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WTO
APPELLATE BODY EXTENDING ITS JURISDICTION? Geneva, 24 Oct 99 -- The provisions of GATT 1994, enabling the formation of customs unions and regional integration agreements, could justify measures by members to act inconsistent with other GATT provisions, but subject to fulfilling two important conditions, the World Trade Organization's Appellate Body has ruled. In handing down a ruling on an appeal by Turkey against a panel report in a case brought by India, the Appellate Body let stand the panel's ruling that the quantitative restrictions imposed by Turkey on 1 January 1995 against 19 categories of textiles and clothing products from India were contrary to Turkey's obligations under Articles XI and XII of GATT 1994 and the Agreement on Textiles and Clothing (ATC). Turkey, as an exporting member under the old Multifibre Agreement (MFA) was subject to quota restrains in the major industrialized importing markets, but had no restraint of its own, and had not notified any such restraint, imposed quota restrictions against exports from developing countries effective 1 January 1995, on the ground that it had to do so because of its agreement with the EU on a customs union. India had challenged these restrictions, and a three-member panel held in India's favour. Turkey appealed. But in opening the way for customs unions to depart from GATT obligations, other than only Article 1, MFN provision of GATT, as hitherto understood, the Appellate Body said: "...we are of the view that Article XXIV may justify a measure which is inconsistent with certain other GATT provisions. However, in a case involving the formation of a customs union, this "defense" is available only when two conditions are fulfilled. First, the party obtaining the benefit of this defense must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of sub-paragraph 8 (a) and 5 (a) of Art.XXIV. And, second, the party must demonstrate that the formation of a customs union would be prevented if it were not allowed to introduce the measure at issue. Again both these conditions must be met to have the benefit of Art.XXIV." In giving this ruling, the Appellate Body obliquely has sought to expand its own jurisdiction in future cases, by stating on points that had not been raised as legal issues or grounds in the appeal, the Appellate Body's view that they had not decided these points, thus implying that they could be brought up in other cases. The 3-member Appellate Body consisted of New Zealand's Christopher Beeby, the United States James Bacchus, and Egypt's Said El-Naggar. "We wish to point out," the Appellate Body said, "that we make no finding on the issue whether quantitative restrictions found to be inconsistent with Art. XI and Art.XIII of the GATT 1994 will ever be justified by Art.XXIV. We find only that the quantitative restrictions at issue in the appeal in this case were not so justified. "Likewise, we make no finding either on many other issues that may arise under Art. XXIV. The resolution of those other issues must await another day. We do not believe it necessary to find more than we have found here to fulfil our responsibilities, under the DSU in deciding this issue." This last appears to be reference to the fact that Uruguay Round Understanding on Article XXIV and on Article XVIII:B (the balance of payments provisions and justifications) have an identical wording about right of members to raise disputes "with respect to any matter arising out of....". In the case against India's Quantitative Restrictions (under Art.XVIII:B) raised by the United States where India claimed BOP justification, and in the case against Turkey by India where Turkey claimed it was justified by the provisions of the Customs Union, the panels came up with the issue of whether the BOP justification in the first case, and the Customs Union justification in the second, were matters that could be raised before and disposed of by a panel, or they should be dealt with by the substantive WTO bodies where all members are represented. In the BOP case, the Appellate Body, as the panel before, so interpreted the "Understanding" as to provide jurisdiction to hear and decide on BOP justification by both the BOP Committee and the panels. India and several other developing countries at the stage of the Dispute Settlement Body's adoption of the recommendations through a negative consensus process strong objected to this interpretation, as a serious inroad into the Special and Differential (and more favourable rights) assured under the WTO, GATT 1994 and Art.XVIII:B. In the Turkey case, the panel took the view that arguably the issue of compliance of a customs union with Art. XXIV was for the WTO body to decide, but that it could go into disputes with respect "to any matters arising from the application of these provisions relating to customs unions, free-trade areas or interim agreements leading to the formation of a customs union or free trade areas." The panel reports on the India BOP case and the Turkey Art.XXIV case were more or less due at the same time, and if they had come, both issues would have landed in the Appellate Body (within 60 days of circulation of the reports) at the same time, and the body would have been forced to deal with the fact of the identical language in both cases about disputes. But the report on the Turkey case was published, on the ground of time needed for translation, a little over a month after it was ready, and thus went to the Appellate Body later. But neither Turkey nor India had even raised as an issue of law in the Turkey appeal the question of the jurisdiction of panels vs the WTO committee on regional agreements on disputes arising from Art.XXIV. In both cases, before the panels, India had taken the same position. But by the "fortuitous" or other circumstance of the Appellate Body hearing in the BOP case taking place before, the US was able to get the Appellate Body to rule about the simultaneous jurisdiction of the WTO body and of the panels on BOP justification. And though an interested party before the panel in the case against Turkey, the US did not intervene at the appellate stage. Nevertheless, the Appellate Body (which under the DSU cannot create or abridge rights and obligations of the WTO), by a kind of obiter dicta that more often come out of Courts of Records in domestic jurisdictions, has in effect invited future appeals to enable it to rule on this contradiction in interpretation of the same wording in the 1994 Understanding on BOP and Art.XXIV. In the Turkey appeal, on the Art.XXIV issue, the Appellate Body has in effect complained that the panel had dealt with the chapeau of para 5 of Art.XXIV only in a passing and perfunctory way. The chapeau was not central to the panel's analysis, which focused primarily on paras 5 (a) and 8 (a) of the article. "However, we believe the chapeau of para 5 of Art.XXIV is the key provision for resolving the issue..." to make a ruling in effect expanding the rights of customs unions in general to depart not only from their MFN obligations, but other GATT obligations too, and then knock this down in its applicability to Turkey and its customs union with the EC! The chapeau, the Appellate Body said, provided that the provisions of GATT 1994 "shall not prevent " the formation of a customs union, and this the Appellate Body says means "shall not make impossible the formation of a customs union." This made clear that the Art XXIV, under certain conditions, justify the adoption of a measure inconsistent with certain other GATT provisions, and may be invoked as a possible "defence" to a finding of inconsistency. And the language in the chapeau that GATT 1994 provisions shall not prevent "the formation of a customs union" indicates that Art XXIV could justify adoption of measures inconsistent with other GATT provisions "only if the measure is introduced upon the formation of a customs union, and only to the extent that the formation of the customs union would be prevented if the introduction of the measure were not allowed." The Appellate Body ruling goes on to point out that sub-para 8(a)(i) of Art.XXIV requires that constituent members of a customs union eliminate "duties and other restrictive regulations of commerce" with respect to "substantially all the trade" between them. But neither the GATT Contracting Parties nor the WTO members have ever reached an agreement on the interpretation of the term 'substantially'. But "substantially" does not mean "all the trade", but something "considerably more than merely some of the trade". In this view, the Appellate Body agreed with the panel that members of the customs union had "some flexibility" when liberalising their internal trade. "Yet we caution that the degree of 'flexibility' that sub-paragraph 8(a)(i) allows is limited by the requirement that 'duties and other restrictive regulations of commerce' be eliminated with respect to substantially all internal trade." This means that constituent members of a customs union apply "substantially the same" duties and other regulations of commerce in external trade with third countries, and thus apply "a common external trade regime" relating to both duties and other regulations of commerce. But this did not mean "the same" duties and other regulations, and that constituent members had some flexibility. However, "comparable trade regulations having similar effect" would not meet this standard. In the Appellate Body's view, the paragraph 2 of the Understanding on Art XXIV, required that in calculating the overall weighted average tariff rates and of customs duties collected (whose incidence as a whole on the external trade should not be higher than before the formation of a customs union), the "applied rate of duty" and not the bound rates should be used. In setting out its findings on the interpretation of the chapeau of Art.XXIV, and the two conditions to be met, the Appellate Body said that the panel had simply assumed, for the sake of argument, that the EC-Turkey customs union fully met the requirements of paras 8(a) and 5 (a), and then focused on the second condition whether the formation of the customs union would have been prevented if Turkey did not impose the quota restrictions. [The panel had said Turkey could have achieved the same objective through rules of origin, identifying the origin of those products that could enter EC freely]. The Appellate Body found fault with the panel that it "did not address the question of whether the regional arrangement between Turkey and the European Communities is in fact a 'customs union' meeting the requirements of paras 8 (a) and 5 (a) of Art.XXIV. The panel, the Appellate Body noted, had maintained that "it is arguable" that panels do not have jurisdiction to assess the overall compatibility of a customs union with the requirement of Art. XXIV. The appellate ruling added: "We are not called upon in this appeal to address this issue, but we note that in this respect our ruling in India-Quantitative Restrictions on Imports of Agricultural, Textiles and Industrial Products on the jurisdiction of panels to review the justification of balance-of- payments restrictions under Art.XVIII:B not the GATT 1994." The Appellate Body then makes a grievance of the fact that "the panel considered that, on the basis of the principle of judicial economy (that the Appellate Body itself has preached in the past), it was not necessary to assess the compatibility of the regional trade arrangements between Turkey and the EC with Art. XXIV in order to address the claims of India..... and assumed arguendo that the arrangement between Turkey and the EC is compatible with the requirements of Art XXIV 8(a) and 5(a) and limited its examination to the question whether Turkey was permitted to introduce the QRs at issue." The assumption by the panel that the Turkey-EC arrangement is a 'customs union" was not appealed and "therefore the issue whether the arrangement met the requirements... is not before us." Having said this, and after laying out the ground-work to encourage future disputes and appeals to bring Art. XXIV arrangements (including a possible EC-Lome V accord or Mercosur, or ASEAN Free Trade etc) under the DSU process, the Appellate Body goes on to agree with the panel that Turkey could have dealt with the problem of textiles and clothing imports from India and others through rules of origin. "A system of certificates of origin would have been a reasonable alternative until the quantitative restrictions applied by the European Communities are required to be terminated under the provisions of the ATC. Yet no use was made of this possibility to avoid trade disputes. Turkey preferred instead to introduce the quantitative restrictions at issue. For this reason we conclude that Turkey was not, in fact, required to apply the quantitative restrictions at issue in this appeal to form a customs union with the EC. Therefore Turkey has not fulfilled the second of two necessary conditions that must be fulfilled to be entitled to the benefit of the defence under Article XXIV." (SUNS4537) The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor. [c] 1999, SUNS - All rights reserved. May not be reproduced, reprinted or posted to any system or service without specific permission from SUNS. This limitation includes incorporation into a database, distribution via Usenet News, bulletin board systems, mailing lists, print media or broadcast. For information about reproduction or multi-user subscriptions please contact < suns@igc.org >
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