US and EC asked to end "banana dispute"

Meeting in a General Council emergency session, WTO members deliberated on the announcement by the US of retaliatory measures against the EU for the alleged WTO-inconsistency of the latter's banana import regime. In addition to doubts surrounding the legality of the US move itself, the unilateralism involved raises broader concerns that the multilateral character of the WTO system could be placed in jeopardy.

by Chakravarthi Raghavan

GENEVA: Members of the World Trade Organization on 8 March sent a strong message to the United States and the European Union to settle quickly their "banana dispute", but the majority did so in a manner that might encourage the US in its unilateralist tactics and do damage to the multilateral system.

The General Council met in an emergency session convened at the request of the European Union over the US-announced trade measures against some $520 million worth of imports from the EU over the banana dispute (see "Wobbly legs of the rule-based WTO" on p 5).

Like all other meetings, the General Council meeting too was in private, and the WTO official briefings left much to be desired. While the statements of the US and the EC, and of the WTO Director-General were made available, the press briefing did not give detailed briefings on what other delegations had said nor were copies of statements of others easily available to the media.

In the first week of March, the US had announced the punitive duties, which would be retroactive to 3 March, if and when the arbitrators approve such penalties against the EU over the US complaint that the EU was favouring banana imports from the Caribbean nations while discriminating against imports from Latin America, shipped and marketed by the US banana transna- tional, the Chiquita Corporation, and that the EU had not complied with the WTO ruling in its new banana regime.

The European Commission, which represents and speaks for the 15-member EU, made clear at the outset (when members met informally to argue whether the Council should meet without the normal 10-day notice) that it was not looking for any vote or decision at the General Council.

But if the Commission had hoped that a sufficiently large number of key delegations would speak up against the US unilateralism and imposing trade measures - in the form of withholding final customs clearance and warning importers that they may face a 100% duty on those products retrospectively when customs clearance is finally done - the EC would have been disappointed.


Except for a few delegations who pointedly addressed the systemic issues and the US unilateralism, many of the major trading nations of the industrial and developing world did not speak up and say inside the Council chamber what some of their diplomats were saying outside to the media while talking privately about the US wielding its "S.301" trade law threats at the behest of its corporations.

India, Canada and Japan were among those which did focus on the systemic issues raised. India was forthright and strongest in criticizing the US for taking action contrary to the express provisions of Art. 22.6 of the Dispute Settlement Understanding (DSU) that pending an arbitrator's award (on the level of trade damage), no concessions could be suspended in retaliation. The banana dispute, India said, had made one thing clear: "Both major powers would like to ensure that their will prevails in this organization. In my view, the responsibility on the rest of the members is to ensure that rules prevail in the organization."

While the US sought to present a maladroit argument that it had not suspended any concessions, and that its notice about final customs clearance was not a suspension of concession, a US internal document which the EC had made available to the WTO members (angering the US delegation) made clear that the US administration had anticipated that its announcement about retrospective imposition of duties and their being collected from importers via the final customs clearance procedure, would end the imports of all the products targeted.

Canada's Amb. John Weekes, in his intervention, said that anything that walks like a duck and quacks like a duck must be a duck and the US announcement was a trade "measure". Even more bluntly, Weekes told the two majors that their mutual bilateral trade amounted to no more than 5% of world trade, and it was time to move on and deal with the issues relevant to the other 95% of world trade and concerns of the membership.

A large number of the delegations criticized the EC for calling the emergency meeting on 8 March, with Mexico openly asking whether such a meeting could have been held if any other nation had been the target.

In comments at the informal and formal sessions of the General Council, and in conversations outside, the members also criticized the US for imposing provisional sanctions against imports from the EC, when it would have lost nothing by staying its hand and waiting for the reconvened banana panel to give its ruling and for the final view of the arbitrators on the level of nullification or impairment to the US based on the WTO-inconsistency of the EC regime and the level of suspension of concessions that the US should be authorized to implement.

But the members failed to do it in a manner that would have forced Washington to pay heed to views of other trading nations against US unilateralism.


Trade diplomats said later that part of the blame lay with the EC Commission, at Brussels and here, for its failure to "lobby" delegations and explain the real issues at stake for the system.

On the other hand, they said, the US appeared to have done some heavy lobbying in key capitals and with delegations here, asking them not to speak up - arguing that the EC would use any criticism of the US to procrastinate further and not carry out the letter and spirit of the WTO rulings on the banana dispute, and may feel encouraged to continue with its protectionist common agricultural policies.

A number of nations in Asia and Latin America, hit by the financial crisis, seem to have taken a low profile, other trade observers suggested.

But while almost every one of the members, and the WTO head, appealed to the two sides to cool their rhetoric and settle the problem quickly, it did not seem to have had much effect on the two protagonists.

At the outset, in a statement to the Council, WTO Director- General Renato Ruggiero stressed that the DSU was the essential element of the WTO and the peaceful development of the multilateral trading system. The banana issue, he said, was, and still is, a difficult and complex one, and just a few weeks from an outcome.

The rule-based system, the WTO head claimed, is working and will continue to work, "even if there are different interpretations about some important aspects related to the banana issue."

Ruggiero referred to other difficult issues (of implementation) that would be before the WTO, "with a high profile for public opinion and the trading system" and needing "very careful handling", and said that all parties to a dispute need to work positively towards a solution within the WTO rules and procedures.

"The real issue," he added, "is not the credibility of our dispute settlement system which is at stake. The system is, and will continue to be, ready to give its legal response to the disputes which are brought to it. It is the users of the system who will put their credibility at stake if they do not act in conformity with the letter and spirit of the system, which seeks above all to produce mutually acceptable settlements."

The EC ambassador, Mr. Roderick Abbott, in his statement, said the US action was unjustified, unauthorized, unlawful and unacceptable, and taken at a time when the WTO procedures to decide non-compliance and arbitrate the level of retaliation to be applied were still underway.

The WTO was faced with the fact that the US had decided to defy the rules and procedures and taken retaliatory action without WTO authorization. Though presented as provisional while awaiting the final decision of the WTO arbitrators, the US measures were as damaging to the EC export trade as if the full 100% duties had been applied immediately. The EC exports of these products have been effectively stopped.

The US measures were unlawful and unacceptable, not authorized by the Dispute Settlement Body (DSB) at all, and thus outside the WTO rules and procedures and hence totally unilateral in nature.

It was difficult to understand why the US could not have waited for three weeks more, until the arbitrators make a final decision. Instead, the US had demonstrated to the world its willingness to ignore WTO rules and proceed to unilateral action based on its own judgements as regards actions of other members. To gain a few short weeks, the US had flouted the DSU, whose Art. 22.6 clearly said concessions or other obligations shall not be suspended during the course of the arbitration process.

Abbott cited the statement of the USTR, Ms Barshefsky, at Beijing on 4 March justifying the US actions and stating that the US "will enforce its rights under the WTO to take appropriate action against Europe's or any other country's non- compliance with panel rulings."

The US, he added, was "declaring war on any and all WTO members whose compliance it decides is inadequate... and on the basis it will enforce its rights but will not necessarily respect its obligations. This is not acceptable in a rules- based system."


Responding US ambassador Rita Hayes argued that the EC had not shown respect to the plain meaning and purpose of the dispute settlement system. Instead of implementing the ruling, it had tried to block the adoption of the US agenda, and had even got a panel established against itself (a reference to the EC request, accepted by consensus by the DSB, that its new banana regime be looked into by the reconvened banana panel).

"Given the EC's failure to implement a WTO-consistent banana regime, the United States is completely within its rights to seek recourse to Art. 22 (retaliation provision)," Hayes said.

"Given that the arbitrators have failed to complete their work within the clear Art. 22 deadlines, the US is also completely within its rights to preserve its ability to suspend concessions as of March 3," she added.

Hayes insisted that the measure taken on 3 March to withhold customs liquidation was not itself a suspension of concessions. The US will abide by the arbitrators' decisions. If the EC was so confident that its regime is WTO-consistent and causes no nullification or impairment of the US benefits, "the EC should be confident that its goods will not be subject to any increased duties at the time entries of goods are liquidated," she added.

Referring to the EC circulation of an internal US official document (in which the US administration reportedly had said that the effect of the 3 March announcement would be to immediately stop imports of the EC products), Hayes, without denying the authenticity of the document, asked how the EC could get hold of and circulate an internal document.

Credibility at stake

India's Amb. S.Narayanan underscored Ruggiero's view that the credibility of the system was at stake and those using the system would put their own credibility at stake if they did not act in conformity with the letter and spirit of the system. The DG's statement, he added, was a clear exhortation to both parties, namely the US and the EC, to act in conformity with the letter and spirit of the system.

While the banana dispute was a complex one, involving the vital interests of many countries, the direct trade interests of the US and the EC were rather limited. But many banana producer/exporting countries were directly affected, positively or negatively, by the dispute.

India thus appreciated their difficulties. India was not taking sides on the substance of the banana dispute, and was with neither side over this issue. "But we are for the system, and a rule-based system... whether we like it or not, recognize it or not, what happens in this case at various stages will establish precedents that we will not be able to ignore in the future."

When the issue was before the DSB, "the real issue was whether a prevailing party can unilaterally determine compliance or non-compliance with recommendations of the DSB by a losing party and on the basis of that unilateral determination proceed to seek authorization of the DSB to suspend concessions." India had clearly stated its views at that time, and almost all members of the DSB had shared this view.

A compromise was found, thanks to the DSB chair and the DG, to preserve the primacy of the system while ensuring that the rights of parties under the DSU were not compromised in any manner. A "creative" solution was found in persuading the EC to request arbitration under Art. 22.6 even before the panel dealing with the 21.5 proceedings had given its verdict, and the US was persuaded to agree to the same individuals being given the task of arbitration. The problem of how the panel and the arbitrators would coordinate their work was left to them, and it was understood that being the same individuals "they would find a logical way forward in consultation with the parties".

Narayanan cited the DSB chair's statement on 29 January that the US request for suspension of concessions in retaliation was not authorized and, after the arbitrators' award was circulated, a new request could be made. The arbitrators had now circulated a communication seeking further information from the parties.

"Thus it is clear that the arbitrators have not made their final decision as yet. According to Art. 22.6, concessions or other obligations shall not be suspended during the course of arbitration. But this is exactly what the US has regrettably done on 3 March," Narayanan said.

Referring to the arguments of Rita Hayes at the meeting, the Indian ambassador said that he got the impression that the US was faulting the arbitrators for not giving their final decision on 2 March. For very valid reasons, India recalled, several panel reports and those of the Appellate Body had not been issued within the time limits indicated in the DSU. The present situation was one where the arbitrators had not found it possible to issue the final report without the additional information sought.

Narayanan cited the US argument in the Committee on Rules of Origin, where the Marrakesh deadline to complete the harmonization work had not been met, that it doubted "whether a fixed deadline was the best way to ensure a quality product ... and that an unrealistic deadline for harmonization work programme might not be of benefit to the credibility of the Committee or the WTO."

"We have a situation where in one case the US does not want to take the deadline in the Agreement seriously, and in another where it is faulting the arbitrators for not giving a final decision on 2 March, even though they know fully well the arbitrators have had only a very brief period of time to look into this complex matter."

Why then had the US felt compelled to resort to these trade measures on 3 March? According to the US press release announcing the measures, they had been taken at that time "to ensure that when the arbitrators reach their final decision we will be in the same position as if they had rendered their final decision yesterday (2 March)."

It was difficult to believe, Narayanan said, that in a dispute that had gone on for quite some time, the US could not have waited for a few more weeks. It appeared that the US action was related to a particular US legislation with which everyone was familiar.


"In other words the US has decided to place the requirements of its own domestic legislation on a higher pedestal as compared to its WTO obligations. This is a matter of grave concern."

Narayanan then cited a recent article by eminent lawyers which said that the US S.301 "was modified slightly as a result of the Uruguay Round, but its basic structure remains the same and it continues to authorize the President to act in a way that could violate the WTO/GATT Agreement."

India would urge the US to look into this dichotomy between its domestic legislation and its WTO obligations and devise a system that would guarantee it would abide by the WTO obligations.

Narayanan referred to the case against India (by the US) over TRIPS, and recalled that when India argued before the panel that even if there be an apparent contradiction between domestic law and the WTO system, it would not matter since the Indian Supreme Court always interpreted domestic law in light of international obligations, the argument was not accepted and

India was told that its trading partners could not accept even the appearance of divergence between domestic law and international obligations. India had accepted that verdict in good faith.

"Today it appears that a major trading power in this organization is telling us that they have a right even to ignore their international obligations in order to maintain the supremacy of their domestic law. It is for members to ponder as to whether such an approach can really promote the image of this organization as a rule-based system."

Referring to Rita Hayes' view that the discussion in the General Council was not necessary since "nothing is going to be solved here," Narayanan said that regrettably this conveyed the impression that the General Council was not a relevant body in the WTO for anything, though it is the highest forum of the WTO and can assume the competence of any other WTO body.

It was clear that the discussions in the DSB on 29 January (over the US request for authorization) enabled the rest of the members to express their concerns, and the two major powers had to take these on board.

India did not intend to take any position on the substance of the banana dispute or the compliance or non-compliance with its obligations by the EC. But India felt strongly that the measures taken by the US struck at the root of multilateralism and were thus a matter of concern.

On the US view that the EC was leading others into mischief, Narayanan said he was sure the US ambassador did not seriously believe that the EC or anyone else could lead him into mischief. "What I have said today is based on our conviction that the WTO has no future if powerful trading partners resort to unilateral actions outside the scope of the WTO provisions. That is why in the preparatory process for the Ministerial, India had floated a paper on unilateral trade measures, urging all members never to resort to unilateral trade measures, but take immediate steps to modify national legislations that implicitly or explicitly authorize such actions."

While he was "pleased" that the EC cited from the communique of the G-15 summit against unilateralism, Narayanan said he would be more pleased if the EC took seriously other positions of the G-15, especially the portions expressing reservations and concerns about overloading the WTO system against the interests of developing countries.

Predictability and security

Brazil's Amb. Bahadian said that multilaterally agreed rules were supposed to be predictable, assuring traders that the applicable rules are well known and there would not be unexpected changes. The trade rules were also supposed to provide security and predictability in international trade relations.

"Today we are faced with a situation that proves predictability and security provided by the WTO is also very precarious... they are precarious because they only exist while members remain committed to respecting the rules and working together to surmount eventual obstacles."

While there may be different interpretations of existing rules, the multilateral character of the institution should not be put in jeopardy. "There is no room for unilateralism in the WTO. It is a concept extraneous to the functioning of the Organization and undermines our security and predictability."

Compliance was fundamental to maintaining the credibility of the system and that credibility had to be maintained by everyone complying.

The timing of the crisis was an additional reason for concern. "It would be most unfortunate if the world financial crisis, brought about in many cases by lack of security and predictability, were to be compounded by a trade crisis. The results could be extremely serious for all of us." (Third World Economics No. 205, 16-31 March 1999)

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