Turkey's textile/clothing QRs held illegal

by Chakravarthi Raghavan

Geneva, 1 June -- Customs Unions and Free Trade Agreements permitted by GATT/WTO enable their members to give mutual tariff preferences, derogating from the GATT MFN principles, but do not authorize departures from multilateral WTO obligations of their members, a WTO dispute settlement panel has ruled.

The panel ruled that quantitative restrictions (QRs) imposed by Turkey on imports of some 19 categories of textiles and clothing products from India, purportedly because of its customs union with the European Community, are WTO-illegal.

The panel found the Turkish measures were inconsistent with Articles XI and XIII of GATT and thus with Article 2.4 of the Agreement on Textiles and Clothing (ATC). The panel rejected Turkey's defense that such GATT/WTO incompatible import restrictions were nevertheless permitted by Article XXIV of GATT.

The ruling, the panel said, did not in any way render Turkey's right to form a Customs Union with the EC a nullity. The terms of the Customs Union had left enough flexibility for Turkey to adopt WTO-compatible alternatives, particularly given the share of the imports of these categories in Turkey's overall trade.

The EC and Turkey, for example, could have origin rules enabling free trade between EC and Turkey on textiles and clothing products originating in Turkey, and border measures by the EC to restrain on non-Turkish origin products entering via Turkey.

The panel (constituted by agreement of Turkey and India) was chaired by Amb. Wade Armstrong of New Zealand, and two other members - Dr. Luzius Waseschba (Switzerland) and Mr. Johannes Human (South Africa). Human became a member when Prof Robert Hudec resigned, when Turkey expressed some concern over his views in writings against regional trade agreements.

The panel has held that the restrictions imposed by Turkey to bring its textiles and clothing import regime in line with the EC restrictions, are contrary to Turkey's obligations under GATT 1994 and the WTO Agreement on Textiles and Clothing (ATC) and Turkey could not cite its customs union with the EC and the GATT provisions in Art. XXIV to justify the restrictions.

According to Indian data, India's exports to Turkey of the 19 categories in 1995 was valued at $42.236 million, and fell to $21.8 million in 1996 (when restrictions were imposed) and $19.867 million in 1997.

According to Turkish data, the 1995 import value for same categories was $45.68 million, falling to $32 million in 1996 and $30.65 million in 1997. Turkey's imports from all non-EC countries of these 19 product categories was less than three percent of its imports of all products from those countries in 1994 and 1995, and fell to two percent in 1996 and 1997.

In declining to rule on the overall GATT/WTO compatibility of the Turkey-EC Customs Union, the panel has taken the position that the jurisdiction of a panel, in areas assigned for multilateral scrutiny to WTO bodies of all members, is more limited.

The GATT/WTO compatibility of any regional trade agreement (RTA) under Art. XXIV of the GATT, the panel said, was a very complex undertaking involving the economic, legal and political perspectives of different members and a matter of broad multilateral assessment concerning the membership as a whole.

However, said the panel, the WTO compatibility of any specific measures adopted on the occasion of the formation of a customs union could be the subject of a dispute and could be ruled upon by a panel.

In distinguishing between the remit of a WTO body in judging the overall compatibility of an RTA under Art. XXIV, and that of a panel in judging the impairment of rights and obligations of the non-RTA members as a result of a specific measure put in place by the RTA member, the panel has taken a different view from that of the panel that ruled against India in the BOP case brought by the United States.

Under the scheme of WTO/GATT 1994 (as earlier under GATT 1947), the justification or otherwise of BOP-related import restrictions of a member (under Art XII or Art XVIII:B) is to be considered by the Committee on Balance of Payments. Similarly, the overall compatibility, under Art. XXIV of the GATT 1994, of an RTA among members (integration agreement, customs union, a free trade agreement or an interim agreement leading to these) is to be judged by the Committee on Regional Trade Agreements (CRTA).

Both the GATT 1994 Understanding on BOP provisions and the Understanding on RTAs are Uruguay Round accords negotiated in parallel, and have similar wordings to enable other Members to raise disputes if they feel their rights impaired.

In the BOP Understanding, a footnote says that GATT provisions (Art. XXII and XXIII) may be invoked "with respect to any matters" arising from the application of restrictive import measures under the BOP provisions. In the case of the RTAs, para 12 of the Understanding on XXIV:6, says that Art. XXII and XXIII may be invoked with respect "to any matters arising from the application" of those provisions of Art. XXIV relating to customs unions, free trade areas or interim agreements leading to them.

The BOP panel took the view that both the panel and the DSB when it adopts the ruling (by negative consensus) and the BOP Committee and WTO Council (acting on basis of positive consensus) could judge the BOP justification without any conflict. The BOP panel thus made the footnote meaningless and inutile - an issue which India has now taken up in appeal.

The panel on the Turkey textiles and clothing restrictions has taken the opposite view -- intended by the negotiators -- namely, that the overall issues of concern to all members should be judged by the entire membership through the relevant WTO bodies, while the WTO rights of individual members, impaired by the application of any measure could be adjudicated before a panel.

The panel report was published 31 May, and either party could appeal on points of law. Having won its case, there is no need for India to go in appeal. Even if Turkey does, it is unlikely that this issue of the differing roles of the WTO body and dispute panels in judging the RTA would be taken up in appeal.

In the panel proceedings, Hong Kong China, Japan, the Philippines, Thailand and the US were third parties. The EC did not exercise its rights to be a third party, but answered questions put to it by the panel, but though invited chose not to comment on any matter before the panel it considered relevant.

At the consultation stage, the EC had wanted to be joined in along with Turkey, but India did not agree. India's point was that the EC and Turkey were both members of the WTO and had obligations, and could not use their bilateral agreement to frustrate their multilateral obligations. India had a right under international law to proceed against Turkey over its breach of multilateral obligations - a view that the panel has upheld.

The panel has said that the EC-Turkey customs union had no WTO legal personality, and could not be subject to DSU procedures.

The panel also held that since Turkey had defended its measures on the basis of the customs union, the restrictions was not within the jurisdiction of the Textile Monitoring Body (TMB).

The measures were QRs adopted by the Turkey, and even if taken within the ambit of the Customs Union, were implemented, applied and monitored by Turkey for application in Turkish territory. They were hence mandatory Turkish measures and India could challenge it through the DSU.

As from 1 Jan 1996 (when it joined a customs union with the EC), Turkey applied QRs on 19 categories of textile and clothing products imported from India.

Before joining the customs union, Turkey had no QRs on textiles and clothing products from any country. On the entry into force of the WTO, Turkey did not notify, under Art 3.1, any MFA-type QRs, and as a result, under the WTO/ATC, it could not maintain or impose any discriminatory QRs against imports from a particular source. But the EC, having notified all its MFA restrictions, could continue with them. As part of the Customs Union accord, the EC persuaded Turkey to apply the same EC quota restrictions on others.

The EC and Turkey signed their Association agreement of Sep 1963. Their interim agreement of 1971, and the additional protocol of 1970 which entered into force in Jan 1973, provided for an extended transition period of 22 years (for a customs union), and Turkey began a gradual alignment with EC customs duties. In Nov 1992, negotiations were initiated on modalities for completion of the customs union, and in March 1995, EC and Turkey agreed on modalities for the final phase of the Customs Union - for elimination of customs duties and other barriers between the two, harmonization of commercial policies and other details. The Customs Union came into force on 1 Jan 1996 - with duties and other restrictions eliminated between the two, as also all QRs of the EC against Turkey excepting in respect of agricultural products, steel and some other sectors. The customs union was notified to the WTO, but details provided only in Nov 1996. The customs union and its compatibility with the WTO/GATT was referred to the CRT which has held 2-3 meetings, but has not reached any conclusions or submitted any report.

Along with the notification of the customs union to the WTO, Turkey also notified the restrictions it had imposed on textiles and clothing to the TMB, but said these were being done in order to conform to the EC's commercial policy and the EC's own quota restrictions under the ATC on these products.

India sought consultations with Turkey on the restrictions in March 1996 - and so did a number of other developing countries whose exports too were restrained. The India-Turkey consultations (as that of others) could not be held because of disagreements over the participation of the EC in the consultations. Turkey insisted that the EC as its partner should be represented in the consultations. But India declined, underlining that third party participation in consultations was conditional on both sides agreeing. India did not accept Turkish offers to increase India's quotas, if India did not challenge the quota regime itself.

The panel has found that the QRs imposed were Turkish measures, adopted by the Turkish government at a date different from the EC measures, and were applied and enforced by Turkey alone. In this context, the EC was not an essential party to the dispute, though the EC was invited to submit to the panel any relevant facts or arguments that it deemed appropriate. And since the EC-Turkey Customs Union had no WTO-legal personality, it could not be impleaded as such.

The Turkish QRs against India had not been introduced under the ATC, but rather in the context of the formation of Turkey-EC customs union. Therefore the matter at issue was not for the TMB and the panel had jurisdiction to adjudicate on it.

The Turkish measures were "new measures" pursuant to Article 2.4 of the ATC and, unless they could be justified under a GATT provision, the discriminatory QRs imposed by Turkey against the imports of 19 categories of textiles and clothing imports from India, would violate Articles XI and XIII of GATT and thus Article 2.4 of the ATC.

As for Turkey's defense of its measures as based on Article XXIV of GATT, the panel decided that it had jurisdiction "to examine any specific measure adopted by a WTO Member in the context of a customs union but that, in this case, it did not need, and indeed was asked by the parties not to assess the overall WTO compatibility of the Turkey-EC customs union.

The panel said it understood para 12 of the GATT 1994 Understanding on Art XXIV to mean that panels have jurisdiction to examine "any matters 'arising from' the application of those provisions of Article XXIV".

A panel could thus examine the WTO compatibility of one or several measures "arising from" Article XXIV types of agreement. Although the right of WTO Members to form regional trade arrangements is "an integral part" of the set of multilateral disciplines of GATT and now WTO, the DSU procedures could be used to obtain a ruling from a panel on the WTO compatibility of any matters arising from such regional trade arrangements. The term "any matters" clearly included "specific measures adopted on the occasion of the formation of a customs union or in the ambit of a customs union.

"Thus, we consider that a panel can assess the WTO compatibility of any specific measure adopted by WTO Members at any time" and there was nothing in the DSU, Article XXIV or the 1994 GATT Understanding on Article XXIV that would suspend or condition the right of Members to challenge measures adopted on the occasion of the formation of a custom union.

As to how far-reaching a panel's examination should be of the regional trade agreement underlying the challenged measure, the panel said that the CRTA had been established, inter alia, to assess the GATT/WTO compatibility of regional trade agreements entered into by Members and this was "a very complex undertaking which involves consideration by the CRTA, from the economic, legal and political perspectives of different Members, of the numerous facets of a regional trade agreement in relation to the provisions of the WTO."

Hence, the issue regarding the GATT/WTO compatibility of a customs union, as such, was generally a matter for the CRTA since it "involves a broad multilateral assessment of any such custom union, i.e. a matter which concerns the WTO membership as a whole. Citing an Appellate Body ruling (in the Guatemala anti-dumping duties case) that the terms of reference of panels must refer explicitly to the "measures" to be examined by panels, the panel said that regional trade agreements might contain numerous measures, all of which could potentially be examined by panels, before, during or after the CRTA examination, if the requirements laid down in the DSU are met. "However, it is arguable that a customs union (or a free-trade area) as a whole would logically not be a 'measure' as such, subject to challenge under the DSU."

The question whether panels had the jurisdiction to assess the overall compatibility of a customs union was not an issue on which it was necessary for the panel to reach a decision.

Both India and Turkey had asked the panel not to go into the WTO compatibility of the Customs Union with Art. XXIV. Subsequently, Turkey suggested that the panel could not judge the "measures" without judging the compatibility of the Customs Union - a view that the panel rejected.

But as a general principle, the panel found that Turkey was bound, at all times, by all WTO obligations, unless there was a conflict between any provisions. Since the wording of Articles XI and XIII of GATT and Article 2.4 of the ATC was clear in prohibiting the introduction of QRs such as those at issue, the panel examined the terms of Article XXIV to decide whether Turkey could be exempted from the application of these prohibitions.

The panel found that the provisions of paragraphs 5 and 8 of Article XXIV did not authorize any violation of the WTO obligations, other than the MFN obligation, when members of a customs union gave mutual preferences. Indeed, these paras 5 and 8 of Art XXIV did not provide any indication as to the type of measure to be used in the formation of a customs union but rather provided guidelines for the overall assessment of regional trade agreements.

"We have therefore concluded that Article XXIV did not authorize the violation of Articles XI and XIII of GATT or Article 2.4 of the ATC. While reaching this conclusion on the basis of the wording of the provisions at issue, we have endeavoured to ensure that our interpretation did not render Turkey's right to form a customs union with the European Communities a nullity, since pursuant to Article XXIV:8(a)(ii), constituent members to a customs union are required to adopt substantially the same regulations of commerce. This standard leaves flexibility to the constituent members."

Turkey's textiles and clothing exports to the EC represented 40% of its trade with the EC.

In any event, in the present case, taking into account, inter alia, the share of trade affected by the type of measures at issue (QRs on textiles and clothing), the panel found that there were WTO compatible alternatives available to Turkey if it wanted to conclude a customs union with the European Communities."

Turkey's own data show that in years 1995, 1996 and 1997, textiles and clothing imports of turkey from all non-EC countries (including members and non-members of WTO) was between 8-9 percent of Turkey's total imports from those countries; and imports of the 19 restrained products from non-EC countries amounted to 4.5 percent of total imports of turkey while that from India less than 3% of total imports from the non-EC countries.

Hence a variation in policy relevant to WTO members on at most 4.5% of Turkey's external trade, in any event of a temporary nature (since EC's MFA-derived QRs have to be eliminated by 1 Jan 2005) could not be considered to jeopardise the Art XXIV:8(a) requirement that substantially the same regulations be applied by Turkey and EC to third countries.

In the panel's view, the terms of Art.XXIV:8(a)(ii) do not provide any authorization for members of a customs union to violate Articles XI and XIII of GATT or Art.2.4 of the ATC.

The ATC has "grand-fathered" certain MFA derived rights regarding import restrictions for specific Members, and GATT Articles XII, XIX, XX and XXI of GATT authorize members, in specific situations, to make use of special trade measures. But the formation of a customs union and the need to adopt similar policies, would not provide a legal basis for one member's specific right to exist for other members of the customs union.

The prohibitions against QRs in the textiles and clothing sector constitute a fundamental feature of the WTO Agreement that argue strongly against introduction of any such new restrictions in that sector. And considering the flexibility offered by the possibility of "interim agreements" under Art.XXIV, and the inherently transitional nature of the QRs in the textiles and clothing sector, "we find that Turkey is in a position to avoid violations of Articles XI and XIII of the GATT and Art. 2.4 of the ATC."

The panel rejected the argument of Turkey that India by rejecting the offer to negotiate a bilateral limitation on textiles and clothing imports (as some 24 other countries had done), had broken the chain of causation between the measures challenged and the nullification and impairment caused. Although parties should generally favour mutually acceptable settlement, the solution must be one that was "mutually" acceptable. India considered the solution offered by Turkey and EC as not acceptable, and hence the nullification or impairment could not be considered as caused by India's failure to accept the "offer".

The panel also rejected the allegations of Turkey that since India had not fully utilized the quotas under examination, it had suffered no impairment. QRs lead to increased transaction costs and create uncertainties which could affect investment plans or trade, and thus is an impairment.

The panel said that even if the presumption of nullification of Article 3.8 of the DSU were rebuttable, Turkey had not submitted evidence that the benefits accruing to India under the ATC and GATT had not been reduced or nullified by the introduction of WTO incompatible quantitative restrictions.

The panel concluded that the measures adopted by Turkey on 19 categories of textile and clothing products were inconsistent with the provisions of Articles XI and XIII of GATT and consequently with those of Article 2.4 of the ATC. The panel rejected Turkey's defense that the introduction of any such otherwise GATT/WTO incompatible import restrictions was permitted by Article XXIV of GATT.

The panel noted that under Art. 3.8 of the DSU, where there is infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment of benefits under that agreement.

And, "to the extent that Turkey has acted inconsistently with the provisions of covered has nullified or impaired the benefits accruing to the complainant under the agreements."

The Panel recommended that DSB request Turkey to bring its measures into conformity with its obligations under the WTO Agreement. (SUNS4446)

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

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