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Banana rulings don't cut any Gordian knots

The reconvened banana panel may have ruled on the WTO- inconsistency of the EC regime but broader issues of unilateralism in the course of dispute settlement proceedings remain unresolved. Chakravarthi Raghavan surveys the fallout from the longstanding dispute which raises questions that strike at the very core of the multilateral trading system.

by Chakravarthi Raghavan


GENEVA: Caught up in the tangle of banana disputes - the labyrinthian EC trade regimes and preferences and their administration, US assertion of unilateralist rights, and ill- drafted and imprecise dispute settlement rules - the WTO Dispute Settlement Body "compromised" by referring all the problems to the reconvened banana panel, acting in different capacities, to find a "logical way forward".

The DSB authorized US sanctions on 19 April (see issue No. 207/208), and adopted on 6 May the report on Ecuador's Art. 21.5 reference. The EC has also said that while it would take a little time to choose and implement one of the options in the Ecuador ruling and change its regime, it would nevertheless do so.

US power play

In handing down its rulings on the WTO-compliance of the new EC banana regime and assessing the value of trade damage suffered by the US, the three-member panel may have sought to bring to a close the "endless loop" of banana disputes, but trade observers feel it may have shored up the WTO's potential as a trade instrument for US power play.

It has been the US contention, not merely in this dispute, that if it wins a dispute, during the "reasonable period for implementation" provided by arbitration, the other party must consult and negotiate with the US on how it would comply.

However, if there is no agreement, and the other side goes ahead and changes its trade measures and laws to give effect to what it views as compliance, but this does not meet US "demands", at the end of the "reasonable period", the US would straightaway seek authorization for impairment (which the WTO is required to give automatically, subject to an arbitrator's assessment of level of impairment) and impose trade sanctions.

The banana arbitration and reconvened panel rulings appear to be supportive of such US views. Hence the reaction of Washington that there was no need to seek any changes in the Dispute Settlement Understanding rules (under the ongoing review process) to clarify the relationships and sequencing of actions under Art. 21.5 (reconvening of a panel to rule on compliance) and Art. 22.6 (seeking authorization for trade sanctions).

According to trade diplomats, changes (which require consensus) to clarify the rules (sequencing of reconvened panel to judge compliance, before seeking authorization for retaliation) mooted by others have been rejected informally by the US.

The Banana-III panel (chaired by Hong Kong's Stuart Harbinson, with Australia's Kym Anderson and Switzerland's Christian Haberli as members) was named by the WTO Director- General, as the rules provide, since the parties could not agree on the membership. And the chairman generally has a reputation among trade diplomats of being one who would do his own homework and reading as a panellist.

But the rulings may have created more problems for the future.

Trade observers fear that unless members act quickly, even before Seattle, to deal with the new tangles enveloping them, the system may be headed for serious trouble, since the US seems determined to use its interpretation of the arbitrators' ruling to force others to accept its view of how they should implement rulings, on pain of sanctions, where only the amount is to be assessed.

The DSB gave its "automatic authorization" (because of the rule of "negative consensus") to the US for the trade retaliation - without being asked to adopt the arbitrators' report or even to take note of it.

The US even tried to discourage any discussion, suggesting it would be a waste of time, and disdainfully dismissed the suggestion of the chair that the list of products on which the US was imposing sanctions should be provided multilaterally to the DSB/WTO and that any sanctions had to be prospective from the time of the sanction. There is nothing in the rules requiring this, US officials argued.

And the US Trade Representative, Charlene Barshefsky, in Washington, made clear that with the US having won authorization for trade sanctions (without the US trade law S.301 being pronounced upon), the DSU and the system worked and there was no need to review or change any of the rules.

And the DSU can be changed only by consensus (including that of the US). This, and the chorus at the WTO from the generality of members about preserving "consensus decision- making", have foreclosed the option of authoritative interpretation of rules by recourse to vote.

Unhealthy precedent

Only a few members, other than the "banana" parties, made any comment at the DSB.

Of the few who did comment (and in effect tried to ensure that the rulings did not become a precedent to be followed), India said that the three-member panel had "done their best under very difficult circumstances," and Japan said they may have tried to find a logical way forward in this difficult case. Nevertheless, the two set out some views, trying to stake out a position that the way the banana problem has been handled would not be a precedent, and in their statements voiced some serious systemic concerns.

Egypt, Australia and Mauritius also made some comments of their own.

The rulings (the reconvened panel's ruling on the Ecuador reference about the WTO-compliance of the EC regime, the EC's own reference about its regime, which was turned down on procedure, and the panel's arbitration on the US trade impairment), and some of the reasoning of the original panel and the Appellate Body, have raised some serious questions about the WTO system, including its dispute settlement system.

In the first two banana disputes and panel hearings (at the old GATT), the US - though the prime mover behind Latin American complaints, in order to advance the interests of its corporations Chiquita, Dole and Del Monte, which has now moved to Mexico - did not raise the dispute itself.

The US became a complaining party only under the WTO.

But the main US claim (and also one on which the arbitrators have set the trade impairment amounts) was on the basis of the violation by the EC of its commitments in wholesale services under GATS.

The US had first raised a WTO complaint of its own, which it then withdrew, and put in a joint complaint with four Latin American banana producer/exporters (Ecuador, Guatemala, Honduras and Mexico) to raise a dispute where banana product imports and services issues were dealt with together.

Even without the US (and its rights under GATS), any WTO panel looking into the complaints of others probably would have had to agree that the EC regime had discriminated against these Latin American producer/exporters and impaired their right under GATT rules relating to trade in goods.

But without the US, the EC might probably have "compensated" the banana exporters (as they had done with regard to Colombia and Costa Rica, among others, after the Banana-II ruling, through the tariff quotas in the Uruguay Round schedule).

Legal interest

Nothing in Art. 3.3 or 3.7, nor any other provision of the DSU, contains any explicit requirement that a member must have a "legal interest" as a prerequisite for seeking a panel, the WTO banana panel said in ruling on Banana-III and whether the US could raise a complaint of GATT impairment.

The panel, upheld later by the Appellate Body, said the US could raise a dispute in relation to the import and export of bananas. WTO rules are concerned not with actual trade but with "competitive opportunities" (a gradual extension of the national-treatment requirement for imported goods in Art. III of GATT, that was brought about through successive panel interpretations, but accepted by the GATT Contracting Parties).

Banana panel-III then added: "With the increased interdependence of the global economy, which means that actions taken in one country are likely to have significant effects on trade and foreign direct investment flows (not a right or obligation covered by WTO rules) in others, Members have a greater stake in enforcing WTO rules than in the past... Thus in our view a Member's potential interest in trade in goods or services and its interest in a determination of rights and obligations under the WTO Agreement are each sufficient to establish a right to pursue a WTO dispute settlement proceeding."

The panel thus extended the remit of the WTO and interests of members.

If the WTO panel's view about GATT rulings that establish every country having a potential trade interest and competitivity, and interdependent economies and globalization, is correct - that every member of the WTO (whether or not it has a direct or substantial trade interest) has a standing to raise disputes, to ensure that other members and their trade laws conform to their WTO obligations - would it really be possible, in letter and spirit, to satisfy the tests (Art. 8 of the DSU) to name panellists?

And since the WTO system now reaches into what was previously the domain of autonomous and sovereign domestic decision-making of countries, is there a danger that all members under the dispute settlement system itself are "parties" to a dispute (whether or not so declared) and, guided by a secretariat and its "philosophy", will be upholding the rights of corporations in a globalizing world and interdependent economy, thus endangering the legitimacy of the system?

In seeking authorization for sanctions, the US did not go through the Art. 21.5 provision of the DSU to seek a ruling on whether the new EC regime was in compliance. It determined for itself that the EC regime was not, and sought authorization under Art. 22.6, which limited the arbitrators (against whose ruling there is no appeal) to an assessment of the level of damage and not whether there is compliance or not.

The arbitrators found a way around this by taking as their remit the need to assess the level of impairment, which had to be on the basis of the new regime and how far it complied with WTO obligations. While briefly outlining these in the arbitration ruling, the reconvened banana panel has done so in greater detail on Ecuador's 21.5 reference and the hearings to make a judgement on this, though technically one was independent of the other.

This may be "logical", but what likelihood is there - when it is a case of the US vs another, weaker trading partner- member against whom a ruling is given, and the US goes straightaway for retaliation (at the end of the implementation, as its trade officials have said it would) - that arbitrators would be able to adopt a similar approach to that on the banana issue and judge the nature of any changes in law made by a member to comply with a ruling but which the US thinks are not enough to meet its demands?

Damages and other oddities

In assessing the level of damages, while upholding the US right to claim presumption of nullification of GATT rights due to the EC regime, the arbitrators also have said "however, a Member's legal interest in compliance by other members does not, in our view, automatically imply that it is entitled to obtain authorization to suspend concessions..."

Given the mix of product and services impairment, and ruling out products shipped from the US to banana-producing countries and incorporated in the final product, and similarly ruling out management and other services provided to the banana-exporting countries, the arbitrators arrived at a figure of $191 million, using some "counter-factuals" of the US claims on the EC regime.

It is difficult to find from this the exact "product" trade damage content involved in the award to the US, though there is an impression left that the award is on GATS "impairment".

But given the findings on US GATT and GATS rights (as different from impairment for trade), the US, having suffered impairment in services, nevertheless was able to impose sanctions on goods imported from the EC.

There are some other oddities in this bundle of rulings.

On the EC's own self-reference under Art. 21.5 (where none of the others were prepared to provide their views or challenge the EC's views on the compliance of its regime with the ruling, or the effect of their not challenging the new EC regime through Art. 21.5 proceedings), the panel has said it was not clear from 21.5 whether an original respondent could or should be permitted to initiate such a proceeding.

The panel declined to provide its ruling on the relationships between Art. 21, 22 and 23 of the DSU raised by the EC, noting in this connection that "we are well aware of the controversy in the DSB over the interpretation of these Articles and their relationships, but we view that question as one best resolved by Members in the ongoing review process."

The panel also took note of the Japanese argument before it that allowing such a procedure presents certain practical problems or anomalies.

"However, we are also sympathetic to the concerns of India, also expressed as a third party, that in an appropriate case a respondent-initiated Art. 21.5 proceeding should be allowed. In our view, we would not rule out the possibility of using Art. 21.5 in such a manner, particularly when the purpose of such initiation was clearly the examination of the WTO-consistency of implementing measures."

In the ruling (on the level of US impairment), the reconvened panel as arbitrators has looked into the WTO- consistency of the EC's new regime, turning down the EC view that it should not do so in an arbitration proceeding against which there is no appeal on law.

In looking in the arbitration proceedings at the new EC regime's consistency, the arbitrators say they have taken into account the US brief - where the US has dedicated a "significant part" of its written submissions and oral statements to why the new regime continues most of the WTO- inconsistencies of the previous regime - and the fact that "to some extent" the EC has responded to the US allegations about the WTO-inconsistency.

Knotty issue

In Greek mythology, Gordius, King of Phrygia and father of Midas, was a peasant who was made king because he was the first to "drive" into town - after an oracle commanded the people to select as their ruler the first person to drive into the public square in a wagon. In gratitude, Gordius is said to have dedicated his wagon to Zeus and placed it in the temple grove, tying the pole of the wagon to the yoke with a rope of bark and entwining the knot intricately to hide the ends of the string.

Whoever managed to unravel the knot, it was said, would become the ruler of all Asia. Many tried but failed. According to legend, Alexander the Great came to Phrygia and, unable to unravel the knot, cut it with his sword, and then marched on to fulfil the popular saying, by battling and defeating the Persian King, Darius III, and conquering Asia (though only up to the west bank of the river Indus).

But the three-member banana panel (and arbitrators) has cut no Gordian knot in its rulings, nor are the rulings like "Solomon's judgement" - where Solomon ordered a baby (disputed between two claimants) to be cut, with one portion given to each claimant, when the natural mother stepped forward to save her baby. (SUNS4427)

* Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) in which the above article first appeared.

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