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US now complains of panels ‘interpreting’ WTO law

by Chakravarthi Raghavan

Geneva, 27 Aug 2001 - The WTO’s Dispute Settlement Body adopted last week a ruling by a dispute panel against the United States in a complaint by Canada against the United States over the latter’s counter-vailing duty law, Sec. 771(5) of the Tariff Act of 1930 as amended by the Uruguay Round Agreements Act (URAA), and the treatment under it of ‘export restraints’ of another country as a subsidy to be subject to countervailing duties.

The ruling and its automatic adoption under the ‘negative consensus’ requirements of the Dispute Settlement Understanding, however, will strengthen concerns about the functioning of the system on a number of systemic issues, including the role and influence of the secretariat in guiding panels in the dispute settlement process, the different standards adopted in ‘interpreting domestic law’ vis-a-vis international organizations, recourse of panels to minutes and summaries of the secretariat during the Uruguay Round as ‘negotiating history’, and perhaps dictionary hunting too to support a panel’s view of the ‘ordinary meaning’ of the words used.

Overall, the ruling also raises questions, being repeatedly voiced by Brazil in its continuing disputes with Canada over the SCM and the differing ways in which export subsidies of industrialized and developing countries are being dealt with - an issue that cannot be blamed on the DSU or its panel, but on those who negotiated these agreements in small conclaves, and at the end in December 1993 rolled them all up into one agreement with annexes that everyone had to accept as a whole.

The three-member panel (headed by former Hong Kong representative Michael Cartland) had given a finding that ‘export restraints’ as such don’t constitute a subsidy, but that to fall foul of the WTO’s rules in the Subsidies and Counter-vailing Measures (SCM) Agreement, there must be both a ‘financial contribution’ by the government and conferment of a ‘benefit’, both in effect directly related to and conditional on exports.

However, said the panel, the provisions of the US law, read in the light of the Statement of Administrative Actions (SAA), “does not mandate” treatment of export restraints as financial contributions - which would violate the SCM.

Though Canada’s request for a finding against the United States did not succeed, in effect (as the US complained), Canada succeeded in getting an ‘advisory opinion’ on how the US statute (the language of the statute and the SAA) could or could not be used by the US in any measure it takes.

Before the DSB, in what seems to be a growing practice, Canada thanked both the panel “and the Secretariat (emphasis added)” for their work in preparing the report. Canada also thanked the panel for its finding and for the report being “extremely helpful in clarifying and reaffirming” key principles underlying the SCM.

For its part, in a lengthy response, the United States complained that the DSU and the panel have been used by Canada to get an ‘advisory opinion’ on an interpretation of the provisions of an agreement - a role reserved to the Ministerial Conference and the General Council.

This last, about the usurping of the interpretation role by panels and the appellate body has so far been a complaint of developing countries, and of the EU in some panel rulings. With the US now joining in this complaint, in a case that went against it though, there is at least perhaps one issue on which there is a positive consensus against the panel system (and the secretariat’s) on this.

A dispute panel in the case against the United States over its ‘Section 301’ legislation (enabling private parties and the government to initiate or threaten to initiate proceedings under it) against other countries for their various alleged acts impeding US exports, had found the section as violating the WTO obligations and the requirement on the US to bring its domestic into compliance. However that panel took account of the SAA, and the US administration’s view, that the SAA represented Congressional guidance to US domestic courts and hence must be accepted as the US law.

The panel in that case (brought by the EU) had said that though “S.301-310” of the US trade law (the various provisions enabling an US administration to force trading partners to negotiate with it, under threat of trade sanctions) was a kind of Damocles sword against WTO members and a violation of their rights, the interpretation in domestic law of these provisions, as set out by the US administration as to how it would implement the provisions, made to Congress in the SAA, and reiterated before the panel by the US, provided sufficient trade security!

In an earlier case, against India over TRIPS and the mail-box system, brought by the United States, both the panel and the appellate body took the view that the Indian government about its domestic law and the delegated authority to subordinate bodies (and how it would be dealt with by Parliament and interpreted by Courts) was not sufficient to provide the ‘certainty’ for trade partners.

In the current dispute between Canada and the US, the panel has cites the SAA as saying that it “represents an authoritative expression by the Administration concerning its views regarding the interpretation and application of UR Agreements, both for the purposes of US international obligations and domestic law. Furthermore, the Administration understands that it is expectation of the Congress that future Administrations will observe and apply the interpretations and commitments set out in this Statement. Moreover, since this Statement will be approved by the Congress at the time it implements the UR agreements, the interpretation of those agreements included in this Statement carry particular authority.”

There are two problems with a WTO panel accepting such a view about the state of US law - namely, the Congressional view that US courts, in litigating disputes in domestic law should not interpret the URAA in terms of the US obligations under the UR agreement, but rather under the SAA.

Firstly, the SAA in fact is only binding on the administration that gave it. Future administrations could easily go back or take a different course, and only the Congress could then call that future administration to account.

And in the case of the US where treaties and other international undertakings of one administration can be repudiated by a successor and the George W. Bush administration in its short span has repudiated at least four or five international obligations - abiding by an SAA could not be assumed.

Secondly, even though not only US courts, but most domestic courts, defer generally to legislative views in such matters, in the US such a position would not prevail if the statute itself is challenged in terms of the ‘due process’ clause of the Bill of Rights, and only a constitutional amendment could reverse the court view. In other countries, such as India or Brazil and several others, the law cannot survive a challenge on the basis of violation of the Constitution or ‘fundamental rights’.

As such deference to the administration’s views before the WTO as to how US courts would in future interpret the URAA, but refuse to similar deference to other countries amounts in effect to a power-based system of interpretation over-riding the socalled rules-based trade system.

When the DSB adopted the S.301 ruling, not only did India point to this inconsistency, but even more Jamaica (one of the interveners in the S.301 case) raised it. Jamaica pointed to the inconsistency between the panel and appellate body rulings in the TRIPS case against India that “WTO-consistent administrative instructions and practices were not sufficient enough to remove legal uncertainty,” (a view that Jamaica supported) and that India must change its statutes to provide certainty. Jamaica pointed out to the DSB on 27 January 2000, that its view of the ruling was that the US undertaking to the panel as to how it would carry out the law in sections 301-310 in a ‘WTO consistent manner’ as set out in its SAA, had been accepted by the panel as embodying the US efforts to remove the inconsistency between its domestic law and the WTO obligations. Jamaica noted that this was inconsistent with the view taken by the appellate body in the case against India.

In the current case, in the dispute over the US obligations under SCM, the panel first interpreted the provisions of the SCM, and its requirement that a subsidy should involve both a financial contribution by the government and conferring of a benefit to the exporter.

In interpreting whether the export restraint results in a financial contribution by the government in terms of Article 1.1(a)1.(iv), and the meaning of the words ‘entrusts’ or ‘directs’, the panel (Footnotes 127 and 128 and FN 129, on pages 79 and 80 of its report) cites the dictionary meaning of ‘entrusts’ in The New Shorter Oxford English Dictionary Vol. 1993. For the meaning of ‘direct’, the panel cites the Concise Oxford Dictionary, Ninth Edition 1995.

The New Shorter Oxford English Dictionary came out in 1993, with a preface bearing March 1993. That dictionary says it is an “entirely new text” drawing on the Oxford English dictionary Second Edition, but also the result of fresh research into word meanings, history pronunciation etc.

The Uruguay Round agreements were ‘negotiated’ between 1987 and 1993 - but much of these texts were settled in 1991 (in the ‘Dunkel text’) and only a few like agriculture, anti-dumping etc were reopened in 1993 at the US insistence, and the texts finalised in December 1993. It is very doubtful how many of the trade negotiators did in fact have a copy of that dictionary to refer to ‘ordinary meanings’ (a requirement of the Vienna Law of Treaties for interpretation) of that edition. And even if the Concise dictionary represented an abridgement of the 1993 volume, the concise dictionary came out only in 1995, after the UR agreements entered into force.

Using these meanings, the panel ruled (para 8.44 of report) that the “ordinary meanings of the words ‘entrusts’ and ‘directs’ require an explicit and affirmative action of delegation or command” by a government in relation to a financial contribution to an exporter, and then goes to rule that an ‘export restraint’ is thus not a financial contribution in terms of the SCM.

Not satisfied with this, the panel goes on to use ‘negotiating history’ to buttress its view. It first cites that the US tried and failed to get a more extended meaning of ‘financial contribution’, and cites the various proposals tabled in the UR in this area, and then uses what it calls the positions of various countries “summarised in a note by the secretariat concerning the negotiating group’s meeting of 26-27 September.”

As trade diplomats of those times, involved in such negotiations explain it, the secretariat’s draft summaries, often coming out some weeks later, were probably used by delegations who did not attend the meeting to file reports back home. Most of those who did attend would look at the drafts to ensure that their own positions were correctly reflected or suggest changes. Very few, not even majors, looked at these notes or summaries of discussions at meetings, to check whether views of others had been correctly reflected or changed. In any event general practice in multilateral institutions is that only the delegations concerned could seek changes or correction of their views.

Even now, this appears to be the actual practice, even after the trade diplomats have begun to feel some ‘disquiet’ over the way secretariat drawn up minutes and reports are being used.

To use these notes as ‘negotiating history’ is something that is a kind of retrospective use never envisaged, not even at Marrakesh when, in the absence of a secretariat drawn up negotiating history for approval by the negotiators (as required by the Vienna Law of treaties), all the formal proposals were derestricted, along with the minutes, and shows the dangers of the secretariat going beyond a servicing role in the panel process.

In providing an interpretation of the meaning of the SCM, the panel then says (paras 8.73 and 8.74) that the agreement introduced a two-part definition of ‘financial contribution’ and ‘benefit’ and the two have to be satisfied to become an export subsidy.

The panel then concludes (para 8.75) that an export restraint, as defined in this dispute, cannot constitute a government-entrusted or government-directed provision of goods and thus not a financial contribution in the sense of Art.1.1.(a) of the SCM.

The panel then goes on to look at how the US CVD law, under the URAA, requires the treatment of export restraints as ‘financial contribution’ and whether it is mandatory or discretionary.

The panel notes the earlier provisions of the US law, as under the Tokyo Round code (which had no definition of subsidy as such), and the SCM which contains a definition and the US URAA to give effect to it. Sec.771(5)(D) of the US tariff law, as amended by the URAA, provides the definition of subsidy for US countervailing duty actions.

This provision by itself, the panel notes, did not deal with export restraint.

But it then goes on to discuss the Statement of Administrative Actions (SAA) that the administration sent to the Congress along with the implementing legislation, and the status of the SAA as an authoritative interpretative tool and the legal status granted to it as an interpretative authority in respect of the statute.

In the S.301 case, the US government representatives told the panel about how US domestic courts deferred to Congress in using such interpretative tools, and the assurance given in the SAA by the administration (the Clinton administration) on how it would use the powers in a manner consistent with the WTO obligations by seeking panel rulings, in cases where the investigations or complaints related to the WTO agreements.

In this case the panel has used the SAA, and what it says about the definition of subsidy, namely the administration’s intention to use the definition to have the same meaning as ‘bounty’ or ‘grant’ and ‘subsidy’ under prior versions of the statute, unless the past practice is inconsistent with the statutory definition. Except in this event, all subsides countervailable under current law would continue to be so under the URAA too, and that foreign government programs of indirect subsidy, countervailed under the US law (such as export restraints) would continue to be so in the future.

In effect holding this as the authoritative view of the US statute, namely, that indirect subsidies like export restraints could be subject to countervailing action, the panel however goes on to look into whether such actions by the administration would be mandatory or discretionary.

Under long-standing GATT and now WTO practice, only mandatory legal provisions could be held contrary to the WTO obligations and required to be changed. In the case of discretionary provisions, only measures of government taken under such provisions could be hit.

Canada had contended before the panel that the US each of the US ‘measures’ identified by it - the US statute, the SAA, the Preamble to the regulations, and the US practice - operate individually to require a mandatory treatment of ‘export restraints’ and ‘subsidies’, and thus against WTO.

In this view, the panel has held that Canada had not proved a US practice in these matters that could suggest that the US statute and SAA could be held to be a mandatory provision, and since no measure as such was involved, has provided no ruling.

The panel concludes (para 8.131) that “the statute - including as read in the light of the SAA and the Preamble - does not mandate the treatment of export restraints as financial contribution (which treatment we have found, however, would violate the SCM Agreement). Accordingly, we find that Section 771(5)(B)(iii) of the Tariff Act as such does not violate the SCM Agreement, and we reject the claims of Canada under SCM Article 1.”

In its conclusions and recommendations, the panel said (para 9.1)

        An export restraint as defined in this dispute cannot constitute government-entrusted or government-directed provision of goods in the sense of subparagraph (iv), and hence does not constitute a financial contribution in the sense of Article 1.1(a)of the SCM agreement;

        Section 771 (5)(B)(iii) [of the US CVD law as amended by the URAA] read in light of the SAA and the Preamble to the US CVD Regulations is not inconsistent with Article 1.1 of the SCM Agreement by “requiring the imposition of countervailing duties against practices that are not subsidies within the meaning of Article 1.1”.

In its statement before the DSB, the US was happy that the panel had found no US ‘measure’ to be violating US obligations, but complained strongly against the procedures and processes adopted by the panel to reach this view. The US complained that judged by its conclusions and recommendations, this was the only panel that had rendered a conclusion totally in the abstract.

The US added: “The panel’s protestations to the contrary notwithstanding, the panel did not ‘apply’ or ‘clarify’ the SCM Agreement. Instead it issued an ‘interpretation’ of the SCM Agreement, a function which Article IX:2 of the WTO Agreement reserves to the Ministerial Conference and the General Council.”

The panel’s views on subsidy is just “obiter dictum”, beyond the panel’s authority, and hence concluded the US, no useful purpose would be served by having recourse to an appeal.

But no one should feel reassured by this statement from the most powerful member.

Come a future dispute, after some years, against a developing country, the US would have no worries about consistency and try to use this as a precedent, and a future panel (guided by the secretariat) can be depended upon to use the same reasonings and arguments as now.

The DSU needs to be reformed and panels and secretariat denuded of usurped powers to lay down and interpret WTO law. This needs to be the priority, even ahead of implementation issues. – SUNS4957

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

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