Wobbly legs of the rule-based WTO

Another salvo in the increasingly fractious banana dispute was fired with the US' announcement of retaliatory sanctions on a range of products from the EU. Amidst such manoeuvrings, what the dispute has brought out is the flawed drafting of WTO agreements, which could undermine confidence in the "rule- based" multilateral trading system.

by Chakravarthi Raghavan

GENEVA: The US in effect slapped 100% tariffs on some $520 million worth of imports from the European Union members in retaliation over the EU banana regime, but did so in what the Wall Street Journal (citing unnamed US trade officials) reported as a "crafty move" that would enable Washington to argue it was not circumventing the WTO.

The US announced that starting 3 March, it would withhold "final clearance" (by customs) on products imported from the EU of more than $500 million in value figuring on the US hitlist.

The products include pork (except hams, shoulders and bellies); pecorino cheese from sheep's milk; sweet biscuits, waffles and wafers; bath preparations other than bath salts; candles; propylene plates sheets, film and foil; plastic handbags; small articles made of plastic; uncoated felt paper and paperboard in rolls or sheets; folding cartons, boxes and cases of non-corrugated paper and paperboard; lithograph on paper or paperboard; cashmere sweaters and pullovers; bed linen; lead-acid storage batteries; and electrothermic coffee- or tea-makers.

Trade sources said the items seem to be those exported from countries (except Denmark and the Netherlands, which have opposed the EC banana regime) that have promoted such EC preferences or those like Italy seen as not sufficiently pressuring other EU members to yield to the US.

In Brussels, the US announcement was greeted with outrage. The EC Vice-President and Trade Commissioner, Sir Leon Brittan, denounced the action as "unacceptable and unlawful", and contrary to the US' GATT obligations under Art. I (MFN) and Art. II (bound duties) as well as to Art. 22.6 of the WTO's Dispute Settlement Understanding which prohibits any suspension of concessions during the course of arbitration. The US action, Sir Leon said, is a form of sanctions without any WTO authorization. The EC, he added, would immediately demand consultations and discuss the EC's own response with the EU members.

But at Geneva, the Director-General of the WTO, Renato Ruggiero, issued a statement (after the US announcement on "final clearance" by customs) saying the WTO's dispute settlement system "can provide a legal answer to all the legal issues involved in this dispute" and the system was "now moving us towards a final resolution" of the long-running banana dispute. He asked the US and the EC to act "with a positive spirit" to find a mutually acceptable solution as soon as possible.

But trade diplomats from other countries not directly embroiled in the banana dispute, and trade observers outside, said that the major flaws and faulty drafting of the WTO and its agreements were bringing the system itself into disrepute, and this (rather than new issues and new negotiations) should be the focus of attention of all members.

The US announcement in Washington said that, subject to the ruling of the "arbitrators" on the level of damages, the US would collect effective 4 March, 100% tariffs on the products announced already to be on its hitlist.

If the WTO arbitrators set a value lower than $520 million on which the US would be entitled to withdraw MFN tariff concessions from the EU, and this is automatically approved by the WTO Dispute Settlement Body, the US would modify the list of products or the duties leviable to keep within the ceiling, but collect the duties effective 4 March.

Under the US customs rules and procedures for so-called "suspension of customs liquidation", the US customs authorities would require importers of any products on the US hitlist subject to the 100% tariff, imported into the US after the announcement, to either deposit an amount equivalent to the value of the duty before customs clearance (but conditional on repayment or reimbursement if no duty is leviable) or execute a bond covering that amount.

In practical terms, this would mean that no US importer would import these goods or clear them (even perishables like the Italian cheese) from customs - and the exporters would then incur costs for holding them in the customs warehouse!

Either way, the imports will be uneconomic.

"Super 301"

The US had used this tactic of withholding final customs clearance when it used the "Super 301" against Japan over the auto-parts dispute. But Japanese car makers, anticipating this, had shipped cars to the US and thus did not suffer too much (and may even have benefited) until the dispute was resolved by US-Japan talks.

In the only other publicized instance of using the "Super 301", the US asked India to negotiate under this threat on opening up its domestic insurance markets to foreign suppliers.

India refused to negotiate. But the US imposed no sanctions.

Whether there had been a private deal between New Delhi and Washington that India would open up its insurance sector after it is able to get Parliament to change the nationalization law, is not clear.

Both the US and the EC, and now some developing countries too, have been imposing "provisional" duties on imports after preliminary findings of "dumping" - even if the final determination takes a long time. In the meanwhile, the product targeted in the dumping investigation loses its market; and the importing country is able to use the provisional levy to force exporters to negotiate and agree on price undertakings (in return for which the anti-dumping investigations and provisional duties can be terminated).

The EC has used this route to levy provisional duties on cotton and cotton yarn imports. It has started investigation and levied provisional duties thrice, but in each case the final determination could not be made as the Commission's actions on behalf of European industry failed to be endorsed by the EU ministers.

But such provisional action is expressly allowed under Art. 7.2 of the anti-dumping agreement. In the case of trade retaliation, under Art. 22.6, there is no such authority, and even an implied prohibition.

Banana split

In the banana case, the US had invoked Art. 22.6 of the DSU and sought authorization of the WTO's DSB for withdrawal or suspension of tariff concessions or other obligations for an amount equivalent to $520 million determined by the US as the level of damage caused to its trade interests by the EC. The EC, the US unilaterally determined, has failed to implement the WTO banana ruling in its new banana regime and measures put in place effective 1 January.

The EC asked for arbitration on the level of damages, and this was referred for arbitration to the reconvened banana panel which was looking into the new EC regime and its compliance with its WTO/GATT obligations as determined in the WTO banana panel ruling of 1997.

The reconvened banana panel is seized in this regard with an Ecuadorian request for a ruling on the EC compliance, as well as a separate EC request on the same subject. That ruling is due by 12 April.

But the same panel was asked to sit as arbitrators and rule on the level of trade damage claimed by the US. That ruling was due on 2 March.

But in a communication to the DSB issued on the evening of 2 March, the arbitrators (without asking for more time, which is not envisaged under the rules) effectively have put off handing down a ruling on this. They issued an "initial decision" to the US and the EC, giving a ruling on the scope of their work and the methodology and calculations of the US in claiming damages, and seeking additional information from both parties.

The arbitrators also indicated that they would take a final view on the level of trade damage to the US based on the WTO-inconsistency, if any, of the revised EC banana regime and, if relevant, determine the level of suspension of concessions to be authorized. The arbitrators' decision on the level of damages is not appealable to the Appellate Body, though the decision on the compliance of the EC measures with the WTO ruling could be taken to the Appellate Body by the EC or Ecuador (the two parties before the reconvened panel).

The communication of the arbitrators has indicated that they would take a view on the EC regime's compliance with the WTO and then assess the damages, if any.

But US trade negotiator Peter Scher, who has been negotiating a compromise with the EC, was quoted in the WSJ as saying: "We won. The EU may not like the fact that we won, but we won."

The WSJ report about the US announcement on withholding final clearance from customs of the goods on its hit-list being a "crafty move" came immediately after the quote on Scher - which in US media practice suggests that the unnamed US officials describing their move as a crafty one that would not violate WTO rules could have been Scher or one of the USTR officials.

The EC has indicated that while it would respond against the US, it would not do so by exercise of the same unilateralism it condemns the US side of. Separately, it is pursuing through a panel the challenge to US trade law sections 301-310. It could also do so in relation to the latest US response.

The EC had brought before the WTO General Council a request for an authoritative interpretation of Articles 21.5 and 22.6 of the DSU. While a consensus decision on this was blocked, only India and the EC were willing to take it to a vote (as envisaged in the WTO provision which calls for a three-fourths majority vote on interpretations), but other WTO members were unwilling. The EC has kept the issue pending, and could get the Council reconvened.

The insistence of most members on a consensus decision even on an authoritative interpretation at that time was music to the US' ears. So much so that, after the end of that General Council meeting, the US ambassador, Ms. Rita Hayes, was seen by others in the chamber to be going up to the Malaysian delegate (who spoke at the DSB for ASEAN and insisted on consensus) to thank him for the stand.

The issue has been referred to the DSB, to be taken up as a priority item during its ongoing review of the DSU. And the DSB is due to meet on this on 16 March.

But any change to the DSU rules that the large majority of members may feel is required needs specifically a consensus - and the US has indicated it would not agree to such a consensus.


However, these and other problems show how ill-drafted the WTO's agreements are. In the last days of the Uruguay Round negotiations in November-December 1993, small groups of countries met inside the GATT (now WTO) building, but more often outside (in the US, EC, Hong Kong and Canadian missions), and negotiated various individual agreements, resulting in the same or more or less similar provisions in each being put in different words.

They were all then slapped together and put as annexed agreements to the WTO Agreement. Inconsistencies were noted and brought up by some delegations during the stage (prior to Marrakesh) of scrutiny of the legal texts. But the GATT secretariat officials and the US and other majors discouraged any rectification.

The outcome has been that a definite treaty and agreement, the WTO's annexed GATT 1994, has no legal text of its own - but is to be deduced by reference to the provisional GATT 1947 and the various protocols, understandings and decisions of the Contracting Parties from 1947.

And yet the Appellate Body of the WTO in one ruling, advancing the argument of cumulated obligations under different agreements, has said that the negotiators, in negotiating the various agreements and adopting differing language, had done so to give different meanings!

No wonder that while trade diplomats accredited to the WTO swear by the "rule-based" system and its security - and there are attempts to "coopt" compliant Third World trade officials and some NGOs based around Geneva - civil society in the developing world, including the small and medium enterprises and businesses, has begun to lose faith in the system and its fairness or equity. (Third World Economics No. 205, 16-31 March 1999)

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