TWN Info Service on WTO and Trade Issues (May17/02)
4 May 2017
Third World Network
       
Mexico can retaliate to tune of $163 million in tuna dispute
Published in SUNS #8451 dated 27 April 2017

Geneva, 26 Apr (Kanaga Raja) - An Arbitrator at the World Trade Organisation (WTO) has determined that Mexico may request authorisation from the Dispute Settlement Body (DSB) to suspend concessions or other obligations to the United States at a level not exceeding USD 163.23 million per annum in the dispute over the US "dolphin-safe" labelling regime for tuna products.

Mexico on 10 March 2016 had requested authorization from the DSB to suspend concessions to the United States in the amount of USD 472.3 million annually.

On 22 March 2016, the US objected to this amount and at a meeting of the DSB on 23 March 2016, the matter was automatically referred to arbitration.

In a ruling issued on Tuesday, the Arbitrator has determined that the level of nullification or impairment of benefits accruing to Mexico is USD 163.23 million per annum.

According to the Arbitrator's report, on 13 June 2012, the DSB adopted the original Appellate Body report in this dispute, together with the report of the original panel as modified by the Appellate Body.

In so doing, the DSB adopted the Appellate Body's finding that the Tuna Measure at issue in the original proceedings (the original Tuna Measure) was inconsistent with Article 2.1 of the Agreement on Technical Barriers to Trade (TBT Agreement).

On 9 July 2013, the United States published in its Federal Register a legal instrument entitled "Enhanced Document Requirements to Support Use of the Dolphin Safe Label on Tuna Products" (the 2013 Final Rule).

According to the United States, the 2013 Final Rule constituted the measure taken to comply with the DSB recommendations and rulings pursuant to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).

Mexico considered that the 2013 Final Rule failed to bring the United States into compliance with the DSB recommendations and rulings.

Subsequently, on 14 November 2013, the DSB, at Mexico's request, established a panel under Articles 6 and 21.5 of the DSU, Article 14 of the TBT Agreement, and Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994).

On 14 April 2015, that panel found that the United States had not brought its measure into compliance, and that the "amended tuna measure" was inconsistent with Article 2.1 of the TBT Agreement and Articles I:1 and III:4 of the GATT 1994. The Appellate Body upheld those findings, albeit largely on the basis of different reasoning.

(In response, the US adopted a second modified tuna measure in 2016, which is not the subject of this arbitration. A compliance panel is currently examining the 2016 tuna measure and is expected to issue its final report to the parties by mid-July).

The Arbitrator determined that in the present proceedings, the measure to which this interpretation directs the Arbitrator is the 2013 Tuna Measure, and not the 2016 Tuna Measure.

The 2016 Tuna Measure is not yet subject to any panel or Appellate Body findings, and so it is not a measure that has been found to be WTO-inconsistent. Moreover, the 2013 Tuna Measure, not the 2016 Tuna Measure, was the version of the Tuna Measure in force at the time the RPT (reasonable period of time) expired.

Accordingly, the 2016 Tuna Measure could not and did not bring the Tuna Measure into compliance by the time the RPT expired, and it therefore should not form the basis of the Arbitrator's assessment of the level of nullification or impairment in these proceedings, said the Arbitrator.

FINDINGS OF THE ARBITRATOR

The Arbitrator concluded that the relevant measure for the purposes of these arbitration proceedings is the 2013 Tuna Measure, which is the subject of specific adverse DSB recommendations and rulings.

The Arbitrator therefore rejected the United States' request "for a preliminary ruling that we find the relevant measure to be the 2016 Tuna Measure."

On appropriate time-frame that will form the basis of the calculation of the level of nullification or impairment caused by the 2013 Tuna Measure, the Arbitrator concluded that it is appropriate in these proceedings to assess the level of nullification or impairment caused by the 2013 Tuna Measure for the year 2014, which is the year immediately following the expiry of the RPT given to the United States to comply with the DSB recommendations and rulings.

The Arbitrator then addressed the models that Mexico and the United States have submitted, as well as the assumptions underpinning them.

The Arbitrator recalled that Mexico presents a calibrated partial equilibrium model of the US and Mexican canned tuna markets.

It consists of a set of equations purporting to describe the US and Mexican tuna markets by defining (a) the demand for canned tuna in the United States and Mexico, respectively, (b) the supply of canned tuna in the United States and Mexico, respectively, and (c) the market equilibrium conditions in the US and Mexican markets for canned tuna.

The Arbitrator noted that Mexico's model is underpinned by three main assumptions, namely, that (a) the Tuna Measure has restricted the supply of canned yellowfin from Mexico into the United States; (b) that US consumers have a preference for canned yellowfin and US retailers would sell Mexican canned yellowfin after the withdrawal of the Tuna Measure; and (c) that Mexican producers would supply all of the increased consumption of canned yellowfin in the US market following the withdrawal of the Tuna Measure.

"We found that, on the whole, these assumptions are reasonable, although we are not convinced by some of Mexico's intermediate arguments, in particular its arguments that (a) all US retailers would be willing to sell canned yellowfin imported from Mexico and (b) Mexico would export all of its canned yellowfin to the United States and import yellowfin from other producing countries to produce canned yellowfin for its domestic consumption."

With respect to the United States' model, the Arbitrator recalled that that model is based on Mexico's historical share in the US tuna products market prior to the adoption of the Tuna Measure. It compares actual US imports from Mexico of tuna products with the Tuna Measure in place with the level of imports that would occur if the Measure were withdrawn.

"We have explained above that the United States' model would not be a reasonable basis for our calculation of the level of nullification or impairment caused by the 2013 Tuna Measure because it bases Mexico's share in the US tuna market on historical data that goes too far back into the past."

Thus, the Arbitrator concluded that both of the models proposed by the parties have shortcomings.

"Accordingly, in our view, neither model, at least as initially presented by the parties, provides an appropriate basis for our calculation of the level of nullification or impairment caused by the 2013 Tuna Measure."

Assessing the two models in comparative terms, the Arbitrator recalled that the fundamental difference between Mexico's and the United States' arguments is that Mexico is of the view that the Tuna Measure restricted the supply of canned yellowfin from Mexico to the United States, whereas the United States maintains that the decline in supply has been due to weak demand for canned yellowfin in the US market.

"As we have explained, we think that the evidence on the record tends on the whole to support Mexico's assertion that the Tuna Measure has restricted the supply of yellowfin tuna to the US market. We also agree with Mexico that the evidence demonstrates the existence of demand in the US market for canned yellowfin, and establishes that Mexico would be a competitive supplier of canned yellowfin."

"Accordingly, it would in our view be possible to base our calculation on a modified version of Mexico's model, that is, a version of Mexico's model that replaces those assumptions we have not found to be reasonable with other assumptions that we think better reflect the counterfactual on which we base our assessment."

The Arbitrator recalled that, in assessing the level of nullification or impairment caused by the 2013 Tuna Measure, "we are not bound to base our calculation on either Mexico's or the United States' model. We could, in principle, attempt to develop an alternative model that would more accurately represent our understanding of the relevant counterfactual."

The most plausible alternative approach would be the so-called "price wedge method", whereby one would first determine the tariff equivalent of the US dolphin-safe label, and then model the effect of its removal on the equilibrium price and quantity of Mexican canned tuna products sold in the United States.

However, as both parties acknowledge, the data on the record does not allow the Arbitrator to apply the price wedge approach, because the data does not allow for a comparison between the price of labelled and unlabelled tuna products.

"As we are unable to develop an alternative model, and because we find the theory underlying Mexico's model more convincing than the theory underlying the United States' model, we will base our calculation on a re-specified version of Mexico's model," said the Arbitrator.

"In practical terms, this means that we will use a partial equilibrium model to calculate the level of nullification or impairment."

Partial equilibrium models are used to calculate the equilibrium price and quantity in a certain market. Market demand and supply curves are constructed on the basis of consumer preferences and income, production technology, input costs, and conditions of competition, among other factors. The equilibrium price and quantity of the goods at issue in the specific market are found by equating supply and demand.

In the case at hand, the parties have proposed to calculate the level of nullification or impairment as the export loss, i.e. the difference between the counterfactual level of exports of canned tuna (in the case of the withdrawal of the 2013 Tuna Measure) and the actual level of exports, with both levels being determined for the year 2014.

A partial equilibrium model can therefore be used to analyse the impact of the withdrawal of the Tuna Measure - which, in economic terms, can be conceived of as an exogenous shift in supply - on Mexico's exports of canned tuna to the United States.

The Arbitrator considers as reasonable Mexico's assumption that the Tuna Measure has restricted Mexico's supply of canned yellowfin to the US market and therefore finds it reasonable to model the counterfactual as a shift to the right of the supply curve of canned yellowfin from Mexico to the United States, reflecting the expected increase in supply under the counterfactual.

"In conclusion, it is the Arbitrator's view that, if appropriately implemented, the partial equilibrium modelling approach proposed by Mexico is a reasonable methodology to estimate the export losses caused by the Tuna Measure."

"As regards the level of nullification or impairment resulting from our model and its endogenous variables, we recall that the level of nullification or impairment in these proceedings is the difference between the value of total canned tuna exports estimated under the counterfactual and the value of Mexico's actual exports of canned tuna to the United States, with both levels being calculated for the year 2014."

Under the counterfactual, the Arbitrator estimated the value for total exports in 2014 of canned tuna from Mexico to the United States (all of it being canned yellowfin) to be equal to USD 185.88 million.

The value of Mexican canned tuna actually exported to the United States in 2014 was USD 22.65 million.

Taking the difference between the total value of exports of canned tuna from Mexico to the United States under the counterfactual and the total value of actual exports in 2014, the Arbitrator found that Mexico's estimated trade loss in 2014 amounted to USD 163.23 million.

The Arbitrator thus determined that the level of nullification or impairment of benefits accruing to Mexico as a result of the 2013 Tuna Measure is USD 163.23 million per annum.