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TWN Info Service on WTO and Trade Issues (June12/01)
14 June 2012
Third World Network

WTO upholds ruling in clove cigarette dispute
Published in SUNS #7346 dated 10 April 2012

Geneva, 5 Apr (Kanaga Raja*) -- The Appellate Body of the World Trade Organisation (WTO) has upheld an earlier panel ruling that measures imposed by the United States prohibiting imports of clove cigarettes from Indonesia were inconsistent with its WTO obligations.

In handing down this ruling, the Appellate Body (AB) made clear that in terms of its ruling neither the TBT (Technical Barriers to Trade) nor any other covered agreement of the WTO comes in the way of members devising and implementing public health policies in general and anti-tobacco policies in particular, only that such policies must be in accord with non-discriminatory treatment (as between imports and domestically produced products).

The US measures at issue banned imports of clove flavoured cigarettes (mostly exported by Indonesia and imported into the US), while allowing directly competitive and domestically produced menthol flavoured cigarettes.

The AB upheld the panel's findings, though on different reasoning, that clove cigarettes and menthol cigarettes were ‘like' products, and the different treatments meted out by the US legislation between imported clove cigarettes and domestically produced menthol cigarettes, violated the US obligations on non-discriminatory treatment as between imported and domestic like products, in terms of Article 2.1 of the Technical Barriers to Trade (TBT) Agreement.

The AB also upheld, albeit for different reasons, the panel ruling of US violations of Article 2.12 of the TBT Agreement, namely, that giving a period of only three months for Indonesia to adjust its production methods to conform with US regulations was not a ‘reasonable period of time'. In reaching this conclusion, the panel, as the AB, took account of para 5.2 (on implementation issues) of the 2001 Doha Ministerial decision. The AB however disagreed with the panel that this decision amounted to an interpretative decision by the Ministerial Conference (binding on all members), but rather as constituting a "subsequent agreement" on the interpretation of a provision of a covered agreement under Article 31(3)(a) of the Vienna Convention that the panel or AB could draw upon for the interpretation of the term ‘reasonable interval' in Article 2.12 of the TBT Agreement.

In reaching its conclusion on the US measures as violating Article 2.1 of the TBT Agreement, the AB said: "In reaching this conclusion, we wish to clarify the implications of our decision. We do not consider that the TBT Agreement or any of the covered agreements is to be interpreted as preventing Members from devising and implementing public health policies generally, and tobacco-control policies in particular, through the regulation of the content of tobacco products, including the prohibition or restriction on the use of ingredients that increase the attractiveness and palatability of cigarettes for young and potential smokers. Moreover, we recognize the importance of Members' efforts in the World Health Organization on tobacco control.

"While we have upheld the Panel's finding that the specific measure at issue in this dispute is inconsistent with Article 2.1 of the TBT Agreement, we are not saying that a Member cannot adopt measures to pursue legitimate health objectives such as curbing and preventing youth smoking. In particular, we are not saying that the United States cannot ban clove cigarettes: however, if it chooses to do so, this has to be done consistently with the TBT Agreement. Although Section 907(a)(1)(A) (of the US law) pursues the legitimate objective of reducing youth smoking by banning cigarettes containing flavours and ingredients that increase the attractiveness of tobacco to youth, it does so in a manner that is inconsistent with the national treatment obligation in Article 2.1 of the TBT Agreement as a result of the exemption of menthol cigarettes, which similarly contain flavours and ingredients that increase the attractiveness of tobacco to youth, from the ban on flavoured cigarettes."

In the ruling issued on 4 April, the AB recommended that the Dispute Settlement Body (DSB) request the United States to bring its measure, found in the AB report and in the panel report as modified by the AB report, to be inconsistent with the Agreement on Technical Barriers to Trade, into conformity with its obligations under that Agreement.

The United States had appealed the panel ruling on certain issues of law and legal interpretations developed in the panel report.

Before the panel, Indonesia claimed that the United States acted inconsistently with its substantive and procedural obligations under the Agreement on Technical Barriers to Trade (TBT Agreement) and the General Agreement on Tariffs and Trade 1994 (GATT 1994). In particular, Indonesia claimed that Section 907(a)(1)(A) of the United States Federal Food, Drug and Cosmetic Act (FFDCA) - as amended by the Family Smoking Prevention and Tobacco Control Act (FSPTCA) - was inconsistent with Articles 2.1, 2.2, 2.5, 2.8, 2.9, 2.10, 2.12, and 12.3 of the TBT Agreement. Alternatively, Indonesia claimed that Section 907(a)(1)(A) was inconsistent with Article III: 4 of the GATT 1994, and could not be justified under Article XX(b) thereof.

According to the AB report, the panel, in its report circulated on 2 September 2011, found that Section 907(a)(1)(A) was inconsistent with Article 2.1 of the TBT Agreement because it accorded to imported clove cigarettes less favourable treatment than that accorded to like menthol cigarettes of national origin. Having found that Section 907(a)(1)(A) was inconsistent with Article 2.1 of the TBT Agreement, the panel declined to rule on Indonesia's alternative claim under Article III: 4 of the GATT 1994 and on the United States' related defence under Article XX(b) of the GATT 1994.

The panel also found, amongst others, that the United States acted inconsistently with Article 2.12 of the TBT Agreement by not allowing an interval of no less than six months between the publication and the entry into force of Section 907(a)(1)(A).

Conversely, said the Appellate Body, the panel rejected Indonesia's claims under Articles 2.2, 2.5, 2.8, 2.9.3, 2.10, and 12.3 of the TBT Agreement. More specifically, the panel found that Indonesia failed to demonstrate that Section 907(a)(1)(A) was inconsistent with Article 2.2 of the TBT Agreement to the extent that its ban on clove cigarettes was more trade restrictive than necessary to fulfil the legitimate objective of reducing youth smoking, taking account of the risks non-fulfilment would create. The panel also concluded that Indonesia failed to demonstrate that the United States had acted inconsistently with Article 2.5 of the TBT Agreement, because Indonesia did not request the United States to explain the justification for Section 907(a)(1)(A) "in terms of Articles 2.2 and 2.4 of the TBT Agreement". The panel also found that, in the absence of any evidence or arguments that "urgent problems of safety, health, environmental protection or national security" arose or threatened to arise upon adoption of Section 907(a)(1)(A), Article 2.10 of the TBT Agreement would not be applicable to the present dispute.

The panel had recommended that the DSB request the United States to bring Section 907(a)(1)(A) into conformity with its obligations under Articles 2.1, 2.9.2, and 2.12 of the TBT Agreement.

On appeal, the Appellate Body said, the United States claims that the panel erred in finding that the United States acted inconsistently with Article 2.1 of the TBT Agreement. In particular, the United States claims that the panel erred in finding that imported clove cigarettes and domestic menthol cigarettes were like products within the meaning of Article 2.1. The United States also challenges the panel's finding that Section 907(a)(1)(A) accords to imported clove cigarettes less favourable treatment than that accorded to domestic like products. The United States claims further that the panel acted inconsistently with Article 11 of the DSU in reaching these findings.

The United States also claims that the panel erred in finding that the United States acted inconsistently with Article 2.12 of the TBT Agreement by not allowing an interval of no less than six months between the publication and the entry into force of Section 907(a)(1)(A). The United States conditionally appeals the panel's reliance on the jurisprudence developed under Article XX(b) of the GATT 1994 in its assessment of Indonesia's claims under Article 2.2, should Indonesia appeal the panel's finding that the United States did not act inconsistently with Article 2.2 of the TBT Agreement.

According to the Appellate Body, Indonesia did not raise an appeal of any issues under Article 2.2 of the TBT Agreement. Therefore, the condition on which the United States bases its appeal of the panel's findings under Article 2.2 is not met, it added.

In its analysis, the Appellate Body noted that the dispute concerns Section 907(a)(1)(A) of the FFDCA. Section 907(a)(1)(A) was added to the FFDCA by Section 101(b) of the FSPTCA, and became law on 22 June 2009. Under Section 907(a)(1)(A), beginning three months after the enactment of the FSPTCA - that is, as from 22 September 2009: ... a cigarette or any of its components (including the tobacco, filter, or paper) shall not contain, as a constituent ... or additive, an artificial or natural flavour (other than tobacco or menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, pineapple, vanilla, coconut, liquorice, cocoa, chocolate, cherry, or coffee, that is a characterizing flavour of the tobacco product or tobacco smoke.

The panel had identified the products at issue in this dispute as being clove cigarettes and menthol cigarettes. The panel found that Section 907(a)(1)(A) of the FFDCA is a "technical regulation" within the meaning of Annex 1.1 of the TBT Agreement, and that it is inconsistent with Article 2.1 of the TBT Agreement because it accords to imported clove cigarettes less favourable treatment than that accorded to like menthol cigarettes of national origin.

According to the Appellate Body, Article 2.1 of the TBT Agreement provides that, with respect to their central government bodies: Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country.

In this dispute, the Appellate Body said, it is called upon to clarify the meaning of the national treatment obligation. For a violation of the national treatment obligation in Article 2.1 to be established, three elements must be satisfied: (i) the measure at issue must be a technical regulation; (ii) the imported and domestic products at issue must be like products; and (iii) the treatment accorded to imported products must be less favourable than that accorded to like domestic products.

The United States' appeal concerns only the second and the third elements of this test of inconsistency, namely, whether the products at issue are like and whether the treatment accorded to clove cigarettes imported from Indonesia is less favourable than that accorded to like domestic products in the United States. The preamble of the TBT Agreement is part of the context of Article 2.1 and also sheds light on the object and purpose of the Agreement, said the Appellate Body, adding that it found guidance for the interpretation of Article 2.1, in particular, in the second, fifth, and sixth recitals of the preamble of the TBT Agreement.

In its analysis, the Appellate Body said that the panel had found that clove cigarettes and menthol cigarettes are like products within the meaning of Article 2.1 of the TBT Agreement. The panel reached this conclusion after having evaluated the traditional "likeness" criteria (physical characteristics, end-uses, consumer tastes and habits, and tariff classification), "bearing in mind that the measure at issue is a technical regulation, with the immediate purpose of regulating cigarettes having a characterizing flavour, with a view to attaining the legitimate objective of reducing youth smoking".

The Appellate Body said: "We agree with the Panel that the interpretation of the term ‘like products' in Article 2.1 of the TBT Agreement should start with the text of that provision in the light of the context provided by Article 2.1 itself, by other provisions of the TBT Agreement, and by the TBT Agreement as a whole. We also agree that the relevant context includes the fact that Article 2.1 applies to technical regulations, which are documents laying down the characteristics of products. We further note that the preamble of the TBT Agreement recognizes Members' right to regulate through technical regulations. As explained below, however, we are not persuaded that these contextual elements and the object and purpose of the TBT Agreement suggest that the interpretation of the concept of ‘like products' in Article 2.1 of the TBT Agreement cannot be approached from a competition-oriented perspective."

The AB noted that the balance that the preamble of the TBT Agreement strikes between, on the one hand, the pursuit of trade liberalization and, on the other hand, Members' right to regulate, is not, in principle, different from the balance that exists between the national treatment obligation of Article III and the general exceptions provided under Article XX of the GATT 1994. The second recital of the preamble links the two Agreements by expressing the "desire" "to further the objectives of the GATT 1994", while the "recognition" of a Member's right to regulate in the sixth recital is balanced by the "desire" expressed in the fifth recital to ensure that technical regulations, standards, and conformity assessment procedures do not create unnecessary obstacles to international trade.

"We note, however, that in the GATT 1994 this balance is expressed by the national treatment rule in Article III: 4 as qualified by the exceptions in Article XX, while, in the TBT Agreement, this balance is to be found in Article 2.1 itself, read in the light of its context and of its object and purpose."

The panel was also of the view that the absence of a provision like Article III: 1 of the GATT 1994 in the TBT Agreement would prevent the transposition of the GATT competition oriented approach to likeness to Article 2.1 of the TBT Agreement. Article III: 1 provides that internal fiscal and regulatory measures "should not be applied to imported or domestic products so as to afford protection to domestic production".

However, the Appellate Body said, it did not base its conclusion that "likeness" in Article III: 4 is about the "nature and extent of a competitive relationship between and among products" exclusively on the "general principle" expressed in Article III: 1. Rather, the Appellate Body further clarified, "the word 'like' in Article III: 4 is to be interpreted to apply to products that are in ... a competitive relationship", because it is "products that are in a competitive relationship in the marketplace [that] could be affected through treatment of imports 'less favourable' than the treatment accorded to domestic products".

The AB agreed that the very concept of "treatment no less favourable", which is expressed in the same words in Article III: 4 of the GATT 1994 and in Article 2.1 of the TBT Agreement, informs the determination of likeness, suggesting that likeness is about the "nature and extent of a competitive relationship between and among products". Indeed, the concept of "treatment no less favourable" links the products to the marketplace, because it is only in the marketplace that it can be determined how the measure treats like imported and domestic products.

However, in determining likeness based on the competitive relationship between and among the products, a panel should discount any distortive effects that the measure at issue may itself have on the competitive relationship, and reserve the consideration of such effects for the analysis of less favourable treatment. In such cases, a panel should determine the nature and the extent of the competitive relationship for the purpose of determining likeness in isolation from the measure at issue, to the extent that the latter informs the physical characteristics of the products and/or consumers' preferences.

In the light of the above, the Appellate Body disagreed with the panel that the text and context of the TBT Agreement support an interpretation of the concept of "likeness" in Article 2.1 of the TBT Agreement that focuses on the legitimate objectives and purposes of the technical regulation, rather than on the competitive relationship between and among the products. It further observed that measures often pursue a multiplicity of objectives, which are not always easily discernible from the text or even from the design, architecture, and structure of the measure. Determining likeness on the basis of the regulatory objectives of the measure, rather than on the products' competitive relationship, would require the identification of all the relevant objectives of a measure, as well as an assessment of which objectives among others are relevant or should prevail in determining whether the products are like.

"It seems to us that it would not always be possible for a complainant or a panel to identify all the objectives of a measure and/or be in a position to determine which among multiple objectives are relevant to the determination of whether two products are like, or not. The appeal by the United States of the Panel's determination of consumer tastes and habits, which we address further below, highlights the difficulties that arise when attempting to determine likeness based on the regulatory purposes of the measure rather than on the competitive relationship between and among products."

The Appellate Body said it does not consider that the concept of "like products" in Article 2.1 of the TBT Agreement lends itself to distinctions between products that are based on the regulatory objectives of a measure. "As we see it, the concept of ‘like products' serves to define the scope of products that should be compared to establish whether less favourable treatment is being accorded to imported products... As we consider further below in respect of the United States' appeal of the Panel's less favourable treatment finding, distinctions among products that have been found to be like are better drawn when considering, subsequently, whether less favourable treatment has been accorded, rather than in determining likeness, because the latter approach would alter the scope and result of the less favourable treatment comparison."

The Appellate Body considered that the regulatory concerns underlying a measure, such as the health risks associated with a given product, may be relevant to an analysis of the "likeness" criteria under Article III: 4 of the GATT 1994, as well as under Article 2.1 of the TBT Agreement, to the extent they have an impact on the competitive relationship between and among the products concerned. The interpretation of the concept of "likeness" in Article 2.1 has to be based on the text of that provision as read in the context of the TBT Agreement and of Article III: 4 of the GATT 1994, which also contains a similarly worded national treatment obligation that applies to laws, regulations, and requirements including technical regulations.

"In the light of this context and of the object and purpose of the TBT Agreement, as expressed in its preamble, we consider that the determination of likeness under Article 2.1 of the TBT Agreement, as well as under Article III: 4 of the GATT 1994, is a determination about the nature and extent of a competitive relationship between and among the products at issue. To the extent that they are relevant to the examination of certain ‘likeness' criteria and are reflected in the products' competitive relationship, regulatory concerns underlying technical regulations may play a role in the determination of likeness."

On the claims by the United States that the panel committed errors in its assessments of the end-uses of clove and menthol cigarettes and of the tastes and habits of consumers of clove and menthol cigarettes, as well as to the United States' claim that the panel acted inconsistently with Article 11 of the DSU in its assessment of consumer tastes and habits, the Appellate Body noted that the panel found that both clove and menthol cigarettes have the same end-use, that is, "to be smoked", and disagreed with the United States that the end-uses of a cigarette include "satisfying an addiction to nicotine" and "creating a pleasurable experience associated with the taste of the cigarette and the aroma of the smoke".

The United States claimed that a panel, when conducting an end-use analysis, must consider the different uses of the products and not just the use that is a "common denominator" of the products in question. According to the United States, it is undisputed that both clove and menthol cigarettes are used for smoking, but the panel improperly limited its analysis to considering only this common use between the products while ignoring other relevant end-uses. Menthol cigarettes, the United States posits, are used to "satisfy the nicotine addictions of millions of smokers in the United States", whereas clove cigarettes are primarily used "for experimentation and special social settings" and generally are not smoked to satisfy nicotine addiction in the US market.

Indonesia responded that the panel did not err in finding that the end-use of clove and menthol cigarettes is "to be smoked". In Indonesia's view, moreover, even assuming arguendo that the end-uses put forward by the United States were pertinent ones, the United States presented no evidence showing that clove and menthol cigarettes were not both capable of performing the end-uses of satisfying a nicotine addiction and creating a pleasurable experience.

The Appellate Body said it has also considered that, while each criterion addresses, in principle, a different aspect of the products involved, which should be examined separately, the different criteria are "interrelated" and "not mutually exclusive", so that certain evidence may well fall under more than one criterion. Thus, in its view, that consumers smoke to satisfy an addiction or that they smoke for pleasure are relevant to the examination of both end-uses and consumer tastes and habits, although different aspects are addressed in the analysis of these two separate "likeness" criteria.

It does not consider that it is correct to characterize "satisfying an addiction to nicotine" and "creating a pleasurable experience associated with the taste of the cigarette and the aroma of the smoke" as consumer tastes and habits and not end-uses. To the extent that they describe possible functions of the products, rather than the consumers' appreciation of these functions, they represent, in fact, different end-uses of the products at issue, rather than consumer tastes and habits. In its view, the panel did not perform an analysis of the end-uses of clove and menthol cigarettes that was sufficiently comprehensive and specific to provide significant indications as to the likeness of these products.

The Appellate Body disagreed with the panel that the end-use of cigarettes is simply "to be smoked" and agreed with the United States that there are more specific end-uses of cigarettes such as "satisfying an addiction to nicotine" and "creating a pleasurable experience associated with the taste of the cigarette and the aroma of the smoke". It considered, however, that, based on the panel's findings referred to above, it can be concluded that both clove and menthol cigarettes share the end-uses of "satisfying an addiction to nicotine" and "creating a pleasurable experience associated with the taste of the cigarette and the aroma of the smoke". Accordingly, it considered that the more specific products' end-uses put forward by the United States also support the panel's overall finding that clove and menthol cigarettes are like products.

As to consumer tastes and habits, the Appellate Body, noting that it had disagreed with the panel's approach to interpreting the concept of "likeness" in Article 2.1 of the TBT Agreement in the light of the regulatory objectives of the measure, rather than based on the competitive relationship between and among the products, said it also considers that the panel was wrong in confining its analysis of consumer tastes and habits to those consumers (young and potential young smokers) that are the concern of the objective of the regulation (to reduce youth smoking).

In an analysis of likeness based on products' competitive relationship, it is the market that defines the scope of consumers whose preferences are relevant. The proportion of youth and adults smoking different types of cigarettes may vary, but clove, menthol, and regular cigarettes are smoked by both young and adult smokers. To evaluate the degree of substitutability among these products, the panel should have assessed the tastes and habits of all relevant consumers of the products at issue, not only of the main consumers of clove and menthol cigarettes, particularly where it is clear that an important proportion of menthol cigarette smokers are adult consumers, it added.

The Appellate Body disagreed with the panel that the legitimate objective of Section 907(a)(1)(A), that is, reducing youth smoking, delimits the scope of the consumers whose tastes and habits should be examined to young smokers and potential young smokers.

On whether the panel's failure to evaluate the tastes and habits of current adult consumers of menthol cigarettes undermines the proposition that there is a sufficient degree of substitutability between clove and menthol cigarettes to support an overall finding of likeness under Article 2.1 of the TBT Agreement, the Appellate Body said it considered that, in order to determine whether products are like under Article 2.1 of the TBT Agreement, it is not necessary to demonstrate that the products are substitutable for all consumers or that they actually compete in the entire market. Rather, if the products are highly substitutable for some consumers but not for others, this may also support a finding that the products are like.

The Appellate Body said that the panel's consideration of consumer tastes and habits was too limited. At the same time, the mere fact that clove cigarettes are smoked disproportionately by youth, while menthol cigarettes are smoked more evenly by young and adult smokers does not necessarily affect the degree of substitutability between clove and menthol cigarettes. The panel found that, from the perspective of young and potential young smokers, clove-flavoured cigarettes and menthol-flavoured cigarettes are similar for purposes of starting to smoke. "We understand this as a finding that young and potential young smokers perceive clove and menthol cigarettes as sufficiently substitutable. This, in turn, is sufficient to support the Panel's finding that those products are like within the meaning of Article 2.1 of the TBT Agreement, even if the degree of substitutability is not the same for all adult smokers."

"In the light of the above, we are of the view that, while the Panel should not have limited its analysis of consumer tastes and habits to young and potential young smokers to the exclusion of current adult smokers, this does not undermine the Panel's finding regarding consumer tastes and habits and its ultimate finding of likeness. This is so because the degree of competition and substitutability that the Panel found for young and potential young smokers is sufficiently high to support a finding of likeness under Article 2.1 of the TBT Agreement."

On the claim by the United States that the panel acted inconsistently with Article 11 of the DSU when it reached the conclusion that clove cigarettes and menthol cigarettes are perceived similarly by the consumers at issue in this case, and that it disregarded critical evidence on how consumers actually use and perceive the products at issue in the relevant market, the Appellate Body observed that Article
11 of the DSU requires a panel to make an objective assessment of the matter before it, including an objective assessment of the facts of the case. Thus, Article 11 requires a panel to "consider all the evidence presented to it, assess its credibility, determine its weight, and ensure that its factual findings have a proper basis in that evidence." In addition, panels "are not required to accord to factual evidence of the parties the same meaning and weight as do the parties."

In this respect, the Appellate Body will not "interfere lightly" with a panel's fact-finding authority, and will not "base a finding of inconsistency under Article
11 simply on the conclusion that [it] might have reached a different factual finding".

In sum, the Appellate Body said it is not persuaded that the reasons advanced by the panel for not relying on the surveys submitted by the parties justify the cursory treatment given by the panel to these surveys. Nevertheless, in its view, the panel's error does not amount to a violation of Article 11 of the DSU, considering that the evidence that the panel did not engage with does not have material consequences for the panel's finding that consumer tastes and habits indicate that clove and menthol cigarettes are sufficiently substitutable in certain segments of the market, and does not, therefore, undermine the panel's finding that clove and menthol cigarettes are like products under Article 2.1 of the TBT Agreement.

In its conclusions on "like products", the Appellate Body said it had disagreed with the panel's interpretation of the concept of "like products" in Article 2.1 of the TBT Agreement, which focuses on the purposes of the technical regulation at issue, as separate from the competitive relationship between and among the products. In contrast, it had concluded that the context provided by Article 2.1 itself, by other provisions of the TBT Agreement, by the TBT Agreement as a whole, and by Article III: 4 of the GATT 1994, as well as the object and purpose of the TBT Agreement, support an interpretation of the concept of "likeness" in Article 2.1 that is based on the competitive relationship between and among the products and that takes into account the regulatory concerns underlying a technical regulation, to the extent that they are relevant to the examination of certain likeness criteria and are reflected in the products' competitive relationship.

As a consequence of its interpretative approach to the concept of "like products" in Article 2.1 of the TBT Agreement, the Appellate Body said it had also disagreed with the panel's decision to examine the extent of substitutability of clove and menthol cigarettes from the perspective of a limited group of consumers, that is, young smokers and potential young smokers. It had, nevertheless, considered that the panel's error does not vitiate the conclusion that there is a sufficient degree of substitutability between clove and menthol cigarettes to support an overall finding of likeness under Article 2.1 of the TBT Agreement. It had also determined that the panel's decision that it could not rely on certain evidence submitted by the parties did not amount to an error under Article 11 of the DSU.

In respect of end-use, the Appellate Body said it had disagreed with the panel's conclusion that the end-use of clove and menthol cigarettes is simply "to be smoked". "We have thus concluded that the different end-uses of clove and menthol cigarettes support the Panel's overall finding of likeness." It observed that the United States had not appealed the panel's findings regarding the physical characteristics and the tariff classification of clove and menthol cigarettes.

"In the light of all of the above, while we disagree with certain aspects of the Panel's analysis, we agree with the Panel that the ‘likeness' criteria it examined support its overall conclusion that clove and menthol cigarettes are like products within the meaning of Article 2.1 of the TBT Agreement. Therefore, we uphold, albeit for different reasons, the Panel's finding, in paragraph 7.248 of the Panel Report, that clove cigarettes and menthol cigarettes are like products within the meaning of Article 2.1 of the TBT Agreement."

In addressing the United States' appeal of the panel's finding that the United States acted inconsistently with Article 2.1 of the TBT Agreement by according to clove cigarettes imported from Indonesia less favourable treatment than that accorded to domestic like products, the Appellate Body said that it found it useful to interpret the "treatment no less favourable" requirement of Article 2.1 of the TBT Agreement in the light of the conflicting interpretations of this phrase offered by the participants on appeal.

Citing the sixth recital of the preamble of the TBT Agreement, the Appellate Body said the language of the sixth recital expressly acknowledges that Members may take measures necessary for, inter alia, the protection of human life or health, provided that such measures "are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination" or a "disguised restriction on international trade" and are "otherwise in accordance with the provisions of this Agreement".

"We consider that the sixth recital of the preamble of the TBT Agreement provides relevant context regarding the ambit of the ‘treatment no less favourable' requirement in Article 2.1, by making clear that technical regulations may pursue the objectives listed therein, provided that they are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, and are otherwise in accordance with the provisions of the TBT Agreement... Accordingly, the context and object and purpose of the TBT Agreement weigh in favour of reading the ‘treatment no less favourable' requirement of Article 2.1 as prohibiting both de jure and de facto discrimination against imported products, while at the same time permitting detrimental impact on competitive opportunities for imports that stems exclusively from legitimate regulatory distinctions."

Thus, the Appellate Body said that the "treatment no less favourable" standard of Article III: 4 of the GATT 1994 prohibits WTO Members from modifying the conditions of competition in the marketplace to the detriment of the group of imported products vis-a-vis the group of domestic like products.

On the United States' appeal of the scope of products considered by the panel to determine whether imported clove cigarettes are treated less favourably than US domestic like products within the meaning of Article 2.1 of the TBT Agreement, the Appellate Body noted that Article 2.1 provides that "products imported from the territory of any Member" shall be accorded treatment no less favourable than that accorded to "like products of national origin and like products originating in any other country". Therefore, for the purposes of the less favourable treatment analysis, treatment accorded to products imported from the complaining Member is to be compared with that accorded to like domestic products and like products of any other origin.

In sum, it said, the national treatment obligation of Article 2.1 calls for a comparison of treatment accorded to, on the one hand, the group of products imported from the complaining Member and, on the other hand, the treatment accorded to the group of like domestic products. In determining what the scope of like imported and domestic products is, a panel is not limited to those products specifically identified by the complaining Member. Rather, a panel must objectively assess, based on the nature and extent of their competitive relationship, what are the domestic products that are like the products imported from the complaining Member.

With respect to the group of imported products, the United States claims that the panel erred in failing to include in its analysis treatment accorded to menthol cigarettes imported into the United States from all Members. "We cannot agree. As noted earlier, the national treatment obligation of Article 2.1 calls for a comparison of treatment accorded to the group of like products imported from the Member alleging a violation of Article 2.1, and treatment accorded to the group of like domestic products. It follows that the Panel did not err in finding that a determination of Indonesia's claims under Article 2.1 required an examination of whether Section 907(a)(1)(A) accords to the group of products imported from Indonesia less favourable treatment than that accorded to the group of like products of US origin."

Accordingly, said the Appellate Body, the panel did not err in finding that the group of products imported from Indonesia essentially consisted of clove cigarettes. It noted, however, that the United States does not challenge on appeal the panel's exclusion of domestically produced flavoured cigarettes from the likeness stage of its analysis. Rather, the United States' challenge focuses exclusively on the panel's exclusion of domestically produced flavoured cigarettes from the less favourable treatment stage of the panel's analysis. Because Article 2.1 expressly limits the scope of the less favourable treatment comparison to imported and domestic like products, in the absence of specific findings by the panel that domestically produced flavoured cigarettes other than menthol are like clove cigarettes, "we cannot determine whether the Panel erred in failing to include domestically produced flavoured cigarettes in its less favourable treatment comparison."

On the United States' claim that the panel erred in concluding that any detriment to the competitive opportunities for imported clove cigarettes could not be explained by factors unrelated to the foreign origin of the products, the Appellate Body said that it is not persuaded that the panel erred in ultimately finding that Section 907(a)(1)(A) is inconsistent with Article 2.1. By design, Section 907(a)(1)(A) prohibits all cigarettes with characterizing flavours other than tobacco or menthol. In relation to the cigarettes that are banned under Section 907(a)(1)(A), the panel made a factual finding that "virtually all clove cigarettes" that were imported into the United States in the three years prior to the ban came from Indonesia. The panel also noted that the "vast majority" of clove cigarettes consumed in the United States came from Indonesia.

With respect to the cigarettes that are not banned under Section 907(a)(1)(A), the record demonstrates that, in the years 2000 to 2009, between 94.3 and 97.4 per cent of all cigarettes sold in the United States were domestically produced, and that menthol cigarettes accounted for about 26 per cent of the total US cigarette market.

Given the above, said the Appellate Body, the design, architecture, revealing structure, operation, and application of Section 907(a)(1)(A) strongly suggest that the detrimental impact on competitive opportunities for clove cigarettes reflects discrimination against the group of like products imported from Indonesia. The products that are prohibited under Section 907(a)(1)(A) consist primarily of clove cigarettes imported from Indonesia, while the like products that are actually permitted under this measure consist primarily of domestically produced menthol cigarettes.

It said that it is not persuaded that the detrimental impact of Section 907(a)(1)(A) on competitive opportunities for imported clove cigarettes does stem from a legitimate regulatory distinction. "We recall that the stated objective of Section 907(a)(1)(A) is to reduce youth smoking. One of the particular characteristics of flavoured cigarettes that makes them appealing to young people is the flavouring that masks the harshness of the tobacco, thus making them more pleasant to start smoking than regular cigarettes. To the extent that this particular characteristic is present in both clove and menthol cigarettes, menthol cigarettes have the same product characteristic that, from the perspective of the stated objective of Section 907(a)(1)(A), justified the prohibition of clove cigarettes."

It noted, however, that the addictive ingredient in menthol cigarettes is nicotine, not peppermint or any other ingredient that is exclusively present in menthol cigarettes, and that this ingredient is also present in a group of products that is likewise permitted under Section 907(a)(1)(A), namely, regular cigarettes. Therefore, it is not clear that the risks that the United States claims to minimize by allowing menthol cigarettes to remain in the market would materialize if menthol cigarettes were to be banned, insofar as regular cigarettes would remain in the market.

Given the above, the Appellate Body upheld, albeit for different reasons, the panel's finding, in paragraph 7.292 of the panel report, that, by banning clove cigarettes while exempting menthol cigarettes from the ban, Section 907(a)(1)(A) of the FFDCA accords imported clove cigarettes less favourable treatment than that accorded to domestic menthol cigarettes, within the meaning of Article 2.1 of the TBT Agreement.

In its conclusions on this issue, the Appellate Body said that in the light of the foregoing considerations with regard to the panel's findings on likeness and less favourable treatment, it therefore upheld, albeit for different reasons, the panel's finding, in paragraphs 7.293 and 8.1(b) of the Panel Report, that Section 907(a)(1)(A) of the FFDCA is inconsistent with Article 2.1 of the TBT Agreement because it accords to imported clove cigarettes less favourable treatment than that accorded to like menthol cigarettes of national origin.

In reaching this conclusion, it said that it wished to clarify the implications of its decision. "We do not consider that the TBT Agreement or any of the covered agreements is to be interpreted as preventing Members from devising and implementing public health policies generally, and tobacco-control policies in particular, through the regulation of the content of tobacco products, including the prohibition or restriction on the use of ingredients that increase the attractiveness and palatability of cigarettes for young and potential smokers. Moreover, we recognize the importance of Members' efforts in the World Health Organization on tobacco control.

"While we have upheld the Panel's finding that the specific measure at issue in this dispute is inconsistent with Article 2.1 of the TBT Agreement, we are not saying that a Member cannot adopt measures to pursue legitimate health objectives such as curbing and preventing youth smoking. In particular, we are not saying that the United States cannot ban clove cigarettes: however, if it chooses to do so, this has to be done consistently with the TBT Agreement. Although Section 907(a)(1)(A) pursues the legitimate objective of reducing youth smoking by banning cigarettes containing flavours and ingredients that increase the attractiveness of tobacco to youth, it does so in a manner that is inconsistent with the national treatment obligation in Article 2.1 of the TBT Agreement as a result of the exemption of menthol cigarettes, which similarly contain flavours and ingredients that increase the attractiveness of tobacco to youth, from the ban on flavoured cigarettes."

The Appellate Body also addressed the United States' appeal of the panel's finding that, by failing to allow a period of not less than six months between the publication and the entry into force of Section 907(a)(1)(A) of the FFDCA, the United States acted inconsistently with Article 2.12 of the TBT Agreement.

The FSPTCA was enacted on 22 June 2009. The measure at issue, Section 907(a)(1)(A), entered into force three months thereafter. Before the panel, Indonesia argued that paragraph 5.2 of the Doha Ministerial Decision on Implementation-Related Issues and Concerns (the Doha Ministerial Decision) - which defined the term "reasonable interval" in Article 2.12 of the TBT Agreement as at least six months - constitutes a legally binding interpretation pursuant to Article IX: 2 of the WTO Agreement. Thus, according to Indonesia, by not allowing a reasonable interval of at least six months between the publication and the entry into force of Section 907(a)(1)(A), the United States acted inconsistently with its obligations under Article 2.12 of the TBT Agreement.

In its analysis of Indonesia's claim under Article 2.12 of the TBT Agreement, the panel considered the interpretative value of paragraph 5.2 of the Doha Ministerial Decision. The panel took the view that, although the United States and Indonesia disagreed on the categorization of paragraph 5.2 as an authoritative interpretation under Article IX: 2 of the WTO Agreement, it would "be guided by [the Doha Ministerial Decision] in its interpretation of the phrase 'reasonable interval' as [the Doha Ministerial Decision] was agreed by all WTO Members meeting in the form of Ministerial Conference, the highest ranking body of the WTO".

The Appellate Body noted that, before the panel, Indonesia relied on paragraph 12 of the Doha Ministerial Declaration and on the preamble of the Doha Ministerial Decision, and argued that the interpretation of Article 2.12 of the TBT Agreement was reached on the basis of discussions carried out within the General Council and the WTO subsidiary bodies.

"Whereas the content of paragraph 5.2 of the Doha Ministerial Decision might very well have been based on discussions within the Committee on Technical Barriers to Trade, we are not persuaded that this is sufficient to establish that the Ministerial Conference exercised its authority to adopt an interpretation of the TBT Agreement on the basis of a recommendation from the Council for Trade in Goods. Accordingly, we find that, in the absence of evidence of the existence of a specific recommendation from the Council for Trade in Goods concerning the interpretation of Article 2.12 of the TBT Agreement, paragraph 5.2 of the Doha Ministerial Decision does not constitute a multilateral interpretation adopted pursuant to Article IX: 2 of the WTO Agreement."

The Appellate Body observed that multilateral interpretations adopted pursuant to Article IX: 2 of the WTO Agreement, on the one hand, and subsequent agreements on interpretation within the meaning of Article 31(3)(a) of the Vienna Convention, on the other hand, serve different functions and have different legal effects under WTO law. Multilateral interpretations under Article IX: 2 of the WTO Agreement provide a means by which Members - acting through the highest organs of the WTO - may adopt binding interpretations that clarify WTO law for all Members. Such interpretations are binding on all Members, including in respect of all disputes in which these interpretations are relevant.

"Interpretations developed by panels and the Appellate Body in the course of dispute settlement proceedings are binding only on the parties to a particular dispute. Article IX: 2 of the WTO Agreement does not preclude panels and the Appellate Body from having recourse to a customary rule of interpretation of public international law that, pursuant to Article 3.2 of the DSU, they are required to apply."

The Appellate Body considered, therefore, that a decision adopted by Members, other than a decision adopted pursuant to Article IX: 2 of the WTO Agreement, may constitute a "subsequent agreement" on the interpretation of a provision of a covered agreement under Article 31(3)(a) of the Vienna Convention.

On whether paragraph 5.2 of the Doha Ministerial Decision can be considered to be a subsequent agreement, within the meaning of Article 31(3)(a) of the Vienna Convention, on the interpretation of the term "reasonable interval" in Article 2.12 of the TBT Agreement, the Appellate Body upheld the panel's finding that paragraph 5.2 of the Doha Ministerial Decision constitutes a subsequent agreement between the parties, within the meaning of Article 31(3)(a) of the Vienna Convention, on the interpretation of the term "reasonable interval" in Article 2.12 of the TBT Agreement.

On the United States' claim that the panel erred in finding that Indonesia had established a prima facie case of inconsistency with Article 2.12 of the TBT Agreement that the United States failed to rebut, the Appellate Body said that while it disagreed with the panel that it was for Indonesia to establish a prima facie case that an interval of at least six months between the publication of the FSPTCA and the entry into force of Section 907(a)(1)(A) would not render the fulfilment of the objective pursued by Section 907(a)(1)(A) ineffective, it nevertheless shared the panel's view that the United States failed to establish that an interval of at least six months between publication and entry into force would be ineffective in fulfilling the legitimate objective pursued by Section 907(a)(1)(A). Accordingly, it agreed with the panel that the United States failed to rebut the prima facie case of inconsistency that Indonesia established under Article 2.12 of the TBT Agreement.

"In the light of the foregoing reasons, we uphold, albeit for different reasons, the Panel's finding, in paragraphs 7.595 and 8.1(h) of the Panel Report, that, by failing to allow an interval of not less than six months between the publication and the entry into force of Section 907(a)(1)(A) of the FFDCA, the United States acted inconsistently with Article 2.12 of the TBT Agreement," the Appellate Body said.

(* With inputs from Chakravarthi Raghavan.) +

 


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