A "millstone" for developing world, a "milestone" for US

by Chakravarthi Raghavan

Geneva, 22 Sep 99 -- The Appellate Body of the Dispute Settlement System of the World Trade Organization has again been accused of usurping jurisdiction and modifying significantly the rights and obligations of Members, and upsetting the balance of rights and obligations in the package of the WTO agreements.

The sharp criticism of the appellate body came at the Dispute Settlement Body (DSB) Wednesday when it adopted the ruling against India in a case brought by the United States on the quantitative restrictions maintained by India on grounds of balance-of-payments considerations.

Indian Ambassador, S. Narayanan, while joining the consensus for adoption (he had little option, given that the rules require adoption unless there is consensus to the contrary, the so-called negative consensus rule), made a lengthy presentation, in polite language, but which nevertheless was stinging in its effect, outlining India's serious reservations and concerns, and the implications of the ruling on developing countries and their rights.

The copy of the text was made available to the media.

The Indian statement showed several points of contradiction in the appellate body ruling in this case, and other rulings in other cases, even in the way the same issue is interpreted differently in relation to different agreements (and parties).

India cited one passage in the appellate body report, which in effect rejected the right of India (or any other developing country), under Art.XVIII:11 of GATT 1994, its right to follow its own "development policy", and not be challenged with the argument that with a different policy there would be no need for BOP restrictions. The appellate body's view cited is simply mind- boggling in economics. (SUNS reports on panel ruling in #4410 and #4416, and that on the appellate body in #4500).

The background to that is that the IMF, whose views about adequacy of reserves and BOP is to be accepted, had said that India had sufficient reserves to remove quantitative restrictions quickly, and that adoption by it of different macro-economic policy, and supplementing it with structural changes of ending reservation of production for some products in the small-scale sector, and agrarian reforms (meaning more market agriculture) would obviate the need for BOP restrictions.

India objected to this before the appellate body, as an issue of law, and the appellate body came out with this statement (emphasis added): "We are of the opinion that the use of macro- economic policy instruments is not related to any particular development policy, but is resorted to all members regardless of the type of development policy they pursue. The IMF statement that India can manage its BOP situation using macro-economic policy instruments alone does not, therefore, imply a change in India's development policy..... We believe structural measures are different from macro-economic instruments with respect to their relationship to development policy".

But an even more iniquitous effect of the Appellate body ruling was that the "macro-economic policies" of industrialized countries (that is, their domestic policies aimed at achieving and maintaining full and productive employment or development of economic resources) cannot be challenged in the GATT (under Art.XII,3.d, the BOP articles applying to them), the macro- economic policies developing countries pursue can be challenged and the IMF and the WTO can ask the developing country concerned to change its macro-economic policy so that no BOP restrictions are necessary.

The appellate body's formulation about macro-economics and development policy, that has made these outcomes possible, is either a case of perverse economics to buttress a legal attempt to end developing country privileges, or a case of its sheer ignorance, bordering on illiteracy, on macro-economics and development economics.

The Indian response at the DSB (see separate story), also cited other cases of inconsistencies in interpreting agreements, which cumulatively present a very disturbing picture of the situation of developing countries at the WTO.

Generally, at the adoption stage of panel rulings, only parties concerned present their views.

But a number of developing countries, not parties to the dispute, also spoke up at the DSB, joining India in expressing concerns -- Malaysia, the Dominican Republic, Cuba, Egypt, the Philippines, Sri Lanka, Indonesia and Jamaica.

In an earlier case, the shrimp-turtle dispute, where the appellate body played politics and favoured the US by taking into consideration amicus curae briefs from some non-government organisations, a number of parties, and others had delivered a stinging rebuke to the appellate body for usurping the rights of Members on the issue of giving NGOs access to the DSU.

But the BOP case -- following on the Indonesia car case, the Brazil subsidies case and others --- goes to the heart of the rights and obligations of developing countries and how they are being whittled away by the appellate body and the dispute settlement process.

The overall effect of the ruling, hailed not unsurprisingly as a "milestone" by the US (and supported by the EU), is another and probably, fundamentally the most serious set back to the developing countries in the trading system -- erasing from the rule book all that they had achieved in the old GATT between late 1950s and entry of the WTO (1995), which supposedly preserved their rights.

By an interpretation process, the Appellate Body, contrary to specific injunctions in the rules of the DSU, and taking advantage of the "negative consensus" rule, has put a "mill- stone" around the necks of the developing world that has to be broken.

And if trade negotiators and governments won't, the public will.

This is the not the first instance of the Appellate body and the Dispute Settlement Process, guided by the WTO secretariat, where the rights of the developing world have been whittled down in favour of the developed world, through an interpretation process.

Unless this issue is tackled, and remedied, as first priority at Seattle -- without the mercantilist greed of major countries and their corporations funding elections figuring in the equation -- the perception would strengthen in developing countries - in civil society, domestic enterprises, the public and parliaments - that the WTO is an oppressive, and iniquitous system where the benefits of "rules-based system" is more than offset by vagueness of some rules, and their interpretation to erase developing country rights.

If the situation is not remedied quickly, the WTO system will lose even the little credibility it has among the public, and Seattle could well see the setting in motion of the beginning of the end of the institution.

Trade experts and observers of the Third World say an immediate remedy, while awaiting more careful discussion and changes to other parts of the agreement and the DSU, is needed through an authoritative decision and interpretation by the Ministers at Seattle, reasserting the exclusive jurisdiction of the WTO General Council to provide an authoritative interpretation of rules, and to require that any problems arising (in the panel process) out of differing provisions of differing agreements be referred by panels and the appellate body to the General Council for decision.

Some Third World trade experts (and former trade representatives at the GATT), like Mr.Bhagirath Lal Das, who have been following the various rulings and judgements of the appellate body in a number of cases, say that the Standing Appellate body should be abolished. If there be a need for a second look at panel rulings, another ad hoc body should be named to hear it and the General Council decide.

Any standing body, says Das, will have the tendency to become a "supra body, a super-interpretation body", taking advantage of the fact that its views can be set aside only by a negative consensus (which the party it favours will withhold) and extend its own jurisdiction to decide trade policy, and not in the sense envisaged by the WTO agreements on settling disputes.

Any objective study of the ideas, interpretations, thoughts and analysis set out in their rulings over the last 2-3 years show that the appellate body has developed its own ideas about the WTO and its agreement.

Das, and other experts also note that increasingly, parties and public outside are expressing openly their views and challenging conclusions and even their motivations against panel rulings. To the extent that the secretariat is seen as guiding the panels, they too would come under sharp public criticisms and attack.

It is thus in the secretariat's own interest, and the interest of the credibility of the dispute settlement process, that panels should be serviced by a secretariat outside the WTO.

At least in the case of panels, they are ad hoc in the sense that they are constituted with different individuals and, hopefully these can look at the facts and suggest dispute resolution recommendations.

If there is a need for difficult legal issues to be dealt with, or for a second look at panel ruling, it should be by the WTO political body, even guided by ad hoc panels (to hear the legal arguments) and give a view.

While decisions as between two parties, say Das and other trade experts, may continue to be adopted by a negative consensus rule, interpretations that would affect the rights and obligations of other members, a positive consensus should be required for adoption.

In the statement at the DSB, Indian Amb. Narayanan, noted that the main element of difference in the BOP Committee was that all members of the BOP committee except one (the US) had accepted the length of the phase-out plan of six-years commencing from 1.4.1997.

The Appellate body report made important rulings on the relationship between the judicial and political organs of the WTO in the area of BOP, and by implication, in the area of regional trade agreements.

The Appellate Body, in India's view, had also curtailed the scope of the substantive rights of developing countries under GATT 1994, Article XVIII:B by ruling that:

* the DSU could be invoked on any matters relating to BOP, i.e. not merely those arising from application of individual BOP measures, but the overall justification of BOP measures,

* that the dispute settlement proceedings need not take into consideration, the provisions of Art.XVIII:12, and para 13 of the Understanding on BOP provisions (in the Marrakech agreement), permitting the General Council to decide that BOP restrictions found inconsistent be removed within a "specific period" and approve a time-schedule for this,

* that the right to gradually phase-out BOP restrictions in accord with Note Ad Art.XVII:11 is limited to cases in which renewed BOP would arise "immediately" from removal of restrictions, and not to be invoked in cases where adverse BOP impact of removal of restrictions, though direct and foreseeable, takes place after some time, and

* the proviso to Art.XVIII:11 that no WTO member shall be required to withdraw or modify restraints on the ground that a change in development policy would render unnecessary the restrictions, does not relate to macro-economic policy instruments.

Consequently, developing country members could be required to change macro-economic policies to render their BOP restrictions unnecessary.

India had also presented strong arguments, based on texts, that similar language had been used in the BOP Understanding and that on Art.XXIV which required that the judicial organ only look at matters arising from application of restrictive import measures for BOP or matters arising from application of provisions of Art.XXIV -- and not the overall justification of BOP or the consistency of a regional trade agreement (RTA).

Citing earlier GATT ruling (on EC tariffs on citrus products) and in the banana dispute, where the approach taken was that it was not appropriate for panels to examine or re-examine RTAs under Art.XXIV, and the Korea beef imports case (involving BOP issues) - where the panel distinguished between examination by panel of independent experts of detailed restrictive measures and the BOP committee of government representatives of the wider issues - India said in the only GATT case where a panel was asked to review BOP justification, the panels did not assess the external financial position of the country, but based its decision on this already taken by the Contracting Parties on the basis of an IMF determination.

Throughout the history of GATT 1947, not a single panel had decided to determine the BOP justification of measures notified under Art.XII and XVIII:B or consistency of RTAs with Art.XXIV.

During the Uruguay Round, the US had presented a broad proposal for reform of the surveillance of BOP, and explicitly providing for resolution by panels of the consistency of BOP measures under review before the BOP Committee. But this was opposed by developing countries, and the compromise reached as in terms of the footnote to the BOP Understanding - which provided for the application of measures being able to be agitated before panels.

"None of the other clauses in WTO agreements and understandings defining the causes of action under the DSU contain a similar reference to the application of measures".

The same issue had figured in the panel on Turkey's restrictions on imports of textiles and clothing (where Turkey had used its customs union with the EC to justify it, and said only the Committee on RTA could examine the matter). That panel had ruled that in terms of para 12 of the WTO understanding on RTA that "panels have jurisdiction to examine "any matters 'arising from' the application of provisions of Art. XXIV.... (while) the GATT/WTO compatibility of a customs union as such, is generally a matter for the CRTA, since it involves a broad multilateral assessment of any such customs union, i.e. a matter which concerns the WTO membership as a whole."

"Two concurrent WTO panels thus arrived on the same fundamental issue with opposite conclusions," Narayanan commented, and went on to quote further what the panel on Brazil export financing for aircraft had said (about the issue of developing countries eliminating export subsidies within a phased period, consistent with their development needs). That panel had said that this was an aspect of a particularly political and economic nature, "ill- suited for a panel whose function is fundamentally legal", and hence in the panel's view "a developing country Member is best positioned to identify its development needs and to assess whether export subsidies are consistent with those needs. Thus in applying this provision, we consider that panels should give substantial deference to the views of the developing country member in question." In a footnote, the panel added that in its view a body such as the Subsidies Committee was better equipped to perform this type of examination than a panel.

By the way it has interpreted its jurisdiction to hear all BOP issues, by interpreting the terms "matters arising from the application of" measures taken for BOP, the India BOP panel (headed by then Brazilian ambassador Celso Lafer) had interpreted out of existence the words in the footnote, contrary to the Appellate Body's view on the principle of interpretation in the Japan alcoholic beverages case. And in rejecting the Indian view, the appellate body has given a further twist (that the panel interpretation and that of the appellate body) reflected the "traditional GATT doctrine that with the exception of mandatory rules, only measures that are effectively applied can be the subject of dispute settlement proceedings."

And without giving any argument or reasoning, the appellate has interpreted "the application of measures" in the footnote to mean that the BOP measures must be "effectively applied". Thus contrary to its own jurisprudence, the Appellate body has interpreted "matters arising from the application of" in a manner that deprives if of any practical or legal relevance.

The institutional balance or judicial restraint issue had also been rejected by the appellate body, India noted.

The panel took the view, on the distribution of decision-making power between the judicial and political organs, that panels were in all instances required to make an objective assessment of facts of the case and apply the relevant WTO provisions to those facts. But the panel failed to address the general DSU provisions defining the competence of panels and specific provisions of the WTO agreement allocating competence to make legal determinations to political organs of the WTO, in particular the BOP Committee and the CRTA.

When an organ of the WTO determines its own jurisdiction, it interprets the provisions of the WTO Agreement conferring jurisdiction upon it. But as the appellate body has repeatedly affirmed, the provisions conferring powers on WTO organs must be interpreted in good faith, in accordance with ordinary meaning given to the term in the treaty in their context and in the light of the object and purpose.

Hence, when a WTO organ determines its jurisdiction, it must take account not only the terms of provisions attributing powers to it, but the context - which is the provisions of the WTO attributing related powers to other bodies. An analysis of the provisions may lead a particular WTO organ to conclude that not only that particular organ but another could claim jurisdiction. "Such a conflict must be resolved in good faith in the light of the institutional structure that the framers of the WTO agreement have set up to realise the purpose of the WTO," Narayanan said.

This in practice would mean that panels should normally refrain from performing the central tasks assigned to political bodies of the WTO or at least exercise judicial restraint.

Without examining any of these, the Appellate body concluded that it was of the opinion "that the competence of the panel to review all aspects of BOP restrictions should be determined in the light of Art.XXIII of GATT, as elaborated and applied by the DSU, and the footnote to the BOP understanding". The appellate body said that if "panels refrained from reviewing the justification of the BOP restrictions, they would diminish the explicit procedural rights of Members under Art. XXIII and the footnote 1 of the BOP Understanding, and substantive rights under Art.XVIII:11."

The appellate body ignored the fundamental impact of the creation of a panel track on the decision-making process in the BOP committee. According to Art. 3.2 of the DSU, the dispute settlement process cannot add to or diminish the rights and obligations of Members, and this implied that a panel cannot determine its own jurisdiction in a manner entailing a change in the procedural or substantive rights and obligations of Members.

As India's experience now showed, the panel track, once open to members affected by BOP, would in effect replace the BOP Committee process and the implementation provisions applied by the BOP Committee with the compliance provisions of the DSU.

"Giving unlimited access to this track would therefore no doubt change the balance-of-rights and obligations under the BOP provisions. The decision-making in a WTO body takes place in the shadow of the alternatives available in other bodies. The legal alternatives formally available in one forum can be reduced to inutility by the creation of new procedural opportunities in another forum. The circumstances surrounding this appeal provides a perfect example."

The Panel assumed a further jurisdiction that it could look into the overall justification of India's BOP restrictions, but assessed it as the BOP Committee would on the basis of an IMF opinion that India's reserves were adequate. But then the panel, having found the reserves adequate, did not, as the BOP committee would have done, apply Art XVIII:12 of GATT or para 13 of the Understanding, on the ground that these would not apply to a panel proceeding.

"By performing some, but not all of the functions of the BOP committee, the Panel modified the balance of rights and obligations of India under WTO rules governing the BOP consultations.

Citing the Note ad Art XVIII:11 that no developing country could be asked to relax or remove restrictions, "if such restrictions or removal would thereupon produce (emphasis in original) conditions justifying the intensification or institution respectively of restrictions under para 9 of Art.XVIII, the panel got around this by interpreting "thereupon" to mean "immediately".

And the appellate body endorsed this interpretation, "essentially on the ground that 'immediately' is one of the dictionary meanings of 'thereupon'."

In India's view it was reasonable to interpret thereupon to require a direct and causative link between removal and recurrence of BOP difficulties. But through their interpretation, the BOP panel and the appellate body have resulted in Note Ad Article XVIII:11 losing its practicability in situations of time- lag between removal of restrictions and impact on level of reserves.

Citing also the appellate body views about macro-economic policy being different from development policy, and hence developing countries could be asked to change their macro-economic policy (while WTO bodies are precluded from asking for change in development policy), Narayanan said a consequence of the ruling was stricter obligations were imposed on developing than developed countries. Art XII:3(d), which applied to developed countries, said that they shall not be required to change their macro-economic policies. But by excluding macro-economic policies (from development policy) in Art XVIII:11, "the Appellate has imposed constraints on developing country members invoking the (BOP) provision that are not imposed on developed countries invoking Art XII.

India asked the other WTO members to carefully read the panel and appellate body reports since in India's assessment, these rulings "constitute a fundamental change from practices of GATT 1947, and modify significantly the balance of rights and obligations under Art.XVIII:B."

The appellate body's rulings raise fundamental questions:

"Should the adequacy of monetary reserves of a sovereign state and of the length of the phase-out period for restrictions that cease to have BOP justification emerge from a judicial process? Should panels have the authority to establish legal standards for the adequacy of the reserves of WTO members, assess the macro- economic and other developmental policy alternatives available to Members, and developmental situations and prospects of the Member concerned? What is the proper relationship between the judicial and political organs of the WTO? Is not Art. XVIII:B progressively getting diluted in such a way that it cannot any longer serve the developmental interests of developing countries?"

In comments, the Dominican Republic said that it supported fully the statement of India and was seriously concerned by the problems of principle.

Malaysia shared the deep concerns of India and said there may be serious systemic consequences. The appellate Body had again exceeded its jurisdiction and had modified significantly the rights and obligations of members. It had a serious effect on the balance of rights and obligations contained in the package of WTO agreements.

Cuba supported India, while Egypt shared India's strong concerns.

The Philippines was particularly concerned by the implications of the rulings concerning macro-economic policy, development policy and structural change policies. All these are means to an end, the end being Development, and the means were not an end in itself.

Sri Lanka also expressed concern about the systemic issues arising from the rulings.

Indonesia also shared the concerns about the relationships between the judicial and political organs of the WTO in the area of BOP.

Jamaica was concerned at the rulings and felt these had upset the balance of rights and obligations and showed insensitivity. (SUNS4515)

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

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