TWN Info Service on WTO and Trade Issues (Jul22/11)
27 July 2022
Third World Network

Trade: Arbitrators rule in favour of EU in pharma dispute with Turkey
Published in SUNS #9624 dated 27 July 2022

Geneva, 26 Jul (Kanaga Raja) -- A panel of three arbitrators has generally upheld the findings of a dispute panel against Turkey in a dispute raised by the European Union over certain measures imposed by Turkey concerning the production, importation and marketing of pharmaceutical products.

In an Award (WT/DS583/ARB25) issued on 25 July, the arbitrators recommended that Turkey bring into conformity with its obligations under the GATT 1994 its measures that were found to be inconsistent in the Award and in the Panel Report as modified by the Award.

Pursuant to Article 25.3 of the Dispute Settlement Understanding (DSU), the Award will be notified to the Dispute Settlement Body (DSB), the Council for Trade in Goods, the Committee on Subsidies and Countervailing Measures and the Committee on Trade-Related Investment Measures.

Taking into account that the WTO's Appellate Body is not presently able to hear an appeal, Turkey, on 25 April 2022, had initiated arbitration proceedings under Article 25 of the DSU to review the findings of the panel in the dispute raised by the EU against Turkey.

On 22 March 2022, both the EU and Turkey had notified the DSB that they had agreed on the procedures for arbitration under Article 25 of the DSU (WT/DS583/10) to decide on any appeal of the panel's final report in this dispute.

Under the agreed arbitration procedures, a party's notice of recourse to arbitration under Article 25 of the DSU is characterized as a "notice of appeal".

The panel report was originally issued to both the EU and Turkey on a confidential basis on 11 November 2021, but on 20 December 2021, the EU asked the panel to suspend its work, and the report was not circulated to the rest of the WTO membership.

At the request of both the parties, the dispute panel in this case did not itself circulate its final report to the WTO members, which would have made it public, but instead only transmitted it to the EU and Turkey and allowed them to make the report public. Both Turkey and the EU agreed to make public the panel's findings in this dispute.

If the dispute panel had itself circulated the report, the DSU would have required either party to file an appeal with the Appellate Body - which is currently non-functional - or the DSB to adopt the report, within 60 days following its circulation.

However, in resorting to the arbitration procedures under Article 25 of the DSU that have been mutually agreed to by both the parties, Turkey opted to use a mechanism to appeal the panel's findings through an alternative means of dispute resolution (see SUNS #9566 dated 2 May 2022).

According to the Award by the arbitrators, the arbitration concerns issues of law and legal interpretations developed in the Panel Report, Turkey - Certain Measures Concerning the Production, Importation and Marketing of Pharmaceutical Products.

These issues of law and legal interpretations relate to certain provisions of the General Agreement on Tariffs and Trade 1994 (GATT 1994) applied in the context of Turkiye's "localisation requirement".

The Panel was established on 30 September 2019 to consider a complaint by the European Union with respect to the consistency of the localisation requirement and certain other measures for pharmaceutical products adopted by Turkiye with provisions of the GATT 1994, the Agreement on Subsidies and Countervailing Measures (SCM Agreement), and the Agreement on Trade-Related Investment Measures (TRIMs Agreement).

The Panel Report was issued to the parties on 11 November 2021. In ruling on the European Union's claims regarding the localisation requirement, the Panel found that:

a. the European Union had established the existence of the localisation requirement as a "single measure", whereby (i) Turkiye required foreign producers to commit to localise in Turkiye their production of certain pharmaceutical products; and (ii) where commitments were not given, accepted, or fulfilled, relevant products were no longer reimbursed by Turkiye's Social Security Institution (SSI);

b. the localisation requirement was not covered by the government procurement derogation in Article III:8(a) of the GATT 1994, and was therefore subject to the national treatment obligation in Article III:4 of the GATT 1994 and Article 2.1 of the TRIMs Agreement;

c. the localisation requirement was inconsistent with the national treatment obligation in Article III:4 of the GATT 1994; and

d. Turkiye had not established that the localisation requirement was justified under Article XX(b) or Article XX(d) of the GATT 1994.

The Panel also made findings of inconsistency with the GATT 1994 in respect of another measure challenged by the European Union, namely Turkiye's "prioritization measure".

In this respect, the Panel found that:

a. the European Union had established the existence of an overarching measure whereby Turkish authorities gave priority to the review of applications for inclusion in the "Annex 4/A list" and to good manufacturing practices and marketing authorization applications concerning domestic pharmaceutical products over the review of applications of like imported products; and

b. the prioritization measure was inconsistent with Article III:4 of the GATT 1994.

The Panel concluded that, to the extent that they were inconsistent with the GATT 1994, the measures at issue nullified or impaired benefits accruing to the European Union under that Agreement.

The Panel recommended that Turkiye bring its measures into conformity with its obligations under the GATT 1994.

At the request of the parties, the Panel suspended its work before the circulation of the Panel Report to Members.

On 22 March 2022, Turkiye and the European Union notified Agreed Procedures for Arbitration under Article 25 of the DSU (Agreed Procedures) to the Dispute Settlement Body (DSB).

Under the Agreed Procedures, "[t]aking into account that the Appellate Body is not presently able to hear an appeal in this dispute", the parties agreed "to enter into arbitration under Article 25 of the DSU to decide any appeal from any final panel report as issued to the parties in dispute DS583".

The parties further agreed to "abide by the arbitration award, which shall be final", with the understanding that "un-appealed" panel findings would form an integral part of such an award.

On 25 April 2022, Turkiye notified the DSB of its decision to initiate an arbitration under Article 25 of the DSU through a notice of recourse to arbitration, attaching the Panel Report, in accordance with paragraph 5 of the Agreed Procedures. On the same day, Turkiye filed its written submission.

On 28 April 2022, three arbitrators were selected in accordance with paragraph 7 of the Agreed Procedures.

CONCLUSION

The arbitrators found that Turkiye has not established that the Panel applied an incorrect legal standard under Article XX(d) in finding that Turkiye had failed to demonstrate that the localisation requirement was taken to secure compliance with laws requiring Turkiye to ensure accessible, effective, and financially sustainable healthcare and was therefore justified under Article XX(d) of the GATT 1994.

The arbitrators said that having found that the localisation requirement was not a measure taken to secure compliance with laws or regulations, the Panel did not need to assess the remaining legal elements of Article XX(d) to determine the applicability of this exception, namely, whether the measure was "necessary" to secure such compliance.

Moreover, because the localisation requirement did not fall under Article XX(d) and therefore was not provisionally justified under this sub-paragraph, it was also unnecessary for the Panel to assess whether the localisation requirement was being applied consistently with the requirements of the chapeau of Article XX, they added.

Consequently, the arbitrators upheld the Panel's finding, in paragraphs 7.219 and 8.1.b.iv of the Panel Report, that Turkiye has not established that the localisation requirement is justified under Article XX(d) of the GATT 1994.

AWARD OF THE ARBITRATORS

With respect to Articles III:4 and III:8(a) of the GATT 1994, the arbitrators said on interpretation, they consider that, under Article III:8(a) of the GATT 1994, "procurement by governmental agencies of products purchased for governmental purposes" would typically involve the procurement of products through a purchase by a governmental agency.

However, Article III:8(a) does not contain an unequivocal requirement to that effect, they added.

"We do not foreclose the possibility that, in certain circumstances, the relevant purchase transaction may be entered into by a non-governmental entity so long as the products are procured by a governmental agency and procurement is of products purchased for governmental purposes."

The arbitrators therefore found that the Panel erred in considering, as a starting point for its analysis in paragraph 7.65 of the Panel Report, that Article III:8(a) required a purchase by governmental agencies.

On application, the arbitrators said that central to Turkiye's first claim under Article III:8(a) is whether there is procurement by a governmental agency of products purchased for governmental purposes within the meaning of Article III:8(a).

On the basis of the Panel's factual findings and uncontested facts on the panel record, the arbitrators concluded that there is no procurement, within the meaning of Article III:8(a), by the SSI of the pharmaceutical products included in the Annex 4/A list.

For these reasons:

a. the arbitrators found that the localisation requirement does not fall within the ambit of the derogation in Article III:8(a) of the GATT 1994 on the basis that there is no procurement by governmental agencies within the meaning of that provision;

b. consequently, the arbitrators upheld, albeit for different reasons, the Panel's finding, in paragraphs 7.107 and 8.1.b.ii of the Panel Report, that the localisation requirement is not covered by the government procurement derogation in Article III:8(a) of the GATT 1994, and is therefore subject to the national treatment obligation in Article III:4 of the GATT 1994 and Article 2.1 of the TRIMs Agreement; and

c. the arbitrators declared the Panel's intermediate findings, in paragraphs 7.66-7.81 of the Panel Report, regarding the interpretation of the term "products purchased", as well as its intermediate finding, in paragraphs 7.90, 7.103, and 7.104, that the localisation requirement does not involve the purchase of pharmaceutical products included in the Annex 4/A list by governmental agencies to be moot and of no legal effect.

"Having upheld the Panel's finding that the localisation requirement does not fall within the ambit of Article III:8(a), it is not necessary for us to address Turkiye's conditional requests that we moot or reverse the Panel's findings under Article III:4 of the GATT 1994," said the arbitrators.

Therefore:

a. the arbitrators found that the Panel's finding, in paragraph 8.1.b.iii of the Panel Report, that the localisation requirement is inconsistent with the national treatment obligation in Article III:4 of the GATT 1994, remains undisturbed.

With respect to Article XX(b) of the GATT 1994, the arbitrators said that on interpretation, they do not consider that the Panel committed legal error by confusing the "design" and the "necessity" steps of the legal analysis under Article XX(b) of the GATT 1994.

"We also do not consider that the Panel set out a legal standard requiring a substantial degree of probability of risk for assessing whether a measure has been taken to protect human, animal, or plant life or health, in accordance with Article XX(b) of the GATT 1994, nor that the Panel introduced any quantitative dimension to the notion of risk to human life or health that unduly limited the range of public health measures that fall within the scope of Article XX(b)."

Finally, the arbitrators disagreed that the Panel erred by relying on previous panel reports dealing with provisions other than Article XX(b).

On application, to the extent that they have found no reversible error in the Panel's interpretation of Article XX(b), and considering the nature of Turkiye's application claims, the arbitrators considered that Turkiye failed to establish that the Panel erred in its application of Article XX(b).

With respect to Article 11 of the DSU, the arbitrators did not consider that the Panel exceeded its authority as the trier of facts and thereby failed to make an objective assessment of the matter before it.

For these reasons:

a. the arbitrators upheld the Panel's finding, in paragraphs 7.219 and 8.1.b.iv of the Panel Report, that Turkiye has not established that the localisation requirement is justified under Article XX(b) of the GATT 1994.

With respect to Article XX(d) of the GATT 1994, the arbitrators said that in light of the manner in which Turkiye articulated its justification for the localisation requirement under Article XX(d) of the GATT 1994, they consider that it did not constitute legal error for the Panel to have extended elements of its assessment under Article XX(b) mutatis mutandis to the analysis of Turkiye's defence under Article XX(d).

The arbitrators said that even without the Panel's examination of the laws or regulations cited by Turkiye and their qualification under Article XX(d), the Panel's intermediate finding on the lack of rational relationship between the localisation requirement and the proclaimed objective, which was made on the basis of the Panel's mutatis mutandis application, was sufficient for the Panel to conclude that the localisation requirement was not taken to secure compliance with the relevant laws or regulations, even if taken at face value as described by Turkiye.

For these reasons:

a. the arbitrators upheld the Panel's finding, in paragraphs 7.219 and 8.1.b.iv of the Panel Report, that Turkiye has not established that the localisation requirement is justified under Article XX(d) of the GATT 1994. +