the measure should have attainable standards allowing any developing country similarly situated to be accorded the same privilege as the emerging Arab democracies. Waiver of trade preferences Pursuant to Article IX:3 of the WTO Agreement21 and Article XXV:5 GATT 1994, exceptional circumstances may justify a waiver of a states obligations under the said agreements.
22

Under GATT 1994, a waiver of an obligation may be granted when there are exceptional circumstances, the exceptional circumstances are not provided for in the GATT,23 and two-thirds of at least half of the contracting parties vote in favor of such a waiver. 24 The GATT 1994 requirements for the granting of a waiver became more stringent with the adoption of the WTO Agreement: a consensus must now be sought, and if unavailable, a vote of three-fourths of the Members is now necessary. Again, waivers are granted only for exceptional circumstances.25 While the term exceptional circumstances required for the grant of a waiver has not been defined, 26 since waivers abrogate the basic obligations of the GATT, they are to be limited in interpretation and require the existence of exceptional conditions. 27 Aside from the difficulty of justifying exceptional circumstances needed for a waiver and obtaining a consensus or at least a three-fourths vote, a waiver is limited in duration. As provided in Article IX:4 of the WTO Agreement, any waiver granted for a period of more than one year shall be reviewed annually. 28 These are some considerations

19

EC Tariff Preferences at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds246_e.htm, last viewed on 20 March 2011. 20 K. Moss, supra note 8 at 693. 21 P. Van den Bossche, supra note 5 at 114. 22 D. Marinberg, GATT/WTO Waivers: "Exceptional Circumstances" As Applied To The Lom Waiver, 19 B.U. Int'l L.J. 129 (2001) at 131-132. 23 The GATT 1994 provides for explicitly granted exceptions in Articles XIX (safeguard measures), XX (general exceptions) and XXI (security exceptions). See D. Marinberg, supra note 23 at 132. 24 D. Marinberg, supra note 22 at 132. 25 Id. 26 Id. at 138. 27 Id. at 139. For a discussion on the common elements in waivers, see D. Marinberg, supra note 22 at 160-161. 28 P. Van den Bossche, supra note 5 at 114.

that should be taken into account by the EU if it decides to seek a waiver of its obligations under Article I:1 GATT 1994 in order to carry out the proposed measure. Free Trade Areas (FTAs) In general, regional and bilateral FTAs among countries violate the MFN principle because they extend preferential trade treatment to products originating with certain members. 29 The original GATT signatories recognized, however, that bilateral FTAs can still be economically beneficial for all members if implemented according to certain conditions that promote overall gains from trade.30 Article XXIV GATT 1994 imposes fairly rigorous conditions for entry into either a customs union or FTA.31 The most important of these are found in GATT Article XXIV:5, which provides that states may form a customs union or FTA provided that the new customs union or FTA does not raise its external tariffs above pre-agreement levels, and in Article XXIV:8, which defines customs union and free-trade area to be groupings in which tariffs and other restrictive regulations on commerce are eliminated on substantially all the trade between the parties within a ten-year timeframe.32 The term substantially all the trade has not been defined with any precision, and it is unclear whether it requires a quantitative or qualitative approach, or a combination of the two.33 Some argue that a given sector can be excluded so long as the amount of trade covered as a whole is substantial. 34 Others believe that sectors cannot be excluded, no matter how minimal the trade in that particular sector.35 While the issue arose in the Turkey-Textiles dispute, the WTO Appellate Body failed to clarify the term other than to express that substantially all means more than some, but less than all. 36 The validity of an EU measure creating a customs union or FTA that excludes agricultural and chemical products will depend on the interpretation given to the term substantially all the trade. Thus, a challenge to the proposed measure should be met by the argument that the term substantially all the trade allows the exception of specific sectors so long as the total amount of trade is substantial.

29

A.Schmidt, A New Trade Policy For America: Do Labor and Environmental Provisions In Trade Agreements Serve Social Interests or Special Interests?, 9 Ind. Int'l & Comp. L. Rev. 167 (2009) at 180, citing W. Cooper, Free Trade Agreements: Impact on U.S. Trade and Implications for U.S. Trade Policy 2 (Congressional Research Service 2006). 30 Id. 31 M. Lewis, The Prisoners' Dilemma Posed By Free Trade Agreements: Can Open Access Provisions Provide An Escape?, 11 Chi. J. Int'l L. 631 (2011) at 636. 32 Id. 33 Id. at 637. 34 Id. at 637-638. M. Lewis notes that this is particularly true of parties to European FTAs which often exclude agriculture in whole or in part, citing T. Cottier and M. Foltea, Constitutional Functions of the WTO and Regional Trade Agreements, Regional Trade Agreements and the WTO Legal System (2006) at 48. 35 Id. at 638, citing Z. Hafez, Weak Discipline: GATT Article XXIV and the Emerging WTO Jurisprudence on RTAs, 79 N. Dak. L. Rev 879, 892 (2003). 36 Id., citing World Trade Organization, Report of the Appellate Body, Turkey-Restrictions on Imports of Textile and Clothing Products, WTO Doc WT/DS34/AB/R P 48 (1999).

2. Electric toothbrushes keep teeth healthier and cleaner, so we have been reading for some time now in advertisements of Philips Electronics based in Amsterdam. The new Dutch government appears to be listening. Announced as an attempt to reduce spending on public healthcare (notably, reducing reimbursements of dentists fees through public health insurance), the Dutch government plans to reduce the Value Added Tax (VAT) on electric toothbrushes from 21 to 4%. Philips still has a 55% market share in electronic toothbrushes in the Netherlands, though Chinese and Taiwanese manufacturers of these electronic gizmos are quickly catching up. The Vietnamese federation of exporters of regular toothbrushes, with plastic handles, is quite concerned about the Dutch plans (which may spread to other EU Member States). Vietnamese exporters have displaced most other suppliers, and now hold close to an 80% share of the market for regular toothbrushes in the Netherlands. The Vietnamese worry that the considerable reduction in VAT on electric toothbrushes will be to their disadvantage, and may encourage many people to switch from regular to electric toothbrushes. They ask your advice whether Vietnam has legal grounds to challenge the Dutch governments plans in the WTO.

DISCUSSION Vietnam may attempt to challenge the proposed measure, which may be deemed an internal tax or charge,37 by citing the national treatment principle in Article III GATT 1994. It may be noted that in China Value-added Tax on Integrated Circuits, the United States challenged the Chinese policy of offering a VAT refund on integrated circuits products in China, as well as those designed in China but manufactured elsewhere, on the same legal basis. 38 Unfortunately, the case provides no guidance since the matter was settled amicably with the signing of a Memorandum of Understanding (MOU) and China agreeing to stop providing the VAT refunds. 39 The national treatment principle The national treatment provision is found in Article III GATT 1994. This doctrine prohibits nations from placing foreign imported goods at an economic disadvantage to domestic goods; that is, nations are required to put domestic and imported goods on equal

37 38

The VAT is deemed an internal tax. See P. Van den Bossche, supra note 5 at 349. Request for Consultations by the United States, China Value-added Tax on Integrated Circuits, WT/DS309/1, G/L/675 , S/L/160 (2004) at http://trade.ec.europa.eu/doclib/docs/2004/may/tradoc_117015.pdf, last viewed on 20 March 2011. 39 P. Hsieh, China-United States Trade Negotiations and Disputes: The WTO and Beyond, 4 Asian J. WTO & Int'l Health L. & Pol'y 369 (2009) at 385, citing the Notification of Mutually Agreed Solution, China Value-added Tax on Integrated Circuits, WT/DS309/8, G/L/675/Add.2, S/L/160/Add.2 (06 October 2005).

competitive footing40 by avoiding protectionism in the application of internal tax and regulatory measures.41 The first sentence of Article III:2 GATT 1994 prohibits the imposition of internal taxes or charges on imported products in excess of those applied to like domestic products. The second sentence of Article III:2 GATT 1994 contains the same prohibition, but as distinguished from the first sentence, the rule applies to internal taxes or charges on directly competitive or substitutable products, as stated in the Interpretative Note to the GATT 1994.42 A complaining party alleging a violation of Article III:2 has two possible options: First, it may argue that (i) the domestic and the foreign products are like; and (ii) the latter is taxed in excess of the former. Second, it may claim that (i) the two products are directly competitive or substitutable; (ii) the two products are not similarly taxed, and (iii) that the dissimilar taxation operates so as to afford protection to domestic production. 43 The success of Vietnams challenge under Article III GATT 1994 would thus depend on the resolution of these issues. At the outset, it must be emphasized that Article III:2 GATT 1994 contemplates a favorable or different tax treatment of a domestic product over a foreign one. It is therefore extremely doubtful whether Vietnam can claim a violation of the provision since the proposed measure applies to electronic toothbrushes no matter where they are produced, i.e., China and Taiwan. Assuming that Philips Electronics 55% market share in electronic toothbrushes would be enough to categorize all electronic toothbrushes as domestic products (which is highly unlikely), Vietnam may then attempt to argue that plastic toothbrushes and electronic toothbrushes are either like products or directly competitive or substitutable products. a. Like products The question of whether products are like is established on a case-by-case basis. 44 Previously, likeness was determined by the regulatory intent or aim-and-effect approach, which required examining the reason for the product differentiation.45 In other words,
40

M. Liang, Green Taxes and the WTO: Creating Certainty For The Future, 10 Chi. J. Int'l L. 359 (2009) at 361, citing N. DiMascio and J. Pauwelyn, Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?, 102 Am J Intl L 48, 59-60 (2008). 41 K. Schefer, Dancing With The Devil: A Heretic's View of Protectionism in the WTO Legal System, 4 Asian J. WTO & Int'l Health L. & Pol'y 423 (2009) at 431, citing Appellate Body Report, Japan -- Taxes on Alcoholic Beverages, at 28, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (04 October 1996) at 16. 42 Ad Article III, Paragraph 2, Annex I (Notes and Supplementary Provisions), GATT 1994. 43 H. Horn and P. Mavroidis, Still Hazy After All These Years: The Interpretation of National Treatment in the GATT/WTO Case-Law On Tax Discrimination, 15 Eur. J. Int'l L. 39 (2004) at 41; P. Van den Bossche, supra note 5 at 349 and 359-360. 44 M. Slotboom, A Comparison of WTO and EC law: do different objects and purposes matter for treaty interpretation? (2006) at 85. 45 P. Van den Bossche, supra note 5 at 354, citing US Malt Beverages, GATT Panel Report, BISD 39S/206 (1992).

likeness was to be determined in terms of whether the less favourable treatment was based on a regulatory distinction made to protect domestic production.46 The aim-and-effect test was rejected in the later case of JapanAlcoholic Beverages II47 in favor of the market-based approach, which takes the view that like products are not limited to identical products but also cover other goods on the basis of factors such as the products end-use, the consumers taste and habits, and the products properties, nature and quality. 48 In the succeeding case of EC Asbestos, 49 the WTO Appellate Body endorsed the criteria for establishing likeness contained in the GATT (1947) Working Party on Border Tax Adjustments, namely: (1) the properties, nature and quality of the products; (2) the end-uses of the products; (3) consumers' tastes and habits; and (4) the tariff classification of the products.50 With regard to Article III:2 GATT 1994, it is established that the term likeness must be narrowly construed. The WTO Appellate Body in Japan Alcoholic Beverages II51 made an interesting analogy, describing the concept of likeness as akin to an accordion, stretching and squeezing as different provisions of the WTO Agreement are applied. It then held that in applying the term to Article III:2 GATT 1994, the accordion of likeness must be narrowly squeezed.52 In the instant case, following the criteria in EC Asbestos and the principle of narrow interpretation of the term likeness put forward in Japan Alcoholic Beverages II, proving that plastic toothbrushes and electronic toothbrushes are like products will be problematic. The products are very are different in terms of physical properties, quality, and pricing, among others. b. Directly competitive or substitutable products The term directly competitive or substitutable is interpreted more broadly than like products.53 Not only matters such as physical characteristics, common end-uses and tariff classifications must be considered, but the market place54 should also be taken into account.
46 47

Id. at 355, citing US Taxes on Automobiles, GATT Panel Report, DS31/R (1994). Panel Report, WT/DS58/R, WT/DS10/R, WT/DS11/R (1996), cited in P. Van den Bossche, supra note 5 at 355. 48 M. Slotboom, supra note 44, citing report of the Working Party on Border Tax Adjustments, L/3464, 1970, 185/97, 102, at 18, further cited in the report of the WTO Appellate Body on Japanese Beverages II, at Section H.1(a). 49 Appellate Body Report, WT/DS135/AB/R (2001). 50 R. Quick and C. Lau, Environmentally Motivated Tax Distinctions and WTO Law, 6 J. Int'l Econ. L. 419 (2003) at 428. 51 Appellate Body Report, WT/DS76/AB/R (1999). 52 H. Horn, supra note 43 at 43. 53 F. Ortino and E. Petersmann, WTO Dispute Settlement System 1995-2003 (2004) at 235. 54 H. Horn, supra note 43 at 45.

Competition in the relevant markets is thus one among a number of means of identifying the broader category of products that might be described as directly competitive or substitutable. 55 Another factor in determining whether or not products are directly competitive or substitutable is whether they have common end-uses, as shown by elasticity of substitution. 56 Evincing the broader interpretation given to the concept of directly competitive or substitutable as opposed to like products, the WTO Appellate Body ruled in Japan Alcoholic Beverages II that the term includes products that, although not perceived as substitutable at a given time, are nonetheless capable of being substituted.57 In the given example, Vietnam may find it difficult to prove that plastic toothbrushes and electronic toothbrushes are directly competitive or substitutable. The huge difference in pricing militates against a finding that they are competing products. Moreover, the disparity in pricing, coupled with the difference in their physical attributes (i.e., one is flimsy, the other is more sturdy) and method of operation (i.e., one is operated manually, the other needs a power source) will not allow the substitution of one product for the other. Assuming that Vietnam succeeds in arguing that the products are directly competitive or substitutable, it must then prove that the proposed measure affords protection to domestic production. While protectionist policies may be allowed in some cases,58 Article III:1 in relation to the second sentence of Article III:2 prohibits an internal tax or charge as to afford protection to domestic production. 59 The WTO does not define protectionism, but the term has been described as an intentional government policy to ensure that domestic producers of goods or services have a share in the market for that particular good or service.60 The issue was dealt with in Japan Alcoholic Beverages II, wherein the Appellate Body held that the protective application of a measure can most often be discerned from the design, the architecture, and the revealing structure of a measure.61 The question of intent was also discussed in the said case, and the WTO Appellate Body ruled that the issue is not one of intent but of application. 62
55 56

Id. Id. 57 P. Van den Bossche, supra note 5 at 361. 58 For a detailed discussion on permissible protectionism under the GATT/WTO, see K. Schefer, supra note 41 at 428430. 59 Article III:1 GATT 1994. 60 K. Schefer, supra note 41 at 426-427. 61 P. Van den Bossche, supra note 5 at 366. 62 Id.

Vietnam may have difficulty in proving that the proposed measure affords protection to domestic production. As noted above, the reduction in VAT applies to all electronic toothbrushes regardless of where they are produced. However, in a commentary on the Appellate Bodys decision in Japan Alcoholic Beverages II, one author states that if a tax measure operates in such a way that the lower tax brackets cover primarily domestic production while the higher tax rates apply primarily to imported goods, the implication is that the measure is applied so as to protection to domestic production.63 Considering that the lower VAT applies to 55% Dutch production in the electronic toothbrush market, while the higher regular VAT applies to plastic toothbrushes that are all imported, Vietnam can try and make use of this argument to its advantage. It bears reiterating that the protectionist argument only comes into play if Vietnam proves that plastic and electronic toothbrushes are directly competitive or substitutable.

63

Id.

10