TWN Info Service on WTO and Trade Issues (Apr17/01)
4 April 2017
Third World Network

Mixed ruling in China-EU dispute on TRQs for poultry meat
Published in SUNS #8433 dated 30 March 2017

Geneva, 29 Mar (Kanaga Raja) -- A dispute panel at the World Trade Organization (WTO) has handed down a ruling in favour of China that the European Union had failed to take account of "special factors" in allocating two tariff-rate quotas (TRQs) for poultry meat products exported by China after the EU had relaxed sanitary and phytosanitary restrictions on China in 2008.

In its 173-page somewhat mixed ruling, the panel however ruled against China on eight other TRQ issues it had raised against the EU.

On the two TRQ issues found in favour of China, both relating to processed duck, geese and guinea fowl meat, the three-member panel said that "China has demonstrated that the increase in imports from China over the period of 2009-2011 following the relaxation of the SPS measures in July 2008 was a 'special factor' that had to be taken into account by the European Union when determining which countries had a substantial interest in supplying the products concerned."

The panel said on the two issues that the European Union had acted inconsistently with Article XIII: 2(d) by not recognizing China as a Member holding a substantial interest in supplying the products under tariff lines 1602 39 29 and 1602 39 80 (processed duck, geese and guinea fowl meat) and by failing to seek agreement with China on the allocation of the TRQs for those particular tariff lines.

The panel however rejected all the other claims brought by China including that China has not demonstrated that the European Union acted inconsistently with Article XIII: 1 of the GATT by allocating all or the vast majority of the TRQs to Brazil and Thailand.

It also found several other claims by China to be either outside the panel's terms of reference or not properly before the panel.

In its ruling, the panel concluded that, to the extent that the measures at issue are inconsistent with Article XIII: 2(d) and the chapeau of Article XIII: 2 of the GATT 1994, they have nullified or impaired benefits accruing to China under the GATT 1994.

Having found that the European Union has acted inconsistently with its obligations under Article XIII: 2(d) and the chapeau of Article XIII: 2 of the GATT 1994, the panel recommended that the Dispute Settlement Body request that the European Union bring its measures at issue into conformity with its obligations under the GATT 1994.

Both parties can appeal any of the panel's findings within 60 days.

According to the panel report, the claims brought by China concern the modification by the European Union of bound duties inscribed in its Schedule of concessions on certain poultry products pursuant to negotiations with Brazil and Thailand held under Article XXVIII: 5 of the GATT 1994.

A first negotiation exercise (the "First Modification Package"), which was initiated in 2006 and saw the negotiations concluded in 2006, resulted in the European Union replacing its ad valorem duties with tariff rate quotas (TRQs) on poultry products classified under three tariff items.

(The three tariff items relate to salted poultry meat, prepared turkey meat and cooked chicken meat.)

A second negotiation exercise (the "Second Modification Package"), which was initiated in 2009 and, according to the European Union, concluded at negotiators' level in late-2011, resulted in the European Union replacing its ad valorem bound duties with TRQs for poultry products classified under seven other tariff items.

(These seven tariff items relate to processed chicken meat, processed duck, geese and guinea fowl meat.)

In each negotiation exercise, the European Union determined that Brazil and Thailand were the only WTO Members that held a "principal supplying interest" or "substantial interest", within the meaning of Article XXVIII: 1, in any of the tariff concessions at issue and entered into negotiations with these Members under Article XXVIII: 5.

The European Union based its determination of which Members held a principal or substantial supplying interest on actual import data covering the three years preceding the initiation of each of the two negotiation exercises (i. e. 2003-2005 for the First Modification Package, and 2006-2008 for the Second Modification Package).

According to the panel report, it is not in dispute that, during the reference periods selected by the European Union, imports of the poultry products concerned from China into the European Union were negligible.

Each of the TRQs agreed with Brazil and Thailand provides for an in-quota tariff at a rate that is equal to or lower than the European Union's previously bound rate of duty, together with an out-of-quota tariff rate that is in all cases higher than the European Union's bound rate of duty before the modification.

Under all of the TRQs resulting from the First Modification Package, Brazil and/or Thailand are each allocated their own country-specific share, with an "all others" share set aside for all other countries.

The situation is similar for all of the TRQs resulting from the Second Modification Package, whereby Brazil and/or Thailand are each allocated their own country-specific share, with an "all others" share set aside for all other countries (except for one tariff line - HS1602 3921 - where there is no "all others" share and the entirety of the TRQ is allocated to Thailand).

The majority of each TRQ, and in some cases the vast majority (or all) of the TRQ, is allocated to Brazil and/or Thailand (the "all others" TRQ share is below 20% in all cases).

The total volume of each TRQ and the allocation of TRQ shares among supplying countries was determined, with some exceptions, on the basis of actual import data for the three-year period preceding the initiation of each of the two negotiation exercises (i. e. 2003-2005 for the First Modification Package, and 2006-2008 for the Second Modification Package).

During these reference periods, imports of the poultry products concerned from China into the European Union were negligible.

According to the panel report, the European Union had applied several SPS measures throughout the period concerned by the two Article XXVIII negotiations, i. e. 2003-2008.

Following a relaxation of the SPS measures by the European Union in July 2008, imports of heat treated poultry products from China into the European Union increased significantly under some of the tariff lines at issue.

This increase was taking place while the European Union's negotiations with Brazil and Thailand in relation to the Second Modification Package were still ongoing.

The European Union did not update the reference period selected for the purpose of determining which Members to negotiate with regarding the modification of its concessions, or for the purpose of calculating the total volume of the TRQs or the respective TRQ shares allocated to different countries.

With respect to the TRQs under the Second Modification Package, the European Union made no adjustment to the TRQ allocations to reflect more recent data and the increase in China's share of imports.

According to the panel report, China claimed that the European Union acted inconsistently with various articles of the GATT 1994 by basing the above determinations on actual import levels over the periods 2003-2005 and
2006-2008.

First, China argued that the European Union was prohibited from basing its determinations on actual import levels during the periods 2003-2005 and 2006-2008 on the grounds that, throughout both of these periods, there were SPS measures in place that prohibited or significantly restricted the importation of poultry products from China into the European Union.

According to China, the European Union was obligated to base its determinations under these provisions on either a different reference period, or on an estimate of the import shares that China would have had in the absence of those SPS measures.

China argued that in determining the share that China would have had absent the import ban, the European Union should have taken into account factors such as China's production capacity and investment in the affected products, estimates of export growth, and forecasts of demand in the European Union.

According to the panel report, China provided information on the level of its poultry exports before, during and after the ban, both to the European Union and other countries, to support its contention that China could reasonably be expected to have had a significant share of the EU market in the absence of the SPS measures that were in place.

China claimed that by not basing its determinations under these provisions on an estimate of the import shares that China would have had in the absence of those SPS measures, the European Union violated Article XXVIII: 1, Article XXVIII: 2 read in conjunction with paragraph 6 of the Understanding, Article XIII: 1, and the provisions of Article XIII: 2.

Second, China argued that the European Union was required to use the most recent reference period of 2009- 2011 as the basis for its determinations in the context of the Second Modification Package.

The negotiations under the Second Modification Package were initiated in 2009, but did not conclude at the negotiators' level until September 2011, according to the European Union, and the completion of the negotiations was not notified to the WTO until December 2012.

During that period, China's share of imports under several tariff lines increased following the relaxation of the SPS measures.

China submits that the European Union was under an obligation to base its determinations on the most recent three-year period preceding the conclusion of the negotiations (2009-2011), not the three-year period preceding the initiation of the negotiations (2006-2008).

China claimed that by not doing so in respect of its initial TRQ allocations, the European Union violated Article XXVIII: 1, Article XXVIII: 2 read in conjunction with paragraph 6 of the Understanding, and Article XIII: 2(d) and the chapeau of Article XIII: 2.

China further claimed that by subsequently making no adjustment to the TRQ allocation following a request for reappraisal by China in 2013, the European Union violated Article XIII: 4.

Third, China argued that the European Union was obligated to set aside an "all others" share of at least 10% when allocating the TRQs among supplying countries, regardless of the actual level of imports and whatever the reference period selected.

According to China, the amount set aside for "all others" must be sufficient to allow at least one other Member going forward to achieve a substantial interest as a supplier of the products subject to the TRQs. In this case, the European Union recognised Members as holding a substantial supplying interest if they accounted for 10% share of imports in the tariff line concerned.

Accordingly, China claimed that by not setting aside an "all others" rate of at least 10% within each TRQ, the European Union violated Article XIII: 1 and Article XIII: 2.

According to the panel report, in addition to these three horizontal arguments, China advanced various additional claims and arguments under Article XXVIII: 2 read in conjunction with paragraph 6 of the Understanding, Article XIII: 1, Article II: 1, and Article I: 1.

FINDINGS AND CONCLUSIONS

In respect of the Panel's terms of reference, the Panel concluded that:

i. China's contention that the European Union acted inconsistently with the chapeau of Article XIII: 2 of the GATT 1994 by failing to set aside TRQ shares for "all others" at levels that allow other WTO Members to achieve a substantial supplying interest going forward falls within the scope of the panel's terms of reference;

ii. China's contentions that the European Union acted inconsistently with the chapeau of Article XIII: 2 and Article XIII: 4 of the GATT 1994 by failing to proactively disclose the historical trade data, the representative period selected or the special factors appraised are new claims that are outside the Panel's terms of reference;

iii. China's contentions that the European Union acted inconsistently with Article XIII: 1 and the chapeau of Article XIII: 2 of the GATT 1994 by failing to annually update the initial TRQ allocations constitute new claims that are outside the Panel's terms of reference;

iv. Insofar as China is claiming that the European Union acted inconsistently with paragraph 7 of the Procedures for Negotiations under Article XXVIII or paragraph
1 of the Procedures for Modification and Rectification of Schedules, such claims are not properly before the Panel;

v. Insofar as China is claiming that the European Union acted inconsistently with Article II of the GATT 1994 by implementing the higher out-of-quota rates arising from the First Modification Package over the period 2007- 2009, such claim is not properly before the Panel.

The Panel found that China has not demonstrated that the European Union acted inconsistently with Article XXVIII: 1 of the GATT 1994 by not recognizing China as a Member holding a principal or substantial supplying interest in the concessions at issue in the First and Second Modification Packages.

It also found that China has not demonstrated that the tariff rates and the TRQs negotiated and implemented by the European Union under the First and Second Modification Packages are inconsistent with Article XXVIII: 2 of the GATT 1994, read in conjunction with paragraph 6 of the Understanding on the Interpretation of Article XXVIII of the GATT 1994, by failing to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade than that existing prior to the modification.

In respect of China's claims under Article XIII: 2(d) of the GATT 1994, the Panel concluded that:

i. China has not demonstrated that the European Union acted inconsistently with Article XIII: 2(d) by determining which countries had a substantial interest in supplying the products concerned on the basis of their actual share of imports into the European Union, rather than on the basis of an estimate of what import shares would have been in the absence of the SPS measures restricting poultry imports from China;

ii. China has demonstrated that the increase in imports from China over the period 2009-2011 following the relaxation of the SPS measures in July 2008 was a "special factor" that had to be taken into account by the European Union when determining which countries had a substantial interest in supplying the products concerned, and the European Union acted inconsistently with Article XIII: 2(d) by not recognizing China as a Member holding a substantial interest in supplying the products under tariff lines 1602 39 29 and 1602 39 80 and by failing to seek agreement with China on the allocation of the TRQs for those particular tariff lines.

In respect of China's claims under the chapeau of Article XIII: 2 of the GATT 1994, the Panel concluded that:

i. China has not demonstrated that the European Union acted inconsistently with the chapeau of Article XIII: 2 by determining the TRQ shares allocated to "all others" on the basis of actual share of imports into the European Union, rather than on the basis of an estimate of what import shares would have been in the absence of the SPS measures restricting poultry imports from China;

ii. China has demonstrated that the increase in imports from China over the period 2009-2011 following the relaxation of the SPS measures in July 2008 was a "special factor" that had to be taken into account by the European Union when determining the size of the TRQ shares to be allocated to "all others", and that the European Union acted inconsistently with the chapeau of Article XIII: 2 by not allocating a greater "all others" share under tariff lines 1602 39 29 and 1602 39 80;

iii. China has failed to demonstrate that the European Union acted inconsistently with the chapeau of Article XIII: 2 by not allocating an "all others" share of at least
10% for all of the TRQs under the First and Second Modification Packages.

The Panel also concluded that China has not demonstrated that the European Union acted inconsistently with Article XIII: 1 of the GATT by allocating all or the vast majority of the TRQs to Brazil and Thailand.

China has also not demonstrated that the European Union acted inconsistently with Article I: 1 of the GATT 1994 by allocating all or the vast majority of the TRQs to Brazil and Thailand.

China has not demonstrated that the European Union acted inconsistently with Article XIII: 4 of the GATT 1994 by refusing to enter into meaningful consultations with China.

The Panel further concluded that China has not demonstrated that the European Union acted inconsistently with Article II: 1 of the GATT 1994 by giving effect to the modifications resulting from the Article XXVIII negotiations prior to the changes being reflected in the authentic text of its Schedule through certification.

In the present case, said the Panel, China has not suggested that the tariff rates applied by the European Union exceed those agreed upon in the Article XXVIII negotiations with Brazil and Thailand.

Accordingly, having found that certification is not a legal prerequisite that must be completed before a Member modifying its concessions can proceed to implement the changes agreed upon in Article XXVIII negotiations at the national level, "we are unable to uphold China's claims that the European Union violated Article II by giving effect to the modifications arising from the Article XXVIII negotiations prior to the changes being reflected in the authentic text of its Schedule through certification."

In arriving at this conclusion, the Panel stressed that pursuant to Article 3.2 of the DSU, the task of panels in the dispute settlement system of the WTO is "to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law."

The Panel said that as the Appellate Body has previously confirmed, determining what the applicable rules and procedures ought to be is not "the responsibility of panels; it is clearly the responsibility solely of the Members of the WTO". +