International Trade Law Notes

Law
International Trade Law

Introduction to International Trade Law
Role Name Affiliation
Principal Investigator Dr. Ranbir Singh Vice Chancellor, National
Law University, Delhi
Co-P.I Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi
Paper Coordinator Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Writer/Author Prof. A. Jayagovind National Law University,
Delhi
Content Reviewer Dr. Sheela Rai National Law University,
Orissa
Language Editor Dr. Saloni Khanderia-Yadav National Law University,
Delhi
DESCRIPTION OF MODULE
Items Description of Module

Subject Name Law
Paper Name International Trade Law
Module Name/Title Introduction to International Law
Module Id 1
Pre-requisites  Economics of international trade,
 The theory of comparative advantage, why countries
trade with each other,
 Arguments for and against free trade
Objectives To understand the following:
 The origins of international trade law;

 An analysis of comparative advantage vis-à-vis
absolute advantage;
 An over-view of the GATT and the WTO in
regulating International Trade Law.
Keywords GATT, Protocol of Provisional Application.
E-TEXT:
Topics and Sub-Topics covered:
Introduction
Historical Background
Economic Theories
Developing Countries and Free Trade
Strategic Trade Policy
Conclusions
INTRODUCTION
International Trade Law (ITL) is the law regulating international commerce. It has
two aspects: public and private. The public aspect of ITL seeks to coordinate
commercial policies of states; and it is a part of Public International Law. The private
aspect of ITL governs international commercial transactions between the people
belonging to different states. This is substantially covered under Private International
Law. In addition, the bodies like the United Nations Commission on International
Trade Law have been trying to develop standard laws on various aspects of
transnational transactions and states are expected to incorporate them in their
respective legal system. This process is known as unification of laws. In this module,
only public aspects of ITL are covered.
The purpose of ITL has been to foster free trade among nations. Free trade in this
context means that people should be free to buy and sell goods cutting across national
frontiers. In other words, a person should be free to buy a product from anywhere in
the world wherein he can get the best quality at the cheapest possible price. Similarly,
he should be free to sell his product anywhere in the world at the highest possible
price. In brief, it is the globalization of Article 301 of Indian Constitution: Trade,
Commerce and intercourse shall be free throughout the territory of India.
Before the emergence of modern state system in 17th century, trade was free and
merchants moved all over the world to the extent they could buying and selling goods
and incidentally spreading knowledge and culture. In this way, they were the
harbingers of modern civilization. But once the organized state system came into
existence, the governments started interfering into these commercial transactions. To
start with, they began to levy tariffs on incoming goods mainly with a view to
bolstering their revenues. With the ushering in of Industrial revolution,
manufacturing became an important component of national economy. At that stage,
states started using tariffs and other devices to protect national economy from foreign
competitors. From that time onwards, free trade and protectionism moved side by
side: one following the other like a shadow.
Thanks to the contributions of people like Adam Smith, the governments realized the
value of free trade; and made conscious efforts to promote free trade. One can
identify three distinct stages in the evolution of international free trade regime. To
begin with, states started concluding bilateral treaties, with a view to mutually
reducing tariffs with regard to certain specified goods which were of interest to them.
Anglo-French Treaty of 1860 was the earliest bilateral treaty calling for a “tariff
truce” and aiming at mutual tariff reductions. And this stage continued up to the end
of Second World War.
By the end of Second World War, having realized the limitations of bilateral
approach, the states went for a multilateral approach for the first time. The General
Agreement on Tariffs and Trade was the product of this approach. The principle of
non-discrimination along with tariff reduction became the basis for this new
multilateral regime. The principle of non-discrimination means that states shall not
discriminate between goods by reference to their places of origin.
Thanks to the emergence of multinational corporations and global production chains,

national economies are being globalized. Modern digital technology made the
integration of production at global level possible. The European Union, the North
American Free Trade Area and the World Trade Organization represent the
institutional manifestation of this new trend. Along with trade liberalization, these
institutions have been pursuing the objective of developing global standards and
thereby global governance for intellectual property rights, investment, labor rights,
etc. There have been formidable obstacles on the way, but still the effort towards a
global regime in trade, investment and related aspects such as technology is going on.
Trans-Atlantic Trade and Investment Partnership (TTIP), Transpacific Partnership
Agreement (TPPA) and Regional Comprehensive Economic Partnership (RCEP)
represent this renewed effort. The basic idea seems to be that even if global
consensus is not possible, let us try at substantial regional level.
HISTORICAL BACKGROUND
The General Agreement on Tariffs and Trade (GATT), the International Monetary
Fund (IMF) and the International Bank for Reconstruction and Development (IBAD)
were established to provide institutional framework for post-War international
economic order. They were planned as response to economic problems that afflicted
international economy during inter-War period. Soon after the First World War, the
League of Nations was established to foster multilateral approach towards
international problems. Though the League did not have a separate set up to deal with
international economic problems, its Secretariat made significant intellectual
contribution to the analysis of economic problems. The first World Economic
Conference was held under the under the League’s Auspices in 1927; and it produced
Geneva Convention on Import and Export Prohibitions. This was the first multilateral
effort to establish a legal regime for international trade. The Convention prohibited
quantitative restrictions on international trade except for balance of payments
purposes. Though it was signed by large number of states, there was no adequate
ratification. Hence it did not come into force.
In the early 1930s, international economy was hit by the Great Depression. States
reacted by imposing restrictions on incoming goods, hoping that they would thereby
protect domestic employment. The U.S. Congress passed Smoot-Hawley Act in 1930
whereby import duties were raised considerably. Other states reacted in the same
way; and beggar-my-neighbor policy became the order of the day. Between 1929 and
1934, international trade shrank by 2/3.
When the USA realized that it could not sell its products any longer in international
market, it tried to get out of it by concluding bilateral trade agreements with other
countries whereby the parties mutually reduced the tariffs on selected products. The
U.S. Congress passed Reciprocal Trade Agreements Act in 1934, authorizing the
President to conclude bilateral trade agreements for certain period of time; and when
that time expired, it renewed the authority a couple of times. The fast track authority,
so given to the President was used by the latter to enter into the GATT.
The U.S.A. concluded a number of reciprocal trade agreements with other countries.
All of them invariably contained so-called conditional most favored nation clause.
For example, country A would give most favored nation treatment to certain goods
coming from B provided B reciprocates this gesture. Thus both A and B would
extend to each other most favored nation treatment on reciprocal basis. But this kind
of bilateral approach had its own limitations. Thus when the countries started
negotiations for the establishment of International Trade Organization, there was
general consensus on multilateral approach based on unconditional most favored
nation treatment.
In 1939, the Second World War broke out. Many scholars are of the view that
economic misery, caused by the Great Depression facilitated the rise of
totalitarianism in Germany and Italy. The Allied Powers fought the War against the
Axis Powers under the slogan of protecting democracy from the onslaught of
totalitarianism. Even as the War was raging, the Allied Powers started the
deliberation on new World order which would secure the World peace. The Atlantic
Charter, agreed between the USA and the UK, was the first step in this direction; and
this Charter, inter alia, emphasized free trade. Free trade among free people was the
guiding ideology for the reconstruction of war-ravaged world. The United Nations
Organization was established in 1945 to advance the cause of human rights and
fundamental freedoms. Free trade which is the expression of economic freedom was
considered as the fortification of liberal world order. As Cordell Hull, the leader of
the U.S. delegation to the ITO negotiations, put it:
Enduring peace and welfare of nations are indissolubly connected

with friendliness, fairness, equality and maximum degree of
freedom in international trade. Unhampered trade dovetails with
peace and high tariffs, trade barriers and unfair competition with
War.
By the end of 1945, the U.N.O., the IMF and the IBRD came into existence. The
negotiations for the International Trade Organization (ITO), the trade component of
post-War international economic order, started in 1946. The Economic and Social
Council passed a Resolution, on the initiative of the U.S.A., convening a U.N.
Conference on Trade and Employment. A Preparatory Committee, consisting of 19
countries, was set up to prepare the background materials for the proposed
Conference. A U.S. proposal with inputs from the U.K. on International Trade
Organization provided the basis for the deliberation of Preparatory Committee. The
Preparatory Committee held 3 meetings: in London in October, 1946; in New York in
January, 1947 and in Geneva during April-October, 1947. The final U.N. Conference
on Trade and Employment was held during November 1947 and March 1948 and it
produced the U.N. Convention on Trade and Employment, popularly known as
Havana Charter.
The main interest of the U.S.A. in ITO negotiations was the opening up of markets for
its surplus products. It insisted on parallel negotiations for the reduction of tariffs.
Given the prominence of the U.S.A., other countries could not resist this demand. In
Geneva meeting, 45000 tariff concessions worth $ 10 billion were negotiated between
23 countries. 1947 was a crucial year for the negotiators. The U.S.A. realized that
the negotiations for the ITO were moving much against its ideas; and hence there
would be a likelihood of stalemate. Further, by the end of 1947, the fast track
authority, given to the President under the Reciprocal Trade Agreements Act, would
expire; and it was unlikely that the Congress would extend this fast track authority,
given its hostility towards free trade policies in general. Under these circumstances,
the U.S. delegation took out certain portions of the ITO charter in making, especially
from Part IV dealing with “Commercial Policies” and produced the General
Agreement on Tariffs and Trade (GAT) in order to provide the legal backing to the
tariff concessions already negotiated in Geneva meeting and also to provide a legal
framework for future negotiations. The expression “Tariffs” in the title “The GATT”
indicates the main concern of the U.S.A in undertaking this exercise.
The GATT was essentially conceived as a stop-gap arrangement pending the

establishment of the ITO. Article XXIX of the GATT dealing with the relation
between the GATT and the proposed Havana Charter makes this point clear.
Therefore, the participant states thought of adopting the GATT provisionally through
a protocol. Accordingly, a Protocol on Provisional Application was drafted, and the
idea was that by accepting this Protocol, the GATT would be operationalized. The
Protocol contained two important provisions:
1. Part I and III of the GATT shall be accepted by all the Contracting
Parties;
2. Part II of the GATT shall be accepted “to the fullest extent not
inconsistent with existing legislation.
The Protocol also provided in its Preamble that the GATT would “apply provisionally
on and after 1st January 1948” provided the following eight Governments sign the
Protocol not later than 15 November 1947. These eight Governments were: Australia,
Belgium, Canada, France, Luxembourg, Netherlands, the U.K. and the U.S.A. All of
them signed before 15 November 1947. Many other countries joined the GATT later
on.
Part I of the GATT consisted of Articles I and II providing for most favored nation
treatment and the Schedule of Concessions. Part III, consisting of Articles XXIV to
XXXV, mainly dealt with procedural issues including Tariff Negotiations, i.e. Article
XXVIIII bis. Part II of the GATT consists of substantive obligations such as national
treatment, trade remedies, quantitative restrictions etc. The interpretation of the
clause in the Protocol: “the fullest extent not inconsistent with existing legislation”
was controversial even at that time. It was popularly called as “grand father clause”
in the sense that it protected the existing rights of states. But a contracting state is
prevented from enacting legislation contrary to the GATT once it chooses to become
a party to the GATT.
As was expected, there was strong opposition to the Havana Charter in the U.S.
Senate. The general impression in the U.S.A. was that it had imposed heavy burden
on the U.S.A. to salvage the Europe from economic crisis. Meanwhile, the control of
the U.S. Congress passed from the hands of Democrats to Republicans while the
Presidency was still with Democratic Party. Sensing the defeat in the Senate, the
President in 1950 withdrew the bill containing Havana Charter. And with that, the
post-War deliberations to establish a new economic order came to an end.
ECONOMIC THEORIES
As Prof. McDougal put it, social theories have the unfortunate habit of travelling in
the pairs of opposites. Free trade and protectionism have always been there in
international commercial relations; and they manifested under different garbs. At a
given point of time, one theory may appear to be dominant; but its opposite has been
waiting in the wings to take the central stage.
The idea of modern state system within a defined territory came into existence in
1644 with the conclusion of the Treaty of Westphalia. Many social theories came up
around that time mainly with a view to strengthening the nascent state system. The
basic idea was to strengthen the Central authority against centers of power based on
feudalism or religion. Mercantilism as a theory on international trade was developed
for this purpose. Along with the corresponding political theory of power politics, it
held that the acquisition of power, i.e. economic power, in this context, is summum
bonum of a state. In the absence of modern banking and currency system, economic
power meant acquisition of precious metals – mainly gold. To acquire gold from
other states, a state should achieve export surplus vis-à-vis other states. It could also
simply cutting down imports from other states so as to curtail thy outflow of precious
metals which served as money: nationally and internationally. In brief, protectionism
under the garb of strengthening the central authority, became the dominant ideology.
The limitation of this theory was obvious: aggressive pursuit of export surplus is a
zero sum game, which would soon lead to the shrinking of international trade.
However, in the context of power politics, such an aggressive pursuit was considered
legitimate.
With the dawn of industrial revolution in 18th century, mainly in the U.K., a more
enlightened trade theory emphasizing the expansion of trade was required, because
the industrialized countries required to export their industrial products and to import
raw materials. Adam Smith, in his Wealth of Nations, published in 1776, met that
need. In consonance with the emerging republican spirit emphasizing individual
liberty, he argued that a nation’s strength should be judged by the wellbeing of the
people rather than possession of precious metals. It meant that people engaged in
agricultural must not be squeezed to promote industries. Further, Adam Smith
believed that division of labor and consequent emphasis upon specialization would
contribute to general prosperity. He explained the rationale for free trade as follows:
It is the maxim of every prudent master of a family never to attempt to

make at home what it will cost him more to make than to buy. The
tailor does not attempt to make his own shoes, but buys them from
shoe-maker. The shoe-maker does not attempt to make his own
clothes, but employs a tailor. ---- All of them find it for their interest
to employ their whole industry in a way in which they have some
advantage over their neighbors and to purchase with a part of their
produce whatever they have occasion for.
What is prudence in the conduct of every private family can scarce be

folly in that of great kingdom. If a foreign country can supply us with
a commodity cheaper than we ourselves can make it, better buy it of
them with some part of the produce of our own industry, employed in
a way in which we have some advantage.
In brief, Adam Smith proceeded on the assumption that just like an individual having
some advantage over other individuals in respect of skills, a state has also advantage
over other states. Hence his exposition is known as the doctrine of Absolute
Advantage. But with the advancement of technology, every state can produce almost
everything it requires; and a technologically advanced state can have absolute
advantage over other states. In this context, David Ricardo advanced the doctrine of
Comparative Advantages as a corrective to Adam Smith’s doctrine of Absolute
Advantage. According to him, even if country A has absolute advantage over country
B in production of many goods, it is better for country A to concentrate on producing
those goods in which it has relative advantage compared to the production of other
goods. To quote his classic example:
Suppose in England a gallon of wine costs 120 and a yard of cloth 100
unites of work, while in Portugal, a gallon of wine costs 80 units of
work and a yard of cloth costs 90 units. Portugal has absolute
advantage in both wine and cloth; but England has comparative
advantage, since the production of a yard of cloth in England involves
in giving up production of 5/6 (100/120) of a gallon of wine, whereas
the production of a yard of cloth in Portugal involves giving up 1 1/8
(90 /80) of a gallon of wine. Assuming constant costs, prices
accurately reflect costs and ignoring transport and handling, a piece of
cloth anywhere between 5/6 and 1 1/8 of the price of wine would make
it profitable for Portugal to import cloth and export wine and for
England to export cloth and import wine. If the same amount of
resources, as before trade, are committed, the output for the two
countries will be both more wine and more cloth.
According to Paul Samuelson, if there is one economic theory which has withstood
the test of time, it is Daniel Ricardo’s theory of comparative advantages, because it
has clearly demonstrated how mutually profitable division of labor enhances national
production for all nations.
In the recent time, Heckscher and Ohlin developed Ricardo’s ideas further by
substituting capital and labor. According to them, international trade is determined by
fact or endowments and factor intensities.
Even as Adam Smith’s theory was gaining acceptance, there was counter attack from
Europe. Protectionism in the sense of state intervention to protect community’s
interest emerged under a new garb: infant industry protection. Friedrich List, a
German economist, in his book “National System of Political Economy” argued that
free trade would be harmful to countries like Germany which were inferior to
England, at that point of time, in industrialization. Free trade for Germany would
mean that, it would be flooded with cheap English products; and Germany would
never be able to develop its potential. Hence he argued for the protection of nascent
industries in Germany through high tariff walls. Around the same time, in the U.S.A.,
Hamilton, one of the prominent authors of Federalist Papers, argued for encouraging
manufacturing in the U.S.A through protectionist policies: and thereby openly
repudiating Adam Smith’s ideas.
DEVELOPING COUNTRIES AND FREE TRADE
Between 1950 and 1960, large number of developing countries, freed from colonial
bondage, emerged on international scene. Most of them have become members of the
U.N.O. and other international economic agencies. India was the original member of
most of these institutions. But when it came to economic policies, most of them were
out of tune with the economic philosophy of these economic institutions, i.e. free
trade. The doctrine of comparative advantages meant in this context, the perpetuation
of status quo. During colonial period, they mainly served as the suppliers of raw
materials to the industries of their colonial masters. A static interpretation of
comparative advantages meant that they would continue to be agricultural economies
supplying raw materials to the Western world. According to the poignant expression,
popularized by Gunnar Myrdal, they will continue to be “hewers of wood and drawers
of water” for developed world.
The dilemma faced by developing countries is best expressed by Dr. V. Kurien, the
father of India’s White Revolution, as follows:
They (World Bank economists) talk about comparative advantage, as

though it were a prescription, not a description. If comparative
advantage was a permanent condition, I suspect that our potatoes
would still come from Peru or Ireland; and coal would still be mined
in New Castle. The fact of the matter is that comparative advantage
can be earned by supporting initiative, energy and investment of our
farmers.
If the doctrine of comparative advantages is to be used as a prescription, as Dr.Kurien

put it, the potential of the economy must be taken note of and encouraged. If it does
not move beyond the description of existing situation, while prescribing policy
initiatives, it would mean perpetuation of the status quo. The problem is how to
assess the economic potential of a country. Thanks to modern technology, anything
can be produced anywhere; and the human capability to wield technology seems to be
the decisive factor. We have countries like Japan with very little raw material base
emerging as great economic powers.
There were two kinds of reactions against market fundamentalism advocated by

Western countries and international economic institutions. Most of the Communist
countries chose to remain outside these institutions. Quite a few developing countries
like India chose to the part of these institutions, hoping to change their orientations.
They rallied around a charismatic Argentinian economist, Raul Prebisch who served
as the Secretary-General of UNCTAD. Raul Prebisch, along with British economist,
Hans Singer, after analyzing the data between 1870 and 1930, demonstrated that the
terms of trade between primary commodities and manufactured goods have been
deteriorating. In other words, year after year, more and more primary commodities
had to be sold to acquire the same quantity of manufactured product. To get over this
problem, Prebisch argued for industrialization of economies of developing countries
through import substitution. He urged the developed countries to dilute the
reciprocity consideration while dealing with developing countries. In concrete terms,
he argued for preferential treatment to the goods from developing countries in the
markets of developed countries. Thanks to his efforts through UNCTAD, the
generalized scheme of preferences was adopted within the framework of the GATT.
Part IV titled as Trade and Development was added to the GATT by way of
amendment in 1966. Many international commodity agreements were concluded to
stabilize the prices of primary commodities.
The report submitted by Raul Prebisch to the UNCTAD – II titled as “Towards a New
Trade Policy for Development” provided blueprint for the trade policies of developing
countries. In this report he makes a strong case for import substitution. Because of
the slow growth in demand for primary commodities, developing countries will not be
able to expand their import of manufactured products. In so far as they industrialize
this economy, they would be better customers for industrial products. To quote Raul
Prebisch:
Why has the GATT not been efficacious for the developing countries as
for the industrial countries? First, the Havana Charter is based on the
classic concept of free play of international economic forces by itself
leading to the optimum expansion of trade and the most efficient
utilization of the World’s productive resources; rules and principles are
therefore established to guarantee this play. (P. 21)
In brief, Prebisch advocated strategies combining free trade with protectionism.

Protective elements such as preferences, commodity agreements, etc., were devised,
keeping in mind unequal position and vulnerability of developing countries.
STRATEGIC TRADE POLICY
The most successful economies of the second half of 20th century were South-East
Asian economies including Japan. They are considered as market economies under
the WTO categorization. But they are different from classical liberal economies
wherein the government and markets are supposed to function at arms’ length from
each other. In South Korea, the Government has nurtured the leading private
companies known as chaebols. In Japan, the Government and industries are so close
that they are referred to as Japan incorporated. They are different from communist
economies in two significant ways: (a) they are democracies and (b) they are actively
engaged in international trade and market signals. In the WTO panel’s report on
Japan : Measures affecting consumer Photographic film and paper, 1998, we get a
glimpse of how the Ministry of Trade and Industries in Japan interacts with the
producers and the traders so as to promote efficiency. As the case shows, these
policies are designed in such a way as to escape from the clutches of WTO provision.
The strategic trade policy would lead to “managed trade” instead of free trade.
Strictly speaking, free trade in the real sense of the term did not exist at any point of
time. Negotiations for tariff concessions imply that states have been using tariff for
protectionist purposes. In a free trade world, tariff should be minimal, i.e. no more
than fees for the services rendered at the border. In such a World, there is no need for
elaborate agreements. The very fact that trade negotiations last for years together and
the negotiation for TTIP, TPPA etc., have been going on and on, often generating
controversies in the countries concerned show that participating countries want to
manage the international trade in their respective national interests which often clash
with one another.
Modern system of transnationalized production has further complicated the system.

Mono-location of production envisaged in the GATT no longer exists. The typical
example given in this connection is ipods, manufactured by Apple company of the
U.S.A. The invention and the designs are done in the U.S.A by Apple company. But
the components including soft wares are sourced from different placed and they are
finally assembled in China by Chinese workers under the control of Chinese
subsidiary of Apple company. Though it is labeled as “Made in China”, the Chinese
share would be a very small part of the market price. It was estimated that out of $
194 paid for an ipod, $ 80 went to the U.S.A and only $ 4 went to Chinese. The rest
were distributed among the suppliers of components. Many a time, a product passes
through different countries where there would be value additions. The whole process
is known as supply chains. Supply chains refer to international network of production
in which goods are sent from country to country for value addition, mainly to take
advantage low-wage labor and other services. To refer to this multi-location of
production, the WTO has coined the expression “Made in the World”.
The concept of managed trade and supply chain are in a way intertwined with each
other. There are theories that the moves towards regional agreements such as TPPA
(i.e. Trans Pacific Partnership Agreement) are guided by supply chain considerations.
To operate these supply chains smoothly, the countries involved must have strong IPR
protection and efficient customs administration, etc. Trade Facilitation Agreement,
projected by developed countries as great achievement, would make the movements
through supply chains much smoother. Thus, theses classic interactions between the
government and multinational corporations indicate Strategic Trade Policies pursued
mainly in developed countries.
CONCLUSIONS:
In abstract, free trade and protectionism represent two ends of spectrum. In practice,
no state is likely to identify itself with the extreme ends of the spectrum. States have
by and large pursued the policies containing the elements of both: free trade and
protectionism. With the establishment of the GATT and the WTO at a later stage,
free trade components have become more pronounced in the state policies. The
success of East Asian economies is the vindication of their dexterity in conceiving
and executing the combinations of free trade and protectionism.
Though the original GATT was very much market-oriented, the presence of large
number of developing countries diluted this market orientation to some extent.
Article XVIII and Part IV of the GATT recognize the special and differential
positions of developing countries. But how far have they helped the developing
countries remains a moot question. The demand for more meaningful special and
differential treatment still continues. Doha Round of 2001 was especially dedicated
to discuss the developmental issues. But even after a decade, nothing significant has
come out of it.
***********
Law

Introduction to the General Agreement on Tariffs and
Trade
Delhi
Content Writer/Author Ms. Geetanjali Sharma University of Cambridge
Content Reviewer Prof. A. Jayagovind National Law University,
Delhi
Delhi

Subject Name Law
Module Name/Title Introduction to the General Agreement on Tariffs and Trade
Module Id 2
Pre-requisites  The historical background of the two world wars and
the prevailing economic conditions.
 A brief understanding of the scope of present day
WTO.
 The economic principles of international trade.
 Justifications of the international trade system;

 The origins and scope of GATT;
 The provisional application of GATT;
 The guiding principles of GATT;
 Subsequent negotiating rounds and expansion of the
GATT agenda;
 Evaluation and impact of the GATT on the current
international trade regime.
Keywords GATT, Protocol of Provisional Application, Tokyo Round,

Kennedy Round, terms of trade, nature of GATT etc.
E-TEXT
Topics & Sub-Topics covered
1. Genesis of GATT
1.1 Bretton Woods Conference
1.2. Provisional application of GATT
2. Guiding principles of GATT

3. Expansion of the GATT agenda
3.1 Kennedy Round (1964-67)
3.2 Tokyo Round (1973-79)
4. Justifications for the world trading regime
4.1 The terms-of-trade school
4.2 Political incentivization
4.3 Existing bilateral and discriminatory trade policies
5. Evaluation of GATT and its impact on modern trade rules
6. Conclusion
TEXT
1. Genesis of GATT
1.1. Bretton Woods Conference
The General Agreement on Tariffs and Trade (hereinafter referred to as the ―GATT‖)
began in 1947 with 23 members and a forerunner to the present day World Trade
Organization (hereinafter referred to as the ―WTO‖) which has 160 members, comprising
approximately 96.4 percent of world trade, with the potential to increase to 99.95
percent.1
The GATT should be traced back to the United Nations Conference on Trade and
Development, with the former being set up primarily to remedy the failings of World War
I‘s Versailles Treaty and to support the creation of a new international monetary system
that would facilitate postwar reconstruction, economic stability, and peace. The Bretton
Woods Conference produced two of the most important international economic
institutions of the postwar period: the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (the World Bank).
The Bretton Woods Conference, while establishing the IMF and WB, also recognized the
need for an international institution which would address growing trade concerns. It was
also intended to be a forum for the negotiation of reciprocal reduction of tariffs on trade
in goods between wartime allies, at the behest of the United States of America.
Failed attempts to set

up ITO
Bretton Woods Modern Day WTO
(Provisional
Conference (1944) (1995-till date)
application of GATT)
(1947-1994)
1 Accession in perspective, Handbook on Accession to the WTO, Chapter 1 at

http://www.wto.org/english/thewto_e/acc_e/cbt_course_e/c1s1p1_e.htm (last visited on 10th July
2014)
1.2. Provisional application of GATT
The above intention for the establishment of a multilateral trade institution was fortified
by way of a resolution adopted by the newly established United Nations Economic and
Social Council in 1946 calling for the drafting of charter for the International Trade
Organization. 2 This resolution was followed by the establishment of a Preparatory
Committee in February 1946, which met in October 1946, to work on a charter for an
international organisation for trade on the basis of a proposal made by the United States.
Subsequently, the work was shifted from London to Geneva where it worked from April
to October 1947.
The Geneva 1947 Meeting was an important step in the creation of GATT and the world
trading order. Prof. John H. Jackson describes the 1947 Geneva Meeting as an elaborate
conference divided in three parts dealing with the following areas3:
i. The first dealt with the preparation of a charter for an international trade institution i.e.
the International Trade Organization (ITO);
ii. The second dealt with the negotiation of a multilateral agreement to reduce tariffs on
a reciprocal basis;
iii. The third dealt with the drafting of ‗general clauses‘ of obligations relating to the
tariff obligations.
The second and third items of the agenda eventually constituted the GATT, which was
developed to include a variety of provisions curtailing the imposition of trade-impeding
measures by various nations. While these clauses were negotiated and completed by 1948,
the negotiations on the ITO charter proved more difficult, and towards the end of the
1947 Geneva Meeting it was determined that the ITO charter would realistically not be
implemented along with the GATT.
There were two reasons for the same:
i. First, with the possibility of the trade concessions being known before the
implementation of GATT, there was a strong possibility of disruption of world trade
patterns;
2UN ECOSOC Res. 13, UN Doc. E/22 (1946).

3John Jackson, The World Trade Organization: Constitution and Jurisprudence (Royal Institute of International
Affairs, 1998), p. 15-16 in Peter Van den Bossche & Werner Zdouc, The Law and Policy of the World Trade
Organization (Cambride University Press, 2013), p. 76 (hereinafter referred to as “Van den Bossche &
Zdouc”).
ii. Second, the US negotiators were working under the authority of the 1945 Act which
expired in mid 1948, and there was thus a vested interest in implementing the GATT
as early as possible.4
However, the implementation of GATT and the ITO charter in two distinct stages led to
the provisional application of GATT. While discussing the need to pass domestic
legislation for the implementation of both GATT and the ITO charter, it was felt by
certain countries that the political capital needed to ratify the GATT first may jeopardize
the political capital that may be required to pass the ITO charter in the later years. Thus,
in order to resolve this problem, on 30 October 1947, eight of the 23 countries that had
negotiated the GATT 1947 decided to apply the GATT provisionally and signed the
‗Protocol of Provisional Application of the General Agreement on Tariffs and Trade‘
(PPA), and eventually the other fifteen countries also agreed to the same.
The twenty-three countries engaging in the Geneva negotiations that led to the signing of
the GATT in 1947 were Australia, Belgium, Brazil, Burma (Myanmar), Canada, Ceylon
(Sri Lanka), Chile, China, Cuba, Czechoslovakia (Czech Republic and Slovakia), France,
India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, South
Africa, Southern Rhodesia (Zimbabwe), Syria, United Kingdom, and United States.
Part I of the GATT 1947 contained the MFN obligation and the obligation regarding tariff
concessions, and Part III contained procedural provisions. The PPA resulted in the
nascent international trade order developing some features, which may be described in the
following manner:
i. As per the terms of the PPA, parties undertook to apply Parts I and III of the GATT
1947 in full, and Part II ‗to the fullest extent not inconsistent with existing
legislation‘5, as Part II contained the maximum number of substantive provisions and
would have necessitated the maximum involvement of the domestic legislature.
ii. The PPA also allowed for the creation of ‗existing legislation exception‘ or
‗grandfather rights‘ due to its feature that a GATT Contracting Party was entitled to
maintain any provision of its legislation which was inconsistent with a Part II
obligation.
At the time, it provided for the establishment of ITO as well as certain rules and
procedures for international trade. The aim was to create the ITO at a UN Conference on
Trade and Employment in Havana, Cuba in 1947. The Havana conference began on 21
November 1947, less than a month after GATT was signed. The ITO Charter was
concerned was completed in March 1948 in Havana. However, due to the lack of
congressional approval in the United States which President Truman eventually
abandoned in 1951, the ITO charter never entered into force.6 The ITO quickly became an
4 Id, p. 17-18 in Van den Bossche & Zdouc, supra n. 1, p. 77.

5 GATT BISD, Volume IV, p. 77 in Van den Bossche & Zdouc, supra n. 1, p. 77.
6 Van den Bossche & Zdouc, supra n. 1, p. 78.
unattractive venture once the US, which was a leading trading nation, abandoned its
intention in pursuing it. The reasons behind implementing the GATT separately, divorced
from the ITO charter, highlighted the influence of the political forces which had been
instrumental in creating the global trading order.
The GATT is a key institution that has shaped the current international trade regime, and
is responsible for many rules present in the WTO covered agreements. The practices of
the GATT are still considerably relevant in guiding the practices of the WTO, as affirmed
by Article XVI:1 of the WTO Agreement which states that ―..the WTO shall be guided by
the decisions, procedures and customary practices followed by the Contracting Parties to
GATT 1947 and the bodies established in the framework of GATT 1947‖.
2. Guiding principles of GATT
The objective of GATT was to establish an orderly framework for the reduction of trade
barriers which would lead to the expansion of international trade. The GATT in this
regard contained certain underlying principles which guided its application listed as
follows:
i. Non-discrimination: the Most Favored Nation (MFN) principle
The MFN principle stated that each contracting party to the GATT was required to
provide all other contracting parties with the same conditions of trade as the most
favourable terms it extended, i.e., each contracting party was required to treat all
contracting parties in the same way that it treats its "most favored nation".
ii. Reciprocity
The principle of reciprocity mandated that the benefits of any bilateral agreements
between contracting parties, regarding tariff reductions and market access, must be
extended simultaneously to all other contracting parties. The principle of reciprocity is
closely associated with the MFN principle.
iii. Tariff reduction
The reciprocal reduction of tariffs was a strong principle reflected in the GATT.
Protectionism at the time mainly consisted of tariffs, and negotiations were also naturally
focused on the same. The text of the 1947 GATT lays out the obligations of the
contracting parties in this regard.
The GATT treaty did not provide for a formal institution, but a small GATT Secretariat,
with a limited institutional apparatus, which was eventually headquartered in Geneva to
administer various problems and complaints that might arise among members. The nature
of GATT 1947 was that it was viewed as an agreement aimed at addressing most trade
concerns of its members, although it was a long way off from becoming an international
institution for trade. There were very few institutional features in the GATT 1947. 7
However, during its subsequent rounds of negotiations, the GATT ventured into rule-
making on Non-Tariff Barriers which lent it a more institutional and expansive character,
and ultimately it became a de facto institution.
3. Expansion of the GATT agenda
The GATT agenda was also subsequently expanded as a result of further negotiations
between the parties during the so-called trade rounds. There were multiple trade rounds
from 1947-1994, which are listed below:
Year Place/name Subjects covered Countries

1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1960-1961 Geneva Tariffs 26
Dillon Round
1964-1967 Geneva Tariffs and anti-dumping 62
Kennedy Round measures
1973-1979 Geneva Tariffs, non-tariff measures, 102
Tokyo Round ―framework‖ agreements
1986-1994 Geneva Tariffs, non-tariff measures, 123
Uruguay Round rules, services, intellectual
property, dispute settlement,
textiles, agriculture, creation of
WTO, etc
*Source WTO website at ‗The GATT Years: From Havana to Marrakesh‘ at
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm (last visited on 10th
July 2014)
It is estimated that tariffs on manufactured products fell from a trade-weighted average of

roughly 35 percent before the creation of GATT in 1947 to about 6.4 percent at the start
of the Uruguay Round in 1986.8 Over the same time period, the volume of trade among
7See Article XXV of GATT 1947, entitled „Joint Action by the Contracting Parties‟.
8Hoekman, Bernard, and Michel Kostecki, The Political Economy of the World Trading System (Oxford
University Press 1995) in Meredith A. Crowley, An introduction to the WTO and GATT, Federal Reserve
Bank of Chicago (2003) available at:
GATT members also surged. Among the various negotiation rounds, the Kennedy and the
Tokyo rounds expanded the scope of GATT significantly by venturing into rule-making
on Non-Tariff Barriers.
3.1. Kennedy Round (1964-67)
During the Kennedy Round from 1964-67, which was named after President John F
Kennedy of the US, the Ministers agreed on three negotiating objectives for the round9:
i. Measures for the expansion of trade of developing counties as a means of furthering

their economic development;
ii. Reduction or elimination of tariffs and other barriers to trade;
iii. Measures for access to markets for agricultural and other primary products.
In the end, the result was an average 35% reduction in tariffs, except for textiles,
chemicals, steel and other sensitive products; plus a 15% to 18% reduction in tariffs for
agricultural and food products. In addition, the negotiations on chemicals led to a
provisional agreement on the abolition of the American Selling Price (ASP).10
3.2. Tokyo Round (1973-79)
During the Tokyo Round from 1973-79, 102 countries participated in negotiations. Both
from the point of view of participation and the breadth of the negotiating agenda, this was
the biggest round up to that time. The Tokyo Round was launched on 14 September 1973
at a Ministerial meeting in Tokyo, but the negotiations were conducted largely in
Geneva.11
The Ministerial declaration for the Tokyo Round aimed at the following:
i. Tariff negotiations using the formula method,

ii. Reducing or eliminating non-tariff measures,
iii. Examining the possibility of reducing or eliminating all barriers in selected sectors,
iv. Examining the adequacy of the multilateral safeguard system,
v. Negotiations in agriculture, taking into account the special characteristics and
problems in this sector, and
vi. Treating tropical products as a special and priority sector.
The developing countries were drawn into the negotiating process much more than during
the Kennedy round, as the Tokyo Round held significant potential for influencing trading
https://www.chicagofed.org/digital_assets/publications/economic_perspectives/2003/4qeppart4.pdf
(last visited 10th July 2014).
9 Kennedy Round, http://worldtradereview.com/webpage.asp?wID=437 (last visited on 10th July 2014).
10 Id.
11 The GATT Years: From Havana to Marrakesh at

http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm (last visited on 10th July 2014).
relations between the global North-South. The Tokyo Round expanded the scope of the
GATT 1947 and led to the formulation of rules on Non-Tariff Barriers (NTBs). It led to
discussions among members on how to adequately address trade concerns apart from
reduction of tariffs. The rules agreed upon during the Tokyo Round were usually
accepted only by a relatively small number of parties (mainly industrialized nations) –
often called ―codes‖- and dealt with many substantive areas of rule-making which were
later finalized as Agreements in the Uruguay Round. The following codes were
concluded in the Tokyo Round:
i. Subsidies and countervailing measures - interpreting Articles VI, XVI and XXIII of
GATT 1947
ii. Technical barriers to trade (Standards Code)
iii. Import licensing procedures
iv. Government procurement
v. Customs valuation - interpreting Article VII of GATT 1947
vi. Anti-dumping- interpreting Article VI of GATT 1947 and replacing the Kennedy
Round Anti-Dumping Code
vii. Bovine Meat Arrangement
viii. International Dairy Arrangement
ix. Trade in Civil Aircraft
The Tokyo Round achieved an average one-third cut in customs duties in the world‘s nine
major industrial markets, bringing the average tariff on industrial products down to
4.7%. 12 It was an encouraging beginning, but it had mixed results. It fell short of
delivering an agreement on safeguards or emergency import measures. Several codes
were eventually amended in the Uruguay Round and turned into multilateral
commitments accepted by all WTO members. Only four remained ―plurilateral‖ — those
on government procurement, bovine meat, civil aircraft and dairy products. In 1997 WTO
members agreed to terminate the bovine meat and dairy agreements, leaving only two.13
It is important to mention that a significant achievement of the Tokyo Round was the
finalization of the Differential and more favourable treatment reciprocity and fuller
participation of developing countries, more commonly referred to as the Enabling Clause.
This decision by signatories to the GATT during the Tokyo Round in 1979 allows
derogations to the MFN treatment in favor of developing countries. In particular,
paragraph 2(c) permits preferential arrangements among developing countries in goods
trade. The Enabling Clause has continued to apply as part of GATT 1994 under the WTO.
As the negotiating round which resulted in the finalization of many important agreements
concerning Non-Tariff Barriers, the Tokyo Round is an important milestone in the
expansion of the GATT agenda from mere tariff reduction to other areas of international
trade.
12 Id.
13 Id.
4. Justifications for the world trading regime
Beggar Thy Competitive High tariffs

Neighbour devaluation
Discriminatory
trading blocks
The creation of institutionalized rules for international trade was not an easy matter. As
Paul Krugman observed in 1997, if economists ruled the world, there would be no need
for a World Trade Organization.14 Present-day WTO is the result of a long and arduous
process of negotiations, all of which began with GATT. Apart from understanding the
historical beginnings of the GATT however, it is necessary to examine the economic and
political justifications of GATT. These justifications have their basis in multiple schools
of thought, which are listed below15:
4.1. The terms-of-trade school:
This school of thought focuses on economic incentives.16 The proponents of this school
argue that large countries, which are capable of influencing world prices are focused on
increasing their terms of trade by reducing import prices, and thus improve national
welfare. However, by applying this principle, it also possible that if all nations impose
such an optimal tariff, most gains of trade are neutralized and all countries may be worse
off compared to a situation without tariffs.17
14 Paul Krugman, What Should Trade Negotiators Negotiate About?, 35 J. Econ. Literature 113, 113 (1997) in
Joost Pauwelyn, The Transformation Of World Trade, 104 Mich. L. Rev. 1 (October 2005) (hereinafter referred
to as “Pauwelyn”).
15 Id.
16 See Kyle Bagwell & Robert W. Staiger, The Economics of the World Trading System (2002) in Pauwelyn, supra
n. 14.
17 Harry G. Johnson, Optimum Tariffs and Retaliation, 21 Rev. Econ. Stud. 142 (1954) at 144, in Pauwelyn,
supra n. 14.
In response to the above, the proponents of this school of thought argue that through the
exchange of reciprocal ―concessions‖, countries steered away from so-called beggar-thy-
neighbor policies making everyone worse off, and instead, reciprocal commitments to
liberalize trade, forces countries to take account of the harm they cause to others. In this
vein, GATT was justified as a winning idea.
4.2. Political incentivization:
This school of thought focuses on political incentives to restrict trade,18 and relies on
public choice and constitutional theories to explain the creation of GATT. They argue
that due to collective action problems, the supporters of free trade, such as consumers,
have less incentive to lobby for changes, and as a result, protectionist groups may wield
more political power. As a result, governments may face pressure to introduce ―trade-
restrictive‖ policies and international coordination could be solution to the
disproportionate impact of protectionist groups.19
4.3. Existing bilateral and discriminatory trade policies:
This school of thought focuses on the discriminatory nature of pre-GATT trade relations
determined by colonial preferences and bilateral trade agreements. For instance, between
1934 and 1945 the United States, negotiated and accepted thirty-two reciprocal trade
agreements.20 This view emerged to deal with the establishment of GATT as a response
to existing bilateral and ―discriminatory‖ trade policies.
Proponents of this school of thought point out that the world system is focused on non-
discrimination as opposed to economic efficiency and the protection of producer as
opposed to consumer welfare.21
5. Evaluation of GATT and its impact on modern trade rules
In many ways, GATT constituted a departure from earlier attempts at trade cooperation.
While it bore scant resemblance to the institutionalized rule-making that is delivered by
the WTO, it was a political bargain that transformed international trading relations.
Despite its political nature however, the GATT was the single most important institution
that has led to the development of the WTO today.
18 Gene M. Grossman & Elhanan Helpman, Interest Groups and Trade Policy 111 (2002); J. Michael Finger,
Protectionist Rules and Internationalist Discretion in the Making of National Trade Policy, in New Institutional
Arrangements for the World Economy 310 (Hans-Jürgen Vosgerau ed., 1989) in Pauwelyn, supra n. 14.
19 John O. McGinnis & Mark L. Movsesian, The World Trade Constitution, 114 Harv. L. Rev. 511, 526-30
(2000) in Pauwelyn, supra n. 14.

20 John H. Jackson, World Trade and the Law of GATT: A Legal Analysis of the General Agreement on Tariffs and
Trade 37 (1969) in Pauwelyn, supra n. 14.

21 See Henrik Horn & Petros C. Mavroidis, Economic and Legal Aspects of the Most-Favored Nation Clause, 17
Eur. J. Pol. Econ. 233, 234-36 (2001).

However, the GATT as such was not an extremely successful or effective institution. Prof.
Joost Pauwelyn labels the GATT a ―gentleman‘s club‖ as opposed to a strict legal regime.
In support of the same, he offers the following reasons22:
i. A strong distrust on the part of GATT negotiators for lawyers and rigid legal
methods which may not enable flexible responses to real trade problems, as
evinced by the absence of a strong enforcement mechanism;
ii. The objective of the GATT, in the minds of GATT negotiators, was settling trade
disputes, and not enriching or clarifying trade law;
iii. The prevalence of ―embedded liberalism‖ i.e. ―a common belief amongst the
technocratic elites of the original twenty-three GATT contracting parties--after all,
a limited set of like-minded, capitalist countries--that trade liberalization
increases welfare and requires international coordination and discipline, albeit
with sufficient room left for domestic politics to redistribute income and sustain
the safety-nets of the welfare state at home.‖
iv. Low levels of discipline and law as evidenced by the following:
a) The GATT included broadly defined substantive exceptions - Article XII

permitted trade restrictions to safeguard a country's balance of payments,
Article XVIII allowed for governmental assistance to economic
development, and Articles XX and XXI provided for a broad range of
general exceptions ranging from public morals and health to the
protection of national security, historic treasures, and natural exhaustible
resources.
b) GATT also permitted trade restrictions without the need to base them on
specific non-protectionist concerns. Article XIX introduced so-called
safeguard measures that permit the reinstatement of trade restrictions
when countries are faced with a sudden influx of imports causing serious
injury to their domestic industry. Article VI permitted extra tariffs to
offset so-called dumping i.e. exports sold at less than the normal value of
the products concerned.
c) The ―existing legislation clause‖ in the GATT's Protocol of Provisional

Application, in force until the creation of the WTO in 1995,
grandfathered pre-1947 legislation under Part II of GATT.
In conclusion, Prof. Pauwelyn argues that the GATT represents an interesting exhibition
of bidirectional law and politics, where a predominantly political institution gradually
gets influenced and becomes a legal institution in the future.
22 Pauwelyn, supra n. 14.

6. Conclusion
Prof. Pauwelyn‘s view of GATT as a ―gentleman‘s club‖ as opposed to a legal regime is

an accurate one. The GATT has indeed proved useful for setting out a kind of a roadmap
of the kind of trade rules that countries could agree to have in place, but the modes of
governance of the GATT and WTO are poles apart. The GATT sought to provide a
platform by way of which trade concerns could be aired, and perhaps addressed, but did
not necessarily envision a situation in which the entire international trade regime would
be subject to its control, to some extent.
This is clearly evidenced by its lack of strict rules, the non-binding nature of those rules,
and the somewhat narrow agenda. Even its provisional application and dispute settlement
mechanism attest to its character of a set of trade rules, rather than a multilateral trade
institution. However, despite its failings, the GATT has had a decisive effect on the
present international trade regime, which is revealed more clearly in the Uruguay Round
negotiations.
Law

The Journey from the GATT to the WTO
Delhi
Content Writer/Author Lakshmi Neelakanthan Lakshmikumaran and
Sridharan Attorneys, New
Delhi
Content Reviewer Prof. Abhijit Das Indian Institute of Foreign

Trade, Delhi
Delhi
I. Description of Module

Subject Name Law
Module Name/Title The Journey from the GATT to WTO
Module Id 3
Pre-requisites  The political economy of the world preceding the
two world wars.
 The meaning of laissez faire economy, planned
economy, Keynesian economics & Adam Smith‟s
theory of economics.
 The power politics amongst the North-South nation
states and the circumstances leading to the world
wars.

 The aims for which the Bretton woods conference
was developed;
 How the conference came into being;
 Role (Failure) of the conference in addressing the
issue of international trade;
 The nature of the GATT and its provisional
application;
 Success of GATT during the era of its
implementation
Keywords Bretton Woods, ITO, GATT
II. E-text
Introduction
Bretton Woods can be understood as a system or regime designed to combine binding

legal obligations with multilateral decision-making conducted through the newly
created international organizations. The system owes its origin to the Bretton Woods
Conference which was an effort of the United States (US), the United Kingdom (UK)
and other allied nation states in the aftermath of the second world-war. The states
engaged in a series of negotiations to establish rules for the post-war international
economy. Conducted in July, 1944, the Bretton Woods Conference successfully led to
the creation of two financial institutions (Bretton Woods Institutions, popularly
known as the BWIs)- International Monetary Fund (IMF) and the International Bank
for Reconstruction and Development (more commonly known as the World Bank).
Bretton Wood‟s effort in the creation of a similar institution to regulate international
trade, however failed. Yet, a provisional agreement in the form of General Agreement
on Tariff and Trade (GATT) evolved which existed during 1947-1994
, before being replaced by the modern trade institution- the World Trade Organisation
(WTO).
This module highlights the background of the Bretton woods conference, its aims and
objectives in the aftermath of the second world-war. It also traces the failed attempts
towards the creation of International Trade Organisation (ITO). It further highlights
the process of formation of the GATT- the predecessor organisation to the WTO.
Failed attempts to set

up ITO
Bretton Woods Modern Day WTO
(Provisional
Conference (1944) (1995-till date)
application of GATT)
(1947-1994)
Figure 1.1- Depicting the relevance of the Bretton Woods Conference in the
modern international trade regime
Learning Outcome
 Understanding the politics and economics behind the Bretton Woods Conference.
 Evaluating the role of the Bretton Woods Conference in creation of institutions
regulating the post-war economy.
 Understanding the reasons for the failure of ITO (International Trade Organisation)
and examining its relevance in the modern trade regime.
1Bretton Woods Conference
1.1 Political Economy of the World during the Inter-War Period
1.2 Reasons behind the Bretton Woods Conference
1.3 How did the Bretton Woods operationalize?
1.4 Results of the Conference
1.5 Footprints of Bretton Woods in previous regulatory institutions
2. Formation of the GATT
2.1 Evolution
2.2 The proposed ITO charter and reasons for its failure
2.3 GATT‟s principles &it‟s provisional application
2.4 Provisional application of GATT
3. Evaluation of Bretton Woods’s Efforts: Its contemporary relevance
4. Summary
Text
1. Bretton Woods Conference
1.1 Political Economy of the World during Inter-War Period
The modern era of free trade global regime traces a complex history. The period
between 1945-73, (usually termed as the „golden era of capitalism‟) ushered with the
Bretton Woods conference, was preceded by severe economic turmoil prevalent
between 1914-1945. At the time of the economic turmoil, international economy was
highly inter-linked and this economic linkage influenced countries‟ political choices
in trade and exchange.
The economic linkages, especially in Western Europe and North America were the
results of extensive trade and commerce activities prevalent at that time, industrial
revolution and mass production and exchange (It is apt to note that the era of 1870-
1913 was the „high-noon‟ of Capitalism).1 The impact of colonisation further led to
the liberalisation in the weaker countries and colonies, for example- the Latin
American countries.
This economic situation was however, rudely shaken by the first world-war, which
totally discredited the then popular view that thickening web of commerce would
make wars between inter-linked nation states unlikely.2In reality, international rivalry
amongst the rich capitalist nation states escalated into violent conflicts.
Following the first world-war, the great depression of 1929 was yet another traumatic
event for the world economy. The depression started in the US (with the infamous
1929 Wall Street Crash)- a country that was hit hardest by the experience. Between
1929 and 1932, the output in the US fell by 30% and unemployment increased
1
Ha Joon Chang, Economics: The User’s Guide (Pelican, 2014) 65 (hereinafter Chang)
2
ibid, 73.
eightfold from 3% to 24%. Germany and France also suffered badly, with their
outputs falling by 16 and 15% respectively. 3
Economists hold several reasons for the cause of the great depression. The
predominant view of neo-liberal economists claimed that a totally manageable
financial crisis was turned into the great depression because of the collapse in the
world trade, caused by „trade wars‟ amongst the countries. The situation was
prompted by the adoption of protectionism by the US through the 1930 Smoot-
Hawley Tariffs. The Smoot-Hawley Tariffs Act imposed punitive protectionist tariffs
on foreign goods being imported to the US. The Act was a result of the lobbying
efforts by the U.S. agricultural interests groups in order to gain protection against
agricultural imports The Smoot Hawley Act in-turn led to several retaliatory
protectionist policies by the European Market. Illustratively, countries such as Italy
and Spain showed increased protectionism, all of which worsened the prevailing
economic situation.
Other economists however hold that it was not protectionism but the downward spiral
in international demand, caused by adherence of the governments to the doctrine of
balanced budget, which aggravated the situation, leading to the great depression.4
Even if the cause of the great depression remains debatable, its impact has been
unanimously agreed. The great depression created a spiral of unpaid debts, falling tax
revenues and discouraged private funding. The government was the only economic
actor left in the economy, which thereby faced a budget deficit, while it attempted to
control the situation of low demand in the economy. The economic situation was
further worsened due to the prevailing Gold Standard model. Under this model, each
national currency was backed by the quantity of gold held by country‟s central bank.
Due to this standard, the central banks of the capitalist nation states could not increase
3
ibid, 75-76.
4
ibid, 76.
the money supply for fear of compromising the value of their currencies. Thus, with
restricted money supply, credit became scarce and it further reduced the demand.5
The turmoil of the 1914-45 periods reached its peak with the outbreak of the second
world war. The loss and destruction caused by the second world-war resulted in the
first reversal in the acceleration in economic growth since the early nineteenth century.
To illustrate, per capita income growth rate of the world fell from 1.31 per cent during
1870-1913 to 0.88 per cent during 1913-50.6
Amidst this economic background, two other points are note-worthy. First, a large
part of economics during the „high noon‟ of capitalism era was governed by Adam
Smith‟s laissez faire theory. According to this theory markets are self-correcting and
hence do not require state intervention (laissez-faire capitalism; See Glossary).
However, in the after-math of great depression and the economic situation torn by the
two world wars, this view started changing. Keynesian economics (See Glossary)
which advocated for government regulation became a more predominant view, which
was further endorsed during the Bretton Woods Conference.
The second vital factor noteworthy in the Bretton Wood‟s background was the
prevalent situation of the former USSR countries. Whilst Western Europe and North
America were waging in economic turmoil, Soviet industrialisation under the socialist
principles of a completely planned economy was proving a big success. Illustratively,
Soviet‟s success can be measured in its ability to repel the Nazi advance the Eastern
front during the second world war.7 Similarly, in Soviet countries, income per capita
was estimated to have grown by 5% between 1928-1938, in contrast to 1-2% at which
the rest of the world grew.
With this economic and political background, in mind, let us understand the nature,
aims and role of the Bretton Woods Conference.
5
ibid, 77.
6
A. Madisson, The World Economy: Historical Statistics(OECD, 2003) 383.
7
Chang, 75.
1.2 Reasons behind the Bretton Woods Conference
The world wars were pyrrhic victories indeed with both sides losing heavily. The
lessons drawn from the inter-war period thus informed the approach of global policy
makers towards reconstruction and development of the post war economy. President
Franklin D. Roosevelt of the US and officials such as Secretary of State Cordell Hull
became pioneers for the Bretton Woods Conference. These officials were adherents of
the Wilsonian belief that free trade promoted not just prosperity, but also peace.
In-order to combat the great depression, several protectionist policies were adopted by
the countries. These policies included:
1.2.1 Beggar Thy Neighbour- An international trading policy that utilizes currency
devaluations and protective barriers to alleviate a nation's economic difficulties at the
expense of other countries. While the policy may help repair an economic hardship in
the nation, it will harm the country's trading partners, worsening its economic status.8
1.2.2 Competitive currency devaluations- Competitive devaluation refers to a scenario

in which an abrupt national currency devaluation by one nation is matched by a
currency devaluation of another, especially if they both have managed exchange-rate
regimes rather than floating exchange rates determined by market forces. Competitive
devaluation is considered a “beggar-thy-neighbor” type of economic policy, since it
amounts to a nation trying to gain an economic advantage without consideration for
the ill-effects it may have on other countries.9
1.2.3 High tariffs- Examples of the prevailing high tariffs include the Smoot-Hawley
Act of the US and other retaliatory tariff measures imposed by European countries
such as Italy and Spain, as discussed above.
1.2.4 Discriminatory trading blocs- The prevailing imperial preferences involved in

tariff setting and trade such as the policy of Britain and France towards their colonies
discriminated against preferences allotted to non-colonies.
8
Investopedia, http://www.investopedia.com/terms/b/beggarthyneighbor.aspaccessed 12 July 2014.
9
Investopedia, http://www.investopedia.com/terms/c/competitive-devaluation.aspaccessed 12 July 1214.
Each of these policies further culminated in the destabilisation of international
environment without improving the economic situation. This experience led world
leaders to conclude that economic cooperation was the only way to achieve both
peace and prosperity, at home and abroad.10 Similarly, in theBrettonwoods discourse,
the world was described in terms of free market of sovereign autonomous states
enjoying equal opportunity in an „open international system‟.11
1.3 How did the Bretton Woods operationalize?
The cooperation efforts began with the strengthening of alliance between the US and
the UK. The vision of economic cooperation was first articulated in the Atlantic
Charter, issued by the US president Roosevelt and British Prime Minister Winston
Churchill at the conclusion of the August 1941 Atlantic Conference. The Charter‟s
fourth point committed the United States and the United Kingdom “to further the
enjoyment by all States, great or small, victor or vanquished, of access, on equal
terms, to the trade and to the raw materials of the world which are needed for their
economic prosperity,” while its fifth point expressed their commitment to “the fullest
collaboration between all nations in the economic field with the object of securing,
for all, improved labor standards, economic advancement and social security.”12
The two countries further elaborated upon these principles in Article VII of their
February 1942 agreement on lend-lease aid. In that article, the United Kingdom
agreed that in return for U.S. lend-lease assistance, it would cooperate with the United
States in devising measures to expand “production, employment, and the exchange
and consumption of goods,” to eliminate “all forms of discriminatory treatment in
10
US Department of State, Milestones: 1937–1945, Bretton Woods-GATT, 1941–
1947https://history.state.gov/milestones/1937-1945/bretton-woods accessed 12 July 2014 (hereinafter
US Dept. of State, Bretton Woods-GATT)
11
Richard Peet, Unholy Trinity: The IMF, WB and WTO (Macmillian, 2003) 37 (hereinafter Peet).
12
ibid, 34.
international commerce,” to reduce barriers to trade, and generally to achieve the
goals laid out in the Atlantic Charter.13
By early 1942, U.S. and British officials began preparing proposals that would foster
economic stability and prosperity in the postwar world. Harry Dexter White, Special
Assistant to the U.S. Secretary of the Treasury, and John Maynard Keynes, an advisor
to the British Treasury, each drafted plans. The plans aimed at creating organizations
that would provide financial assistance to countries experiencing short-term balance
of payments deficits.Financial assistance would safeguard countries and thereby
prevent them from protectionist or predatory economic policies adopted to improve
their balance of payments position.14
While both plans envisioned a world of fixed exchange rates, and believed to be more
conducive to the expansion of international trade than floating exchange rates, they
differed in several significant respects. As a result, from 1942 until 1944, bilateral and
multilateral meetings of allied financial experts were held in order to settle upon a
common approach. An Agreement was finally reached at the July 1944 United
Nations Monetary and Financial Conference. This gathering hosted delegates from 44
nations that met in Bretton Woods, New Hampshire, famously known as the Bretton
Woods Conference.15
1.4 Results of the Conference
The conference resulted in the formation of a monetary regime joining an unchanged

gold exchange standard (prevalent in the preceding era), supplemented by a
centralized pool of gold and national currencies, with an entirely new exchange rate
system of adjustable pegs.
13
ibid, 34.
14
US Dept. of State, Bretton Woods-GATT.
15
ibid.
Further, the two major accomplishments of the Bretton Woods conference were the
creation of the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD), commonly known as the World Bank.
The IMF was charged with the following functions:
 Regulatory- administering the rules governing currency values and convertibility and
overseeing a system of fixed exchange rates centered on the U.S. dollar and gold.
 Financial- Supplying supplementary liquidity by providing short-term financial
assistance to countries experiencing temporary deficits in their balance of payments;
 Consultative- serving as a forum for consultation and cooperation among
governments;
The IBRD was responsible for providing financial assistance for the reconstruction of
war-ravaged nations and the economic development of less developed countries.
In July 1945, the US Congress passed the Bretton Woods Agreements Act, which
authorised the US to officially join IMF and the World Bank. The two organizations
officially came into existence five months later.
IMF and IBRD continue to function as pivotal organisations in regulating world trade
and finance. today. However, the fixed exchange rate system established at the
Bretton Woods prevailed only for three decades. Post the exchange crises of August
1971, the US President Richard M. Nixon suspended the dollar‟s convertibility into
gold. Further, during February/March 1973 floating exchange rates become the norm
for the major industrialized democracies, which continues to persist till date.
It can be said that structurally, the Bretton Woods combined a respect for the
traditional principle of national sovereignty, especially of the United States with a
new commitment to collective responsibility for management of monetary relations,
expressed both in mutually agreed rules and in the powers of the IMF.16
1.5 Footprints of Bretton Woods in previous regulatory institutions
Bretton Wood‟s contribution in the formation of modern global regulatory institutions

was tremendous. However, it must be noted that the era of global regulation through
institutions began as early as early 1920s. Political organisations such as the League
of Nations maintained regulatory institutions, for example- the Economic and
Financial Organisation. Similarly, an international bank to aid post war reconstruction
was first discussed in Brussels in 1920. Another proposal to restore the gold standard,
stabilised via central bank cooperation and managed by an international convention
was discussed in Genoa in 1922. League of Nations also helped organise loans for the
countries in the 1927 period. Similarly world leaders including members of the
League, the US and Soviet members met in Geneva and Hague subsequently to
discuss issues of balancing budget, removing control on movement of goods and
services etc. Thus the success of the Bretton Woods can be seen as cumulation of
previously initiated efforts of nation states during the inter war period.17
2. Formation of the General Agreement on Tariffs and Trade (GATT)
2.1 Evolution
While the Bretton Woods was successful in creation of two pivotal financial
institutions to regulate trade and finance, a similar agreement on international trade
proved more difficult to achieve. One of the most contentious issues was the system
of discriminatory preferential tariffs. Such tariffswere established and continued
among the members of the British Commonwealth in 1932, whereby trade within the
Commonwealth was subject to lower tariffs than trade between the Commonwealth
nations and the rest of the world.
16
B. Cohen, Bretton Woods System,
http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html(prepared forRoutledge Encyclopedia of
International Political Economy) Accessed on July 12, 2014.
17
See generally, Peet.
The U.S. officials such as Cordell Hull opposed such imperial preferences on both
ideological and practical grounds. Similarly, countries such as Canada that were
members of the preferential system were also the United States‟ largest trading
partners and hence called for its abolition. However, many Commonwealth officials
favored keeping the preferences. They similarly asserted that imperial preferences
would continue until at-least the US agreed to reduce the high Smoot-Hawley tariffs,
it set in 1930. Thus, an evident dead-lock continued on these issues.
Similarly, the nation-states could not agree on a proposed structure to create an

organisation that would oversee international trade, just as the IMF and IBRD were
formulated.
Post Bretton Woods, 15 countries re-began talks in December 1945 to reduce and bind
customs tariffs. With the second-world war only recently ended, they wanted to give an early
boost to trade liberalization.Thus they began to correct the legacy of protectionist measures
which remained in place from the early 1930s.
This first round of negotiations resulted in a package of trade rules and 45,000 tariff
concessions affecting $10 billion of trade, which was about one fifth of the then world‟s total.
It further led to the elimination of several imperial preferences. The group had expanded to 23
by the time the deal was signed on 30 October 1947. The tariff concessions came into effect
by 30 June 1948 through a “Protocol of Provisional Application”. This signified the birth of
the General Agreement on Tariffs and Trade, with 23 founding members (officially known as
the “contracting parties” to the GATT).
It is vital to note that the 23 were also part of the larger group negotiating a separateCharter
for creating International Trade Organisation- a formal regulatory institution for international
trade. One of the provisions of the GATT said that they should accept some of the trade rules
of the ITO draft. This, the members believed, should be done swiftly and “provisionally” in
order to protect the value of the tariff concessions they had negotiated during GATT
formation. They spelt out how they envisaged the relationship between GATT and the ITO
Charter. GATT was designed not only to implement the agreed tariff cuts but to also serve as
an interim codification of the rules governing commercial relations among its signatories until
the ITO was created. It must be noted that members also allowed for the possibility that the
ITO might not be created.18 In retrospect, this evaluation of the members was correct, as the
ITO never came into existence. The reasons for the same shall be explored below.
2.2 The proposed ITO charter and reasons for its failure
Less than a month after GATT was signed, the Havana conference discussing the ITO began
on 21 November 1947. The Charter provided for the establishment of the ITO, and set out the
basic rules for international trade and other international economic matters. It was proposed
that ITO would be accorded the status of a specialised UN agency. According to the WTO
website, the draft ITO Charter was „ambitious‟. It extended beyond world trade disciplines, to
include rules on employment, commodity agreements, restrictive business practices,
international investment, and services.19
After four months of negotiations, the representatives of 53 countries signed the finished
charter in March 1948. Thus, the ITO Charter was finally agreed in Havana in March 1948.
However, ratification in some national legislatures proved impossible. The most serious
opposition was in the US Congress, even though the US government had been one of the
driving forces. An argument of the US against the new organization was that it would be
involved into internal economic issues. 20 Subsequently, on December 6, 1950, President
Truman announced that he would no longer seek Congressional approval of the ITO
Charter.21 Without the support of the US, the ITO could never come into existence.
Upon ITO‟s failure, the GATT gradually became the focus for international governmental
cooperation on trade matters.22After its ratification, eight rounds of trade negotiations were
conducted under the aegis of GATT which resulted in significant tariff reductions among its
members. The GATT was superseded by the World Trade Organization in 1995, the first
formal trade regulatory institution, after the failure of ITO. 23 The GATT principles and
18
The GATT years from Havana to Marrakesh, WTO website
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm accessed on July 12, 2014.
19
ibid.
20
Jones &Kenen, Handbook of International Economics (1stedn.)376.
21
P. van den Bossche, The Law and Policy of the World Trade Organization (2ndedn. CUP, 2008) 80
22
ibid, 81.
23
Wikipedia, http://en.wikipedia.org/wiki/International_Trade_Organizationaccessed on 12 July 2014.
agreements were thereafter adopted by the WTO, which was charged with administering and
extending them
2.3 GATT’s principles & it’s provisional application
For almost half a century, the GATT‟s basic legal principles remained much as they were in
1948. There were additions in the form of a section on development added in the 1960s and a
few „plurilateral‟ agreements (i.e. with voluntary membership) in the 1970s. GATT‟s efforts
to reduce tariffs further continued. Much of this was achieved through a series of multilateral
negotiations known as “trade rounds” which were held under GATT‟s auspices.
GATT was provisional with a limited field of action, but its success over 47 years in
promoting and securing the liberalization of much of world trade remains
incontestable. Continual reductions in tariffs alone helped spur very high rates of
world trade growth during the 1950s and 1960s, around 8% a year on average. The
momentum of trade liberalization further helped ensure that trade growth consistently
out-paced production growth throughout the GATT era, a measure of countries‟
increasing ability to trade with each other and to reap the benefits of trade. The rush
of new members during the Uruguay Round demonstrated that the multilateral trading
system was recognized as an anchor for development and an instrument of economic
and trade reform.
3. Evaluation of Bretton Woods’s Efforts: Its contemporary relevance
Despite dating back to six decades, Bretton Wood‟s contemporary significance

remains monumental. The efforts that went into the creation of institutions and
agreements such as the IBRD, IMF and the GATT reflected the true political
economy of that era, vital for understanding the functioning of the modern regimes.
Similarly, Bretton Wood‟s conclusion does not go without its critique. At the time of
its conclusion, Bretton Wood‟s core foundational principle was that mutual
dependence, reciprocity and relative equality in economic and political-military
capacity amongst nation-states would prevent further wars.24However, in reality one
24
Peet, 33.
must note that Bretton Woods was conceived in an era of extreme inequality amongst
nation states and lack of dependence (as East was separating from the West). The
prevailing situation at the time of the Bretton Woods Conference can serve as a useful
comparative exercise with the modern trade rounds such as the Doha rounds of trade
negotiation.
Further, Bretton woods was characterised by several economic theories. On one hand
there were aggressive capitalist forces that wanted to expand globally beyond the
domestic boundaries of the western world. On the other hand, the Kenyesian
influence became more prominent, as the Bretton Wood‟s leaders emphasised on
regulation alongside market control. Similar debates are being raised even today, in
the after-math of the economic crisis of 2008, where world leaders are brainstorming
for solutions to combat world recession.
Furthermore, the modern day relationship between the WTO and BWIs such as the World
Bank and IMF remain highly complex. In order to understand the nature of trade and finance
regulation, Bretton Woods and its debates remain highly useful.
4. Summary
Beginning with the early inter-war period, nation states had shown desire to regulate their
international trade and finance through institutional efforts. The period between 1914-45
which witnessed severe economic turmoil, further promoted their efforts to cooperate in
regulation of trade and finance, in-order to further prevent wars. The inter-war period was
characterised by several discriminatory policies adopted by the states, for example- beggar
thy neighbour, imperial preferences in regulating tariffs, imposing high tariffs and indulging
in competitive devaluation. These practices along with the prevailing macro-economic
conditions characterised by the great depression (1929) and the destruction caused by the two
world wars, finally led members of the US, UK and allied powers to convene the Bretton
Woods conference. The conference (1944) successfully created two institutions for financial
regulation and economic development- IMF and IBRD. However, a similar organisation to
regulate trade- ITO could not be finalised. The reasons for the failure of ITO‟s birth were its
ambitious charter, which member states especially the US found too intrusive to domestic
regulation. Instead GATT which was initiated by 23 member states in 1947 continued to gain
strength in the period that followed. Despite its provisional application, it created an initial
trade package deal, tariff concession and subsequent trade liberalisation, before being finally
succeeded by the modern institution of the WTO. Though historical, Bretton Woods and its
efforts hold contemporary relevance. It provides an insight into the political economy of the
inter-war period. It further emphaises the role of regulation in economic liberalisation, a
debate which has resurfaced in the light of the on-going global economic crisis.
Law

The World Trade Organization: 1
Paper Coordinator Dr. Saloni Khanderia- National Law University,
Yadav Delhi
Content Writer/Author Deepak Raju Associate, Sidley Austin
LLP (all views are strictly
personal, and do not
represent the views of the
firm or of any of the firm’s
clients)
Delhi
Language Editor Dr. Saloni Khanderia- National Law University,
Yadav Delhi
Module 4: WTO I Introduction to the Marrakesh Agreement establishing the WTO
PERSONAL DETAILS
http://www.sidley.com/deepak-raju/?nomobile=temp

Subject Name Law
Module Name/Title The World Trade Organization-I
Module Id 4
Pre-requisites  Introduction to the Marrakech Agreement
establishing the WTO
 The organizational structure of the WTO, the key
decision making bodies
 The aims and objectives of the WTO as reflected in
its Preamble and the Marrakech Agreement
 Organizational structure of the WTO;

 Key decision making forums in the WTO;
 Objects and purposes of the WTO as set out in the
Marrakesh Agreement;
 How the WTO agreements give effect to these
objects and purposes.
Keywords Organizational structure; objects and purposes;

Ministerial Conference; General Council; Dispute
Settlement Body; Trade Policy Review Body; Council for
trade in Goods; Council for trade in Services; TRIPS
Council.
E-TEXT
 Introduction and learning objectives

 The organisational structure of the WTO, the key decision making bodies.
o WTO Ministerial Conference
o The General Council
o General Council Meeting as Dispute Settlement Body
o General Council meeting as Trade Policy Review Body
o The Council for trade in Goods (Goods Council)
o Council for Trade-Related Aspects of Intellectual Property Rights ( TRIPS
Council)
o Council for Trade in Services
 The aims and objectives of the WTO as reflected in its Preamble and the
Marrakesh Agreement.
o Creation of a common institutional framework for the conduct of trade
relations
o Provide forum for negotiations
o Developmental goals
o Optimal use of the world’s resources
o Sustainable development and preservation of environment
 Further Readings
Introduction and learning objectives
International law, at its inception, was often referred to as the ‘law of nations’, reflecting an
understanding that the legal system concerned solely the conduct of ‘nations’ or ‘States’.1 In
other words, historically States were considered to be the only ‘subjects’ of international law.2 It
was solely the actions of States that created the norms of international law; and it was solely the
actions of States that were governed by international law. However, in the recent times, this
understanding has evolved, and it is now widely accepted that a wide range of entities apart
from States can be ‘subjects’ of international law.3 The first among these new categories of
actors to be recognized as ‘subjects of international law’ was International Organizations.4
In 1949, the International Court of Justice was called upon to render an advisory opinion as to
whether the United Nations had a legal personality of its own, independent of the legal
personalities of its member States.5 The Court undertook an examination of the United Nations
Charter, and the powers and functions vested in the organization under the Charter. The Court
concluded that the Members had vested on the United Nations, powers and functions that could
be performed effectively only if the organization had its own legal personality.6
While studying any international organization, the constituent instrument, usually an

international treaty that establishes the organization is often the best starting point. The same is
true of the World Trade Organization. The efforts at establishing a multilateral normative
1
James Crawford (ed.), Subjects of International Law, in BROWNLIE’S PRINCIPLES OF INTERNATIONAL
LAW (8th edn., 2013 OUP).
2
Ibid.
3
Ibid.
4
Ibid.
5
. Reparation for Injuries Suffered in the Service of the United Nations, 1949 ICJ Rep. 174.
6
Reparation for Injuries Suffered in the Service of the United Nations, 1949 ICJ Rep. 174.
framework for international trade predates the Marrakesh Agreement by nearly half a century.7
The failed attempt at the Bretton Woods conference to establish an International Trade
Organization, and the decades of provisional application of the General Agreement on Tariffs
and Trade are certainly important areas for exploration for any student of the multilateral trade
system. Yet, the Marrakesh Agreement forms a watershed moment in the history of the
multilateral trade framework. For one, the Marrakesh Agreement, contained in its annexes
several substantive agreements, either elaborating the GATT discipline, or imposing additional
commitments on the Members.
However, more importantly for the purposes of this chapter, it was through the Marrakesh
Agreement that the multilateral trade framework attained the form of an international
organization. In addition to establishing the Organization, the Agreement lays down several
detailed rules for the functioning of the Organization, including the decision making processes
within the Organization. The Organization, as well as all the bodies and functionaries of the
Organization derive their powers and functions from this Agreement. Also, the Preamble to the
Marrakesh Agreement elaborates the key objectives of the WTO as an organization, which is a
valuable tool in interpreting and understanding the substantive provisions of both the
Marrakesh Agreement, as well as the other multilateral trade agreements in the WTO
framework.
This chapter seeks to introduce the reader to the organizational structure of the WTO, the key
decision making bodies, as well as the decision making process in the WTO, as established by
the Marrakesh Agreement. Additionally, the readers will be introduced to the aims and
objectives of the WTO as expressed in the Preamble to the Marrakesh Agreement and the
substantive provisions in various substantive agreements that seek to give effect to these aims
and objectives.
The organisational structure of the WTO, the key decision making bodies.
The Marrakesh Agreement establishes several bodies within the WTO institutional framework.
All of them act as important forums for decision making on matters covered by the Organization.
7
John H. Jackson, The International Institutions of Trade: The WTO and the GATT, in World Trading
System: Law and Policy of International Economic Relations (1997 MIT); Peter Van den Bossche,
The World Trade Organization, in The Law and Policy of the World Trade Organization (2005 CUP).
Below is an organizational chart available on the WTO website. As can be seen, the institutional
framework is complex, and includes several committees, working parties, etc. In line with the
introductory nature of this chapter, detailed discussion shall be limited to some key decision
making bodies, namely the Ministerial Conference, the General Council, The Dispute Settlement
Body and the Trade Policy Review Body.
WTO Ministerial Conference:

WTO Ministerial conference, set up under Article IV (1) of the Marrakesh Agreement
establishing the WTO is the highest decision making body of the WTO. It is comprised of all the
member countries and custom unions of the WTO. The ministerial conference meets at least
once in every two years. The ambit of decision making power of the ministerial conference is
wide enough to include matters under any multilateral trade agreement on the request of a
member. There has been nine ministerial conferences till date. Ministerial conference is also
assigned the function of establishing the mandatory committees which are Committee on Trade
and Development, a Committee on Balance-of-Payments Restrictions and a Committee on
Budget, Finance and Administration and such other committees as it may deem fit. The
ministerial conference appoints the Director General of the WTO Secretariat and adopts
regulation laying down the powers, functions, terms of service etc of the Director general. The
decisions at the ministerial conference are made according to the majority of the vote cast with
each member having one vote unless an exception has been provided for in the Marrakesh
agreement or the relevant Multilateral Trade Agreement. The ministerial conference along with
the General Council holds the exclusive authority to adopt the interpretations of the Marrakesh
Agreement as well as other Multilateral Trade Agreements by a three fourth majority of the
members’ votes. It also has the power to waive an obligation imposed on a member state by a
multi lateral treaty under exceptional circumstances and to review such waiver annually until it
is terminated. It also has powers with respect to amendment of the Marrakesh agreement,
Accession to the agreement etc.
The eighth WTO ministerial Conference at Geneva approved the accessions of Russia, Samoa
and Montenegro. It also adopted a waiver to enable developing and developed-country
Members to provide preferential treatment to services and service suppliers of least-developed
country (LDC) Members. The ninth ministerial conference at Bali saw the adoption of the trade
facilitation agreement which is aimed at significant reduction in transaction costs in
international transactions.
The General Council:
The General Council, established under Article IV (2) of the Marrakesh agreement is the
decision making authority of the WTO that meets regularly to carry out the functions of the
ministerial conference that meets only once in two years. The members of the General Council
are the representatives of the member states of the WTO. It approves the rules and procedure
governing the functioning of the various committees established by the ministerial conference.
It facilitates cooperation between the WTO and other intergovernmental and non-
governmental organizations that perform functions that linked to that of the WTO. It approves
the annual budget of the WTO. The decision making process is similar to that at the ministerial
conference and is made according to the majority of the vote cast with each member having one
vote unless an exception has been provided for in the Marrakesh agreement or the relevant
Multilateral Trade Agreement. As mentioned under the heading on ministerial conference, the
General council along with ministerial conference adopts the interpretation of the Marrakesh
Agreement and the Multilateral Trade Agreements on a three fourth majority vote.
The general council also convenes as Dispute Settlement Body and Trade Policy Review Body.
General Council Meeting as Dispute Settlement Body:
The general council meets as the Dispute Settlement Body (DSB) in order to perform the
functions under the WTO Dispute Settlement Undertaking adopted at the Uruguay Rounds of
Negotiations. It consists of representatives of all member countries. The DSB has its own
chairman and lays down its own procedures for the conduct of its business. The DSB has the
authority to ‘establish panels, adopt panel and Appellate Body reports, maintain surveillance of
implementation of rulings and recommendations, and authorize suspension of concessions and
other obligations under the covered agreements’8. When DSB considers a dispute only such
members who are party to the plurilateral agreement under which the dispute has arisen can
vote on the matter. The DSB informs the councils and committees of the WTO regarding
developments with respect to any dispute. The decisions at the DSB are taken by consensus.
The panels constituted under the DSB in each case assist the DSB in decision making through its
appreciation of facts and law after consultations with the parties to the dispute. Once the panel
has made its report, the report is circulated among the members. The members have 20 days to
consider the report. The parties who object the panel report can raise the same upto 10 days
before the DSB meeting. The report is adopted within 60 days of circulation to the members
unless one of the parties to the dispute informs DSB of its decision to appeal, in which case the
adoption is kept on hold till the decision in the decision on the appeal is made or the report is
unanimously rejected by the DSB.
The DSB also constitutes the appellate body consisting of 7 members, who are individuals with
recognized standing in law and international trade and not affiliated to any government and
three of whom shall serve on each case. Each member has a term of four years. It hears appeals
from panel cases. The appeals are to be decided within 60 days from the date on which a party
signifies his decision to appeal. When the appellate body is unable to deliver its decision within
60 days it has to inform the DSB with the reasons for the same in writing. In any case the
maximum time frame for deciding an appeal cannot exceed 90 days. Appeals can only be from
questions of law in the panel report. The outcome of an appeal may be the appellate body
upholding, modifying or reversing the conclusions of the panel. This report shall be wholly and
8
Article 2(1) WTO Dispute Settlement Undertaking
unconditionally adopted by the DSB and will be binding on parties unless there is a unanimous
decision of the DSB to reject the same.
Generally, the maximum time between DSB constituting the panel and considering the panel
report/ appellate report as the case may be cannot exceed 9 months where the panel report is
not appealed and 12 months where the panel report is appealed.
General Council meeting as Trade Policy Review Body:
As provided under Article IV (4) of the Marrakesh Agreement, the General Council meets as
Trade Policy Review Body(TPRB) to perform its under the Trade Policy Review Mechanism
(TPRM). The body has its own chairman and lays down its own procedure. The body reviews
the trade policy of each member country and the impact of such policy on the multi lateral
trading system on a periodical basis. The frequency of the review on each member depends on
the share of such member in world trade. The review is conducted on the basis of a report
provided by the member who is subjected to review, another report that is prepared by the
WTO secretariat on the basis of the report furnished by the member country after taking
clarifications from that country. Once the review is complete the TPRB publishes the report
furnished by the member country, the report by the WTO Secretariat, and the minutes of the
review meeting of the TPRB and the same is also forwarded to the ministerial conference. The
TPRB is also responsible for the preparation of an annual overview of the developments in the
international trading environment.
The Council for trade in Goods (Goods Council)
The Council for trade in Goods (Goods council), established under IV (5) of the Marrakesh
Agreement looks into the implementation of General Agreement on Trade and Tariff (GATT),
which is the law on international trade in goods. It functions under the guidance of the general
council. The members of the goods council are representatives of the member states. The goods
council is comprised of ten committees, each dealing with a specific subject. These committees
are the committees on agriculture, Anti Dumping, Market Access, Sanitary and Phytosanitary
measures, Technical Barriers to Trade, Subsidies and Countervailing measures, Customs
valuation, Rules of origin, import licensing, Trade related investment methods and Safeguards .
The committees shall establish their respective rules of procedure subject to the approval of the
goods council.
Council for Trade-Related Aspects of Intellectual Property Rights ( TRIPS Council)
Council for Trade-Related Aspects of Intellectual Property Rights ( TRIPS Council), established
under Article IV (5) of the Marrakesh Agreement oversees the implementation of the TRIPS
agreement. The council is under the general guidance of the general council. It has established
subsidiary bodies for the performance of its functions. It’s members are the member States of
WTO. Article 68 of the TRIPS lays down the functions of the TRIPS council to include monitoring
the member countries’ compliance with trips and providing consultations to members on
matters related to TRIPS.
Council for Trade in Services:
Council for trade in services is provided for in Article IV(5) of the Marrakesh Agreement along
with the goods council and TRIPS Council. It functions under the guidance of the general council.
The members include representatives of all member states. Article 24 of the GATS provides the
functions of the council. The council provides consultations to the members with respect to
unresolved issues related to trade in services. The members of the council consist of the
members of the WTO.
The aims and objectives of the WTO as reflected in its Preamble and the Marrakesh
Agreement.
“A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given
to the terms of the treaty in their context and in the light of its object and purpose.”9 Given this
cardinal norm of treaty interpretation, it is important to understand the objects and purposes
that treaty parties sought to attain through the treaty. Often, the provisions of the treaty
9
Article 31(1), Vienna Convention on the Law of Treaties, 1969.
themselves, as well as the Preamble of the treaty, provide useful indications of these objects and
purposes.
In case of the Marrakesh Agreement, the Preamble as well as Articles II and III, spell out these
objects and purposes. Some of the key objects and purposes emerging from these provisions
and the Preamble, as how these objectives are sought to be attained through various
substantive WTO agreements is discussed below.
1. Creation of a common institutional framework for the conduct of trade relations
Article II:1 of the Marrakesh Agreement, while listing the functions of the WTO states: “The
WTO shall provide the common institutional framework for the conduct of trade relations
among its Members in matters related to the agreements and associated legal instruments
included in the Annexes to this Agreement.”
Countries have engaged in negotiations with each other over matters of international commerce
for millennia. Yet, these negotiations were often bilateral or involved a limited number of States.
Moreover, these agreements seldom created institutional frameworks to ensure their smooth
implementation, particularly at times when political relationships between the parties to the
agreements went through rough patches.
GATT 1947 certainly provided an improvement over this status quo of its time. GATT, as an
international treaty, imposed binding legal obligations upon the Contracting Parties, which they
were expected to honor independent of political circumstances. Moreover, the Contracting
Parties acting collectively could take important decisions regarding the functioning of the
organization and could exercise a limited supervisory role to monitor the implementation of
GATT commitments. Yet, the lack of a real organization with a well adapted institutional
framework meant that the same rudimentary institutional structure would have to deal with all
diverse aspects of international trade. Also, this meant that much of the decision making, as well
as the efficacy of the supervisory functions was dependent on political consensus rather than
legal norms.
It is against this background that Article II:1 of the Marrakesh Agreement envisions WTO as a
common institutional framework. As a first step towards meeting this end, Article I establishes
the World Trade Organization and Article VIII:1 clarifies that it has independent legal
personality, implying that the WTO is capable of holding rights and obligations, independent of
those of its Members. Further, as discussed above, the Marrakesh Agreement and other
multilateral trade agreements establish several specialized bodies for decision making and
monitoring of implementation of commitments in various aspects of international trade.
2. Provide forum for negotiations
Article II:2 of the Marrakesh Agreement states “he WTO shall provide the forum for negotiations
among its Members concerning their multilateral trade relations in matters dealt with under the
agreements in the Annexes to this Agreement. The WTO may also provide a forum for further
negotiations among its Members concerning their multilateral trade relations, and a framework
for the implementation of the results of such negotiations, as may be decided by the Ministerial
Conference.”
The Marrakesh Agreement and the WTO themselves are results of prolonged negotiations
among a large number of participants. Countries with diverse trade related interests negotiated
on several aspects before the draft of the Marrakesh Agreement and the other multilateral trade
agreements could be finalized. Subsequently, the WTO Membership has engaged in negotiations
on a large number of topics. While a part of these negotiations concern implementation of
existing commitments other negotiations have sought the adoption of additional commitments.
Another important function of negotiations in WTO is clarification or elaboration of existing
rules. An example of negotiations concerning implementation of existing commitments is in the
area of elimination of agricultural subsidies, an issue that developing countries have repeatedly
raised during trade negotiations. The recent efforts at negotiating a Trade Facilitation
Agreement is an example of negotiations intended at adoption of additional commitments. The
Doha Declaration on TRIPS and Public Health was the negotiated outcome, which was largely in
nature of clarifying, qualifying and elaborating existing commitments under the WTO
commitments on intellectual property.
The WTO, as an organization, and its Members, also engage in prolonged negotiations with non-
Members on conditions for their accession to the Organization. These negotiations decide the
extent of tariff bindings, service schedules and other commitments that the new entrant
undertakes as a part of its WTO commitments. Also, these negotiations often focus on reforming
certain laws and institutional structures within the potential Member that the existing
membership views to be inconsistent with WTO commitments. It is also open to the existing
membership to modify certain obligations, particularly implementation timelines, for the
potential Member through clauses in the accession protocol. For instance, Article 28 of the
Agreement on Subsidies and Countervailing Measures allows WTO members a three year time
period to eliminate certain existing subsidies which are inconsistent with the WTO subsidies
discipline. Yet, the accession protocols of Russia and China effectively deny those new entrants
the benefit of the said grace period.
Trade negotiations have always been, and still remain, a political process. The establishment of
the WTO as a forum for negotiations does not change that or eliminate all the difficulties
associated with a political process of negotiation. Yet, in providing a forum where the views of
all members can be expressed, and by providing a common language for negotiations, WTO
does take the process a step further.
3. Developmental goals
Smith and Ricardo provided economic evidence to suggest that trade benefits both parties to it.
In simple terms, Smith and Ricardo suggest that countries would benefit if they produced what
they could produce at lower cost than other countries, exported these goods to other countries,
and imported those goods that other countries could produce at a lower cost. While economic
literature, both in support of trade and against it, has moved to higher levels of complexity on
this point, WTO is founded on the assumption that trade benefits all trading partners. Yet, it was
recognized that special emphasis should be given to the developmental needs of least developed
countries and other developing countries, and special efforts should be made to meet these
needs.
In recognition of this, the Preamble of the Marrakesh Agreement makes the following
statements in expression of the developmental goals of the organization:
“Recognizing that their relations in the field of trade and economic endeavor
should be conducted with a view to raising standards of living, ensuring full
employment and a large and steadily growing volume of real income and effective
demand, and expanding the production of and trade in goods and services, while
allowing for the optimal use of the world’s resources in accordance with the
objective of sustainable development, seeking both to protect and preserve the
environment and to enhance the means for doing so in a manner consistent with
their respective needs and concerns at different levels of economic development,
Recognizing further that there is need for positive efforts designed to ensure that
developing countries, and especially the least developed among them, secure a share in
the growth in international trade commensurate with the needs of their economic
development,”
The multilateral trade agreements sought to give effect to these goals through several
provisions directed at ensuring the Special and Differential Treatment of developing countries.
Part V of the GATT contained several provisions seeking to address the special needs of
developing countries by calling upon developed countries to enhance the market access for
developing country products, without expectation of reciprocity. Additionally, in 1979, the
GATT Contracting Parties adopted the Enabling Clause, which clarified that the Most Favored
Nation principle under Article I of the GATT did not prevent developed countries from
extending additional benefits to developing countries through a ‘Generalized System of
Preferences’. Also, several substantive agreements allowed developing countries additional
time to implement their commitments. Despite these, several scholars argue that the WTO’s
outlawing of protectionist tactics like quantitative restrictions, voluntary export restrictions,
export subsidies and domestic content subsidies, stringent intellectual property norms, etc. will
deprive the developing countries from availing of the same path that several developed
countries adopted in their journey towards the present stage of their development, ‘kicking
away the ladder’.
4. Optimal use of the world’s resources
As evident from the portion of the Preamble to the Marrakesh Agreement quoted above, optimal
use of the world’s resources is among the proposed objectives of the WTO. There exist concerns
that the lure of additional revenues from trade will result in over-exploitation of certain
exhaustible resources. As a partial solution, Article XX(g) of the GATT allows measures “relating
to the conservation of exhaustible natural resources” as an exception to GATT commitments.
The Appellate Body has clarified that the expression “exhaustible natural resources” must be
given a broad interpretation in line with the objective of sustainable development. Accordingly,
even measures taken to protect living creatures have been held to fall under the ambit of this
provision.
However, Article XX(g) is available as an exception only “if such measures are made effective in
conjunction with restrictions on domestic production or consumption”. Therefore, it may not be
available as a justification where a country chooses to allot a particular commodity solely for
domestic purposes even if that country determines for itself that the said measure is the most
‘optimum’ use of the said resource. In China – Raw Materials,10 China argued that its ban on
10
China — Measures Related to the Exportation of Various Raw Materials, WT/DS 394, Panel Report
certain raw materials was justified since China deemed this to be an optimal use of the resource.
However, the same was rejected by the Panel. Here, there seems to be a divergence between the
multilateral trade frameworks on the one hand, and customary international law which
recognizes the permanent sovereignty of States over their natural resources, 11 and by
implication their right to determine what uses of natural resources are ‘optimal’.
5. Sustainable development and preservation of environment
The Preamble of the Marrakesh Agreement also highlights environmental goals and sustainable
development among the objects and purposes of the Organization. However, the substantive
provisions of the multilateral agreements do not create any environmental obligations for the
parties. Rather, they often provide exceptions to ensure that trade commitments do not come in
the way of environmental goals of the members.
For instance, Article XX of GATT contains the following exceptions – “(a) necessary to protect
public morals; (b) necessary to protect human, animal or plant life or health; […] (g) relating
to the conservation of exhaustible natural resources”.
These exceptions have been used to justify measures taken to inter alia, protect clean air,12
conserve marine mammals,13 and prevent accumulation of waste tyres.14 Recently, the Appellate
Body has also held that prevention of animal cruelty can fall within ‘public morals’ under Article
XX(a), when deciding a dispute relating to trade in seal products.15 India recently banned the
import of foie gras based on cruelty to geese.
11
Permanent Sovereignty over Natural Resources, G.A. res. 1803 (XVII), 17 U.N. GAOR Supp.
(No.17) at 15, U.N. Doc. A/5217 (1962).
12
United States — Standards for Reformulated and Conventional Gasoline, WT/DS2
13
United States — Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS 58; United
States — Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products,
WT/DS 381.
14
Brazil — Measures Affecting Imports of Retreaded Tyres, WT/Ds 332..
European Communities — Measures Prohibiting the Importation and Marketing of Seal Products,
15
DS 401
Law

World Trade Organization: II
Co.P.I. Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi
Yadav Delhi
Content Writer/Author Mr. Deepak Raju Associate, Sidley Austin
LLP (all views are strictly
personal, and do not
represent the views of the
firm or of any of the firm’s
clients)
Delhi
Yadav Delhi
The consensus-based decision making process in the WTO – strengths and

limitations.
PERSONAL DETAILS
http://www.sidley.com/deepak-raju/?nomobile=temp

Subject Name Law
Module Name/Title The World Trade Organization II
Module Id 5
Pre-requisites  The consensus based decision making process in
the WTO-strengths and limitations
 Proposals for reform
 Accession and withdrawal process to the WTO
 Decision making process in the WTO

 Pros and cons of the decision making process
 Potential for reform
Keywords Decision making; consensus; negative consensus; veto;

majority; special majority; plurilateralism; accession
withdrawal
E-TEXT
 Decision making in the WTO

o Decision making in the WTO – an overview
o Proposals for reform
 Voting
 Plurilateralism
 Accession to and withdrawal from the WTO.
WTO is established by an international treaty, namely the Marrakesh

Agreement,1 and all the obligations that parties undertake in the WTO are treaty
obligations. It is well established in international law that no State can be bound
to a treaty obligation without its consent.2 This position emerges from
international law’s axiomatic acceptance of sovereign equality of States. States
being sovereign and equal, no sovereign or group of sovereigns can bind another
sovereign or another group of sovereigns to treaty obligations without the
latter’s consent.3
1
See Vienna Convention on the Law of Treaties, Article 2(1)(a): “"Treaty" means an international
agreement concluded between States in written form and governed by international law, whether
embodied in a single instrument or in two or more related instruments and whatever its particular
designation”.
2
See Vienna Convention on the Law of Treaties, Article 34: “A treaty does not create either
obligations or rights for a third State without its consent.”
3
This emphasis on consent carries with it inherent limitations where a treaty has
near universal membership. An absolute rule of consent would translate, in such
a setting, to a rule of consensus for making any decision that would increase the
obligations, or diminish the rights, of treaty parties. Such consensus is often
difficult to attain in an organization like WTO where a large number of members
have widely differing interests. Some international organizations have found
solutions to this problem in rules of decision making other than consensus –
majority voting, special majorities, voting within specialized organs with limited
membership, or even negative consensus on some limited matters.
This chapter examines the decision making process within the WTO and its
various committees and sub-committees. As will be discussed below, most of the
important decisions in the WTO, especially those enhancing or diminishing the
rights and obligations under various WTO agreements can be undertaken only
by consensus. Further, we will discuss some proposals for potential reform of
this process. Additionally, the mechanisms for acceding to the WTO as well as the
provisions governing exit from the WTO will be considered below.
Decision making in the WTO – an overview

As discussed in a previous chapter, GATT 1947 did not establish an international
organization. However, it provided for ‘Joint Action by Contracting Parties’, in
Article XXV which would be the first semblance of an organizational structure for
matters of international trade. This nascent organizational structure came with
its own rules on decision making.
1.  Representatives
Proposals for of the contracting parties shall meet from time to time for the purpose of
reform.
giving effect to those provisions of this Agreement which involve joint action and, generally, with a
view to facilitating the operation and furthering the objectives of this Agreement. Wherever
 Accession
reference and
is made in this withdrawal
Agreement to theprocess to the
contracting WTO.
parties acting jointly they are designated as
the CONTRACTING PARTIES.
[…]
3. Each contracting party shall be entitled to have one vote at all meetings of the CONTRACTING
PARTIES.
4. Except as otherwise provided for in this Agreement, decisions of the CONTRACTING PARTIES
shall be taken by a majority of the votes cast.
5. In exceptional circumstances not elsewhere provided for in this Agreement, the

CONTRACTING PARTIES may waive an obligation imposed upon a contracting party by this
Agreement; Provided that any such decision shall be approved by a two-thirds majority of the votes
cast and that such majority shall comprise more than half of the contracting parties. The
Thus, GATT 1947 provided the rule of majority as the default rule for decision
making by the CONTRACTING PARTIES (as stated in the provision quoted above,
this expression in block letters denotes Contracting Parties acting jointly). A two-third
majority was required for – (i) waiving obligations under GATT; (ii) altering the
voting rules for decisions on waiver of obligations and (iii) prescribing criteria for the
application of the provisions on waiver of obligations.
Despite the GATT establishing voting as the mode of decision making, over a period
of time, perhaps with a view to attract new members to accede, GATT Contracting
Parties de facto adopted a system of consensus.4 This system of consensus was so
well entrenched in the practice of Contracting Parties that the Marrakesh Agreement
states: “The WTO shall continue the practice of decision-making by consensus
followed under GATT 1947”, even though the text of GATT still had not been
modified to reflect that practice.
It is pertinent to note that ‘consensus’ in the WTO context connotes the lack of any
negative votes, not voting in the affirmative by the entire membership.
1. The WTO shall continue the practice of decision-making by consensus followed under GATT
1947(1). Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter
at issue shall be decided by voting. At meetings of the Ministerial Conference and the General Council,
each Member of the WTO shall have one vote. Where the European Communities exercise their right to
vote, they shall have a number of votes equal to the number of their member States(2)which are
Members of the WTO. Decisions of the Ministerial Conference and the General Council shall be taken by
a majority of the votes cast, unless otherwise provided in this Agreement or in the relevant Multilateral
Trade Agreement(3).
4
Pauwelyn,
2. J. (2005),
The “TheConference
Ministerial Transformation
and of
theWorld Trade”,
General Michigan
Council Law the
shall have Review, 1
exclusive authority to adopt
interpretations of this Agreement and of the Multilateral Trade Agreements. In the case of an
interpretation of a Multilateral Trade Agreement in Annex 1, they shall exercise their authority on the
basis of a recommendation by the Council overseeing the functioning of that Agreement. The decision to
adopt an interpretation shall be taken by a three-fourths majority of the Members. […]
3. In exceptional circumstances, the Ministerial Conference may decide to waive an obligation
imposed on a Member by this Agreement or any of the Multilateral Trade Agreements, provided that any
such decision shall be taken by three fourths (4) of the Members unless otherwise provided for in this
Article IX of the Marrakesh Agreement lays down elaborate decision-making rules
for the WTO. As stated above, it calls upon the Members to continue the “practice” of
consensus decision-making as a first step. Thereafter it proceeds to create the
possibility for voting on the basis of one vote per Member5 where consensus cannot
be reached. In such cases, simple majority is the default rule unless otherwise
specified. Special majorities of two-thirds and three quarters are prescribed for
interpretations of provisions, amendments of provisions or waiver of obligations.
However, WTO has, like GATT, attempted to adopt decisions through consensus, and
resort to formal voting has been rare. This has often meant that WTO membership has
been unable to adopt decisions on several matters, particularly on controversial ones,
for extended periods. Below we explore some possible alternatives to this process.
Proposals for reform
5
An exception to the one vote per member rule is that if the European Union votes as a member, its
vote counts as equal to the number of members that the EU has who are also members of the WTO.
Under such circumstances, the EU members who are also WTO members cannot vote separately.
Accession to and
withdrawal from
WTO: Unlike the
provision on
accession, the
provision on
withdrawal is yet to
be tested, since no
Voting: the member has ever
membership should issued a notice of
seriously consider withdrawal under
allowing voting with Article XV.
simple or special
majority at least on
a predefined set of Plurilateralism: members who are interested
issues. in undertaking additional commitments could
conclude plurilateral agreements inter se.
Voting
Legally, the option of voting is already available to WTO membership. However,

given the centrality of the commercial interests affected by WTO decisions, it is
unlikely that the membership will generally speaking, leave decisions to majority
voting. Developing country members have been particularly vocal against having a
voting based decision making system.
While the number of developing countries and least developed countries in the WTO
exceeds the number of developed country members, the reluctance of developing
country members to yield to majority voting has to be seen against the background of
various political and economic disputes that continue to divide developing countries
from acting as a united front in international organizations. In the late 1960s and
1970s, the developing countries actively participated in the United Nations General
Assembly, often coordinating their positions. However, the shared point of view that
developing countries could develop in the General Assembly given the nature of
issues under consideration, is missing on the trade front given the inherently diverse
nature of interests pursued in the trade fora. On the other hand, developed countries
have developed coordinated strategies on several issues. This is best exemplified by
the fact that the European Union is a member of the WTO in its own capacity,
coordinating al its Members in their voting positions.
Despite these concerns, the membership should seriously consider allowing voting
with simple or special majority at least on a predefined set of issues.
Plurilateralism
In some cases, where consensus was impossible, WTO members have proceeded to
conclude plurilateral arrangements applying amongst some, but not all members of
the WTO. The Agreement on Trade in Civil Aircraft, to which 32 WTO members are
parties, and Agreement on Government Procurement which has 28 members are
current examples of this. Several of WTO’s current multilateral agreements started
out as plurilateral agreements, and gained multilateral character only after the Tokyo
Round.
One solution to the limitations of the consensus rule could be that those members who
are interested in undertaking additional commitments could conclude plurilateral
agreements inter se, which may or may not evolve into multilateral agreements
subsequently.
However, this would undermine one of the cardinal principles of the WTO framework
– the single undertaking. Currently, any Member acceding to the WTO has to accept
all the multilateral agreements, and cannot pick and choose those that it prefers. This
has been hailed as one of the main achievements of the WTO, as it eliminates the
need to negotiate each agreement specifically with an acceding member. Ushering in
plurilateralism may pose serious threats to the idea of a ‘single undertaking’. Also, in
an environment encouraging plurilateralism, members may compromise their efforts
at arriving at ‘consensus’ and opt for the easier route, slowly undermining the
multilateral character of the WTO.
Accession to and withdrawal from the WTO.
In case of the United Nations, both conditions of accession and the possibility of
exiting the organization have been subjects of intense debates, the former leading to
the Admissions Advisory Opinion in 1948, and the latter resulting in ambiguities over
the status of Indonesia when it announced its intention to exit the UN.
In case of the WTO, elaborate provisions of the Marrakesh Agreement govern both
accession and withdrawal.
Article XII – Accession:

1. Any State or separate customs territory possessing full autonomy in the conduct
of its external commercial relations and of the other matters provided for in this
Agreement and the Multilateral Trade Agreements may accede to this Agreement, on
terms to be agreed between it and the WTO. Such accession shall apply to this
Agreement and the Multilateral Trade Agreements annexed thereto.
2. Decisions on accession shall be taken by the Ministerial Conference. The
Ministerial Conference shall approve the agreement on the terms of accession by a
two-thirds majority of the Members of the WTO.
3. Accession to a Plurilateral Trade Agreement shall be governed by the provisions
of that Agreement.
The eligibility to accede to the WTO extends not merely to States, 6 but also to
“separate customs territory possessing full autonomy in the conduct of its external
commercial relations and of the other matters provided for in [the Marrakesh
Agreement] and the Multilateral Trade Agreements”. Thus, Hong Kong and Macao,
while parts of the State People’s Republic of China, have separate memberships in the
WTO. Taiwan (under the name Chinese Taipei) is a member, despite its statehood
6
It is widely accepted that Article 4 of the Montevideo Convention on Rights and Obligations of States
lays down the criteria for statehood in international law.
being a heavily debated topic in international law. European Union is a member in
addition to the membership of its constituent States.7
Currently there are 160 members in the WTO. Starting out with 23 original
signatories to the GATT in 1947, the membership of most of these members is the
result of elaborate negotiations and consequent accession.
The detailed procedure for accession is laid down in WTO document WT/ACC/1
titled “Accession to the WTO — Procedures for Negotiations under Article XII”,
prepared by the WTO Secretariat in 1995. Though the Secretariat’s draft of this
document was considered by the Members and revised according to their inputs
during multilateral consultations, it was decided by the membership that the document
would not be submitted to the Ministerial Conference or General Council for formal
endorsement. Thus, this document serves as a practical roadmap, but not as a legally
binding instrument.
The process of accession begins with a request for membership from an interested and
eligible State or custom territory. The General Council, by a decision, establishes a
working party to consider the request. The working party prepares a report on the
foreign trade regime of the applicant, the applicant provides the necessary documents
and answers questions raised by existing members. After this stage which the WTO
calls the ‘fact finding stage’, the WTO and the applicant proceed to the ‘negotiation
stage’. Negotiations are undertaken multilaterally, bilaterally or plurilaterally
depending on the issue under consideration. At the end of this phase, the Working
Party submits a report to the General Council along with the draft Protocol of
Accession and the draft schedules of commitment in goods and services. This
terminates the mandate of the Working Party.
If the General Council or the Ministerial Conference accepts the report of the
Working Party and the terms of accession, it is open for the applicant to announce its
acceptance of the terms through signature or otherwise. Once the applicant has
7
However, when European Union exercises its vote, the Member States cannot vote. The vote of
European Union has the value equivalent to the number of EU members who are also WTO members.
conveyed its acceptance, the WTO notifies the acceptance of the applicant. The
membership commences in thirty days from the date of such notification.
Withdrawal from the WTO is governed by Article XV:1 of the Marrakesh Agreement.
Any Member may withdraw from this Agreement. Such withdrawal shall apply both to this
Agreement and the Multilateral Trade Agreements and shall take effect upon the expiration of
six months from the date on which written notice of withdrawal is received by the Director-
General of the WTO.
This provision allows members to withdraw from the WTO by simply giving a
written notice to the Director General. The withdrawal takes effect in XV days.
Unlike the provision on accession, the provision on withdrawal is yet to be tested,
since no member has ever issued a notice of withdrawal under Article XV.
Law

The Most favored Nation Treatment
Co.P.I Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi
Delhi
Content Writer/Author Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Reviewer Dr. Prabhash Ranjan South Asian University,
Delhi
Delhi

Subject Name Law
Module Name/Title Most Favoured Nation
Module Id 6
Pre-requisites  What is the MFN principle, its significance for
developing countries?
 Definition of like products,
 Definition of non-discriminatory treatment.
 The principle of most favoured nation as the

cornerstone of the GATT and its bearing on
international trade policy regulation.
 To understand the origins of this principle along with
the scope of this provision as provided by virtue of
Article I of the GATT, 1947; with respect to
discrimination both de jure and de facto.
Keywords GATT, most favoured nation treatment, like products, de jure
discrimination, de facto discrimination.
E-TEXT
6.1. Introduction
6.2. History of the MFN principle
6.3. Modes of discrimination
6.3.1. De jure discrimination
6.3.2. De facto discrimination
6.4. Most Favored Nation Obligations under the GATT, 1947

6.4.1. Scope of the MFN principle under the GATT, 1947
6.4.2. Types of measures covered under Article I: 1
6.4.3. Conduct which is discriminatory by nature
6.4.4. Product must belong to a WTO Member
6.4.5. Product must be a “like” product
6.5. Exceptions to the MFN principle
6.6. Summary
TEXT
6.1. Introduction:
The principle of Most Favored Nation (popularly known as the MFN treatment) is a
fundamental principle of trade ensuring non-discrimination between „like‟ goods and
services.
The clause on the Most Favored Treatment principle is in essence a misnomer. The
clause relates to providing the same benefit and concession to one Member, in case
benefits and concessions are provided to another Member. MFN hence calls for non-
discrimination amongst Members inter-se; so for example, in case a country „A‟
provides a tariff concession to a country „B‟ by imposing a 10% duty on import of
cars, „A‟ is obligated to charge the same rate of 10% to the imports of cars by Country
„C‟. In this sense, a nation is bound to treat every other nation as its favorite or most
favored nation. Thus, with respect to the GATT, a Contracting Party is expected to
treat every other Contracting Party as its favorite nation.
6.2. History of the MFN principle:
The origins of the MFN is said to be traced back to the World War – I with European
trade alliances being one of the major reasons of the war due to their discriminatory
practices. Countries hence realized the importance of the MFN clause and began to
negotiate various bilateral and plurilateral agreements during the war. The birth of the
League of Nations then saw the inclusion of an unconditional MFN clause to promote
the principles of free trade. Trade liberalization saw countries taking advantage of the
new international economic order by exporting products and services they had an
expertise over, and consequently importing products and services they were not so
good at; making countries mutually interdependent over one another. Given the
change in circumstances, and the new economic scenario, equality of treatment to
importers inter se became imperative with the drafting conferences on the GATT in
London (1946) and Geneva (1947); making MFN treatment the cornerstone of the
ITO Charter. With the failure of the (ITO) Charter, MFN treatment was successfully
added in the form of Article I of the GATT to assure traders that they will be treated
equally in the exports of „like‟ products; and that any concession granted to one
Member, shall unconditionally be granted to another.
With the conclusion of the Uruguay Round negotiations in 1994 at the Ministerial
Conference in Marrakesh on 15th April, 1994, various Agreements were part of the
new World Trade Organization as a new start to international trade law. Countries
realized that there was more to trade in goods and due to new developments in
technology and expertise in various services, countries began to export services like
never before. With the mutual interdependence of Members, there was a need to
assure trading partners that their services and service suppliers would be given the
same treatment as that of like services and service suppliers of other Members. MFN
treatment was hence not limited merely to trade in goods, but also to trade in services.
In matters of intellectual property, the Paris and Berne Convention did not consider it
essential to include an MFN clause given the fact that the existence of the principle of
national treatment made it imperative to provide benefits to nationals of other Members in
case benefits were provided to nations of one Member. Discrimination would thus be justified
only if nationals of another country were given more favorable treatment than nationals of its
own country. The Agreement forming the TRIPS hence decided to include the MFN clause to
address such scenarios.
The scope of MFN is hence largely the same in services and intellectual property: that being
to ensure non-discrimination of „like‟ goods. However, while the principle of national
treatment calls for equal treatment of „like‟ goods and services to imported products and
domestic products; the MFN principle ensures that there is equality of treatments amongst
imported goods and services inter-se.
6.3. Modes of discrimination
In order to obtain a thorough understanding of the principle of most-favored nation, it is vital

to understand the forms of discrimination. Discrimination may either be de jure or de facto.
6.3.1. De jure discrimination
By de jure discrimination, we mean that discrimination that is spelt out by law. Hence, when
foreign goods and services are not given the same treatment as domestic goods or services or
that which is given to other Members; despite of being similar or like, it is a case of de jure
discrimination. For example, there may be laws or regulations that have the impact of
discriminating between goods and services that are like. Also, there may be an application of
taxes in a different manner to domestic and imported goods, when in reality there is no real
difference between the two.
6.3.2. De facto discrimination
De facto discrimination is discrimination that is not as explicit as de jure discrimination and is

implicit in the type of measures used. For example, there may be a variable tax rate on
beverages with high alcohol content than those with low alcohol content. There being no real
discrimination apparent in such a measure, it will be regarded as de facto discrimination if,
based on the market scenario, domestic beverages have a low alcohol content and imported
beverages have a higher content.1
Discrimination must hence operate so as to distort the „conditions of competition‟ between

goods and services that are like. Mere existence of different rule, does not lead us to the
1
SIMON LESTER AND BRYAN MERCURIO WITH ARWEL DAVIES AND KARA LEITHNER
WORLD TRADE LAW: TEXT MATERIAL AND COMMENTARY 277 (2d ed. 2008).
conclusion that like goods and services have been discriminated unless the „conditions of
competition‟ have been adversely impacted.
6.4. Most Favored Nation Obligations under the GATT, 1947:
Against this backdrop, Article I of the GATT, 1947 that invokes the principle of most-favored
nation treatment prohibits discrimination that may be in eh form of de facto and de jure
discrimination, against the Contracting Parties inter se. It provides for non-discrimination
amongst trading partners; and applies to every governmental measure in the form of customs
duties and charges, the method of levying the same and the rules and formalities applicable in
the importation and exportation of goods.
Article 1 of the GATT additionally calls for non-discrimination amongst Members inter-se in
the importation of products that are „like‟. Article 1: 1 hence states that
“… any advantage, favor, privilege or immunity granted by any Member to any

product originated in or destined for any other country shall be accorded immediately
and unconditionally to the like product originated in or destined for the territories of
other Members”
Having understood that any form of discrimination is prohibited by virtue of Article I of the
GATT 1947, the MFN principle entails to:
6.4.1. Scope of the MFN principle under the GATT, 1947:
Like mentioned in the previous paragraphs, the MFN principle under the GATT prohibits
discrimination that is either de jure or de facto. Hence, discrimination that is either is the form
of explicit provisions of laws or regulations, or by means of a conduct is prohibited. The
Belgian Family Allowances dispute comprehensively elucidates the scope of discrimination,
and the phrase “any advantage, favor, privilege or immunity” for the purpose of
understanding the nature and scope of discrimination prohibited by the MFN principle.
In this dispute, the measure at issue was whether Belgium had violated the MFN principle
because of levying a charge on exports only due to the fact that such countries did not have a
similar family allowance policy in place. As a result, countries like Denmark and Norway had
to pay a charge on exports only by reason of not having a similar family allowance policy as
that of Belgium. The question was whether Belgium was justified in imposing a special
charge on the condition that exporting nations should also have a policy similar to that of
Belgium. In this context, the Panel held that Belgium had Article I:1 of the GATT as a result
of this measure. It elaborated that any advantage, etc. which was granted by one Contracting
Party with respect to products originating or destined for any country must also be granted to
all other countries. Hence, the Panel stated that such classifications made for certain products
must exclusively be based on the characteristics of the products themselves; as against being
based on the characteristics of the country where they originate from.
6.4.2. Types of measures covered under Article I: 1:
The principle of most-favored nation under Article I: 1 of the GATT covers the following
types of governmental measures:
 With respect to customs duties and charges of any kind (for example, transport or
warehouse charges) which are requisite for free and fair trade; and such type of
customs duty or charge must be imposed on or in applied in connection with the
importation and exportation of products;
 The charge imposed on the internal transfer of payments for imports or exports.
Hence, suppose a Member charges a different exchange rate or service charge on the
importation or exportation of goods only for a particular WTO Member in a
discriminatory manner, the measure is in violation of Article I: 1.
 The method of levying such duties and charges. This measure refers to the method
used to calculate the duties and charges; and in turn refers to the application of ad
voleram versus specific duties. Accordingly, if a WTO Member applies ad voleram
duties on the (like) products imported or exported to some Members, while imposing
specific duties on similar products; the same would be considered as a different
method of levying duties and charges.
 Other rules and formalities in connection with importation and exportation: this
means that rules and formalities with respect to importation and exportation of like
products must be uniform for all Members so as to maintain a level playing field.
 Measures referred to in Article III: 4 of the GATT, 1947; with respect to all laws,
regulations and requirements affecting their internal sale, offering for sale, purchase,
transportation, distribution or use must also be uniform for like products from goods
destined to or coming from another Member‟s territory.
6.4.3. Conduct which is discriminatory by nature:
Against this backdrop, the scope of the MFN clause is application to conduct by means of a
government imposed measure which is discriminatory. As a result of prohibiting any conduct
which has a consequence of being discriminatory by nature, Article I: 1 covers even measures
that are discriminatory on exports and imports. In other words, in the event a Contracting
Party applies a measure by means of an advantage, favor, privilege or immunity on either the
importation or the exportation of a product; and such measure is discriminatory, it would
attract the scope of Article I:1 of the GATT, 1947. For instance, if India, a Contracting Party
to the GATT, 1947 applies an additional customs duty on mangoes, but only if these mangoes
are exported to the European Union (another Contracting Party to the GATT); because India
aims at curbing the exportation of these mangoes in order to increase domestic consumption
of the same, and because EU is the largest importer of mangoes. According to the provisions
of the GATT, India‟s measure mentioned above is violative because it did not ban the export
of mangoes on the whole, i.e. to every nation importing mangoes. On the contrary, India
merely banned the fruit when the destination was E.U. In this respect, any advantage, etc.
provided to one Contracting Party must be given unconditionally and immediately to all other
Contracting Parties.
6.4.4. Product must belong to a WTO Member:
According to Article I:1, any advantage, etc. provided to any country, must be extended
immediately and unconditionally to all the other WTO members. This has various
implications.
 Firstly, the advantage, favor, etc. must be extended to any country. Thus, such
country who receives the advantage, etc need not be a WTO Member; and may still
receive the favorable treatment by another WTO Member.
 Secondly, such favorable treatment must be extended to all other WTO Members;
and
 Thirdly, not only should such favorable treatment be extended to all other WTO
Members, but must also be done immediately and unconditionally.
Hence, suppose Somalia which is not a Member of the WTO receives some form of favorable
treatment, in the form of lesser customs duties on the export of cotton to India (8%); whereas
South Africa, which is a Member is expected to pay 9% customs duties on the import of
cotton to India, it is a violation of the principle of MFN. This is because every favorable
treatment extended by India as a Member of the WTO to any other country (whether a
Member or a non-Member) must be extended immediately and unconditionally to all other
Members. In other words, India cannot impose a condition on South Africa stating that the
former must export a certain percentage to receive the favorable treatment. Nor can India
assert that it would extend the favorable treatment to South Africa from a certain date
onwards.
6.4.5. Product must be a “like” product:
In order to prove that the principle of MFN has been violated, the aggrieved party
must first prove that the products are „like‟. The jurisprudence of the concept of
„likeness‟ evolved in the case of Border Tax Adjustment wherein the Panel laid down
the guidelines to determine „like‟ goods by following four general criteria: a) the
property, nature and quality of the products; b) the end uses of the product; c)
consumer tastes and habits and d) tariff classification of the products. Hence, the
physical properties, the extent to which the product may be perceived as serving the
same end use, the extent to which consumers perceive and treat the products as an
alternative and the international classification of the products for tariff purposes is
what ought to be taken into account.2
The Japan-Alcoholic Beverages case is also known for its jurisprudence on the
concept of “like products”3 The question before the Panel in this case was whether
„vodka‟ and the Japanese drink „sochu‟ were alike. While Japan argued that the two
shared no similarities, the Panel in its report (which was later upheld by the Appellate
Body) stated that the two should be regarded as alike due to the fact that the two
shared the same physical characteristics and even the same end-use. The differences
in the same simply lie in the fact that the process of filtration is not the same. In
elaboration, the Panel gave a comparison of other alcoholic beverages like „rum‟ to
sochu, stating that the two cannot be considered as „like‟ products because of the
difference in the ingredients, while „whiskey‟ and „brandy‟ had different appearances
to that of „sochu‟. At the same time, „gin‟ „genever‟ and „liqueurs‟ contained certain
addictives. To this extent, vodka and sochu must be considered as like products given
the fact that they are similar in appearances and even have identical end-uses. There
2
Appellate Body Report, European Communities – Measures affecting Asbestos and Asbestos
containing products, WT/DS145/AB/R, Para. 102 (March 12, 2001).
3
Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R
and WT/DS11/AB/R (Nov. 1, 1996).
were however, no clear guidelines as to the circumstances in which goods may be
considered as „like.‟
Hence, products that are „like‟ must be treated equally, irrespective of their origin.
Considerations in determining „like‟ products are essentially the same in case of the MFN
clause as well. Discrimination among „like‟ goods arises when goods that are otherwise
similar are discriminated by governmental measures. In EC- Bananas, the issues revolved
around the banana‟s import regime of the EC. The EC identified three types of bananas. The
first were EC bananas: which were originating in the EC and received a duty free treatment.
The second type was ACP bananas which originated in Africa, Caribbean and Pacific: which
were known as traditional bananas (due to its traditional supply of bananas to the EC). ACP
bananas also received duty free treatment, but were subject to a quota that specified the
respective shares of 12 countries in the ACP. The third type was that of non-traditional
bananas: wherein the bananas were imported by ACP countries (including the 12 countries
mentioned above); but exceeded the shares allotted to these countries. The third type of
bananas also involved imports from other nations; and required additional qualifications than
that applicable to ACP countries. The Appellate Body noted that “the essence of the non
discrimination obligations is that like products are treated equally, irrespective of their
origin…” The Appellate Body further clarified that the obligation of non-discrimination may
be waived in case of existence of Customs Unions or Free Trade Areas approved by Article
XXIV of the GATT.4 „Like‟ products are hence discriminated against when governmental
measures either in the form of customs duties and charges, or the method of levying the same
or the rules and regulations thereof so operate to discriminate between the two products rather
than between two countries.
With reference to the MFN principle addressed in the GATT, the difference between the
scope of discrimination in Article III (providing for the national treatment obligation) and
Article I (providing for the MFN obligation) must be thoroughly understood. While both the
national treatment and the most favored nation treatment make certain to eliminate measures
that are both de jure and de facto discriminatory; the national treatment obligation is
applicable to merely internal measures that are in the form of taxes, charges and
governmental regulations. The National treatment clause is also invoked only when imports
of „like‟ products of a Member are not treated in the same manner as that of domestic „like‟
4
Appellate Body Report, European Communities - Regime for the Importation, Sale and Distribution of
Bananas, WT/DS27/AB/R (Sept. 9, 1997).
products. The MFN clause, on the other hand is broader a provision due to the fact that it
covers all forms of government measures, including measures in the form of border
measures. 5 Secondly, the MFN principle is also broader in its application due to its
application to both exports and imports6; making it the true cornerstone of GATT.
6.5. Exceptions to the MFN principle:
The MFN obligation is not sans exceptions. In addition to the general exceptions7 and the
security exceptions8 to the obligations of GATT, the existence of customs union and free
trade areas (FTA‟s) are also justification to measures that are otherwise GATT inconsistent.
Free Trade
Areas
Exceptions to
the MFN
principle
Special and
Differencial
Customs
Treatment to
Union
Developing
Countries
1. Customs Union: A Customs Union is defined in Article XXIV: 8 (a) of the GATT,
1994 as “a substitution of a single customs territory for two or more customs territory
so that duties and other restrictive regulations of commerce are eliminated w.r.t.
5
GATT, supra note 19, at 21 which clarifies that A - I: I is applicable to "Customs, duties and charges
of any kind imposed on or in connection with importation or exportation or imposed on the
international transfer of payments for imports or exports, and with respect to the method of levying
such duties and charges, and with respect to all rules and formalities in connection with importation
and exportation…”
6
Id.
7
Id. A - XX.
8
Id. A - XXI.
substantially all trade9 between the constituent territories of the union or at least w.r.t.
substantially all trade in products originating in such territories.”10 Furthermore, the
existence of customs union justifies a measure that is otherwise GATT inconsistent if
the formation of that customs union were made to be impossible if the introduction of
that measure was not permitted. At the same time, the existence of a customs union
makes it obligatory for the members of the customs union to apply substantially the
same duties and other regulations of commerce to each of the trade territories not
included in the union.11 In the application of substantially the same duties and other
regulations of commerce, Article XXIV: 8(5) (a) (of the GATT) also imposes the
obligation that such duty and other regulations are not higher or more trade restrictive
than they were before the constitution of the customs union.
2. Free Trade Area: Measures inconsistent with the MFN obligation under the Article 1:
1 of the GATT is also permitted with the formation of a free trade area. A free trade
area is defined under Article XXIV: 8 (b) as “a group of two or more customs
territories in which duties and other regulative restrictions are eliminated 12 on
substantially all trade between the constituent territories in products originating in
such territories.” Hence, the measure is justified on the ground that the formation of
the free trade area would be unattainable but for the existence of such a measure.
While the existence of a customs union makes it obligatory vide Article XXIV: 8(a) (ii) to
apply substantially the same duties and regulations of commerce to territories not a part of the
customs union (commonly known as „third party rights‟); the same is not the case with free
trade areas. Free trade areas, hence only establish a standard for internal trade between
members of the free trade area. Trade territories not a part of the FTA are merely assured that
the duties and other regulations of commerce are not higher or more restrictive than they were
prior to the formation of the free trade area.
3. Preferential Treatment to Developing Countries: Next, countries may also be

exempted from the MFN obligation with the aim to provide preferential treatment to
9
In the Turkey – Textiles case, the Appellate Body ruled that the phrase “substantially all trade” does
not mean all trade; and is something considerably more than all trade; Appellate Body Report, Turkey–
Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R (Oct. 22, 1999).
10
It must be noted that as per Article XXIV: 8(a) of the GATT, regulative restrictions under Article XI,
XII, XIII, XIV, XV and XX are still permitted notwithstanding the existence of a customs union.
11
GATT, supra note 19, at 21. A - XXIV: 8(a) (ii).
12
It must be noted that as per Article XXIV: 8(b) of the GATT, regulative restrictions under Article XI,
XII, XIII, XIV, XV and XX are still permitted notwithstanding the existence of the free trade area;
thereby making Article XXIV: 8 (b) similarly worded to Article XXIV: 8(a) of the GATT.
developing countries. The UNCTAD Special Committee on Preferences recognized
as long as in the year 1970 that preferential treatment granted under the generalized
scheme of preferences was a motivating factor for developing countries to increase
their exports so as to promote industrialization and accelerate economic growth. 13
Thereafter, the Waiver Decision on the Generalized System of Preferences 14 was
passed in the year 1971 to give effect to the Agreed Conclusions; which was
eventually replaced as a result of the Tokyo Round Negotiations by the 1979 GATT
Decision on Differential and More Favorable Treatment, Reciprocity and Fuller
Participation of Developing Countries; commonly known as the „Enabling Clause‟.15
The Enabling Clause authorizes Members to deviate from MFN obligations under Article 1: 1
of the GATT and accord differential and more favorable treatment to developing countries,
without according the same to other Members. Preferential treatment may therefore be
accorded in accordance with the Generalized System of Preferences by Members of
developed countries to products originated in developing countries. The Appellate Body in
EC- Tariff Preferences ruled that the Enabling Clause is enacted with a view to enhance the
market access to products originating from developing countries beyond the access granted to
like products originating from products of developed countries. The Enabling Clause, thereby
persuades developing countries to accord „differential and more favorable treatment‟ to
developing countries; keeping in mind that the same is designed to facilitate and promote the
trade for developing countries and not raise barriers or create undue difficulties for the trade
of other Members; and that it does not constitute an impediment to the reduction or
elimination of tariff and other restrictions to trade on an MFN basis. Lastly, the differential
and more favorable treatment provided to developing countries under the Enabling Clause
shall also be designed or modified as the case may be to respond positively to the
development, financial and trade needs of the developing country.16
6.6. Summary:
13
Para 1: 2 of the Agreed Conclusions of the UNCTAD Special Committee on Preferences, 1970.
14
The Waiver Decision on the Generalized System of Preferences, GATT document L/3545, June. 25
1971, BISD 18S/24. The Waiver Decision came into force to give effect to certain provisions in para.
1: 2 of the Agreed Conclusions of the UNCTAD‟s Special Committee on Preferences, 1970. These
provisions in general permitted special treatment to developing nations to increase industrialization,
improve export earnings and economic growth.
15
The Enabling Clause, GATT Document L/4903, Nov. 28, 1979, BISD 26S/203.
16
Id.para 4.
With this lesson we have therefore understood that Article 1:1 of the GATT would therefore
require the analysis of four questions to verify the existence of non-discrimination, namely:
 Whether there is an advantage created by a measure?
 Whether the products affected by the measure „like‟?
 Whether the disputed measure is a type regulated by the MFN provision?
 Whether the advantage is not offered to all like products unconditionally?17
17
RAJ BHALA, INTERNATIONAL TRADE LAW: THEORY AND PRACTICE 70 (2d ed. 2001).
Law

National Treatment
Co-P.I. Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi
Delhi
Delhi
Delhi
Delhi
PERSONAL DETAILS

Subject Name Law
Module Name/Title National Treatment
Module Id 7
Pre-requisites  Significance of national treatment provision,
 What is the difference between Articles III.2 and
III.4?
 Concept of like products and how is it different from
the concept of directly competitive and substitutable
products,
 What is the role of Article III.1 in interpretation of
Articles III.2 and III.4?
 To understand the concept on national treatment and

the significance of the same in liberalizing and
further achieving the goals of international trade
policy as regulated by the World Trade Organization.
 To analyze the concept and significance of national
treatment.
 To throw light on the scope and impact of the
concepts of like products vis-à-vis directly
substitutable products.
Keywords GATT, national treatment, like products, directly competitive
or substitutable products, discrimination.
E-TEXT
7.1. Introduction:
7.2. Significance of the National Treatment Provision
7.3. The bearing of Article III of the GATT on internal taxes and internal charges
7.3.1. What do we understand by internal taxes and internal charges?
7.3.2. Understanding ―in excess of‖
7.4. The concept of “like” products vis-à-vis “directly competitive or substitutable
products”
7.4.1. Understanding the concept of directly competitive or substitutable products
7.4. Article III: 4 and its bearing to Regulatory Measures in the form of laws,
requirements and regulations
7.6. Internal quantitative regulations
7.6.1. Exception to paragraph five
7.7. Allocation among external sources of supply
7.8. Government procurement as an exception to the principle of national treatment
in the GATT, 1947
7.9. Summary
TEXT
7.1. Introduction:
The principle of national treatment is expressed in Article III of the GATT, 1947 and
is one of the core principles of the GATT and the international trade regime. Like the
term suggests, the principle endeavors to provide equal treatment to goods that
originate or are being exported by foreign countries, and “like” domestic goods.
Against this backdrop, it would be pertinent to note that where on the one hand, the
principle of most favored nation endeavors to provide equal treatment to “like”
products or goods belonging to Member nations inter se; the principle of national
treatment delves to provide equal treatment to “like” goods of foreign nations vis-à-
vis domestic goods. In this respect, the principle of national treatment seems to have a
larger bearing on international trade regulation simply due to the fact that nations are
more likely to discriminate against foreign goods vis-à-vis their own goods; than
discriminate between foreign goods inter se. in other words, the Article III of the
GATT imposes an obligation on the Members to provide equal treatment to foreign
Member nations, as far as “like” products are concerned; and thus not “afford
protection to domestic production.”
For this purpose, Article III: 1 states that:
―The contracting parties recognize that internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal sale,
offering for sale, purchase, transportation, distribution or use of products,
and internal quantitative regulations requiring the mixture, processing or
use of products in specified amounts or proportions, should not be applied to
imported or domestic products so as to afford protection to domestic
production.‖
Apropos, paragraph 1 of Article III acts as the preamble for the principle of national
treatment. Therefore, it general specifies that internal tax, internal charges and laws,
regulations and requirements for the sale and purchase, transportation or distribution
of imported goods must not be applied in a manner that the same results in affording
protection to domestic like products. The remaining paragraphs of Article III
thereinafter provide a detailed explanation of the application of the principle with
respect to individual aspects such as internal taxes and charges; laws, regulations and
requirements; and lastly purchase sale, transportation and distribution of imported
goods.
7.2. Significance of the National Treatment Provision:
The principle of National Treatment endeavors to prohibit discrimination (both de
jure1 and de facto2) between domestic and imported goods and services that are like.
1
De jure discrimination refers to discrimination that is spelt out in the law. For a detailed discussion on
the concept, kindly refer to the module pertaining to the most favored nation treatment.
2
De facto discrimination refers to the discrimination that is implied by means of the governmental
measures of the given Member country. For a detailed discussion on the concept, kindly refer to the
module pertaining to the most favored nation treatment.
In essence, the principle of national treatment seeks to promote trade liberalization.
With this, the principle of national treatment sought to provide tariff concessions to
countries in general as against limiting them to countries that had negotiated for the
same.
Against this backdrop, Article III of the GATT, 1947 aims and endeavors to achieve
the following:
 It seeks to promote the conditions of competition between countries. In the Japan –
Alcoholic Beverages Case, the Appellate body held that “the fundamental purpose of
the Principle of national treatment is to prevent protectionism in the application of
internal tax and regulatory measures.” 3 National treatment entails to improve the
conditions of competition in the market, and any protectionism afforded to imported
production shall directly hamper the conditions of competition. Prejudices against
goods that are not locally made are considered to be unfair trade practices; with the
principle of national treatment ensuring that free trade is fair and fair trade is free.
 It seeks to ensure that imported goods are not subjected to any discrimination in the
country of importation by way of measures either in the form of internal taxes or
internal charges and laws, regulations and requirements…is not applied in such a
manner so as to afford protection to domestic production.
 Hence, national treatment ensures that imported goods will be afforded the same
treatment as domestic goods in matters that are under the control of the government.
With the discrimination first being prohibited by the General Agreement on Tariff and
Trade, 1947 in the form of the „grandfathering paragraphs‟ of national treatment and
that of the most favored nation, discrimination has also been subsequently been
upheld in the agreements forming the World Trade Organization in the year 1995.
7.3. The bearing of Article III of the GATT on internal taxes and internal charges:
Like mentioned in the previous paragraphs, Article III, paragraph I acts as the
preamble of the principle of national treatment as elucidated in the above mentioned
Article. For that reason, paragraph I sets out the general treatment towards imported
goods with respect to internal taxes and internal charges; laws, regulation;
transportation, sale, purchase; so on and so forth. On the other hand, the subsequent
paragraphs from paragraph 2 through paragraph 10 set out the treatment that must be
3
offered by domestic producers towards producers of imported “like” goods with
respect to specific measures.
In a related vein, paragraph 2 of Article III sets out the bearing of the principle of
national treatment towards internal taxes and internal charges.
7.3.1. What do we understand by internal taxes and internal charges?
It is important to note that GATT which is now a part of the WTO is applicable to
merely governmental measures. Hence, private measures or measures applied by
private persons do not fall within the purview of the GATT. Accordingly, the terms
internal taxes and internal charges refer to the taxes and charges applied by means of
a governmental measure once the goods in question have crossed the boundary and
entered the jurisdiction of the importing nation. Therefore, internal taxes refer to the
taxes applied once the imported goods have entered the boundary of the importing
nation; and taxes need to be levied for the sale of the good.4 For instance, applied
taxes, specific taxes and ad voleram taxes are common examples of internal taxes. At
the same time, service tax and value added tax or VAT is also a common example of
taxes. On the other hand, internal charges are the charges applied for the sale,
purchase, transportation or storage of the imported good in the jurisdiction of the
importing nation.
Consequently, Article III: 2 states that:
―The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess of
those applied, directly or indirectly, to like domestic products. Moreover, no
contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.‖
4
However, it is important to note that the Panel, in Argentina-Hides and Leather noted that internal
taxes and charges could sometimes be levied before they reach the border and may still be considered
as internal for the purpose of this Article. In the above mentioned dispute, the Panel considered the pre
payment of VAT on imports (IVA) as an internal tax; irrespective of the fact that it was collected prior
to the importation. See, Panel Report, Argentina – Measures Affecting The Export Of Bovine Hides And
The Import Of Finished Leather, WT/DS155/R
19 December 2000
With the intent of truly reducing and removing tariff and non-tariff barriers to trade,
the principle of national treatment, as seen above is keen to ensure that goods are
given the same treatment as that of „like‟ goods in the domestic market; i.e. the
country of importation.
In particular, the GATT aims at providing equality to imported and domestically
produced goods. The principle of National Treatment set forth in Article III of the
Agreement forming the GATT, states that internal taxes and internal charges
i. shall not be so applied imported products so as to be in excess, directly or indirectly,
of domestic products;
ii. and to afford protection to „like‟ domestic goods.5
Consequently, Article III: 2 which pertain to the application of the principle of national
treatment with respect to internal taxes and charges are divided into two parts. The first part
of paragraph two is the first sentence; which states that:
The products of the territory of any contracting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal
taxes or other internal charges of any kind in excess of those applied, directly or
indirectly, to like domestic products.
Apropos, according to the first part of paragraph 2, two points need to be significantly kept in
mind while applying the provisions of Article III: 2.
5
General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-3.2, 55 U.N.T.S. 194 [hereinafter
GATT, 1947].
7.3.2. Understanding ―in excess of‖:
Question One: Are the products in question ―like‖?
Prior to understanding the phrase “in excess of”, it is important to note that the
principle of National Treatment set in Article III of the GATT is applicable when the
discriminatory conduct in question is towards goods that are alike. In other words, a
Member nation is permitted to provide different treatment to unlike or dissimilar
products. For this reason, in order to gain a complete understanding of the first
sentence of Article III: 2 of the GATT, one must first understand the concept of like
products.
The concept of “like” products with reference to the principle of national treatment set
in Article III of the GATT, 1947 is similar to that in the most favored nation treatment
set in Article I of the GATT; elucidated in the previous module. However, for the
purpose of discussion in this module, the concept would be discussed in brief again.
With respect to the concept of like products referred to in Article III: 2 of the GATT,
1947; the Japan-Alcoholics Beverage dispute best illustrates the same.6 The question
at issue in this particular dispute was whether Japan was providing discriminatory
conduct towards alcoholic beverages like vodka, gin and whiskey; in comparison to
the treatment offered with respect to internal taxes and internal charges towards the
Japanese local drink names “sochu”.
As we are aware, “like” imported products must not be subject to internal taxes or
internal charges in excess of those applied towards domestic products. For this reason,
the question at debate was primarily whether the Japanese local drink names “sochu”
was like the imported alcoholic beverages like vodka, gin and whiskey. In other
words, one must first ascertain if and whether the goods at question are alike; and
only if the answer the question is positive, can one proceed to examine if the said like
products have been subjected to internal taxes and internal charges that are in excess
to those applicable to domestic products.
In the above mentioned dispute, the issue before the Panel was whether imported
vodka, gin and whiskey was provided discriminatory treatment in comparison to the
local traditional drink of Japan named “sochu”.
6
and WT/DS11/AB/R (Nov. 1, 1996). (Hereinafter referred to as the Japan-Alcohol dispute).
The Panel in this dispute was of the view that despite the fact that vodka and sochu
had different alcoholic strengths, it did not necessarily mean that the two would have
been dissimilar products. For this matter, it even examined that the Japanese Schedule
of Concessions had classified both vodka and sochu within the same heading. 7 In
addition, the Panel re-called the criteria laid down in the Panel Report of the Border
Tax Adjustment dispute; namely, a) the property, nature and quality of the products; b)
the end uses of the product; c) consumer tastes and habits and d) tariff classification
of the products. Hence, the physical properties, the extent to which the product may
be perceived as serving the same end use, the extent to which consumers perceive and
treat the products as an alternative and the international classification of the products
for tariff purposes is what ought to be taken into account.8 On appeal, the Appellate
Body agreed with the above mentioned views of the Panel and upheld that vodka and
sochu must be considered as like goods for the purpose of this dispute.
While Japan argued that the two shared no similarities, the Panel in its Report (which
was later upheld by the Appellate Body) stated that the two should be regarded as
alike due to the fact that the two shared the same physical characteristics and even the
same end-use. The differences in the same simply lie in the fact that the process of
filtration is not the same. In elaboration, the Panel gave a comparison of other
alcoholic beverages like „rum‟ to sochu, stating that the two cannot be considered as
„like‟ products because of the difference in the ingredients, while „whiskey‟ and
„brandy‟ had different appearances to that of „sochu‟. At the same time, „gin‟ „genever‟
and „liqueurs‟ contained certain addictives. To this extent, vodka and sochu must be
considered as like products given the fact that they are similar in appearances and
even have identical end-uses. There were however, no clear guidelines as to the
circumstances in which goods may be considered as „like.‟
Question Two: Are the ―like‖ imported products being internally taxed or internally
charged in excess of domestic products?
7
For this purpose, while vodka was classified within the Harmonized system of Classification under
heading 2208.90, sochu was classified under heading 2208.60; and had the same tariff being applied to
both.
8
Appellate Body Report, European Communities – Measures affecting Asbestos and Asbestos
containing products, WT/DS145/AB/R, Para. 102 (March 12, 2001).
Once it has been ascertained that the products in question are like, one must next
examine whether the “like” products have be internally taxed or internally charged at
rates in excess of that which are being charged to domestic goods. While ensuring that
internal taxes or internal charges are not applied in excess, the principle of National
Treatment in GATT ensures that even the slightest difference in the amount of taxes
makes the measure illegal. The exception of de minimus hence is not a valid exception
to the principle. Internal taxes and internal charges, on the other hand must be
different than that applied to similar goods.
For this purpose, the Panel examined whether vodka had been charged in excess of
that in comparison to the Japanese local drink named sochu. The Panel held that
despite the fact that the two products in question had been ascertained to be like
products, vodka which was an imported product was been taxed at 9,927 Yen per
degree of alcohol; whereas sochu was being taxed at merely 6,228 Yen per degree of
alcohol. 9 Accordingly, the Panel Report (subsequently agreed to by the Appellate
Body Report) held that vodka had been taxed in excess of in comparison to sochu.
The second part of Article III: 2 states that apart from restraining the application of
excess internal taxes and duties towards imported like products, no Contracting Party
must additionally apply internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles set forth in paragraph 1 (i.e.
to afford protection to domestic products).
In other words, two criteria must be satisfied:

i. The internal tax or internal charge must not be in excess of that applicable to like
domestic goods; and
ii. These internal taxes and charges must not be applied in a manner that distort
conditions of competition and consequently afford protection to domestic products.
This means that even when a Contracting Party has satisfactorily fulfilled the first
criteria; it must in addition successfully prove that the internal taxes or internal
charges have not been applied in a manner that would distort the competition in favor
of the domestic production. To this effect, the Panel in Argentina-Hides and Leather
9
Panel Report, Japan-Alcohol, para.6.24
noted that the intention of Article III: 1 (first sentence) is not to directly impact
internal taxes or charges directly as policy measures; but rather ensure that their
operation does not in any manner have a negative impact on competition between
domestic and imported products.10
The US – Automobiles dispute aptly elucidates this second factor; namely whether
internal taxes and internal charges have been applied to distort conditions of
competition and afford protection to like domestic products.11
The question before the Panel in the above mentioned dispute was whether certain
products that were being imported to the United States which were above USD
30,000 were in any manner different to those being sold below USD 30,000 in order
to be considered as luxury products; and hence be subject to a different and higher tax.
Consequently, it was important to decide whether the automobiles that fell in the
former category were “like” or similar to the automobiles that fell in the latter
category; and if so, was the difference in the taxes in order to afford protection to the
domestic industry.
In the concerned dispute, E.U. alleged that the U.S. was taxing certain luxurious
products such as boats, aero planes, fur and the like, sold above the threshold limit of
USD 30,000 at 10% in excess of the retail price; and that such products were similar
to or like products being sold under the said amount. For this purpose, the Panel was
left with two primary questions to answer:
i. Are the products like or similar?; and
ii. Are the like products being treated differently in order to afford protection to the
domestic industry?
For the purpose of determining the answer to the first question, the Panel referred to
the criteria laid down in the Border Tax Adjustment dispute (discussed above).
Therefore, the end uses, common features and physical characteristics must be taken
into account of while determining if the products in question are alike or similar.
10
See, Panel Report, Argentina – Measures Affecting The Export Of Bovine Hides And The Import Of
Finished Leather, WT/DS155/R
19 December 2000
11
Panel Report, United States-Taxes on Automobiles, (11 Oct, 1994) (Unadopted), DS31/R.
Once it has been determined that the products are similar, it must be ascertained
whether the said products have been subject to an internal tax or internal charge that
has been in excess of that being charged with respect to domestic products. In
addition, like the second sentence of Article III: 2 mentions, the Panel and Appellate
Body are left to determine if and whether this excess tax/charge has been imposed for
the purpose of affording protection to the domestic industry.
Against this backdrop, Article III: 2 makes it requisite to read the same in light of
paragraph 1 which sets out the purpose of the Article. Consequently, the Panel noted
that paragraph 2 of Article III aims at preventing the parties from imposing internal
taxes or internal charges that are in excess of those imposed for domestic like
products; and the reason for imposing such excess taxes/charges is to afford
protection to the domestic industry. In a related vein, the Panel noted that the aim and
intention of the parties must be taken into account of. Hence once it has been
established that the aim of the party was to afford protection to domestic industry, it
must additionally be established that the intention was to distort conditions of
competition in favor of the domestic industry.
For the purpose of the US-Taxes on Automobiles dispute, the Panel held that the U.S.
conduct of imposing a higher tax for luxury products above USD 30,000 did not
violate Article III: 2 simply because U.S. did not impose a higher tax in order to
afford protection to domestic productions and consequently distort conditions of
competition in the domestic market. The Panel additionally noted that the U.S. itself
was selling a large number of products that fell outside the threshold limit of USD 30,
000; and additionally E.U. also had enough opportunity to export products under the
threshold limit. For the same reason, the Panel held that the U.S. had not violated
Article III: 2 as it did not classify the products for the purpose of affording protection
and distorting the conditions of competition; according to the aims and intent test.
It is important to note at this juncture that the Appellate Body in the Japan-Alcoholic
Beverages dispute disregarded the aims and intent test set out in the U.S.-Automobile
dispute. What the Appellate Body regarded however was that Members are not
permitted to impose internal taxes and internal charges that are not only in excess of
those imposed on domestic products; but also for the purpose of affording protection
to the domestic production.12
7.4. The concept of “like” products vis-à-vis “directly competitive or substitutable

products”:
The concept of like products has been discussed in detail above. Like mentioned in
the previous section, the criteria for the determination of like products was first laid
down in the Border Tax Adjustments dispute; and has been referred to relentlessly by
subsequent Panels for the determination of like products. For the purpose of
determining “like” products, the criterion has therefore remained constant for both the
Most Favored Nation Treatment and the National Treatment principles.
The first sentence of Article III: 2 (discussed above) is applicable only when the
discrimination in question by means of an internal tax or internal charge is between
goods that are imported and domestic; and such goods are alike.13 In other words, the
first sentence of paragraph two is restricted to like products. On the other hand, the
second sentence of Article III: 2 pertains to directly competitive or substitutable
products.
In a related vein, while the second sentence states that apart from restraining the
application of excess internal taxes and duties towards imported like products,
―… No Contracting Party must additionally apply internal taxes or other

internal charges to imported or domestic products in a manner contrary to
the principles set forth in paragraph 1 (i.e. to afford protection to domestic
products).‖
Accordingly, as mentioned in the previous section, the principle of national

treatment of the GATT entails equal that not only should:
12
Panel Report, Japan — Taxes on Alcoholic Beverages, WT/DS8/R, WT/DS10/R, WT/DS11/R,
adopted 1 November 1996, as modified by the Appellate Body
Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR 1996:I. [hereinafter referred to as
Japan-Alcoholic Beverages II].
13
Article III: 2 provides:
“The products of the territory of any contracting party imported into the territory of any other
contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges
of any kind in excess of those applied, directly or indirectly, to like domestic products.‖
i. Internal taxes and charges be the same for imported and domestic products that
are similar;
ii. And the manner of applying the same (for example the method of calculation) be
in such a way that the domestic industry for such similar or like products does
not distort the competition in its favor. It thus creates a level playing field for
imported vis-à-vis domestic like products.
Nevertheless, the second sentence of paragraph two is wider in scope, given its
applicability towards not only “like” products, but additionally also products that may
not be like, but would be considered as directly competitive or substitutable to the
domestic product. Against this backdrop, the Ad Note to Article III: 2 provides that,
―A tax conforming to the requirements of the first sentence of paragraph 2
would be considered to be inconsistent with the provisions of the second
sentence only in cases where competition was involved between, on the one
hand, the taxed product and, on the other hand, a directly competitive or
substitutable product which was not similarly taxed.‖
internal tax of
charged for a
"like" good from a
Member is the
BUT, the manner same as the "like"
of calculating the domestic product
internal tax is not
the same
and results in
distortion of
conditions of
competition.
would be considered as a "directly

competitive or substitutable".
The Ad Note to paragraph two therefore makes it clear that:

i. An internal tax of a certain Member or Contracting Party of the GATT may be the
same (and not in excess of) for both imported and domestic like products (in
accordance to the first sentence of paragraph two).
ii. Nevertheless, the said internal tax may still be inconsistent with paragraph two (the
second sentence) when the manner of applying the internal tax is such that it would
distort conditions of competition between goods that are not merely like: but also
directly competitive or substitutable.
This connotes that the second sentence of paragraph two is certainly wider in scope,
given the application of the Ad Note mentioned above. Consequently, one must
understand the true difference between products that are alike and products that are
not alike, but on the contrary directly competitive or substitutable.
7.4.1. Understanding the concept of directly competitive or substitutable products:
In the previous section, we examined how products that are like must be similar in all
respects. Hence, they must have similar end-uses; or the physical characteristics must
be the same; or the likeness may be adjudged from consumer preferences. Against
this backdrop, vodka and sochu were adjudged by the Panel and the Appellate Body
to be similar, in the Japan-Alcoholic Beverages dispute. The two products were
primarily similar because they physical characteristics were similar: the two being
while, clean spirits. On the contrary, whiskey, gin and genever were considered as
unlike: but directly competitive or substitutable products. In this dispute, the Panel
and Appellate Body held that whiskey, gin and genever were primarily different given
the use of addictives (in gin and genever vis-à-vis sochu), the color (whiskey versus
sochu) and the difference in ingredients (in rum and sochu). However, the Panel and
Appellate Body clarified that despite these alcoholic beverages being dissimilar, they
were certainly directly competitive or substitutable.14
Against this backdrop, the Panel in the Japan-Alcoholic case 15 emphasized that
besides the physical characteristics, common end uses and tariff classifications; the
14
Panel Report, Japan Alcoholic Beverages, para. 6.23; read along with Appellate Body Report, Japan
Alcoholic Beverages, para 20-24.
15
„market place‟ and „elasticity of substitution‟16 must also be identified before goods
are considered as “directly competitive or substitutable.”Imported goods that are „like‟
or “directly competitive or substitutable” are said to be discriminated against only
when they are not similarly taxed as their domestic counterparts. The rationale,
behind this dissimilar taxation should then be proved to be applied in such a manner
so as to afford protection and hamper competitive conditions in the market.17
The Chile- Alcoholic Beverages case18 best illustrates the same. In this case, a certain
Chilean tax measure that increased the tax rate along with the increase in alcohol
content was scrutinized. The tax rate increased by 4% with every degree in the
increase of alcohol content; the minimum being less than or equal to 35 degree
charged with 27% tax ad volerem. The Panel in this case found that approximately
75% of the domestic production had an alcohol content of less than 35 degree;
therefore being charged at the lowest of 27%, and that the majority of the imported
beverages had an alcoholic content of 39% which was liable to a tax rate of 47%, thus
being the highest. The Panel, in this case found that imported beverages were
“directly competitive or substitutable” with that of domestic beverages and that the
tax measures of Chile were with a view to afford protection to domestic goods and
thereby distort competition in the market.
In the Korea- Alcohol case, the Panel noted that product categories must not be so
narrowly construed so as to defeat the purpose of non-discrimination provided in
Article III. Apples and oranges could hence be regarded as “directly competitive or
substitutable”; as illustrated by the Geneva session of the Preparatory Committee.19
7.4. Article III: 4 and its bearing to Regulatory Measures in the form of laws,
requirements and regulations:
The previous section explained the application of the principle of national treatment
as set in Article III of the GATT, 1947, to internal taxes and charges. Paragraph four
16
Elasticity of substitution identifies how consumers are likely to substitute one product for another.
17
Appellate Body Report, Japan-Alcoholic Beverages, para 24-25
18
Appellate Body Report, Chile-Taxes on Alcoholic Beverages, WT/DS87, 110/AB/R (Jan. 12, 2000).
19
Appellate Body Report, Korea – Taxes on Alcoholic Beverages, WT/DS75/AB/R, WT/DS84/AB/R
para 10.38 (Jan. 18, 1999).
on the other hand pertains to providing a level playing field and equal competitive
conditions as far as regulatory measures by means of laws, requirements and
regulations are concerned. In other words, the GATT prohibits Contracting Parties
from enacting laws, regulations, requirements and other regulatory measures that
distort conditions of competition in favor of the domestic industry.
Against this backdrop, paragraph 4 provides:
―The products of the territory of any contracting party imported into the
territory of any other contracting party shall be accorded treatment no less
favorable than that accorded to like products of national origin in respect of
all laws, regulations and requirements affecting their internal sale, offering
for sale, purchase, transportation, distribution or use. The provisions of this
paragraph shall not prevent the application of differential internal
transportation charges which are based exclusively on the economic
operation of the means of transport and not on the nationality of the product.‖
must be
imported from
a Contracting
Party
National
Treatment with
respect to laws,
regulations and
requirements
Must be subject
to treatment no
Products must
less favorable
be alike
to like domestic
products
Against this backdrop, the principle of national treatment also encompasses regulatory
measures that are governmental in nature by way of laws, regulations and other
requirements that affect internal sale, offering for sale, purchase, transportation,
distribution or use of imported goods that accords less favorable treatment to
imported products than „like‟ domestic products. Hence, any form of government
action that seeks to provide protectionism to domestic goods over imported goods,
violate the principle of national treatment.
The US- Gasoline dispute was the first dispute before the WTO Dispute Settlement
Body after the coming into birth of the WTO.20 Apart from various other questions
before the Panel, the latter was also requested to decide whether the US measure had
violated Article III: 4; in a dispute brought before the DSU by Venezuela and Brazil.
The law under dispute in this case was the US Clean Air Act, 1963; that aimed at
controlling pollution and thus improving the environment. For this purpose, the Act
segregated the areas, and identified nine areas that had severe pollution. Consequently,
it directed that only “reformulated gasoline” could be sold in these localities. In
localities that did not face such high pollution levels, “conventional gasoline” could
continue to be sold. However, for the purpose of selling the latter, the producers had
to ensure that it was as clean as it was in the year 1990. To that end, the year 1990
was the baseline, to which both conventional and reformulated gasoline was supposed
to be compared to in the future. For the purpose of comparison, a domestic refiner that
operated for a minimum period of six months in the year 1990 was permitted to
establish a refinery baseline to produce gasoline similar to that in the year 1990.21
Consequently, such a refiner was permitted to use any of the methods, namely:
i. Using the quality and volume of gasoline produced in 1990; or
ii. The data of the blendstocks and records of the gasoline in 1990; in the event that
confirming to the first method is impractical and unachievable; or
iii. The data on the quality of the blendstocks of gasoline post 1990; and this data may be
used only when confirming to any of the above two methods is impractical for the
refiner.22
The issue:
The issue pertaining to the method of assigning a refiner according to the above-
mentioned methods was under dispute. In other words, according to the Clean Air Act
and the methods it identified; an importer of gasoline was only permitted to use the
first method, namely use of the data on the quality and volume of gasoline produced
20
Appellate Body Report, United States — Standards for Reformulated and Conventional
Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I.
21
Appellate Body Report, US-Gasoline, para 6.1.
22
Appellate Body Report, US-Gasoline, para 6.2.
in 1990. On the other hand, domestic producers were permitted to use any of the three
methods. Consequently, Venezuela and Brazil urged that the Clean Air Act had
violated the principle of national treatment because it imposed different and more
stringent conditions for foreign producers. As a result, foreign producers interested in
exporting gasoline to the United States were required to make expensive changes to
their refineries in order to comply with the first method. Venezuela and Brazil
therefore alleged that not only did the U.S. violate Paragraph 4 of Article III, but also
did so in order to afford protection to the domestic producers: thereby violating
Article III: 1 as well.23
The findings of the Panel:
The Panel held that the U.S. had violated both Article III: 1 and III: 4, mainly
because the methods identified for setting up a refinery were not the same for
domestic producers and importers of gasoline. Hence, by permitting importers to only
use the first method (i.e. the use of the data of the volume of gasoline in 1990), the
Act had violated the principle of national treatment by according treatment that was
less favorable to importers of a like product. For this purpose, the Panel referred to the
criterion used to identify like product in the Border Tax Adjustment dispute and Japan
Alcoholics Beverage dispute. Consequently, the Panel noted that imported and
domestic gasoline as similar in physical characteristics and its end uses. In addition,
the Clean Air Act was a law by virtue of Article III: 4 and created certain rules that
required to be followed; failing which defaulters would face a penalty. To this end,
the Panel requested the U.S. to bring its law in conformity with the international
obligations under Article III: 1 and III: 4.24
The violation of Article III: 4 was in question before the Dispute Settlement Body in
the Korea-Beef case.25 In this dispute, the Panel analyzed a Korean law requiring two
retail distribution systems for the sale of beef, one for imported beef and the other for
23
Appellate Body Report, US-Gasoline, para 6.3-6.4.
24
Appellate Body Report, US-Gasoline, para 6.5-6.16.
25
Appellate Body Report, Korea- Measures Affecting Importation of Fresh, Chilled and Frozen Beef,
WT/DS161, 169/AB/R (Jan. 10, 2001).
domestic beef. Accordingly, a “Specialized Imported Beef Store” can sell only
imported beef, while another retailed can sell only domestic beef. A supermarket may
however sell both domestic and imported beef. Post 1990, Korea promulgated a dual
retail system, wherein retailers had to choose the type of beef they desired to sell:
domestic or imported. In the result, most retailers preferred to sell domestic beef,
hampering the sale of imported beef. Gradually, a new retail system was incorporated
to provide for the sale of imported beef. The new retail system nevertheless resulted
in merely approximately 5,000 shops selling imported beef as against (approximately)
45,000 shops selling domestic beef. The Panel, in this case held that the treatment
accorded to imported beef with the introduction of the dual retail system by the
Korean law and regulation, is less favorable than the treatment given to the like
domestic beef; a finding that was upheld by the Appellate Body.
The Canada-Foreign Investment Review Act dispute initiated by the United States,
further clarifies the various nuances of paragraph 4 of Article III of the GATT,
1947. 26 The dispute revolves around the Canadian measure vide the Foreign
Investment Review Act regarding the purchase undertakings the Act sought to
obligate vis-à-vis foreign investors. Apropos, the Act obliged the foreign investors to
purchase Canadian goods in certain quantities and also to manufacture in Canada, as
against importing goods from foreign sources.27
The question before the DSB was whether the above-mentioned provision in the Act
was a violation of the principle of national treatment and whether the same is:
i. A law, regulation and requirement within the meaning of Article III: 4 of the GATT,
1947;
ii. Does the Canadian obligation offer less favorable treatment to foreign importers vis-
à-vis domestic suppliers?
iii. Is this obligation a manner to afford protection to domestic suppliers and producers?28
The United States alleged that the Act fell within the purview of law, regulation or
requirement because it obliged foreign investors wishing to do business in Canada, to
use domestic goods whenever “available”, “reasonably available” or “competitively
26
Panel Report, Canada — Administration of the Foreign Investment Review Act, adopted
7 February 1984, BISD 30S/140. [hereinafter referred to as the Canada-Investment dispute]
27
Panel Report, Canada-Investment, para 1.1.
28
available”. Accordingly, the U.S alleged that this provision in the Canadian Act acted
as a requirement for foreign investors, because like Canadian goods would almost
always be available, reasonably available or competitively available. In addition, even
in instances where foreign investors did not agree as to the competitiveness and the
quality of the Canadian product, the matter would always be subject to a controversy.
As a result, the obligation by means of an undertaking to purchase goods from Canada
whenever possible provided less favorable treatment to foreign investors.
Consequently, the U.S. also alleged that the Act was a requirement in order to invest
and do business in Canada because providing an undertaking simply made it easier for
foreign investors to do business with the Canadian government. In other words, even
though foreign investors were only required to present their proposal to invest and do
business; in most cases they would prefer to give an undertaking in order to make it
easier to gain an acceptance. It was for this reason that the U.S. alleged that the
Foreign Investment Review Act was a requirement since providing an undertaking in
turn provided a benefit to the investors; whereas on the contrary, failing to do so
resulted in a loss.29
The Panel in this dispute ruled in favor of the United States and noted that the
provisions of the Canadian Act certainly acted as a requirement within the scope and
meaning of the principle of national treatment of the GATT, 1947. It noted that the
application of Section 9(c) read along with Section 21 of the Foreign Investment
Review Act was certainly a requirement because of the manner in which it was
worded. In other words, Section 9 (c) states that
―Any written undertakings…relating to the proposed or actual investment
given by any party thereto conditional upon the allowance of the
investment…‖30
Whereas Section 21 provides:
―Where a person who has given a written undertaking…fails or refuses to
comply with such undertaking, a court order shall be made directing such a
person to comply with the undertaking.‖31
29
Panel Report, Canada-Investment, para 3.5-3.11.
30
31
Against this backdrop, the Panel noted that the relevant Sections mentioned
above were a requirement irrespective of the fact that the foreign investors were
free to provide an undertaking at the time of presentation of the proposal. Hence,
once they provided an undertaking, they were obligated to comply failing which
a penalty would follow.
In addition, the words “available”, “reasonably available” and “competitively
available” reduced the options of foreign investors; by prohibiting them to choose
imported products whenever a like domestic product was available. Consequently,
the Panel noted that this resulted in less favorable treatment to foreign products;
which were mainly aimed at affording protection to the domestic industry.
Therefore, even if foreign investors were free not to offer an undertaking; the fact
that once they did, imported product were offered less favorable treatment vis-à-
vis like domestic products was certainly a violation of the principle of national
treatment.32
7.6. Internal quantitative regulations:
The principle of national treatment provided for in the GATT, 1947 additionally
prohibits the application of internal quantitative regulations. In other words, in
the event a Contracting Party of the GATT mandates an importer to use a certain
amount of domestic products (as intermediates), during the production of the
final products, the former would said to have violated the principle of national
treatment. This provision seeks to provide the freedom to importers to choose the
manner of production of final goods; and moreover prohibit Contracting Parties
to protect domestic suppliers and distort competitive conditions in favor of such
domestic suppliers. To this end, the principle prohibits a Contracting Party from
making it mandatory for importers to make use of domestic supplies (either as
specified amounts or proportions); as part of mixing, processing or use of the
products. For this reasons, Article III: 5 provides that:
―No contracting party shall establish or maintain any internal quantitative
regulation relating to the mixture, processing or use of products in specified
amounts or proportions which requires, directly or indirectly, that any
32
Panel Report, Canada-Investment, para 5.6 -5.9.
specified amount or proportion of any product which is the subject of the
regulation must be supplied from domestic sources. Moreover, no contracting
party shall otherwise apply internal quantitative regulations in a manner
contrary to the principles set forth in paragraph 1.‖
The Canada – Foreign Investment Review Act dispute discussed in the previous
section also revolved around the scope of paragraph five of the principle of
national treatment. In brief, the question before the Panel was whether the relevant
provisions of the Foreign Investment Review Act that obliged foreign investors to
purchase, in specified amounts, goods of Canadian origin; were in violation of
paragraph five of Article III of the GATT, 1947. It was discussed in the previous
section pertaining to the relevant dispute in question, that Canada did not per se
mandate foreign investors to undertake that the former would source from
domestic Canadian suppliers. On the contrary, foreign investors themselves
preferred to provide an undertaking to that effect; in order to make it easier to do
business with the Canadian government. Hence, it was only after a foreign
investor had provided an undertaking to that effect, was it mandatory for the
former to comply with the same by means of sourcing from domestic suppliers.
For this reason, the Canadian obligation did not have an “umbrella” effect making
it mandatory for all foreign investors to comply. In addition, Sections 9 (c) and
Section 21 were only applicable to such foreign investors providing such an
undertaking. Against this backdrop, the Panel was now left to consider whether
such forms of “regulations” that did not have a general application; but rather
merely a specific application towards the investors providing the undertaking, were
prohibited by virtue of paragraph five. The United States urged that despite the fact
that the undertakings did not have the effect of general regulations, but they were
certainly enacted in order to impact competition and afford protection to domestic
producers. Hence, they were nevertheless prohibited by Article III: 5 (last
sentence). To this end, the Panel ruled in favor of the United States on this ground.
It is important to note that the first sentence of Article III: 5 pertains to the
application of internal quantitative regulations towards the mixture, processing and
use of domestic supplies. However, the provision has a wide scope and to that
effect ensures that even though an internal quantitative regulation that is neither of
the three mentioned above (mixture, processing or use); it may still be in order to
afford protection to domestic suppliers, and thus prohibits the latter as well.
Nevertheless, the scope of this paragraph is intended to cover instances of
international trade between domestic vis-à-vis foreign traders of like products. For
this reason, the Ad Note to paragraph five clarifies that even though an internal
quantitative regulation would be in compliance with the first sentence, it would
additionally be in compliance with the second sentence as well, if the other forms
of internal quantitative regulations (other than pertaining to mixtures, processing or
use) were made applicable to a) merely domestic products, b) being produced in
substantial quantities.33
7.6.1. Exception to paragraph five:
Article III: 10 is an exception to paragraph five elucidated in the previous
paragraph. Hence, while paragraph five forbids the use of internal quantitative
regulations that require sourcing from domestic producers; paragraph ten permits
the use of internal quantitative regulations when the same are applicable to
cinematograph films; and for the purpose of allocation of screen quotas.
For this purpose, paragraph ten provides that:
―The provisions of this Article shall not prevent any contracting party from
establishing or maintaining internal quantitative regulations relating to
exposed cinematograph films and meeting the requirements of Article IV.‖
In this respect, the application of an internal quantitative regulation by a Contracting

Party by means of screen quotas for cinematograph films is permitted; and does not
lead to a violation of the principle of national the GATT, 1947. Screen quotas are
quotas that are applied by the domestic industry for exposed cinematograph films,
stating that domestic films must be run for a minimum number of hours per year per
theatre: in order to protect the domestic cinematograph industry.
7.7. Allocation among external sources of supply:
33
Panel Report, Canada-Investment, Para. 3.12 and 5.13.
While the previous section dealt with the existence of internal quantitative
regulations in order to support and allocate sources from the domestic industry,
Article III: 7 pertains to the allocation among external sources of supply. In other
words, the difference lies in the fact that paragraph five pertains to allocation
among domestic sources; whereas paragraph seven pertains to the allocation
among foreign suppliers.
For this purpose, paragraph seven provides that:
―No internal quantitative regulation relating to the mixture, processing or
use of products in specified amounts or proportions shall be applied in such
a manner as to allocate any such amount or proportion among external
sources of supply.‖
Hence, for instance an importing Contracting Party is not permitted to apply an

internal quantitative regulation that necessitates that a part of the mixture or
processing or a product (by way of an intermediate) must be sourced from a certain
foreign source only. This is specifically application in the current era where the
production of final goods depends on the use of intermediates or inputs from various
countries. Hence, elucidating the illustration mentioned above, suppose India seeks to
import a certain product, let‟s assume cars. India is then, by virtue of paragraph seven,
not permitted to impose an internal quantitative regulation stating that the inputs (in
this case the parts of the car) must be sourced from specific external sources. Hence,
India cannot impose a condition stating that the engine must be sourced from the
United States, or the wheels must be sourced from China. Doing so would make India
liable under Article III: 7.
7.8. Government procurement as an exception to the principle of national treatment

in the GATT, 1947:
Government procurement is based on the postulation that governments may have their
own preferences in certain matters essential for the purpose of governance such as
rails, roads, airlines, etc. and may in the process hire its own choice of suppliers.
Article III: 8 of the GATT gives due recognition to this need of the governments by
stating that the principle of national treatment is not applicable to laws, regulations or
requirements governing the procurement by governmental agencies of products that
are exclusively for governmental use and not for commercial resale or even for use in
products that are commercially sold. The Tokyo Round subsequently witnessed the
adoption of an Agreement on Government Procurement with one major difference,
that being that the Agreement was plurilateral in nature, hence making accession to
the Agreement purely optional. 34 Drafters however recognized that government
procurement could be discriminatory in nature, undermining the objectives of the
GATT-WTO; hence making it obligatory to publish procurement opportunities and
criteria for awarding contracts in cases of government supplies.
Accordingly, Article III: 8 of the GATT provide that:
―(a) The provisions of this Article shall not apply to laws, regulations or
requirements governing the procurement by governmental agencies of
products purchased for governmental purposes and not with a view to
commercial resale or with a view to use in the production of goods for
commercial sale.
(b) The provisions of this Article shall not prevent the payment of subsidies
exclusively to domestic producers, including payments to domestic producers
derived from the proceeds of internal taxes or charges applied consistently
with the provisions of this Article and subsidies effected through
governmental purchases of domestic products.‖
Against this backdrop, paragraph eight of the principle of national treatment of the
GATT provides two exceptions to this principle. Firstly, government procurement
that has been given a legal effect by means of a law, regulation or requirement; as a
result of which such government agencies decide to buy products in violation of the
principle of national treatment (for instance by procuring by exclusively domestic
suppliers; or by insisting that a certain amount of imports contain a percentage of
domestic products as intermediates). However, such government procurement is only
34
The Agreement on Government Procurement, Jan. 1, 1995, 1867 U.N.T.S. 194 [hereinafter the GPA].
The GPA has 28 Members, operating as a plurilateral agreement under Annex 4 of the WTO; and is
exempted from the rule of the GATT-WTO that all members of the GATT must also be party to any
Agreement of the WTO subsequently adopted.
permitted when the government agencies procure the products for government
purposes and not for re-selling the product so procured in the commercial market. In
other words, suppose a government office seeks to purchase a product, let‟s assume
furniture for its offices; the said office may insist that the goods must contain a certain
percentage of domestic wood as intermediates. Such an act would be in compliance
with the principle of national treatment of the GATT, 1947 only if the said
(governmental) office seeks to use the furniture for personal use and does not intend
to sell the same.
Secondly, the governments of Contracting Parties of the GATT, 1947 are permitted to
provide subsidies to domestic producers (only), by means of the payments such
government may have received by means of the internal tax and internal charge that
was collected in compliance to the second paragraph (discussed above). For instance,
a government of a Contracting Party (assume India) is permitted to provide subsidies
(by way of a loan, payments, etc.) to exclusively domestic producers of certain goods
(assume cars or food grains). Accordingly, these subsidies would be paid from the
proceeds of the internal taxes and internal charges that were levied (on imports) in
compliance with paragraph two; or in other words were not in excess of those charged
to like/directly competitive or substitutable domestic products, so as to afford
protection to the latter.
7.9. Summary:
With this lesson we have learnt the following:
The principle of national treatment set in Article III of the GATT, 1947 entails that:
 Contracting parties must not treat imports of products entering their territory in a
manner that affords protection and distorts competitive opportunities in favor of
domestic products. Hence it sets out the purpose of the principle of national treatment
and ensures a level playing field between domestic and imported products. For this
matter, inter alia internal taxes, internal charges and regulatory requirements must be
the same for domestic and imported products. (Paragraph 1).
 According to the purpose (mentioned above), internal taxes and internal charges on
imported products, must not be levied in excess to those levied on “like” domestic
products. In addition internal taxes and internal charges must not be levied even on
directly competitive and substitutable products in a manner that affords protection
to the domestic industry. (Paragraph 2).
 As far as regulatory requirement such as laws, regulations and requirements that
affect transport, sale, purchase and the like are concerned; the same must operate in a
manner that does not treat “like” imported products in a less favorable manner.
Nevertheless, transport charges once the imported products have entered the domestic
market of another Contracting Party may be different simply because of the differing
costs among different means of transport. This does not violate the principle of
national treatment of the GATT, 1947. (Paragraph 4).
 No Contracting Party must maintain an internal quantitative regulation that stipulates
that imported products must be sourced from domestic sources for processing,
mixture or its use. (Paragraph 7). The only exception is internal quantitative
regulations that are applied on cinematograph films by means of screen quotas.
(Paragraph 10).
 In addition, Contracting Parties must not even maintain internal quantitative
regulations that allocate the amounts to be used in a mixture, processing or the use of
a certain product, among external sources of supply. (Paragraph 7).
 Government procurement of products that are not meant for commercial re-sale may
require that such procurement be made from exclusively domestic producers: thus
otherwise being in violation of the principle of national treatment. However, when
such procurement is made for personal use (and not commercial re-sale), such
procurement would be permitted under the provisions of national treatment of the
GATT, 1947. In a related vein, the government of a Contracting Party is also
permitted to pay domestic producers, by means of a subsidy, proceeds that it would
collect from internal taxes and internal charges. (Paragraph 8).
Law

Quantitative Regulations
Delhi
Content Writer/Author Mr. Rachit Ranjan Oval Observer Foundation

Delhi
Delhi
PERSONAL DETAILS

Subject Name Law
Module Name/Title Quantitative Restrictions
Module Id 8
Pre-requisites  Article XI, XII, XIII and XVIII of the GATT, 1994
 Prohibition of Quantitative Restrictions
 Balance of Payment Exceptions
 Special Provisions for Developing Countries
 To provide a practical outlook on the rules and

exceptions regarding quantitative restrictions under
the international trade law.
Keywords quantitative restrictions; non-tariff barriers; balance of

payment; exceptions; tariffs; quotas; voluntary export
restraints; import licensing; administration of quotas;
balance of payments.
E-TEXT
1. General Elimination of Quantitative Restriction

2. Tariffs versus Quotas
3. De Facto Quantitative Restrictions
4. Private Actions Attributable to Governments and Non-binding Measures
5. Restrictions made Effective Through “State-Trading Corporations”
6. Voluntary Export Restraint
7. Minimum Export/Import Prices/ Licensing
8. Relationship between Article III:4 and XI:1
9. Exceptions Under Article XI
10. Article XI:2 (a)
11. Article XI:2 (b)
12. Article XI:2 (c)
13. Article XII & XVIII: Balance of Payment Exceptions
14. Framework and Case Law
15. Infant Industry Protection
16. Administration of Quantitative Restrictions
17. Rule of Non-Discrimination
18. Rules on Distribution of Trade
A. INTRODUCTION
As the course title suggests quantitative restrictions are those measures, applied
by a country, which aim at limiting the access that a particular good has to a
market. These restrictions may be placed through a restriction on imports or a
restriction on exports. Under the General Agreement on Tariffs and Trade, 1994
(‘GATT’), this practice is prohibited subject to certain exceptions. The reasoning
behind placing a ban on this practice is premised on the ideals of free trade
theory. It is widely believed that such restrictions serve protectionist interests,
thereby distorting free trade. In this regard, in order to understand the structure
of the international trading regime, it is imperative to understand the provisions
relating to quantitative restrictions under the GATT.
B. LEARNING OUTCOME
This module deals with the theoretical basis for quantitative restrictions as
well as
 Foster an understanding of the necessity of Article XI prohibition on quantitative

restrictions as well as exceptions under the GATT.
 Foster an understanding of the theoretical concepts involved in the subject so as to be

able to apply them in practice.
 Foster an understanding of the principal case laws dealing with quantitative

restrictions.
QUANTITATIVE RESTRICTIONS
I. BACKGROUND
Upon the onset of the Great Depression in the 1930s, countries started adopting
non-tariff barriers with the objective of restricting access of foreign goods to
their market and protecting their domestic industry. In fact, during the
negotiation rounds for the formulation of ITO and GATT, the discussion
provisions relating to elimination of quotas were the most difficult and contested
phase.1 Four articles under the GATT lay down the rule with respect to
quantitative restrictions. Article XI deals with the prohibition of quantitative
restrictions, with certain exceptions. Article XII is an exception to the rule on
quantitative restrictions to deal with issues regarding balance of payment
(‘BOP’) problems. Article XIII deals with non-discriminatory administration of
permissible quantitative restrictions. Article XIV creates an exception to Article
XIII in certain BOP circumstances. These four articles are known as the “London
Compromise” as they were the result of debates at the 1946 London Preparatory
Conference. The Conference witnessed advocacy of elimination of quotas from
western powers such as United States and Canada and opposition from war torn
nations such as France, which wanted to protect their scarce foreign exchange
reserves for the purposes of reconstruction (led to the drafting of Article XII).2
Apart from these provisions, Article XVIII creates an exception for less developed
WTO Member States allowing them to impose quantitative restrictions for BOP
reasons. The module shall deal with the theoretical underpinnings and judicial
pronouncements with respect to the aforementioned provisions under separate
sub-headings.
TYPES OF QUANTITATIVE RESTRICTIONS
 Prohibition: A ban on a product, which may be absolute or conditional.

 Quota: measure indicating the quantity that may be imported or exported
 Automatic and non-automatic licensing
 Other QR made effective through State trading operations; Voluntary export restraint;
minimum price that triggers a QR or a mixing regulation. 3
II. ARTICLE XI: GENERAL ELIMINATION OF QUANTITATIVE

RESTRICTIONS
Article XI:1: No prohibitions or restrictions other than duties, taxes or other

charges, whether made effective through quotas, import or export licences or
other measures, shall be instituted or maintained by any contracting party on the
importation of any product of the territory of any other contracting party or on
the exportation or sale for export of any product destined for the territory of any
other contracting party.
1
John H. Jackson, World Trade and The Law of GATT, (Lexis Law Publications 1969) 306-07
2
Raj Bhala, Modern GATT Law (Sweet and Maxwell, 2005) 352; See also for reservations placed by
India and Cuba on complete elimination of quotas.
3
Peter Van Den Bossche & Werner Zdouc, The Law and Policy of the WTO, (3rd edn, Cambridge
Press 2013) 482
II.1 TARIFFS VERSUS QUOTAS
Before proceeding to explain the aforementioned provision, it is important to

address the distinction between tariffs/customs duties and quotas, particularly
the reasoning behind differential treatment between the two, under the GATT.
Although both forms of barriers may distort trade, economic theory portends to
attach a greater degree of restriction to quotas because of the following reasons.
 Quotas do not lead to any revenue gain for the importing country.
 Quotas do not offer the predictability that tariffs offer due to the lack of a fixed rate
of protection. Unlike tariffs, quotas make the consumption of a dutiable good
impossible.
 Quotas create problems of administration and transparency.
 The value of removing quotas is difficult to measures and obstructs trade negotiations.
 Quotas allow protected domestic producers to exercise greater monopoly powers.
 Quotas encourage rent seeking by creating opportunities for bribing governments to
gain access to their market.4
In this regard, a tariff quota doesn’t qualify as a quantitative restriction as it

only charges varying duties on a good after a certain quantity has entered the
concerned market. For example, the duty levied on 1000 automobile engines
would be 10% ad valorem and beyond that the duty will be 25% ad valorem.
As these quotas do not restrict the entry of a good directly in terms of an
absolute prohibition or a restriction on the quantity of imports. Further
duties are transparent, provide revenue to the importing country and restrict
rent-seeking opportunities. 5
Article XI doesn‟t define quantitative restrictions, however Article XI:1 does prohibit any
measure other than “duties, taxes or other charges”. 6 There may be instances, where it is easy
to identify a quantitative restriction such as an outright ban. The Panel addressed the scope of
restrictions in India-Quantitative Restrictions.
“We note that the text of Article XI:1 is very broad in scope, providing for a
general ban on import or export restrictions or prohibitions "other than duties,
taxes or other charges". As was noted by the panel in Japan - Trade in Semi-
conductors, the wording of Article XI:1 is comprehensive: it applies "to all
measures instituted or maintained by a [Member] prohibiting or restricting the
importation, exportation, or sale for export of products other than measures
that take the form of duties, taxes or other charges." The scope of the term
4
See Raj Bhala, Modern GATT Law, (Sweet and Maxwell, 2005) 344-350
5
Press 2013) 446
6
The term quantitative restrictions may be used interchangeably with „quota‟, „restriction‟ and
„prohibition‟ in light of the text of Article XI
"restriction" is also broad, as seen in its ordinary meaning, which is "a
limitation on action, a limiting condition or regulation".”7
Thus there may be many measures that can qualify as quantitative restrictions.
These may be de jure or de facto. Over the years, many disputes have contributed
towards shedding light on the contours of de jure and de facto quantitative
restrictions. While de jure restrictions refer to measures, which explicitly
establish a numerical quota on import or export8, de facto restrictions, attempt to
establish the same numerical targets through implicit means.
II.2 DE FACTO QUANTITATIVE RESTRICTIONS
As observed in both India-Quantitative Restrictions and Japan- Semiconductors,

Article XI:1 is very broad in scope. By virtue of this observation, we can deduce
that the scope of the provision stretches beyond literal interpretation of the text.
It includes within its ambit, measures which may not provide an explicit
numerical target but results in a de facto restriction on imports and exports.9 To
illustrate this, let us consider the facts of India-Autos. In this dispute, the point of
contention was a regulation, which required automobile manufacturers to sign a
Memorandum of Understanding (MOU) that their export would be equivalent to
their exports in value over a certain period. The MOU did not stipulate any
numerical target for the manufacturers. However, the Panel observed that a
restriction may not always be in the form of a “ blanket prohibition or a precise
numerical target”. 10 The Panel then went on to observe that since the trade
balancing condition aimed at maintaining a complete balance between exports
and imports, it naturally compelled the manufacturer to consider in numerical
terms the amount of exports it could make, which in turn would determine the
amount of imports that could be made. By applying this reasoning, the Panel
concluded that the MOU amounted to an import restriction and thus contravenes
Article XI:1. 11
7
WT/DS90/R, Para. 5.128
8
In Canada — Periodicals, the Panel found that a complete ban on imports of certain magazines was
inconsistent with Article XI:1 of GATT. “Since the importation of certain foreign products into Canada
is completely denied under Tariff Code 9958, it appears that this provision by its terms is inconsistent
with Article XI:1 of GATT 1994.” See GATT Analytical Index; Available at:
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_05_e.htm#article12A; Last
visited: 17/7/2014
9
Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2nd edn, West Academic 2013)
63
10
WT/DS146/R, Para. 7.270
11
Id. Para. 7.277-7.278
Although de facto quantitative restrictions are prohibited within the framework
of Article XI:1, the alleging party must present sufficient evidence to prove that
the measure in question caused an export/import restriction. In Argentina-Hides
and Leather the EC argued that the presence of domestic tanners’
representatives during the customs inspection procedures for export-oriented
hides placed a de facto restriction on the exports. The Panel observed that there
was insufficient evidence to label the presence of the representatives as an
export restriction.12 It is important to remember here that the current
jurisprudence doesn’t stipulate that the complainant must prove the actual trade
effect of such a measure. Rather it only places emphasis on the potential for a
measure to have a QR effect. In other words, the evidence presented must seek to
establish a causal link between the measure and a potential trade restrictive
effect.13
II.3 PRIVATE ACTIONS ATTRIBUTABLE TO GOVERNMENTS AND NON-

BINDING MEASURES
The GATT, is an international agreement between governments. To that extent,

only quantitative restrictions imposed by the government may come under the
ambit of Article XI:1. Nevertheless as is the case under the Agreement on
Subsidies and Countervailing Measures (ASCM), private enterprises, which have
been entrusted or directed by the government to impose measures or have
strong ties to some governmental actions may fall within the ambit of Article XI:1
of the GATT. The provision under Article XI:1, may also be attracted if non-
mandatory measures or informal instructions are issued by a government, if they
operate in a manner equivalent to mandatory measures.14
Example 1: Japan- Trade in Semi-Conductors (GATT Panel Report)
Facts: In this dispute, the Japanese Government requested Japanese producers

and exporters of semi-conductors not to export their products at prices below
company costs to certain third countries. This request was carried out to
accommodate the deal between Japan and US regarding trade in semi-
conductors.
Contention of Parties: EEC, the complainant alleged that these measures fell
within the purview of Article XI: 1. However, Japan argued that since the
12
WT/DS155/R, Para 11.17; See also Peter Van Den Bossche & Werner Zdouc, The Law and Policy of
the WTO, (3rd edn, Cambridge Press 2013) 449
13
WT/DS398/R, Para 7.35
14
WTO E-Learning- Quantitative Restrictions, 11
<http://ecampus.wto.org/admin/files/Course_298/Module_1587/ModuleDocuments/QR-L2-R1-E.pdf>
accessed 17 July 2014.
measures imposed by the government they were not legally binding, they
weren’t actionable under Article XI:1.
Panel Report: The Panel observed that for a measure to be in contravention of

Article XI:1 in this case, it is imperative to establish two important criteria.
Firstly, there were reasonable grounds to believe that sufficient incentives
or disincentives existed for non-mandatory measures to take effect.
Secondly, the measure was dependent on government action or
intervention.15
The Panel reviewed various factors relating to the Japanese exporting system of
semi-conductors. These factors ranged from a statutory requirement to submit
information on export prices to monitoring of companies and export prices. The
Panel’s preliminary review of the legal provision under Article XI:1 led to the
finding that since the provision did not refer to laws or regulations but more
broadly to measures, it clearly indicated that a measure which establishes a
quantitative restrictions is covered under the provision, regardless of the legal
status of the measure.16 Finally, the Panel observed that an administrative
structure was created by the Japanese government to impose pressure on the
private sector to prohibit them from exporting at prices below the company-
specific costs. After establishing that Article XI:1 did not require a measure to be
legally binding , and the administrative structure prevented the export of semi-
conductor at prices below company-specific costs, the Panel opined that the
measure in dispute was inconsistent with Article XI:1.17
Although there is no rule of stare decisis under the WTO dispute settlement
mechanism, much reliance has been placed on Japan-Semiconductors in cases
where it is to be decided whether a particular measure should be attributed to a
government. However, the Panel report in Japan- Semiconductor falls short of
offering any precise criteria for establishing a measure as attributable to the
government. In Argentina-Hides and Leather, the Panel reduced the scope of the
findings in Japan-Semiconductors by observing that as per the text or context of
Article XI:1 there isn’t any obligation upon Members to exclude provision of
incentives by the government to private players in pursuance of a measure,
which is essentially not trade-restrictive.18
II.4 RESTRICTIONS MADE EFFECTIVE THROUGH “STATE-TRADING

OPERATIONS”
15
Japan Trade in Semi-Conductors; Para 108-109; GATT Panel Report
16
Id., Para. 106
17
Id., Para. 117
18
WT/DS155/R, Para. 11.19
As observed in India-Quantitative Restrictions, any restriction made effective
through state-trading operations can also be inconsistent with Article XI:1. In
such cases it is important to show the causal link between the restriction and the
operation of the state trading entity.19
Example 2- India-Quantitative Restrictions (WT/DS90/R)
Facts: India maintained quantitative restrictions on a large number of

agricultural, textile and industrial products. These tariff lines were contended to
be in violation of India’s commitment under Article XI:1, XVIII:1 of the GATT and
Article 4.2 of the Agreement on Agriculture. These restrictions had been notified
to the Committee on Balance-of- Payments Restrictions in May 1997 in the
course of consultations being held with India. The restrictions that are within the
scope of the dispute appear in Annex I, Part B of WT/BOP/N/24. A previous
notification had been made in July 1996 (WT/BOP/N/11 and Corr.1) and
included quantitative restrictions maintained for both balance of payments and
other reasons.20
Panel Report (on the issue of restrictions made effective through state
trading operations): The Panel observed that “In analyzing the US claim, we
note that violations of Article XI:1 can result from restrictions made effective
through state trading operations. This is made very clear in the Note Ad Articles XI,
XII, XIII, XIV and XVIII, which provides that “Throughout Article XI, XII; XIII; XIV;
and XVIII, the terms ‘import restrictions’ or ‘export restrictions’ include restrictions
made effective through state-trading operations.” It should be noted however, that
the mere fact that imports are effected through state trading enterprises would not
in itself constitute a restriction. Rather, for a restriction to be found to exist, it
should be shown that the operation of this state trading entity is such as to result in
a restriction.”21
On basis of this finding the Panel concluded that the report submitted by India to
the BOP committee coupled with evidence presented by the US indicated that
“…the "canalization" measures specified in Part III of the Negative List of Imports,
to the extent that they apply to products specified in WT/BOP/N/24, Annex I, Part
B, operate as a restriction on imports within the meaning of Article XI:1.”22
19
WT/DS90/R, Para. 5.134
20
Id., Para 2.1
21
Id.
22
Id., Para 5.136
II.5 VOLUNTARY EXPORT RESTRAINT
Voluntary export restraint (VER) actions are taken by exporting countries, where
a Member levies a self-imposed restriction on exports of a product. Under the
GATT 1947, the issue of VER remained a grey area. However, with the advent of
WTO, the legality of such restraints was decided. Under the Agreement on
Safeguards, Article 11.1(b) explicitly prohibits voluntary export restraints.23
Example 3- China-Rare Earths, (WT/DS432/R)
Facts: The dispute arose because of China's use of export quotas and export
duties on various forms of rare earths, tungsten, and molybdenum. In this regard,
the complainants have also challenged the administration and allocation of the
minerals through export licensing of the export quotas.
Contention of the parties: The complainants (US, Japan ad European Union)

argued that the export duties, quotas including its administration and allocation
is inconsistent with certain commitments under China’s Accession Protocol as
well as Article XI:1 of the GATT. China, in response, argued that its export duties
and quotas are justified under the Article XX(b) and (g) exceptions respectively
and thus it hasn’t deviated from its commitment under the Accession Protocol or
the GATT.
Panel Report (on the issue of inconsistency with Article XI:1 of the GATT):
Upon examining the China’s defense under Article XX(g), The Panel concluded
that China had failed to justify that the export quotas instituted by the
government was done with the objective to conserve natural resources and that
the measure were not invoked in an arbitrary, discriminatory and unjustifiable
manner. The Panel observed that “In the Panel's view, China's has not met its
burden of demonstrating that its export quota on rare earths is applied in a
manner that does not result in unjustified or arbitrary discrimination or disguised
restriction on trade against foreign users. In view of the above, the Panel concludes
that China has not demonstrated that its 2012 export quota on rare earths was not
applied in a manner that constitutes arbitrary or unjustifiable discrimination or a
disguised restriction on international trade. For the reasons given above, the Panel
concludes that China's export quota on rare earths is inconsistent with Article XI:1
of the GATT 1994 and Paragraphs 162 and 165 of China's Working Party Report.
The Panel also concludes that China's export quota on rare earths is not justified
under either subparagraph (g) or the chapeau of Article XX of the GATT 1994.”24
23
Press 2013) 491
24
WT/DS432/R, Para. 7.678-680
*Why did China impose the VER on these minerals?
“ Rare earth metals are used in all sophisticated modern electronic devices
including computers, smart phones, cars, magnetic devices, and turbines. China
produces an overwhelming majority of the world’s rare earth metal supply — 90
percent of all rare earth metals used in global industry originate in China. Beijing
has taken advantage of its near-monopoly power in the past. In 2010, Beijing cut
export quotas by 40 percent, causing prices to skyrocket.”25
II.6 MINIMUM EXPORT/IMPORT PRICES; LICENSING
The minimum export prices imposed by a Member may have effects similar to
export taxes as “they both create a wedge between domestic and world prices.”
26 If this price is set at a certain level it may result in a restricted quantity of
exports. In China-Raw Materials, the dispute concerned four types of export

restraint that China imposed on export of certain raw materials. As China was
the leading producer of these minerals, the complainants argued that the
restraint resulted in higher prices of the products in the global markets. The
arguments advanced by both parties in this case are similar to the arguments
placed before the Panel in China-Rare Earth27. On the issue of minimum export
prices established by China, the complainants argued that “such a requirement
prohibits exportation if the price of the export is lower than the floor established by
the minimum export price. In the complainants' view, this amounts to a "limiting
condition" that is a restriction within the meaning of Article XI:1 of the GATT
1994.1517 They argue that China's system has an impact on prices and distorts
world market conditions for the raw materials at issue because of China's alleged
position as a leading producer of these materials.”28
The Panel relied on the findings of the Panel in EEC-Minimum Import Prices,
Japan-Semiconductors and Colombia- Port of Entry, where the Panel members
interpreted the term “restriction” under Article XI:1 “to mean that refers to
measures that create uncertainties and affect investment plans, restrict market
access for imports or make importation prohibitively costly.”29 In other words,
previous Panels had already concluded that a measure, which prevents
25
Ankit Panda, “WTO Finds Chinese Rare Earth Export Restrictions in Violation of International
Trade Law”, The Diplomat Magazine <http://thediplomat.com/2014/03/wto-finds-chinese-rare-earth-
export-restrictions-in-violation-of-international-trade-law/> accessed 17 July 2014.
26
Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2nd edn, West Academic
2013) 62
27
China-Raw Materials was decided before China-Rare Earths
28
WT/DS398/R, Para. 7.1067
29
Id., Para 7.1078
exportation below a certain price level inherently constitutes “restriction” and is
inconsistent with Article XI:1 of the GATT. In this regard, the Panel opined that
“The Panel consider the very potential to limit trade is sufficient to constitute a
"restriction ... on the exportation or sale for export of any product" within the
meaning of Article XI:1 of the GATT 1994.1531 The Panel considers this view is
consistent with the conclusion by the panel on Colombia – Ports of Entry that any
measure that creates uncertainty as to the ability to import/export, and otherwise
"compete" in the marketplace, violates Article XI:1.”30
The Panel also evaluated claims by the complainant relating to the licensing
regime established by China and its alleged inconsistency with Article XI:1 of the
GATT. The Panel observed that any license that is granted without condition or
in pursuance of a measure justifiable under the exceptions to Article XI:1 are
consistent with the framework of the provision as long as these measures do not
by their nature have a limiting or a restrictive effect. However, in this case the
Panel found that although the Chinese export-licensing regime wasn’t
inconsistent with Article XI:1 per se but the requirement to submit an
unqualified number of other documents of approval under the relevant
regulations, resulted in an additional restriction inconsistent with Article XI:1. 31
II.7 RELATIONSHIP BETWEEN ARTICLE III:4 & XI:1
Interpretative Note Ad Article III from Annex I

Any internal tax or other internal charge, or any law, regulation or requirement of the
kind referred to in paragraph 1 which applies to an imported product and to the like
domestic product and is collected or enforced in the case of the imported product at the
time or point of importation, is nevertheless to be regarded as an internal tax or other
internal charge, or a law, regulation or requirement of the kind referred to in paragraph
1, and is accordingly subject to the provisions of Article III.
The text of the aforementioned provision makes it clear that measures, which are
applicable to both domestic and foreign products, even if they are applicable at
the border32, will continue to be covered by the discipline enshrined in Article III
GATT. In other words, the Ad Note to Article III, makes it possible for a measure,
which is enforced at the time or point of importation to be treated as an internal
measure, thus falling within the purview of Article III.
The Panel in Canada-FIRA had observed that a distinction must be drawn

between measures which fall under Article III:4 and XI:1 except for measures
invoked by state trading operations as they are both the importers and the
distributors. In India-Autos, India defended a claim brought against its trade
30
Id., Para 7.1081
31
Id., Para 7.957-7.958
32
Article XI:1 applies to border measures, whereas Article III:4 generally applies to internal measures,
which are in violation of the national treatment principle.
balancing requirement by claiming that the matter fell under Article III and not
Article XI:1.33 Owing to this defense, the Panel expounded the distinction in the
nature and scope of both Articles. The Panel observed that “…it therefore cannot
be excluded a priori that different aspects of a measure may affect the competitive
opportunities of imports in different ways, making them fall within the scope either
of Article III (where competitive opportunities on the domestic market are
affected) or of Article XI (where the opportunities for importation itself, i.e.
entering the market, are affected), or even that there may be, in perhaps
exceptional circumstances, a potential for overlap between the two provisions, as
was suggested in the case of state trading. Any analysis of the applicability of either
Article III:4 or XI:1 should thus be based on the principles within Article 3.2 34 of the
DSU.”35
II.8 EXCEPTIONS UNDER ARTICLE XI
As mentioned above, the London Compromise witnessed heated debates

between western blocs and war torn/developing countries in order to reach a
mutually agreeable on the issue of quantitative restrictions. The “compromise”
reached, prohibited trade restrictive practices in the form of quantitative
restrictions with certain exceptions found throughout the agreement. Among
these, certain exceptions were agreed to be included within the framework of
Article XI itself. Thus, Article XI:2 contains a list of exceptions to the general
proscription against quantitative restrictions, contained in Article XI:1.
a) Article XI (2) (a): “Critical Shortages” Exception
Article XI (2): The provisions of paragraph 1 of this Article shall not

extend to the following:
(a) Export prohibitions or restrictions temporarily applied to prevent or
relieve critical shortages of foodstuffs or other products essential to the
exporting contracting party;
The legislative history of the 1946 London preparatory conference suggests that
“other products”, refers to permission given to Members to permit imposition of
33
Petros C. Mavroidis, The General Agreement on Tariffs and Trade: A Commentary (OUP 2007) 46
34 Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations
provided in the covered agreements.
35
WT/DS175/R, Para. 7.224
quota on exports for conservation of natural resources. 36 The provision also
mentions that such a ban must be for “prevention” or “relief”. Professor Bhala
argues that this wording suggests that a measure may be taken in light of an
imminent critical shortage or during the course of such shortage.37 The defense
under Article XI:2(a) may seem counter-intuitive as it goes against the basic
principle of non-discrimination enshrined in the GATT. However, from an
alternative moral lens it becomes a necessary evil to ward off companies from
engaging in profit making initiatives in situations where supply of a concerned
product is limited.
b) Article XI:2 (b): “Clarification and Grading” Exception
Article XI (2): The provisions of paragraph 1 of this Article shall not

extend to the following:
(b) Import and export prohibitions or restrictions necessary to the

application of standards or regulations for the classification, grading or
marketing of commodities in international trade;
It is imperative to differentiate the scope of the aforementioned provision from

Article XX(d) of the GATT ( i.e. measures which are necessary to secure
compliance with the laws and regulations, which are not inconsistent with the
GATT). While Article XX(d) is invoked to address a policy concern which is
specific to the imposing member, Article XI:2(b) is invoked to address the
concerns of all trading nations.38 Although, a bare reading of the provision may
indicate that Members may very well abuse this in order to invoke quantitative
restrictions, the existence of the term “necessary” raises the evidentiary burden
on the invoking member, thus making it difficult for a Member to take recourse
to this provision without sufficient evidence.
c) Article XI:2(c): “Agriculture or Fisheries” Exception
36
Raj Bhala, Modern GATT Law, (Sweet and Maxwell, 2005) 370 (citing U.N. Doc. EPCT/A/SR.40 st
1-2(1947)); Although this isn‟t clear from the text of the provision.
37
Id.
38
Id. 369
Article XI (2): The provisions of paragraph 1 of this Article shall not extend to the following:
(c) Import restrictions on any agricultural or fisheries product, imported in any form,* necessary to
the enforcement of governmental measures which operate:
(i) to restrict the quantities of the like domestic product permitted to be marketed or produced, or, if there is
no substantial domestic production of the like product, of a domestic product for which the imported product
can be directly substituted; or
(ii) to remove a temporary surplus of the like domestic product, or, if there is no substantial domestic
production of the like product, of a domestic product for which the imported product can be directly substituted,
by making the surplus available to certain groups of domestic consumers free of charge or at prices below the
current market level; or
(iii) to restrict the quantities permitted to be produced of any animal product the production of which is
directly dependent, wholly or mainly, on the imported commodity, if the domestic production of that commodity
is relatively negligible.
Any contracting party applying restrictions on the importation of any product pursuant to subparagraph (c) of
this paragraph shall give public notice of the total quantity or value of the product permitted to be imported
during a specified future period and of any change in such quantity or value. Moreover, any restrictions applied
under (i) above The
shallaforementioned
not be such as will reduce is
exception the total of the
arguably imports
mostrelative toone.
technical the total
As is of domestic production,
clear
from the text the exception does not permit a complete ban on importation on a
product, rather it only permits a “restriction” on them. The negotiating history of
this provision also reveals a very interesting debate that ensued between
developed and developing Members. As Professor Jackson has explained, the
exception was vehemently opposed by the developing Members, who perceived
this provision as a medium to cater to the local producers of the developed
nations.39 Nevertheless, it is important to remember that the exception has never
been successfully used owing to high evidentiary standards set forth in the text
of the convention. In order to successfully claim an Article XI:2(c) exception, the
defendant Member must prove that import restriction is “necessary”.40Even
upon meeting these criteria, the defendant must still prove that the measure has
been invoked to achieve a purpose listed under Article XI;2(c). Moreover, in
keeping with the transparency commitment under Article II, the defendant is
also obliged to provide detailed accounts of the value or quantity of import
restrictions as well as the timeline for such restrictions.41
39
John H. Jackson, World Trade and The Law of GATT, (Lexis Law Publications 1969) 317
40
The test for necessity is the same as used for Article XX exceptions, i.e. whether there is a less trade
restrictive measure available to ensure the implementation of same policy goals?; whether the
restriction is for the enforcement of a measure? Whether an official authority has invoked the measure?
41
Raj Bhala, Modern GATT Law, (Sweet and Maxwell, 2005) 371-372; See Canada-Import
Restrictions on Ice Cream and Yoghurt; B.I.S.D. (36th Supp.) 68,93, Para.84 (1990) (adopted 5
December 1989)
Other Exceptions to Article XI:1
1) General Exception- Article XX GATT, 1994

2) Security Exception- Article XXI GATT, 1994
3) Regional Trade Agreements- Article XXIV GATT, 1994
4) Balance of Payments Exception- Article XII/XVIII/XV GATT, 1994
5) Waivers- Article IX:3 Marrakesh Agreement
6) Safeguard- Article XIX GATT, 1994 and Agreement on Safeguards
7) Provisions relating to Special and Differential Treatment- e.g.
Article XVIII:2(b)
III. ARTICLE XII & XVIII: BALANCE OF PAYMENT EXCEPTIONS
III.1 FRAMEWORK AND CASE LAW
As mentioned above, there are a number of exceptions to the prohibition on

quantitative restrictions outside the framework of Article XI. Among these,
Article XII, which allows imposition of quantitative restrictions if a Member
State is facing balance of payment (BoP) problems, was specifically designed
to accommodate countries having scarce foreign exchange reserves. A similar
provision is contained under Article XVIII(b) with a less stringent burden of
proof requirement on the imposing Member State. The following differences
between the two provisions will assist in understanding the provisions in a
comprehensive manner.
 Article XVIII:B, protection is available to Member States with inadequate

monetary reserves, whereas Article XII is to used in situations, where a Member
has very low monetary reserves. The use of the term “inadequate” in Article
XVIII:B allows a Member State a greater level of deference in administering
restrictions with a higher deferential standard of review.
 The Procedure for engaging in consultations with respect to invocation of BoP

exceptions is much more simplified under Article XVIII:B.
 Article XII requires Member States to progressively relax the restrictions

imposed, whereas under Article XVIII:B, no Member is required to alter the
restrictions on account of any policy, which would render such restriction
unnecessary.42
Currently, any BoP restriction must be presented to the Balance of Payments

Committee under the framework of WTO, before it is invoked. The requirement
owed its development to the system of a prevailing system of fixed exchange
rates. This precluded countries from devaluing their currency in order to
maintain its foreign reserves, without a multilateral consensus on the issue.43
However, with a shift towards a system of flexible exchange rates countries are
increasingly addressing BoP concerns through devaluation of currency. 44 The
invocation of BoP restrictions must also pass the test of an IMF consultation
process. This is duly recognized under Article XV:2 of the GATT.45
In India-Quantitative Restrictions46, India advanced its defence for maintaining
certain quantitative restrictions under Article XVIII:B, arguing that owing to a
BoP crisis in 1991, it was imperative to maintain these restrictions. The question
before the Panel was whether India was facing a serious decline or threat thereof
as listed under Article XVIII:9(a) or had inadequate reserves as listed under
Article XVIII:9(b). Upon evaluating the evidence placed before the Panel, it came
to the conclusion that as per the IMF and RBI reports, India’s reserves were
rising at a consistent rate post 1996. Hence, the reserves were not inadequate or
facing any serious decline or threat thereof.47 The Panel then moved on to
address whether these measures could still be maintained under the Ad Note to
Article XVIII:11. The Ad Note to Article XVIII:11 clarifies that any relaxation or
removal should not result in a situation which worsens the BoP problems. The
Panel observed that in order to “ …maintain the measures at issue, it must be
determined that one of the conditions contemplated in sub-paragraphs (a) and (b)
of Article XVIII:9 would appear immediately after the removal of the measures, and
42
2013) 73
43
The devaluation of currency allows exports to become cheaper and imports more expensive. This in
turn, protects a country‟s foreign reserves and adds to the same. This is of course dependent on price
elasticity of the concerned market.
44
2013) 74
45 Article XV:2: In all cases in which the CONTRACTING PARTIES are called upon to consider or
deal with problems concerning monetary reserves, balances of payments or foreign exchange
arrangements, they shall consult fully with the International Monetary Fund. In such
consultations, the CONTRACTING PARTIES shall accept all findings of statistical and other facts
presented by the Fund relating to foreign exchange, monetary reserves and balances of payments,
and shall accept the determination of the Fund as to whether action by a contracting party in
exchange matters is in accordance with the Articles of Agreement of the International Monetary
Fund, or with the terms of a special exchange agreement between that contracting party and the
CONTRACTING PARTIES. The CONTRACTING PARTIES in reaching their final decision in cases
involving the criteria set forth in paragraph 2 (a) of Article XII or in paragraph 9 of Article XVIII,
shall accept the determination of the Fund as to what constitutes a serious decline in the
contracting party's monetary reserves, a very low level of its monetary reserves or a reasonable
rate of increase in its monetary reserves, and as to the financial aspects of other matters covered
in consultation in such cases.
46
Facts mentioned on page 6-7.
47
WT/DS 90/R, Para 5.158-5.184
a causal link must be established between the anticipated reoccurrence of the
conditions of Article XVIII:9 and the removal. It should be noted that the text
requires more than a mere possibility of reoccurrence of the conditions ("would
produce"). The Ad Note therefore allows for the maintenance of measures on the
basis only of clearly identified circumstances, and not on the basis of a general
possibility of worsening of balance-of-payments conditions after the measures have
been removed. Such an interpretation could lead to the maintenance of balance-of-
payments measures for indefinite periods, as it could almost always be argued that
there exists a risk of worsening of balance-of-payments conditions at some time in
the future.” 48Consequently, the Panel decided that measures invoked by India
couldn’t be justified because its removal wouldn’t immediately result in
conditions requiring reinstitution of import restrictions. The Panel then moved
to address the issue of whether India was entitled to maintain these measures
under the proviso to Article XVIII:11.
Article XVIII:11 contains a proviso as follows: "no Member shall be required to

withdraw or modify restrictions on the ground that a change it its development
policy would render unnecessary the restrictions which it is applying under Article
XVIII:B". India argued that the IMF report has assumed that a change in India’s
development policy would result in rendering the restrictions unnecessary. The
Panel observed that India did not present sufficient evidence to justify this
stance. Furthermore, the Panel clarified that there was no assumption either on
part of the Panel or the IMF report on changes in India’s development policy. The
Panel observed that usage of macro-economic policy instruments is not
tantamount to amendments in development policies. Further, any changes could
be made to domestic policies, which are not development policies. Since, India
wasn’t clear on what it considered a development policy in this context, the
Panel concluded that the measures were not justified under the proviso to
Article XVIII:11. 49
III.2 INFANT INDUSTRY PROTECTION
Article XVIII was drafted with the objective of providing exceptions to

developing economies so as to ease the constraints on their economy. In this
regard, Article XIII:(C) was drafted to allow developing countries to deviate from
their obligations in order to protect their infant industry. The threshold for
allowing this exception is that such a measure should raise the general standard
of living coupled with certain notification requirements and an obligation to
engage in consultations if a certain product is subject to a tariff binding.50
48
WT/DS90/R, Para 5.199
49
WT/DS90/R, Para 5.216-5.223
50
2013) 77
IV. ADMINISTRATION OF QUANTITATIVE RESTRICTIONS
IV.1 RULE OF NON-DISCRIMINATION
Article XIII:1: No prohibition or restriction shall be applied by any contracting

party on the importation of any product of the territory of any other contracting
party or on the exportation of any product destined for the territory of any other
contracting party, unless the importation of the like product of all third countries
or the exportation of the like product to all third countries is similarly prohibited
or restricted.
Article XIII:1 stipulates that no prohibition or restriction shall be applied in a
discriminatory manner. In other words, it requires a Member imposing a QR on
any product, to extend the same restriction to such product from all countries
and not restrict to any particular country or a group of countries. In this regard,
the provision creates an MFN-like obligation.
The provision was discussed in a GATT Panel dispute, EEC-Apples (Chile 1). In
this dispute, the EC attempted to execute a voluntary restraint agreement with
Chile on the importation of apples but the negotiations failed. The EC had
successfully executed these arrangements with Argentina, Australia, New
Zealand and South Africa. Regardless of the outcome of the negotiation, the EEC
imposed a quantitative ban on importation of apples from Chile. The Panel
observed that since there was no correlation between the measures invoked
against other countries as compared to Chile (essentially Chilean imports ban
was an involuntary export restraint), there was a violation of Article XIII:1. 51
51
Press 2013) 492; See Panel Report, EEC-Apples (Chile 1) (1980) at Para 4.11
Article XIII: 2: In applying import restrictions to any product, contracting parties shall aim at a distribution of trade in such product
approaching as closely as possible the shares which the various contracting parties might be expected to obtain in the absence of such
restrictions and to this end shall observe the following provisions:
(a) Wherever practicable, quotas representing the total amount of permitted imports (whether allocated among
supplying countries or not) shall be fixed, and notice given of their amount in accordance with paragraph 3 (b) of this
Article;
(b) In cases in which quotas are not practicable, the restrictions may be applied by means of import licences or
permits without a quota;
(c) Contracting parties shall not, except for purposes of operating quotas allocated in accordance with
subparagraph (d) of this paragraph, require that import licences or permits be utilized for the importation of the product
concerned from a particular country or source;
(d) In cases in which a quota is allocated among supplying countries the contracting party applying the restrictions
may seek agreement with respect to the allocation of shares in the quota with all other contracting parties having a
substantial interest in supplying the product concerned. In cases in which this method is not reasonably practicable, the
contracting party concerned shall allot to contracting parties having a substantial interest in supplying the product
shares based upon the proportions, supplied by such contracting parties during a previous representative period, of the
total quantity or value of imports of the product, due account being taken of any special factors which may have affected
or may be affecting the trade in the product. No conditions or formalities shall be imposed which would prevent any
contracting party from utilizing fully the share of any such total quantity or value which has been allotted to it, subject to
importation being made within any prescribed period to which the quota may relate.*
…
5. The provisions of this Article shall apply to any tariff quota instituted or maintained by any contracting party, and, in so far as
applicable, the principles of this Article shall also extend to export restrictions.
IV.2 RULES ON THE DISTRIBUTION OF TRADE
Article XIII:2 requires Members to make efforts to ensure that the distribution of
trade with respect to a certain product is not hampered owing to a QR other than
a prohibition or a ban. In EC-Bananas III, the EC’s regime for importation of
bananas was applied in three categories: traditional imports from 12 ACP
countries; non-traditional imports from ACP countries based on quantities and
any export by ACP countries which are non-traditional supplier; imports from
non-ACP countries. The Appellate Body observed that the allocation of non-
utilised tariff quotas only among those countries that concluded a Framework
Agreement with the EC did not factor the trade flows, which would exist in the
absence of tariff quotas.52 This was inconsistent with Article XIII:2, whose object
and purpose is to minimize the impact of QRs on trade flows. Further Article
XIII:2(d) specifies that in allocating quotas among specific supplier countries,
Members with a substantial interest in supplying the concerned product must be
consulted and if that is not possible then they should be assigned quotas on basis
of Article XIII:2(d), second sentence. In EC-Poultry, the Appellate Body held that
such quotas must be calculated on basis of total imports, which would include
imports coming from non-members also. 53
52
Press 2013) 493; See WT/DS158/AB/R, Para 163
53
WT/DS389/AB/R, Para 106
Law

The Anti-dumping Agreement under the WTO
1
UNIVERSITY GRANTS COMMISSION
e-PATSHALA MODULE
James J. Nedumpara
Associate Professor of Law, O.P. Jindal Global University;

Executive Director, Centre for International Trade and Economic Laws.
2
An initiative by the University Grants Commission, MHRD under the National Mission on
Education through Information and Communication Technology.
Personal Details

Principal Investigator Prof. (Dr.) Ranbir Vice Chancellor, National Law
Singh University, Delhi
Co-Principle Coordinator, Prof. (Dr.) G.S. Registrar, NLU, Delhi
if any Bajpai
Co-ordinator Dr. Saloni NLU, Delhi
Khanderia-Yadav
Content Writer (CW) James J. Nedumpara O.P. Jindal Global University
Content Reviewer (CR) Prof. (Dr.) NLU, Delhi
Jayagovind
Language Editor (LE) Dr. Saloni NLU, Delhi
Khanderia
Description of Module

Subject International Trade Law
Name
Paper e-PG Patshala Learning Module on the Anti-Dumping Agreement World
Name Trade Organization
Module Anti-Dumping Agreement under the WTO
Name/Title
Module 9
Id
Pre-  The concept of unfair trade practice under the GATT and the justification
requisites of anti-dumping and countervailing duties.
 Article 6 of the GATT and the Anti-dumping Agreement under the WTO
 Dumping, material injury and the concept of causation.
Objective To Understand:
s  The concept of unfair trade practice under the GATT and the justification
of anti-dumping and countervailing duties.
 Article 6 of the GATT and the Anti-dumping Agreement under the WTO
 Dumping, material injury and the concept of causation.
Keyword Anti-dumping, causation, material injury, WTO.

s
3
TABLE OF CONTENTS
ABBREVIATIONS/SHORT-HAND ______________________________________________________________ 6
LEARNING OUTCOME ___________________________________________________________________________ 7
1. INTRODUCTION _____________________________________________________________________________ 8
1.1. Rationale for Anti-Dumping Actions ______________________________________________________ 11
1.2. Administration of Antidumping Investigations ___________________________________________ 12
2. DETERMINATION OF DUMPING _______________________________________________________ 13
2.1. Normal Value ________________________________________________________________________________ 14
2.1.1. Domestic Sales Transaction Method _____________________________________________________________ 14
2.1.2. Alternative methods to calculate Normal Value ________________________________________________ 17
2.2. Export Price _________________________________________________________________________________ 26
2.2.1. Fair price comparison_____________________________________________________________________ 28
2.2.2. The Obligation to Compare Prices at the Same Level of Trade _______________________________ 29
2.2.3. Due Allowances ____________________________________________________________________________________ 29
2.2.4. Comparison between Normal Value and Export Price ________________________________________ 30
2.2.5. Calculation of Dumping Margin _________________________________________________________________ 32
3. DETERMINATION OF INJURY___________________________________________________________ 36
4
3.1. Investigation of Injury ______________________________________________________________________ 36
3.1.1. Evidentiary standards for injury ________________________________________________________________ 39
3.2. Injury factors ________________________________________________________________________________ 44
3.3. Determination of Causation ________________________________________________________________ 46
3.4. Non-attribution ______________________________________________________________________________ 46
3.5. Threat of Injury _____________________________________________________________________________ 47
4. Procedural Requirements ____________________________________________________________________ 53
4.1. Introduction__________________________________________________________________________________ 53
4.2. Application ___________________________________________________________________________________ 53
4.4. Due Process Rights __________________________________________________________________________ 55
4.4.1. Public Notices and Explanation of Determinations ______________________________________________ 55
4.4.2. Confidentiality and disclosure of essential facts __________________________________________________ 56
4.4.3. Other Rights ________________________________________________________________________________________ 57
4.4.4. Facts Available/Administrative Deadlines ________________________________________________________ 57
4.4. Provisional Measure ___________________________________________________________________________ 57
3.5. Price Undertakings ____________________________________________________________________________ 57
3.6. Anti-dumping Duties __________________________________________________________________________ 58
4.7. Retroactivity ___________________________________________________________________________________ 59
4.8. Reviews _________________________________________________________________________________________ 60
4.9. Judicial Review ________________________________________________________________________________ 61
4.10 AD Application on behalf of a third country _______________________________________________ 61
5. Initiation of a Dispute under ADA in the WTO ______________________________________________ 64
5.1. Identification of Measures in Request for Establishment __________________________________ 64
5.2. Special Standard of Review ___________________________________________________________________ 64
5.3. Specificity of Claims in Request for Establishment _________________________________________ 64
5.3.1. New Claims _________________________________________________________________________________________ 64
5.3.2. Standing ____________________________________________________________________________________________ 65
5.4. Panel Recommendations and Suggestions _________________________________________________ 65
6. DISPUTES REFERRED IN THE MODULE _____________________________________________ 66
5
ABBREVIATIONS/SHORT-HAND
AB Appellate Body
ABR Appellate Body Report
ADA Anti-Dumping Agreement
ADD Anti-Dumping Duty
Art. /Arts. Article/Articles
EU European Union
GATT General Agreement on Tariffs and Trade
IA Investigating Authority
Members WTO Member States
PR Panel Report
US United States of America
WTO World Trade Organization
6
LEARNING OUTCOME
The module shall aim to clarify the substantive and procedural aspects of the Anti-Dumping
Agreement (World Trade Organization). Students shall gain insight as to current
jurisprudential underpinnings into various concepts imbibed in the ADA for an in-depth
appreciation of the complexities involved in the interpretation of the respective text.
Briefly, the aim of the module is to cover:
a) Meaning and rationale of dumping;

b) Origin of Anti-Dumping Agreement;
7
c) Meaning and calculation of Normal Value;
d) Meaning and calculation of Export Price;
e) Explanation on and calculation of dumping margin;
f) Conditions to calculate and analyse injury and causation;
g) Various procedural details to initiate an investigation and impose anti-dumping duties to
filing; a dispute in the WTO under the Anti-Dumping Agreement.
1. INTRODUCTION
Antidumping laws are the most widely used instruments of trade contingent protection. At a
fundamental level, the purpose of antidumping measures is to offset the injury to the
domestic industry in the importing country. The first internationally-accepted definition of
the term „dumping‟ is provided under Article VI of the General Agreement on Tariffs and
Trade (GATT) 1947. 1 It consequently formed the basis for drafting the Anti-Dumping
1
Michael J. Trebilcock, Understanding Trade Law (Edward Elgar, 2013) 65.
8
Agreement (ADA) by the GATT Secretariat during the Uruguay Round of Trade
Negotiations from 1986-1994. 2 Therefore, the official name of the ADA reads as the
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade
1994.
„Dumping‟ is an act of a firm to sell goods abroad at a lower price than it sells them in its
home market. There has been a general understanding among nations before the
establishment of the World Trade Organization (WTO) that „dumping‟ is an unfair trade
practice, and that each importing country should have the right to impose anti-dumping duties
on goods that are dumped in its market, to protect its domestic industry.3
Art. VI GATT 1994 authorizes Members to impose anti-dumping duties (ADD) in

addition to other tariffs as negotiated among Members. 4 ADDs are levied if the domestic
investigating agencies find that specific imported products are sold at less than normal value
and such imports cause or threaten to cause injury or material retardation to the domestic
industry.5 The ADA aims to expand and clarify the application of Art. VI of GATT 1994. 6 It
allows WTO Members, when taking action against dumping, to depart from key GATT
principles including the Most-Favoured Nation (MFN) principle 7 and self-help which is
prohibited under the Dispute Settlement Understanding (DSU).8
Box 1.1: Definition of Dumping
Article VI of the GATT
A product is considered as introduced into the commerce of an importing country at less than its
normal value if the price of the product exported from one country to another: (a) is less than the
comparable price, in the ordinary course of trade for the like domestic product when destined for
consumption in the exporting country; (b) in the absence of such, domestic price, is less than either:
(i) the highest comparable price for the like product for export to any third country in the ordinary
course of trade; or (ii) the cost of production of product in the country of origin, plus a reasonable
addition of selling cost and profit.
The Appellate Body (AB) in the US – 1916 Act provides that Art. VI: 1 GATT 1994
must be read together with the provisions of the ADA.9 It referred to the text of Art. 110 of the
2
K.D. Raju, World Trade Organization Agreement on Anti-Dumping (Kluwer Law International, 2008) 6.
3
John H. Jackson, Jean-Victor Louis and Mitsuo Matsushita, „Implementing the Tokyo Round: Legal Aspects
of Changing International Economic Rules‟ [1982-83] Mich. L. R., 18, 273.
4
Bossche, (n 2) at 513.
5
Rudiger Wolfrum, Peter-Tobias Stoll and Michael Koebele, eds., Max Planck Commentaries on World Trade
Law: WTO Trade Remedies (Martinus Nijhoff Publishers, 2008).
6
ibid.
7
MFN treatment under Article I GATT 1994 and the obligation to not to impose duties in excess of bound
duties under Article II GATT 1994.
8
Article VI GATT 1994 allows a member to initiate counter-measure against the dumped products whereas
such self-help measures are prohibited under Article 23 of the Dispute Settlement Understanding.
9
WTO, United States – Anti-Dumping Act of 1916- Report of the Appellate Body (28 August 2000)
WT/DS136/AB/R [137] (US Antidumping Act 1916).
10
Article 1: Principles
9
ADA to state that anti-dumping measures taken under the ADA must also adhere to Art. VI
of GATT 1994.11 It further stated that Article VI is applicable to any specific action against
dumping of exports, i.e., action that is taken in response to situations presenting the
constituent elements of „dumping‟.12
It should be noted that Art. VI GATT 1994 and the provisions of the ADA together limit
the permissible responses against „dumping‟ to definitive anti-dumping duties (ADD),
provisional measures and price undertakings.13 Furthermore, Art. 18 of the ADA provides
that any specific action against dumping should be in accordance with the provisions of
Art.VI of GATT 1994.
Table 1.1: Evolution of Antidumping Agreement

ROUNDS OF TRADE NEGOTIATIONS
Year Place/name Subjects covered Countries
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1960-1961 Geneva, Dillon Round Tariffs 26
1964-1967 Geneva, Kennedy Round Tariffs and ant-dumping measures 62
1973-1979 Geneva, Tokyo Round Tariffs, non-tariff measures “framework” agreements 102
1986-1994 Geneva, Uruguay Round Tariffs, non-tariff measures, rules, services, 123
intellectual property, dispute settlement, textiles, agriculture,
creation of WTO
Art. VI of the GATT does not provide much guidance on the circumstances under which
Members are allowed to impose countermeasures against the unfair trade practices. 14 Nor
does it include any procedural safeguards to ensure that this instrument is not used in a
protectionist manner. 15 However, significant regulations and clarifications in this respect
were included in the Tokyo Antidumping Code.16 The ADA builds on the general statement
contained in Art. VI GATT 1994 and the Tokyo Code by specifying the conditions under
which Members are authorized to act against dumped imports.17
An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of
General Agreement on Tariffs and Trade (GATT) 1994 and pursuant to investigations initiated and
conducted in accordance with the provisions of this Agreement. The following provisions govern the
application of Article VI of GATT 1994 in so far as action is taken under anti-dumping legislation or
regulations.
11
US Antidumping Act 1916 (n. 9) [120].
12
ibid [124]-[126].
13
ibid [137].
14
Peter-Tobias and Frank Schorkopf, Max Planck Commentaries on World Trade Law- WTO: World
Economic Order, World Trade Law (Martinus Nijhoff Publishers, 2003).
15
ibid.
16
ibid.
17
ibid.
10
The current text of ADA contains detailed rules for national anti-dumping investigation
procedures and stipulates methods for defining the phrases used in Art. VI, such as „dumping‟,
„normal value‟, „export price‟ and „injury‟.18 Art. 1 of the ADA clarifies that the national anti-
dumping measures shall be adopted only pursuant to investigations initiated and conducted in
accordance with the provisions of the ADA.19
ADA imposes a series of both substantive and procedural obligations which are meant to
bind the discretion of a national investigating authority (IA) when performing such
calculations. The former is meant to substantiate a fair comparison-standard that an IA must
abide to and the latter reflect a due process standard that an IA must respect.
1.1. Rationale for Anti-Dumping Actions
There are three broad theories which support the application of ADD. These three theories
consider ADD measure as:
 Response to unfair trade

 Mechanism of special protection
 Strategic weapon
Response to unfair trade: The first argument understands ADD to be a protection

against unfair trade by exporters.20 The theory provides that dumping is a price discrimination
between markets.21 However, it should be noted that the ADA provides for imposition of
ADD in cases where the dumped imports are found to have caused or threatens to cause
material injury and the causal link has also been established. 22 Therefore, practically, the
ADA does not provide a mechanism against unfair trade per se.
Mechanism of special protection: The second argument provides that AD measures
facilitate trade liberalization by allowing countries to increase tariffs in order to protect
domestic industries which are injured by imports.23 This has been referred to as the Safety
Valve Theory. According to this argument, AD measures act as a safeguard mechanism.24
According to the Safety Valve Theory, AD measures provide a temporary reprieve to the
domestic industry from the shock of tariff cuts arising out of tariff liberalization.
Strategic weapon: The third argument provides that ADD is a strategic or a protectionist
policy in the hands of the WTO Members. It is also known as the Retaliation Theory. This is
due to the evidence that such protection was granted to politically significant industries. 25
Michael Finger notes that countries using ADD protection form a „club‟ and tend to apply
ADD against another rather than against the „non-club‟. 26 Thomas Prusa argues that
18
ibid.
19
ibid.
20
Raju (n 2) 8.
21
ibid.
22
ibid.
23
ibid.
24
ibid.
25
Raju (n 2) 9.
26
ibid.
11
countries target ADD against those countries which have previously initiated investigations
or imposed duties, providing a tit-for-tat behaviour.27
According to Hansen and Prusa, the first two arguments estimate ADDs as a welfare
enhancing mechanism. The third argument, however, perceives it as a loophole in the WTO
regime and that the growth of ADD can have a detrimental impact on the fundamental
aspirations of the WTO.28
1.2. Administration of Antidumping Investigations
All WTO members who have imposed antidumping measures have authorized various
domestic agencies to conduct antidumping investigations. The investigating agencies will
have to determine three elements:
 Dumping
 Material Injury
 Causal Link
Dumping or dumping margin is determined by the national investigating authorities of the

respective WTO Member States. There is no international agency to perform this task.
Table1.2: Antidumping Agencies

Country AD Investigation Agency
India Directorate General of Anti-Dumping and Allied Duties (DGAD), Ministry of Commerce.
China MOFCOM –Ministry of Commerce
United States ITA of the Department of Commerce
European Union European Commission
Japan Ministry of Finance ('MOF') and the Ministry of Economy, Trade and Industry ('METI')
Brazil CAMEX and DECOM (as a technical branch of SECEX), deals specifically with trade remedies.
Source: WTO
In certain jurisdictions, dumping, injury and causal link determination are determined by
the same agency. For example, in India and the EU a single agency is tasked with the
dumping and injury determination. The DGAD (India) is tasked with the determination of
both dumping and injury. In the case of Canada and the US, a bifurcated determination
process is employed. Further, in Canada the dumping determinations are conducted by
Revenue Canada whereas the injury determinations are conducted by the Canada
International Trade Tribunal. In the case of the US, the International Trade Administration
under the Department of Commerce conducts the dumping determination. The International
Trade Commission conducts the injury determination.
27
ibid.
28
Thomas J. Prusa, The Trade Effects of US Antidumping Actions, NBER, January 1997,
http://www.nber.org/chapters/c0313.pdf (last visited 12 July 2014). See also, Hasnat Shah, Syed and Ahmad
Nawaz, Hakro, Economic rationale, trade impact and extent of antidumping – case study of Pakistan, 12 The
Lahore J. Eco. 1 (2007).
12
2. DETERMINATION OF DUMPING
The key issue in an antidumping investigation is whether a product is being dumped and if so,
the calculation of the dumping margin. Art. 2 of the ADA provides important provisions to
determine the margin of dumping. First of all, an IA will have to determine the “normal value”
and the “export price”. These are the two main elements necessary for the determination of
margin of dumping:
 Normal value is the price at which the like product is sold in the exporting country during the
ordinary course of trade.29
 Export price is ordinarily based on the transaction price at which the producer in the
exporting country sells the product at issue to an importer in the importing country.30
Dumping, under the ADA (Art. 2.1), occurs when the normal value is more than the
export price of like product in the importing country market during the ordinary course of
trade.
Normal Value
Export Price Dumping occurs when
Price at which the product the normal value is more
or its 'like' product is sold Price at which the than the export price of
in the home market of the exporter sells the product the like product in the
exporting country in the in the importing country ordinary course of trade.
ordinary course of trade
Dumping and the margin of dumping under the ADA means one and the same thing. The
AB in the US-Stainless Steel (Mexico) provided that the definition of dumping is applied for
the purpose of the „ADA‟ and therefore, „dumping‟ and „margin of dumping‟ have the same
meaning throughout the ADA.31
Dumping = Normal Value – Export Price
Flowchart 2.1: Determination of dumping involves the following steps
Calculate the
Calculation of Calculation of Export Adjusted Export Calculate the Margin
Normal Value Price Price and Normal of Dumping
Price
29
ibid.
30
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“ADA”)
(15 April 1994) LT/UR/A-1A/3 art. 2.1 <http://wtodocumentsonline.org>.
31
WTO, United States – Final Anti-Dumping Measures on Stainless Steel from Mexico- Report of the Panel
(30 April 2008) WT/DS344/AB/R [94], FN 208 (Mexico Steel).
13
2.1. Normal Value
Art. 2.2 of the ADA provides that the normal value (“NV”) is the price of a like product in
the home market of the exporting country during the ordinary course of trade. There are three
defined methodologies under the ADA to calculate the NV. The basic method is to assess
domestic sales transaction of the product in the exporting country‟s domestic market. In case
the normal value cannot be determined on the basis of domestic market sales, two other
alternatives have been provided in the ADA: Third Country Market Price Method and
Constructed Normal Value Method. A substantive discussion on the three methods is
provided in the sub-subsections below.
Flowchart 2.2: Methods to calculate the Normal Value
Calculation of Normal Value

Third Country Price Method
Domestic Sales Price Method Constructed Normal Value Method
DIRECT METHOD ALTERNATIVE

METHODS
2.1.1. Domestic Sales Transaction Method
Assessing domestic sales transactions is the standard way to determine the normal value for
the purposes of calculating dumping margins. There are four conditions on the basis of which
domestic sales transactions can be used to determine the normal value:
 Sale must be in the ordinary course of trade;

 Sale must be of the like product;
 Products must be destined for the consumption in the exporting country;
 Price must be comparable.32
2.1.1.1. Sales in the Ordinary Course of Trade (OCT Test)
Art. 2.1 of the ADA authorizes the IAs to exclude sales not made in the “ordinary course of
trade” (“OCT”) from the calculation of normal value. The purpose of the OCT test is to
ensure that normal value is, indeed, the “normal” price of the like product, in the home
market of the exporter.33 Art. 2.2.1 of the ADA does not define the concept „in the ordinary
course of trade‟ but it provides an example of sales which are not in the OCT.
32
ADA (n 30) 2.1.
33
WTO, United States- Anti-Dumping Measures on Certain Hot-Rolled Steel-Report of the Appellate Body (24
July 2001) WT/DS184/AB/R [140] (Hot Rolled Steel AB rep).
14
It provides that sales made below per unit (fixed and variable) cost of production plus
selling, general and administrative expenses (SGA) may, under certain circumstances, be
considered as not in the ordinary course of trade. It is further enquired if the sales were
made within an extended period of time34, in substantial quantities35, and at prices which do
not allow for the recovery of all costs. This additional test is conducted to find out whether a
loss resulting from a comparison of prices and costs on a transaction basis is eliminated if
prices are compared to long-run costs, i.e., the Period of Investigation.
An assessment as to whether sales in the domestic market of the exporting Member are
made in the OCT can be a complex task. There are many situations where the transactions are
not in the OCT. Such circumstances include:
 Sales below cost.36

 Sales to affiliated parties;
 Aberrationally high priced sales/abnormally low priced sales;
Sales not made in the OCT may be disregarded in determining the NV. 37 The NV would
then be determined on the basis of the remaining sales.
Box 2.1: OCT and Below Cost Test

WHETHER DETERMINATION OF SALES ARE MADE IN THE ORDINARY COURSE OF TRADE
ʘ Calculate the cost of manufacturing.

ʘ Calculate the general expenses.
ʘ Calculate the total cost (add the cost of manufacture and general expenses).
ʘ Calculate the domestic price.
ʘ Compare net domestic prices to total cost (adjusted).
ʘ Identification of sales at prices below cost.
ʘ Verify whether sales made below cost were made:
ʘ Within an extended period of time
ʘ In substantial quantities; and
ʘ At prices which do not provide for the recovery of costs within a reasonable period of time.
ʘ If all three conditions are met, the sales concerned may be excluded from the calculation of normal
value.
It must be noted that the ADA does not treat sales below cost as outside the OCT by
definition. Selling below cost may be a normal business practice if such sales are made in the
short run and for relatively low volume of sales or if the firm can recover the losses in the
long run (See Item 7 in Box 4 of this Module). Article 2.2.1 of the ADA states that prices
which are below total cost at the time of sale, but above the weighted average total cost
during the POI can be considered to provide for cost recovery within a reasonable period of
time. The total cost of the product would include the cost to make and sell the product. To
determine whether the below cost sales are in made in substantial quantities, the ADA also
34
Normally one year but in no case less than six months.
35
If the weighted average selling price of the transactions under consideration is below the weighted average
per unit costs, or if the volume of sales at a loss represents at least 20% of the volume of transactions.
36
ADA (n 30) art. 2.2.1.
37
ibid.
15
provides for the 80: 20 test. Sales below total cost are made in substantial quantities when
sales below cost represent 20 percent, in volume, of all domestic sales in the country of
export or export sales to third country. When the home market sales or sales to third countries
do not satisfy the 80:20 test, such sales can be treated as not being in the OCT and may be
disregarded for determining normal value.
The AB in the US-Hot-Rolled Steel confirmed that the ADA does not define the term „in
the ordinary course of trade‟. The issue in this case was whether the US could exclude some
of the sales of hot-rolled steel within the Japanese market from the calculation of the normal
value. The US Department of Commerce had used a methodology which excluded from
dumping calculation home market sales by an exporter to a related or affiliated party unless
the price was at least 99.5 percent of the average price charged to unaffiliated or independent
third party customers.
Even though, Art. 2.1 provides for a method to determine whether „sales below cost‟ are
„in the ordinary course of trade‟; the provision does not purport to exhaust the range of
methods for determining the same and it does not cover the specific issue of sales between
affiliated parties.38 It held that the IA‟s discretion under Art. 2.1 to determine how to avoid
distortions in the NV should be exercised in an even-handed manner which is fair to all
parties.39
Box 2.2: Arms’ Length Test in OCT determination
“…[W]e observe that, under the 99.5 percent test, a great range of low-priced sales to affiliates
can be excluded from the calculation of normal value because they are deemed not be “in the
ordinary course of trade.” The effect of the test is to minimize, to an extreme degree, possible
downward distortion of normal value that might result from sales to affiliates.”40
AB, US- Hot-rolled Steel
As opposed to the 99.5 percent test for low-priced transactions, there was no similar rule
for OCT determination for high-priced transactions between affiliates. As far as high-priced
transactions were concerned, in the US- Hot-Rolled Steel, the US Department of Commerce
excluded those sales from the calculation of normal value only if those prices were
“aberationally” or “artificially high”. According to the AB, there was a lack of even-
handedness in the tests applied by the US. The AB observed that the combined application of
these two rules operated systematically to raise NV, through the automatic exclusion of all
high-prices sales, coupled with the automatic inclusion of all high-priced sales.41
2.1.1.2. Volume of Sales
38
Petros C. Mavroidis, George A. Bermann and Mark Wu, The Law of the World Trade Organization (WTO):
Documents, Cases & Analysis (American Casebook) West; 1 edition (2012) 447.
39
ABR, Hot-Rolled Steel, rep (n 33) [148].
40
ibid [150].
41
ibid [154].
16
Sufficiency of sales in the home market is a key determinant in the OCT analysis. 42 The
volume expressed in relative terms is determinative of the number of sales made in the
domestic market compared with the number of export sales. Footnote 2 of ADA in sales shall
normally be considered sufficient in volume if they represent at least 5% of the sales of the
product to the importing/investigating country. It is clear that the 5% benchmark is not an
absolute criterion. Assuming evidence that sales at a lower ratio are still of sufficient
magnitude to provide for a proper comparison, a lower volume of sales should be acceptable
for the purposes of the NV determination.43
The ADA does not specify whether the sufficient volume-test relates to all domestic
sales by an investigated exporter, or to only those sales by the exporter which are made in the
OCT.44 It has been argued that the purposes of the test is to determine whether the domestic
market is sufficiently large to enable domestic sales to serve as a legitimate measure of NV,
and all sales, even those outside the OCT, should be taken into account in making this
benchmark determination.45
2.1.1.3. Particular Market Situation
Particular market situation of the given prices in the exporting country should be properly
assessed as such situations can influence the market price which shall effect the NV
calculation. A GATT Panel (EC-Cotton Yarn) found that hyper-inflation combined with a
fixed exchange rate did not necessarily constitute a particular market situation.46 What needs
to be demonstrated is whether or not the sales concerned would permit a proper
comparison. 47 The Panel considered that the complainant had failed to demonstrate that
prices used as the basis of the NV were themselves so affected by the combination of high
domestic inflation and a fixed exchange rate such that those sales did not permit a proper
comparison.48
2.1.2. Alternative methods to calculate Normal Value
The ADA provides for two alternatives under these three situations to determine the NV:
 There are no sales of the like product in the ordinary course of trade in the exporting
country;
 When the particular market situation do not permit a proper comparison, and
 The low volume of sales in the domestic market of the exporting country does not
permit a proper comparison.49
The two alternatives are:
42
ibid (n 59) 448.
43
ADA (n 30) footnote 2.
44
Mavroidis (n 38) 448-449.
45
ibid.
46
Mavroidis (n 38) 449.
47
ibid.
48
ibid.
49
ADA (n 30) art. 2.2.
17
 Third Country Market Price Method;
 Constructed Normal Value Method.
In other words, Art. 2.2 of the ADA considers three special situations and provides two
alternative methods for calculating normal value in such cases (third country exports and
constructed normal value). The Panel in US-Salmon (Norway) noted that there is no order of
preference to apply the below-mentioned alternative methods to establish NV.50
The ADA does not allow full discretion to IAs when constructing the NV. In short, they
must:
(a) With respect to cost of production, follow the disciplines included in Art. 2.2.1.1 of the
ADA; and
(b) With respect to SGA and profits, follow the disciplines included in Art. 2.2.2 of the
ADA.
Flowchart 3.1: Conditions when the alternative methods to calculate NV are applied
No sales of the like product in the ordinary course of

Third Country Price trade in the domestic market
Method
Alternative A particular market situation which do not let a
methods proper comparison
Constructed Normal
Value Method
Low volume of sales in the domestic market of the
exporting country
2.1.2.1. Third Country Price Method
Art. 2.2 of the ADA provides that the calculation of NV on the basis of export price to a third
market, should be “appropriate”, and that the export price to that county should be
“representative”. However, there is no other guidance under the ADA as to the method of
calculation while using the data from a third country. However, the WTO Members have over
time developed an understanding about these terms. Thus, for example, they generally test the
volume of exports to a given third country against the volume of exports to the importing
Member, i.e. the Member conducting the investigation.
 Normal Value Determination Involving Non-Market Economy/ Use of Surrogate Country
The Non-Market Economy (“NME”) treatment in antidumping investigation assumes special

importance in view of the frequent use of this methodology against People‟s Republic of
China.
A number of GATT/WTO Members do not accept prices or costs in non-market

economies as an appropriate basis for the calculation of normal value on the ground that such
prices and costs are controlled by the Government and therefore are not subject to market
50
United States – Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway- Report
of the Panel (27 April 1994) ADP/87, 391 (Chilled Atlantic Salmon Panel).
18
forces.51 There is no definition of NME, other than a rather incomplete definition provided in
the Interpretative Note ad Art. VI GATT, “a country which has a complete or substantially
complete monopoly of its trade and where all domestic prices are fixed by the state”.
While using NME methodology, an investigating agency will resort to prices or costs in
Box: 2.3: China’s Accession Protocol
Sub para (a) (ii): Investigating member to a use methodology not based on a strict comparison with
domestic process or costs in China if the producers cannot clearly show that market economy
conditions prevail in the industry for the manufacture, production and sale of the product.
Provisions of sub para. (a) (ii) to expire after 15 years from the date of accession
a third country as the basis for normal value. This means that export prices from the NME to
the importing Member will be compared with prices or costs in this surrogate/analogue
country. It should be noted that for several reasons the surrogate country concept tends to
lead to findings of high dumping. A number of IAs collect production costs from firms or
enterprises situated in market economy surrogate countries. Details on finance cost, wage
cost, etc., are taken from agencies such as Department of Labour in the US or organizations
such as the World Bank. This can at times be an arbitrary exercise. Again, the producers in
surrogate countries may not cooperate effectively with the IAs. Most of such surrogate
country producers will be competing in the market place with the NME exporters and it is
therefore not in their interest to minimize a possible finding of dumping for their NME
competitors.
Notwithstanding the NME methodology, several countries provide that individual

companies from China or other NME countries may prove that they operate under market
economy conditions and receive Market Economy Treatment (MET). If individual companies
can get MET, they can escape the surrogate country values and determine their normal value
based on their actual cost. The definition of what constitutes a market economy is by and
large similar in most jurisdictions employing antidumping measures and the focus is on
criteria such as the absence of state interference and of market distortions carried over from
the former economic system, currency convertibility, and the freedom
to hire employees and negotiate wages, etc.
Hypothetical
In a situation where China dumps laptops at below
than fair market value into the United States and
the USITC wants to assess the NV from a third
market…
51
WTO, United Sates- Definitive Anti-Dumping and Countervailing Duties on Certain Products from China-
Report of the Panel (22 October 2010) WT/DS379/R [17.68] (AD CVD Panel).
19
Box 2.4: Non-Market Economy Treatment and China
In the case of China, several agencies including the US Department of Commerce have treated
India, Philippines, Thailand, Indonesia, Colombia, Peru as surrogate countries for the determination
of cost data. Article 15 (a) of China‟s Accession Protocol makes an attempt to limit the use of NME
methodology beyond 2016. However, Chinese exporters have the opportunity to establish under the
national law of the importing Member that it is a market economy. For an interesting appreciation
of this topic you may read:
William P. Alford, “When is China Paraguay? An Examination of the Application of the Anti-
Dumping and Countervailing Duty Laws of the United States to Nonmarket Economy Nations,”
61 Southern California Law Review 79 (1987).
2.1.2.2. Constructed Normal Value
Art. 2.2 of the ADA distinguishes three elements of constructed normal value:
 Cost of production;
 Reasonable amount for administrative, selling and general costs (often called SGA);
 Reasonable amount for profits.
On the basis of the above three elements the IA in the importing Member country
calculates the constructed normal value. A WTO Panel in Thailand-H-Beams provides that
the underlying goal of the constructed normal value is to ensure a result as close to what
would be obtained on the basis of a price-to price comparison.52
The ADA provides rules on how the costs should be calculated while it also establishes a
set of rules for the calculation of SGA as well as of profits. In dumping investigations, the
agency routinely requests both price and cost information to check whether domestic sales
are made below cost. 53 Art. 2.2.2 of the ADA provides that the amounts for SGA and for
profits shall be based on an actual data pertaining to production and sales in the ordinary
course of trade of the like product.
2.1.2.2.1. Calculation of Cost Price
52
WTO, Thailand- Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-
Beams from Poland-Report of the Panel (28 September 2000) WT/DS122/R [7.127] (Thailand H-Beams
Panel).
53
WTO, Guatemala – Anti-Dumping Investigation Regarding Portland Cement from Mexico- Report of the
Panel (19 June 1998) WT/DS60/R [8.183] (Guatemala AD).
20
Art. 2.2.1.1 of the ADA contains three types of obligations relating to an IA‟s cost
calculations for the purpose of determining whether home market sales are in the ordinary
course of trade and for calculating a constructed NV:
 Art. 2.2.1.1 of the ADA, first sentence, requires the IA to normally base their calculation on
actual cost data of the examined producer or exporter, provided that:
ʘ Such records are in accordance with the generally accepted accounting principles
(GAAP) of the exporting country, and
ʘ They reasonably reflect the costs associated with the production and sale of the product
under consideration;
 The second sentence of Art. 2.2.1.1 of the ADA requires the IAs to consider all available
evidence on the proper allocation of costs including that which is made available by the
exporter or producer in the context of an anti-dumping investigation, provided that such
allocations have been historically utilized by the exporter or producer;
 The final sentence then provides for the appropriate adjustment of costs for non-recurring
items of cost which benefit future and/or current production or for circumstances in which
costs during the period of investigation are affected by start-up operations.
Art. 2.2.1.1 provide that costs shall normally be calculated on the basis of records kept
by the exporter or producer under investigation. The records should be in accordance with the
generally accepted accounting principles of the exporting country and reasonably reflect the
cost of production and sale of the product under consideration. 54 The IAs are required to
consider all available evidence on the proper allocation of costs, including that which is made
available by the exporter or producer in the course of investigation.55
The IAs will also examine whether the allocations have been historically utilized by the
exporter or producer, in particular in relation to establishing appropriate amortization and
depreciation periods and allowances for capital expenditures and other development costs.56
The third rule in Art. 2.2.2.1 provide that costs shall be adjusted appropriately for non-
recurring components which benefit future and/or current production. An adjustment is also
foreseen for circumstances in which the costs during the period of investigation have been
affected by start-up operations.
The Panel in US-Broiler Products provides that the consideration of the appropriate cost
allocation methodology necessarily includes the consideration of the methodologies used in
the exporter‟s books and records.57
Box 2.5: Antidumping on Broiler Products: Cost Allocation
54
55
ibid.
56
ibid.
57
WTO, China- Anti-Dumping and Countervailing Duty Measures on Broiler Products from the United States-
Report of the Panel (2 August 2013) WT/DS427/R [7.195] (China AD CVD Broiler).
21
One of the interesting issues involved in the WTO dispute China- Broiler Products was the cost
allocation methodology for constructing the normal value of the US producers. Interestingly, the most
important category of broiler products exported by China was chicken feet, or known otherwise as
chicken paws, which are hardly consumed in the US or were regarded as a waste or used in animal
feed products. In China, by contrast, they are delicacy and command higher prices. This necessitated
the constructed cost methodology to determine the normal value for the product concerned.
Since the antidumping investigation by China involved broiler chicken products and not the
whole chicken, it was important to allocate the costs. In the course of the proceedings, the three US
producers, namely Pilgrim‟s Pride, Keystone and Tyson (US Producers) had reported that given the
nature of production of chicken products they would use a “relative sales value” allocation
methodology in the determination of the constructed normal value.
Chicken products have common costs up to the point of spilt-off of the various parts from the
whole chicken such as breast, leg, quarters and chicken feet. For example, companies or firms
producing joint or co-products which have a single production cost up to a certain point allocate that
cost across the various resulting products. In the above example, if a single chicken was divided up
and the breast was sold for $5, the thigh for $ 3, wings for $ 1 and paws for $1, then 50 percent of the
pre-split-off production cost would be allocated to the breast, 30 percent to the thighs and 10 percent
each to the wings and paws.
However, if there are by-products which are not part of the commercial business of the firm,
there products will not have any spilt up costs assigned to them. The other allocation methodology is
the “weight based allocation”, according to which the split up costs would be allocated according to
the weight of the product concerned. Under this approach, China first estimated the average cost of
producing a chicken and then calculated MOFCOM adopted the “weight-based allocation” whereas
the respondents insisted on the “value-based allocation” in the underlying investigations.
According to the MOFCOM, the cost allocation methodologies of the three US respondents,
treated paws improperly by allocating too little of the cost of production to them. China alleged that
certain broiler items such as paws, which accounted for most of the US exports to China, were
allocated a very small portion or none of the total costs which led to distortion of the normal value.
Art. 2.2.1.1 of the ADA states that costs shall normally be calculated on the basis of records kept
by the exporter or producer under investigation, if those books are records (i) are consistent with the
GAAP of the exporting country, and (ii) reasonably reflect the costs associated with the production
and sale of the product under consideration.
According to the Panel, the term “normally” in Art. 2.2.1.1 means that an IA is bound to explain
why it departed from the norm and declined to use the respondent‟s books and records. In other
words, in the language of the Panel, there is a presumption that the books and records of the
respondent shall be used in order to calculate the cost of production to determine the normal value.
The IAs retain the right to decline the use of such books or records if they are either: (1)
inconsistent with GAAP or, (ii) do not reasonably reflect the costs associated with the production and
sale of the product under consideration. The Panel, accordingly, found that China acted inconsistently
with the first sentence of 2.2.1.1 when MOFCOM declined to use Tyson‟s and Keystone‟s books and
records.
The US producers suggested during the investigation that their own cost allocation methodology
22
should be the basis for determination of constructed normal value. In such a situation the key question
is whether MOFCOM complied with the obligations in the second sentence of Art. 2.2.1.1 when it
devised and applied its own allocation methodology as opposed to the alternate methodology
suggested by the respondents?
To address this question, the Panel examined the analytical framework established by the AB in
US-Softwood Lumber V, China-GOES and EC-Salmon. Especially relying on the reasoning of the AB
ruling in US – Softwood Lumber V, the Panel observed that in instances where there is "compelling
evidence" available to the IA that more than one allocation methodology potentially may be
appropriate to ensure that there is a proper allocation of costs, the IA may be required to "reflect on"
and "weigh the merits of" evidence that relates to such alternative allocation methodologies. In the
opinion of the panel, such an assessment was necessary in order to satisfy the requirement to
"consider all available evidence".
The cost allocation methodology has been a controversial topic, but this is the first time a WTO
Panel had an opportunity to give an authoritative ruling on this issue. The Panel ruling has given
primacy to the recording keeping of affected exporters and has shifted the burden to the IAs to
establish how the exporter‟s books or records do not “reasonably reflect the costs”.
2.1.2.2.2. SGA and Profits & Constructed Normal Value
According to Art. 2.2.2 of the ADA, the Administrative, Selling and General Costs (“SGA”)
are to be calculated on the basis of actual sales and production data obtained in the OCT of
the product under investigation. However, when the data is not available, Paragraphs (i), (ii),
(iii) of Art. 2.2.2 of the ADA provide alternative methods for calculating SGA. The three
options are as follows:
 the actual amounts incurred and realized by the exporter or producer in question in
respect of production and sales in the domestic market … of the same general
category of products;
 the weighted average of the actual amounts incurred and realized by other exporters
or producers….in respect of production and sales of the like product….;
 any reasonable method……;
(Emphasis added)
Art. 2.2.2 paragraph (i) provides that the amounts can be based on the actual amounts
incurred and realized by the investigated exporter for the same general category of products
(which may include the like product). How broad the general category of products may be, is
not defined in the ADA. The Panel, in Thailand-H-Beams, found that the text of Art. 2.2.2 of
the ADA does not provide precise guidance as to the required breadth or narrowness of the
product category.58 It did note, however, that the narrower the category, the fewer products
other than the like product will be included in the category, and this would seem to be fully
consistent with the goal of obtaining results that approximate as closely as possible the price
of the like product in the OCT in the domestic market of the exporting country.59
58
Thailand H-Beams, Panel (n 53) [7.111].
59
ibid [7.113].
23
In the underlying investigation in EC- Bed Linen, a landmark dispute in the WTO, the
EC (respondents) relied on the constructed normal value under Art. 2.2.2 ADA for certain
exporters of cotton-type bed linen products from India. One of the issues involved in this
dispute was the determination of NV of Indian exporters who did not have representative
domestic sales in the OCT of the product under investigation, i.e. Bed Linen.
The EC determined the SGA and profits for some of the exporters based on the
methodology mentioned under Art. 2.2.2 (ii). India argued before the Panel that EC
improperly used a figure from one “other producer” (Bombay Dyeing) without calculating
the weighted average of the actual amounts incurred and realized by other exporters or
producers. India contended that the relevant part of Article 2.2.2(ii) provides that the amounts
for SGA and profits shall be based on: “. . . the actual amounts incurred and realized by other
producers or exporters. . . ” (Emphasis added).
According to India, the reference under Art. 2.2.2 to the terms “other exporters and
producers” along with the term “weighted average” meant that the production and sales
amounts are required to be averaged among more than one firm and thus could not be based
on one firm‟s data. The Panel had rejected India‟s claim saying that a mere implication that
plural words in the provision envisages situations of consisting of more than one exporter
should not be a basis to reject the EC methodology. 60 According to the panel, the existence of
data of more than one exporter or producer is not a necessary prerequisite for the application
of the “weighted average” approach in calculating the S, G& A.
However, the AB overruled the Panel‟s reasoning as such was not a correct interpretation
of Art. 2.2.2 (ii) of the ADA. The AB provided that the plural usage in the provision of Art.
2.2.2(ii) “other exporters or producers” is obviated by the usage of “weighted average” as an
average of amounts for SGA and profits cannot be calculated on the basis of data on SGA
and profits relating to only one exporter or producer.61 Further, the usage of „weight‟ the‟
average‟ further supported the view because average reflects the combination of data from
different producers and exporters which should provide the relative importance of these
different exporters or producers in the overall mean.62
In EC-Pipe Fittings, a trade dispute involving Brazil and the EC, the question arose
whether data relating to sales that has been discarded by the EC‟ IA under Art. 2.2 of the
ADA could still be used for the purposes of constructing SGA and profits in the context of
Art. 2.2.2 of the ADA. It may be worth noting that the term ordinary course of trade is not
expressly mentioned in Paragraphs ((i), (ii) and (iii) of Art. 2.2.2.
The AB made it clear that the IA, which has discarded the actual data for the reason that
such sales were made outside the ordinary course of trade, can make use of the actual data for
60
European Communities- Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India- Report of the
Panel (n. 55) [7.65] (EC-Bed Linen).
61
WTO, European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India –
Report of the Appellate Body [74].
62
ibid.
24
the calculation of SGA when constructing the NV.63 In the context of Paragraph (ii) of Art.
2.2.2 of the ADA, the AB emphasized that in the calculation of weighted average, all of the
actual amounts will have to be included, regardless whether the underlying sales were made
in the ordinary course of trade or not.
The Panel in EC- Salmon (Norway) addressed a claim by Norway regarding the meaning
of “reasonable” in the context of Art. 2.2.2 (iii) ADA. The Panel noted that the actual
domestic profit data and actual SGA data should not be excluded because of the low volume
of domestic sales or the low level of profitability of the sales to which they pertain.64
The determination of what could be SGA itself can be matter of dispute. The Panel in
US-Softwood Lumber V noted that Art. 2.2.2 of the ADA does not define the terms SGA costs,
nor does it states which cost items should be considered to be general or administrative
costs.65 The Panel noted that the ordinary meaning of general costs as costs affecting all or
nearly all product manufactured by a company, while administrative costs were defined as
costs concerning or relating to the management of the company‟s affairs.66 As such, costs can
only have a bearing on all the products manufactured by a company.67
SGA costs have to be based on actual data pertaining to production and sales of the like
product. 68 The Panel in US-Softwood Lumber V provided that SGA costs benefit the
production and sale of all goods that a company may produce, they must certainly relate or
pertain to those goods including to the product under investigation. It thus concluded that:
Unless a producer/exporter can demonstrate that the product

under investigation did not benefit from a particular SGA cost item,
an investigating authority is not precluded from attributing at least
a portion of that cost to the product under investigation.
The Panel then held that it was not unreasonable of the USITC to allocate part of a large
settlement amount relating to claims concerning hardwood to the production and sale of
softwood lumber as this settlement cost was a cost bore by the company as a whole.69
Flowchart 3.2: Summary on the Calculation of Normal Value
63
WTO, European Communities- Anti-Dumping Duties on Malleable Cast Iron Tube or Pipe Fittings from
Brazil- Report of the Appellate Body (22 July 2003) [101] (EC – Malleable Cast).
64
European Communities – Anti-Dumping Measure on Farmed Salmon from Norway- Report of the Panel (n
50) [7.309], [7.318].
65
WTO, United States- Investigation of the International Trade Commission in Softwood Lumber from
Canada-Report of the Panel (22 March 2004) WT/DS277/R [7.263] (US Softwood V).
66
ibid.
67
ibid.
68
ibid [7.267].
69
ibid.
25
Determine the country of origin or country of export for determining Normal Value
Determine the sufficiency of sales.
Exclude sales not made in the ordinary course of trade

If the sales are between related parties, make
from the calculation of normal value, or calculate
determination with respect to the prices of those
market related prices on the basis of the resale price to
sales reflected in the ordinary course of trade.
first unrealted purchase.
If sales are at prices below cost, make determination

Exclude sales not in the ordinary course of trade from whether those sales qualify as not in the ordinary
the calculation of normal value, or calculate course of trade, within the meaning of Art. 2.2.1.
constructed values for those sales.
80/20 Test If any sales excluded, consider reapplying sufficiency

test on the remaining sales.
No sales in OCT in the domestic market, go

Calculate the normal value
for Constructed NV/This country sales
Calculate the adjusmtments.
Calculae the adjusted normal value.
2.2. Export Price
As the name suggests, export price is the price at which the exporter sells the product in an
importing country market. It is ordinarily based on the transaction price. 70 The ADA provides
no specific guidelines on the determination of export price. In many countries, export prices
are estimated at an ex-factory level.71
Ex-factory export prices are assessed after making numerous adjustments.72 Such include
adjustments for taxes, discounts and rebates actually granted and directly related to the sales
concerned, packaging costs, costs relating to the export and transportation of the product,
costs charged for the product‟s entry into the country, including transport, maintenance,
insurance, loading and unloading and handling costs, and other unforeseen costs incurred
from the commencement of transportation at the point of export until delivery to the buyer.73
However, when there is no export price or when it appears to the IA that it is

significantly different from the average price charged to the related importers compared with
the price charged to other importers; or that it is unreliable because of association or a
compensatory arrangement between the exporter and the importer or a third party, the export
70
Bossche (n 2) 520.
71
Aradhna Aggarwal, Anti-Dumping Law and Practice: An Indian Perspective (2002) Working Paper No. 85,
April 2002, ICRIER, 39 < http://icrier.org/pdf/antiDump.pdf> accessed 20 July 2014.
72
Aggarwal (n 72) 39.
73
ibid.
26
price has to be constructed on the basis of the price at which the imported products are first
resold to an independent buyer, or on such reasonable basis as the authorities may
determine.74
In cases where there is no export price or where it

appears to the authorities concerned that the export price is
unreliable because of association or a compensatory
arrangement between the exporter and the importer or a
third party, the export price may be constructed on the basis
of the price at which the imported products are first resold
to an independent buyer, or if the imported products are
first resold to an independent buyer, or not resold in the
condition as imported, on such reasonable basis as the
authorities may determine.
In cases involving constructed export prices, additional allowances are to be made for
costs incurred between importation and resale, including duties, taxes, and profits accruing,
any commissions paid, any direct selling expenses incurred in the importing country; any
indirect selling expenses associated with economic activity; any costs and expenses resulting
from further manufacturing expenses incurred in the importing country. 75 The greater the
number of adjustment, the greater is the risk of bias in the estimations.76
At any point of adjustment, this procedure may create a risk of artificial dumping
findings if the overhead costs and/or profits are overestimated. In the absence of the actual
information, the IAs use the best available information to construct the export price. 77 In the
case of India, trade statistics provided by Directorate General of Commercial and intelligence
Statistics or on list prices provided by complainants. In most cases, adjustments are made on
the basis of the best available data which is generally provided by the petitioners. 78 Such
adjustments may introduce downward bias in the export prices risking positive dumping
findings.79
The Panel in US-Stainless Steel (Korea) provided the following function of constructed
export price as:
“…rather, an export price is constructed, and the appropriate

allowances made, because it appears to the investigating
authorities that the export price is unreliable because of
association or a compensatory arrangement between the exporter
and the importer or third party. By working backwards from the
74
ADA (n 30) art. 2.3.
75
ibid art. 2.4.
76
Aggarwal (n 72) 40.
77
ibid 44.
78
ibid 45.
79
ibid.
27
price at which the imported products are first resold to an
independent buyer, it is possible to remove the unreliability.
Thus, we agree with the US that the purpose of these allowances
is to construct a reliable export price to use in lieu of the actual
export price or… to arrive at the price that would have been paid
by the related importer had the sale been made on a commercial
basis”.80
The Panel further held that, as the constructed export price should be a reliable export
price, costs incurred between importation and resale can only be deducted if they were
foreseen. 81 Only such foreseen costs can be considered to be reflected in the price. 82
Interestingly, the Panel highlighted that there does not exist an obligation to make such
adjustments.83 In other words, making such allowances would not constitute a disadvantage
to the exporter, as it implies a higher export price and thus lower dumping margin.84
Flowchart 3.3: Summary on the Calculation of Export Price
Calculation Calculation
Calculation of
of of adjusted
export price
adjustments export price
If sales between related parties, make
determination with respect to whether
the prices of those sales are reliable
Calclation of market-related prices on the
basis of resale price to the first unrelated
(independent) purchaser.
2.2.1. Fair price comparison
Art. 2.4 lays down as key principle that a fair comparison shall be made between export price
and the normal value. The IAs must proceed and perform a fair comparison between the two
prices, namely, it must ensure that:
 The two prices must be at the same level of trade; and

 Due allowances for any differences affecting price comparability must be made in
accordance with the ADA.
The requirement to perform a fair comparison is an obligation of result and not of

specific conduct. 85 The duty to make a fair comparison and the need for adjustments in
80
WTO, United States – Anti-Dumping measures on Stainless Steel Plate in Coils and Stainless Steel Sheet
and Strip from Korea-Report of the Panel (22 December 2000) WT/DS179/R [6.98]-[6.100] (US Stainless
Steel).
81
ibid.
82
ibid.
83
ibid [6.98-6.100].
84
ibid.
85
28
particular, will form an important part of the investigation.86 It is through this mechanism of
adjustments that the exporters will try to get the NV as low as possible and the export price as
high as possible, while the petitioners will try to argue the opposite.
2.2.2. The Obligation to Compare Prices at the Same Level of Trade
Art. 2.4 of the ADA provides that the comparison shall be made at the same level of
trade, normally at the ex-factory level, and in respect of sales made at as nearly as possible
the same time. Although the ADA does not prohibit the use of FOB (free-on-board) or CIF
(cost, insurance, freight) prices, it appears that the normal way to perform a fair comparison
at the same level of trade is by comparing prices at the ex-factory level.87
The obligation of fair comparison implies that an authority will have to work its way
back to the ex-factory level to establish the NV and the export price.88 The Panel in its report
on Argentina-Poultry pointed out, “it seems to us that under normal circumstances there is an
obvious inconsistency with Art. 2.4 if an IA compares F.O.B. export prices with delivered
domestic prices, because such a comparison would not be made at the same level of trade.”89
2.2.3. Due Allowances
Art. 2.4 of the ADA provides an indicative list of due allowances that can legitimately be
made once prices have been brought to the same level of trade. Art. 2.4 of the ADA makes a
reference to S. 3.
The purpose of the above provision in the words of the Panel in US-Stainless Steel
(Mexico) is to neutralise differences in a transaction that an exporter could be expected to
have reflected in his pricing. 90 Art. 2.4 of the ADA provides a mere indicative list, and
requires that due allowance shall be made for any explicitly listed differences which are also
demonstrated to affect price comparability. For example, in EC-Pipe Fittings, the Panel
accepted that due allowance could be made for packing expenses, an item not explicitly
mentioned in Art. 2.4 of the ADA.91 Moreover, the Panel on US-Stainless Steel (Mexico) was
of the view that only differences that the exporter could reasonably have anticipated and
could have taken into account in his price determination may be the subject of adjustments.92
In other words, Art. 2.4 of the ADA does not require that an adjustment be made
automatically in all cases where a difference is found to exist, but only where (based on the
merits of the case) that difference is demonstrated to affect price comparability. For e.g., the
fact that a trading company handles domestic or exports sales of an investigated product, does
not in and of itself mean that there is a difference that affects price comparability and that an
adjustment has to be made. The Panel in US- Stainless (Steel) noted as follows:
86
ibid.
87
ibid 457.
88
ibid.
89
WTO, Argentina – Definitive Anti-Dumping Duties on Poultry from Brazil- Report of the Panel (22 April
2003) WT/DS241/R [7.235].
90
Mexico Steel (n 31) [6.77].
91
Malleable Cast Iron [7.184].
92
Mexico Steel [n 31] [6.77].
29
“Article 2.4.2 provides that the existence of dumping shall
normally be established „on the basis of a comparison of
weighted average normal value with a weighted average of all
comparable export transactions. (emphasis added). The inclusion
of the word „comparable‟ is in our view highly significant, as in
its ordinary meaning, it indicates that a weighted average normal
value is not to be compared to a weighted average export price
that includes non-comparable export transactions. It flows from
this conclusion that a Member is not required compare a single
weighted average normal value to a single weighted average
export price in cases where certain export transactions are not
comparable to transactions that represent the basis for the
calculation of normal value.” 93
Since Art. 2.4 of the ADA does not set forth a particular methodology for the calculation
of such adjustments, the IA is presumed to act in a WTO-consistent manner, if it acts in an
unbiased and even-handed manner, and where it does not use its discretion in an arbitrary
manner. The Panel in EC-Tube or Pipe Fittings dealt, inter alia, with a claim by Brazil that
the EC had denied due allowances for differences in indirect taxation because of the
methodology it had privileged to address this issue.94 The Panel rejected Brazil‟s argument.95
In its view, the ADA did not specify a particular manner in which differences in indirect
taxation should be accounted for. As a result, any methodology used, to the extent reasonable,
should be considered WTO-consistent.96
Who bears the burden to ensure fair comparison under Art. 2.4 of the ADA? In EC-Pipe
Fittings, the parties differed in their view of the nature of evidence that should be submitted
in support of a claim for such an adjustment, and whether it is the IA or the exporter that
bears the burden of identifying and substantiating the claimed adjustment. 97 According to the
Panel it is for the IA to make due allowances and abide by the disciplines of Art. 2.4 of the
ADA; the IA retains discretion as to items to be included as well as the manner in which they
will be evaluated.98 To this effect, it could very well be the case that an investigating agency
does not accept each and every claim presented under Art. 2.4 of the ADA. It might request
clarity from the party making the argument and, if this is the case, the party concerned is
under duty to cooperate.
2.2.4. Comparison between Normal Value and Export Price
The ADA includes three methods that could theoretically, be used by an IA when comparing
the Normal Value and Export Price for establishing a dumping margin. Art. 2.4.2 ADA
provides:
93
US Stainless Steel (n 81) [182]-[183].
94
Malleable Cast Iron (n 92) [7.158].
95
ibid.
96
ibid.
97
Malleable Cast Iron (n 92) [7.158].
98
ibid.
30
… The existence of margins of dumping … shall
normally be established on the basis of a comparison of a
weighted normal value with a weighted average of prices of
all comparable export transactions or by a comparison of
normal value and export prices on a transaction-to-
transaction basis.”
(Emphasis added)
The three standard methods to calculate the dumping margin by the investigating agency
are:
 Weighted average to weighted average (“WA-WA”)

 Transaction –to –transaction (“T-T”)
 Weighted- Average- to- Transaction (“WA- T”)
The ADA provides that when using the WA-WA methodology, the weighted average
NV should be compared to a weighted average of prices of all comparable export transactions.
The Panel in US-Stainless Steel (Mexico), however, rejected the idea that the mere fact
that there existed significant differences in NV, or export price over the course of an
investigation, by itself, was sufficient basis to conclude that export and home transactions at
different points in the period of investigation were not comparable such that the use of
multiple averages was permissible under Art. 2.4.2 of the ADA. 99 According to the Panel,
difference in timing may be considered to give rise to a comparability problem, only in case
of two elements:
ʘ A change in prices; and

ʘ Differences in the relative weights by volume within the POI of sales in the home
market as compared to the export market.100
The T-T methodology does not involve an evaluation of all sales either. There could be a
discrepancy in the number of sales in the home and export market. As a result, in such cases,
in practice, an IA will look for the domestic sale as close in time as possible to each of the
export transactions. In other words, it will compare the two transactions which are as close
time-wise to each other as possible, and will neglect the remaining home market transactions.
The choice of methodology for calculating the margin will have an important impact on
whether dumping is found to exist or not.
The AB in EC-Pipe Fittings made it clear that two methods (WA-WA, T-T) are offered
as alternatives, and WTO Members are free to choose one or other of them. 101 The AB
99
Mexico Steel (n 31) [6.123].
100
ibid.
101
EC – Malleable Cast (n 64) [76].
31
rejected all arguments to this effect, arguing that nothing in the ADA privileges one
methodology over the other.102
A third exceptional methodology is provided for in Art. 2.4.2 of the ADA which allows
in specific circumstances, a comparison between weighted average-NV and prices of specific
export transactions. This third methodology is to be used exceptionally when the conditions
mentioned in this provision have been met. This provision aims to counteract targeted
dumping, if, for example, during the POI, an exporter dumping substantial volumes of
exports during, one month, only then probably under this provision, an investigating agency,
for the calculation of dumping margins, can legitimately take into account the export prices
as reflected in the transactions during this month. The AB in EC-Bed Linen recognized that:
this provision allows Members, in restructuring their anti-dumping investigations, to address
three kinds of targeted dumping, namely dumping that is targeted to certain purchasers,
targeted to certain regions, or targeted to certain time periods.
This comparison shall be made at the same level of trade, normally the ex-factory level,
and in respect of sales made at nearly the same time. The ex-factory price is the price of a
product at the moment that it leaves the factory. Thus, Art. 2.4 of the ADA, envisages that
costs incurred after that be deducted to the extent that they are included in the price. If, for
example, an export sale is made on a Cost Insurance and Freight 103 (CIF) basis. Thus, these
costs are included in the export price and must therefore be deducted to return to the ex-
factory level. If, on the other hand, the terms of the sale are ex-factory, non-deduction will
need to be made because the price is already at an ex-factory level.
2.2.5. Calculation of Dumping Margin
In the case of dumping, the IAs are required under Art. 2 of the ADA to determine an
appropriate and fairly calculated dumping margin.104
Dumping Margin = Normal Value – Export Price
If the dumping margin is positive, then there is dumping; if it is zero or negative, then no
dumping has occurred.105 Sometimes, dumping margins are expressed in percentage terms,
namely, as a percentage of the export price.106 Then the formula becomes:
Dumping Margin (%) = Normal Value – Export Price

--------------------------------------- x 100
102
ibid.
103
A trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and
provide the buyer with the documents necessary to obtain the goods from the carrier.
104
Raju, (n 2) at 55.
105
ibid.
106
ibid.
32
Export Price
Comparison of the normal value and the export price should be done at the same level of
trade (e.g., at the ex-factory level) or at levels as close as possible to the same.107 As noted in
the Flowchart 3.4, the process of calculating the dumping margin begins with the
determination of normal value and export price. The methodology to be applied when
calculating the difference between the normal value and the export price may raise difficult
issues.
2.2.5.1. Zeroing
“Zeroing” has been one of the controversial elements of dumping margin calculation. Zeroing
is a methodology whereby an IA treats as „zero‟ the negative dumping margins to calculate
the overall dumping calculation.108 Such a practice leads to a dumping margin in excess of
the one wherein the negative duping margins had been taken into account. 109 It is deemed as a
violation Art. 2.4.2 of the ADA.110 Art. 2.4.2 provides how the margins of dumping should be
calculated and the various price comparison methodologies that could be used. It states:
Article 2.4.2 ADA
The existence of margins of dumping during the

investigation shall normally be established on the basis of
the comparison of a weighted average normal value with a
weighted average of prices of all comparable export
transactions or by a comparison of normal value and export
prices on a transaction-to-transaction basis. A normal value
established on a weighted average basis may be compared
to prices of individual export transactions if the authorities
find a pattern of export prices which differ significantly
among different purchasers, regions or time periods, if an
explanation is provided as to why such differences cannot
be taken into account appropriately by the use of weighted
average-to-weighted average or transaction-to-transaction
comparison.
It simply provides that the comparison between export price and normal value should be
based on a weighted average of all transactions during the period under investigation or on a
transaction-to-transaction basis. However, there is an exception in the case of targeted
107
WTO, „Technical Information on anti-dumping by the World Trade Organization‟
<http://www.wto.org/english/tratop_e/adp_e/adp_info_e.htm> accessed 25 July 2014.
108
James J. Nedumpara, „Antidumping Proceedings and „Zeroing‟ Practices: Have We Entered the
Endgame?‟[2012] 7(1) GCTJ, Kluwer Law International 15.
109
ibid.
110
ibid.
33
dumping where the IAs can use weighted average to transaction comparison (W-T).111 The
impact of zeroing is that it eliminates „negative dumping margins‟ from the overall dumping
margin calculation. In such cases, dumping will look more serious than it actually is.
The two most commonly noted manifestations of zeroing are „simple zeroing‟ and „model
zeroing‟.
 Model Zeroing
Model zeroing occurs in the case of the weighted average to weighted average margin
calculation. Model matching is a central component of an AD investigation. Each model is a
specific type of the subject product, defined in terms of physical features or characteristics.
Taking the example of US Department of Commerce‟ practice, it used to calculate the
dumping margin for each model sold by concerned exporter in the US. 112 It calculated the
dumping margin for each model sold by the concerned exporter in the US. In order to come
to a single overall weighted dumping margin, the US Department of Commerce used to add
up the dumping amounts only for those US models for which there was a positive dumping
and divided this by the total ex-factory value of all US models sold during the period in
question. In adding the comparison results by group of model, positive results were added to
determine the total amount of dumping, but all results showing negative results were
disregarded or treated as zero in the aggregation exercise.113
Table 2.1: Sample of Model Zeroing
Model/Types Normal Value Export Price Units Sold Weighted Average

Dumping Margin
Model A 100 90 10 8%
100 80 20
100 100 10
Model B 90 105 10 (-10%)* [treated as
100 110 5 zero]
90 95 10
Model C 110 100 5 10%
120 110 5
115 105 5
Source: Nedumpara (2012)
 Simple Zeroing
Simple zeroing is very similar to model zeroing although it occurs when (T-T) or (W-T)
calculations are made.114 Under the (T-T) comparison method, the ex-factory price of a single
US sale is compared to the ex-factory price of the comparable home market sale. Such a
111
ibid.
112
ibid.
113
ibid.
114
ibid.
34
comparison is bound to yield a transaction-specific margin.115 When the US Department of
Commerce applies the weighted average-transactions margin (W-T), it compares the
weighted average ex-factory prices for a given period – in most cases, typically a
contemporaneous month-with the ex-factory prices for a given period in most cases, typically
a contemporaneous month, with the ex-factory prices of individual US sales.116 To come to a
single overall weighted dumping margin, the US Department of Commerce sums the
dumping amounts only for those transactions for which there was a positive dumping and
divides this by the total ex-factory value of all US sales.117 Similar to model zeroing, in the
simple zeroing as well, the negative comparison results are treated as „zero‟.118
Table 2.2: Example of Simple Zeroing
Weighted Average Normal Value Export Price Dumping Amount
150 75 75
150 125 25
150 175 (-25)* Treated as zero
150 225 (-75)* Treated as zero
Source: Nedumpara (2012)
The negative dumping occurs because the export price is actually higher than the normal
value. If the negative dumping can be used to offset the positive amount, no dumping will be
found to exist. However, it has been the practice of some WTO Members 119 not to allow such
offset and to attribute a zero value to negatively dumped transactions. This is known as the
practice of zeroing.
The AB in US-Softwood Lumber V stated that zeroing occurs only at the stage of
aggregation of the results of the sub-groups in order to establish an overall margin of
dumping for the product under investigation as a whole.120
2.2.5.2. Like Product in Antidumping Investigations
The determination of what constitutes like product, involves:
 Examining the imported product or products that is or are alleged to be dumped; and
 Then establishing the product that is like.
Art. 2.6 of the ADA defines like product to mean a product identical or having
characteristics closely resembling to the product at issue. However, the IAs are given wide
115
ibid.
116
ibid.
117
ibid.
118
ibid.
119
The EU-now abandoned the practice and presently, the US is practising the same.
120
WTO, United States- Final Dumping Determination on Softwood Lumber from Canada- Report of the
Appellate Body (11 August 2004) WT/DS264/AB/R [64].
35
scope and discretion to regard products as „like‟ under the ADA. The Panel in EC-Salmon
(Norway) rejected Norway‟s argument that in defining “like product”, Art. 2.6 ADA required
an assessment of “likeness” in respect of the product under investigation “as a whole” and
this required a comparison of all product categories considered as potentially “like product.121
The Panel in EC-Fastners (China) held that Arts. 2.1 & 2.6 of the ADA do not require
the IAs to define the product under consideration to include only products which are like. 122
The Panel stated that the mere fact that a dumping determination is ultimately made with
respect to a product provides nothing about the scope of that product. The Panel concluded
that while Art. 2.1 of the ADA establishes that a dumping determination is made for a single
product under consideration, there is no guidance for determining the parameters of that
product, and certainly no requirement of internal homogeneity of that product. 123
Thus, the ADA provides that a fair comparison must be made between the export price
and the normal value.124 It also provides that due account should be given to the differences
which affect price comparability such as differences in the levels of trade at which normal
value and the export prices are calculated.125
Flowchart 3.4: Determination of Dumping Margin
Weighted Calculate the dumping margin

Average Normal [the absolute difference
Calculate the Calculate the
Value v. between the weighted average
weighted average weighted average
Weighted normal value and the
normal value. export price.
Average Export weighted average export price
Price is divided by the latter].
Select a method to
determine the dumping Calculation of
margin For each export dumping margin
price, select a by transaction Calculate the
Individual normal
comparable (divide the weighted average
Value v.
normal value in absolute of all transaction-
Individual Export
terms of difference specific dumping
Price
proximity of ebtween the margins.
time. normal value and
export price)
3. DETERMINATION OF INJURY
3.1. Investigation of Injury
An affirmative determination of injury to the domestic industry and the consequent causal
link with dumped imports is a basic pre-requisite for the imposition of anti-dumping duties by
the IAs. Subsections of Art. 3 of the ADA provides for the determination of injury and
121
ibid [7.51].
122
WTO, European Communities – Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners
from China-Report of the Panel (3 December 2010) WT/DS397/R [7.263] (EC Iron Steel Fastners).
123
ibid.
124
ADA (n 30) art. 2.4.
125
ibid.
36
causation. The AB in Thailand-H-Beams emphasized that Art. 3 of the ADA provides the
substantive obligations that a Member must fulfil in making the injury determination.126
The ADA defines injury to mean one of the following three concepts:
 Material Injury  A genuine injury to the domestic industry.

 Threat of Material Injury  A genuine threat of injury to the domestic industry and not an
allegation or a conjecture.
 Material Retardation of the establishment of a domestic industry  A situation where an
industry was about to be established, but its establishment was materially retarded because of
the dumped imports. Once the industry is established, the domestic producers forming part of
this new industry cannot rely on this meaning of the term injury anymore.
The ADA provides further details and guidance relating to the determination of material
injury and a threat of material injury but provides no further guidance on the consideration of
material retardation of the establishment of a domestic industry.
Determination of Injury
The ADA does not condition the initiation of an injury analysis on a prior finding of
dumping. In practice, the investigation of dumping margins and of injury, often takes place in
parallel. An IA has to demonstrate, by looking at the volume of dumped imports, their price
effects, and the injury indicators specifically reflected in the ADA, that the domestic industry
producing the like product has been injured (Arts 3.2 and 3.4 of the ADA) as a result of the
dumped imports (Art. 3.5 of the ADA).
 Domestic Industry
An ADD is applied when the „dumping‟ causes injury to a „domestic industry‟. Art 4.1 of the
ADA provides the definition of „Domestic Industry‟, “as the domestic producers as a whole
of the like products or…those of them whose collective output of the products constitutes a
major proportion of the total domestic production of those products”.
The AB in US-Hot Rolled Steel noted:
The Anti-Dumping Agreement provides that; injury‟ means

„material injury to a domestic industry, threat of material
injury to a domestic industry or material retardation of the
establishment of such an industry‟. It emerges clearly from
this definition that the focus of an injury determination is
the state of the „domestic industry‟.127
It should be noted that if a domestic producer is related to an exporter or exporters of the

product under investigation, then the IAs have the discretion to exclude such producer from
126
Thailand- Cigarettes (n 62) [106].
127
ABR, Hot Rolled Steel, (n 33) [189].
37
the category of domestic industry. As such a producer who is economically related to the
exporter does not require the protection by an ADD.128
Under the ADA domestic producers will be considered as „related‟ to the exporters if:
 A domestic producer directly or indirectly controls an exporter or vice versa

 Both are directly or indirectly controlled by a third party
 It is likely that the domestic producers act differently from what it would if there was
no such relationship.129
In US-Hot-Rolled Steel, the AB dealt with an issue whether or not production of hot-
rolled steel by the domestic industry for „in-house consumption‟ can be excluded from the
scope of domestic industry. The AB ruled that an injury determination should be based on the
„totality‟ of domestic industry and not simply on one part of the domestic industry. 130
The AB in EC-Fasteners (China) found that the EU authorities violated Art. 4.1 of the
ADA by defining „domestic industry‟. It provided that:
“A major proportion” should be understood as a proportion

defined by reference to the total production of domestic
producers as a whole. „A major proportion‟ of such total
production will standardly serve as a substantial reflection
of the total domestic production…In our view, the above
interpretation is confirmed by the purpose of defining the
domestic industry under the Anti-Dumping Agreement. As
footnote 9 to Article 3 of the Anti-Dumping Agreement
indicates, “the domestic industry forms the basis on which
an investigating authority makes the determination of
whether the dumped imports cause of threaten to cause
material injury to the domestic producers…‟ a major
proportion of the total domestic industry defined on the
basis is capable of providing ample data that ensure an
accurate injury analysis…to ensure the accuracy of an
injury determination, an investigating authority must not
act so as to give rise to a material risk of distortion in
defining the domestic industry, for example, by excluding a
whole category of producer of the like product…131
128
Mitsuo Matsushita, Thomas J. Schoenbaum & Petros C. Mavroidis, The World Trade Organization: Law,
Practice and Policy (2nd ed. OUP 2006) 421.
129
ADA (n 30) art. 4.1(i).
130
Matsushita (n 162) 422.
131
WTO, European Communities –Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from
China- Report of the Appellate Body (15 July 2011) WT/DS397/AB/R [412-414] (EC Iron Steel Fastners
AB).
38
Flowchart 3.5: Determination of Injury: Legal Requirements
Article 3.1 Article 3.2 Article 3.3 Article 3.4 Article 3.5 Article 3.6 Article 3.7 and 3.8
• Fundamental • Determination • Cumulation: • Evaluation of • Determination

• Effect of • Determination
substantive of volume and Requiremens to relevant of causal link dumped of the threat of
obligation to price effects on investigate economic between the imports shall be material injury
objectively the domestic imports from factors to assess injury and the assessed in and special care
examine and industry by the more than one the impact of dumped relation to the while assessing
ascertain the like domestic country. dumped imports. domestic the same.
positive dumped products on the
• Non-attribution production of
evidence. imports in the domestic analysis to the like product
importing industry. assess that the when available
country. impact of other data permit the
factors is not separate
attributed to the identification of
dumped that production
products. on the basis of
the mentioend
criterias.
The above-mentioned legal requirements are discussed substantively in the following sub-
sections.
3.1.1. Evidentiary standards for injury

3.1.1.1. Objective examination & positive evidence
Art. 3.1 of the ADA provides that the injury shall be based on a positive evidence and involve
an objective examination of the:
 Volume of dumped imports and the effect of such imports on prices in the domestic market for
the like product;
 Consequent impact of these imports on domestic producers of the like domestic product.
The AB and Panels have shown that Art. 3.1 of the ADA provides the more detailed
obligations with respect to determination of injury set out in the subsequent paragraphs of Art.
3.132 Art. 3.1 of the ADA provides that IAs must ensure that a determination of injury is made
on the basis of positive evidence and an objective examination of the volume and effect of
dumped imports.
However, Art. 3.1 of the ADA does not prescribe a particular methodology that must be
followed while making that determination. An injury determination made in conformity with
132
ibid [90]. See WTO, Mexico- Anti-Dumping Investigation of High-Fructose Corn Syrup (HFCS) from the
United States- Report of the Panel (28 January 2000) WT/DS132/R [7.119] (High Fructose Corn Syrup).
39
the requirements of Art. 3.1 of the ADA is one of the prerequisites for the establishment of a
WTO Member‟s right to impose definitive anti-dumping measures.
 Positive Evidence
The AB in US-Hot-Rolled Steel considered that the requirement of positive evidence implied
that the evidence must be objective and verifiable.133 It stated that the term „positive evidence‟
relates to the quality of the evidence that authorities may rely upon in making a determination.
It further added, that the term means that the evidence must be of an affirmative, objective
and verifiable character, and that it must be credible.
 Objective Examination
While the term “positive evidence” focuses on the facts underpinning and justifying the
injury determination, the term “objective examination” is concerned with the investigative
process itself. 134 The term “examination” is the way in which the evidence is gathered,
inquired into and subsequently, evaluated. 135 Thus, this term relates to the conduct of the
investigation generally. The AB in US-Hot Rolled Steel stated that an objective examination
requires IAs to assess the effects of the dumped imports in an objective manner, without
favouring the interests of any interested party in the investigation.136
The qualifying term, “objective”, indicates that the “examination” process must conform
to the dictates of the basic principles of good faith and fundamental fairness.137 It stated that
an “objective examination” requires that the domestic industry and the effects of dumped
imports, be investigated in an unbiased manner, without favouring the interests of any
interested party, or group of interested parties in the investigation.
3.1.1.2. Significant volume of dumped imports and the price effects on the domestic
industry
Art. 3.2 of the ADA provides that an IA shall consider whether there has been a significant
increase in dumped imports, either in absolute terms or relative to production or consumption
in the importing member with regards to the volume of the dumped imports. It further
provides that as regards the effects of the dumped imports on prices of the like domestic
product, the IA shall consider:
 Whether there has been a significant price undercutting by the dumped imports as
compared with the price of a like product of the importing Member, or
 Whether the effect of such imports is otherwise to depress prices to a significant
degree or
 Prevent price increases (price suppression), which otherwise would have occurred,
to a significant degree.
133
134
ibid [193].
135
ibid [204].
136
ibid [193].
137
ibid [194].
40
It ends on the analysis of volume and price factor by stating that none of the several of these
processes gives a decisive guidance.
The important constituents of the obligation laid in Art. 3.2 are discussed below.
 “Shall consider” price and volume effects
It should be noted that Art. 3.2 of the ADA mentions that the IA shall consider price and
volume effects. The usage of this language is meant to leave an appropriate discretion to the
IA for an efficient and appropriate assessment of factors leading to the injury determination.
However, such a discretion is not a liberty to negate the importance of factors mentioned in
the ADA for the purposes of providing a reasonable and satisfactory basis to impose ADD.
The AB in China-GOES provided that the word „consider‟ in Art. 3.2 of the ADA
obliges the IA to take into account the mentioned elements in reaching its decision to impose
ADD. It provided that the word „consider‟ does not impose an obligation to make a definitive
determination but to consider the impact of volume and price effects of the dumped imports.
Such a consideration is bound by the overarching obligation under Art. 3.1 to base the
decisions on positive evidence and examination of the relevant evidence in an objective
manner. It ended by providing that the obligation to consider than to make a definitive
determination, does not change the subject matter which is required for consideration under
Art. 3.2.138
 Injury Examination and Like Product
Identification of the like product is also central to injury examination. Both Arts. 3.1 and 3.2
of the ADA mention that the volume and price effect analysis are relevant only for like
products. Prices are comparable only when the products are like.139 Before beginning with the
price and volume effects under Art. 3.1, the IA needs to ascertain price comparability of the
products at issue.140
The Panel in China-X-Ray cited the AB in China-GOES to state that Art. 3.2 of the ADA
involves a comparison of prices of dumped imports with the prices of the like domestic
product.141 The AB in China-GOES stated:
An investigating authority must consider “whether there

has been a significant price undercutting by the dumped or
subsidized imports as compared with the price of a like
product of the importing Member. This with regard to
138
WTO, China – Countervailing and Anti-Dumping Duties on Grain Oriented Flat-rolled Electrical Steel
from the United States- Report of the Appellate Body (12 October 2012) WT/DS414/R [130-131] (US
GOES).
139
WTO, China – Definitive Anti-Dumping Duties on X-Ray Security Inspection Equipment from the European
Union- Report of the Panel (26 February 2013) WT/DS425/R [7.41] (China X-Ray).
140
ibid [7.41].
141
ibid.
41
significant price undercutting, Article 3.2…expressly
establishes a link between the price of subject products and
that of like domestic products, by requiring a comparison
be made between the two.142
…We do not see how a failure to ensure price

comparability could be consistent with the requirement
under Article 3.1…that a determination of injury be based
on positive evidence and involve an objective examination
of inter alia, the effect of subject imports on the prices of
domestic like products…We therefore see no reason to
disagree with the Panel when it stated that as soon as price
comparisons are made, price comparability necessarily
arises as an issue.143
The following section discusses in detail the two basic conditions which has to be objectively
and positively examined by the IAs.
 How to examine „Volume Effects‟?
Art. 3.2 of the ADA provides that an IA needs to consider whether there has been a
significant increase in the dumped imports. Such increase could either be in absolute terms or
in relative terms to production or consumption in the importing member. The text of the ADA
is clear that the consideration of “dumped imports” for the purposes of making an injury
determination is consistent with Arts. 3.1, 3.2, 3.4 and 3.5 of the ADA.144 The ADA, however,
does not set the criteria for examining whether the increase is “significant” or the time period
that should be identified for conducting such as an analysis. By convention, most IAs take a
three year period prior the period of investigation for conducting the volume and price
analysis. This period is called as the “injury investigation period” in trade remedy parlance.
An antidumping investigation may be initiated against several countries. When dumped

imports come from various sources at the same time, there is a need to examine the aggregate
effect of the imports from all the countries identified as dumping the product under
investigation. Art. 3.3 provides the framework for cumulative assessment of injury.
Cumulative Assessment of Injury
Article 3.3 of ADA
Where imports of a product from more than one country are simultaneously
subject to anti-dumping investigations, the investigating authorities may
cumulatively assess the effects of such imports only if they determine
that (a) the margin of dumping established in relation to the imports from
142
US-GOES (n 139) [136].
143
ibid [200].
144
EC-Bed Linen (n 55) [6.133].
42
each country is more than de minimis as defined in paragraph 8 of Article 5
and the volume of imports from each country is not negligible and (b) a
cumulative assessment of the effects of the imports is appropriate in light of
the conditions of competition between the imported products and the
conditions of competition between the imported products and the like
domestic product.
De minimis under the ADA is provided to be less than 2% as a percentage of exports.145

The Panel in the EC- Bed Linen observed that a proper calculation will lead to the conclusion
that when a producer is attributed a zero or de minimis margin, the imports attributable to
such a producer/exporter should not be considered as dumped for purposes of injury analysis.
The AB on a review of the Panel‟s analysis stated that “if a producer or exporter is found not
to be dumping, all imports from that producer or exporter must be excluded from the volume
of dumped imports”.146
Such a view is also supported by logic behind the imposition of anti-dumping measures.
It is not in doubt that no ADDs can be imposed in the absence of a finding of dumping.
Similarly, Art. 5.8 of the ADA provides that there shall be an immediate termination in cases
where the authorities determine that the margin of dumping is de minimis and no anti-
dumping duties can be imposed on such imports. By the same logic, the concept of
cumulation will have to be carefully applied while conducting antidumping investigation.
 Examining Price Effects
An IA is also required to assess price effects of the dumped imports. Price effect analysis
involves assessing whether the dumped imports lead to any of the three mentioned
consequences:
ʘ Price suppression: Price suppression refers to the situation where prices of the domestic like
products in terms of the amount of money set for sale of the product or the value or worth of
the product either are prevented or inhibited from rising or the increase evidenced is less than
it otherwise would have been.147 Evidence of cost-price squeeze could be an indication of
price suppression
ʘ Price depression: Price depression refers to the situation where prices of the domestic like
products are pressed down or reduced.148
ʘ Price undercutting: Price undercutting is a situation where imported products are priced
below like domestic products.149
145
ADA (n 17) art. 5.8.
146
WTO, European-Communities –Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India-
Report of the Appellate Body (1 March 2001) WT/DS141/AB/R [115] (EC-Cotton AB).
147
WTO, United States- Subsidies on Upland Cotton- Report of the Appellate Body (5 March 2005) [423-427]
(US Upland Cotton).
148
ibid.
149
ibid.
43
Price Suppression
Domestic prices of the product at issue are Price Depression
inibited or suppressed from risising. or the The domestic prices of the product at issue
increase is less than otherwise would have are pressed down or reduced.
been.
Price Undercutting
The price of the product at issue is set below
the domestic like products.
Art. 3.2 of the ADA does not set forth any particular methodology for conducting a price
analysis and deciding whether price undercutting, depression or suppression has been caused
by dumped imports.
The Panel in China-X-Ray provided that the obligations in Art. 3.2 of the ADA must be
read in light of the requirement to consider whether there has been a significant price
undercutting, price suppression or price depression. 150 The requirement to consider price
effects does not require a definitive determination regarding the existence of price
undercutting, price suppression or price depression. The consideration must involve an
objective examination of positive evidence.151
3.2. Injury factors
The injury examination requires an evaluation of the impact of dumping on domestic

producers of a majority of like products. Art. 3.4 of the ADA provides that an examination of
the impact of the dumped imports on the domestic industry concerned shall evaluate all
relevant economic factors and indices having a bearing on the state of industry and an actual
or potential decline in:
150
China X-Ray (n 140) [7.293].
151
ibid.
44
 Sales  The magnitude of the margin of
 Profits dumping
 Output  Actual and potential negative effects
 Market share on cash flow
 Productivity  Inventories
 Return on investments  Employment
 Utilization of capacity  Wages
 Factors affecting domestic prices  Growth
 Ability to raise capital or investments
The AB in EC-Pipe Fittings provides that Art. 3.4 of the ADA does not impose any
obligation as to the manner in which the mentioned factors should be examined. It is
sufficient under Art. 3.4 to implicitly examine the factors.152 Art. 3.4 of the ADA requires an
IA to carry out a reasoned analysis and a thorough evaluation of the state of industry.
The list of factors included in Art. 3.4 of the ADA seems to combine both indicators of
the state of the domestic industry and factors which may be relevant in resolving the
causation question. According to the Panel in Egypt-Steel Rebar, Art. 3.4 of the ADA does
not require a full causation analysis and stated that as a whole, these factors are more in the
nature of effects than causes.153 Finally, an IA must examine all relevant economic factors
and not only those mentioned in Art. 3.4 of the ADA.
The Panel in US-Hot-Rolled Steel stated that it is necessary for the IA to evaluate data
and not merely mention it in its analysis.
„Evaluation‟ according to the Panel is the putting of data in

context and assessing such data both in their internal
evolution and vis-a-vis other factors examined. Only on the
basis of the evaluation of data in the determination would a
reviewing panel be able to assess whether the conclusions
drawn from the examination are those of an unbiased and
objective authority.154
The Panel in EC-Pipe Fittings provided that the findings of previous Panels and the ABs
is that the economic indicators‟ list under Art. 3.4 contains a mandatory- rather than
illustrative – list of factors and that all of the factors explicitly listed in Art. 3.4 must be
addressed in every investigation. 155 Each factor should be explicitly and independently
addressed in each determination on the basis of the precise terms used in the relevant
provision.156 Such would be highly desirable as it would increase an IA‟s confidence that all
factors were considered.157 However, there is no such obligation in text of the provision and
consequently it is not a required approach to an analysis under Art. 3.4. The provision
152
153
WTO, Egypt- Definitive Anti-Dumping Measures on Steel Rebar from Turkey-Report of the Panel (8 August
2002) WT/DS211/R [7.62] (Turkey Steel Rebar).
154
ABR, Hot Rolled Steel, rep (n 33) [7.232].
155
EC – Malleable Cast (n 95) [7.304].
156
ibid at [7.310].
157
ibid at [7.310].
45
requires substantive, rather than a compulsory formal compliance. 158 The requirements of this
provision is satisfied where it is at least apparent that a factor has been implicitly
addressed.159 It may be noted that there is no requirement that the domestic industry might
show injury in respect of all the 15 injury parameters. After evaluating each of these
parameters, an IA is required to provide an overall assessment of the domestic industry,
including the weight attached to the injury parameters.
3.3. Determination of Causation
Art. 3.5 of the ADA requires the IA to demonstrate that dumped imports are, through the
effects of dumping, as set forth in Arts. 3.2 and 3.4 of the ADA are causing injury within the
meaning of the ADA.160 Accordingly, Art. 3.5 provides that the volume and price effects of
the imports needs to be assessed to establish a causal link between the imports and the injury
to the domestic industry. Further, it emphasises that the demonstration of a causal
relationship be based on an examination of all relevant evidence.
An IA‟s determination of the causal relationship between the imports of the product at
issue and injury must be reasoned and adequate.161 In making the determination, the IA is
required to demonstrate a relationship of cause and effect, such that the products at issue are
shown to have caused the injury to the domestic industry. 162 The „other‟ factors which may
also have caused injury is no bar to establishing the causal relationship, provided that the
product at issue has contributed to the injury.163 As the Panel in China-Autos (US) provided
that the subject imports need not be “the” cause of the injury suffered by the domestic
industry, provided they are “a” cause of such injury. 164 However, the other factor which
might have caused simultaneous injury should be identified and separated; as the injury
caused on account of these factors shall not be attributed to dumping.
3.4. Non-attribution
Art. 3.5 of the ADA, imposes a dual obligation on an IA, which must ensure that:
 Injury is attributed to dumped imports; and

 Injury is not attributed to factors other than dumped imports.
The second obligation is commonly known as the non-attribution requirement. It simply

means that when assessing factors causing the injury, the IAs also need to consider whether
factors other than those caused by the dumped products are also causing injury at the same
period of time. As such injury caused by factors other than the dumped imports should not be
wrongly attributed to the dumped goods. An indicative list of other factors is provided in Art.
3.5 of the ADA:
158
ibid.
159
ibid.
160
China X-Ray (n 140) [7.251].
161
WTO, China – Anti-Dumping and Countervailing Duties on Certain Automobiles from the United States-
Report of the Panel (23 May 2014) WT/DS440/R [7.322] (AD CVD Automobiles Panel).
162
ibid [7.323].
163
ibid [7.322].
164
ibid.
46
 Volume and prices of imports not sold at dumped prices
 Contraction in demand or changes in the patterns of consumption
 Trade restrictive practices of and competition between the foreign and domestic producers
 Development in the technology
 Export performance and productivity of the domestic industry
Such is not an exhaustive list.165 Any factor raised by an interested party can be the
„other factor‟ which needs to be assessed as to its impact on the domestic industry during the
investigating period.166
The AB in China- Autos (US) provides:
We emphasize that the particular methods and approaches

by which WTO Members choose to carry out the process of
separating and distinguishing the injurious effects of
dumped imports from the injurious effects of the other
known causal factors are not prescribed by the Anti-
Dumping Agreement. What the Agreement requires is
simply that the obligations in Article 3.5 be respected when
a determination of injury is made.167
There is no requirement to determine the impact of the other factors individually or

collectively as it depends upon subjective facts of each case. 168 Once injury has been shown
to have been caused, at least partially, by dumped imports, the whole injury analysis becomes
moot as ADDs will be imposed to counteract the dumping margin and not the resulting injury
for the domestic industry producing the like product.169
3.5. Threat of Injury
The term „injury‟ in the ADA refers to both material injury and threat of material injury to a
domestic industry: not only actual material injury but also threat of injury can be addressed
through ADA. Art. 3.7 of the ADA sets forth the requirements that an IA has to comply with
in the case of a threat of injury examination:
 A determination of threat injury must be based on facts and not merely on allegations,
conjecture or a remote possibility;
 The expected injury must be imminent and clearly foreseen;
 The following factors needs to be considered by the IA
ʘ whether dumped imports have been increasing at a significant rate which indicates
the likelihood of substantially increased importation;
165
166
Malleable Cast Iron Tube (n 95) [7.359].
167
168
European Communities- Anti-Dumping Duties on Malleable Cast Iron Tube or Pipe Fittings from Brazil-
Report of the Appellate Body (n 67) [191-192].
169
47
ʘ whether there is sufficiently freely disposable or an imminent substantial increase in
the capacity of the exporter indicating a likelihood of substantially increased dumped
exports;
ʘ whether the prices of the dumped imports are such that they have a significant price
depressing or suppressing effect on domestic prices and would therefore likely
increase demand for further imports; and
ʘ The state of the investors of the subject product.
The list of factors mentioned in Art. 3.7 is not an exhaustive list, but only an indicative
list.170 Art. 3.7 clearly mentions that a determination of threat of injury should not be based
on pure conjecture or remote possibility but on facts. The AB in Mexico-Corn Syrup made an
important comment on the said clause by stating that:
In our view, the „establishment‟ of facts by investigating

authorities includes both affirmative findings of events that
took place during the period of investigation as well as
assumptions relating to such events made by those
authorities in the course of their analysis. In determining
the threat of material injury, the investigating authorities
will necessarily have to make assumptions relating to the
„occurrence of future events‟ since such future events “can
never be definitively proven by facts”. Notwithstanding this
intrinsic uncertainty, a proper establishment of facts in a
determination of threat of material injury must be based on
events that, although they have not occurred, must be
„clearly foreseen and imminent‟, in accordance with Article
3.7 of the Anti-Dumping Agreement.171
Therefore, the IA is permitted to have recourse to Art. 3.7 to justify imposition of ADD
when the injury is imminent in a short period of time and is not a speculative allegation. Such
is supported by Art. 3.8 of the ADA which provides that in cases where there is a threat of
injury, AD measures shall be imposed after special care. According to the Panel in US-
Softwood Lumber VI, this requirement implies a degree of attention over and above that is
required of investigating authorities in all anti-dumping and countervailing duty injury
cases.172
3.5.1.1. Double Remedies
The WTO agreements, along with the WTO Accession Protocols of China and Vietnam, do
not prohibit the concurrent application of CVD and AD.173 However, there are some serious
170
ibid.
171
WTO, Mexico- Anti-Dumping Investigation of High-Fructose Corn Syrup (HFCS) from the United States-
Report of the Appellate Body (22 October 2001) WT/DS132/R [136] (High Fructose Corn Syrup).
172
US-Softwood V (n 67) [7.33].
173
Brian D. Kelly, „The Offsetting Duty Norm and the Simultaneous Application of Countervailing and
Antidumping Duties‟ [2011] 11 GLOBAL ECON.J. 1524, 1524. See also Matthew Ryan Kelly, „Resolving
the Double Remedy Dispute: A Critique of the WTO Appellate Body‟s Decision in United States –
48
concerns regarding the AD and CVD remedies. As cumulative imposition of AD and CVD
on the same product which is simultaneously prosecuted may lead to double remedies or
double imposition of duties to remedy the same injury. Therefore, the drafters of GATT
provided Art. VI (5) GATT 1994 which states:
Article VI (5) GATT 1994
No product shall be subject to both anti-dumping and countervailing

duties for the purpose of dealing with one and the same situation
arising or from export subsidization.
The AB in US-Anti-Dumping and Countervailing Duties (China)

provided that the term “„same situation‟ is central to an
understanding of the rationale underpinning the prohibition
contained in Article VI: 5, which sheds light on the reason why, in
the case of domestic subsidies, an express prohibition is absent.”174
It is provided that in the case of an export subsidy there will be a pro rata reduction in
the export price of the product but there will be no effect on the domestic sales price of the
same product.175 It means that the subsidy will lead to increased price discrimination and a
higher margin of dumping. 176 The AB provided that in such situation, subsidization and
dumping are the „same situation‟ and the application of cumulative duties will amount to
double remedies.177
For example, in a case scenario involving export subsidy and dumping, the subsidy
granted by the government to the industry is $10 and the normal value, i.e. the domestic sale
price of the product in the exporting country is $50 which does not reflect any subsidy as
subsidy has been granted only for the exported goods. Further, the export price is $30 which
reflects the decrease of $10 (the subsidy value). When an investigating agency calculates the
dumping margin (i.e. NV-EP) the value of subsidy reflected in the EP is not so reflected in
the NV which leads to an inflated dumping margin. In such a situation, if the investigating
agency after imposing ADD, attempts to impose CVD on the same product; it will lead to
double imposition of duties i.e. double remedies.
Table 3.1: Export Subsidies
In the case of an export subsidy

Subsidy granted $10
Export Price $30
Normal Value $50
Definitive Anti-Dumping and Countervailing Duties on Certain Products from China‟[April 2013] Seattle
University School of Law <http://ssrn.com/abstract=2273938> accessed 25 July 2014.
174
WTO, United Sates- Definitive Anti-Dumping and Countervailing Duties on Certain Products from China-
Report of the Appellate Body(11 March 2011) WT/DS379/AB/R [567-569] (China Certain Products).
175
ibid.
176
ibid.
177
ibid.
49
Dumping Margin $50-$30= $20 includes the subsidy granted ($10)
$20 which is reflected in the export price.
NV-EP= DM
Therefore, Art. VI (5) of the GATT 1994 expressly prohibits simultaneous imposition of
AD and CVD on the same product from the same country in the case of export subsidization
when the NV is based on the standard method of domestic sales transaction.
However, another plausible situation arises whereby cumulative application of AD and

CVD measures will lead to double remedies. Art. VI: 1(a) and second ad note to Art. VI: 1
GATT provides the legal basis for alternative methods to calculate NV in the case of Non-
Market Economies (NME). In the case of domestic subsidization, it is in such situations that
there is possibility that the concurrent application of AD and CVD on the same product could
lead to „double remedies‟.178
Note that under the NME methodology, the IAs calculate the dumping margins under
which the export price is compared to a normal value which is based on „alternative‟ costs or
prices from a third country. The rationale behind the NME methodology is that prices and
costs of production in the exporting country are distorted as a result of government
intervention in the economy and therefore it does not reflect market economy conditions.
In such a situation, it is considered that neither the sales prices of the NME producer in
the domestic market of the exporting country nor a normal value constructed on the basis of
that producer‟s actual costs of product would offer a reliable source of comparison to
calculate a margin of dumping. Normally, in practice, the IA constructs the normal value on
the basis of cost of production in a third country market economy.
The dumping margin calculated under the NME methodology – i.e., the difference
between the constructed normal value and the export price reflects price discrimination
caused by dumping as well as the economic distortion caused by subsidization.179 Therefore,
the dumping margin calculated under an NME methodology generally is higher than would
otherwise be the case. As it results from a comparison of the export price to surrogate NV
wherein the effects of subsidy is reflected in the export price but not in the NV as it is
constructed from the unsubsidized costs of production, rather than to the producer‟s actual,
subsidized (or distorted) cost of production.180
The Panel while substantiating the process leading to

double remedies provided that “in such a situation to the
extent that part of dumping margin found to exist resulted
from subsidies provided in respect of the exported good,
the ADD calculated under an NME methodology will
remedy both dumping and subsidization. In this sense, it
case be said that if countervailing duties are simultaneously
applied to imports of the same good, the subsidy is likely to
178
ibid [569].
179
ibid [14.69].
180
ibid.
50
be “offset” more than once. i.e., once through the
antidumping duties and again at least partially through the
countervailing duty. For this reason, we consider that the
concurrent imposition of antidumping duties calculated
under an NME methodology and of countervailing duties
creates the potential for imposition of a „double
remedy‟.”181
Hypothetical
Exporting Country Third Market Economy Importing

Country
Taking our NME example

further, suppose the US
Department of Commerce
wants to impose cumulative AD and CVD on the dumped Chinese
laptop imports coming into the US. The Chinese producer in China receives a subsidy of
$100 on a laptop; the Chinese producer has a normal value of $400; the producer sells in the
US‟ market at $300; the producer‟s export price is $100 lower than its domestic prices.
In this case the USDOC would continue to set CVD at $100 because CVD is equal to the
subsidy. The USDOC will not use China‟s NV because it considers the prices and costs in the
NMEs to be unreliable. As we discussed in the previous section on NME, that NV in the
NME is based on surrogate costs from a third country which is India in this case. The NV in
the surrogate country is $500 which means that the producers in India do not enjoy $100
subsidy as compared to China. Further, given that the export price of the product at issue is
$200 that dumping margin comes out to be $300. The USDOC will set the ADD at $300.
Such ADD unlike the ADD applied to a market economy, does not create a level playing
field because the export price reflects the subsidy while the similar effects of subsidy is
removed from NV due to the use of surrogate value.182
Table 3.2: Double Remedies in the case of NME Methodology for NV Calculation
181
ibid [14.70].
182
John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed.
1997) 335.
51
In the case of NME methodology to calculate NV
Subsidy granted $100 CVD: $100
Actual Price (DS) China $400
NV Based on cost structure in a market economy $500

(India) as a representative to China. It reflects
the fair market price of the product in a market
economy.
EP Export Price charged by China in the US for $200
its laptops. It reflects the subsidy granted
$100.
Dumping Margin NV-EP=DM $300 AD: $300
$50-$20= $30
Source: Adopted from Kelly (2013)
Table 3.3: Domestic Industry Standing - Calculation of Percentage of Domestic Producers’

Approval of Proceeding
Group Description Output
A Producers submitting the application 30

B Producers expressing support for the 30
application but not involved in submitting
it
C Producers expressing opposition to the 50
application
D Producers not expressing an opinion about 60
the application
Total – 170
A+B Domestic producers supporting the application
A+B+C Domestic producers who have expressed an opinion about the
application, either in favour or against
A+B+C+D All domestic producers
Test 1
50% Support from Producers Expressing an Opinion
A and B are the domestic producers supporting the application. A, B and C are the producers expressing an opinion on the application.
Therefore (A+B) must be more than 50% of (A+B+C) for the first prong of the Article 5.4 test to be met, as it is in the example above:
((A+B)/ (A+B+C))
(60/110) = .5454 =54.54%
Test 2
Express Support Must Constitute 25% of the Total Production of the Domestic Industry
(A+B) represents the production of the segment domestic industry that has expressed support. (A+B+C) represented the entire domestic
output. Because 60 is greater than 25 percent of 170, the second prong of the Article 5.4 test is met:
52
(A+B)/ (A+B+C+D)
(60)/(170) = .3529 = 35.29%
4. Procedural Requirements
4.1. Introduction
Relevant Articles Substance

Article 5 Initiation and subsequent investigation, including the standing determination
Article 6 Evidence, including due process rights of interested parties
Article 7 Provisional Measures
Article 8 Price Undertakings
Article 9 Imposition and collection of anti-dumping duties
Article 10 Retroactivity
Article 11 Duration and review of anti-dumping duties and price undertakings
Article 12 Public notice and explanation of determinations, pertaining to initiation, imposition of
preliminary and final measures
Article 13 Judicial review
The general tendency of the Appellate Body and Panels have been to interpret these
provisions under the ADA, strictly.
4.2. Application
There are two methods under Article 5.2 of the ADA to initiate an anti-dumping
investigation: either by a written application by or on behalf of the domestic industry, or on
the initiative of the investigating authority. As regards the written application by or on behalf
of the domestic industry, the Agreement requires that the application include evidence of
dumping, injury and a causal link between the dumping and injury. Unsubstantiated
applications are insufficient to initiate the investigations. The Agreement provides detailed
provisions regarding the information to be included in the application. Such information
includes inter alia the identity of the applicant; a description of the allegedly dumped product;
the name(s) of the country of origin or export; the identity of each known exporter;
information on export prices; and, finally, information on the evolution of the volume of the
allegedly dumped imports and the effects of these imports on prices of the like product in the
domestic market.
4.3. Pre-initiation Examination
Article 5.3 of the ADA provides the obligation of the importing Member authorities to
examine before initiation of the investigation, the accuracy and the adequacy of the evidence
in the application. However, as Article 5.3 does not provide further details on the nature of
this examination, it is difficult for Panels to judge whether importing Member authorities
have complied with Article 5.3.
4.3.1. Standing Determination
53
Under Article 5.4 ADA, provides that the IA shall examine on the basis of the degree of
support for or against the initiation of investigation, whether the application expressed by the
domestic producers of the like product has been made by on behalf of the domestic industry.
GATT Panels on several occasions held that failure to properly determine standing before
initiation is a fatal error which cannot be repaired retroactively in the course of proceedings.
It should be noted that an application is said to be made by or on behalf of the domestic
industry if it is supported by domestic producers whose collective output constitutes more
than 50% of the total production of the like product produced by that portion of the domestic
industry expressing either support for or opposition to the application. There can be no
standing if the collective output of the domestic producers in support of the application is less
than 25% of the total output. Such a test is also called 50-25% test.
4.3.2. Notification
Article 5.5 of the ADA expresses a preference for confidential treatment of application prior
to initiation of an investigation. On the other hand, before initiation, the importing Member
authorities must notify the government of the exporting Member. The ADA does not contain
rules on the form of such notification.
4.3.3. De minimis/Negligibility Thresholds
According to the Article 5.8 of the ADA, an anti-dumping investigation shall be immediately
terminated if the IA determine that the margin of dumping is within the de minimis standards
or that volume of dumped imports, whether actual or potential, or injury is negligible. The
ADA further provides numerical limits for the de minimis standards as well as for negligible
imports.
A dumping margin is to be considered within the de minimis standards if it is less than

2% expressed as a percentage of the export price. A volume of dumped imports is to be
considered negligible if it accounts for less than 3% of the imports of the like product in the
importing country. However, if countries that individually account for less than 3% of the
imports of like product, these imports shall not be considered negligible. The de minimis rules
might operate in favor of developing countries, because there are many instances where the
exports of developing countries are negligible in relation to the imports of developed
countries.
4.3.4. Deadlines
Art. 5.10 provides that investigations shall normally be concluded within one year and in no
case more than 18 months, after their initiation. The 18 months‟ deadline seems absolute.
4.3.5. Interested Parties
54
The parties most directly affected by an anti-dumping investigation are the domestic
producers, foreign producers and exporters and their importers. However, the government of
the exporting country and representative trade associations also qualify. Art. 6.11 provides
that other domestic or foreign parties may also be included as interested parties by the
importing country Member.
4.4. Due Process Rights
Art. 6 and 12 ADA contain various due process rights of interested parties and the Appellate
Body emphasized their importance in Thailand- H-Beams:
…Article 6…establishes a framework of procedural and due

process obligations which, amongst other matters, requires
investigating authorities to disclose certain evidence, during the
investigation, to the interested parties. Article 6.2 requires that
parties to an investigation “shall have a full opportunity for the
defence of their interests”. Article 6.9 requires, that, before, a final
determination is made, authorities shall “inform all interested
parties of the essential facts under consideration which form the
basis for the decision”……In a similar manner to Article 6, Article
12 establishes a framework of procedural and due process
obligations concerning, notably, the contents of a final
determination…Article 12, like Article 6, sets forth important
procedural and due process obligations.
4.4.1. Public Notices and Explanation of Determinations
Art. 12 of the ADA lays down detailed rules concerning public notice by an IA of initiation
of an investigation, preliminary and final determinations, and price undertakings. Upon
initiation of an investigation, countries the products of which are subject to investigation as
well as interested parties shall be notified, and a public notice shall be made. The same
parties shall be notified in the case of preliminary and final determinations and price
undertakings.
The ADA provides detailed provisions regarding the content of a public notice of
initiation of investigation. The information may be provided in the notice itself or separate
report is provided which must be readily available to the public. However, where a separate
report is provided it must be at least incorporated by reference in the public notice. With
respect to the notice of preliminary and final determinations and price undertakings, whether
regarding the imposition or the termination of such measures, the ADA provides that notices
of the above shall indicate adequately the findings and conclusions reached on all issues of
fact and law considered material by IAs.
The ADA lays down detailed provisions regarding the content of a public notice of the
imposition of a provisional measure; in particular, such a notice (or separate report) should
explain adequately preliminary determinations of dumping and injury and matters of fact and
55
law which have led to decisions regarding arguments. A public notice of conclusion or
suspension of an investigation in the case of a positive determination that provides for the
imposition of a definite duty or the acceptance of price undertakings should contain, or
should provide through a separate report, all relevant information on matters of fact and law,
reasons which have led to the imposition of a final measure or the acceptance of a price
undertaking, and reasons for decisions regarding relevant arguments or claims made by
exporters or importers. When an investigation is terminated or suspended as a result of the
acceptance of a price undertaking, the public notice shall include the non-confidential part of
the price undertaking. It is worth mentioning that the rules regarding public notice applies
also to reviews.
A public notice of an investigation shall contain, adequate information on the following:
a) Name of the exporting country/countries and product involved;

b) The date of initiation of the investigation;
c) The basis of which dumping is alleged in the application;
d) A summary of the factors on which the allegation of injury is based;
e) The address of which representations by interested parties should be directed;
f) The time-limits allowed to interested parties for making their views known.
…sufficiently detailed explanations for the preliminary determinations on dumping and injury and shall refer to
the matters of fact and law which have led to arguments being accepted or rejected. Such a notice or report
shall…contain in particular.
(i) Names of the suppliers, or when this is impracticable, the supplying countries involved.
(ii) A description of the product which is sufficient for customs purposes;
(iii) The margins of dumping established and a full explanation of the reasons for the methodology used in
the establishment and comparison of the export price and the normal value under Article 2;
(iv) Considerations relevant to the injury determination as set out in Article 3;
(v) The main reasons leading to the determination.
…all relevant information on the matters of fact and law and reasons which have led to the imposition of final
measures…In particular, the notice or report shall contain the information described in subparagraph 2.1, as well as the
reasons for the acceptance or rejection of relevant arguments or claims made by the exporters and importers, and the
basis for any decision made under subparagraph 10.2 of Article 6. Conceptually, Article 12 violations are often linked
to substantive violations. If, for example, an exporter argues that the injury suffered by the domestic industry was not
caused by dumped imports, but by its lack of productivity and the investigating authority does not examine this
argument, the authority logically violates both Article 3.5 (the substantive obligation) and Article 12.2.2 (the
procedural obligation).
While some panels have followed this logic, others, have not.
The difference between the two approaches is important because of the two-tiered WTO dispute settlement
system and the lack of remand authority of the Appellate Body. If, under the second approach, the Appellate Body
overturns the substantive violation, it may not be able to address the Article 12 violation because the Panel has not
reached a finding on this issue.
4.4.2. Confidentiality and disclosure of essential facts
Anti-Dumping investigations involves confidential and sensitive business information

because they require companies to submit the importing Member authorities pricing and
costing information in various markets. In order to have an optimal legal defense, interested
parties ideally need access to the confidential information submitted by the opposing side
(foreign producers and their importers versus domestic producers and vice versa).
56
On the other hand, the parties will be extremely reluctant to provide their own
confidential information to their competitors. Thus, to ensure fair play and equality of arms, a
balance must be struck between these competing interests and a legal system must give
opposing parties levels of access to information. Art. 6.5 of the ADA chooses for the
principle that information which is by its nature confidential or which is provided on a
confidential basis shall, upon good cause shown, be treated as confidential by the authorities
and shall not be disclosed without specific information of the party submitting it.
However, the authorities shall require interested parties providing confidential

information to provide meaningful non-confidential summaries thereof. Thus, whenever,
interested parties make a submission to the importing Member authorities, they should
generally prepare both a confidential and non-confidential version of the submission. The
confidential version, on the other hand, will be placed in the non-confidential file and can be
accessed by interested parties in the investigation.
4.4.3. Other Rights
Certain other important due process rights in Article 6 include the opportunity to present
evidence in writing (Art. 6.1), the right to receive the file (Article 6.12JO. 6.4), the right to
have a hearing and to meet opposing parties (confrontation meeting; Article 6.2), the right to
be timely informed of the essential facts under consideration which form the basis for the
decision whether to apply definitive measures (disclosure; Article 6.9), and the right to obtain,
subject to exceptions, an individual dumping margin (Article 6.10).
4.4.4. Facts Available/Administrative Deadlines
Art. 6.8JO. Annex II to the ADA provides that in cases where an interested party refuses
access to, or otherwise does not provide, necessary information within a reasonable period or
significantly impedes the investigation, preliminary and final determinations, affirmative or
negative, may be made on the basis of the facts available.
4.4. Provisional Measure
Provisional measures should preferably take the form of a security (cash deposit or bond),
may not be applied sooner than 60 days from the date of initiation and may not last longer
than four months or, on decision of the importing Member authorities, upon request by
exporters representing a significant percentage of the trade involved, maximally six months.
Where authorities examine the lesser authorities examine the lesser duty rule, these
periods may be six and nine months. It is important to note that Art. 7 of the ADA uses the
term „measures‟ and not „duties‟. Under the system of the ADA, at the time that the importing
Member decides to impose definitive duties, it must also decide whether to retroactively levy
provisional anti-dumping duties.
3.5. Price Undertakings
Anti-dumping investigations may be suspended or terminated without anti-dumping duties

where exporters offer undertakings to revise prices or cease exports to the area in question at
57
dumped prices so that the authorities are satisfied that the injurious effect of the dumping is
eliminated. Use of the word „may‟ indicates that authorities have complete discretion in this
regard and, indeed, some authorities are reluctant as a matter of policy to accept price
undertakings. Price undertakings are often the preferred solution by exporters. The Panel in
EC –Bed Linen ruled that acceptance of price undertakings may qualify as a constructive
remedy in cases involving developing countries.
3.6. Anti-dumping Duties
IAs can impose three types of remedies: provisional measures, price undertakings and
definitive or final measures. It is important to note before understanding the types of
remedies, that such remedies are limited to the magnitude of the allegedly unfair imports,
meaning that the importing nation impose massive import restrictions in response to an
allegedly unfair imports. Further, remedies are time bound.
58
PROVISIONAL MEASURES
• A provisional measure may take the form of a provisional duty or a security such as a
cash deposit or bond equal to the amount of the antidumping duty provisionally
estimated and not greater than the provisionally esitmated margin of dumping. Such a
measure may not be applied sooner than 60 days from the date of initiation of the
investigation. The period of the application of a provisional measure shall not exceed
four months, or six months upon the request of exporters representing a significant
percentage of trade. Such measures may be extended to six or nine months if a duty
lower than the marin of dumping would be sufficient to remove the injury.
PRICE UNDERTAKINGS
•Price undertaking means to revise prices or to cease exports which may b entered
into by the interested parties in lieu of imposition of an anti-dumping duty, whether
preliminary or provisional. The amount of price increase as a result of price
undertakings shall not be higher than necessary to eliminate the margin of dumping,
and when such increases are adequate to remove injury the Agreement makes a
preference that the amount of undertakings be less than the margin of dumping.
Such undertakings are voluntary and refusal to do so shall not prejudice the
concerned exporter or on the decisions of the authorities. The Agreement lays down
sanctions for violating the undertaking agreement. As the Agreement provides that
authrotiies concerned may take expeditious action, includin the imposition of
provisional measures, on the basis of best information available. Price undertakings
represent "grey-area measures" and may represent an opportunity of cartelization.
Such is preferred by comepting industries while the IAs find such an option
convenient to solve bilateral problems.
DEFINITIVE MEASURES
•Definitive measures refers to the imposition and collection of 'defined and targeted'
antidumping duties from the respective foreign producers exporting the said
product. The ADA lays down detailed provisions governing the same. The key rule
is that the amount of ADD should not exceed the margin of dumping.
4.7. Retroactivity
Generally, both the provisional measures and definitive measures are applied as of the date of
the determination of dumping, injury and causality. However, the ADA also provides for the
application of retroactive duties in specific circumstances. The rationale is to compensate for
the injury which might have occurred during the period of investigation or to offset actions
taken by exporters to avoid anti-dumping duties. However, after a final determination is made,
any provisional duties so collected given the threat of injury or material retardation, and the
final duty levied is less than the provisional collected the remaining amount needs to be duly
refunded to the exporters.
59
Art. 10 of the ADA provides for two types of retroactivity.
 First, where a final determination of injury (but not of a threat thereof or of a material
retardation of established of an industry) is made or, in the case of a final determination of a
threat of injury, where the effect of the dumped imports would, in the absence of the
provisional measures, have led to a determination of injury. Antidumping duties may be
levied retroactivity for the period for which provisional measures, if any, have been applied.
This type of retroactivity is often applied by the importing Members.
 Second a definitive anti-dumping duty may be levied on products which were entered for
consumption not more than 90 days prior to the date of application of provisional measures,
when the authorities determine for the dumped product in question that:
ʘ there is a history of dumping which caused injury or that the importer

was, or should have been, aware that the exporter practices dumping
and that such dumping would cause injury, and
ʘ the injury is caused by massive dumped imports of a product in a
relatively short time which in light of the timing and the volume of the
dumped imports and other circumstances (Such as a rapid build-up of
inventories of the dumped product) is likely to seriously undermine the
remedial effect of the definitive anti-dumping duty to be applied,
provided that the importers concerned have been given an opportunity
to comment.
The second type of retroactivity is seldom applied because the conditions are stringent.
4.8. Reviews
The ADA recognizes two types of reviews of anti-dumping measures.
 First, a review shall be conducted on the initiative of authorities or, after a reasonable period
of time since the imposition of a definitive anti-dumping duty, upon the request of an
interested party. Authorities shall examine whether the continued imposition of the duty is
necessary to offset dumping and/or whether the injury would be likely to continue to recur if
the duty were removed or modified. [Art. 10 of the ADA]
 Second, the ADA provides for a „sunset‟ review. According to this review, definitive
antidumping duties shall be terminated after five years from the imposition unless authorities
upon a duly substantiated request by or on behalf of the domestic industry within a reasonable
period of time prior to that date, that the expiry of the duty would be likely to lead to
continuation or recurrence of dumping and injury. Pending such a review, the duty remains in
force. [Art. 11 of the ADA]
The ADA sets 12 months for completing such reviews. The Draft Consolidated Chair
Texts of the AD and SCM Agreements further provide that any antidumping duty extended
beyond the end of the initial five-year period following a review in accordance with
paragraph 3 (sunset reviews) shall be terminated on a date not later than 10 years after the
date of the imposition of the ADD.
60
4.9. Judicial Review
Art. 13 of the ADA provides that Members, which do adopt anti-dumping legislation, must
also maintain independent judicial, arbitral or administrative tribunals or procedures for the
purpose or prompt review of administrative decisions regarding final determinations and
review of determinations.
4.10 AD Application on behalf of a third country
The ADA permits the pursuit of an AD action on behalf of a third country. Such an
application shall be supported by information showing that imports are being dumped and are
causing injury to the domestic industry in the third country. The government of the third
country shall provide assistance to authorities of the importing country. Authorities of the
importing country shall consider the effects of the alleged dumping on the industry concerned
as a whole in the third country, meaning that the injury is not to be considered in relation only
to the effect of the alleged dumping on the industry‟s exports to the importing country or on
the industry‟s total exports. The importing country shall decide whether or not to proceed
with the case. Nevertheless, the provisions relating to antidumping action on behalf of a third
country are of little practical relevance.
4.11. Special Provisions for Developing Countries
The Agreement contains special provisions regarding developing countries. According to Art.
15 of the ADA when imposition of ADD would affect the essential interests of developing
country Members, possibilities of constructive remedies must be considered. However,
definite obligations of the developed countries towards the developing countries seem to be
ambiguous. However, such provision was employed by the Panel in EC-Bed Linen Dispute,
by stating:
Pure passivity is not sufficient, in our view, to satisfy the

obligation to explore possibilities of constructive remedies,
particularly where the possibility of an undertaking has
already been broached by the developing country
concerned. Thus, we consider that the failure of the EC to
respond in some fashion other than bare rejection
particularly once the desire to offer undertakings had been
communicated it constituted a failure to “explore
constructive remedies,” and therefore concluded that the
EC failed to act consistently with its obligations under
Article 15 of the AD Agreement.
Panel, EC-Bed Linen [6.238].
Flowchart 4.1: Procedural stages in an anti-dumping investigation emanating from the

ADA.
It is emphasized that national implementing legislation often will be much more detailed.
61
62
INJURY DETERMINATION
STEP 1: Reciept of application from

petitioners and initial examination. STEP 8: Drafting and issuance of
STEP 9: Reciept and processing of
questionarrie to domestic producers,
questionanrie responses, including
importers, foreign producers and
review and verification of information
exporter, purchasers, and any other
provided.
relevant industry participants.
STEP 2: Thorough review and evaluation of

the information included in the application for
anti-dumping relief: i) Assess the standing of
the petitioner (Art. 5.4); ii) Determine whether
application is properly documented (Art. 5.2) STEP 7: Identification of the unique
and iii) Examine accuracy and adequacy of STEP 10: Drafting the initial factual
conditions of competition facing the
the evidence provided and determine report.
particular industry
whether sufficient to justify initiation of
investigation (Art. 5.3).
STEP 3: If Step 2 criteria met based on

information in application - draft, issue
and publishes notice required under Step 14: Drafting the final
STEP 6: Identification of specific issues Step 11: Conduct hearing as
Article 12.1: i) draft notice of initiation; determination and report, and issuance
to be considered in the investigation appropriate
ii) issue notice to exporting Member of public notice.
Governments; iii) publish official notice
of initiation.
STEP 4: Clarification of products,

STEP 5: Identification of additional Step 13: Conduct analysis on key
parties and time periods to be included Step 12: Finalize the factual report
sources of information relevant to the issues relating to injury and causation
in the investigation.
unjury and causation.
63
5. Initiation of a Dispute under ADA in the WTO
5.1. Identification of Measures in Request for Establishment
Art. 17.4 of the ADA contains a special rule providing that a member may refer the
matter to the DSB if final action has been taken by the administering authorities of the
importing Member to levy definitive anti-dumping duties or to accept price
undertakings. When a provisional measure has a significant impact and the Member
that requested consultations considers that the measure was taken contrary to the
provisions of paragraph 1 of Art. 17 of the ADA, the Member may also refer such
matter to the DSB. Thus, Art. 17.4 of the ADA does not have a counterpart in other
commercial defence agreements such as the Agreement on Subsidies and
Countervailing Measures and the Agreement on Safeguards, explicitly identifies they
types of measures.
5.2. Special Standard of Review
Art. 17.6 of the ADA provides a special standard of review for Panels examining anti-
dumping disputes. Art. 17.6(i) is designed to prevent de novo review by panels by
placing limits on their examination of the evaluation of the facts by the authorities.
Art. 17.6(ii) obliges panels to uphold permissible interpretations of ADA provisions
by national authorities in cases where such provisions permit more than one
permissible interpretation.
5.3. Specificity of Claims in Request for Establishment
The claims must be specified with sufficient precision in the request for establishment
of a Panel. While in some instances, it may be sufficient to mention the articles of the
Agreements alleged to have been violated, in cases where articles contain multiple
obligations, more detail will generally be necessary, unless the rights of defence of the
respondent are not impeded by the failure to do so. The latter determination must be
based on a case-by-case basis.
Such is determinative as multiple articles in ADA like Arts. 2, 3, 4, 5, 6, and 12

contain multiple obligations and may form the basis for numerous claims. It is
therefore recommendable that an applicant not only refers to articles and paragraphs
in an ADA dispute, but also shortly summarizes its claims in descriptive form. This is
all the more so because disputes in this area tend to me multi-claim in nature.
5.3.1. New Claims
The AB has confirmed that a government bringing an anti-dumping case is not

necessarily confined to the claims made by its producers in the course of the national
producers. There is, in other words, no principle of exhaustion of administrative
remedies.
64
5.3.2. Standing
WTO dispute settlement proceedings are between governments and consequently,

only WTO Members can initiate such proceedings. Thus, even though anti-dumping
disputes are driven by the private sector and target foreign competitors, as opposed to
foreign governments, neither the domestic industry nor foreign exporters and
producers can initiate or respond in WTO dispute settlement proceedings or appear
before Panels or the Appellate Body in their own right.
Indirectly, however, industry representatives may play a role in such proceedings

in at least two manners. First, the AB has held that Members have the right to
compose their own delegation. Thus, if a WTO Member decides to attach an industry
representative to its delegation. This is allowed, it being understood that the
representative will be subject to the same confidentiality requirements as
governmental members of the delegation. Such happened, for example, in EC-Bed
Linen in the panel phase and in Thailand-H-Beams in the AB phase.
5.4. Panel Recommendations and Suggestions
The distinction between Panel recommendations and suggestions (those not legally
binding) is made in Art. 19.1 DSU and is therefore not specific to the ADA. However,
it is recalled that the main reason for this distinction is that a number of GATT panels
in the AD/CVD area has recommended that, where investigations have been initiated
illegally by the investigating authorities, AD/CVD measures imposed must be
revoked and duties collected reimbursed. Such recommendations are no longer
possible and only suggestions to that effect can now be made.
65
6. DISPUTES REFERRED IN THE MODULE
Y Dispute Citation
ear
1 United States – Imposition of Anti-Dumping Duties on ADP/87
994 Imports of Fresh and Chilled Atlantic Salmon from Norway
1 Guatemala-Anti-Dumping Investigation Regarding Portland WT/DS60/R
998 Cement from Mexico
2 Mexico – Anti-Dumping Investigation of High Fructose WT/DS132/
000 Corn Syrup (HFCS) from the United States R
2 European-Communities –Anti-Dumping Duties on Imports WT/DS141/
000 of Cotton-Type Bed Linen from India R
2 Thailand-Anti-Dumping Duties on Angles, Shapes and WT/DS122/
000 Sections of Iron or Non-Alloy Steel and H Beams from Poland R
2 United States – Anti-Dumping measures on Stainless Steel WT/DS179/
000 Plate in Coils and Stainless Sheet and Strip from Korea R
2 United States – Anti-Dumping Act of 1916 WT/DS136/
000 AB/R
2 United States – Anti-Dumping Measures on Certain Hot- WT/DS184/
001 Rolled Steel Products from Japan R
2 European-Communities –Anti-Dumping Duties on Imports WT/DS141/
001 of Cotton-Type Bed Linen from India AB/R
2 Thailand – Anti-Dumping Duties on Angles, Shapes and WT/DS122/
001 Sections of Iron or Non-Alloy Steel and H Beams from Poland AB/R
2 United States – Anti-Dumping Measures on Certain Hot- WT/DS184/
001 Rolled Steel Products from Japan AB/R
2 Egypt – Definitive Anti-Dumping Measures on Steel Rebar WT/DS211/
002 from Turkey R
2 European Communities – Anti-Dumping Duties on WT/DS219/
003 Malleable Cast Iron Tube or Pipe Fittings from Brazil R
2 Argentina-Definitive Anti-Dumping Duties on Poultry from WT/DS241/
003 Brazil R
2 United States – Investigation of the International Trade WT/DS277/
004 Commission in Softwood Lumber from Canada R
2 United States –Subsidies on Upland Cotton WT/DS267/
004 R
2 United States –Subsidies on Upland Cotton WT/DS267/
005 AB/R
2 Korea – Anti-Dumping Duties on Imports of Certain Paper WT/DS312/
005 from Indonesia R
2 European Communities – Anti-Dumping Measure on WT/DS337/
007 Farmed Salmon from Norway R
2 United States –Final Anti-Dumping Measures on Stainless WT/DS344/
007 Steel from Mexico R
2 United States – Final Anti-Dumping Measures on Stainless WT/DS344/
008 Steel from Mexico AB/R
2 European Communities – Definitive Anti-Dumping WT/DS397/
010 Measures on Certain Iron Steel Fasteners from China R
2 European Communities – Definitive Anti-Dumping WT/DS397/
011 Measures on Certain Iron Steel Fasteners from China AB/R
66
2 United Sates- Definitive Anti-Dumping and Countervailing WT/DS379/
011 Duties on Certain Products from China- Report of the Appellate AB/R
Body=
2 China-Countervailing and Anti-Dumping Duties on Grain WT/DS414/
012 Oriented Flat-Rolled Electrical Steel from the United States R
2 China-Countervailing and Anti-Dumping Duties on Grain WT/DS414/
012 Oriented Flat-Rolled Electrical Steel from the United States AB/R
2 China-Anti-Dumping and Countervailing Duty Measures on WT/DS427/
013 Broiler Products from the United States R
2 China-Definitive Anti-Dumping Duties on X-Ray Security WT/DS425/
013 Inspection Equipment from the European Union R
2 China – Anti-Dumping and Countervailing Duties on WT/D440/R
014 Certain Automobiles from the United States
67
Law

Countervailing Measures under the WTO
UNIVERSITY GRANTS COMMISSION
AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES
e - PATSHALA MODULE
Page 1 of 61
James J. Nedumpara
Associate Professor of Law, O.P. Jindal Global University,

Executive Director, Centre for International Trade and Economic Laws
An initiative by the University Grants Commission, MHRD under the National Mission on Education
through Information and Communication Technology.
Personal Details

Principal Investigator Prof. (Dr.) Ranbir Singh Vice Chancellor, National Law
University, Delhi
Co-Principle Prof. (Dr.) G.S. Bajpai Registrar, National Law University,
Investigator Delhi
Paper Coordinator Dr. Saloni Khanderia-Yadav NLU, Delhi
Content Writer (CW) James J. Nedumpara O.P. Jindal Global University
Content Reviewer Prof. Abhijit Das Indian Institute of Foreign Trade, Centre
(CR) for WTO Studies, Delhi
Language Editor (LE) Dr. Saloni Khanderia-Yadav NLU, Delhi
Description of Module

Subject Name International Trade Law
Paper Name e-PG Patshala Learning Module on the Anti-Dumping Agreement World
Trade Organization
Module Name/Title Countervailing Duties
Module Id 10
Pre-requisites  Emergency action to protect domestic economy and safeguard
measures.
 Article VII of the GATT and the Agreement on Subsidies and
Countervailing Measures.
 The Concept of subsidy, material injury and causation.
 Simultaneous application of anti-dumping and countervailing
measures.
Objectives To understand:
 Emergency action to protect domestic economy and safeguard
measures.
 Article VII of the GATT and the Agreement on Subsidies and
Countervailing Measures.
Page 2 of 61

The Concept of subsidy, material injury and causation.

Simultaneous application of anti-dumping and countervailing
measures.
Keywords Subsidy, countervailing duties, WTO
TABLE OF CONTENTS
ABBREVIATIONS/SHORT-HAND ........................................................................................................................................................................... 4
LEARNING OUTCOME ............................................................................................................................................................................................. 5
1. INTRODUCTION ................................................................................................................................................................................................ 7
1.1. How does a subsidy affect international trade? .............................................................................................. 7

2. HISTORICAL PERSPECTIVE ......................................................................................................................................................................... 8
2.1. SCMA and the Tokyo Code ........................................................................................................................... 9

2.2. Structure of the Agreement........................................................................................................................... 10
3. ARTICLE VI OF GATT 1994 .......................................................................................................................................................................... 12
3.1. General Understanding ................................................................................................................................. 12

3.2. Article VI of GATT 1994 ............................................................................................................................. 12
3.2.1. Relationship between GATT Art.VI and SCMA ..................................................................................... 14
4. IDENTIFYING A SUBSIDY ............................................................................................................................................................................ 15
4.1. What is a subsidy? ........................................................................................................................................ 16

4.1.1. Financial Contribution.......................................................................................................................... 17
4.2. What is specificity? ...................................................................................................................................... 28
4.3. What are the classes of subsidies? ................................................................................................................ 30
4.3.1. Prohibited Subsidies.............................................................................................................................. 31
4.3.1.1. Export Subsidies ........................................................................................................................................................................... 32
4.3.1.2. Import Substitution Subsidies ..................................................................................................................................................... 32
4.3.2. Actionable Subsidies ............................................................................................................................. 33
4.3.2.1. What is injury?.............................................................................................................................................................................. 34
4.3.2.2. What is serious prejudice? ....................................................................................................................................................... 35
4.3.3. Non-Actionable Subsidies ..................................................................................................................... 37
5. IMPOSITION OF COUNTERVAILING MEASURES ................................................................................................................................ 38
Page 3 of 61
5.1. Against what kind of subsidies can countervailing measures be imposed upon? ......................................... 38
5.1.1. Substantive Requirement ....................................................................................................................... 38
5.1.1.1. What is a domestic industry? .................................................................................................................................................. 42
5.2. Procedural Requirement ............................................................................................................................... 43
5.3. Other Requirements ...................................................................................................................................... 44
5.4. Imposition of CVDs ..................................................................................................................................... 45
5.4.1. How to calculate the benefit? ................................................................................................................ 45
5.4.2. Calculation of Subsidy .......................................................................................................................... 46
5.4.3. Per Unit/Ad Valorem Subsidy ............................................................................................................... 46
6. DOUBLE REMEDIES ...................................................................................................................................................................................... 48
7. CALCULATION OF A SUBSIDY ................................................................................................................................................................... 50
8. EMERGENCY ACTIONS AND SAFEGUARD MEASURES..................................................................................................................... 50
8.1. General principles ......................................................................................................................................... 50

8.2. Historical background................................................................................................................................... 51
8.3. Structure ....................................................................................................................................................... 51
8.4. Conditions for application of safeguard measures ........................................................................................ 51
8.5. What is the comparator? ............................................................................................................................... 52
9. SUMMARY......................................................................................................................................................................................................... 53
10. DISPUTES REFERRED IN THE MODULE ............................................................................................................................................... 55
11. ANNEXURE: Example of Subsidy Calculation .......................................................................................................................................... 57
ABBREVIATIONS/SHORT-HAND
AB Appellate Body
AD Anti-Dumping
ADA Anti-dumping Agreement
ADD Anti-Dumping Duty
ASCM/SCM Agreement on Subsidies and Countervailing Measures
CVD Countervailing duty
Page 4 of 61
DCs Developing countries
DRAMs Dynamic Random Access Memory Semiconductors
DSB Dispute Settlement Body
DSU Dispute Settlement Understanding
EC European Communities
EU European Union
EPZs Export processing zones
FTA Free Trade Area
GATT General Agreement on Tariffs and Trade
IA Investigating Authority
IP Investigation period
NME Non-Market Economy
NTBs Non-tariff barriers
R&D Research and development
SCM Subsidies and Countervailing Measures
SCMA Subsidies and Countervailing Agreement
UNCTAD United Nations Conference on Trade and Development
US United States
WTO World Trade Organization
Member World Trade Organization Member States
LEARNING OUTCOME
The module aims to provide a comprehensive understanding of the basic concepts under the
Subsidies and Countervailing Agreement of the WTO. It provides various examples for students
underlining the practical relevance of certain concepts in the application as well as interpretation
of the Subsidies and Countervailing Agreement.
Page 5 of 61
Briefly, the module shall cover the following areas:
a) History of the SCMA

b) Relation between GATT and SCMA
c) Meaning and constituents of a subsidy
d) Calculation of a subsidy
e) Classes of subsidies and their relevance under the SCMA
f) Concept of Double Remedies
g) Countervailing actions to limit the effect of subsidies as well as safeguard measures
Page 6 of 61
1. INTRODUCTION
There are few topics in the field of international trade law that are as contentious and
complicated as the topic of subsidies. During the early years of GATT, emphasis was placed on
reduction of tariffs.1At that time, tariffs were the primary form of protection.2 As an outcome of
the negotiations relating to subsidies Contracting Parties to the GATT were authorized to take
domestic actions against injurious effects of subsidies in the form of countervailing duties under
Article (“Art.”) XVI and VI of the GATT.
As time elapsed, concerns over subsidies as an alternative form of protection began to grow.3
This change in perception of subsidies was due to significant reductions in tariff, which made
subsidies a larger problem (in relative terms). Countries decided to act by making the subsidies
discipline more compact during the Tokyo Round through the Subsidies Code. However, it was
the Agreement on Subsidies and Countervailing Measures (SCMA), concluded at the historic
Uruguay Round that established the primary rules concerning subsidies and countervailing
measures.4
1.1. How does a subsidy affect international trade?
Situation: State “Y” and State “Z” are two countries that produce Product X. State “Y” has a
greater share of the global market owing to comparative advantage 5 over State “Z”. The
Government of State “Z” decides to provide subsidy to the domestic producers of Product X in
their country. Flowchart 1 will explain the possibilities of such a subsidy.
Flowchart 1: How subsidy affects international trade
1 Andreas F. Lowenfeld, International Economic Law (OUP 2008) 217. [hereinafter “Lowenfeld”].
2 Simon Lester, Bryan Mercurio, Arwel Davies and Kara Leitner, World Trade Law: Text, Materials and Commentary (2nd ed.
Hart Publishing 2010) 412 [hereinafter “Lester”].
3 ibid 412.
4 Lowenfeild (n 1) 238.
5 For more information on Comparative Advantage, please visit
<http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact3_e.htm> accessed on 11 July 2014.
Page 7 of 61
State "Z" subsidizes the
production of product "X"
Situation 3: State "Y's" market

Situation 1: State "Z" is able to Situation 2: State "Y" could have share in 3rd countries (State
sell their products in State "Y", sold (or further sold) product B,C,D) declines because of
which could not have ocurred "X" in State "Z", had it not been subsidy to State "Z" which has
without subsidy. for the subsidy also entered the product in the
market of other countries.
In this situation, State “Z” can defend its economy by imposing a tariff known as countervailing
duty as the subsidy provided by State “Z” has negatively impacted the market share of State “Y”.
We will be referring to this example in the module.
2. HISTORICAL PERSPECTIVE
The SCMA has strengthened the legal discipline that governs trade distorting subsidies given by
governments to domestic firms. Such subsidies lead to economic distortion and an unfair
competitive advantage and nullify the benefits of tariff reductions.
The first legal provisions dealing with subsidies were in the text of GATT 1947 (enshrined in Art.
VI of GATT 1947 and XVI GATT 1947). These original rules were general in nature. Art. XVI
GATT 1947 did not define the term “subsidy”.6 Further, there was no clarity regarding the types
of adverse effects that could be caused by subsidies. Also, the text of the GATT 1947 did not
provide any response actions that other Contracting Parties could take in such a case.7 In fact, Art.
VI of GATT contained only three paragraphs regarding the use of countervailing measures.8
Thus, the legislation and remedies concerning subsidies was ambiguous. The issue was again
brought to attention during the Tokyo Round of GATT Negotiations (1973-1979). Negotiations
during this round resulted in the “Code on Subsidies and Countervailing Duties”, also known as
the “Tokyo Code”.9 The Tokyo Code eventually proved to be a disappointment.10Adherence to it
6 Bernard M. Hoekman, Trade Laws and Institutions: Good Practices and the World Trade Organization (World Bank
Publications, 1995) 19 [hereinafter “Hoekman”].
7 Arthur E. Appleton and Michael G. Plummer, The World Trade Organization: Legal, Economic and Political Analysis
(Springer Science & Business Media 2007) 688 [hereinafter “Appleton”].

8 This is discussed in detail in the next section.
9 Lowenfeld (n 1) 222.
10 ibid.
Page 8 of 61
was optional and only few countries were willing to participate in the Tokyo Round
negotiations.11 A more detailed reasoning is provided in the next section.
Once again, subsidies became an important issue during the Uruguay Round of GATT
Negotiations (1986-1994), with negotiators building on the Tokyo Code of 1979.12 By now, the
importance of a legal discipline regulating subsidies was recognized globally. 13 The resulting
SCMA was applicable to all members of the World Trade Organization (WTO). It must also be
noted that no changes were made to the provisions of original GATT that dealt with subsidies –
Art.VI and XVI GATT 1994.
It is also important to mention the significance of Art. XVI of the GATT. Under this provision, if
any Contracting Party grants or maintains any subsidy which operates directly or indirectly to
increase exports of any product from, or to reduce imports of any product into, its territory, it
must notify the Contracting Parties of the nature and extent of subsidization and of its likely
effects on imports and exports and upon request discuss with the other concerned Contracting
Parties the possibility of limiting subsidization. However, in reality, the consultation provisions
under Art. XVI were by and large ineffectual.
2.1. SCMA and the Tokyo Code
The SCMA was an improvement on the Tokyo Subsidies Code. A detailed description on the
changes that SCMA brought to the Subsidies regime in the WTO after the GATT negotiations is
mentioned below:
Box 1.: The Uruguay SCM Code
ʘ Defined certain key terms such as “subsidy” and “serious prejudice” for the first time in any GATT
agreement;
ʘ Prohibited export subsidies and subsidies contingent on the use of domestic instead of imported goods,
including de facto export subsidies that are tied to exports or export earnings in practice though not in
law;
ʘ Created a special presumption of serious prejudice for certain egregious subsidies;
ʘ Significantly strengthened the procedures for showing when serious prejudice exists in foreign markets;
ʘ Established a category of government assistance is deemed to be non-actionable and non-countervailable.
This would require the satisfaction of strict conditions and criteria mentioned within the text of the
11 “The GATT Years: From Havana to Marrakesh”,

<http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm> accessed on 11 July 2014; See also, Congress
of the United States, The Effects of Tokyo Round on Multilateral Negotiations (July 1979),
<https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/111xx/doc11153/79doc660.pdf> accessed on 13 July
2014.
13 ibid.
Page 9 of 61
SCMA;
ʘ Required all developing countries (not least developed countries), to phase out export subsidies and import
substitution subsidies, and accelerate the phase-out of export subsidies in situations where a developing
country has achieved global export competitiveness in a particular product sector.
Source: Yan Wang, Trade Remedies and Non-Market Economies (The World Bank Policy Research Working Paper 4650,
March 2008) 5.<http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-4560> accessed on 13 July
2014.
2.2. Structure of the Agreement
In terms of its structure, the SCMA is divided into eleven parts:14
14 TradeMarks Southern Africa, Training Module on Subsidies and Countervailing Measures (2010) 11-12
<http://pages.au.int/sites/default/files/Subsidies%20Training%20Module.pdf> accessed on 10 July 2014
[hereinafter “TradeMarks SA”].
Page 10 of 61
PART I – GENERAL
Art. 1:Definition of subsidies

Art. 2:Concept of specificity
PART II – PROHIBITED SUBSIDIES
Art. 3: Provides that export subsidies and import substitution

subsidies are prohibited;
Art, 4: Provides multilateral remedies against prohibited subsidies;
PART III – ACTIONABLE SUBSIDIES
Art. 5:Covers the concept of adverse effects;

Art. 6:Discusses serious prejudice;
Art. 7: Similar to provision of Art. 4, as it discusses the multilateral
remedies against actionable subsidies;
PART IV – NON-ACTIONABLE SUBSIDIES
Art. 8: Provides that subsidies which are not specific are non-actionable. It furthermore exempts certain environmental, research and
development (R&D) and regional subsidies, even though they are specific. This category applied provisionally for five years ending 31
December 1999, and pursuant to Art. 31 GATT, could be extended by consensus of the SCM Committee. 15 As of 31 December 1999, no
such consensus had been reached resulting in the expiry of this provision.
PART V – COUNTERVAILING DUTIES
Arts. 10–23:Includes procedural and material injury provisions;

Art. 14: It particularly contains important rules on the calculation of the amount of certain subsidies;
PART VI – INSTITUTIONS
Establishes the Committee on Subsidies and Countervailing Measures and authorizes the establishment of a permanent group of experts;
PART VII – NOTIFICATION AND SURVEILLANCE
Contains important notification and surveillance procedures;
PART VIII – DEVELOPING COUNTRIES
Grants significant special and differential treatment to developing country Members.
PART IX – TRANSITIONAL ARRANGEMENTS
Deals with accessions and transition economies;
PART X – DISPUTE SETTLEMENT
Art. 30: Provides that the Dispute Settlement Understanding (DSU) provisions apply, except as otherwise specified in the SCMA; and
PART XI – FINAL PROVISIONS
15 Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement
Establishing the World Trade Organization, Annex 1A, THE LEGAL TEXTS: THE RESULTS OF
THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 231 (1999), 1869
U.N.T.S. 14. [hereinafter “SCMA”]
Page 11 of 61
Includes the provision that Art. 6.1 (serious prejudice definition) and Arts. 8 and 9 (non-actionable subsidies) applied for five years only. Because
of the failure of the Seattle Ministerial Conference, these provisions expired on 31 December 1999.
Apart from the structure present in the main agreement, the SCMA also includes
seven Annexures:16
Annexure I The illustrative list of export subsidies;
Annexure II Guidelines on consumption of inputs in the production process;
Annexure III Guidelines in the determination of substitution drawback systems as export subsidies;
Annexure IV Calculation of the total ad valorem subsidization for purposes of Article 6.1(a);
Annexure V Procedures for developing information concerning serious prejudice;
Annexure VI Procedures for on the spot investigations ex Article 12.6;
Annexure VII Coverage of developing and least developed Member Countries
3. ARTICLE VI OF GATT 1994
3.1. General Understanding
As pointed out in Flowchart 1, one of the defenses available to State “Z” when State
“Y” provides subsidy for Product X is the imposition of a special tariff, known as
countervailing duty (CVD). CVD is exempted from the Most-Favored Nation (MFN)
obligation,17 and the conditions for CVDs are set out in Art. VI GATT 1994. Notably,
this is the same text that was adopted in the GATT 1947.
3.2. Article VI of GATT 1994
Art. VI GATT 1994 permits members to impose duties (and other measures) on goods
originating in other Members States receive subsidies. 18 Art. VI GATT 1994
specifically imposes certain important conditions on CVD in paragraph 3 and 6.
Paragraph 3 of Art. VI stipulates that imposition of CVDs shall not be in excess of the
estimated subsidy determined to be granted. 19 The reason for this is because a
countervailing duty is not meant to impose penalty, but to offset the distortion that has
been caused by the subsidy.20 This point has been further illustrated by the Appellate
Body (“AB”) in the US – Countervailing Duties on Certain EC products dispute.21 In
this dispute, products were exported to the US from the EC by privatized companies.
These companies were previously state-owned and received government subsidies
before they were privatized. The measure that was challenged in the dispute was the
16 ibid.
17 General Agreement on Tariffs and Trade 1947 (GATT) (15 April 1994) LT/UR/A-1A/1/GATT/2, art
I <http://docsonline.wto.orh> last accessed on 20 June 2014.
18 ibid art. VI.
19 GATT (n 17) art VI (3).
20 Peter Van Den Bossche, The Law and Policy of the World Trade Organization: Text, Cases and Materials (CUP
2013) 353 [hereinafter “Bossche”].

21 WTO, United States — Countervailing Measures on Certain Products from European Communities- Report of the
Appellate Body (9 December 2002) WT/DS212/AB/R [139] [hereinafter “EC-CVD”).
Page 12 of 61
US CVD law governing the treatment of subsidies provided to state-owned companies
that were later privatized. Subsidy calculation methodologies developed by the United
States Department of Commerce (“USDOC”) were also questioned. The AB noted
that CVDs should not be levied on any product in excess of the amount of the subsidy
that is found to exist. The Appellate Body was reaffirming one of key principles in
GATT Art VI (3), namely, “[n]o countervailing duty shall be levied on any product of
the territory of any contracting party… in excess of an amount equal to the estimated
bounty or subsidy determined to be granted…”
In sum, Art. VI of GATT 1994 still remains significant and will have to be read
together with the SCMA.
“Moreover, Article 19.4 of the SCM Agreement, [is]

consistent with the language of Article VI: 3 of the
GATT 1994. … In sum, these provisions set out the
obligation of Members to limit countervailing duties to
the amount and duration of the subsidy found to exist
by the investigating authority.” ABR, US —
Countervailing Measures on Certain EC Products
[139].
The AB has noted that Paragraph 3 of Art. VI also identifies the responses that are
permitted when a subsidy is found to exist. In US - Offset Act (Byrd Amendment)
dispute, the Complainants22challenged the U.S. amendment to the Tariff Act of 1930
signed on 28 October 2000. This amendment was widely referred to as the “Byrd
Amendment” and was seen as a way to support the steel industry in the U.S. 23
According to the Complainants, the Byrd Amendment was inconsistent with the
obligations of the U.S. under several provisions of the GATT, the Anti-Dumping
Agreement (ADA), the SCMA, and the WTO Agreement.
While determining the relationship between the GATT and SCMA, the AB found that
there are four permissible responses to a countervailable subsidy under the two
agreements.24 See Box below.
“In our view, Article VI: 3 of the GATT 1994 and Part
V of the SCM Agreement encompass all measures
taken against subsidization. To be in accordance with
the GATT 1994, as interpreted by the SCM Agreement,
a response to subsidization must be either in the form of
22 Joint complaint was filed by Australia, Brazil, Chile, European Communities, India, Indonesia, Japan,
Korea and Thailand.
23 For more information, please visit <http://www.ebearing.com/legislation/2000act.htm> last accessed
on 16 July 2014.
24 WTO, United States – Continued Dumping and Subsidy Offset Act 2000- Report of the Appellate Body (16 January
2003) WT/DS217/AB/R [267] [hereinafter “US- Subsidy Offset Act 2000”].
Page 13 of 61
definitive countervailing duties, provisional measures or
price undertakings, or in the form of multilaterally-
sanctioned countermeasures resulting from resort to the
dispute settlement system.” ABR, US - Offset Act
(Byrd Amendment) [267].
Further, CVDs can only be levied when it is demonstrated that the effect of
subsidization is causing “material injury” to an established domestic industry,
according to Paragraph 6 of Art VI of GATT 1994.25
Art VI (6) GATT 1994

“No contracting party shall levy any antidumping or
countervailing duty on the importation of any product
of the territory of another contracting party unless it
determines that the effect of the dumping or
subsidization, as the case may be, is such as to cause or
threaten material injury to an established domestic
industry, or is such as to retard materially the
establishment of a domestic industry.”26
Going back to the example mentioned in Flowchart 1, even if State “Z” has given a
subsidy to a product that is exported to State “Y”, and the investigating authorities
within State “Y” have rightly determined the amount of subsidy given, yet no
countervailing duty can be imposed by State “Y” unless the subsidy “is such as to
cause or threaten material injury to an established domestic industry, or is such as to
retard materially the establishment of a domestic industry”.27
In a later part of this module, we will be discussing the term “cause” and “material
injury” in detail.
3.2.1. Relationship between GATT Art.VI and SCMA
The relationship between Art. VI GATT and the SCMA is not expressly mentioned in
the concerned agreements. 28 However, there have been various deliberations
regarding the relationship between these two provisions in Panel and AB decisions. A
WTO Panel in Brazil — Desiccated Coconut touched upon this issue. In this dispute,
the Philippines had expressed concern over CVD imposed by Brazil on the
Philippines’ exports of desiccated coconut.29 The Philippines claimed that the duty
25 GATT (n 18) art VI (6).

26 ibid.
27 K.D. Raju, World Trade Organization Agreement on Anti-Dumping (Kluwer Law International, 2008) 100
[hereinafter “Raju”].
28 ibid.
29 Desiccated coconut is obtained from shredded coconut kernel and is extensively used in puddings and
confectioneries.
Page 14 of 61
imposed was inconsistent with WTO and GATT rules. During the course of the
dispute, the Panel was faced with the following questions: Whether Article VI of GATT
1994 created rules which were separate and distinct from those of the SCMA, and which
could be applied without reference to that Agreement? Whether Art. VI GATT 1994 and the
SCMA represented an inseparable package of rights and disciplines that must be considered
in conjunction?
In phrasing this issue, the Panel made it clear that the SCMA did not supersede Art.
VI of GATT 1994. 30
“It is evident that both Article VI of GATT 1994 and

the SCM Agreement have force, effect, and purpose
within the WTO Agreement. That GATT 1994 has not
been superseded by other Multilateral Agreements on
Trade in Goods … is demonstrated by a general
interpretive note to annex 1A of the WTO Agreement.
The fact that certain important provisions of Article VI
of GATT 1994 are neither replicated nor elaborated in
the SCM Agreement further demonstrates this point.
Thus, the question for consideration is not whether the
SCM Agreement supersedes Article VI of GATT 1994.”
PR, Brazil — Desiccated Coconut [17].
Later, the AB also upheld the Panel’s findings regarding the relation between Art. VI
of GATT 1994 and the SCMA. The factual reason for this was because the
investigation was initiated by Brazil prior to 1 January 1995, which was the date that
the WTO Agreement came into effect for Brazil. The Panel had opined that the
subsidy rules in GATT could not apply independently of the SCMA.31
4. IDENTIFYING A SUBSIDY
For a measure to be covered by the SCMA, it needs to satisfy:
 Definition of a subsidy mentioned in Art. 1 of the SCMA; and

 Specificity requirements mentioned in Art. 2 of the SCMA.
30 WTO, Analytical Index 1994-2013,

<http://www.wto.org/english/res_e/booksp_e/analytic_index_e/subsidies_05_e.htm> accessed 14
July 2014.
31 WTO, One Page Summary: Brazil Desiccated Coconut
<http://www.wto.org/english/tratop_e/dispu_e/cases_e/1pagesum_e/ds22sum_e.pdf> accessed on
25 July 2014.
Page 15 of 61
Box 2.: Definition of a subsidy
Article 1 SCMA: Definition of a Subsidy
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within the territory of a
Member (referred to in this Agreement as “government”), i.e. where:
(i) A government practice involves a direct transfer of funds (e.g. grants, loans and equity
infusion), potential direct transfer of funds or liabilities (e.g. loan guarantees),
(ii) Government revenue that is otherwise due is foregone or not collected (e.g. fiscal
incentives such as tax credits)
(iii) A government provides goods or services other than general infrastructure, or purchases
goods;
(iv) A government makes payments to a funding mechanism, or entrusts or directs a private
body to carry out one or more of the type of functions illustrated in (i) to (iii) above
which would normally be vested in the government and the practice, in no real sense,
differs from practices normally followed by governments;
Or
(a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994;
And
(b) a benefit is thereby conferred.
1.2. A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be
subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the
provisions of Article 2.
4.1. What is a subsidy?
The standard economic definition of “subsidy” involves the notion of payment by a

government to a private entity.32 However, the SCMA recognizes that subsidies can
be offered through other means as well. The SCMA sets out rules for identification of
such subsidies. A subsidy is “deemed to exist” if two conditions are met:33
 There must be a financial contribution by the government or any public body or any
form of income or price support;
 A benefit must be conferred (meaning, by the financial contribution or the
income/price support).

32 Lester (n 2) 423.
33 Subsidies and Countervailing Agreement (15 April 1994) LT/UR/DEC-2/1, art. 1.1,
<http://docsonline.wto.org> last accessed on 12 May 2014).
Page 16 of 61
Flowchart 2: What constitutes a subsidy?
Benefit
Financial conferment
contribution by which makes Subsidy
a public body the conferee
better off
From the above diagram, it can be seen that mere existence of a financial contribution
does not, in itself, qualify to constitute a subsidy. The financial contribution must also
confer a benefit. Therefore, both the above mentioned conditions must be met.34
4.1.1. Financial Contribution
Art. 1.1(a) (1) SCMA provides a closed list of the types of financial contribution that
includes:35
 Direct transfers of funds such as grants, loans and equity infusions (SCMA Art.
1.1(a)(1)(i));
 Potential direct transfers of funds or liabilities, such as loan guarantees (SCMA
Art. 1.1(A)(1)(i));
 Government Revenue, otherwise due, that is foregone or not collected (SCMA
Art. 1.1(a)(1)(ii));
 The provision by a government of goods or services other than general
infrastructure (SCMA Art. 1.1(a)(1)(iii));
 The purchase by Government of goods (SCMA Art. 1.1(a)(1)(iii)); and
 Government payments to a funding mechanism or entrustment or direction of a
private body (SCMA Art. 1.1(a) (1) (iv)).
Flowchart 3. : Types of Financial Contribution
34 Lester (n 2) 423.
35 SCMA (n 37) art.1; See also, WTO, United States – Measures Affecting Trade in Large Civil Aircraft – Second
Complaint-Report of the Panel (31 March 2011) WT/DS353/R [7.164] [hereinafter “US- Large Aircraft”].
Page 17 of 61
TYPES OF FINANCIAL CONTRIBUTION
The provision The Government

Government by a payments to a
Potential Direct Revenue, government of The purchase by funding
Direct Transfer transfer of otherwise due, goods or a government of mechanism or
of Funds Funds that is foregone services other goods entrustment or
or not collected than general direction of a
infrastructure private body
From Art. 1of the SCMA,36 it is clear that the government does not necessarily have
to make payments to qualify that action as a subsidy. A financial contribution will
also exist if a government makes payments to a funding mechanism, or “entrusts” or
“directs”37 a private body to carry out one or more of the type of functions described
above rather than directly doing so itself.38
Further, it should be mentioned that the reason for providing an exhaustive list of
governmental actions that could come with the ambit of “financial contribution” is to
limit the kinds of government actions which could fall within the scope of the
SCMA.39 An analysis of the types of financial contribution is provided below:
4.1.1.1. Direct and Potential Direct Transfer of Funds
As can be observed from the heading, there are two terms that require discussion:
direct transfer of funds and potential transfer of funds.
Financial contribution involving “direct transfer of funds” from government or a

public body to a private body comes within the scope of the first type of financial
contribution. As the name suggests, the transfer of funds is directly made in this case
through “grants, loans and equity infusion”, as is identified in the main text of the
SCMA.
The word “potential” constitutes a financial contribution when the government

promises to transfer money under certain conditions. The SCMA itself has given the
example of “loan guarantees” as a form of potential transfer of funds. Determination
of this type of transfer is more difficult to identify when compared to those under the
category of “direct transfer of funds”. However, it must be noted that assuming the
possibility that the government may transfer funds is not a sufficient reason to satisfy
the term “potential direct transfer of funds.”
36 ibid.
37 The term “entrust” and “direct” are discussed in detail at a later part of this module.
38 Lester (n 2) 238-240.
39 WTO, United States – Measures Treating Export Restraints as Subsidies- Report of the Panel (29 June 2001)
WT/DS194/R [8.69] [hereinafter “US - Export Restraints”].
Page 18 of 61
In the US — Large Civil Aircraft (2nd complaint) dispute, EC had claimed that ten
categories of measures implemented by the US (including tax and non-tax benefits
from the State of Washington, property and sales break from the State of Kansas, etc.)
provided subsidies to Boeing’s (a U.S. multinational company that designs and
manufactures commercial airplanes) large civil aircraft division). This, according to
the EC was inconsistent with the SCMA. One of the contentions raised related to the
“potential direct transfer of funds”. The Panel established that “mere possibility that a
government may transfer funds” upon the fulfillment of any pre-defined condition is
not enough to satisfy the definition of a financial contribution. Therefore, it could not
be brought under “potential direct transfer of funds”.40
4.1.1.2. Revenue Foregone that is otherwise due
A financial contribution also exists when a government does not collect or foregoes
revenue which is otherwise due. This kind of financial contribution is more
complicated in nature. A fiscal inventive such as a “tax credit” could come within the
ambit of this category.
In the United States — Tax Treatment for Foreign Sales Corporations (FSC) dispute,
several countries challenged the tax exemptions amounting to billions of dollars given
to offshore foreign sales corporations established by U.S. firms. The FSCs were
generally subsidiaries of US corporations selling goods in foreign markets. The Panel
and AB had to address several questions regarding “revenue foregone or otherwise
foregone”. In particular, one important question was addressed by the Panel:
When is ‘foregone revenue’ otherwise due?
The Panel noted that the term “otherwise due” referred to a situation that would have
prevailed had the measures in question not been implemented. 41 Therefore, it is a
matter of determining whether, in the absence of such measures, would there have
been a higher tax liability? In the view of the Panel 42 , when considering whether
revenue foregone was “otherwise due”, an examination of the situation that would
exist had the measure in question not been implemented, must be made.43
In the Canada – Autos dispute44, an import duty exemption was granted to certain
imported cars. This was considered to be revenue “otherwise due” as the exemption
implied that the normal MFN import duty of 6% would not have to be paid to the
40 US-Large Aircrafts (n 39) [7.164].

41 WTO, United States – Tax Treatment for “Foreign Sales Corporation”- Report of the Appellate Body (24 February
2000) WT/DS108/AB/R [90] [hereinafter “US-FSC”].
42 WTO, United States – Tax Treatment for “Foreign Sales Corporation”- Report of the Panel (8 October 1999)
[7.45] WT/DS108/R. [hereinafter “PR US-FSC”]

43 ibid.
44 WTO, Canada-Certain Measures Affecting the Automotive Industry- Report of the Appellate Body (31 May 2000)
WT/DS139/AB/R [91] [hereinafter “Canada-Autos”].
Page 19 of 61
Canadian Government. According to the Appellate Body, this exemption amounted to
“foregone revenue” that the Government would otherwise have raised.45
4.1.1.3. Government Purchase of Goods or Provision of Goods and Services
In general, governments purchase goods and services with a transfer of funds to

private companies.46 An example of this could be the purchase of military equipment
by the government from private companies. From the example, one can gauge that the
ambit of the term “goods and services” is very broad. The Canada–US Softwood
Lumber dispute, which is one of the most significant and enduring trade disputes in
recent history, provides guidance on the concept of ‘government purchase of goods
and services’.
At the heart of the dispute is the claim that the Canadian lumber industry was being
unfairly subsidized by federal and provincial governments, as most timber in Canada
is owned by the provincial governments. The prices charged to harvest the timber
(known also as “stumpage fee”) were set administratively, rather than through the
competitive marketplace. Competitive market place charging was the norm in the U.S.
The U.S. claimed that this act by Canada constituted an unfair subsidy, and was thus
subject to the U.S. CVD laws. The Canadian government and lumber industry
disputed this assertion, based on a number of factors, including that Canadian timber
was provided to such a wide range of industries, and that lack of specificity made it
ineligible to be considered a subsidy under US law. Since 1982, there had been six
major iterations of the dispute which are simply named Softwood Lumber I, Softwood
Lumber II, Softwood Lumber III, Softwood Lumber IV, Softwood Lumber V and
Softwood Lumber VI.
Could standing timber be a “good”?
In the Softwood Lumber IV dispute, 47 Canada argued that the term “goods” was
limited to tradable items with an actual or potential tariff classification. Standing
timber, according to Canada, did not fall within its definition. The AB examined the
dictionary definition of the term “goods” and concluded that the meaning of the term
“goods” as used in Art 1.1 (a) (1) (iii) included items that were tangible and capable
of being possessed. The AB summarized its findings in Paragraph 67:
“In sum, nothing in the text of Article 1.1(a) (1) (iii), its
context, or the object and purpose of the SCMA, leads
us to the view that tangible items -- such as standing,
45 Petros C. Mavroidis, George A. Bermann and Mark Wu, The Law of the World Trade Organization (WTO):
Documents, Cases & Analysis (1st ed. West American Casebook 2012) 564.
46 SCMA (n 37) art. 1.1.
47 WTO, United States - Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from
Canada-Report of the Appellate Body (29 August 2003) WT/DS257/AB/R [152] – [153] [hereinafter
“Softwood Lumber IV”].
Page 20 of 61
unfelled trees -- that are not both tradable as such and
subject to tariff classification, should be excluded, as
Canada suggests, from the coverage of the term 'goods'
as it appears in that Article.”
The AB also noted in Paragraph 51 of the report that:
“[T]he concept of subsidy defined in Article 1 of the SCM Agreement

captures situations which something of economic value is transferred
by a government to the advantage of a recipient.”
Thus, the AB concluded that standing timber are “goods” within the meaning of
Art.1.1 (a) (1) (iii) of the SCMA. The AB found that the Canadian stumpage
arrangements gave tenure holders the right to enter onto government lands, cut
standing timber, and enjoy exclusive rights over the timber that was harvested.
According to the AB, by granting right of harvest of standing timber, the provincial
governments put at the disposal of timber harvesters the right to make use of these
resources. This was financial contribution “in kind” within the meaning of Article 1.1
(a) (1) (iii) of the SCMA.
4.1.1.4. Payment to Funding Mechanisms/Entrustments or Direction of a Private

Body
In this type of financial contribution, the Government involves a private entity to

perform one of the three earlier mentioned kinds of financial contribution. 48
According to the wordings of the text, the Government may make payments to a
“funding mechanism”, or can “entrust or direct” a private body to do so.
In US- Countervailing Duty Investigation on DRAMS dispute, the US imposed

countervailing duty order on import of Dynamic Random-Access Memory (DRAM),
a sophisticated version of Random Access Memory (RAM) from South Korea. One of
the issues in this dispute related to the interpretation of the term “entrustment” and
“direction” to a private body. The U.S. alleged that the South Korean Government
had permitted to “entrust” and “direct” a groups of creditors (which was not 100%
owned by the Korean Government) to participate in all financial contributions at
issue. The AB had to decide the distinction between the terms “entrustment” and
“direction”, and whether the South Korean Government had “entrusted” or “directed”
the creditors.49
According to the AB, “entrustment” occurs when the Government gives a

responsibility to a private body, whereas “direction” refers to a situation where the
48 Lester (n 2) 426.
49 WTO, United States – Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors
(DRAMS) from Korea-Report of the Appellate Body (27 June 2005) WT/DS296/AB/R [108]; [110]; [111];
[116] [hereinafter “US – DRAMS”].
Page 21 of 61
Government exercises authority over the private body.50 Therefore, both these criteria
must be met to prove “direction and entrustment”.51
The determination of “entrustment” or “direction” in disputes is very intensive and

fact based. The facts of EC-Countervailing Measures on DRAMS Chips (EC- DRAM)
were very similar to the US- Countervailing Duty Investigation on DRAMS. The
product that was investigated was the same Dynamic Random-Access Memory from
South Korea. In this case, the Panel concluded the presence of an “entrustment or
direction” after considering the following:52
 The extent of Government ownership of the banks that were involved in

the dispute;
 Financial situation of the recipient of the financing which, at the time,
was weak;
 Restructuring took place by way of a formal government act;
 Withholding information during the subsidy investigation.
Therefore, the degree of difficulty in determining the “entrustment or direction” is

visible from the approach taken by the Panel in the EC-Countervailing Measures on
DRAMS Chips.
4.1.1.5. Income or Price Support
Article 1.1 (a) (2) of the SCMA also treats any form of income or price support as a
subsidy if it confers a benefit. The term “support” is often used in the context of
agriculture, especially with respect to government support programs for farm products.
In the ordinary meaning, “support” denotes “the action of contributing to the success
or maintaining the value of something”. In the light of this ordinary meaning, the
meaning of “support” within Article 1.1 (a) (2) refers to the action of the government
that directly or indirectly increases the export of any product from its territory or
reduces the imports of any product within its territory. The Appellate Body in United
States- Softwood Lumber noted that the range of government measures capable of
providing subsidies is broadened still further by the concept of “income or price
support” in paragraph (2) of Article 1.1(a).53
4.1.2. Government or Public Body
For a financial contribution to be deemed a subsidy for the purposes of the SCMA,
the financial contribution must be made by government or a public body. However,
any financial contribution made by a private body may still fall under the definition in
50 Agreement on Subsidies and Countervailing Duties, Analytical Index,

http://www.wto.org/english/res_e/booksp_e/analytic_index_e/subsidies_01_e.htm (last visited July 18,
2014).
51 ibid.
52 WTO, EC-Countervailing Measures on DRAMS Chips – Report of the Panel (17 June 2005) WT/DS299/R; See
also, Mavroidis (n 49) 540.

53 PR, Softwood Lumber IV (n 51) at 52.
Page 22 of 61
Art. 1.1 SCMA if that contribution was made pursuant to entrustment or direction by
the government.
What is a public body?
In Korea — Commercial Vessels, the European Communities argued before a WTO panel
that the Export-Import Bank of Korea (KEXIM) was a public body on the grounds that, inter
alia, it was created and operated on the basis of a public statute giving the government control
over its decision making. The Panel agreed with the EC that KEXIM was a public body
because it was controlled by government (or other public bodies). The panel noted:
[A]n entity will constitute a ‘public body’ if it is controlled

by the government (or other public bodies). If an entity is
controlled by the government (or other public bodies), then
any action by that entity is attributable to the government,
and should therefore fall within the scope of Article 1.1(a)
(1) of the SCM Agreement.
In the US — Anti-Dumping and Countervailing Duties (China), 54 products from

China (circular welded carbon quality steel pipe, light-walled rectangular pipe and
tube laminated woven sacks and certain new pneumatic off-the-road tyres) were
allegedly subsidized and dumped in the US market. The US Department of
Commerce (“USDOC”) imposed anti-dumping and countervailing duties concurrently
on the products.
The AB, in this dispute, noted that the term “public body” in Article 1.1(a) (1) of the
SCMA 55 covers only those entities that possesses, exercise or are vested with
governmental authority. The AB completed an analysis prescribed by Art. 31 of the
Vienna Convention on Law of Treaties and concluded that the concept of “public
body” shared certain attributes with the concept of “government”. Further, the AB
noted that a public body within the meaning of Article 1.1. (a)(1) of the SCMA must
be an entity that possesses, exercises or is vested with governmental authority.
However, it stressed that:
Just as no two governments are exactly alike, the

precise contours and characteristics of a public body are
bound to differ from entity to entity, State to State, and
case to case. Panels or ABs confronted with the
question of whether the conduct falling within the scope
of Art. 1.1.(a)(1) SCMA is that of a public body has to
be answered by conducting a proper evaluation of the
core features of the entity concerned, and its
relationship with government in the narrow sense.
54 WTO, United States- Definitive Anti-Dumping and Countervailing Duties on Certain Products from China-Report of
the Appellate Body (11 March 2011) WT/DS379/AB/R [317–318] [hereinafter “China -AD-CVD”).
55 SCMA (n 37) art.1.1 (a) (1).
Page 23 of 61
In the same dispute, another pertinent question was raised by China was with regard
to the interpretation of the term “public body” by the Panel. The Panel upheld the
finding of the USDOC that certain State-owned Enterprises (SOEs) and State-owned
Commercial Banks (SOCBs) in China were public bodies for the purposes of SCMA.
According to the panel SOEs and SOCBs were “controlled by the government”. A
key question in this dispute was:
Whether government ownership is relevant for government control?
The AB concluded that the Panel’s analysis lacked proper legal basis as even if a
government is the majority shareholder of an entity, such did not demonstrate whether
the government exercised meaningful control over the conduct of that entity.
The AB reversed the panel finding on the issue of government control. The AB drew
a distinction between entities merely owned or controlled by a government and
entities that exercise some degree of “governmental authority.” According to the AB,
“[a] public body within the meaning of Article 1.1. (a)(1) of the SCM Agreement
must be an entity that possesses, exercises or is vested with governmental authority”.
The key issue according to the AB was whether these SOEs and SOCBs exercise
governmental functions on behalf of the Chinese Government. According to the AB,
evidence that a government exercises meaningful control over an entity and its
conduct may serve, in certain circumstances, that the relevant authority possesses
government authority.
Further, the AB diverged from the Panel’s reasoning that the use of the collective
term “government” had no meaning besides facilitating the drafting of the SCMA and
that the words “a”, “or”, and “any” within the phrase “a government or any public
body” indicated that “government” and “public body” are separate concepts with
distinct meanings.56
4.1.3. Benefit
The existence of the financial contribution or income/price support is not sufficient

for the existence of a subsidy. There must also be a benefit that has been conferred.
Art. 1 of the SCMA identifies the practices that constitute a “financial contribution”,
but it does not define the term “benefit” or set out criteria for measurement of whether
a benefit is conferred.
However, the AB report in Canada – Aircraft provides guidance relating to the term
“benefit”. In this dispute, Brazil alleged that Canada had granted certain subsidies
with the intention to support the export of civilian aircraft. Brazil primarily contended
that these measures were inconsistent with Art. 3 of the SCMA. The Panel, in its
56 Abhijit Das and Shailja Singh, Key Concepts on Subsidies Jurisprudence (Indian Institute of Foreign Trade)
<http://wtocentre.iift.ac.in/DisputeAnalysis/WTO%20Subsidies%20Agreement_Recent%20Jurisprude
nce_230212.pdf> accessed on July 12, 2014. [hereinafter “Das”].
Page 24 of 61
report, provided its clarification regarding the meaning of the term “benefit”. In its
opinion, the ordinary meaning of “benefit” encompassed some form of advantage.57
The Panel stated that “the ordinary meaning of “benefit” per se included any notion of
net cost to the government.”58
“Marketplace” comparison
“We also believe that the word ‘benefit’ as used in Art.
1.1 (b), implies some kind of comparison. This must be
so, for there can be no ‘benefit’ to the recipient unless
the ‘financial contribution’ makes the recipient ‘better
off’ that it would otherwise have been, absent that
contribution. In our view, the marketplace provides an
appropriate basis for comparison in determining
whether a benefit has been conferred, because trade-
distorting potential of a “financial contribution” can be
identified by determining whether the recipient has
received a “financial contribution” on terms more
favourable than those available to the recipient in the
market”. ABR, Canada – Aircraft [9.112]
In sum, the Panel in Canada – Aircraft found that a “financial contribution” conferred
a “benefit” and constituted a subsidy under Art. 1 SCMA when it was provided on
terms which were more advantageous that those otherwise available to the recipient
on the market.
While conducting the benefit analysis, the panel in EC–DRAMS agreed with the
Appellate Body in Canada–Aircraft that the proper standard is whether the recipient
is “better off” than it would have been absent the contribution.59 As a corollary, it
found that the appropriate basis” for determining the existence of a benefit is the
market place. This view has also been upheld in Canada – Renewable Energy, where
the AB noted that a financial contribution conferred a benefit within the meaning of
Art. 1.1(b):60
“When it conferred an advantage on its recipient, and that such an advantage was to
be determined by comparing the position of the recipient in the marketplace with or
without the financial contribution.”
4.1.3.1. Methods to Calculate Subsidy
57 ibid 7.
58 WTO, Canada – Measures Affecting the Export of Civilian Aircraft- Report of the Panel (14 April 1999)
WT/DS70/R [9.112]
[hereinafter “Canada- Aircrafts”].
59 PR, EC-DRAMS (n 56) [7.176].
60 WTO, Canada – Certain Measures Affecting the Renewable Energy Generation Sector-Report of the Panel (19
December 2002) WT/DS412/R [5.159] [hereinafter “Canada-Renewable Energy”].
Page 25 of 61
(Please also look at Chapter 6 and Annexure I)
The SCMA, however, does not define the term ‘benefit’, although a definition of this
term has a crucial importance in converting a government contribution into a subsidy.
Therefore, it may be necessary to read Art. 1.1 (b) of SCMA along with Art. 14. As
noted earlier, Art.14 of SCMA provides that the term ‘benefit’ refers to ‘benefit to
recipient’. It appears that definition of benefit in Art. 1.1 (b) has been influenced by
the context of Art. 14.
Art. 14 of the SCMA is concerned with the calculation of the subsidy in

countervailing investigations specified by Part V of this Agreement. In addition to Art.
14, Annex IV of the SCMA also deals with the calculation of the total ad valorem
subsidization (paragraph 1(a) of Art. 6). 61 As indicated earlier, the approach under
Annex IV of the SCMA is based on a cost-to-government approach, while the former
is based on benefit-to-recipient approach.62
Although existence of a benefit is a necessary part of establish a subsidy, cost to

government may still be used when calculating the amount of the subsidy. In any case,
neither of the two provisions mentioned is amply clear.63
Art. 14 SCMA64establishes that any method of calculating benefit shall conform to

certain guidelines. .
The guidelines set out in Art. 14 SCMA are:65
 Government provision of equity capital confers a benefit where the investment

decision can be regarded as inconsistent with the usual investment practice
(including that regarding the provision of risk capital) of private investors in that
member’s territory;
o
 A loan by a government confers a benefit where there is a difference between the
amount that the firm receiving the loan pays on that loan and the amount the firm
would pay on a comparable commercial loan that the firm could actually obtain on
the market, with the benefit equal to the difference between these two amounts;
o
 A loan guarantee by a government confers a benefit where there is a difference
between the amount that the firm receiving the guarantee pays on that guaranteed
loan and the amount that the firm would pay on a comparable commercial loan
absent the government guarantee, with the benefit equal to the difference between
these two amounts adjusted for any differences in fees; and
o
61 Petros C. Mavroidis, Patrick A. Messerlin and Jasper M. Wauters, The Law and Economics of Contingent
Protection in the WTO, (Edward Elgar Publishing Limited 2008) 384-386 [hereinafter “Mavroidis II”]
62 ibid.
63 ibid.
64 SCMA (n 37) at art. 14.
65 ibid art. 14.
Page 26 of 61
 The provision of goods or services, or the purchase of goods, by a government
confers a benefit where the provision is made for less than adequate remuneration, or
the purchase is made for more than adequate remuneration, with the adequacy of
remuneration determined in relation to prevailing market conditions for the good or
service in question in the country of provision or purchase (including price, quality,
availability, marketability, transportation, and other conditions of purchase or sale).
These guidelines are inspired by a simple view of “distortion”. The assumption is that a
financial contribution confers a benefit when it leads to distortion of the market mechanism.
The AB in Japan- DRAMs (Korea) made the following observations regarding the
requirements of the chapeau of Article 14:
The chapeau of Article 14 sets out three requirements. The

first is that “any method used” by an investigating authority
to calculate the amount of a subsidy in terms of benefit to the
recipient shall be provided for in the national legislation or
implementing regulations of the Member concerned. The
second requirement is that the “application” of that method
in each particular case shall be transparent and adequately
explained. The third requirement is that “any such method”
shall be consistent with the guidelines contained
in paragraphs (a)-(d) of Article 14.
Notwithstanding the benefit-to-the recipient language, one could argue that other
approaches such as cost of production (COP) test could also be relevant in the in the
determination of subsidy where the domestic market price is distorted by government
intervention, or where there is no market place. Contextual support for this
proposition is also available from Item (j) and (k) of Annex I of the SCMA. In US -
Softwood Lumber III,66 both Panel and AB examined the USDOC’s calculation of the
benefit conferred on the lumber producers from the provision of a “good” (trees) by
the Canadian Government on the basis of Art 14(d) of the SCMA. Emphasis was laid
on trying to identify the prevailing market conditions. While the Panel in the dispute
noted that the prevailing market conditions would be the rate of trees in private land
in Canada, the AB held otherwise. As per the AB, the Canadian market was too
distorted to be used as a benchmark. In general, this demonstrates that there is no
uniformity in conclusively The AB, paragraph 102, stated:
The determination of whether private prices are

distorted because of the government’s predominant role
in the market, as a provider of certain goods, must be
made on a case-by-case basis, according to the
particular facts underlying each countervailing duty
investigation.
Pass- Through and Privatization Issues
66 WTO, US — Softwood Lumber III- Report of the Appellate Body (22 March 2004) WT/DS277/AB [102]
[hereinafter “Softwood Lumber III”).
Page 27 of 61
The application of the benefit-to-the-recipient had presented particular problems in
the cases of state-owned enterprises which had been subsequently privatized. When a
non-recurring financial contribution was paid to a state-owned enterprise, one
particular issue was whether the benefit would remain with the firm, or with the
firm’s owners or its productive assets. The USDOC in several cases held that even
after change of ownership of a state-owned enterprise pursuant to sale at arm’s length
and at fair market value, it could continue to impose CVD on the premise that pre-
privatization subsidies have not been fully exhausted. The U.S. raised the argument
that the benefit to the productive operations of the original contribution continue to
exist even after the privatization.
The issue was resolved by the WTO panel in US- Lead Bismuth II, whose reasoning
was upheld by the AB:
Box 3: Pass-Through Benefit and Privatization
Privatization at arm’s length and; for fair market value must lead to the conclusion that the
privatized producer paid for what he got and thus did not get any benefit or advantage from
the prior financial contribution bestowed upon the state-owned producer. While Members
may maintain a rebuttable presumption that the benefit from financial contributions (or
subsidization) continues to accrue to the privatized producer, privatization at arm’s length and
for fair market value is sufficient to rebut such a presumption. PR, US- Lead Bismuth II,
para. 7.82
4.2. What is specificity?
Once the existence of a financial contribution along with the conferment of benefit
has been established, a subsidy is deemed to exist. However, only “specific” subsidies
are subject to regulation under the SCMA. Therefore, a discussion on the concept of
specificity is central to classifying a government support as a ‘subsidy’.67
Art. 2 of the SCMA provides that a subsidy to be actionable, it must be specific to

“certain enterprises”.68 This means that the subsidy in question must be specific to an
enterprise, industry or a group of enterprises or industries within the jurisdiction of
the authority that is granting the subsidy.
However, Art. 2.1 of the SCMA clarifies that a subsidy is specific not only when it is
limited to certain enterprises by law (de jure) but also where the subsidy is provided
in fact (de facto) only to certain enterprises.69 De jure specific subsidies are of two
67 Lester (n 2) 427.
68SCMA (n 37) art. 2.
69 SCMA (n 37) art.2.1 (b).
Page 28 of 61
types: export subsidy and import substitution subsidies (discussed later in this
module).
The differences between de jure and de facto specificity are mentioned in the table
below.
De jure Specificity De facto Specificity
ʘ Where a subsidy is explicitly limited ʘ It is quite possible that a subsidy at

sectorally or regionally, either by face value is non-specific, but in fact
the granting authority, or by is operated in a specific manner.
legislation, it is de jure specific. Other factors may be considered,
including:
ʘ Where the authority or legislation
establishes an objective criteria or  the use of a subsidy programme by a
conditions governing the eligibility limited number of certain enterprises;
for, and amount of, a subsidy, the  predominant use of certain
specificity will not exist. enterprises;
 the granting of disproportionately
large amounts of subsidy to certain
enterprises, etc.
ʘ In the analysis, account must be taken

of the extent of diversification of
economic activities within the
jurisdiction as well as of the length of
time during which the subsidy
programme has been in operation.
The analysis may lead to a finding of
de facto specificity.
Sometimes, de jure grounds for a finding of specificity are absent. In such a case,
other factors may be considered:70
 Use of a subsidy program by a limited number of certain enterprises;

 Predominant use by certain enterprises;
 Grant of disproportionately large amounts to certain enterprises; and
 Manner in which discretion has been exercised by the granting authority in the
decision to grant a subsidy.
70 Matthias Herdegen, Principles of International Economic Law (OUP 2013) 247 [hereinafter “Herdgen”]
Page 29 of 61
In considering these four factors, one should take account of the diversification of
economic activities within the relevant jurisdiction, as well as the length of time that a
subsidy program has been in operation. The text of Art. 2.4 of the SCMA require that
any determination of specificity be clearly substantiated on the basis of positive
evidence.71
Further, under Art. 2 of the SCMA, all export subsidies and import substitution
subsidies within the meaning of Art. 3 of the SCMA are automatically deemed to be
specific. This has been upheld by the Panel in the US – Cotton dispute.72
4.3. What are the classes of subsidies?
Art. 3 to 9 of the SCMA establishes a three-class framework for the categorization of

subsidies and subsidy remedies:73
 Subsidies that are prohibited (the red light category);

 Subsidies that may be challenged in WTO dispute settlement proceedings
and domestically countervailed if they cause adverse trade effects (the
yellow light category); and
 Subsidies that are non-actionable and non-countervailable if they are
structured according to criteria intended to limit their potential for causing
trade distortions (the green light category).
71 SCMA (n 37) art. 2.4.

72 WTO, United States – Subsidies on Upland Cotton-Report of the Panel (8 September 2004) WT/DS267/R
[7.1153] [hereinafter “US Upland Cotton”).
73 SCMA (n 37) art. 9.
Page 30 of 61
Flowchart 4: Classes of Subsidies
Prohibited Subsidies
(Red Light Subsidies)
•Export Subsidy
Such subsidies are strictly prohibited •Import Substitution Subsidy
under the SCMA.
Such are also known as:
•Specific
Actionable Subsidies •Causes adverse effects to the
interests of other Members (
(Yello Light Subsidies) injury, nullification or
Such subsidies are subject to challenge impariment of benefits to
under the DSB is they cause injury to accuring to Members or a
the Members. A subsidy is actionable if serious prejudice including a
it is: threat thereof).
Non-actionable and Non-countervailable
Subsidies
(Green Light Subsidy)
Group of subsidies to which the

discipline of SCMA does not apply.
4.3.1. Prohibited Subsidies
Art. 3 of the SCMA lists subsidies that are prohibited under all circumstances.74 To
challenge such a subsidy successfully in WTO dispute settlement proceedings, a
complaining country need only prove that the subsidy exists; there is no need to
demonstrate that the subsidy suffered adverse trade effects. CVD action under
domestic law also may be taken against prohibited subsidies, but an affirmative injury
determination still must be made.
Two types of subsidies are prohibited under Art. 3 of the SCMA:75
 Subsidies contingent, in law or in fact, whether solely or as one of several other

conditions, on export performance (export subsidies);
 Subsidies contingent, whether solely or as one of several other conditions, on the
use of domestic rather than imported goods (import subsidies).
Flowchart 5. What constitutes “prohibited Subsidies?”

74 SCMA (n 37) art.3.
75 ibid.
Page 31 of 61
Export Subsidies
Prohibited Subsidies
Import Substitution Subsidies
4.3.1.1. Export Subsidies
Export subsidies are subsidies contingent upon export performance. This includes
programmes included in the explanatory list of export subsidies in Annex I of the
SCMA. Art. 4 of the SCMA establishes expeditious procedures for resolving disputes
concerning prohibited subsidies.76 For this, the existence of a prohibited subsidy must
be proven. If a Panel or the AB finds that the State is maintaining a prohibited subsidy,
the Dispute Settlement Body of the WTO (DSB) can authorize countermeasures if the
subsidy is not withdrawn expeditiously.77
4.3.1.2. Import Substitution Subsidies
This category of prohibited subsidies is defined as subsidies contingent, whether

solely or as one of several other conditions, on the use of domestic over imported
goods.78 These often take the form of local content requirements (“LCR”), making the
analysis complicated. It must be noted that Art. 3.1(b) SCMA mentions the term
“goods”, but since local content requirements often comprises not only goods but also
other costs items, the requirements themselves require deep scrutiny.79
“… We believe a finding that Article 3.1(b) extends

only to contingency “in law” upon the use of domestic
over imported goods would be contrary to the object
and purpose of the SCM [agreement], because it would
make circumvention of obligations by Members too
easy.” ABR, Canada –Autos [142].
In Canada- Autos, Canada’s import duty exemption for imports by certain

manufacturers was challenged. Amongst other issues such as MFN and National
Treatment (‘NT’), the Panel and subsequently, the AB also discussed prohibited
subsidies at length. The import duty exemption implemented by the government of
Canada was in conjunction with a “production to sales ratio” requirement.
76SCMA (n 37) art. 4.
77 US International Trade Administration. Enforcement and Compliance, ‘Statement of Administrative
Actions: Agreement on Subsidies and Countervailing Measures’
<http://enforcement.trade.gov/regs/uraa/saa-cv.html> accessed on 12 July 2014.
78Lester (n 2) 441.
79 SCMA (n 37) art.3.1 (b).
Page 32 of 61
With regard to Export Subsidies, the AB upheld the Panel’s interpretation of Art 3.1
(a) SCMA that the duty exemption in conjunction with the ratio requirements was a
prohibited subsidy that was contingent “in law” or de jure. This was because the
amount of the duty exemption earned by a domestic manufacturer was directly
dependent upon the amount exported. The AB further noted that Art 3.1 (b) SCMA,
dealing with import prohibition subsidies, extended to subsidies that are contingent
“in fact” or de facto upon the use of domestic over imported goods. In this regard, the
AB was of the opinion that the Panel’s analysis had insufficient factual basis.
In the US – Upland Cotton dispute,80 US’ agricultural “domestic support” measures,

export credit guarantees and other measure were alleged to be export and domestic
content subsidies and consequently challenged by Brazil. Brazil opined that such
schemes implemented by the US were adversely affecting Brazil’s domestic industry.
After a detailed analysis, the AB held that US’ export credit guarantee programmes at
issue were “export subsidies” within the terms of the SCMA.
4.3.2. Actionable Subsidies
In essence, the use of the term “actionable” means that under this provision subsidies
are not prohibited outright, as they are under the category of prohibited subsidies, but
an action against the measure may be brought if it is negatively impacting trade.81 Art.
5 SCMA sets out three conditions for a specific subsidy to be treated as actionable
subsides under the second conditions of having an adverse effect on trade:82
Flowchart 6. Adverse Effects
80 WTO, United States – Subsidies on Upland Cotton- Report of the Panel (8 September 2004) WT/DS267/R.
81 Lester (n 2) 441.
82 SCMA (n 37) art. 5.
Page 33 of 61
Injury to domestic industry of another WTO Member
Nullification or impairment of benefits accruing directly or indirectly

to other WTO members (in particular, a country may not introduce or
increase a subsidy that has the effect of negating the value of a tariff Adverse Effects
cut)
Serious prejudice to the interests of another member
4.3.2.1. What is injury?
Footnote 45 SCMA clarifies that the term “injury” to mean material injury to a
domestic industry. 83 This has been clarified by the AB in the US – Carbon Steel,
where it was alleged by the EC that CVD imposed by the US on imports of certain
corrosion-resistant carbon steel flat products (“corrosion resistant steel”) was in
contradiction of the SCMA. This dispute related, in particular, to the final results of a
full sunset review of the measure which was carried out by USDOC. The USDOC
found that revocation of the CVD order would likely to lead to continuation or
recurrence of a countervailable subsidy. One of the issues that the AB had to deal
with was the term “injury”:84
Moreover, footnote 45 to Art. 15 indicates that, in the

SCMA, the term “injury” is, “unless otherwise
specified”, [to] be taken to mean material injury to a
domestic industry, threat of material injury to a
domestic industry or material retardation of the
establishment of such an industry and shall be
interpreted in accordance with the provisions of Article
15.
Material injury has been defined in Art. 15.1 of the SCMA.85 This is mentioned in
greater detail in the subsequent section.
83 Lester (n 2) 443.
84 WTO, United States – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel Flat Products from
Germany- Report of the Appellate Body (28 November 2002) WT/DS213/AB/R [78] [hereinafter “US-Steel”).
85 SCMA (n 37) art. 15.1.
Page 34 of 61
4.3.2.2. What is serious prejudice?
Serious prejudice arises where the effect of a subsidy is manifested in: import
displacement or impediment in either the subsidizing-country or third-country
markets; significant price undercutting, significant price suppression, price depression
or lost sales in any market; or an increase in world market share.86 In other words,
serious prejudice covers the negative effect of the subsidies in the market of the
subsidizing Member, as well as in a third country market. Under the SCMA, a
determination of serious prejudice must be based on measurable, verifiable data.87Art.
6.4 to Art. 6.6 of the SCMA provide more detailed guidance on the criteria set out in
Art. 6.3. They do not, however, articulate any defenses to allegations of serious
prejudice.88 (Such defenses are contained in Arts. 6.7 and 6.8 SCMA).
Box 4: Serious Prejudice
Article 6.3: Serious Prejudice
Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several
of the following apply:
(a) the effect of the subsidy is to displace or impede the imports of a like product of another Member
into the market of the subsidizing Member;
(b) the effect of the subsidy is to displace or impede the exports of a like product of another Member
from a third country market;
(c) the effect of the subsidy is a significant price undercutting by the subsidized product as compared
with the price of a like product of another Member in the same market or significant price suppression,
price depression or lost sales in the same market;
(d) the effect of the subsidy is an increase in the world market share of the subsidizing Member in a
particular subsidized primary product or commodity(17) as compared to the average share it had during
the previous period of three years and this increase follows a consistent trend over a period when
subsidies have been granted.
(footnote original) 17 Unless other multilaterally agreed specific rules apply to the trade in the product
or commodity in question.
If one of the conditions of Art. 6(3) is met then, “serious prejudice” may exist. The
SCMA gives no additional guidance of whether the conditions listed in Art. 6(3) are
sufficient for serious prejudice to exist.
86 ibid 6.3.
87Congress of the United States, ‘The Effects of Tokyo Round on Multilateral Negotiations’ (July 1979),
<https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/111xx/doc11153/79doc660.pdf (last
visited on 20 July 2014).
88 ibid.
Page 35 of 61
In the case of actionable subsidies, the complainant must establish adverse effects.
Therefore in claims involving serious prejudice, adverse effects are required to be
established. In US- Upland Cotton, the adverse effects were found to entail price
suppression for upland cotton in the world market. The various U.S. domestic
subsidies were cotton were considered as the cause for the price suppression.
Similarly in the case of EC- Large Aircraft, subsidies by EU member countries to
Airbus were considered to have adverse effects on Boeing, the U.S. company. The
adverse effects were noticed in the nature of displacement of imports in the European
Market, displacement of export from other third country markets and lost sales.
Conditions for application of “Serious Prejudice”
The Panel, in US — Upland Cotton (Article 21.5 —

Brazil) has demonstrated the conditions to determine
“serious prejudice”: 89 “Article 6.3(c) of the SCM
Agreement provides that “serious prejudice in the sense
of paragraph (c) of Article 5 may arise in any case
where one or several of the following apply” (emphasis
added). The Panel considers that this phrase must be
interpreted to mean that “the situations listed in Article
6.3(a)-(d) in themselves constitute serious prejudice”.
PR, US- Upland Cotton [10.255]
Notably, the SCMA refers to two kinds of actionable subsidies against which action
can be taken in the WTO or in domestic CVD proceedings if adverse effects are
established.90
 The first type of subsidies are those that are not otherwise dealt with by the SCMA as
prohibited or non-actionable subsidies;
o
 The second (termed dark amber subsidies), listed in Art.6.1, are presumed to cause
serious prejudice.
Where serious prejudice is presumed, the burden is placed on the government that has
allegedly provided the subsidy to demonstrate that serious prejudice did not result
from the subsidization in question. The four “dark amber” subsidies are:
 Total subsidization of a product exceeding five percent ad valorem, which is

calculated in accordance with Annex IV on a cost-to-the-government basis;
 Subsidies to cover operating losses sustained by an industry;
 Subsidies to cover operating losses sustained by an enterprise other than one-time
measures that are non-recurrent and cannot be repeated for that enterprise and
89 PR, US-Upland Cotton (n 73) at [10.255].

90 ibid [10.255].
Page 36 of 61
that are given merely to provide time for the development of long-term solutions
and to avoid acute social problems; and
 Direct forgiveness of debt.
Art. 7 SCMA and Annex V establish expeditious and effective procedures for
resolving disputes regarding “dark amber” and “yellow light” subsidies. The
procedures are virtually identical to those for other WTO dispute settlement
proceedings.91
 Once a Member requests consultations regarding such a subsidy, the SCMA allots
180 days for completion of the panel proceedings and the issuance of a decision by
the DSB.
o
 The SCMA provides an additional 60 days for appeals of panel findings.
o
 The losing party cannot block adoption of an adverse panel or AB report and the DSB
must authorize countermeasures where a signatory has not either withdrawn a subsidy
found to be causing serious prejudice or eliminated its adverse effects within six
months.
“Injury” and “Serious Prejudice”
Are “injury” and “serious prejudice” the same?
“In short, we see serious prejudice as an entirely

different concept from injury. Rather than having to do
with the condition of a particular domestic industry
within the territory of a Member (the subject matter of
injury analysis), in our view serious prejudice has to do
in the first instance with negative effects on a
Member’s trade interests in respect of a product caused
by another Member’s subsidization.” PR, Korea —
Commercial Vessels [7.578]
4.3.3. Non-Actionable Subsidies
Art. 8.2 SCMA sets out the criteria and conditions under which three types of
subsidies may be non-actionable:92
 Government assistance for industrial research and pre-competitive

development activity;
 Government assistance to disadvantaged regions; and
 Government assistance to adapt existing plant and equipment to new
environmental requirements.
91SCMA (n 37) art. 7.

92 ibid art. 8.2.
Page 37 of 61
This category applied provisionally for five years ending 31 December 1999, and
pursuant to Art. 31 SCMA, could be extended by consensus of the SCM Committee.93
As of 31 December 1999, no such consensus had been reached resulting in the expiry
of this provision.
5. IMPOSITION OF COUNTERVAILING MEASURES

5.1. Against what kind of subsidies can countervailing measures be imposed
upon?
Countervailing measures can be imposed against two types of subsidies:
 Actionable subsidies
 Prohibited subsidies
However, for countervailing measures to be imposed, a WTO Member must fulfill:
 Existence of a subsidy scheme;

 Injury to its domestic industry producing like products; and
 Causal link between (a) and (b)
The SCMA also distinguishes between definitive CVDs and provisional CVDs.
Definitive CVDs are imposed at the end of the investigation. On the other hand,
provisional CVDs are imposed on the basis of a preliminary finding of subsidy
causing injury. 94 However, the investigation must be initiated in accordance with
Art.11 SCMA.95
5.1.1. Substantive Requirement
A WTO Member who is attempting to impose a CVD measure must demonstrate that
a subsidy must be causing injury or a threat of injury to the domestic industry
producing the same product (as you may recall, “what is a subsidy” has already been
discussed at an earlier stage).Thus, the three substantive requirements which is
required to be proven before the imposition of a CVD measure are as follows:
 Injury
 Like Products
 Causality
a.) Injury: The definition of material injury is provided in Art. 15 SCMA. 96 For
“injury” to be demonstrated, a Member must disclose “positive evidence”
regarding the volume of the subsidized imports and their effect on prices in the
93 ibid art. 31.

94 ibid art.17.
95 ibid art. 11; for more information, kindly refer to <http://www.wto.org/english/docs_e/legal_e/24-
scm_02_e.htm#articleXV> accessed on 19 July 2014.

96 ibid art.15.
Page 38 of 61
domestic prices for “like products”. Material injury has been defined in Art. 15.1
SCMA:
Art. 15.1 SCMA: Definition of Material Injury
“A determination of injury for purposes of Article VI

GATT 1994 shall be based on positive evidence and
involve an objective examination of both (a) the volume
of the subsidized imports and the effect of the
subsidized imports on prices in the domestic market for
like products and (b) the consequent impact of these
imports on the domestic producers of such products.”
What is positive evidence?
“The term “positive evidence” related, in our view, to

the quality of the evidence that authorities may rely on
in making a determination. The word “positive” means
to us that the evidence must be of an affirmative,
objective and verifiable character, and must be credible.”
ABR, EC-Bed Linen (Article 21.5 – India) [114]
The evaluation of volume requires an IA to consider whether there has been a

significant increase in subsidized imports. 97 The SCMA clarifies that the eventual
estimation of volume could be based on one or several factors. However, such
culmination of several factors is permitted when the conditions required by Art. 15.2
SCMA has been fulfilled.
What are the conditions under Art 15.2 of SCMA?
“There are three ways in which an investigating

authority may comply with the Article 15.2 requirement
to “consider whether there has been a significant
increase in subsidized imports.” First, the investigating
authority may consider whether there has been a
significant increase in the volume of subsidized imports
in absolute terms. Second, the investigating authority
may consider whether there has been a significant
increase in the volume of subsidized imports relative to
domestic production. Third, the investigating authority
may consider whether there has been a significant
increase in the volume of subsidized imports relative to
domestic consumption. Article 15.2 provides that “[n]o
97 This may be in absolute or relative terms.
Page 39 of 61
one or several of these factors can necessarily give
decisive guidance.” PR, US — DRAMs [7.223].
Art. 15.4 of the SCMA requires that the examination of the impact of the dumped
imports on the domestic industry shall include an evaluation of all relevant economic
factors and indices having a bearing on the state of the industry and then mentions 15
specific factors. Art. 15.4 SCMA concludes that this list is not exhaustive and that no
single or several of these factors can necessarily give decisive guidance. Some of
these are as under:98
ʘ Actual and potential decline in output;

ʘ Sales;
ʘ Market Share;
ʘ Profits;
ʘ Productivity;
ʘ Return on investments;
ʘ Utilization of capacity;
ʘ Factors affecting domestic product prices;
ʘ Actual and perceivable negative effect on cash flow;
ʘ Inventories
ʘ Employment, etc.
Threat of Injury: The SCMA requires demonstration of threat of injury. Threat of

injury must have occurred and cannot be based on conjecture or remote possibility.99
The Panel in the US- Softwood Lumber VI held that the authorities do not have to
specify one particular event that has occurred, which will cause damage in
“progression” of the given circumstances. It may happen that a domestic industry
alleges that it is not yet suffering material injury, but is threatened with injury which
will develop into material injury unless countervailing measures are imposed.100
Art. 15.7 SCMA offers special provisions for a case of threat of material injury. This
is because any investigation based on threat of material injury will necessarily be
speculative since it involves analysis of events that have not yet happened.101 That is
why a determination of threat must be based on facts and not merely on allegation,
conjecture or remote possibility (as was stated earlier).
b.) Domestic Industry producing like products: Like product has been defined in
Footnote 46 of the SCMA as a product which is identical, i.e. alike in all respects,
to the product under consideration. In absence of such a product, another product
which is not alike in all respects, but has characteristics closely resembling those
of the product under consideration is permitted.102
98 SCMA (n 37) art. 15.4.

99 ABR Softwood Lumber IV (n 51) [7.60].
100 Trademarks SA (n 15) 9.
101 SCMA (n 37) art. 15.7.
102 TradeMarks SA (n 15) 9.
Page 40 of 61
Footnote 46 to SCMA
Throughout this agreement the term “like product” shall

be interpreted to mean a product which is identical, i.e.,
alike in all respects to the products under consideration,
or in the absence of such a product, another product
which, although not alike in all respects, has
characteristics closely resembling those of the products
under consideration.
This definition is to be strictly applied. In the Indonesia – Automobile Industry, the

Panel had to determine which European and American cars were “like” the
Indonesian-produced Timor car. The Panel rejected the EC argument that all
passenger cars were “like” products, and rather took a more nuanced view, based on
data from the automotive industry itself.103
“One reasonable way for this Panel to approach the

“like product” issue is to look at the manner in which
the automotive industry itself has analyzed market
segmentation. The United States and the European
Community have submitted information regarding the
market segmentation approach taken by DRI”s Global
Automotive Group, a company whose clients include all
major auto manufacturers, including KIA, PT TPN”s
national car partner. DRI has in its analysis considered
the physical characteristics of the cars in question when
designing its segmentation. It has used as an initial filter
the size of the vehicle, but it has then divided cars of a
given size into upper and lower end categories, and has
moved luxury cars, regardless of size, from lower
segments to the E segment. We consider such an
approach, which segments the market based on a
combination of size and price/market position, to be a
sensible one which is consistent with the criteria
relevant to “like product” analysis under the ASCM.”
PR, Indonesia – Automobile Industry [14.234].
The Panel in Indonesia – Automobiles Industry concluded that finished-Timors and

comparable kit- car imports were alike in the circumstances of the case.104It is noted
that the jurisprudence involving “like products” refused to adopt a formalistic
understanding.105
103 ibid.
104 WTO, Indonesia – Certain Measures Affecting the Automobile Industry- Report of the Panel (2 July 1998)
WT/DS54/R [14.234–14.235] [hereinafter “Indonesia-Autos”].
Page 41 of 61
5.1.1.1. What is a domestic industry?
Art. 16.1 SCMA defines domestic industry as domestic producers as a whole of like
products, or those of them whose collective output of the products constitutes a major
proportion of the total domestic production of those products. The text appurtenant to
Art. 16.1 SCMA reads as follows:
Article 16.1 SCMA

For the purposes of this Agreement, the term “domestic
industry” shall, except as provided in paragraph 2, be
interpreted as referring to the domestic producers as a
whole of the like products or to those of them whose
collective output of the products constitutes a major
proportion of the total domestic production of those
products, except that when producers are related to the
exporters or importers or are themselves importers of
the allegedly subsidized product or a like product from
other countries, the term “domestic industry” may be
interpreted as referring to the rest of the producers.”
In US — Offset Act (Byrd Amendment), the Appellate Body noted that Article 11.4 of
the SCM Agreement requires investigating authorities to “determine” whether an
application for the initiation of an investigation has been “made by or on behalf of the
domestic industry”. If a sufficient number of domestic producers have “expressed
support” and the thresholds set out in Article 11.4 of the SCM Agreement have
therefore been met, the “application shall be considered to have made been by or on
behalf of the domestic industry”.
One of the issues in Mexico – Oil was whether enterprises might be excluded as a
domestic “producer” of the like product solely on the basis that they lack actual
output at particular defined moments. The panel held that there is no requirement that
a particular producer be producing the like product at the moment the application was
filed.106
In certain cases, subsidies to an upstream product can result in benefits to the

downstream product. Although the input may not be a like product for the purpose of
domestic industry standing, if it can be demonstrated that the subsidies have passed
through to the downstream product which was exported, then CVD duties can be
maintained.107
106 WTO, Mexico – Definitive Countervailing Measures on Olive Oil from the European Communities- Report of the
Panel, WT/DS341/R (4 September 2008) [7.188].
107 ABR, US- Softwood Lumber III (n 51) [163].
Page 42 of 61
c.) Causal Nexus between subsidy and Injury: Art. 15.5 SCMA requires a causal
nexus between the subsidy and the material injury. The text of Art. 15.5 SCMA
has been reproduced below:
It must be demonstrated that the subsidized imports are,

through the effects of subsidies, causing injury within
the meaning of this Agreement. The demonstration of a
causal relationship between the subsidized imports and
the injury to the domestic industry shall be based on an
examination of all relevant evidence before the
authorities. The authorities shall also examine any
known factors other than the subsidized imports which
at the same time are injuring the domestic industry, and
the injuries caused by these other factors must not be
attributed to the subsidized imports. Factors which may
be relevant in this respect include, inter alia, the
volumes and prices of non-subsidized imports of the
product in question, contraction in demand or changes
in the patterns of consumption, trade restrictive
practices of and competition between the foreign and
domestic producers, developments in technology and
the export performance and productivity of the domestic
industry.
According to Bossche, this provision imposes a dual obligation:108
ʘ Attribute injury to subsidized imports; and

ʘ Ensure that injury caused by factors other than subsidized imports is not
attributed to subsidized imports. (‘Non-attribution’ test)
The evaluation of import volumes, prices and their impact on the domestic industry is
helpful in assessing whether the domestic industry has suffered material injury.
Further, these factors will also be indicative of whether the injury has been caused by
the dumped imports or by other factors. Footnote 47 SCMA states that the
demonstration of the causal link must be based on an examination of all relevant
evidence before the IAs. IAs must also examine factors other than the subsidized
imports injuring the domestic industry at the same time. The resulting injury caused
by these factors must not be attributable to the dumped imports.
5.2. Procedural Requirement
Flow chart 7: Procedures under SCMA
108 Bossche (n 21) 531.
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Article 11: Initiation and
Article 21: Duration and Article 22: Public notice and
subsequent investigation,
review of countervailing explanation of determinations
including the standing
duties and undertakings; measures;
determination;
Article 12: Evidence,

including due process rights of Article 20: Retroactivity; Article 23: Judicial Review
interested parties;
Article 19: Imposition and

Article 13: Pre-initiation
collection of countervailing
consultations;
duties;
Article 17: Provisional

Article 18: Undertakings;
measures;
5.3. Other Requirements
STEP 1: Contents application A countervailing duty case normally starts with the official
submission of a written complaint by the domestic industry to the
importing country authorities that injurious subsidization is
taking place. This complaint is called the application in the
SCMA. Art. 11.2 contains requirements for the contents of this
application.
STEP 2: Pre-initiation examination Art. 11.3 imposes the obligation on the importing country
authorities to review, before initiation, the accuracy and the
adequacy of the evidence in the application. However, as Art.
11.3 does not provide any details on the nature of this review, it
is difficult for Panels to judge whether importing country
authorities have complied with Art. 11.3.
STEP 3: Standing determination Under Art. 11.4 SCMA, importing country authorities must
determine, before initiation and on the basis of an examination of
the degree of support for, or opposition to, the application
expressed by domestic producers of the like product that the
application has been made by or on behalf of the domestic
industry.
STEP 4: Pre-initiation consultations Art. 13 SCMA requires an importing Member to engage in
consultations with the exporting Member prior to initiation, with
the aim of clarifying the situation and arriving at a mutually
agreed solution.
STEP 5: De minimis/negligibility Art. 11.9 contains the important de minimis rule that the
rules investigation shall be promptly terminated if the subsidization
margin is less than 1% ad valorem. Similarly, prompt termination
is required where the volume of subsidized imports, actual or
potential, from a particular country is negligible.
STEP 6: Investigation deadline Art. 11.11 provides that investigations shall normally be
concluded within one year and in no case more than 18 months
after their initiation. The 18 month deadline appears to be
absolute.
Page 44 of 61
5.4. Imposition of CVDs
5.4.1. How to calculate the benefit?
The general rules for calculation of value of subsidy are as follows:
Step I: Allocation period and The subsidy amount has to be established during the Period of Investigation
allocation (POI, which is normally the most recent financial year), but as many subsidies
are effective for a number of years, subsidies granted before the POI should
also be investigated; Per unit subsidy: Weighted average value over the POI
(e.g. duty drawback);Global sum subsidy: Allocation of the global sum to each
unit of the product as appropriate (e.g. machinery)
Allocation involves two exercises:
1. Attribution to the POI of subsidies granted before the POI; and

2. Allocation of the subsidy amount per unit of the like product.
Step II: Allocation to the IP of Recurring subsidies (e.g. tax incentives), which effects are felt immediately
portion of subsidies granted after granting: the expensed amount in the POI should be increased by the
before the IP
annual commercial interest rate; Non-recurring subsidies linked to the
acquisition of fixed assets (e.g. machinery): total value of subsidy has to be
spread over the normal depreciation period of the assets.
Step III: Appropriate Once the subsidy amount for the POI has been established, the per unit amount
denominator for allocation of is derived by allocating it over the appropriate denominator consisting of the
subsidy amount
volume of sales or exports of the product concerned.
Appropriate denominator:
Export subsidies: Export volume during the POI;

Non-export subsidies: Total sales (domestic plus export);
If the benefit of a subsidy is limited to a particular product, the denominator
should reflect only sales of that product.
Step IV:Deduction from Allowed deductions from the amount of subsidy: Any application fee or cost
amount of subsidy necessarily incurred to qualify for, or to obtain the subsidy, directly paid to the
government in the POI; Export taxes, duties or other charges levied on the
export of a product, specifically intended to offset the subsidy.
Page 45 of 61
5.4.2. Calculation of Subsidy
Calculating the amount of subsidy and value of a subsidy presents complex
accounting issues which cannot be fully explored in this module 109 . Once the IA
establishes that a subsidy is countervailable, intricate formulas are employed to
determine how the subsidy be allocated over the production of the like product.110 In
general terms, the per unit subsidy is determined by dividing the subsidy by the
number of units produced (in the case of domestic subsidies) or exported (in the case
of export subsidies). The benefits or effects of the subsidy may extend beyond the
amount of subsidization
5.4.3. Per Unit/Ad Valorem Subsidy
The SCMA assumes that an important effect of a subsidy is always to reduce a firm’s
costs and the methodology adopted to calculate CVD’s therefore reflects the same.111
The objective of the calculation is to arrive at the amount of subsidy per unit of
production during the investigation period.112 In the case of consumer products, such
as television sets, the appropriate unit would be each individual item. 113 If bulk
products, such as fertilizers or chemicals, are involved, it would be appropriate to
calculate the subsidy, say, per ton, or other appropriate unit of measurement. 114
Therefore, the simplest type of subsidy is that granted on a per unit basis.115
Per unit subsidy can be converted into an ad valorem rate by expressing the per unit
subsidy as a percentage of the average CIF (duty unpaid) unit import price. In this
way it can be established whether the subsidy amount is de minimis since this is
expressed ad valorem. In certain circumstances, it may also be considered to be
appropriate to express the CVD on an ad valorem basis.
Box 5. Numerical Example
Company A which is located in an Export Promotion Zone, receives an

income tax exemption if it wholly exports its product, namely Urea.
During the period of investigation, Company A produced and exported
100000 tonnes of Urea. The Company made a profit of US$ 4 million on
Urea during the POI. The normal income tax rate in Company A’s
jurisdiction is 25percent. The value of the income tax exemption for
Company A, based on this tax rate, is US $ 1 million, which equates to a
per tonne value of US $10. The interest rate applicable in that country is
10 percent per annum. Since the tax exemption has an equivalent effect
to a cash grant, the value of countervailable export subsidy is US $ 11
109 Foreign Affairs, Trade and Development Canada, Government of Canada, ‘U.S. Trade Remedy Law:
The Canadian Experience’ <http://www.international.gc.ca/trade-agreements-accords-
commerciaux/topics-domaines/disp-diff/section02.aspx?lang=eng> accessed on 20 June 2014.
110 ibid.
111 European Commission, ‘Guidelines for the Calculation of the amount of subsidy in countervailing duty
investigations’ Official Journal of the European Commission (17.12.98) Official Journal of the European
Communities (98/c 394/04).
112 ibid.
113 ibid.
114 ibid.
115 ibid.
Page 46 of 61
per tonne.
Once determined, CVDs can be imposed on an aggregate basis or a lesser duty rate
basis.
a) Aggregate Basis: The text of Art. 19.3 SCMA states:116
“When a countervailing duty is imposed in respect of any product, such

countervailing duty shall be levied, in the appropriate amounts in each case,
on a non-discriminatory basis on imports of such product from all sources
found to be subsidized and causing injury, except as to imports from those
sources which have renounced any subsidies in question or from which
undertakings under the terms of this Agreement have been accepted. Any
exporter whose exports are subject to a definitive countervailing duty but who
was not actually investigated for reasons other than a refusal to cooperate,
shall be entitled to an expedited review in order that the investigating
authorities promptly establish an individual countervailing duty rate for that
exporter.”
As can been seen from the text above, Art. 19.3 of the SCMA permits the Members to
impose duties on an aggregate basis. This means that all imports originating in a
country that is found to be subsidized reserve a right to establish their rate of subsidy
(if any). In the US-Softwood Lumber IV dispute, the AB confirmed that this article
permitted WTO Member States to impose duties on non-investigated exporters.117
b) Lesser Duty Rate Basis: The text of Art 19.2 SCMA states:118
“The decision whether or not to impose a countervailing duty in cases where

all requirements for the imposition have been fulfilled, and the decision
whether the amount of the countervailing duty to be imposed shall be the full
amount of the subsidy or less, are decisions to be made by the authorities of
the importing Member. It is desirable that the imposition should be permissive
in the territory of all Members, that the duty should be less than the total
amount of the subsidy if such lesser duty would be adequate to remove the
injury to the domestic industry, and that procedures should be established
which would allow the authorities concerned to take due account of
representations made by domestic interested parties whose interests might be
adversely affected by the imposition of a countervailing duty.”
Thus, according to Art. 19.2 SCMA, Members can impose duties by:
 Matching the level of subsidy paid; or
116 SCMA (n 37) art. 19.3.

117 ABR, Softwood Lumber IV (n 71) [91–92].
118 SCMA (n 37) art 19.2.
Page 47 of 61
 Enough to counteract the injury suffered, provided that duties at an amount
lower than that under (a) suffices to counteract the damages suffered.
Sub-point (b) of Art 19.2 SCMA is known as lesser-duty rate.119No CVD shall be
levied on any imported product in excess of the amount of the subsidy found to exist,
calculated in terms of subsidization per unit of the subsidized and exported product as
per Art 19.4 SCMA. Certain WTO members such as the European Union has adopted
the lesser duty rule.
6. DOUBLE REMEDIES
Please refer to the discussion on “double remedies” in the module on Antidumping.
Important Provisions in the SCMA and GATT against the imposition of Double
Remedies
It should be noted that the AD and CVD measures are trade remedies which addresses two
distinct trade practices and have different purposes and effects.120The important provisions
from the standpoint of SCMA which obligated the IAs to avoid imposing double remedies on
the same products are mentioned below.
Art. VI: 5 GATT

…no product…shall be subject to both anti-dumping and
countervailing duties to compensate for the same situation of
dumping or export subsidization.
Art. VI: 3 GATT

No countervailing duty shall be levied on any product of the
territory of any contracting party imported into the territory
of another contracting party in excess of an amount equal to
the estimated bounty or subsidy determined to have been
granted, directly, or indirectly…
The AB in US-AD-CVD (China) considered the clause “in excess of an amount equal to the
estimated bounty or subsidy” Art. VI: 3 GATT and paralleled it with the intention stated
under Art. 19:3 and 19:4 of the SCMA which provides:
Art. 19.3 SCMA

When a countervailing duty is imposed in respect of any
product, such countervailing duty shall be levied, in the
appropriate amount in each case, on a non-discriminatory
basis on imports of such product…
Art. 19.4 SCMA
119Lowenfeld (n 1) 539.
120Report of the Appellate Body, United Sates- Definitive Anti-Dumping and Countervailing Duties on Certain
Products from China (11 March 2011) [239] WT/DS379/AB/R.
Page 48 of 61
No countervailing duty shall be levied on any imported
product in excess of the amount of the subsidy found to exist,
calculated in terms of subsidization per unit of the subsidized
and exported product.
Given Art. VI GATT is the founding provision for both the AD and SCMA, it therefore
reverberates in the overlaps of the SCM and AD Measures given a cumulative application of
the SCMA and ADA. The AB in the US-AD-CVD (China) held as erroneous the Panel’s
holding that “the imposition of anti-dumping duties calculated under a nonmarket economy
country methodology has no impact on whether the amount of the concurrent countervailing
duty is collected is ‘appropriate’ or ‘not’” and that the Art. 19.3 does not address the double
remedy issue. The AB held that the Panel failed to give meaning to all the terms of Art. 19.3
SCMA and stated that:
Article 19.3 SCMA

The appropriateness of the countervailing duties cannot be
determined without having regard to anti-dumping duties
imposed on the same product to offset the same subsidization.
The amount of a countervailing duty cannot be ‘appropriate’
in situations where that duty represents the full amount of the
subsidy and where the anti-dumping duties, calculated at
least to some extent on the basis of the same subsidization,
are imposed to remove the same injury to the domestic
industry. Dumping margins calculated based on [non-market
economy (surrogate normal value methods) methodology are,
for the reasons explained above, likely to include some
component that is attributable to subsidization.
The AB also held that an IA has an affirmative obligation to establish whether or to what
degree the concurrent application of CVD and AD would offset the same subsidization
twice.121
The AB distinguished between the legal and factual issue of double remedies and provided
that double remedies do not necessarily exists in every instance of concurrent application of
duties, when an IA is using the NME methodology. 122 The offsetting of the same
subsidization twice depends on whether to what extent domestic subsidies have affected the
export price of a product, and on whether the IA has taken the necessary steps to adjust its
methodology to take account of this factual situation.123 The AB held while noting that the US’
had argued that it had no statutory authority to make adjustments to CVDs, that the failure of
address the double remedies represents the failure of USDOC’s duty to determine the
“appropriate” amount of CVDs.124 The AB stated that such an obligation flows from Art. VI:
3 GATT into the Art. 19.3 and 19.4 SCMA.125
121 ibid [604].

122 ibid [599].
123 ibid.
124 ibid [604]-[605].
125 ibid [601].
Page 49 of 61
7. CALCULATION OF A SUBSIDY
As was mentioned earlier, calculation of subsidies is a complex undertaking. However, the

EC introduced guidelines for the calculation of the amount of subsidy in countervailing duty
investigations. This was published in the Official Journal of the European Communities on 17
December 1998. In it, the EC has considered several examples on how to calculate subsidies.
These have been reproduced in Annexure I of this document. This exercise will greatly help
in clearing concepts regarding calculation of subsidies.
8. EMERGENCY ACTIONS AND SAFEGUARD MEASURES
A WTO member may apply a temporary or “safeguard” measures in cases where

increase in imports of the product is causing, or is threatening to cause, serious injury
to the industry. 126 Safeguards could be in the form of extra duty, or any other
measures on the import of a product. Notably, safeguard measures were always
permitted under the GATT 1947 regime by way of Article XIX.127 However, they
were infrequently used, and some governments preferred to protect their industries
through other measures such as the “grey area” measures.128
It was the WTO Safeguards Agreement (“SGA”) which established procedural and
substantive rules, including time limits, on the use of safeguards, and in prohibiting
“grey area” measures.
8.1. General principles
The SGA sets forth the rules for application of safeguard measures pursuant to
Article XIX of GATT 1994. Safeguard measures are defined as “emergency” actions
with respect to increased imports of particular products, where such imports have
caused or threaten to cause serious injury to the importing Members domestic
industry.129
The guiding principles of the Agreement with respect to safeguard measures are:
 Such measures must be temporary;

 They may be imposed only when imports are found to cause or threaten
serious injury to a competing domestic industry;
 They be applied on a non-selective (MFN) basis that they be progressively
liberalized while in effect;
126 WTO, Technical Information on Safeguard Measures

<http://www.wto.org/english/tratop_e/safeg_e/safeg_info_e.htm> accessed on 22 July 2014
(Technical Information).
127 GATT (n 18) art XIX.
128Will be discussed late in this module.
129 Agreement on Safeguards (SGA) LT/UR/SG (15 April 1994) art.2. <http://docsonline.wto.org>
accessed 12 May 2014.
Page 50 of 61
 Member imposing them must pay compensation to the Members whose trade
is affected.
Thus, safeguard measures, unlike anti-dumping and countervailing measures, do not

require a finding of an “unfair” practice, must be applied on an MFN basis.
8.2. Historical background
Under GATT 1947, safeguards were regulated only by Article XIX, and it was the
Uruguay Round that created the SG Agreement, which adds clarity and introduces
certain changes. SGA was negotiated in because GATT Contracting Parties had been
increasingly applying a variety of so-called “grey area” measures to limit import on
certain measures. Grey area measures include bilateral voluntary export restraints,
orderly marketing agreements, etc. These measures were not imposed pursuant to
Article XIX, and thus were not subject to multilateral discipline through the GATT.
SGA now clearly prohibits such measures.130
8.3. Structure
The Agreement consists of fourteen articles and one annex. In general terms, it has
four main components:
 General provisions (Articles 1 and 2);

 Rules governing Members' application of new safeguard measures (i.e., those
applied after entry into force of WTO Agreement (Articles 3-9));
 Rules pertaining to pre-existing measures that were applied before the WTO
entry into force (Articles 10 and 11); and
 Multilateral obligations and institutions regarding application of safeguard
measures (Articles 12-14).
8.4. Conditions for application of safeguard measures
Article 2 sets forth the conditions under which safeguard measures may be applied.
These conditions are:
 Increased imports and;

 Serious injury or threat thereof caused by such increased imports.
Serious Injury is defined in the agreements as significant overall impairment in the

position of a domestic industry. In determining whether serious injury is present,
investigating authorities are to evaluate all relevant factors having a bearing on the
condition of the industry. Factors that must be analyzed are:131
130 Technical Information (n 155).

131 ibid.
Page 51 of 61
ʘ Absolute and relative rate and amount of increase in imports,
ʘ Market share taken by the increased imports,
ʘ Changes in level of sales, production, productivity, capacity, utilization, profits and
losses, and;
ʘ Employment of the domestic industry.
8.5. What is the comparator?
Unlike the SCMA which requires “like products” comparison, the SGA requires
“directly substitutable products” as a comparator. In the Korea – Alcoholic Beverage
dispute, the AB held that:
The term “directly competitive or substitutable”

describes a particular type of relationship between two
products, one imported and the other domestic. It is
evident from the wording of the term that the essence of
that relationship is that the products are in competition.
This much is clear both from the word “competitive”
which means “characterized by competition”, and from
the word “substitutable” which means “able to be
substituted”. The context of the competitive relationship
is necessarily the marketplace since this is the forum
where consumers choose between different products.
Competition in the market place is a dynamic, evolving
process. Accordingly, the wording of the term “directly
competitive or substitutable” implies that the
competitive relationship between products is not to be
analysed exclusively by reference to current consumer
preferences. In our view, the word “substitutable”
indicates that the requisite relationship may exist
between products that are not, at a given moment,
considered by consumers to be substitutes but which are,
nonetheless, capable of being substituted for one
another. ABR, Korea- Alcohol Beverages [114].
8.6. What were the “grey area” measures and how did the SGA address grey
area measures?
Grey area measures are primarily bilateral or plurilateral measures that are trade
restrictive. The SGA required the phase-out of all grey area measures that were in
effect when the SGA entered into force. Members were given a period within which
they had to notify all such measures that they maintained, as well as timetables for
phasing them out. No such pre-existing measures could be maintained beyond 31
Page 52 of 61
December 1999.132 Furthermore, the SG Agreement strictly prohibits the use of any
such measures going forward.
Primary differences between SCMA and SGA are as follows:
SCMA SGA
Objective To counteract To prevent or remedy serious injury to
subsidization that is the domestic industry caused by a surge
causing injury to the of imports (no unfair practice) and give
domestic industry time to facilitate adjustment to
competition
Nature Non-MFN MFN
Requirements Subsidized Imports; Increased Imports; Serious Injury;
Material Injury; Causal Link Causal Link
Product Like Products Directly Substitutable Products
Coverage
9. SUMMARY
SCMA primarily addresses two closely related topics: multilateral disciplines

regulating the provision of subsidies, and the use of countervailing measures to offset
injury caused by subsidized imports.
9.1. Structure of the Agreement
 Part I provides that the SCMA applies only to subsidies that are specifically provided
to an enterprise or industry or group of enterprises or industries, and defines both the
term “subsidy” and the concept of “specificity.”
 Parts II and III divide all specific subsidies into one of two categories: prohibited and
actionable, and establish certain rules and procedures with respect to each category.
 Part V establishes the substantive and procedural requirements that must be fulfilled
before a Member may apply a countervailing measure against subsidized imports.
 Parts VI and VII establish the institutional structure and notification/surveillance
modalities for implementation of the SCMA.
 Part VIII contains special and differential treatment rules for various categories of
developing country Members.
 Part IX contains transition rules for developed country and former centrally-planned
economy Members.
 Parts X and XI contain dispute settlement and final provisions.
9.2. Scope & Coverage
132 ibid.
Page 53 of 61
Part I of the SCMA provides its scope and coverage. Specifically, it establishes a
definition of the term “subsidy” and an explanation of “specificity”. Only a measure
which is a “specific subsidy” within the meaning of Part I is subject to multilateral
disciplines and can be subject to countervailing measures.
9.3. Definition of the term ‘subsidy’
Unlike the Tokyo Round Subsidies Code, the Uruguay Code of the SCMA contained
a definition of the term “subsidy”.
The definition contains three basic elements:
(i) Financial contribution

(ii) by a government or any public body within the territory of a Member
(iii) which confers a benefit. All three of these elements must be satisfied in order for
a subsidy to exist.
Concepts such as “financial contribution”, “government or any public body”, “benefit”

etc. has been explained in detail.
9.4. Categories of Subsidies
The SCMA creates two basic categories of subsidies:
(i) those that are prohibited;

(ii) those that are actionable.
9.5. Countervailing Measures
Part V of the SCM A sets forth certain substantive requirements that must be fulfilled
in order to impose a countervailing measure, as well as procedural requirements
regarding the conduct of a countervailing investigation.
A Member may not impose a countervailing measure unless it determines that there
are:
(i) subsidized imports,

(ii) injury to a domestic industry, and
(iii) causal link between the subsidized imports and the injury.
9.6. Double Remedies
Despite being wholly different in nature, occasionally a situation does arise where a
subsidized product is dumped in the domestic market of another country. This is
Page 54 of 61
known as “double remedies”. An analysis of the provisions of GATT and the SCMA
is made in this chapter to bring out a clear picture on double remedies.
9.7. Emergency Actions
“Safeguard” measures are implemented in cases where increase in imports of the

product is causing, or is threatening to cause, serious injury to the industry. These are
also known as “emergency actions”. The legal regime for this is provided under the
Safeguards Agreement (SGA). A comparison between the SCMA and the SGA has
been made for the sake of clarity.
*_*_*
10. DISPUTES REFERRED IN THE MODULE
Year Dispute Citation

1998 WTO, Indonesia – Certain Measures Affecting the Automobile WT/DS54/R
Industry- Report of the Panel
1999 WTO, United States – Tax Treatment for “Foreign Sales WT/DS108/R
Corporation”- Report of the Appellate Body
1999 WTO, Australia- Subsidies Provided to Producers and Exporters of WT/DS126/R
Automotive Leather- Report of the Panel
1999 WTO, Canada – Measures Affecting the Export of Civilian Aircraft- WT/DS70/R
Report of the Panel
2000 WTO, Canada-Certain Measures Affecting the Automotive Industry- WT/DS139/AB/R
Report of the Appellate Body
2000 WTO, United States – Tax Treatment for “Foreign Sales WT/DS108/AB/R
Corporation”- Report of the Appellate Body
2000 WTO, Canada- Certain Measures Affecting the Automotive Industry- WT/DS139/AB/R
Report of the Appellate Body
2001 WTO, United States – Measures Treating Export Restraints as WT/DS194/R
Subsidies-Report of the Panel
2001 WTO, United States – Measures Treating Export Restraints as WT/DS194/R
Subsidies-Report of the Panel
2002 WTO, United States — Countervailing Measures on Certain Products WT/DS212/AB/R
from European Communities- Report of the Appellate Body
2002 WTO, United States- Preliminary Determinations with Respect to WT/DS236/R
Certain Softwood Lumber from Canada- Report of the Panel
2002 WTO, United States – Countervailing Duties on Certain Corrosion- WT/DS213/AB/R
Resistant Carbon Steel Flat Products from Germany- Report of the
Appellate Body
2002 WTO, Canada – Certain Measures Affecting the Renewable Energy WT/DS412/R
Generation Sector-Report of the Panel
2003 WTO, United States - Final Countervailing Duty Determination with WT/DS257/R
Respect to Certain Softwood Lumber from Canada-Report of the Panel
2003 WTO, United States – Continued Dumping and Subsidy Offset Act WT/DS217/AB/R
2000- Report of the Appellate Body
Page 55 of 61
2003 WTO, United States - Final Countervailing Duty Determination with WT/DS257/AB/R
Respect to Certain Softwood Lumber from Canada-Report of the
Appellate Body
2003 WTO, European Communities – Anti-Dumping Duties on Imports of WT/DS141/AB/RW
Cotton-type Bed Linen from India-Article 21.5 Report of the Appellate
Body
2003 WTO, United States - Final Countervailing Duty Determination with WT/DS257/AB/R
Respect to Certain Softwood Lumber from Canada-Report of the
Appellate
2004 WTO, United States – Subsidies on Upland Cotton-Report of the Panel WT/DS267/R
2004 WTO, United States – Subsidies on Upland Cotton-Report of the Panel WT/DS267/R
2005 WTO, United States – Countervailing Duty Investigation on Dynamic WT/DS296/AB/R
Random Access Memory Semiconductors (DRAMS) from Korea-Report
of the Appellate Body
2005 WTO, United States – Countervailing Duty Investigation on Dynamic WT/DS296/R
Random Access Memory Semiconductors (DRAMS) from Korea-Report
of the Panel
2005 WTO, Korea- Measures Affecting Trade in Commercial Vessels- WT/DS273/R
Report of the Panel
2008 WTO, Mexico – Definitive Countervailing Measures on Olive Oil from WT/DS341/R
the European Communities- Report of the Panel
2010 WTO, United Sates- Definitive Anti-Dumping and Countervailing WT/DS379/R
Duties on Certain Products from China- Report of the Panel
2011 WTO, United States – Measures Affecting Trade in Large Civil WT/DS353/R
Aircraft – Second Complaint-Report of the Panel
2011 WTO, United States – Measures Affecting Trade in Large Civil WT/DS353/R
Aircraft – Second Complaint-Report of the Panel
2011 WTO, United Sates- Definitive Anti-Dumping and Countervailing WT/DS379/AB/R
Duties on Certain Products from China- Report of the Appellate Body
2011 WTO, United Sates- Definitive Anti-Dumping and Countervailing WT/DS379/AB/R
Duties on Certain Products from China- Report of the Appellate Body
Page 56 of 61
11. ANNEXURE: Example of Subsidy Calculation
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LAW
Safeguard Measures Page 1 of 38

Yadav Delhi
Content Writer/Author Dr. Sheela Rai National Law University,
Odisha
Delhi
Page 2 of 38
Yadav Delhi

Subject Name Law
Module Name/Title Safeguard Measures under the GATT/WTO
Module Id 11
Pre-requisites  Article XIX of the GATT and the Agreement on
Safeguards
 The relevance of unforeseen development
 The Concept of serious injury
 Purpose of safeguard measures

 What are the conditions for imposition of
safeguard measures?
 How panel/appellate body have balanced
between the need for safeguard measures
and avoidance of excess of protectionism?
 What are the ambiguities in the provisions
relating to safeguard measures in the WTO?
Keywords Safeguards, injury, increase in imports, causal link,
Page 3 of 38
unforeseen, review, investigation and parallelism.
E-TEXT
11.1. Introduction
11.2. Unforeseen Developments and Correlation between Article XIX of GATT

1994 and the Safeguards Agreement
11.2.1. What is an Unforeseen Development?
11.2.2. Relevance of the Requirement of Unforeseen Development Today
11.3. Increase in Imports
11.3.1. Absolute and Relative Increase
11.3.2. How to Measure Increase in Imports
11.4. Issue of Parallelism
11.5. Increase in Imports under Agreement on Agriculture
11.6. Serious Injury to the Domestic Industry
11.6.1. What is Serious Injury and threat of serious injury?
Page 4 of 38
11.6.2. Injury under Agreement on Agriculture
11.6.3. Causal Link Requirement
11.6.4. Other Conditions
11.7. Concluding Remarks
TEXT
11.1. Introduction:
The term ‘safeguard measures’ is sometimes used in wide sense including all
defense mechanisms given in the WTO to safeguard a member’s economy and
industry. As such it would include all trade remedy measures and also measures
under articles XII and XVIII. However, for our purposes we use the term ‘safeguard
measures’ in its specific sense which only includes product specific safeguard
measures given under article XIX of GATT 1994 and the Safeguards Agreement. In
this sense safeguards measures are one of the three trade remedy measures.
Other two are antidumping measures and countervailing measures. Safeguard
measures are taken when domestic industry is seriously injured by increase in
imports and seeks protection of the government to maintain its existence in the
domestic market. Government then, if conditions given in the safeguards
agreement are fulfilled, is authorized to restrict imports so that the domestic
industry gets a breathing space and is able to again stabilize its situation in the
market. However, the government in order to be justified in taking safeguard
Page 5 of 38
measures needs to fulfill certain conditions which are substantive and procedural.
Substantive conditions are three:
(a) There should be increase in imports

(b) There should be serious injury to the domestic industry producing like or
directly competitive products; and
(c) There should be causal link between increase in imports and serious injury
To Domestic industry
Increase Causing Serious producing like or directly
in Imports Injury competitive products
Procedural conditions tell us about the procedure required to be observed before

taking safeguard measures and period upto which safeguard measures can be
taken. Let us first examine the substantive conditions. Procedural requirements
would be given briefly at the end.
11.2. Unforeseen Developments and Correlation between Article XIX of GATT

1994 and the Safeguards Agreement:
Article XIX:1(a) of GATT 1994 provides:
If as a result of unforeseen developments and of the effect of the

obligations incurred by a contracting party under this Agreement,
including tariff concessions, any product is being imported into the
territory of that contracting party in such increased quantities and
under such conditions as to cause or threaten serious injury to
Page 6 of 38
domestic producers in that territory of like or directly competitive
products, the contracting party shall be free, in respect of such
product, and to the extent and for such time as may be necessary to
prevent or remedy such injury, to suspend the obligation in whole or
in part or to withdraw or modify the concession.
Article 2.1 of the Safeguards Agreement states:
A Member may apply safeguard measure to a product only if that

Member has determined, pursuant to the provisions set out below,
that such product is being imported into its territory in such
increased quantities, absolute or relative to domestic production,
and under such conditions as to cause or threaten to cause serious
injury to the domestic industry that produces like or directly
competitive products.
As it can be noted the first line of Article XIX:1(a) ‘If as a result of unforeseen
developments and of the effect of the obligations incurred by a contracting party
under this Agreement, including tariff concessions’ is missing from article 2.1 of
the Safeguards Agreement which otherwise repeats all the conditions given in
article XIX:1(a). Can we say that the Safeguards Agreement has modified article
XIX:1(a) of GATT 1994? It should be remembered that the Safeguards Agreement
was finalized only in 1994 while Article XIX:1(a) was always part of GATT which
was finalized in 1947. Can we say that later agreement has modified the earlier
Page 7 of 38
agreement? How was the problem to be solved since both GATT 1994(which
includes GATT 1947) and the Safeguards Agreement are part of the WTO treaty?
The issue came up in two cases: - Korea-Dairy Products1 and Argentina-Footwear2.

European Communities was complainant in both the cases. It argued that Korea
and Argentina had not fulfilled the requirement of Article XIX:1(a) in their
investigation process therefore safeguard measures taken by them was not
compatible with the WTO. According to the EC there was nothing on record which
showed that the investigating authorities in the two countries before authorizing
safeguard measures had established that increase in imports was due to
unforeseen developments and tariff obligations undertaken by the parties under
GATT 1994. Korea and Argentina argued that GATT was finalized in 1947 when the
drafters were not sure about the fate of the proposed agreement. In 1994 after
fifty years agreement on safeguards was finalized and the drafters of the
safeguards agreement consciously dropped the first line of article XIX:1(a) from
article 2.1 of the safeguards agreement. Korea and Argentina cited Appellate
Body decision in the case of Brazil-Measures Affecting Desiccated Coconut3
wherein the Appellate Body had stated that if there was a conflict between the
general provisions of GATT 1994 and the specific agreements then provisions of
specific agreements would prevail. In this case there was conflict between article
XVI of GATT 1994 and the Agreement on Subsidies and Countervailing Measures.
1
Korea- Definitive Safeguard Measures on Imports of Certain Dairy Products WT/DS98/AB/R
2
Argentina-Safeguard Measures on Imports of Footwear WT/DS121/AB/R
3
WT/DS22/AB/R
Page 8 of 38
Appellate Body held that provision in the Agreement on Subsidies and
countervailing measures would prevail.
In the two safeguard cases mentioned above, Panel and Appellate Body reached
different decisions. Panel agreed with the respondents and held that the first line
of article XIX: 1(a) reflects the mental reservations in the minds of drafters about
the fate and outcome of GATT 1947.4 GATT was the first multilateral trade
agreement signed not long after World War II. Contracting parties had no
experience with such type of agreement and were unsure of its effect on their
economies. Therefore the provision starts with a rider that if there are unforeseen
conditions(conditions which contracting parties are not able to visualize at the
time) and there is an increase in imports causing serious injury to domestic
industry, contracting parties can take recourse to article XIX. Panel went on to say
that after 50 years of working of the GATT members now did not feel any
uncertainty about the outcome of their commitment in the WTO therefore, the
phrase was removed by the drafters of the Safeguards Agreement.
Appellate Body, however, reversed the findings of the panel and held that article
XIX of GATT 1994 and the Safeguards Agreement together are part of a single
WTO treaty. Therefore it would interpret the WTO treaty in a way in which every
provision of the treaty gets fullest application in a harmonious way. Appellate
Body further stated that in international law one treaty prevails over other only in
case of conflict and for a conflict to exist it is necessary to establish that the two
treaties cannot be simultaneously applied. According to the Appellate Body such a
4
WT/DS98/R, WT/DS121/R
Page 9 of 38
conflict did not exist between article XIX and the Safeguards Agreement,
therefore, both provisions of the WTO Agreement would be given fullest
application. Appellate Body also referred to article 1 and article 11.1 of the
Safeguards Agreement. Article 1 of the safeguards agreement states;
This Agreement establishes rules for the application of safeguard

measures which shall be understood to mean those measures
provided for in Article XIX of GATT 1994.
Article 11.1(a) of the Safeguards Agreement states;
A Member shall not take or seek any emergency action on imports of

particular products as set forth in Article XIX of GATT 1994 unless
such action conforms with the provisions of that Arrticle applied in
accordance with this Agreement.
On the basis of the above provisions Appellate Body pointed out that Safeguards
Agreement itself requires that safeguard measures should be applied in
accordance with article XIX of GATT 1994. Therefore there was nothing in the
Safeguards Agreement which indicates the intention of the drafters to amend
application of article XIX:1(a) in accordance with article 2.1 of the Safeguards
Agreement. Had the drafters wanted to amend article XIX:1(a) by article 2.1 of the
Safeguards Agreement they would clearly have incorporated their intention in the
text of the agreement.
The Appellate Body, however, went on to state that although the investigating
authority has to establish existence of unforeseen developments, it was not an
Page 10 of 38
additional condition to the three conditions given in article 2.1 of the Safeguards
Agreement. It was just a factual circumstance and it only needs to be shown that
imports increased due to circumstances that could not be foreseen. Well, the
riddle is- what is the difference between a condition and a circumstance?
Appellate Body did not solve it. Panel in United States-Fresh Chilled Lamb5
pointing to the failure of the Appellate Body in explaining the difference opined
that the term could be read to imply a lesser threshold of proof than that
required in establishing a condition.
11.2.1. What is an Unforeseen Development?
Definition of Unforeseen Developments was given by Czechoslovakia in the first

safeguards case United States- Report on the Withdrawal by the United States of a
Tariff Concession under Article XIX6 known as the Fur Hat case. The definition
given by the Czechoslovakia was accepted by the United States and by the
contracting parties. The definition provided:
‘Unforeseen Development’ should be interpreted to mean

developments occurring after the negotiation of the relevant tariff
concession which it would not be reasonable to expect that the
negotiators of country making the concession could and should have
foreseen at the time when the concession was negotiated.7
5
United States- Safeguard Measures on Imports of Fresh Chilled or Frozen Lamb Meat from New Zealand and
Australia WT/DS177&178/R.
6
Adopted on 27March 1951.
7
Report on the Withdrawal by the United States of a Tariff Concession under Article XIX, adopted 27 March 1951.
Para 9.
Page 11 of 38
Appellate Body in the Korea-Dairy Products and Argentina-Footwear adopted this
definition of unforeseen developments and this has now become the standard
definition of unforeseen developments. In Korea-Dairy Products case the
Appellate Body distinguished between ‘unforeseen developments’ and
‘unforeseeable developments’. According to the Appellate Body unforeseen
developments means unexpected developments and unforeseeable is defined in
the dictionaries as ‘unpredictable’ or ‘incapable of being foreseen, foretold or
anticipated’. Appellate Body felt that using ‘unforeseeable developments’
standard would be applying a higher threshold requirement for the imposition of
safeguard measures. Article XIX:1(a) provides for unforeseen developments and
not unforeseeable developments.
Requirement as well as relevance of unforeseen development can be understood

with the help of an example. In Argentina-Preserved Peaches8 the issue was
whether increase in world production was an unforeseen development. In this
case, it was shown that world production in 1999/2000 was less than one percent
higher than in 1992/93 when Uruguay Round negotiations were going on. Panel
asked Argentina as to why Argentine negotiators could not foresee or notice this
development. Argentina argued that its negotiators could not foresee that
increase in world production would become a rule rather than an exception. But
the report of the competent authority had not provided any observation that
increase in level of production had become a rule rather than an exception.
8
Argentina-Definitive Safeguard Measures on Imports of Preserved Peaches WT/DS238/R
Page 12 of 38
Therefore, Panel held that Argentina had not fulfilled the requirements of article
XIX:1(a).
The above case not only shows how unforeseen development requirement has to
be proved and what amounts to an unforeseen development, but also compels us
to question its continuance which is discussed below.
11.2.2. Relevance of the Requirement of Unforeseen Development Today:
Since the decision of the appellate body in Korea-Dairy and Argentina-Footwear,

there have been critics as well as defenders of the requirement of unforeseen
development. Important critic is Prof. Yong Shik Lee.9 Prof. Lee points out that
negotiating history of the Safeguards Agreement tells us that negotiators wanted
the agreement to be the sole authority for safeguard measures. He also tells us
that earlier drafts of the Safeguards Agreement had unforeseen development
clause which was dropped by the mid 1990s. He says that the clause does not
serve any useful purpose. Members would not have granted the concessions to
the extent they did had they foreseen developments leading to injury to their
domestic industry. Even if they did, they would have been assured of the
availability of the safeguards measures. According to Prof. Lee safeguards
measures encourages free trade by assuring the members of a safety clause in
times of need. The requirement of unforeseen developments would only
9
See generally, Yong-Shik Lee, Safeguard Measures in World Trade Legal Analysis (2005); Not Without a Clue:
Commentary on “the Persistent Puzzles of Safeguards Journal of World Trade 40(2): 385-404,2006; Safeguard
Measures: Why Are They Not Applied Consistently With the Rules Journal of World Trade 36(4): 641-673, 2002;
The Agreement on Safeguards in Patrick F.J. Macrory, Arthur E. Appleton et al ed. The World Trade Organisation:
Legal, Economic and Political Analysis 749 (Springer 2005).
Page 13 of 38
discourage members from making more concessions. Important supporters of the
continuance of the applicability of this requirement are Allen O. Sykes10 and Felix
Muller11. Prof. Sykes justifies the unforeseen development requirement by linking
the question of increase in imports to the unforeseen development issue.
According to him the level of imports in the absence of trade concession serves as
the baseline against which to measure the increase and this baseline would be
lost if one reads out the unforeseen development clause. Felix Muller supports
the requirement more or less on the basis of same arguments as is given by the
appellate body. Mavroidis and Horn are other supporters of the decision of the
appellate body.12
What is your conclusion? Is the requirement relevant or irrelevant today? Before

you conclude let me tell you my thoughts:13
1. In the light of definition of unforeseen developments, it is difficult to say

which negotiations/concessions the panel/ appellate body was referring to?
The first time when a product was committed to GATT concessions in 1947?
10
See generally, Alan O. Sykes, The WTO Agreement On Safeguards (2006); Protectionism as a “Safeguard”: A
Positive Analysis of the GATT “Escape Clause” with Normative Speculations LEXSEE 58 U. CHI. L. REV. 255;
The Persistent Puzzles of Safeguards: Lessons From The Steel Dispute 7 J. Int'l Econ. L. 523 (2004); The
Fundamental Deficiencies of the Agreement on Safeguards; A Reply to Professor Lee Journal of World Trade
40(5):979-996; The Safeguard Mess: A Critique of WTO Jurisprudence World Trade Review (2003), 2:3, 261-295.
11
Felix Mueller, Is the General Agreement on Tariffs and Trade Article XIX “Unforeseen Development Clause”
Still Effective Under the Agreement on Safeguards? Journal of World Trade 2003 37(6): 1119-1151.
12
Henrik Horn and Petros C. Mavroidis, United-States Safeguard Measures on Imports of Fresh Chilled or Frozen
Lamb Meat from New Zealand and Australia: What should be required of a Safeguard Investigation ‘in Henrik
Horn and Petros C. Mavroidis ed. The WTO Case Law of 2001 72( 2003).
13
See Sheela Rai, Recognition and Regulation of Safeguard Measures under GATT/WTO(2011); Sheela Rai,
Imposition of Safeguard Measures and Unforeseen Development Foreign Trade Review Vol XLI No. 4 January-
March 2007, 48.
Page 14 of 38
Or further reductions in tariffs, therefore also further concessions which
were made? Can a negotiator in 1947 even try to foresee developments in
2014? Even if they did can anyone remember? This gives too much
discretion to the panel and appellate body to decide whether requirement
of unforeseen development was satisfied or not.
2. In 1947 tariff concessions were made on product by product basis whereby
negotiations were conducted with contracting parties and bargaining done
for concession on each product. But now tariffs are cut across board on all
products applying certain formulas. Therefore unless there is any serious
consideration existing at the time of making concessions with regard to any
product, no negotiator makes an econometric analysis in future about
every product, there being thousands of products. Moreover, in the hard
bargaining that takes place in the negotiations it is difficult to blame a
negotiator for lack of foresight.
3. The purpose of safeguard measures is to encourage members to liberalise
trade by assuring them of flexibility and protection if their domestic
industry are facing crisis in the market. By including the ‘unforeseen
developments’ clause, recourse to safeguard measures becomes difficult
which would dissuade members from trade liberalization.
11.3. Increase in Imports:
After being familiarized with a requirement which is not a condition but a

circumstance, let us now examine the first substantive condition for imposition of
safeguard measures that is, increase in imports. Now it has to remembered,
Page 15 of 38
safeguard measures are fair trade remedy measures and exporters have not
indulged in any unfair trade practice as in case of antidumping measures and
countervailing measures. Therefore conditions for imposition of safeguard
measures are also more onerous and are also interpreted in strict manner.
11.3.1. Absolute and Relative Increase:
Increase in imports can be absolute or relative to domestic production. Under

article XIX there was some doubt earlier whether relative increase in imports
were allowed to be considered for imposition of safeguard measures. The
ambiguity has now been cleared. Article 2.1 of the Safeguards Agreement as it
may be noted, provides for both absolute and relative increase in imports. Prof.
Jackson criticizes inclusion of relative increase in imports as a protective device
and states that it would not be fair to take safeguard measures where there has
been no increase in imports but decline in domestic production and it would be
unjustified to place the burden on foreign products.14 Prof. Lee accepts that
relative increase in imports may qualify for being considered as increase in
imports but thinks that it would be difficult to prove causal link requirement
because if imports and domestic production both fall it means that injury has
been caused by general decline in demand rather than by increased imports.15
11.3.2. How to Measure Increase in Imports:
14
John H. Jackson, World Trade and the Law of GATT 555 (1969).
15
Lee, Safeguard Measures In World Trade 21 (2005)
Page 16 of 38
Do we measure increase in imports by comparing import quantities in the
beginning and end of the period of investigation (POI) or we also have to look into
the trend of imports during the period of investigation?
The issue was discussed by the Panel and the Appellate Body in Argentina-
Footwear Case. Argentina argued that past increase in imports whenever it takes
place during the period of investigation, satisfies the Agreement’s requirement of
increased imports, even when there is an intervening decline. According to
Argentina, Agreement does not tell us how an increase in imports is to be
measured and therefore end-point to end-point comparison was permitted.
Argentina also pointed out that the Agreement does not tell us as to how long
and how recent a period of investigation must be.
Panel, however, did not accept Argentina’s argument. In Argentina’s investigation

imports had declined in the intervening period by 38 percent and ratio of imports
to production declined from 33 percent to 19 percent. Panel concluded that the
decline of this magnitude in the three year period during POI could not be
considered as temporary decline and it showed the long term trend that imports
in Argentina were declining. Panel noted that the Agreement requires not any
increase in imports but increase in such quantities as to cause or threaten serious
injury. Panel said that although the agreement does not provide any numerical
guidance as to how this has to be judged, it did not mean that the requirement
was meaningless. Appellate Body upheld Panel’s interpretation and held that
increase in imports should show a trend in increase and therefore Argentina erred
Page 17 of 38
by not taking into consideration the decline in the intervening period. Appellate
Body noted:
In our view, the determination of whether the requirement of

imports ‘in such increase quantities’ is met is not a merely
mathematical or technical determination. In other words, it is not
enough for an investigation to show simply that imports of the
product this year were more than last year-or five years ago. Again
and it bears repeating, not just any increased quantities of imports
will suffice. There must be such increased quantities as to cause or
threaten to cause serious injury to the domestic industry in order to
fulfill this requirement for applying a safeguard measure. And this
language in both Article 2.1 of the Agreement on Safeguards and
Article XIX:1(a) of the GATT 1994, we believe, requires that increase
in imports must have been recent enough, sudden enough sharp
enough, and significant enough, both quantitatively and qualitatively,
to cause or threaten to cause serious injury.16
Let us see an example. In Argentina-Definitive Safeguard Measures on Imports of

Preserved Peaches17 Argentina had taken 1996-2000 as period of investigation. In
1997 and 1998 there was decline in imports due to climatic situation which
affected the production and export capacity of Greece, the leading world
producer and exporter of preserved peaches. Chile argued that increase in
16
Report of the Appellate Body, para 131.
17
WT/DS238/R
Page 18 of 38
imports after 1998 was in the nature of recovery to historical levels. Panel noted
that Argentina had taken 1998 as the base year for the determination of increase
in imports. Argentina had argued that it was not necessary to show increase in
imports for all five years of period of investigation. Recent and sharp increase in
imports would qualify as increase in imports. Panel accepted Argentina’s
argument but held that although recent and sharp increase was a necessary
condition, it was not a sufficient condition. Panel held that evaluation of the most
recent data in isolation may give a misleading picture of the domestic industry.
Panel noted that volume of imports in absolute terms in Argentina 1996-2000
declined by one-seventh in terms of volume and over one-third in terms of price.
The volume of imports in absolute terms declined over the period 1996-1998 by
more than the increase which the competent authorities identified from 1998-
2000. In light of these facts Panel held that Argentina had acted inconsistently
with article XIX:1(a) and arts 2.1 and 4.2(a) of the Safeguards Agreement.
Therefore recent increase is not enough if there is decline in the interim period
and recent increase is in the nature of recovery of imports to their previous levels.
Therefore trend of imports during the whole of period of investigation has to be

examined to see if imports have been rising to justify imposition of safeguard
measures because such increase is sufficient to cause serious injury to the
domestic industry.
The above case shows that there is no baseline given in the Safeguards
Agreement against which increase in imports can be measured. Earlier the year
1948 was considered as a natural baseline. However, with passage of time and
Page 19 of 38
further multilateral talks that baseline failed to convince. Appellate Body has tried
to fill the gap by bringing in conditions such as ‘sudden increase’ ‘recent increase’.
But how sudden and recent should the increase be? This becomes a subjective
criterion. Prof. Sykes criticizes Appellate Body decision of requiring ‘recent
enough’, ‘sharp enough’, and ‘sudden enough’ increase.18 Prof. Lee counters
Prof. Sykes by stating that the determination is an art rather than a science. He
states
A given amount of an increase in imports may well have different

impacts on the condition of different industries, depending upon the
specific circumstances and susceptibilities of the particular domestic
industries. It is why an assignment of specific numbers as cut-off
standards would be difficult, without making these standards
excessively arbitrary.19
Prof. Sykes replied by saying that his purpose was to criticize the Appellate Body’s
reliance on recent increase rather than long-term increase which according to him
conflicts with the purpose of the Safeguards Agreement.20
11.4. Issue of Parallelism:
Unlike the antidumping and countervailing measures, safeguard measures have to

be taken on MFN basis. Earlier under article XIX there was some uncertainty
18
Sykes, The WTO Agreement On Safeguards: A Commentary (2006).
19
Yong-Shik Lee, ‘Not Without Clue: Commentary on the Persistent Puzzles of Safeguards Journal of World Trade
40(2) (2006): 391
20
Sykes, The Fundamental Deficiencies of the Agreement on Safeguards: A Reply to Professor Lee Journal of
World Trade 40(5):979-996, 2006 at 995.
Page 20 of 38
whether safeguard measures can be applied on selective basis. Even though
dominant opinion was that it should be applied on MFN basis and in one case
Panel finally stated that safeguard measures was to be applied on MFN basis; it
was not specifically provided in article XIX. During the Uruguay Round there was a
debate whether safeguard measures should necessarily be taken on MFN basis.
After much debate MFN rule was accepted on the insistence of developing
countries with an exception. This would be discussed later. Now, article 2.2 of the
Safeguards Agreement clearly lays down the MFN rule and states; ‘Safeguard
Measures shall be applied to a product being imported irrespective of its source.’
As you know there are some exceptions to GATT principles. One of the important
ones is article XXIV of GATT allowing for regional and preferential/free trade
agreements under certain conditions laid down in that provision. Countries who
are members of regional, preferential/free trade agreements may avoid
compliance with certain GATT provisions like the rule of MFN in order to honour
the commitments taken under the preferential trade agreements. Article XXIV
since it is exception to GATT provisions, it is exception to article XIX also and
latter’s implementation through the Safeguards Agreement. Therefore, although
safeguard measures have to be taken on MFN basis, a country can exempt
imports from other members of a preferential trade agreement, to which the
importing country is also member, from imposition of safeguard measures. This
was accepted in Argentina-Footwear. However, principle of parallelism was
enunciated by Panel and the Appellate Body in this case. According to this
principle if the importing country does not want to take safeguard measures
Page 21 of 38
against countries which are party to preferential trade agreement to which
importing country is also a party, then the importing country would have to
exclude imports from exempted countries in assessment of increase of imports
and serious injury also. In this case Argentina included imports from Mercosur
countries and third countries in assessment of increase in imports and serious
injury but excluded imports from Mercosur countries from imposition of
safeguard measures. Safeguard measures were taken only against non-Mercosur
third countries. Appellate Body held that Argentina being party to Mercosur could
exclude imports from member countries from imposition of safeguard measures
but it has also to exclude their imports in assessment of total increase in imports
in investigation period and injury if any caused by these imports to domestic
industry. This is known as principle of parallelism.
Page 22 of 38
11.5. Increase in Imports under Agreement on Agriculture:
Agricultural products were not strictly subject to GATT rules. In the Uruguay
Round through Agreement on Agriculture efforts were made to subject trade in
agriculture to some disciplines. These disciplines related to market access (non-
tariff measures to be eliminated and converted into tariff equivalents), domestic
support (limitation and gradual reduction in aggregate measure of support i.e.,
subsidy) and export subsidy (limitation and gradual reduction in export subsidy).
Countries who transformed their existing non-tariff measures into tariffs were of
two categories-(i) those who converted their existing market access restrictions
into tariffs; (ii) those that adopted bound rate approach to tariffication. The first
category got the benefit of Special Safeguard Mechanism under article 5 of the
Page 23 of 38
Agreement on Agriculture. Unlike the Safeguards Agreement, article 5 of the
Agreement on Agriculture adopted quantitative benchmarks to examine increase
in imports. It had volume trigger and price trigger. Volume trigger operates when
imports rise beyond a particular bench mark (trigger level) and price trigger
relates to a situation when price of imports fall beyond particular benchmark. For
our purposes only former is relevant.
In volume trigger, trigger level is based on the market access opportunities.

Market access opportunities is defined as imports as a percentage of the
corresponding domestic consumption during the three preceding years for which
data are available. When market access opportunity is higher, trigger level is
lower, when market access opportunity is lower, trigger is higher.
Page 24 of 38
For example if market access opportunity is greater than 30 percent, trigger level
would be equal to 105 percent. If market access opportunity is 10 percent or less,
trigger level would be 125 percent. Base trigger level of 125 percent would apply
where domestic consumption is not taken into account. Safeguard measures can
be taken if volume of imports exceeds the sum of (a) the base trigger level
multiplied by average quantity of imports during the three preceding years for
which data are available; and (b) the absolute volume change in domestic
consumption of the product concerned in the most recent year for which data are
available compared to the preceding year. If these conditions are met, additional
duty can be imposed at a level that shall not exceed one-third of the level of
ordinary customs duty in effect in the year in which the action has been taken.
Such duty can be maintained till the end of the year in which it has been imposed.
Unlike the Safeguards Agreement, specific quantitative benchmarks are given in

article 5 of the Agreement on Agriculture. This is so because of the protectionist
history of the sector and effort being made through Agreement on Agriculture to
bring protectionism on the trade in agriculture products under some disciplines. It
has to be noted that developing countries largely did not get the benefit of article
5 because they had adopted the bound rate method for tariffication. In the Doha
Round of negotiations developing countries are making an effort to extend the
application of special safeguard mechanism (SSM) to them also and rules are
being negotiated in this regard.
Page 25 of 38
Similar to Agreement on Agriculture, Agreement on textiles and clothing also had
a special safeguard mechanism but its discussion is redundant now as Agreement
on Textiles and Clothing is no longer in operation.
11.6. Serious Injury to the Domestic Industry:
Second and third condition for imposition of safeguard measures is that there is
(a) serious injury or threat of serious injury and (b) serious injury or threat thereof
is caused by increase in imports. There are two differences from antidumping
measures here (i) instead of material injury we have serious injury which is
defined in the Safeguards Agreement as ‘total and complete impairment of
domestic industry’ (b) domestic industry is defined in wider sense which includes
not only producers of like products but also producers of directly competitive and
substitutable products. Hence while on the one hand imposition of safeguard
measures is made difficult by providing a higher threshold for injury, on the other
hand the provision has been made liberal by extending its application to wider
category of producers. However, the Appellate Body in United States-Safeguard
Measures on Imports of Fresh Chilled or Frozen Lamb Meat from New Zealand and
Australia21 held that the category should not be interpreted in very wide terms. In
this case, the International Trade Commission (ITC) of the United States included
growers and feeders of live lambs also with packers and breakers of lamb meat
for assessing the condition of the domestic industry on the ground that they were
all producers of lamb meat. US argued that there was a continuous line of
production from live lamb which was the raw material to lamb meat which was
21
WT/DS177&178/AB/R
Page 26 of 38
the finished product. According to the ITC there was coincidence of economic
interest and evidence of vertical integration in the industry. Their fortunes were
also interdependent because when processors did well, growers and feeders also
benefitted; however, when processors confronted lower prices, they passed the
lower price back to feeders and then to growers, and all suffered to some extent.
According to the Appellate Body under article 4.1(c) domestic industry includes
producers of like or directly competitive products and therefore focus is
exclusively on producers of a very specific group of products and identification of
products, and not to the process by which those products are produced.
Therefore in this case domestic industry could only include producers of lamb
meat and not of live lambs.
11.6.1. What is Serious Injury and threat of serious injury?
Article 4:1(a) defines serious injury as ‘significant overall impairment in the

position of the domestic industry’. Threat of serious injury is defined as ‘serious
injury that is clearly imminent, in accordance with provisions of paragraph 2. A
determination of the existence of a threat of serious injury shall be based on facts
and not merely on allegation, conjecture or remote possibility’. Paragraph 2 gives
an inclusive list of factors which are to be examined in determining the existence
of serious injury or threat of serious injury. It specifically states, ‘ In the
investigation to determine whether increased imports have caused or are
threatening to cause serious injury to domestic industry under the terms of this
Agreement, the competent authorities shall evaluate all relevant factors of an
objective and quantifiable nature having a bearing on the situation of that
Page 27 of 38
industry, in particular, the rate and amount of the increase in imports of the
product concerned in absolute and relative terms, the share of the domestic
market taken by the increased imports, changes in the level of sales, production,
productivity, capacity utilization, profits and losses, and employment.’
It has been decided by the Panel and the Appellate Body in Argentina-Safeguard
Measures on Imports of Footwear22 that all relevant factors mentioned in article
4.2(a) should be necessarily examined. These are the minimum factors which
have to be examined and there can be other additional factors.
Can the competent authority in any case give a positive finding on the existence
of both serious injury and threat of serious injury? In United States-Definitive
Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from
Korea,23 Panel said ‘no’ but Appellate Body said ‘yes’. Appellate Body stated that
the Agreement does not require a discreet finding whether injury is in the nature
of present serious injury or threat of serious injury. According to it safeguard
measures can be taken to the extent serious injury is caused by increase in
imports and this does not depend on whether it is characterized as serious injury
or threat of serious injury. It is noteworthy that this interpretation of the
Appellate is at odds with the Panel decision in antidumping case, Korea-
Antidumping Duties on Imports of Polyacetal Resins from the United States,24
where on the basis of argument of the United States, Panel had held that it was
necessary to provide what was the nature of injury which was caused to the
22
WT/DS121/AB/R
23
WT/DS202/R as modified by the Appellate Body report WT/DS202/AB/R
24
ADP/92
Page 28 of 38
domestic industry, present injury, threat of injury that is injury which can occur in
future or material retardation in the establishment of domestic industry, that is
domestic industry is not in existence and is not able to make its existence because
of dumping. All cannot take place simultaneously.
As to what amounts to ‘serious’ injury as distinguished from ‘material’ injury, it is

difficult to state. It has been considered as subjective assessment. In Hatter’s Fur
case, Czechoslovakia had contended that injury to the US domestic industry was
not enough to qualify as ‘serious’ injury. The working party in this case found that
the record showed some injury to the US domestic industry but was not sure
whether it would amount to serious injury or not. The burden of proof falls on the
complainant to prove that injury caused to domestic industry was not serious
enough to justify imposition of safeguard measures. The working party concluded:
Any view on [this] is essentially a matter of economic and social

judgment involving a considerable subjective element. In this
connection it may be observed that the Working Party naturally
could not have the facilities available to the United States authorities
for examining interested parties and independent witnesses from the
United States hat-making areas, and for forming judgments on the
basis of such examination. Further, it is perhaps inevitable that
governments should on occasion lend greater weight to the
difficulties or fears of there domestic producers than would any
international body, and that they may feel it necessary on social
grounds, e.g. because of lack of alternative employment in the
localities concerned, to afford a high degree of protection to
individual industries which in terms of cost of production are not
economic.25
25
Report of the Working Party, 15-16.
Page 29 of 38
Things have not changed under the Safeguards Agreement even though the
Agreement now defines serious injury. Whether analysis of relevant factors show
serious injury or not is left to the discretion of the investigating authority with
only requirement that the investigating authority show how it considers injury to
be serious injury.
11.6.2. Injury under Agreement on Agriculture:
Provisions for safeguard measures in relation to agricultural products are given in

article 5 of the Agreement on Agriculture. The provision does not have any
requirement of serious injury. What is present which may come close to some
sort of assessment on injury is the price trigger. Safeguard measures can be taken
if the CIF price of the shipment concerned falls below the trigger price equal to
the average 1986 to 1988 reference price for the product concerned. The amount
of duty that can be imposed is given in article 5.5 in terms of a sliding scale
schedule. For example, stating broadly, if trigger price difference is 10 percent or
less then no additional duty can be imposed. If trigger price difference is 10
percent to 40 percent, the additional duty can be 30%, if difference is 40% to 60%
additional duty can be equal to 50%. The trigger price concept is no doubt based
on the concept of injury to be caused to domestic industry, but is not an injury in
the same sense as required in the Safeguards Agreement. This is because both
volume trigger and price trigger cannot be invoked together. Only one of them
can be invoked and different remedies are provided for the two, i.e. volume
trigger and price trigger.
Page 30 of 38
11.6.3. Causal Link Requirement:
The third condition is whether serious injury is caused by increase in imports or

other factors are present in the economy which is adversely affecting the health
of the domestic industry. In Korea-Dairy Products, Panel accepted discretion of
the investigating authority to adopt the methodology to determine existence of
causal link between increased imports and serious injury. But in Argentina-
Safeguard Measures on Imports of Footwear, Panel adopted a three step test to
decide the existence of causal link:
(i) Whether an upward trend in import coincided with downward trend in

the injury factors, and if not, whether a reasoned explanation was
provided as to why nevertheless the data showed causation.
(ii) Whether the conditions of competition in the domestic market between
imported and domestic product as analysed, demonstrate, on the basis
of objective evidence, a causal link of the imports to any injury; and
(iii) Whether other relevant factors have been analysed and whether it is
established that injury caused by factors other than imports has not
been attributed to imports. 26
26
This test was reaffirmed by the Panel in US-Wheat Gluten and US-Lamb and US-Steel
Page 31 of 38
The last of this is called the non-attribution clause. The appellate body in US-
Wheat Gluten27 established the following three step test in deciding the non-
attribution:
27
United States- Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities
WT/DS166/R.
Page 32 of 38
Cases came before the WTO dispute settlement body challenging the US law
requiring that increased imports have to be substantial cause of injury. The US
authority did not distinguish the effects of other causes and establish that there
was causal link between increased imports and serious injury after segregating
the effects of other factors. The Appellate Body held that this was not in
accordance with the Safeguards Agreement. But the Appellate Body also said that
increased imports need not by themselves be capable of causing serious injury or
injury caused by other factors must be excluded from the determination of
serious injury. There should be ‘genuine and substantial relationship’ between
increased imports and serious injury.
Page 33 of 38
As can be seen that the Appellate Body could not lay down a clear criterion for
establishing the causal link and their decision creates confusion. However, the
Appellate Body has consistently held that US law requiring a substantial causal
relationship between increased imports and serious injury as applied was not
meeting the requirements of the Safeguards Agreement as it did not include the
process of identifying and segregating injury caused by other factors.
Decision of the Appellate Body has given rise to a debate between Prof. Sykes and
Prof. Lee.28 Prof. Sykes criticizes the Appellate Body decision on the ground that
the same factors which cause increase in imports also cause injury to the
domestic industry, e.g. fall in general demand for the goods. Therefore, the
decision of the Appellate Body is not logical. The causal link requirement can look
reasonable according to him if we interpret it in the light of unforeseen
development clause. Prof. Lee defends the requirement on the ground that we
have to examine the issue from the perspective of the domestic industry. From
this perspective if increased imports have caused serious injury to domestic
industry, it is irrelevant for them to know what has caused increase in imports.
11.6.4. Other Conditions:
28
See generally, Alan O. Sykes, The WTO Agreement On Safeguards (2006); Protectionism as a “Safeguard”: A
Positive Analysis of the GATT “Escape Clause” with Normative Speculations LEXSEE 58 U. CHI. L. REV. 255;
The Persistent Puzzles of Safeguards: Lessons From The Steel Dispute 7 J. Int'l Econ. L. 523 (2004); The
Fundamental Deficiencies of the Agreement on Safeguards; A Reply to Professor Lee Journal of World Trade
40(5):979-996; The Safeguard Mess: A Critique of WTO Jurisprudence World Trade Review (2003), 2:3, 261-295;
28
Lee, Not Without a Clue: Commentary on “the Persistent Puzzles of Safeguards” Journal of World Trade40(2)
385-404, 2006 at 397.
Page 34 of 38
Other conditions for imposition of safeguard measures are procedural in nature.
There has to be investigation done which has to result in positive finding of
increase in imports, serious injury and causal link. Request for investigation
should normally be made by the domestic industry which is defined as producers
of major proportion of the production. Principles of natural justice should be
followed that means all interested parties should be notified and hearing has to
be given to all the parties. The committee on safeguard measures should also be
notified about the initiation of the investigation and imposition of final measures.
Safeguard measures once taken can be in existence for four years and they can be
extended for next four years. They have to end after eight years. Developing
countries are allowed to take safeguard measures for ten years. Once safeguard
measures is taken on any product and it has been ended, in cannot be applied by
that country for the same product for a period equivalent of that for which the
measure was in force. For example if a safeguard measure has been in force for
six years and has been ended after that then it cannot be applied for the same
product for next six years. For developing countries the period of non-application
has to be half of the period of application. That means a developing country can
take safeguard measures after three years. If the safeguard measures is imposed
for 180 days or less it can be applied again if one year has passed since the
introduction of safeguard measures on that product and it is not applied more
than twice in the five years period in respect of same product.
Safeguard measures can be in the form of safeguards duty or quantitative

restrictions. In this way safeguard measures are an exception to article II and
Page 35 of 38
article XI of GATT 1994. If safeguard measures are taken in the form of
quantitative restrictions, then quota has to be allotted on the basis of agreement
with the exporting countries. If this is not possible then quota has to be allotted
on the basis of share of exporters in previous years. Normally safeguard measures
have to be applied on MFN basis, but if there is disproportionate increase in
imports from a particular country and safeguard measures are taken in the form
of quantitative restrictions, then it may be applied against that particular
exporting member only. Provisional safeguard measures can also be taken
pending final findings but these cannot be for more than 200 days and have to be
in the form of safeguards duty only. This is because if final findings are negative
then the safeguard duty which has been collected can be refunded but
irreparable loss can be done by quantitative restrictions. There has to be mid-
term review of the measures once taken and they can be extended beyond four
years only if before the end of this term a review is conducted which shows the
necessity of continuing the measures beyond four years.
Since safeguard measures are fair trade remedy, article XIX of GATT 1994 and
article 8 of the Safeguards Agreement provide that member taking safeguard
measures should provide substantially equivalent level of concession to exporting
members in other sectors/products. If the member fails to provide the same,
affected exporting members are free to suspend equivalent concessions towards
member taking safeguard measures.
Page 36 of 38
11.7. Concluding Remarks:
Safeguard measures are aimed to protect domestic industry. Like all trade remedy
measures they are also criticized by liberal economic thinking as anti-competitive.
According to this view it would be better to restructure or close an inefficient
industry and train the persons working in such industries in other skills, rather
than maintaining these industries at the cost of overall national welfare by
making consumers pay for it. These arguments have more force in case of
safeguard measures because they are fair trade remedy. There is no unfair trade
practice like dumping or subsidization. The arguments in favour are both political
and economic. Political argument is that existence of safeguard measures
emboldens countries to liberalise trade because opposition to trade liberalization
by the domestic industry can be bought away by stating that in case of crisis there
exist measures which can be used to give them protection. Economic argument is
that it gives an industry in crisis a protective environment to restructure itself and
come back in the market. Even if the industry has to close there would be more
orderly exit by buying time to reallocate the assets and the labour in other
enterprises. Finally it all depends how these measures are used. Too much
protection no doubt makes domestic industry uncompetitive and it would be
wrong to maintain their parasitic existence on national society; it is also true that
competition does not exist in void and domestic industries are important sources
for giving competition to exporters. It is also true that letting an entire industry to
close down may create crisis in the economy in terms of unemployment, loss of
Page 37 of 38
national income etc. The debate it should be conceded is unending. It should also
not be forgotten that these protective measures are needed only when there is a
liberal market economy.29
29
For discussion on the justification of trade remedy measures and protection see Sheela Rai, Recognition and
Regulation of Safeguard Measures (2011); Sheela Rai, Antidumping Measures: Policy Law and Practice in India
(2014).
Page 38 of 38
Law

State Trading Corporations
Delhi
Delhi
Delhi

Subject Name Law
Module Name/Title State Trading Corporations
Module Id 12
Pre-requisites  Basic knowledge of the WTO principles such as
MFN, NT, tariff concessions.
 Knowledge of the nature and functioning of state
enterprises in global economy/native domestic
jurisdiction.
Objectives  To understand the meaning of STE in context of

WTO
 Understand the discipline of the WTO and the
obligations imposed on STEs
Keywords STEs, non-discrimination, transparency

II. E-text
Introduction
State trading enterprises continue to play a vital role in sectors of economies such as
agriculture. They are also widespread and continue to contribute to a large proportion
of world trade. Their regulation thus becomes an important subject of international
trade law. The regulation of STEs also involves challenges owing to their potentially
trade distorting operations and due to the special privileges granted to them by the
respective state, vis. other industries. Article XVII of the GATT has detailed rules on
the meaning, scope and operation of STEs and the various obligations imposed by the
GATT/WTO discipline.
This module deals with the meaning and types of STEs and explores the reasons for
regulating them. It further discusses various aspects of meaning and obligations under
Article XVII of the GATT. Finally, four key obligations of STEs, namely- non-
discrimination, transparency, prohibition on quantitative restrictions and preservation
of tariff concessions are discussed in detail.
Learning Outcome
I. Understanding the meaning and types of STEs falling within WTO‟s regulation
II. Understanding the need to regulate STEs
III. Understanding the broad discipline of WTO‟s regulation of STEs
IV. Understanding the core obligations of STEs with respect to the WTO rules

1. Meaning and Types
2. Why regulate STEs?
3. WTO’s discipline in regulation of STEs
3.1 Exclusive or special privileges
3.2 Involving either imports or exports
3.3 Act in a manner consistent with the general principles of non-discriminatory

treatment
3.4 Having due regard to the other provisions of this Agreement
3.5 Commercial considerations
3.6 STEs and Article XX (d) and Article XXXVII:3 (a) of GATT
4. Obligations of STEs
4.1 Non-discrimination
4.2 No quantitative restrictions;

4.3 Preservation of the value of tariff concessions; and
4.4 Transparency.
5. Whom are the STE rules for: the enterprises or countries?

6. Summary
Text
1. Meaning and Types
The exact meaning and scope of STEs has been a subject of constant debate. At the
time of formulation of the WTO rules, the GATT members took an arduous task of
defining STEs in-order to regulate their scope of operation. Article XVII of the GATT
1994 is the principal provision dealing with state trading enterprises and their
operations. Thus, the meaning of STEs can be drawn from the basic framework of
Article XVII:1(a) of the GATT agreement.
The meaning of STEs includes all enterprises owned by the state. STEs also refer to
private enterprises that are granted special privileges by the State. The nature of the
special privilege should be such that it provides advantage to the enterprise vis. other
entities, and as a result of this special privilege, the enterprise is in a position to
influence the level or direction of trade. Examples of this privilege include subsidy or
equivalent, monopoly status in the production, consumption or trade of goods etc. It is
important to note that the special right or privilege granted need not give the
enterprise a monopoly position, in all situations.1
Thus, STEs are defined as governmental and non-governmental enterprises, including
marketing boards, which deal with goods for export and/or import. 2 e.g. Livestock
Products Marketing Organization (LPMO), which was established to administer
import restrictions on beef in Korea (Korea-Beef case) was classified as a STE.
In-order to further provide clarity on the meaning of STEs, WTO has drawn a list of
various categories of enterprises which qualify as STEs. We define these categories as
„types‟ of STEs.3
1
Technical Information on State Trading Enterprises,
(http://www.wto.org/english/tratop_e/statra_e/statra_info_e.htm accessed on 15 July 2014
(hereinafter Technical Information on STEs, WTO website)
2
ibid
3
ibid
Statutory Marketing Boards
Export Marketing Boards
Regulatory Marketing Boards
Fiscal Monopolies
Canalizing Agencies
Foreign Trade Enterprise
Boards or Corporations resulting from nationalised industries
Figure 1.1 Types of STEs

Needless to say, the emphasis on defining STEs is to ensure a clear framework for
regulation of their activities. The reasons to regulate STEs have been explored below.
2. Why regulate STEs?
STEs may be used as a vehicle for implementing a number of trade policy measures
which are not consistent with the WTO provisions. The most common is a violation
of market access obligations. For example, an STE may be used to provide protection
for the domestic market in a given product by setting resale prices of imports at very
high levels, thus negating tariff concessions bound in WTO Schedules and violating
Article II of GATT 1994. Similarly, the provision of subsidies to STEs which are
mainly involved in exporting may run afoul of export subsidy disciplines. Even in
cases where the objective of the government acting through the STE is not
intentionally trade-distorting, the STE's operations may nevertheless distort trade. For
example, the protection of public health, which is a frequently stated rationale for the
maintenance of monopolies on alcohol and alcoholic beverages, may seriously distort
trade in those products. It is only when the activities of STEs can be examined that
their impact on trade can be analysed, and more effective rules for their regulation
gets developed.4
Therefore, in-order to make State traders behave as private competitive traders, and
thus to remove the potential for trade distortion offered by government involvement
in an enterprise's decisions and activities, regulation of STEs becomes an important
issue.5
3. WTO’s discipline in regulation of STEs
4
ibid
5
ibid
Article XVII of the GATT 1947 is the primary Article dealing with STEs and their
operations. The provision sets out that STEs in their purchases or sales involving either
imports or exports should act in accordance with the general principles of non-discrimination,
and that commercial considerations must guide their decisions on imports and exports. It also
instructs that Members must notify their state trading enterprises to the WTO annually. The
specific obligations of the STEs shall be explored in the next section of the module. Preceding
that discussion, let us analyse various aspects of Article XVII pertaining to the overall
discipline for regulation of STEs.
Article XVII:1 states:
(a) Each contracting party undertakes that if it establishes or maintains a State enterprise,
wherever located, or grants to any enterprise, formally or in effect, exclusive or special
privileges, such enterprise shall, in its purchases or sales involving either imports or exports,
act in a manner consistent with the general principles of non-discriminatory
treatmentprescribed in this Agreement for governmental measures affecting imports or
exports by private traders.
( b) The provisions of sub-paragraph (a) of this paragraph shall be understood to require that
such enterprises shall, having due regard to the other provisions of this Agreement, make any
such purchases or sales solely in accordance with commercial considerations, including price,
quality, availability, marketability, transportation and other conditions of purchase or sale,
and shall afford the enterprises of the other contracting parties adequate opportunity, in
accordance with customary business practice, to compete for participation in such purchases
or sales.
The five core aspects of sub-clauses (a) and (b) of Article XVII:1 have been discussed below:
3.1 Exclusive or special privileges
As discussed above, „exclusive or special privilege‟ is something that sets an enterprise at an

advantageous position vis. other enterprises. However, the scope of this „exclusive or special
privilege‟ is limited. Not every privilege granted to an enterprise amounts to an „exclusive or
special privilege‟ within the meaning of Article XVII. For example, the report of a sub-
committee which considered the articles of the charter on state trading during the Geneva
session of the Preparatory Committee stated that: “It was the understanding of the Sub-
Committee that governmental measures imposed to ensure standards of quality and efficiency
in the execution of external trade, or privileges granted for the exploitation of national
natural resources, did not constitute „exclusive or special privileges‟. Similarly if a Member
Government exempted an enterprise from certain taxes, as compensation for its participation
in the profits of this enterprise, this procedure should not be considered as „granting exclusive
privileges‟.”6
3.2 Involving either imports or exports
The Geneva Sub-Committee report recorded that, “the intent of these words is to cover,
within the terms of this Article, any transactions by a State enterprise through which such
enterprise could intentionally influence the direction of total import or export trade in the
commodity in a manner inconsistent with the other provisions of the Charter.” Thus, the
6
EPCT/160, p. 3 and p. 4
control of an enterprise to influence imports or exports becomes vital to be considered an STE
within the meaning of Article XVII.7
3.3 Act in a manner consistent with the general principles of non-discriminatory treatment
The meaning of „non-discriminatory‟ treatment in the context of STE has been a topic of
extensive debate. This can be drawn from the discussions during the preparatory phase of the
GATT. Under Article 26 of the US Draft Charter, state enterprises were to accord to the
commerce of other Members “non-discriminatory treatment, as compared with the treatment
accorded to the commerce of any country other than that in which the enterprise is located.”
In the London Draft Charter, the non-discrimination obligation was reformulated to read: “the
commerce of other Members shall be accorded treatment no less favourable than that
accorded to the commerce of any country, other than that in which the enterprise is located.”8
At Geneva, the present words “act in a manner consistent with the general principles
of non- discriminatory treatment” were inserted in order to allay the doubt that
“commercial considerations” (in paragraph 1(b)) meant that the usually the same price
would have to exist in different markets. 9 Some leeway was allowed to charge
different prices for its sales of a product in different markets, provided that this is
done for commercial reasons, to meet conditions of supply and demand in export
markets.
Further, it was resolved that the Article on State trading referred only “to most-favoured-
nation treatment and not to national treatment.”10 This was further confirmed by the 1952
WTO panel report on „Belgian Family Allowances case which stated that the obligation of
STE to make purchases in accordance with commercial considerations did not extend to
matters dealt with in Article III dealing with national treatment provision.11
3.4 Having due regard to the other provisions of this Agreement
It was agreed in discussions at Geneva in 1947 that this phrase also covers differential
customs treatment maintained consistently with the other provisions of the Charter.12
3.5 Commercial considerations
It must be noted that the commercial considerations criterion becomes relevant only after it
has been determined that the governmental action at issue falls within the scope of the general
principles of non-discriminatory treatment prescribed by the GATT. This reasoning has been
further clarified in the 1984 Panel report on “Canada - Administration of the Foreign
7
ibid., p. 4
8
London Report, EPCT/C.II/52, 53 p. 32
9
EPCT/160, p. 5-6; EPCT/A/PV.14, p. 24
10
EPCT/A/SR.10, p. 34
11
G/32, adopted on 7 November 1952, 1S/59, 60, para. 4
12
EPCT/160, p. 5; EPCT/183, p. 3
Investment Review Act”.13 The report stated that the introductory words of sub-clause (b),
„determined that the governmental action at issue falls within the scope of the general
principles of non-discriminatory treatment prescribed by the General Agreement‟ does not
establish a separate general obligation to allow enterprises to act in accordance with
commercial considerations, but merely defined the obligations set out in the preceding
paragraph (a).
3.6 STEs and Article XX (d) and Article XXXVII:3 (a) of GATT
Two additional Articles of GATT 1994 deal with State trading. Article XX covers “General
Exceptions” and its paragraph (d) states that nothing in the Agreement shall prevent the
adoption or enforcement by any Member of measures necessary to ensure compliance with
laws or regulations relating to the enforcement of monopolies operated under Articles II:4 and
XVII.
Article XXXVII, which is part of Part IV of the General Agreement (dealing with special
provisions for developing countries) states in paragraph 3 (a) that developed country
Members shall make every effort, in cases where a government determines the resale price of
products wholly or mainly produced in the territories of developing country Members, to
maintain trade margins at equitable levels.
4. Obligations of STEs
It is amply clear that the WTO does not seek to prohibit or even discourage the establishment
or maintenance of state trading enterprises.14 It merely ensures that STEs are not operated in a
manner inconsistent with WTO principles and rules. This was emphasised by the WTO panel
in Korea Beef which said that the mere existence of producer-controlled import monopolies
could not be considered as a separate import restriction inconsistent with the General
Agreement. The Panel noted, however, that the activities of such enterprises had to conform
to a number of rules contained in the General Agreement, including those of Article XVII. 15
WTO does not concern with the organization or management of import monopolies but only
their operations and effects on trade.
The substantive obligations of Members under the rules governing state trading can thus be
summarized as below:16
(1) non-discrimination, commonly referred to as „most favoured nation‟ (MFN) treatment;
13
4L/5504, adopted on 7 February 1984, 30S/140, 163, para. 5.16
14
L/2281, paras.9-10 (referring to proposal at L/2147, p. 7, and Secretariat Note at
LEGAL/W/3). The proposal, made during the preliminary work on the drafting of Part IV of
the General Agreement, was designed to ensure that “in interpreting the provisions contained
in Article XVII of the General Agreement, contracting parties should give sympathetic
consideration to the need for developing contracting parties to make use of State-trading
enterprises as one means of overcoming their difficulties in their early stages of
development”.
15
L/6503, adopted on 7 November 1989, 36S/268, 301-302, paras. 114-115.
16
Technical Information on STEs, WTO website
(2) no quantitative restrictions;
(3) preservation of the value of tariff concessions; and
(4) transparency.
4.1 Non-discrimination
Following up from the discussion in the previous section, we shall further explore the
obligation of non-discrimination which is one of the core fundamentals of Article
XVII.
First, as stated above, Article XVII:1 sets forth the concept of non-discriminatory
treatment. Members undertake that any enterprise “covered by XVII:1(a) shall, in its
purchases or sales involving imports or exports, act in a manner consistent with the
general principles of non-discriminatory treatment set out in the General Agreement
for governmental measures affecting imports or exports by private traders”. This
standard of conduct is further explained in paragraph 1(b): “... such enterprises shall...
make any such purchases or sales solely in accordance with commercial
considerations including price, quality, availability, marketability, transportation and
other conditions of purchase or sale, and shall afford... other contracting parties
adequate opportunity... to compete for participation in such purchases or sales.”
Secondly, it should be noted that a strict MFN (most favoured nation) treatment was
not intended, as is shown by the Interpretative Note to Article XVII:1. The note
allows a State trading enterprise to charge different prices for its sales of a product in
different markets, provided that this is done for commercial reasons, to meet
conditions of supply and demand in export markets.
Thirdly, another manifestation of non-discrimination is drawn from the relationship
between Article XVII and Article XX(d) of the GATT. A country has a right
necessary to secure compliance with laws consistent with the General Agreement
relating to the enforcement of monopolies. This right is specifically provided for in
Article XX(d) of the GATT The Panel report in “Canada - Import, Distribution and
Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies” recognized that
a beer import monopoly that also enjoyed a sales monopoly might, should not prohibit
unconditionally the private delivery of imported beer while permitting that of
domestic beer. Thus Canada‟s right to establish import and sales monopoly for beer
did not entail the right to discriminate against imported beer inconsistently with
Article III:4 through regulations affecting its internal transportation.17
4.2 No quantitative restrictions
GATT has outlawed quantitative restrictions and STEs are subject to the same
discipline. The Interpretative Note to Articles XI, XII, XIII, XIV, and XVIII, all of
which deal in whole or in part with quantitative restrictions, states that:
“Throughout [these] Articles, the terms „import restrictions‟ or „export restrictions‟
include restrictions made effective through State trading operations”.
Thus, a law which granted a STE exclusive import rights in a certain product, and a
decision by that enterprise to refuse to import at all, would appear to be a violation of
Article XI (General Elimination of Quantitative Restrictions).18
17
DS17/R, adopted on 18 February 1992, 39S/27, 79-80, para. 5.15
18
4.3 Preservation of tariff concessions
GATT Articles II:4 and XVII:3 deal with concessions relating to market access.
Article II of GATT 1994 deals with GATT schedules of concessions and sets out (in
paragraph 4) that any monopoly of the importation of any product covered in a GATT
Schedule shall not result in protection which is on the average in excess of the amount
of protection provided for in that Schedule.19
An Interpretative Note clarifies that the provisions of paragraph 4 are to be applied in
the light of Article 31 of the Havana Charter which contains the obligation to
negotiate the level of protection afforded by monopolies.20
By its terms, Article II:4 applies to import monopolies whether or not they are State
enterprises. Article XVII:4 (b) covers import monopolies on products which are not
the subject of an Article II concession (i.e., not included in a GATT Schedule) and
sets out that such monopolies shall, on request, inform the WTO Members of the
import mark-up21 on the product during a recent representative period or of the price
charged at resale. The clear purpose of these extra provisions relating to monopolies
was to preserve the value of negotiated tariff concessions, i.e. to prevent an import
monopoly from instituting protection for domestic producers and thus nullifying a
tariff concession.22
4.4 Transparency
The requirement to notify STEs and their operations are laid in paragraph 4 (a) of
Article XVII. The paragraph reads that:
“Members shall notify... the products which are imported into or exported from their
territories by enterprises of the kind described in paragraph 1 (a) of this Article.”
It is further elaborated in paragraph 1 of the Understanding on the Interpretation of
Article XVII of the GATT 1994 which states that:
“In order to ensure the transparency of the activities of state trading enterprises,
Members shall notify such enterprises to the Council for Trade in Goods...”
The notification requirement is an essential element in the rules on State trading. One
reason for notifications is to make it possible for Members to judge the extent to
which State trading enterprises serve as a substitute for other measures covered by the
General Agreement, e.g. quantitative restrictions, tariffs and subsidies.
The second is to allow members to assess the possible trade distortion resulting from
the operations of notified STEs.
Further, it should be noted that the notification requirement does not apply to government
procurement. Government procurement is defined as imports of products for immediate or
ultimate consumption in governmental use.23
19
ibid
20
ibid
21
Import mark-up represents the margin by which the price charged by the import
monopoly for the imported product (exclusive of internal taxes within the purview of
Article III, transportation, distribution, and other expenses incident to the purchase,
sale or further processing, and a reasonable margin of profit) exceeds the landed cost.”
22
23
Government procurement is regulated by the Agreement on Government Procurement for
those Members which are parties to it.
Procedural obligations of transparency regime include the following obligations:
 The format for notifications is a standard questionnaire.
 The questionnaire was revised in 1998 and then again in 2003 when the frequency of
notifications was made less burdensome.24
 A “new and full” notification (i.e. a complete set of answers to the questionnaire)
must be made every two years.
 The previous requirement for new and full notifications every three years with
updating notifications in the intervening years was changed to a biannual obligation
to ease the burden on Members and encourage compliance with the notification
obligation.25
 The notifications are made to the Council for Trade in Goods and circulated to all
Members.
 Counter-notifications may also be made by a Member which has reason to believe
that another Member has not adequately met its notification obligation.26
5. Whom are the STE rules for: the enterprises or the countries?
This question was also subjected to some debate during the preparatory phase of GATT
negotiations. The Report of the Working Party on the “Sixth Review of Trade with Hungary
under the Protocol of Accession” recorded, inter alia, the question of the Canadian
representative. The question was why Hungary made no notifications under Article XVII and
what it considered to be state trading and the observation that at the very least foreign trade
enterprises under administrative supervision would qualify for notifications under Article
XVII?27
In response, the representative of Hungary said that the trade pattern was shaped by the
competitive position of firms. It was not decided or organized by the State and that the entity
was not under any administrative supervision. Article XVII referred to state-owned
enterprises or private enterprises having exclusive privileges in foreign trade matters; referred
to enterprises not to countries.28
Similarly, at the preparatory phase of the Havana Charter negotiations, there had been
proposals to draw up special provisions for countries with a complete monopoly of foreign
trade, but these proposals died away and were not discussed in Havana. The GATT
consequently did not contain any special provision for countries with complete monopoly of
foreign trade. There was no such category as state-trading country in the GATT legal system
and any existing legislation based on this notion was not in conformity with the GATT. The
monopoly of foreign trade in Hungary or the form of ownership of production means had no
relevance to Article XVII.29
Thus, one can infer from the preparatory texts and opinions of member-states that these
obligations belong to the enterprises and not countries.
24
G/STR/3/Rev.1
25
G/STR/5; G/STR/6 and G/STR/7
26
27
L/5977, adopted on 22 May 1986, 33S/136, 147-148, para. 36.
28
ibid.,33S/148, para. 37
29
ibid
Summary
State trading enterprises can have severe trade distorting effects. Therefore, there
exists a clear need to regulate them. The WTO/GATT framework has created this
regulatory regime via drafting Article XVII of the GATT. The framework also defines
STEs and the WTO over time, has attempted to classify them in various categories.
The core features within the meaning and scope of STEs involve understanding of
concepts including: what amounts to special privilege; what are commercial
considerations etc.? The core obligations of STEs include non-discrimination (an
MFN type treatment and not a NT standard); transparency (substantive and procedural
requirements); prohibition on quantitative restrictions and respecting the concessions
negotiated under Article II of the GATT. Further, the obligations of STEs fall on the
enterprises and not countries per se.
Law

Exceptions to the GATT
Paper Coordinator Dr. Saloni Khanderia- NLU, Delhi
Yadav
Content Writer/Author Lakshmi Neelakantan National Law University,
Jodhpur
Content Reviewer Mr. James Nedumpara Jindal Global Law School,
Sonipat
Language Editor Dr. Saloni Khanderia- NLU, Delhi
Yadav
PERSONAL DETAILS

Subject Name Law
Module Name/Title Exceptions to the GATT
Module Id 13
Pre-requisites  The historical background of the two world wars
and the prevailing economic conditions.
 A brief understanding of the scope of present
day WTO.
 The economic principles of international trade.
 An understanding of the basic principle in
GATT 1994.
 A brief idea of the concept of exceptions under
GATT
 The scope of Article XX of GATT;

 The test to be applied under Article XX;
 Applicability of Articles XX(a), (b) and (g);
 Nature of the requirements of the chapeau to
Article XX;
 Article XXI of GATT.
Keywords GATT, discrimination, environmental measures, the

necessity test, reasonably available alternatives, public
morals, conservation of natural resources, security
exceptions etc.
E-TEXT
1. Exceptions in Article XX, GATT 1994
2. Scope of Application of Article XX
i. Can Article XX be invoked to justify inconsistencies in with other WTO
Agreements apart from GATT 1994?
ii. What is the test for justifying a measure under Article XX?
iii. Public Morals: What is the nature of the exception contained in Article
XX(a)?
iv. Public Policy Considerations: What are the requirements under
Articles XX(b) and (g)?
v. What is the test to be applied under the chapeau to Article XX?
3. Scope of Article XXI of GATT

TEXT
The international trade system has multiple objectives. Reduction and elimination of
tariff and non-tariff barriers, efficient dispute settlement, uniform administration of
trade remedies measures, and protection of intellectual property rights are all
commonly stated objectives. However, the WTO also exists to protect the sovereignty
and policy space of a country to enact measures which may be inconsistent with
GATT, but are otherwise necessary for the well-being of the country in question.
The negotiators foresaw such an eventuality and drafted clauses relating to exceptions
to WTO obligations. This module addresses the exceptions contained in Article XX
and XXI of GATT 1994. This module traces the meaning and scope of Articles XX
and XXI of GATT 1994, the legal tests for a valid defense under the same and the
relevant debates in international trade law relating to public morals, environment etc.
A discussion of the text of Articles XX and XXI of GATT is provided on the basis of
judicial interpretations developed by panels and the Appellate Body and the
commentary provided by Van den Bossche & Zdouc (2013).1
1. Exceptions in Article XX, GATT 1994:
Article XX of GATT is entitled “General Exceptions” and worded in the following

manner:
“Article XX
General Exceptions
Subject to the requirement that such measures are not
applied in a manner which would constitute a means of
arbitrary or unjustifiable discrimination between
countries where the same conditions prevail, or a
disguised restriction on international trade, nothing in
this Agreement shall be construed to prevent the
adoption or enforcement by any contracting party of
measures:
(a) necessary to protect public morals;
(b) necessary to protect human, animal or plant life or
health;
…..
(d) necessary to secure compliance with laws or
regulations which are not inconsistent with the
provisions of this Agreement, including those relating to
customs enforcement, the enforcement of monopolies
operated under paragraph 4 of Article II and Article
XVII, the protection of patents, trade marks and
copyrights, and the prevention of deceptive practices;
(e) relating to the products of prison labour;
1
Peter Van den Bossche & Werner Zdouc, The Law and Policy of the World Trade Organization
(Cambridge University Press, 2013), p. 76 (hereinafter referred to as “Van den Bossche & Zdouc”).
(f) imposed for the protection of national treasures of
artistic, historic or archaeological value;
(g) relating to the conservation of exhaustible natural
resources if such measures are made effective in
conjunction with restrictions on domestic production or
consumption;”
Articles XX (c), (h), (i) and (j) relate to trade in gold and silver; obligations under
international commodities agreements; efforts to ensure essential quantities of
materials to a domestic processing industry; and the acquisition of products in general
or local short supply respectively. Till date, these provisions have seldom been used
by countries2, and therefore detailed discussion is not devoted to the same.
The nature of Article XX is such that measures which are otherwise inconsistent with
the provisions of GATT may be justified if they fall within the categories listed in
Article XX and otherwise fulfill the conditions laid down in Article XX. The GATT
Panel in US – Section 337 Tariff Act stated that the defense in Article XX(d) is a
“limited and conditional” exception to GATT provisions.3 The GATT Panel used the
term “limited” as the list of exceptions in Article XX is exhaustive and “conditional”
because Article XX only provides for the justification of a GATT-inconsistent
measure when the conditions set forth in Article XX are fulfilled.4 It is important to
note that Article XX can only be invoked by a Member when a measure has already
been found to be inconsistent with another provision of GATT. From the above, it is
also appropriate to characterize Article XX essentially as a balancing provision
between trade liberalization, market access and non-discrimination and societal values
and interests.5
The nature and function of Article XX was generally held to be a separate and
independent analysis by the Appellate Body in Thailand – Cigarettes (Philippines)
(2011) where the Appellate Body made the following observations in para 173:
“173. We have difficulties understanding why the
Panel's disposition of the Philippines' claim under
Article III:4 should depend on the Panel's disposition of
Thailand's defence under Article XX(d). It is true that,
in examining a specific measure, a panel may be called
upon to analyze a substantive obligation and an
affirmative defence, and to apply both to that measure.
It is also true that such an exercise will require a panel
to find and apply a "line of equilibrium" between a
substantive obligation and an exception. Yet this does
not render that panel's analyses of the obligation and
the exception a single and integrated one. On the
contrary, an analysis of whether a measure infringes an
obligation necessarily precedes, and is distinct from,
the "further and separate" assessment of whether such
2
Van den Bossche & Zdouc, supra n. 1, p. 546.
3
Panel Report, US – Section 337 Tariff Act, para 5.9.
4
5
measure is otherwise justified. Thus, we reject
Thailand's request to reverse the Panel's Article III:4
finding on the grounds that the Panel erred in its
analysis of Thailand's Article XX(d) defence.”
2. Scope of Application of Article XX
To capture the essence of Article XX in a nutshell, it is essential to understand and

answer the following questions:
i. Can Article XX be invoked to justify inconsistencies with other WTO
Agreements apart from GATT 1994?
In China – Publications and Audiovisual Products, the Appellate Body

considered the question of whether measures inconsistent with China‟s
obligations under its Accession Protocol, could be justified under GATT
Article XX(a). Here, the Appellate Body considered the wording of para 5.1 of
China‟s Accession Protocol which stated that “without prejudice to China‟s
right to regulate trade in a manner consistent with the WTO Agreement..”. The
Appellate Body held that this was a reference to its power to subject
international commerce to regulation, and the measures that China had sought
to justify have a clearly discernible and objective link to China‟s trade
regulation.6 As a result, the Appellate Body concluded that, in this particular
case, China could resort to Article XX to justify its measures under its
Accession Protocol.
The question of whether Article XX could be invoked to justify

inconsistencies with other WTO Agreements rose again in subsequent disputes.
The Appellate Body in China – Raw Materials and China – Rare Earths
dismissed China‟s claim that Article XX was available to justify a measure
inconsistent with paragraph 11.3 of its Accession Protocol.7 It may be noted
however that China – Raw Materials and China – Rare Earths dealt with a
different set of measures, in addition to the fact that the language of paras 5.1
and 11.3 of the Accession Protocol were different. The Appellate Body
considered the ruling in China – Publications and Audiovisual Products and
held that there was no language in para 11.3 that was similar to the language
found in para 5.1 of the Accession Protocol. 8 The observations of the
Appellate Body are reproduced below:
6
Appellate Body Report, China – Publications and Audiovisual Products, paras 221 & 223 in Van den
Bossche & Zdouc, supra n. 1, p. 549.
7
See Appellate Body Report, China – Raw Materials, para 307; Appellate Body Report, China – Rare
Earths, para 5.73.
8
“304. In China – Publications and Audiovisual
Products, in the context of assessing a claim brought
under Paragraph 5.1 of China's Accession Protocol, the
Appellate Body found that China could invoke Article
XX(a) of the GATT 1994 to justify provisions found to
be inconsistent with China's trading rights commitments
under its Accession Protocol and Accession Working
Party Report. In reaching this finding, the Appellate
Body relied on the language contained in the
introductory clause of Paragraph 5.1, which states
"[w]ithout prejudice to China's right to regulate trade
in a manner consistent with the WTO Agreement". As
noted by the Panel, such language is not found in
Paragraph 11.3 of China's Accession Protocol. We
therefore do not agree with China to the extent that it
suggests that the Appellate Body's findings in China –
Publications and Audiovisual Products indicate that
China may have recourse to Article XX of the GATT
1994 to justify export duties that are inconsistent with
Paragraph 11.3.”
This confirms the understanding that this line of enquiry is dependent on the
facts of each dispute and the measure in question.”
ii. What is the test for justifying a measure under Article XX?
Article XX carries with it a two-tier test to determine whether a GATT-

inconsistent measure can be justified under any one of its provisions. The test
for a measure to be justified under Article XX is to (i) satisfy the requirements
of the specific sub-clause under Article XX (paras (a) – (j)); and (ii) satisfy the
requirements of the chapeau to Article XX.
This was highlighted by the Appellate Body in US – Gasoline by way of the

following observation9:
“Having concluded, in the preceding section, that the

baseline establishment rules of the Gasoline Rule fall
within the terms of Article XX(g), we come to the
question of whether those rules also meet the
9
Appellate Body Report, US – Gasoline, p. 22.
requirements of the chapeau of Article XX. In order that
the justifying protection of Article XX may be extended
to it, the measure at issue must not only come under one
or another of the particular exceptions- paragraphs (a)
to (j) - listed under Article XX; it must also satisfy the
requirements imposed by the opening clauses of Article
XX. The analysis is, in other words, two-tiered: first,
provisional justification by reason of characterization
of the measure under XX(g); second, further appraisal
of the same measure under the introductory clauses of
Article XX.”
Additionally, the Appellate Body in US – Shrimp clarified the hierarchical

nature of the test; that first, it must be examined whether the measure falls
within one of the categories enumerated by Article XX, and subsequently, the
measure must be tested for conformity with the chapeau of Article XX.10
iii. Public Morals: What is the nature of the exception contained in Article
XX(a)?
Article XX(a) includes measures that are “necessary to protect public morals”.
Article XX(!) exceptions are very rarely used before panels and the Appellate
Body. In China – Publications and Audiovisual Products, the Panel adopted
the meaning of “public morals” as the on assigned to it by the Panel in US –
Gambling which found that the term „public morals‟ (i) denotes standards of
right and wrong conduct maintained by or on behalf of a community or nation;
(ii) the content and meaning of “public morals” can vary from country to
country and depend on a range of factors including social, cultural, religious
and ethnic values; and (iii) Members should be given the scope to define and
apply for themselves the concept of “public morals” according to their systems
and values.11
Recently, in the EC – Seal Products dispute, the question of Article XX(a)

came up for consideration before the Panel and the Appellate Body. The
dispute essentially consisted of EU regulations that prohibit the import and
placing on the market of seal products. With regard to EU‟s defense that the
measures were justified under Article XX(a) of GATT, the Panel that the EU
seal regime was not justified under Article XX(a) of the GATT 1994
10
Appellate Body Report, US – Shrimp, paras 119-120 in Van den Bossche & Zdouc, supra n. 1, p.
552.
11
Panel Report, China – Publications and Audiovisual Products, para. 7.759 citing Panel Report, US –
Gambling, para. 6.461 and 6.465 & Appellate Body Report, US – Gambling, para. 299.
(“necessary to protect public morals”) because they failed to meet the
requirements under the chapeau of Article XX (“not applied in a manner that
would constitute arbitrary or unjustified discrimination where the same
conditions prevail or a disguised restriction on international trade”).12
The EU Seal Regime had essentially provided for various exceptions to the
prohibition if certain conditions were met, including for seal products derived
from hunts conducted by Inuit or indigenous communities (IC exception) and
hunts conducted for marine resource management purposes (MRM exception).
The Appellate Body disagreed with the Panel‟s reasoning and method of
interpretation but also ultimately held that the measure was not justified under
Article XX of GATT 1994 due to the following reasons:13
a) EU did not show that the manner in which the EU Seal Regime treated
seal products derived from IC hunts as compared to seal products
derived from "commercial" hunts can be reconciled with the objective
of addressing EU public moral concerns regarding seal welfare;
b) The presence of considerable ambiguity in the "subsistence" and
"partial use" criteria of the IC exception. Given the ambiguity of these
criteria and the broad discretion enjoyed by the authorities applying
them, seal products which
should be characterized as "commercial" hunts could potentially enter
the EU market under the IC exception;
c) The EU had not made "comparable efforts" to facilitate the access of
the Canadian Inuit to the IC exception as it did with respect to the
Greenlandic Inuit.
iv. Public Policy Considerations: What are the requirements under Articles
XX(b) and (g)?
Article XX(b) concerns measures which are “necessary to protect human,

animal or plant life or health”. A measure may fulfill the requirements of
Article XX(b) if it satisfies two criteria: (a) the policy objective pursued by the
measure is the protection of the life or health of humans, animals or plants;
and (b) the measure is necessary to fulfill that policy objective. 14 While the
first prong of the two-tiered test has not posed significant interpretative
problems, the second requirement has proved to be far more complex.
12
Panel Report, EC- Seal Products, paras 7.650 & 7.651.
13
Appellate Body Report, EC – Seal Products, paras 5.338 & 5.339.
14
Panel Report, US – Gasoline, para 6.20; Panel Report, EC – Tariff Preferences, para 7.179 and
7.199; Panel Report, Brazil – Retreaded Tyres paras 7.40-7.41; and Panel Report, China – Raw
Materials, paras 7.479 – 7.480, in Van den Bossche & Zdouc, supra n. 1, p. 554.
The concept of the “least trade restrictive alternative test” is important in an
Article XX(b) analysis. The least trade restrictive alternative test essentially
seeks to compare the measure with possible alternatives to the measure, in
order to determine if the alternative measures were equally efficacious in
achievement of the objective pursued. For instance, in Brazil – Retreaded
Tyres, the Appellate Body found that the import ban on retreaded tyres was
“apt to produce a material contribution to the achievement of its objective”,
which was the reduction in waste tyre volumes. The Appellate Body also
found that the proposed alternatives, which consisted of waste management
and disposal measures, were not real alternatives to the import ban, which
could prevent the accumulation of tyres.15
The Appellate Body in EC- Asbestos outlined important principles to be kept

in mind while applying the “necessity” test in Article XX(b). The measure at
issue was a French ban on asbestos and asbestos products, which the Appellate
Body held was not inconsistent with the obligations under Article III:4 of
GATT. The Appellate Body highlighted in EC – Asbestos the following
principles which must be kept in mind:
a. First, the more important the societal value pursued by the measure,
and the more this measure contributes to the promotion of this value,
the more “necessary” such a measure may be considered;16
b. Second, in determining whether an alternative measure is “reasonably
available” several factors must be taken into account, along with the
difficulty of implementation. 17 The Appellate Body subsequently
confirmed this understanding in Brazil – Retreaded Tyres that a
Member cannot reasonably be expected to employ an alternative
measure if that measure does not allow it to achieve the desired level
of protection with respect to the policy objective pursued.18
c. Third, it is for the WTO Member in question to determine the level of
protection of health or environment that each Member considers
appropriate.19
d. Fourth, the Appellate Body held that a Member is not obliged, in
introducing a health policy, to follow a majority scientific opinion, and
15
Appellate Body Report, Brazil – Retreaded Tyres, paras 210 & 211.
16
Appellate Body Report, EC – Asbestos, para 172.
17
Id., in Van den Bossche & Zdouc, supra n. 1, p. 557.
18
19
Appellate Body Report, EC – Asbestos, para 168.
a panel is not required to reach its conclusion on a “preponderant”
weight of evidence.20
Article XX(g) concerns measures relating to the conservation of exhaustible

natural resources. Article XX(g) requires a three pronged test necessitating
that a measure:
a. relate to the conservation of exhaustible natural resources. The

Appellate Body held in US – Shrimp held that a broad, evolutionary
interpretation of the concept of exhaustible natural resources. 21 The
Appellate Body also held that the scope of “exhaustible natural
resources” extends to all such resources, whether living or non-living
and the obligations in Article XX(g) must be read in light of
contemporary meaning.22
b. relate to the conservation of exhaustible natural resources. The
Appellate Body clarified again in US – Shrimp that Article XX(g)
requires a “close and real” relationship between the measure and the
policy objective, thus meaning that the means employed must be
reasonably related to the end pursued i.e. conservation of an
exhaustible natural resource.23
c. be made effective in conjunction with restrictions on domestic
production and consumption. With regard to the third requirement, the
Appellate Body held in US – Gasoline that while Article XX(g) does
not require domestic and imported products to be treated identically, it
requires that they be treated in an “even-handed” manner. 24
Furthermore, in China – Rare Earths, the Appellate Body found that
the Panel had erred when it had suggested that “even-handedness” is a
separate requirement that must be fulfilled in addition to the
requirements expressly provided for in Article XX(g). However, the
Appellate Body also considered that the error did not taint the
remaining elements of the Panel's interpretation of the second clause of
sub para (g).25
Recently, the China – Rare Earths dispute also dealt with the defense under
Article XX(g). In China – Rare Earths, China had imposed a quantitative limit
(quotas) on the amount of rare earths, tungsten, and molybdenum that can be
20
Id, para 178.
21
Appellate Body Report, US – Shrimp, paras 128-`131.
22
Id.
23
Id, para 141.
24
Appellate Body Report, US – Gasoline, p. 20-1.
25
exported in a given period. Although it recognized that such restrictions were
inconsistent with the GATT 1994, China argued that they were justified under
the exception in Article XX(g) of, since they relate to the conservation of an
exhaustible natural resource. The Panel found that China‟s export quotas were
designed to achieve industrial policy goals rather than conservation.
China appealed the Panel's interpretation and application of Article XX(g)

regarding its findings that the export quotas at issue were not measures
“relating to” the conservation of exhaustible natural resources, and were not
“made effective in conjunction with” restrictions on domestic production or
consumption. The Appellate Body found that, contrary to what China alleged,
the Panel did not, consider itself bound to limit its analysis to the examination
of the design and structure of the measures. Rather, the Panel had considered
that it should focus on the measures' design and structure rather than on their
effects in the marketplace.
v. What is the test to be applied under the chapeau to Article XX?
We recall that every measure tested for consistency under Article XX of

GATT is to first satisfy the requirements under the individual sub-clause of
Article XX and then satisfy the requirements of the chapeau of Article XX.
The chapeau is often the most difficult and controversial requirement to be
satisfied in an Article XX enquiry.
In a nutshell, the chapeau to Article XX is an expression of the good faith

principle in international law. 26 The object and purpose of the chapeau to
Article XX is to avoid that provisionally justified measures under a sub-clause
to Article XX are applied in such a way as would constitute a misuse or an
abuse of exceptions under Article XX. 27 The requirements set out in the
chapeau have been interpreted in the following manner by panels and the
Appellate Body:
a. “a means of arbitrary or unjustifiable discrimination between

countries where the same conditions prevail”. The Appellate Body
decided in US – Shrimp that discrimination may result when the same
measure is applied to countries where different conditions prevail.
When a measure is applied without regard for the difference in
conditions between countries and this measure is applied in a rigid and
26
Appellate Body Report, US – Shrimp, para 158.
27
Appellate Body Report, Brazil – Retreaded Tyres, para 215 in Van den Bossche & Zdouc, supra n. 1,
p. 573.
inflexible manner, the application of the measure may constitute
“arbitrary discrimination” within the meaning of chapeau of Article
XX.28
Furthermore, a measure also has to satisfy the test “unjustifiable
discrimination” under Article XX. In US- Gasoline, the Appellate
Body dealt with the meaning of “unjustifiable discrimination” and
held the measure to have satisfied such a requirement. In arriving at its
decision, the Appellate Body held that the resulting discrimination
from the measure must have been foreseen, and was not merely
inadvertent or unavoidable. 29 Therefore, it may be noted that the
Appellate Body emphasized on the deliberate nature of the
discrimination. This ruling of the Appellate Body was also mirrored
by the panel in Argentina – Hides and Leather.30
b. “disguised restriction on international trade”. The Appellate Body in

US – Gasoline held that the requirements of “arbitrary or unjustifiable
discrimination” and “disguised restriction on international trade” may
read side-by-side as they impart meaning to each other, and “disguised
restriction” includes disguised discrimination. 31 The Appellate Body
also held that “disguised restriction” includes restrictions amounting
to arbitrary and unjustifiable discrimination in international trade
under the guise of a measure formally within the terms of an
exception listed in Article XX. 32 The panel in EC- Asbestos
additionally clarified that a restriction will constitute an abuse if its
compliance is to conceal the pursuit of trade-restrictive objectives.
However, bearing in mind the fact that the aim of the measure may
not be easily ascertained, the protective application of a measure can
be discerned from its design, architecture and revealing structure.33
3. Scope of Article XXI of GATT
Article XXI of GATT deals with security exceptions to trading obligations, mainly
consisting of measures imposing disclosure requirements, security interests of a WTO
Member country etc. Article XXI of GATT is entitled “Security Exceptions” and is
worded in the following manner:
28
Appellate Body Report, US – Shrimp, paras 164-165 and 177 in Van den Bossche & Zdouc, supra n.
1, p. 575.
29
Appellate Body Report, US – Gasoline, p. 28-29 in Van den Bossche & Zdouc, supra n. 1, p. 576.
30
Panel Report, Argentina – Hides and Leather, paras 11.324 – 330.
31
Appellate Body Report, US – Gasoline, p. 25 in Van den Bossche & Zdouc, supra n. 1, p. 580-581.
32
Id.
33
Panel Report, EC- Asbestos, para 8.236.
“Article XXI
Security Exceptions
Nothing in this Agreement shall be construed
(a) to require any contracting party to furnish any
information the disclosure of which it considers
contrary to its essential security interests; or
(b) to prevent any contracting party from taking any
action which it considers necessary for the protection of
its essential security interests
(i) relating to fissionable materials or the materials
from which they are derived;
(ii) relating to the traffic in arms, ammunition and
implements of war and to such traffic in other goods
and materials as is carried on directly or indirectly for
the purpose of supplying a military establishment;
(iii) taken in time of war or other emergency in
international relations; or
(c) to prevent any contracting party from taking any
action in pursuance of its obligations under the United
Nations Charter for the maintenance of international
peace and security.”
Till date, Article XXI has not been invoked before a panel or the Appellate Body.
However, there are some instances in which Article XXI has been invoked as a
justification for a measure. In 1985, the US imposed a trade embargo on Nicaragua. 34
The US considered itself strongly opposed to the communist Sandinistas who were in
power in Nicaragua at the time. Nicaragua argued that the trade embargo imposed by
the US was inconsistent with Articles I, II, V, XI and XIII and Part IV of the GATT
and could not be justified under Article XXI. The US argued that Article XXI left it to
each Contracting Party to judge what action it considered necessary for the protection
of its essential security interests.35 A panel was established but the panel concluded
that its terms of reference did not allow the examination of arguments under Article
XXI and therefore reached no conclusion.36
There was also the instance of the US – Cuban Liberty and Democratic Solidarity Act
dispute in 1996 between the EC and US, commonly referred to as the US – Helms-
Burton Act. The US – Helms-Burton Act permits US nationals to bring legal action in
US courts against foreign companies that deal or traffic in US property confiscated by
the Cuban government.37 The EC argued that this and other measures provided under
the US – Helms-Burton Act were inconsistent with US‟ obligations under Articles I,
III, V, XI and XIII of GATT 1994.38 The US considered that this dispute concerned
diplomatic and security issues and was not fundamentally a trade matter, and
34
35
Id, p. 598.
36
Panel Report, US – Nicaraguan Trade, L/6053 dated 13 October 1986, para 5.3 in Van den Bossche
& Zdouc, supra n. 1, p. 598. This report was never adopted.
37
38
Request for Consultations , US – The Cuban Liberty and Democratic Solidarity Act (Helms – Burton
Act), WT/DS38/1, dated 13 May 1996 in Van den Bossche & Zdouc, supra n. 1, p. 598.
therefore not a WTO matter.39 It is to be noted that at the request of EC, the panel
proceedings were suspended to allow for further negotiations to reach a mutually
agreed solution to this dispute. No such solution has ever been explicitly agreed on
but the US has never applied the most controversial aspects of the US – Helms-
Burton Act.40
39
WT/DSB/M/24 dated 16 October 1996, p. 7 in Van den Bossche & Zdouc, supra n. 1, p. 598.
40
Van den Bossche & Zdouc, supra n. 1, p. 597, FN 235.
Law

Dispute Settlement under the WTO
Principal Investigator Prof. (Dr.) Ranbir Singh Vice Chancellor, NLU, Delhi
Paper Coordinator Dr. Saloni Khanderia- NLU, Delhi
Yadav
Content Writer/Author Geetanjali Sharma University of Cambridge
Content Reviewer Mr. James Nedumpara Jindal Global Law School, Sonipat
Yadav
I. Personal Details
II. Description of Module

Subject Name Law
Module Name/Title Dispute Settlement under the WTO
Module Id 14
Pre-requisites Knowledge of core principles of GATT and international law such as:
 Basic differences between GATT and WTO
 Rule of consensus

 Meaning of nullification & impairment
 Types of admissible claims before the WTO
 Jurisdiction and applicable law of the WTO
 Meaning and role of reverse consensus
Keywords standard of review, amicus curiae, locus standi
III. E-text
Introduction
The institution of WTO’s dispute settlement mechanism has emerged as one of the
most credible and enforceable regimes amongst the prevailing international tribunals
and bodies. Its credibility is linked to several improvements that were incorporated
through the adoption of Dispute Settlement Understanding (DSU) which refined the
earlier existing regime under the GATT. This module attempts to discuss the
evolution of the modern day dispute settlement framework under the WTO through
introduction of concepts inter-alia, reverse consensus. The module also discusses the
prevailing controversial themes within the DSU such as: standard of review to be
adopted while adjudication, applicable law before the WTO and locus standi and
standing of individuals and amicus curiae petitions.
Learning Outcome
To understand the following:
 The similarities and dissimilarities between the old and modern dispute settlement
mechanism;
 Understanding the prevailing controversies in modern WTO DSU pertaining to
standard of review, applicable law before the WTO, locus-standi and amicus curiae
briefs.
1. Evolution of dispute settlement mechanism from the GATT to WTO
2. The role of the panel and appellate body in settlement of disputes
3. The concept of reverse consensus
4. Locus standi of the parties
5. Amicus curiae briefs
IV. Text
1. Evolution of dispute settlement mechanism from GATT to the WTO
The WTO dispute settlement system came into force on 1 January 1995. It is
considered as one of the most effective and credible systems of adjudication within
the vast domain of modern international tribunals and bodies. Its enforceability is
driven by the binding character of awards rendered by the system. However, it would
be naïve to say that such a system was born only in 1995. The modern WTO dispute
settlement system has absorbed fifty years of experience of trade disputes’ resolution
under GATT, 1947. The modern system has introduced several modifications and
improvements in the old model, but owes its foundational existence to GATT 1947.
In this context, Article 3.1 of the Dispute Settlement Understanding1 (DSU) becomes
relevant. The provision states that:
“Members affirm their adherence to the principles for the management of disputes
heretofore applied under Articles XVII and XVIII of GATT, 1947, and the rules and
procedures as further elaborated and modified herein.”
Let us understand the historical roots of the modern WTO dispute settlement system,
tracing its inception to GATT 1947. The historical background of dispute settlement
under GATT 1947 becomes relevant to understand the similarities and differences
between the two systems of dispute settlement prevalent in 1947 and 1994. We shall
discuss these issues under the following heads:
Nullification & Impairment of benefits
Violation Non- Situation

Violation
1 UNDERSTANDING ON RULES AND P ROCEDURES GOVERNING THE SETTLEMENT OF D ISPUTES, 1869

UNTS 401; 33 ILM 1226 (1994).
As we have discussed in the Module ‘Evolution of GATT’, GATT 1947 was not
conceived as an international organisation for trade. Naturally, it did not provide for
an elaborate dispute settlement system and only contained two brief provisions
relating to dispute settlement- Articles XXII and XXIII. Pursuant to these provisions,
GATT members had recourse to adjudication pertaining to three sets of claims-
violation; non-violation & situation complaints.
 Violation complaint requires ‘nullification or impairment of a benefit’ as a result of
the ‘the failure of another [Member] to carry out its obligations’ under GATT 1994.
 Non-violation complaint may be used to challenge any measure applied by another
Member, even if it does not conflict with GATT 1994.
 Situation complaints cover any situation whatsoever, as long as it results in
‘nullification or impairment’. However, although a few such situation complaints
have been raised under the old GATT, none of them has ever resulted in a panel
report.
These complaints have been held to be admissibility even under the modern WTO
system. Therefore, even though vast varieties of claims are admissible before the
WTO dispute settlement body, in-order to be adjudicated, they must result in
nullification or impairment (or possibly the impeded attainment of an objective). This
protects the intention to maintain the negotiated balance of concessions and benefits
between the WTO Members. It was GATT practice and it is now WTO law that a
violation of a WTO provision triggers a rebuttal presumption of nullification or
impairment of trade benefits (Article 3.8 of the DSU).
Working Parties: Erstwhile Panels
Under the GATT 1947 regime, a dispute which parties failed to resolve through
consultations, was handled by GATT working parties set up pursuant to Article
XXIII:2. These working parties comprised of representatives of all interested
Contracting Parties, including the parties to the dispute, and made decisions on the
basis of consensus. Therefore, from 1950s onwards, ‘panels’ of three to five
independent experts from GATT Contracting Parties (other than the disputing parties)
adjudicated trade related claims. Thus, the concept of Panel is not new to the modern
WTO system.
Decision making
Earlier, the panel was tasked with the duty of reporting the decision to the GATT
Council, which comprises of all Contracting Parties, which would have to adopt by
consensus the recommendations and rulings of the panel before they would become
legally binding on the parties to the dispute. This however was a major draw-back of
the old system in WTO.
The decision on establishment of panel and thereafter adoption of the panel report
were taken by the GATT Council through consensus. This gave the party in dispute,
i.e. the respondent enough authority to either block the establishment of panel in the
first place, or even if a panel is formed and a case is decided against its interest, to
block or delay the adoption of such an adverse ruling. This is the reason, why several
Panel reports such as could not be implemented and enforced under the previous
GATT regime.
Another related shortcoming of the old GATT system was that panels were shy to
handle politically sensitive trade disputes since such decisions could never be
executed any way, given the tremendous clout of the respondent. As a result of this
situation, the essence of trade adjudication was lost which resulted in countries such
as the United States resort to increasingly unilateral action against measures they
considered in breach of the GATT law, without having them adjudicated legally. A
classic example of a unilateral conduct was s. 301 of the US Trade Act, 1974 which
authorized the President to impose economic sanctions on countries that “burden or
restrict United States commerce.” The law did not even require that the alleged
foreign conduct violate any trade agreement with the United States to be subject to
sanction under the Act. Similarly, putting countries on ‘watch-list’/’priority list’ on
their failure to comply by US’ standards of intellectual property protection and
imposing sanctions thereon, were clear conducts of unilateral adjudication, which
were allowed to prevail as the GATT system of dispute settlement did not have
enough tooth and nail. This situation to a large extent has been improvised by the
modern WTO dispute settlement institution, even though such unilateral trade
sanctions have not been completely eliminated.
Interestingly, despite apparent shortcomings, the GATT system of 1947 worked
satisfactorily in about majority cases. Individual respondent contracting parties mostly
refrained from blocking consensus decisions and allowed disputes in which they were
involved to proceed, even if this was to their short-term detriment. They did so
because they had a long-term systemic interest and knew that excessive use of the
veto right would result in a response in kind by the others. Accordingly, panels were
established and their reports frequently adopted, albeit often with delays (even though
the authorization of countermeasures was only granted once). 2 Similarly, while
adjudicating the three panelists knew that their report had also to be accepted by the
losing party in order to be adopted. Accordingly, there was an incentive to rule not
solely on the basis of the legal merits of a complaint, but to aim for a somewhat
“diplomatic” solution by crafting a compromise that would be acceptable to both
sides.3
In the light of this discussion, the old system can be contrasted with the modern DSU
regime under the GATT. It is vital to note that the innovations of the DSU include:
1. Quasi-automatic adoption of requests for the establishment of a panel, of dispute
settlement reports and of requests for authorisation to suspend concessions;
2. Strict timeframes for various stages of the dispute settlement process; and
3. The possibility of appellate review of panel reports. This innovation is linked to the
quasi-automatic adoption of panel reports and reflects high quality in international
adjudication.
4. Furthermore, unlike a lack of supervision over unilateral conducts during the GATT
era, DSU’s Article 23.1 overcomes this concern as it mandates WTO members to
‘have recourse to, and abide by, the rules and procedures of this Understanding’.
The other remarkable features of the modern WTO dispute settlement system include:
 Recognition of its role in providing security and predictability to the multilateral
trading system (Article 3.2 DSU).
2 HISTORIC DEVELOPMENT OF THE WTO DISPUTE SETTLEMENT , CHAPTER 2, D ISPUTE SETTLEMENT

SYSTEM TRAINING MODULE, W ORLD T RADE ORGANISATION , AVAILABLE AT:
http://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c2s1p1_e.htm
3 ibid
 Interpretation of rights and obligations of members under the covered agreements,
and to clarify the existing provisions in accordance with customary rules of
interpretation of public international law (Article 3.2 DSU).
 Aiming to secure a positive solution of the dispute (Article 3.7, DSU) along with
prompt settlement (Article 3.3 DSU).
Therefore, in tracing the evolution of the modern WTO dispute settlement system,
trade scholar Robert Hudec recognises the modern system as increasing ‘legislation’
of the GATT’s ‘diplomatic jurisprudence’. Overall, the GATT dispute settlement
system has evolved from a power-based system through diplomatic negotiations into a
rile-based system of settlement through legal adjudication.
2. Role of Panel and Appellate Body in settlement of disputes
Pictorial representation of decision making process in the WTO

Source: Google Images
Upon the request of a complaining party, the DSB establishes a panel to hear and
decide a dispute. The DSB does this by a process called the reverse consensus. The
establishment of a panel under the modern WTO DSU regime is therefore ‘automatic’.
As a rule, panels consist of three persons, who are not nationals of the Members
involved in the dispute. These persons are often trade diplomats or government
officials. Academics and practising lawyers also regularly serve as panellists. The
terms of reference of the panel are determined by the request for the establishment of
a panel, which identifies the measure at issue and the provisions of the covered
agreements allegedly breached. It is the task of panels to make an objective
assessment of the matter, including an objective assessment of the facts of the case
and the applicability of and conformity with the relevant covered agreements.
The Appellate Body hears appeals from the reports of dispute settlement panels.
Unlike panels, the Appellate Body is a permanent, standing international tribunal. It is
composed of seven persons, referred to as Members of the Appellate Body. Members
of the Appellate Body are appointed by the DSB for a term of four years, once
renewable. Only the complaining or responding party can initiate appellate review
proceedings. Appeals are limited to issues of law covered in the panel report or legal
interpretations developed by the panel. The Appellate Body may uphold, modify or
reverse the legal findings and conclusions of the panel that were appealed.
The role of Panels and AB can be further discussed through the following heads:
Providing access of adjudication to WTO members
The WTO dispute settlement system is a government-to-government dispute
settlement system for disputes concerning rights and obligations of WTO Members.
Therefore, only governments are provided access to bring and adjudicate their claims
before the WTO. The regime excludes within its purview the rights of individual
parties, whose claims must be espoused by their respective states in-order to attain the
valid locus to present their case before the WTO. The issue of standing becomes
relevant with respect to the rights of third-parties, NGOs and other inter-governmental
entities that would be discussed in the section below.
Exercising Compulsory Jurisdiction
The jurisdiction of the WTO dispute settlement system is compulsory in nature.
Pursuant to Article 23.1 of the DSU, quoted above, a complaining Member is obliged
to bring any dispute arising under the covered agreements to the WTO dispute
settlement system. With regard the jurisdiction of the WTO dispute settlement system,
it should also be noted that the system has only contentious, and no advisory
jurisdiction.
Applying the relevant applicable law
Though DSU imposes a jurisdiction limitation on Panels and AB, there is no such rule
on applicable law. Article 3.2 of DSU directs Panels and AB to clarify the existing
provisions of those agreements in accordance with customary rules of interpretation
of public international law. Recommendations and rulings of the DSB cannot add to
or diminish the rights and obligations provided in the covered agreements.
Therefore, there is an apparent conflict between the use of general body of public
international law and its application before the WTO DSB. The problem is aggravated
when disputes pertaining to ‘other branches of public international law’ surface- e.g.
breach of GATT obligation for complying by rules of Regional Trade Agreement or
other health, environment laws under international law.
The three predominant views in the light of this academic controversy include:
 The universe of International law relevant to the WTO was not exhausted in April
1994, thus general public international law continues to hold relevance. This view
finds support in decisions such as the US-Gasoline 4 which endorse the view that
WTO does not exist in clinical isolation.
 Since the jurisdiction clause of WTO is narrow, broad disputes pertaining to public
international law may not be adjudicated from the funnel of applicable law.
4 APPELLATE B ODY REPORT, UNITED S TATES — S TANDARDS FOR REFORMULATED AND

CONVENTIONAL G ASOLINE , WT/DS2/AB/R, ADOPTED 20 MAY 1996, DSR 1996:I, 3
 Other scholars taking a rather middle view opine that in case of any conflict between
public international law and the law of the WTO, the latter should prevail. The
reasoning is premised on a combined reading of Articles 3.2 & 19.2 of the DSU. The
use of other public international law as valid defences for breach of GATT has also
been pleaded before the WTO, e.g. in the Argentina footwear (EC) decision where
the breach resulted from compliance of a parallel obligation under an international
treaty, i.e. MERCOSUR 5 . Scholars have also opined that other rules of
harmonisation e.g. prevalence of a specialised principle or one which applies later in
time, may become useful in resolving such conflicts.
Standard of review
The standard of review clause is mentioned under Article 11 of the DSU. The clause
reads as follows:
“Accordingly, a panel should make an objective assessment of the matter before it,
including an objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements, and make such other findings as
will assist the DSB in making the recommendations or in giving the rulings provided
for in the covered agreements.”
Panels and the AB are frequently called upon to review an investigation by a domestic
government. An investigation is required, for example, prior to the implementation of
safeguards measures, anti-dumping measures, countervailing duties, and SPS
measures. When such a case finds its way to a panel, the review of the measure
includes two separate elements. The first is the form of the review by domestic
authorities. In this context, relevant questions include- Did they take into account the
right evidence? Did they provide appropriate procedures? The second stage of the
review concerns the substantive question of whether the measure is justified on the
merits.6
Standard of review thus remains a controversial issue. The dilemma is whether the
WTO’s adjudicating organs must conduct a de-novo assessment of the case, or they
should provide deference to the policy rationales chosen by the states.
EC-Hormones7 in this regard clarified that the standard of review is neither de novo
nor total deference but that of objective assessment of facts.
Furthermore, such standard of review clauses also find mention in specialised WTO
Agreements such as the Anti-Dumping Agreement. Under the special standard of
review, panels and AB usually are not required to adjudge issues such as whether
dumping, injury, causation have taken place. Rather, their role is restricted to
checking whether the relevant authorities have complied by with the international
obligations set out in the WTO agreement. It has been clarified that under such
clauses of specialised WTO agreements, panels are not required to engage in a new
and independent fact finding may but assess the value/weight attached to those facts
and whether it was done in an unbiased and objective manner.
Academic literature highlights that tension between neutrality and expertise is most
acute in cases involving national authorities' significant exercise of judgment.8 How
5 APPELLATE B ODY REPORT, ARGENTINA — S AFEGUARD MEASURES ON IMPORTS OF

FOOTWEAR , WT/DS121/AB/R, ADOPTED 12 J ANUARY 2000, DSR 2000:I, 515
6
Alexis Goh, The WTO Dispute Settlement System, 2001 AUSML. INT'L LJ. 208, 230 (2001).
7 APPELLATE B ODY REPORT, EC MEASURES CONCERNING MEAT AND MEAT P RODUCTS
(HORMONES), WT/DS26/AB/R,WT/DS48/AB/R, ADOPTED 13 FEBRUARY 1998, DSR 1998:I, 135
should a panel or the AB review these decisions? It is understood that domestic
conditions are important, and domestic authorities are much better at evaluating those
conditions. Similarly, selecting methodology and drawing inferences requires
expertise, and domestic authorities are more likely to have such expertise given their
advantage in terms of time, resources, and contextual knowledge vis. adjudicating
bodies. Therefore, several scepticism prevail when panels/AB tend exercise a de novo
review, especially in cases pertaining to the SPS Agreement (Santiary and
Phytosantiary Measures) where complex scientific issues are in question.
3. Reverse consensus
Decisions in the WTO are usually taken by consensus (Article 2.4 of the DSU).
Footnote 1 to Article 2.4 of the DSU defines consensus as being achieved if no WTO
Member, present at the meeting when the decision is taken, formally objects to the
proposed decision. This means that the chairperson does not actively ask every
delegation whether it supports the proposed decision, nor is there a vote. On the
contrary, the chairperson merely asks, for example, whether the decision can be
adopted and if no one raises their voice in opposition, the chairperson will announce
that the decision has been taken or adopted. In other words, a delegation wishing to
block a decision is obliged to be present and alert at the meeting, and when the
moment comes, it must raise its flag and voice opposition. Any Member that does so,
even alone, is able to prevent the decision.
However, the consensus rule works in a slightly different fashion when it relates to
the dispute settlement mechanism. For example, when the DSB establishes panels, or
when it adopts panel and Appellate Body reports and when it authorizes retaliation,
the DSB must approve the decision unless there is a consensus against it (Articles 6.1,
16.4, 17.14 and 22.6 of the DSU). This special decision-making procedure is
commonly referred to as “negative” or “reverse” consensus. At the three mentioned
important stages of the dispute settlement process (establishment, adoption and
retaliation), the DSB must automatically decide to take the action ahead, unless there
is a consensus not to do so. This means that one sole Member can always prevent this
reverse consensus, i.e. it can avoid the blocking of the decision (being taken). To do
so that Member merely needs to insist on the decision to be approved.
Under the current WTO rules, no Member (including the affected or interested
parties) is excluded from participation in the decision-making process. This means
that the Member requesting the establishment of a panel, the adoption of the report or
the authorization of the suspension of concessions can ensure that its request is
approved by merely placing it on the agenda of the DSB. In the case of the adoption
of panel and Appellate Body reports, there is at least one party which, having
prevailed in the dispute, has a strong interest in the adoption of the report(s). In other
words, any Member intending to block the decision to adopt the report(s) has to
persuade all other WTO Members (including the adversarial party in the case) to join
its opposition or at least to stay passive. Therefore, a negative consensus is largely a
theoretical possibility and, to date, has never occurred.
For this reason, one speaks of the quasi-automaticity of these decisions in the DSB.
This contrasts sharply with the situation that prevailed under GATT 1947 when
8
Claus-Dieter Ehlermann & Nicolas Lockhart, Standard of Review in WTO, LAW, 7J. INT'L ECON. L.
491, 507 (2004)
panels could be established, their reports adopted and retaliation authorized only on
the basis of a positive consensus. Unlike under GATT 1947, the DSU thus provides
no opportunity for blockage by individual Members in decision-making on these
important matters. Negative consensus applies nowhere else in the WTO decision-
making framework other than in the dispute settlement system.9
4. Locus Standi
There is no explicit provision in the DSU requiring a Member to have a “legal interest”
in order to have recourse to the WTO dispute settlement system. Panel and Appellate
Body reports have clarified that such a requirement is not implied either in the DSU
or any other provision of the WTO Agreement.10 In EC – Bananas III, the Appellate
Body held:
“… we believe that a Member has broad discretion in deciding whether to bring a
case against another Member under the DSU. The language of Article XXIII:1 of the
GATT 1994 and of Article 3.7 of the DSU suggests, furthermore, hat a Member is
expected to be largely self-regulating in deciding whether any such action would be
“fruitful”.11
Further, the Appellate Body explicitly agreed with the statement of the Panel in EC –
Bananas III stating that:
“... with the increased interdependence of the global economy, ... Members have a
greater stake in enforcing WTO rules than in the past since any deviation from the
negotiated balance of rights and obligations is more likely than ever to affect them,
directly or indirectly.”12
In EC – Bananas III, the Appellate Body considered in deciding whether the United
States could bring a claim under the GATT 1994, the fact that the United States is a
producer and a potential exporter of bananas, the effects of the EC banana regime on
the United States internal market for bananas and the fact that the United States
claims under the GATS and the GATT 1994 were inextricable interwoven. The
Appellate Body subsequently concluded that “[t]aken together, these reasons are
sufficient justification for the United States to have brought its claims against the EC
banana import regime under the GATT 1994.”13 The Appellate Body added, however,
that “this does not mean though, that one or more of the factors we have noted in this
case would necessarily be dispositive in another case.”14
Therefore, EC-Bananas III stands for the proposition that member states even with a
hypothetical trade interest can institute claims before the WTO.
The issue of locus standi has invoked much controversy within the WTO. Some
scholars claim that it creates an inherent bias in the system as all claims must be
espoused by the government. Since the government is more vigorous in countries
such as the US and Europe to address claims of their domestic trading organisations,
9 WTO B ODIES INVOLVED IN THE DISPUTE SETTLEMENT PROCESS ,

HTTP:// WWW. WTO. ORG/ENGLISH / TRATOP _ E /DISPU _ E /DISP _ SETTLEMENT_ CBT_ E /C 3 S1 P1_ E . HTM
10 APPELLATE B ODY REPORT, EUROPEAN C OMMUNITIES — REGIME FOR THE IMPORTATION, S ALE
AND D ISTRIBUTION OF B ANANAS,WT/DS27/AB/R, ADOPTED 25 SEPTEMBER 1997,
DSR 1997:II, 591, PARAS. 132 AND 133.
11 IBID, PARA. 135.
12 IBID, PARA. 136.
13 IBID, PARA. 138
14 IBID
many small countries owing to lack of such economic and legal capacity may lose out
in the process. Therefore, locus standi inevitably determines the inequalities amongst
the nations which in turn determine the nature and type of disputes proceed before
international tribunals for adjudication.
At present, the issue of locus standi also raises interesting questions in the light of the
on-going plain packaging dispute against Australia which have been instituted by
countries such as Honduras, Dominican Republic and Ukraine. 15 Neither of these
states contribute towards Australia’s imports as facts and statistics demonstrate that
Australia only remains a minor market for tobacco export for the three countries.
Thus, these three complainants have very little economic interest to engage in a
financially cumbersome dispute at the WTO. In this light, it is perceived that
corporate entities such Phillip Morris by virtue of their monetary and legal resources
are able to influence small countries in instituting claims on their behalf.16
5. Amicus Curiae
Since WTO is a government to government dispute settlement system, individuals,

companies, international organisations, NGOs, labour unions or industry associations
have no direct legal access to the WTO dispute settlement system.
Under the current DSU system, they do not have the right to be heard or right to
participate in any way, in the proceedings. However, under the AB case law, panels
and AB have the right to accept and consider written briefs submitted by individuals,
companies or organisations. The acceptance by panels and the AB of these briefs,
which are commonly referred to as amicus curiae briefs (friends of the court’s briefs)
has been controversial and criticised by most WTO members.17
A discussion of the foregoing cases indicates the approach of DSU towards amicus
curiae briefs.
Shrimp-Turtle 18 - Because of the importance of the case to global environmental
management, amicus briefs were submitted by three coalitions of NGOs who were
concerned about environmental issues. The Panel in this case declined to accept the
unsolicited briefs. However, the AB, reversing the stand of the Panel, decided that the
submissions, though unsolicited, were part of government submissions, which are
admissible.
15 AUSTRALIA — CERTAIN MEASURES CONCERNING T RADEMARKS AND O THER P LAIN P ACKAGING

REQUIREMENTS APPLICABLE TO T OBACCO P RODUCTS AND P ACKAGING (DS434), AUSTRALIA —
CERTAIN MEASURES CONCERNING T RADEMARKS , GEOGRAPHICAL INDICATIONS AND O THER
P LAIN P ACKAGING REQUIREMENTS APPLICABLE TO T OBACCO P RODUCTS AND P ACKAGING
(DS435), AUSTRALIA — CERTAIN MEASURES CONCERNING T RADEMARKS , GEOGRAPHICAL
INDICATIONS AND O THER P LAIN P ACKAGING REQUIREMENTS APPLICABLE TO T OBACCO P RODUCTS
AND P ACKAGING (DS 441).
16 R ACHIT R ANJAN, PACKAGING A NEW ERA OF INTERNATIONAL DISPUTE S ETTLEMENT, 6 TH
OCTOBER 2014, G LOBAL P OLICY
HTTP:// WWW. GLOBALPOLICYJOURNAL. COM /BLOG/06/10/2014/ PACKAGING- NEW -ERA-
INTERNATIONAL- DISPUTE -SETTLEMENT
17 AMICUS CURIAE B RIEF: S HOULD THE C OURT REMAIN FRIENDLESS? CUTS B RIEFING P APER , 2002,
AVAILABLE AT: HTTP :// WWW. CUTS -CITEE . ORG/PDF /BP02-WTO-3. PDF
18 APPELLATE B ODY REPORT, UNITED S TATES — IMPORT P ROHIBITION OF CERTAIN S HRIMP AND
SHRIMP P RODUCTS,WT/DS58/AB/R, ADOPTED 6 NOVEMBER 1998, DSR 1998:VII, 2755
Thus, strictly speaking, it cannot be said that the AB accepted any amicus brief in the
Shrimp-Turtle case, as the information provided by the NGOs was received only as
part of government submissions and not as amicus briefs as such.
Salmon Dispute 19 - In a case instituted against Australia for its ban of imports of
salmon from Canada, the Panel considered information contained in an unsolicited
letter from Concerned Fishermen and Processors of South Australia as relevant to its
procedures and accepted the information as part of the records. Thus, this case was
the first instance in which a Panel accepted an amicus brief.
British Steel 20 - In a case against the United States, regarding the imposition of
countervailing duties on certain hot-rolled carbon steel products originating in the
United Kingdom, the Panel received an unsolicited brief from the American Iron and
Steel Institute. The Panel declined to accept the brief, stating that it came too late in
the Panel’s process.
At the appellate level, the AB received the brief from the American Iron and Steel
Institute on the same day that the US government filed the case. Later, another
unsolicited brief came from a trade association called Specialty Steel Industry of
North America.
The AB stated that it had the authority to decide whether to accept unsolicited briefs
because Art. 17.9 of the DSU enable it to draw up its working procedures. It further
stated that a private person has no legal right to have its brief considered by the AB.
Instead, there is a legal authority to accept private briefs when it is found pertinent
and useful to do so. Later the AB concluded that it was not necessary to take the two
briefs into account.
Asbestos Case 21 -The Asbestos case was the first case where the AB had taken
initiatives in order to open the avenue for amicus briefs, in their true sense, to be
submitted at the adjudication process under the DSU. In this case the Panel received
five written submissions from asbestos victim groups and industry. Two of these were
appended to the European Communities’ submission and considered by the Panel as
defending party’s arguments. The Panel rejected the remaining three. Two of them
were rejected without explanation and one was rejected because it was submitted late.
The AB laid down an Additional Procedure applicable only to this particular case, to
file an amicus brief stating that the decision to publish the criteria was made in the
interests of fairness and orderly procedure in the conduct of the said appeal.
In none of the cases however did the Panels specify why they accepted or rejected
independent submissions.22
V. Summary
19 APPELLATE B ODY REPORT, AUSTRALIA — MEASURES AFFECTING IMPORTATION OF

S ALMON, WT/DS18/AB/R, ADOPTED 6 NOVEMBER 1998, DSR 1998:VIII, 3327
20 APPELLATE B ODY REPORT, UNITED S TATES — IMPOSITION OF COUNTERVAILING DUTIES ON
CERTAIN HOT -ROLLED LEAD AND BISMUTH CARBON STEEL PRODUCTS ORIGINATING IN THE U NITED
K INGDOM , WT/DS138/AB/R, ADOPTED 10 MAY 2000
21 APPELLATE B ODY REPORT, EUROPEAN COMMUNITIES — MEASURES AFFECTING ASBESTOS
AND ASBESTOS -CONTAINING P RODUCTS , WT/DS135/AB/R, ADOPTED 5 APRIL 2001
22 AMICUS CURIAE B RIEF SHOULD THE WTO REMAIN F RIENDLESS?, B RIEFING PAPER CUTS,
HTTP:// WWW. CUTS -CITEE . ORG/ PDF/BP02-WTO-3. PDF
The modern dispute settlement mechanism under the WTO has far progressed from
its predecessor during the GATT era. However, the modern institution has several
underpinnings derived from the GATT. While admissible claims in the form of
violation, non-violation and situation complaints continue to prevail under the modern
DSU, the latter regime seeks for more credibility and enforceability through
strengthening processes such as reverse consensus in decision making. Panels and
Appellate Bodies play a crucial role in adjudication and legal scope of concepts such
as standard of review and applicable law continue to evolve. Similarly, locus-standi
and amicus curiae standings before the WTO dispute settlement body also raise
questions for further clarity by both panels and appellate body.
Law

Enforcement of WTO rulings
Principal Investigator Prof. (Dr.) Ranbir Singh Vice Chancellor, NLU, Delhi
Co. P.I Prof. (Dr.) G.S. Bajpai Registrar, NLU, Delhi
Paper Co-ordinator Dr. Saloni Khanderia- National Law University, Delhi
Yadav
Content Reviewer Dr. Prabhash Panjan South Asian University, Delhi
Yadav

Subject Name Law
Module Name/Title Enforcement of WTO rulings
Module Id 15
Pre-requisites Knowledge of core principles of GATT and international law
such as:
 Basic differences between GATT and WTO regime
 Basic understanding of the framework of Dispute
Settlement Understanding (DSU) including concepts
such as: Transition from positive to negative
consensus rule.

 To understand the enforcement regime under the
WTO
 To understand the inherent limitations of the current
regime
 To familiarise oneself with the relevant academic
debate within DSU such as: The objective of
retaliation & the sequencing debate.
Keywords Compliance, Compensation, Cross-Retaliation, Sequencing
II. E-text
Introduction
The previous module on DSU has highlighted the strength and enforceability of
WTO’s dispute settlement. Inevitably the element of enforceability is linked to the
diverse remedies provided for under the WTO. The WTO has contracted out of the
prevalent rules of international law which prohibit counter-measures by endorsing
even harsh remedies such as cross-retaliation, in the face of compliance. These
features provide a unique character to WTO’s enforcement regime.
However, despite the vast discourse of remedies, there remain several controversies
and limitations attached to the modern DSU system. This chapter highlights upon
some of these controversies such as the debate on ‘equivalence’ of cross-retaliation
and the ‘sequencing debate’. The chapter elaborately discusses the nature and scope
of remedies and also critically analyses their impact vis. both developing and
developed countries. The chapter also entails reference of a few DSU proposals
presently being considered by the WTO.
Learning Outcome
 The framework of the existing WTO regime vis. its GATT counterpart
 Compare the different remedies provided under the DSU and analyse their inherent
limitations
 Academic debates on sequencing and ‘equivalence’ standard of cross-relation.
1. An overview of the remedies under the WTO
Transition from GATT to the WTO

Compliance & Compensation
Retaliation- Types and Rules Applicable
When is cross retaliation allowed? Case study of US-Gambling dispute
Mechanism of Cross-Retaliation
Objectives of Retaliation- The debate on ‘Equivalence’: Rebalancing trade
negotiations or acting as punitive measures?
2. Enforcement of WTO Rulings: A critical analysis
Limitations of bringing a measure ‘in conformity with the agreement’
Limitations of compensation
Retaliation
Limitations of retaliation for developing countries
Limitations of retaliation for other/developed countries
Proposals for reforms to the DSU remedial systems should be explored
3. Sequencing debate
III. Text
1. An overview of the remedies under the WTO
Transition from GATT to the WTO

Broadly speaking, the modern WTO Dispute Settlement system provides for three
forms of remedies:
1) Withdrawal of the inconsistent measure
2) Compensation
3) Suspending application of concessions or other concessions.
The aforesaid rule is elaborated under Article 3.7 of the DSU which states as follows:
“In the absence of a mutually agreed solution, the first objective of the dispute
settlement mechanism is usually to secure the withdrawal of the measures concerned
if these are found to be inconsistent with the provisions of any of the covered
agreements. The provision of compensation should be resorted to only if the
immediate withdrawal of the measure is impracticable and as a temporary measure
pending the withdrawal of the measure, which is inconsistent with a covered
agreement. The last resort which this Understanding provides to the Member
invoking the dispute settlement procedures is the possibility of suspending the
application of concessions or other obligations under the covered agreements on a
discriminatory basis vis-à-vis the other Member, subject to authorization by the DSB
of such measures.”
Before analysing these remedies, let us contrast the modern WTO regime with the
original GATT framework. Under the GATT regime of dispute settlement, member
states had the option to suspend concessions or obligations if rulings are not complied
with. In this regard, Article XXIII:2 provided that a complaining nation could be
authorised to suspend concessions or obligations under the GATT, provided two
substantive conditions are fulfilled:
(a) Circumstances are serious enough
(b) The proposed suspension is appropriate.
Apart from the vague thresholds of these standards, the prevalence of the positive
consensus rule ensured that the losing party could effectively veto any proposal for
suspending concessions, rendering the authorisation of such retaliation to very rare in
the history of GATT. Classic cases where such an authorisation was blocked by the
losing party includes the EEC-Oilseeds II case1 (adoption of the decision blocked by
EEC) and the US-Superfund case 2 (adoption of the decision blocked by the US).
Therefore, in the words of John Jackson, GATT suffered from ‘birth defects’,3 which
later had to be overcome by the WTO system in 1994.
In the light of the traditional rules, we shall now discuss the relevant provisions of the
DSU and the advancement made under the modern rules.
Compliance & Compensation
The enforcement mechanism under the WTO has strengthened post the adoption of
DSU in 1994. The first objective of bringing the measure in conformity with the
WTO Agreement is enshrined under Article 19.1 of DSU which states as follows:
“Where a panel or the Appellate Body concludes that a measure is inconsistent with a
covered agreement, it shall recommend that the Member concerned 4 bring the
measure into conformity with that agreement.5 In addition to its recommendations, the
panel or Appellate Body may suggest ways in which the Member concerned could
implement the recommendations.”
In this light, prompt compliance with recommendations or rulings of the DSB is
essential in order to ensure effective resolution of disputes to the benefit of all
Members (Article 21.1). That compliance is the first preference, and only in the
absence of compliance, the other remedies follow is further recognised by Article
22.1 of DSU which states:
1
GATT Panel Report on EEC – Oilseeds II, adopted on 31 March 1992, BISD 39S/91.
2
GATT Panel Report on U.S. – Superfund, adopted on 17 June 1987, BISD 34S/136.
3
John H. Jackson, History of the General Agreement on Tariff and Trade Overview and Birth Defects,
published in R. Wolfrum, P. -T. Stoll and H. P. Hestermeyer (eds.), WTO – Trade in Goods (Martinus
Nijhoff
Publishers, 2011), pp. 1-24.
4
The “Member concerned” is the party to the dispute to which the panel or Appellate Body
recommendations are directed.
5
With respect to recommendations in cases not involving a violation of GATT 1994 or any other
covered agreement, see Article 26.
“Compensation and the suspension of concessions or other obligations are temporary
measures available in the event that the recommendations and rulings are not
implemented within a reasonable period of time. However, neither compensation nor
the suspension of concessions or other obligations is preferred to full implementation
of a recommendation to bring a measure into conformity with the covered
agreements.”
Pursuant to Article 22 DSU, the decision making is based on ‘negative consensus
rule’6 which effectively prevents the process of retaliation from being blocked. This
aspect is revolutionary and depicts a major advancement of the modern regime from
the traditional GATT model. Needless to say, the strong enforceability of the WTO
dispute settlement mechanism is thus derived from the prevalence of negative
consensus rule in adoption of Panel and Appellate Body (AB) reports.
Retaliation- Types and Rules Applicable
The WTO rules are comprehensive as they elaborate upon the nature and types of
retaliation, permissible to be adopted by member states:
 Parallel Retaliation- The complaining party should first seek to suspend concessions
within the same sector where a violation is found.
 Cross Sector Retaliation- If the party considers that it is not (i) practicable or (ii)
effective to suspend to suspend concessions within the same sector, it may continue
to seek suspension of concessions in other sectors under the same agreement.
 Cross Agreement Retaliation- If it is not practicable or effective to implement ‘cross
sector retaliation, when the circumstances are serious enough, that party may further
seek to suspend concessions under another WTO agreement. Both ‘cross sector’ and
‘cross agreement’ retaliation are collectively referred to as cross-retaliation.7
Similarly, unlike Article XXIII:2 of GATT which laid out vague terms for retaliation,
Article 22.2 clarifies that parallel retaliation (within the same sector) may be taken up,
if the opposite party fails to comply with the rulings within a reasonable period of
time and with no satisfactory compensation agreed. The reasonable period has been
discussed in detail in Article 21.3 DSU. Further, the modern regime also provides for
cross-retaliation across sectors and agreements. e.g. retaliation against a Member for
violation in the goods sector can be done by imposing market access barriers on
sectors such as services or intellectual property.
Furthermore, the purpose of retaliation is that it should be effective enough to induce
compliance. The term ‘effective’ has been subject to interpretation as shown by the
WTO jurisprudence. In terms of ‘effectiveness’, it has been clarified that ‘the impact
of a suspension must be strong and have desired result of inducing compliance’.8 If
the parallel retaliation can sufficiently achieve this purpose, the cross-retaliation is not
supposed to be requested. In fact, the parallel retaliation which is frequently
authorized, in most circumstances leads to the compliance. To give an extreme
example, if the offending party, an economy dependent on exports to the complaining
6
Enshrined as per Article 6, 16.4, 17.14 & 22.7 DSU.
7
See WTO Secretariat, ‘A Handbook on the WTO Dispute Settlement System’ (Cambridge University
Press, 2004) p.83. However, some scholars disagree with this view. Liu Wanchao states that cross-
retaliation only refers to cross-agreement retaliation. See Liu Wanchao, Retaliation mechanism in the
WTO dispute settlement system 2004, Haidian University Journal, vol. 67, no. 3, p. 77.
8
Decision by the Arbitrators, European Communities – Regime for the Importation, Sale and
Distribution of Bananas – Recourse to Arbitration by the European Communities under Article 22.6 of
the DSU, WT/DS27/ARB/ECU, 24 March 2000 (hereinafter ‘EC – Banana III (Ecuador)’) Para 72.
party, violates certain obligations under the GATT 1994, the parallel retaliation
seems to be sufficient to induce compliance since it will release a ‘nuclear bomb’,
destroying that country’s economy. In this regard, the factors – e.g. imbalance in
trade volume, asymmetry in market power between both parties, will sometimes be
extremely vital for arbitrators to decide the case. Moreover, arbitrators also consider
the observation that the cross-retaliation is least detrimental to the complaining party
itself if actual evidence is attached.9
When is cross-retaliation allowed?: Case study of US-Gambling
Practical
Effective
Serious
Table representing the requisite analysis of relevant circumstances permitting
cross-retaliation
A classic example of cross retaliation is the US-Gambling dispute where Antigua and
Barbodas, two small island nations effectively used the tool of cross-retaliation
against the economic clout of the US. In Stage One, the arbitrators firstly established
that the parallel retaliation in the same sector (that is, ‘Recreational, Cultural and
Sporting Services’) under the GATS was not practical or effective. This is because the
only trade within this sector under the GATS that Antigua had made commitments on
was sub-sector (‘Entertainment services’).10 In facts of this case, the suspension in
this sector would have adversely affected Antiguan citizens, i.e. limiting
entertainment options available, while having virtually no impact on the U.S., due to
Antigua’s negligible trade volume.11
In Stage Two, Antigua continued to argue that it heavily relied on imports of products
and services sourced from the U.S. by virtue of the fact that it is a small island with
limited natural resources, so that raising tariff on products or limiting the provision of
services would have ‘a disproportionate adverse impact on Antigua by making these
products and services materially more expensive to the citizens of country’.12
In addition, Antigua emphasised how adverse impact of the cross-retaliation would
manifest in some specific service sectors. For instance, Antigua’s initially proposed
cross-sector retaliations in ‘communication services’ and in ‘travel and transport
services’ were both impractical because not only the volume of those trades was
extremely low, but also finding a replacement for current service providers (from the
U.S.) requires high switching cost, which is actually a huge burden on Antiguan
9
YE Siyu, The Legal Analysis of the Cross-Retaliation Under the WTO Framework, LLM Paper,
University of Ghent (2012-13) at 12.
10
Decision by the Arbitrator, United States – Measures Affecting the Cross-Border Supply of
Gambling and
Betting Services – Recourse to Arbitration by the United States Under Article 22.6 of the DSU,
WT/DS285/ARB, 21 December 2007 (hereinafter ‘U.S. – Gambling’), Para 2.3.1
11
Ibid, Para 4.52
12
Recourse to Article 22.2 by Antigua, WT/DS285/22, 22 June 2007
citizens.13 Therefore, it was not practicable or effective for Antigua to take the cross-
sector retaliation in other sectors under the GATS.
Bearing this in mind, the arbitrators proceeded to Stage Three where they examined
the ‘seriousness’ of the circumstances to see whether the cross-agreement retaliation
under the TRIPS Agreement can be justified. In the absence of specific guidance, the
arbitrators had a margin of appreciation. Through various figures demonstrated by
Antigua in comparison with the population, territorial size, GDP, imports and exports
volume of the U.S., the arbitrators plausibly drew that there existed an extremely
unbalanced trading relations between the two countries, which made it more difficult
for Antigua to ensure the effectiveness of the retaliation under the same agreement.14
Based on the afore-said analysis, Antigua’s request for cross-retaliation was found
consistent with Article 22.3 DSU and thus allowed. This case-study reflects the
various rules based on which courts would permit cross-retaliation.
It is also interesting to note that during the DSU negotiations, the U.S. and other
developed countries believed that in case of TRIPS violations by developing countries,
cross-retaliation against goods or services from these countries would be more
effective than retaliation with respect to intellectual property. 15 Ironically, it is
developing countries that have so far used the cross-retaliation in the TRIPS area
against developed countries.16 A few other illustrations of cross-retaliation include:
Case name Requesting member Agreements orOther sectors or
sectors whereagreements where
violation have beenproposed cross
found retaliation may take
place
EC-Bananas III Ecuador GATT 1994 & TRIPS (copyright,
GATS (distribution GIs and industrial
service) designs)
US-Upland Cotton Brazil GATT, 1994 GATS (business,
communication,
construction, and
related engineering
services) and the
TRIPS (copyrights
and related rights,
patents and protection
of confidential
information,
industrial designs and
trademarks)
Mechanism of Cross-Retaliation
Upon a request for cross retaliation, it is either authorised by the DSB or in case of
any objections raised by the offending party, is referred to arbitration under Article
22.6, DSU where the decision to modify the level of retaliation is made, upon which
13
US-Gambling, Paras 4.93 and 4.96
14
Ibid, Paragraphs 4.109 and 4.114
15
Sherzod Shadikhodjaev, Retaliation in the WTO dispute settlement system (Kluwer Law
International, the Netherlands, 2009) p. 67
16
Ibid
the DSB authorises cross retaliation. The arbitral decision in this regard is final and
binding and not subject to judicial review.17 The role of the arbitrator is to assess the
legal requirements for authorisation which include e.g. the level of ‘equivalence’ to
the damages suffered. However, an arbitrator may not intrude upon the qualitative
aspects of the proposed suspension touching upon the ‘nature’ of concessions, e.g.
whether to retaliate in apples or oranges?18
Furthermore, usually the ‘trade affects’ approach has been used to assess equivalence.
In EC – Hormones (U.S.) arbitration, for instance, the arbitrators need to first tackle
the question that ‘what would annual prospective U.S. exports of hormone-treated
beef and beef products to the EC be if the EC had withdrawn the ban on 13 May
1999’.55 In next step, arbitrators will quantify the NoI by applying a ‘direct trade-
effects’ test, which measures ‘trade flows blocked, that is, transactions lost or
turnover not realized due to the offending party’s measure’.19 In EC – Banana III
(U.S.) arbitration, the arbitrators identified that the benchmark for the calculation of
NoI of the U.S. trade flows should be losses in the U.S. export of goods combined
with losses suffered by the U.S. service suppliers
Objectives of Retaliation- The debate on ‘Equivalence’: Rebalancing trade
negotiations or acting as punitive measures?
A discussion of the various WTO remedies would remain incomplete unless the
relevant controversy surrounding them is highlighted. The ‘real’ objective of
remedies is a subject of intense academic debate and scholars and WTO case-laws
remain divided on this stand. For the first time, the academic Joost Pauwelyn sought
to inquire the true objective of retaliation in the WTO- is it simply to rebalance trade
concessions or it aims to compensate the victims?20 The debate simply boils down to
the quantum of punishment that may be accorded to the non-complying party,
especially by way of permitting retaliatory measures against the specific member state.
Pursuant to this observation, an analysis of WTO case-laws indicates that the
jurisprudence stands divided on this issue and thus the position of law thus remains
unsettled.
For instance, in the EC – Banana III (U.S.) arbitration under Article 22.6 DSU, the
arbitrators expressly ruled that ‘(…) this temporary nature indicates that it is the
17
Brendan McGivern, ‘Retaliation Revisited: Compliance and Implementation Issues in WTO Dispute
Settlement’, published in Dencho Georgiev and Kim Van ler Borght (eds.), ‘Reform and Development
of the World Trade Organization Dispute Settlement System’ (Cameron May, 2006) p. 225; also See
Article 22.7 DSU, it says that ‘the parties shall not seek a second arbitration’.
18
Decision by the arbitrators, European Communities – Measures Concerning Meat and Meat Products
–
Recourse to Arbitration by the EC under Article 22.6 DSU, WT/DS26/ARB, 12 July 1999 (hereinafter
‘EC –
Hormones (U.S.)’) Para. 19.
19
Simon Schropp, ‘The equivalence standard under Article 22.4 of the DSU: a ‘tariffic’
misunderstanding?’, published in Bown and Pauwely
n (infra) at 468.
20
Joost Pauwelyn, ‘The calculation and design of trade sanctions in context: what is the goal of
suspending
WTO concessions?’, published in Chad P. Bown and Joost Pauwelyn (eds.),‘The Law, Economics and
Politics
of Retaliation in WTO Dispute Settlement’ (Cambridge University Press, 2010) p. 46
purpose of countermeasures to induce compliance’. 21 This conclusion has been
further reinforced in the U.S. – Gambling arbitration, where the arbitrators confirmed
that retaliation is not an appropriate tool to offer exact and full compensation because
they encountered difficulties to calculate the level of suspension with limited
information available,22 which frequently happened in other cases as well.
Another view suggests that Article 22.4 DSU provides that ‘the level of the
suspension of concessions (…) shall be equivalent to the level of the nullification or
impairment’. The proposed suspension is thus subject to the multilaterally controlled
‘equivalence’ standard examined by arbitration in line with Article 22.6 DSU. This
reminds the author of the Shakespeare’s story of ‘a pound of flesh’. Likewise, it is
hard for arbitrators to quantify the elements on both sides of equation and determine
the ‘equivalence’ between two.23
In this regard, it may be concluded that granting compensation to victims is not a goal
of the WTO remedy system or at most it is only a supplementary goal of the
retaliation under the WTO framework.
Yet another is the spectrum of the view indicating that the word ‘retaliation’
originally referred to punitive sanctions against the other.
The following table further depicts the divided jurisprudence of the WTO.
Rebalancing trade concessions Compensate the victims
(Compliance)?
(Buy-outs)?
EC-Bananas III Brazil Aircraft
US-Gambling Canada Aircraft
EC-Hormones
2. Enforcement of WTO Rulings: A critical analysis

Statistics indicate that WTO DSB has a successful implementation rate of 83% and
only 10 disputes so far have faced disagreement over implementation.24 This could be
linked to the system of WTO strong remedies in place- conformity with the WTO
agreement; compensation and most vital retaliation. Though compliance through
removal of measure is the most preferred remedy, compensation and retaliation also
act as effective bargaining tools and may strengthen the enforcement regime.
However, the current remedial structures may said to have inherent limitations. Most
important, the remedial structure in place goes against the spirit of WTO, i.e. trade
21
Decision by the Arbitrators, European Communities – Regime for the Importation, Sale and
Distribution of
Bananas – Recourse to Arbitration by the European Communities under Article 22.6 of the DSU,
WT/DS27/ARB, 9 April 1999 (hereinafter ‘EC – Bananas III (U.S.)’) Para. 6.3
22
US-Gambling, Paras. 3.173-4; Pauwelyn at 63.
23
One difficulty in determining damages arises from the complexity in choosing a suitable
counterfactual, while the other is mainly because of the difficulty in monetizing a proposed measure –
some measures may have a long-term effect on reputation, business image and etc., which brings
about irreparable damages, so it is not wise to only consider the short-term monetary loss.
24
William Davey, The WTO Dispute Settlement System: The First Ten Years, 8(1) Journal of
International Economic Law 17, 24 (2005) at 47
liberalisation, as all remedies of the WTO have potential to restrict trade, in the name
of enforcement.
Limitations of bringing a measure ‘in conformity with the agreement’
The limitation of Article 19 of DSU which only requires the losing party to ‘confirm
with the provisions of the agreement’ has been felt in a few cases. For example in the
Australia-Salmons dispute, Canada won the case as Australian measure was said to be
in violation of the SPS agreement as Australia’s risk assessment was arbitrary. Under
Article 19 of the DSU, AB exercised its power to recommend members to bring
measures in ‘conformity with the agreement’. Note, that AB does not have express
powers to ask member states to ‘remove the inconsistent measures’. Thus Australia
in-order to comply with the ruling, added restrictions on the earlier excluded fish (so
that the new measure is not arbitrary) and reduced (to a little extent) the restrictions
on salmons from Canada. This was said to be compliant with the provisions of the
WTO agreement (SPS Agreement) when Canada later challenged Australia’s conduct.
It is a classic case of compliance as per Article 19, but the result does not go well with
the overall objective of the WTO to reduce trade restrictions and effectuate trade
liberalisation, that the complainant Canada sought to achieve. Such incidents have
made critiques conclude that WTO is not about enforcement or compliance, but only
meeting the formal requirements of the terms that have been negotiated for. Similar
problems also occur in most of the trade remedies disputes, where modifying instead
of removing the inconsistent measure meets the ‘compliance’ requirement under the
WTO.
Limitations of compensation
Article 22.1 of the DSU requires compensation to be consistent with the covered
agreements. This demonstrates a structural flaw in the negotiated agreement. Even if
the winning country negotiates for certain trade compensation with the losing country,
in lieu of removal of modification of the measure, it would be nullified as being in
violation to the MFN obligation. Any special trade compensation would amount to an
‘advantage, benefit’ and the losing country would have to extend such concessions to
all countries in order to comply with Article 22.1 and Article I, GATT. Thus, the
entire purpose of granting special trade concession as a compensatory relief to the
applicant gets defeated. True enforcement through compensation cannot be achieved,
till the MFN exception is carved out under Article 22.1 of DSU.
Retaliation
In modern parlance, retaliation is understood as the enforcement mechanism for WTO
judicial rulings. However, it should be noted that the concept of retaliation via,
‘suspension of concessions and other obligations’ was historically linked to
rebalancing trade interests of the parties (ITO negotiations). This idea of rebalancing
is also envisaged under Article 22.4 of DSU (equivalent to the level of nullification or
impairment). But modern case-laws accept retaliation as an enforcement tool. This is
opposed by some economists who do not consider retaliation a sound economic
policy. Retaliation allegedly creates a systemic ‘institutional bias’ in the WTO, as
limited retaliatory power of the developing countries, creates a ground for their
adversaries not comply with the ruling, thereby largely deterring the developing
countries to initiate complaints in the first place. Others claim that retaliation in itself
is not a good tool to measure enforcement and there are other factors that influence
compliance.
Limitations of retaliation for developing countries
The purpose of retaliation gets defeated, especially from the view of small economies.
Small and least developed economies would tend to suffer relatively more harm in
their own national economy while imposing punitive duties or raising import prices.
Further, their inability to affect world prices by way of retaliation only imposes a
welfare cost on them (Chad Brown). For the same reasons, the compliance inducing
effects of retaliation would also fail. For example, as Antigua and Barbuda mentioned
it their retaliation request in the US-Gambling dispute, even if it ceased all trade with
the US, this would affect less than 0.02% of total US exports. Similarly, since the
exports of developing and small countries are less-diversified, being shut out in a few
export markets would cause them more economic hardships (Mavroidis). Thus the
limitations of the effects of retaliation in the same trade sector have been recognised
by the WTO DSB (EC-Bananas III; US-Gambling; US-Cotton) as ‘impractical’;
‘ineffective’, finding further support in scholarly writings (HR Khan; Hudec; Daniel
Kennedy) and the WTO secretariat (World Trade Report, 2007). Hence, cross-
retaliation which was incorporated by developed countries to retaliate for TRIPS
violations against developing and small countries in their goods sector has now
gained more appeal and is used against them (US-Gambling dispute).
Limitations of retaliation for other/developed countries
Retaliation cannot be a true test of enforcement or compliance system within the
WTO. There are several extraneous factors that come into play. For example, the
political will of the respondent state to remove measures is a crucial policy. This
political will can be influenced by retaliation, but since countries find other ways to
comply with the WTO (conduct of Australia, post Australia-Salmon), retaliation has
limitations. The series of cases- US-FSC; US-Byrd Amendment; US-1916 Act; EC-
Hormones and EC-Bananas, all involved countries such as the US and EU, and still
were not settled, despite the tool of retaliation.
Retaliation may have its limitations based on internal structures of the countries. For
instance, retaliation against a structure such as the EU may be spread over a number
of governments and the resulting harm per nation may not be strong enough to
comply. Similarly, even if a few EU countries are facing the harm, and have an
incentive to comply, the decision making may still be vetoed by other/minority
members in the EU. Thus, retaliation against entities such as the EU may have
inherent structural limitations. This may also enhance the troubles of developing
countries to retaliate. For example, in the EU-Bananas dispute, Ecuador felt that even
if it retaliated by allowing its local wine producers to sell their red wine as ‘Bordeaux’
and permit local music pirates to sell unauthorised copies of European hit sounds, it
would be unlikely that enough political pressure would be created on the EC.
Proposals for reforms to the DSU remedial systems should be explored
This raises the contemporary debate raised in 1960s to have collective retaliation and
monetary compensation as effective remedies in the WTO which are more amenable
to developing countries and LDC, to enforce their WTO rights (Hudec; Mavroidis;
DSU reform proposals by Ecuador, India, Cuba etc endorse this proposition).
Similarly, Mexico has proposed for tradable retaliation rights. Some scholars have
also proposed for financial compensation.
A better enforcement regime could enhance the credibility and legitimacy of the
institution and thus bring more participation, thereby reinforcing the belief that WTO
is a rule based institution. This would be possible to go beyond what has been
negotiated for in 1994 and alter the enforcement regime with the changing needs of
the global trading system.
3. Sequencing debate
So far we have explored the framework and inherent limitations of the framework of
remedies under the WTO. The discussion would remain incomplete till the issue of
sequencing is highlighted.
The issue of sequencing arises as there remain an apparent textual ambiguity between
Article 21.5 and 22.6 of the DSU.
To understand the scope of this debate, let us take an overview of these provisions:
Surveillance of Implementation of Recommendations and Rulings
21.5- Where there is disagreement as to the existence or consistency with a covered
agreement of measures taken to comply with the recommendations and rulings such
dispute shall be decided through recourse to these dispute settlement procedures,
including wherever possible resort to the original panel. The panel shall circulate its
report within 90 days after the date of referral of the matter to it. When the panel
considers that it cannot provide its report within this time frame, it shall inform the
DSB in writing of the reasons for the delay together with an estimate of the period
within which it will submit its report.
Compensation and the Suspension of Concessions
22.6- When the situation described in paragraph 2 occurs, the DSB, upon request,
shall grant authorization to suspend concessions or other obligations within 30 days
of the expiry of the reasonable period of time unless the DSB decides by consensus to
reject the request. However, if the Member concerned objects to the level of
suspension proposed, or claims that the principles and procedures set forth in
paragraph 3 have not been followed where a complaining party has requested
authorization to suspend concessions or other obligations pursuant to paragraph 3(b)
or (c), the matter shall be referred to arbitration. Such arbitration shall be carried
out by the original panel, if members are available, or by an arbitrator (15)
appointed by the Director-General and shall be completed within 60 days after the
date of expiry of the reasonable period of time. Concessions or other obligations shall
not be suspended during the course of the arbitration.
A reading of the two provisions indicate that each supply a procedure to be taken by
the complaining party if the losing party fails to fully comply with the DSB. But, the
DSU fails to clarify the relationship between the two procedures. Thus, what remains
unclear is the following question:
 How the drafters intended the Article 22 timetable to be reconciled with the
potentially protracted compliance review pursuant to Article 21.5?
This conflict became apparent during the EC-Bananas dispute. In this dispute, the EC
approved reforms to its discredited banana import regime six months before the
expiration of the reasonable period, which, to the complaining parties, did not bring
the EC into compliance with the rulings and recommendations of the DSB.
The US immediately moved to prevent the new measures from taking effect and
proposed that the parties return to the original panel under Article 21.5 procedures for
a ruling on the compatibility of the new measures. The EC rejected this, insisting that
an Article 21.5 compliance review can only be undertaken after the expiration of the
reasonable period.
The EC suggested that even upon the expiration of the reasonable period, Article 21.5
required the US to commence a fresh WTO procedure to challenge the new measure.
In response, the US threatened to request the suspension of concessions immediately
upon the ending of the reasonable period (irrespective of whether an Article 21.5
review was undertaken).
Upon the US’ actual authorisation to suspend concessions on the expiration of the
EC’s compliance period, EC insisted that the US was ignoring:
(i) the explicit mandate of Article 21.5 taking recourse to these dispute settlement
procedures and
(ii) insisted that Article 22 rights are conditioned upon this requirement.
The US objected to this interpretation, claiming that this would further delay the
compliance process as parties would have to wait longer to exercise their right to
suspend concessions.
The dispute was finally resolved as Article 22 arbitrators and the Panel under Article
21.5 comprised of the same individuals and provided in tandem the two decisions
holding the EC measure to be inconsistent and allowing the US to impose suspension
equivalent to the nullification and impairment.
Therefore, even though the EC bananas case could only provide an improvised
solution to the crisis, the issue is not resolved till now. Countries therefore enter into
voluntary agreements to either waive the timetable under Article 22 or keep them in
suspension till the inconsistency is established under Article 21.5 panel.
This provides a slight relief to the sequencing debate, without curing it completely.
IV. Summary
The system of various forms of remedies and its enforceable element introduced by
the negative consensus applied in adoption of WTO decisions makes WTO one of the
strongest adjudicative organs under international law. The modern framework of the
DSU provides several advancements vis. the traditional GATT framework. However,
the existing remedies also suffer from certain in-built limitations. In this light, DSU
reform proposals have achieved great momentum. This chapter has highlighted upon
some of these controversies such as the equivalence debate and the problem of
sequencing.
V. Learn More
Did you Know?

Relationship between WTO Rules and Rules of Nature of WTO rules Source
International Law:
Certain WTO rules add/contract/affirm to the Suspension of concessions Joost

existing pool of general international law. The rule contract out of general Pauwelyn, The
on suspension of concessions falls in the second international law rules on Role of Public
category as they contract out of general international countermeasures. They further International
law or deviate from, or even replace other pre- replace, deviate from pre- Law in the
existing international law rules existing rules such as bilateral WTO: How Far
quota or tariff arrangements and Can We Go?,
the Tokyo Round Codes. American
Journal of
International
Law 95 (2001).
Literature review indicates that mediation vis. arbitration could be a better method of Hansel T.
enforcing rights and remedies under the WTO regime. In this light, the following Phamd,
substantives are argued: Developing
First, since a negotiated or mediated decision must be mutually acceptable to both Countries And
parties, it is much more likely that the agreement will be enforced voluntarily, thereby The WTO: The
circumventing the difficulties that developing countries face in trying to enforce panel Need For More
decisions using retaliatory counter-measures. The parties “may [also] desire mediation Mediation In
because a mediator can be used to monitor, verify and guarantee any eventual The DSU, 9
agreement.” Harv. Negot. L.
Second, for the more cost-conscious developing countries, mediation would provide a Rev. 331
relief by avoiding the high costs of panel and even perhaps appellate litigation. (2004).
Third, developing countries have stressed their desire that WTO dispute settlement
expand its vision beyond the strict letter of the law. In the ADR literature, there are
many examples of how the adversarial nature of litigation in some countries like the
U.S. contributes to a “zero-sum” mentality that inhibits the development of potentially
creative and value-adding solutions. According to Professor Joseph Weiler, in contrast
to earlier GATT diplomatic solutions, now “[l]egal disputes [in the WTO] which go to
adjudication are not settled; they are won and lost. The headlines talk of ‘victory’ and
‘defeat.”’
It has also been charged that because the new DSU promotes the rule of law and the
“rule of lawyers” with career ambitions and desires for job satisfaction, sometimes the
very fact that a country could clearly win a case “becomes in the hands of all too many
lawyers an almost automatic trigger to ‘we should bring the case.”
Once a dispute reaches the panel stage, there are inherent influences for both parties
and panels to become locked in positional stances. Once a dispute has reached the
panel, the parties rarely suspend or terminate the panel proceedings because they could
come to a mutually satisfactory solution prior to submission of the panel’s decision.
Professor Weiler argues that by the time two parties enter into litigation, the WTO
dispute settlement process often regresses from its dispassionate and objective ideal into
a battle of rhetoric and the desire to win--both “inimical to compromise.” As a result,
there are “less than a handful of cases in the history of the WTO where a compromise
was found and a dispute settled once a Panel started its work.”
Points to Ponder
Numbers Points to ponder
1. “The complainant’s strategy in selecting the retaliation list, and the likelihood of
the defendant’s compliance or compensation in response to the proposed or
foreseeable retaliation, depends on the political and economic environments on
both sides of the disputing parties. This paper also captures the possibility of
enforcement failures under the current WTO dispute settlement procedure, where
the complainant does not have enough retaliation capacity to induce compliance
or some form of compensation from the defendant.” (Pao Li Chang, The Politics
of WTO Enforcement Mechanism, 2004).
Critically analyse this statement.
Law

The WTO and Regional Trade Agreements
Delhi
Delhi
Delhi
Delhi

Subject Name Law
Module Name/Title WTO and Regional Trade Agreements
Module Id 16
Pre-requisites  The concept of Customs Union and Free Trade Areas
 Whether the recent proliferation of FTA’s is a
building Bloc or stumbling blocs in the development
of multilateralism?
 The concept of Customs Union and Free Trade Areas

 Whether the recent proliferation of FTA’s is a
building Bloc or stumbling blocs in the development
of multilateralism?
Keywords GATT, WTO, regionalism, free trade areas, customs unions,

multilateralism.
E-TEXT
16.1. Introduction to Customs Unions and Free Trade Areas

16.2. The Inception of Regionalism
16.2.1. Types of Regional Trade Agreements
16.3. Article XXIV of the GATT, 1947
16.3.1. Conditions precedent for the creation of a customs union and free trade
areas
16.4. Defining a customs union
16.4.1. What is meant by the phrase “substantially all trade”?
16.4.2. Understanding the phrase “substantially the same duties and restrictions of
commerce”
16.4.3. What happens when the formation of a customs union leads to the increase
in duties with third parties?
16.4.4. A measure imposed by a customs union such formation must be necessary,
if it is inconsistent with the GATT rules
16.5. Defining a Free Trade Area
16.5.1. Examples of FTA‟s

16.7. The Sudden Proliferation of RTA’s: Stepping Stones or Stumbling Blocs?
16.7.1. Regionalism versus Multilateralism
16.7.2. Motivating Factors
16.7.3. Stepping Stone or Stumbling Bloc?
16.8. Summary
TEXT
16.1. Introduction to Customs Unions and Free Trade Areas:

This module pertains to the understanding of the World Trade Organization and
Regional Trade Agreements. Regional Trade Agreements (hereinafter referred to as
RTA’s) are Agreements in order to further liberalize and facilitate trade among
nations. It must be noted that the agreements are not necessarily negotiated between
nations belonging to the same region. The inception of the WTO in 1995 has
witnessed and in fact even encouraged the formation of Regional Trade Agreements.
Accordingly, Article XXIV of the GATT, 1947 facilitates and regulated the
functioning of Regional Trade Agreements. In fact, RTA’s operate as an exception to
the corner-stone of the significant principle of most-favored nation discussed
previously. In other words, while the principle of most-favored nation makes it
incumbent for WTO Members to provide equal treatment, and prohibits
discrimination (both de jure and de facto; RTA’s are an exception to this, which
signifies that Members of an RTA are authorized to adopt measures by virtue of being
a Member of an RTA, which may otherwise be a WTO inconsistent measure. Against
this backdrop, this module shall delve to understand the functioning of RTA’s as
regulated by the WTO, and understand the extent to which the operation of RTA’s
operates as an exception to the principle of equality in the WTO.
For this purpose, this chapter would discuss:
 Article XXIV of the GATT, 1947;
 The Understanding on the Interpretation of Article XXIV of the GATT, 1947;
 The concept of Customs Unions; and
 The concept of Free Trade Areas;
 Article V of the GATS (The General Agreement on Trade in Services) and the
exception of regional integration.
16.2. The Inception of Regionalism:

RTA’s have proliferated since the birth of the WTO in 1995. In the year 2013,
approximately 575 RTA’s were notified to the WTO.1 This entails that countries
in the international community now perceive regionalism as the preferred method
of trade. Also, some of the most common reasons why nations are now turning to
regionalism are, because it involves the interests of a smaller group of countries.
This in turn makes it easier for countries involved to reach some form of
consensus, than at a global level where the interests of countries are different
economic levels is involved.
Consequently, the General Agreement on Tariffs and Trade (GATT, 1947) which
is now a part of the WTO, 1995 recognizes the significance of regional integration
on trade by virtue of Article XXIV. In other words, despite the fact that the
operation of RTA’s (both Customs Union and Free Trade Area’s) is inconsistent
to the principle of Most-Favored Nation; the former are permitted to operate when
1
The World Trade Organization, (n.d.) Regional Trade Agreements, Retrieved November 12, 2013,
from http://www.wto.org/english/tratop_e/region_e/region_e.htm
they fulfill certain criteria laid down by the GATT, 1947 (for goods) and the
GATS (for services).
16.2.1. Types of Regional Trade Agreements:

RTA’s are regulated by virtue of Article XXIV of the GATT, 1947 as far as trade
in goods is concerned. However, in the event of trade in services, RTA’s are
governed by the GATS or the General Agreement on Trade in Services, in order
to facilitate trade in services between members belonging to such RTA’s.
RTA's
Types of RTA's recognised by
the GATT
Customs Union where

Preferencial Trade
Members agree to
Agreements provide
eliminate tariffs aand all
preferencial access to
other regulative
Members of the bloc
restrictions of commerce.
Common Free Trade Areas which

Markets/Economic are similar to Customs
Unions that agree to Union except for the fact
harmonize laws, that a common tariff is
regulations, policies and not imposed on Members
maybe even currencies like in Customs Unions
Albeit the fact that there are several forms of regional integration, both the
GATT and the GATS merely regulate the operation of Customs Union and
FTA’s by virtue of Article XXIV and Article V respectively.
16.3. Article XXIV of the GATT, 1947:
For most, Article XXIV of the GATT recognizes the fact that countries in the
international community may be desirous of building closer relations among one
another; for the purpose of further liberalizing international trade. Apropos, the
GATT, by virtue of Article XXIV facilitates the creation of Customs Unions and
FTA’s in order to facilitate international trade; while at the same time not raise the
trade barriers for other non-Members. Accordingly, Article XXIV: 4 states that:
“The contracting parties recognize the desirability of increasing freedom
of trade by the development, through voluntary agreements, of closer
integration between the economies of the countries parties to such
agreements. They also recognize that the purpose of a customs union or of
a free-trade area should be to facilitate trade between the constituent
territories and not to raise barriers to the trade of other contracting
parties with such territories.”
16.3.1. Conditions precedent for the creation of a customs union and free trade
areas:
For the purpose of facilitating the formation of customs unions and free trade
areas, as provided in Article XXIV: 4, the GATT further states that Members are
free to adopt an interim agreement for the purpose of forming a customs union or
free trade area; subject to two conditions:
 That duties and other regulations of commerce which are imposed at the time of
the formation of the Customs Union should not be higher for non-members, than
they were before the formation of such Customs Union;
 and that the formation of the customs union or FTA would be prevented in case
the first criteria is not met.
16.4. Defining a customs union:

Accordingly, a customs union has been defined under Article XXIV: 8(a) as
“The substitution of a single customs territory for two or more
customs territories, so that
(i) duties and other restrictive regulations of commerce (except, where
necessary, those permitted under Articles XI, XII, XIII,XIV, XV and XX) are
eliminated with respect to substantially all the trade between the
constituent territories of the union or at least with respect to substantially
all the trade in products originating in such territories, and,
(ii) (ii) subject to the provisions of paragraph 9, substantially the same duties
and other regulations of commerce are applied by each of the members of
the union to the trade of territories not included in the union.”
With respect to the first criteria,

Two or more nations which are members
of the WTO may come together so as to
form a customs union.
Members of the customs union must

eliminate duties and other restrictive
regulations of commerce.
This is done for the purpose of further

liberalizing international trade between
the Members of such customs unions.
While the formation of customs union

necessitates the elimination of duties and
other regulations of commerce, those
regulations for the purpose of the
application of quantitative restrictions,
balance of payment regulations,
exceptions to the principle of non-
discrimination, exchange arrangements
and general exceptions are otherwise left
outside the scope of customs union.
While the above mentioned criteria are for the purpose of regulating international
trade between the Members of the Union, the GATT additionally lays down a
standard for Members of such a Union to apply with respect to non-members. For
the purpose of external trade (i.e. trade with non-members of the customs union),
the GATT, 1947 makes it implicit that members of the union apply substantially
the same duties and regulations of commerce to territories that are not part of the
union.
In brief, while the GATT, 1947 encourages the formation of customs union
between its Members, it also ensures that such formation does not raise the
barriers to trade for those territories which are not parties to such customs union.
Hence, “duties and other restrictive regulations of commerce are eliminated for
substantially all trade between them.”
16.4.1. What is meant by the phrase “substantially all trade”?
The scope of Article XXIV: 5 (a) and 8(a) was further clarified by the Appellate
Body in the Turkey: Importation of Textiles dispute. The facts of this dispute in
brief were that Turkey entered into an interim agreement with EU in order to
form a customs union; in accordance with Article XXIV: 5(a) of the GATT, 1947.
As a result, Turkey imposed Quantitative Restrictions (QR’s) on 19 types of
textiles to be imported from India. India challenged this measure before the Panel
in order to examine the scope of Article XXIV read along with Articles XI and
XIII of the GATT, 1947. At the same time, Turkey argued that the formation of
customs union under Article XXIV of the GATT permitted certain violation to
the principles of the GATT-WTO; which were otherwise inconsistent. Hence,
violation of Article XI and XIII and imposition of QR’s by Turkey on Indian
textiles and clothing was permitted, when Turkey did so for the purpose of
forming a customs union. On ruling in favor of India, the Panel (confirmed by the
Appellate Body) adopted the view that the scope of Article XXIV: 8(a) was to
increase the freedom of trade between its Members, which may consequently be
improved by closer integration between some nations. However, the Panel
warned that closer integration between nations in the form of customs union must
only increase trade and further liberalize international trade and not under any
circumstance raise the barriers to trade of other Members to trade with such
territories; thereby creating an adverse effect on trade.2 In a related vein, Turkey
was of the view that Article XXIV: 5 which permitted the formation of a customs
union would be redundant if derogation from a GATT rule was not permitted.
Hence, maintaining restrictions of commerce and imposing QR’s was a necessary
corollary to the formation of a customs union, according to Turkey’s arguments.
The Panel however ruled in favor of India and stated that the formation of
2
Panel report, Turkey-Restrictions on Imports of Textiles and Clothing Products, WT/DS34/R, adopted
on 19 November, 1999; para 9.101-102, p 127.
customs union does not permit in any manner the imposition of QR’s on third
party members.
16.4.2. Understanding the phrase “substantially the same duties and restrictions
of commerce”:
The application of substantially the same duties and regulations of commerce is

the second criteria for the formation of a customs union. Despite the fact that the
phrase “substantially all trade” has not been defined in the GATT, it does not
mean that QR’s can be imposed on third parties in a bid to liberalize trade
between members of the customs union. Against that backdrop, the Panel in the
Turkey: Textiles dispute noted that a customs union should not raise barriers to
trade on the whole; and the purpose of the GATT provisions on the same was to
liberalize trade. In addition, while confirming the Panel’s ruling in India’s favor,
the Appellate Body also noted that while it was required by the Members of the
customs union to “apply substantially the same duties and regulations of
commerce”, it was not necessary that all the members of the customs union apply
exactly the same duty. Thus, the term “substantial” meant “almost the same” and
not “the same”.3
The Understanding on the Interpretation of Article XXIV of the GATT

(hereinafter referred to as “the Understanding”) seeks to further clarify the
meaning of the phrase “substantially all duties and restrictions of commerce”. In
this respect it is important to note that Article XXIV: 8(a) which defines a
customs union must be read along with Article XXIV: 5 (a) which require that
“…duties and other regulations of commerce imposed by the members of the
territory must not be higher or more trade restrictive than the general incidence
of the duties and regulations of commerce applicable in the constituent territories
before the formation of such union…”
The Understanding clarifies the meaning and scope of Article XXIV: 5 (a) by
virtue of Paragraph 2 and states that the calculation of the for the purpose of
3
on 19 November, 1999; as modified by the Appellate Body Report, WT/DS34/R, DSR 1999:VI, Para
49-50
understanding whether the duties and regulations of commerce are more trade
restrictive that the “general incidence … applicable before the formation of
such union”, an overall assessment of the weighted average tariff rates of the
customs duties should be calculated. The Understanding additionally
elaborates that the applied rates of the duties must be used to calculate the
weighted average of the customs duties.
On the other hand, regulations of commerce must also not be more trade
restrictive than they have been before the formation of such a territory. For
this purpose, the Understanding clarifies that there must be an overall
assessment of other inter-dependant regulations of commerce such as “the
examination of individual measures, regulations, products covered and trade
flows which may be affected.”4
16.4.3. What happens when the formation of a customs union leads to the
increase in duties with third parties?
While forming a customs union in accordance with the provisions of Article
XXIV: 5(a), it may so happen that the duties with respect to Members not
party to such a territory may consequently be increased. In such scenarios,
Article XXIV: 6 requires the application of the procedure listed in Article
XXVIII of the GATT, 1994, in order to achieve a mutually satisfactory
solution. For the purpose of providing a compensatory adjustment, the Article
XXIV: 6 clarifies that Members should “give due account to the compensation
already afforded by the reduction in the corresponding duty of the other
constituents of the union.” The Understanding sheds light on Article XXIV: 6
and states that in the event the reduction in corresponding duties is not
sufficient, customs unions must offer compensation in the form of reduction of
duties or tariffs.5
16.4.4. A measure imposed by a customs union such formation must be
necessary, if it is inconsistent with the GATT rules:
4
Para 2 of the Understanding
5
The Understanding on the Interpretation of Article XXIV of the GATT, Para 5 and 6. The
Understanding also states by virtue of Paragraph 5 that if a compensatory adjustment is not able to be
reached, the customs union may modify or withdraw the concessions at issue; leaving the affected
Members to withdraw substantially equivalent concessions as per the provisions of Article XXVIII of
the GATT.
While the GATT does permit certain derogations from its rules in order to form a
customs union, without which the formation would be impossible. For instance, as
mentioned in the previous paragraphs, the formation of a customs union (and for
that matter even a free trade area) requires the elimination of duties and restrictive
regulations of commerce between the territories. As a result, duties and regulative
restrictions of commerce are bound to be higher for non-member territories than
they are for the territories of the customs union/free trade area. Consequently, the
formation of a customs union/free trade area would lead to the violation of the
rule of most-favored nation treatment. Likewise, there may be certain other
measures that may be required to be introduced; and without with the formation of
a customs union would be impossible. Similarly, in the Turkey-Textiles dispute,
Turkey argued that the introduction of QR’s on textiles being imported from India
was a necessary measure; without which the formation of a customs union with
European Union would be rendered impossible. Turkey’s stance was that since
EU had imposed QR’s on textiles and clothing from India, EU would additionally
stop importing textiles and clothing from Turkey in case the letter imported the
said products from India. Since Turkey exported 40% of its total exports to EU, it
could not afford to lose this trade with EU on importing textiles and clothing from
India.
The Appellate Body however concluded that Turkey’s measure of imposing QR’s
from Indian textiles and clothing is certainly not a necessary measure without
which the formation of a customs union would be impossible. Turkey could
alternatively invoke the rules of origin (ROO) in order to distinguish the textiles
and clothing originating from Turkey; thereby permitting the EU to import the
said products from Turkey.6
16.5. Defining a Free Trade Area:
6
on 19 November, 1999; as modified by the Appellate Body Report, WT/DS34/R, DSR 1999:VI, para
61-62.
The constitution of free trade areas (FTA’s) also permits the application of a GATT
inconsistent measure, if the application of such measure is necessary for the formation of
an FTA. Against this backdrop, Articles XXIV: 5(b) and XXIV: 8(b) pertains to the
formation of FTA’s.
An FTA has been defined by virtue of Article XXIV: 8(b) to mean:

“…A group of two or more customs territories in which the duties and other
restrictive
regulations of commerce (except, where necessary, those permitted under
Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the
trade between the constituent
territories in products originating in such territories.”
When two or more customs territories
come together
They eliminate duties and other

regulative restrictions of commerce
with respect to substantially all trade
between them.
While the formation of customs union

necessitates the elimination of duties
and other regulations of commerce,
those regulations for the purpose of the
application of quantitative restrictions,
balance of payment regulations,
exceptions to the principle of non-
discrimination, exchange arrangements
and general exceptions are otherwise
left outside the scope of customs union.
FTA’s do not require to have

“substantially the same duties and other
regulations of commerce” with respect
to territories which are not party to the
free trade area.
The operation of FTA’s is similar to that of customs unions, with respect to the
meaning and scope of elimination of “substantially all trade and restrictive regulations
of commerce.” Thus this phrase would have a similar interpretation with respect to
FTA’s as well. The difference lies in the fact that unlike the operation of customs
unions, FTA’s do not require to have “substantially the same duties and other
regulations of commerce” with respect to territories which are not party to the free
trade area. In other words, there is no defined standard with respect to external trade
with the members of the FTA. Therefore, members of the FTA are free to decide their
own duties and regulative restrictions of commerce with third parties; unlike in the
case of customs unions wherein territories of the customs union must have
substantially the same duties and regulative restrictions of commerce for third parties.
In a related vein, Article XXIV: 5(b) states that the duties and other regulative
restrictions of commerce with respect to the trade between the constituent territories
and third parties shall not be more trade restrictive than it was prior to the formation
of the FTA. For this purpose, Article XXIV: 5(b) states:
“With respect to a free-trade area, or an interim agreement leading to the formation of
a free-trade area, the duties and other regulations of commerce maintained in each if
the constituent territories and applicable at the formation of such free-trade area or the
adoption of such interim agreement to the trade of contracting parties not included in
such area or not parties to such agreement shall not be higher or more restrictive than
the corresponding duties and other regulations of commerce existing in the same
constituent territories prior to the formation of the free-trade area, or interim
agreement as the case may be.”
16.5.1. Examples of FTA‟s:
 ASEAN – Australia – New Zealand Free Trade Area (AANZFTA);

 ASEAN–China Free Trade Area (ACFTA);
 ASEAN–India Free Trade Area (AIFTA).
16.7. The Sudden Proliferation of RTA’s: Stepping Stones or Stumbling Blocs?7

The recent wave of regional trade agreements has raised serious questions on the
functioning of the multilateral trade regime regulated by the World Trade
Organization (hereinafter referred to as the WTO). This is chiefly due to the fact that
where on the one hand, the multilateral trade regime embarks upon the principle of
most-favored nation; thus prohibiting discrimination among the members of the WTO,
7
This discussion in this part (16.7.) is a reproduction of the manuscript authored by the author (Dr.
Saloni Khanderia-Yadav), and has been accepted for publication in the South Currents Texas
International Trade Law Journal, titled: Is Regionalism „Softly‟ Killing the WTO‟s Multilateral Agenda:
Forthcoming, South Texas Currents’ International Trade Law Journal. (Texas, United States).
regionalism is an exception to this principle. In other words, where regionalism in the
form of customs union or free trade areas provide preferential treatment to members
within the area, multilateralism is an anti-thesis and provides non-discriminatory
treatment to all the Members. This recent surge in regionalism, whether it is in the
form of customs unions or free trade areas, can be traced to the coming into existence
of the WTO. Against this backdrop, while nations traditionally preferred regionalism
as a way to remove barriers between the Members of such Agreements, Regional
Trade Agreements (RTA’s) in the current era often focus on deeper integration that
just the mere removal of trade barriers. Hence, while Article XXIV of the GATT,
1947 regulates the functioning of Customs Unions (CU) and Free Trade Areas
(FTA’s), there do exist various other forms of regionalism as well. Regionalism may
be in the form of preferential trade agreements which provide preferential access to
goods and services to Members of the Agreement in comparison to non-members.
Common markets are another example of regionalism wherein even the laws,
regulations and policies are harmonized to further liberalize international trade.
Nevertheless, Customs Unions and FTA’s are today the most prominent forms of
regionalism among the members of the international community.
In the previous discussion pertaining to customs unions and Free Trade Areas, we
have seen that the General Agreement to Tariffs and Trade (hereinafter referred to as
the GATT) has encouraged the formation of such forms of regionalism. In the year
2013, the WTO had received 575 notifications approximately for the formation of
RTA’s.8 Hence, RTA’s have certainly become a prominent part of the international
trading system. Nonetheless, given the fact that they operate as an exception to the
MFN principle, have raised several concerns about whether regionalism operates as a
building stone or a stumbling bloc to the multilateral trade regime.
16.7.1. Regionalism versus Multilateralism:
To begin with, as we are aware, regionalism operates as an exception to the principle

of most favored nation (MFN). Article XXIV permits Members of such RTA’s (either
in the form of Customs Unions or FTA’s) to “eliminate duties and other restrictive
8
The World Trade Organization, Regional Trade Agreements, Retrieved November 12, 2013, from
http://www.wto.org/english/tratop_e/region_e/region_e.htm
regulations of commerce” with respect to “substantially all trade” between its
Members. Consequently, the nations party to such RTA’s are permitted to afford
more favorable treatment to other members of the Agreement, such treatment being
more favorable than that afforded by the Schedule of Concession. At the same time,
the countries that are forming either a Customs Union or Free Trade Area have to
ensure that such forms of regionalism does not “on the whole” increase the level of
protectionism or be higher than what it was (the level of protection) before the
formation of such blocs.9 However, Mansfield and Milner draw attention to the fact
that despite Article XXIV prohibits the level of protection to be higher for non-
members than it was prior to the formation of such blocs; in reality the situation
seems to be the opposite.10 This is primarily due to the fact that nations do, in practice
tend to bind the tariffs with respect to non-members on the basis of the average tariffs
for the members of such Customs Unions and FTA’s. This factor causes the tariffs to
rise as for non-members while eliminating tariffs and other barriers to trade for its
members. However, before analyzing whether RTA’s operate as a stepping stone or a
stumbling bloc, it becomes imperative to understand the motivating factors that have
encourages nations of the international trading community to negotiate such
Agreements, despite the existence of a multilateral trade regime already in place.
16.7.2. Motivating Factors:
9
Bhagwati, J.(1993), Regionalism and Multilateralism: An Overview. In Jamie de Melo and Arvind
Panagriya(Eds), New Dimensions in Regional Integration, Centre for Political Research.
Article XXIV: 5 (a) of the GATT, 1947 states that: “… duties and other regulations of commerce
imposed at the institution of any such union or interim agreement in respect to trade with contracting
parties not parties to such union or agreement shall not on the whole be higher or more trade restrictive
than the general incidence of the duties and regulations of commerce applicable in the constituent
territories prior to the formation of such union or the adoption of such interim agreement…”
10
Mansfield, E.D. & Milner, H.V. (1999). The New Wave of Regionalism, International Organization,
53 (3), 589-627.
The international trade community has in general preferred the formation of RTA’s
against the multilateral trade regime for numerous reasons over the past couple of
years; thereby causing serious implications over the functioning of the multilateral
trade regime. 11 Albeit the fact that nations have come to be drawn towards
regionalism over the last decade, primarily due to the reason that there seems to be
some level of frustration among the international trade community over
multilateralism, given the slow pace of reaching any consensus12; there seem to be
various other deciding factors as well. Firstly, RTA’s have benefitted the Members by
providing the latter with the advantage to added trade concessions by reason of
preferential access to the markets of other Members. This in turn aids Members to
such RTA’s to develop better diplomatic ties with other Members of the RTA (be it a
Customs Union or a Free Trade Area). Richardson (1993) further elaborates this
factor by stating that better diplomatic ties help in promoting peaceful relations with
Members of the RTA, mainly due to the fact that Members are no longer politically
empowered to engage in tariff protection strategies on negotiating an RTA. This in
11
Andriamananjara, S., (n.d.) Customs Unions. Retrieved on November 12, 1013, from
http://siteresources.worldbank.org/INTRANETTRADE/Resources/C5.pdf.
12
In other words, reaching any form of consensus in the WTO has of late become a difficult task given
the diverse nature of the membership. Hence nations find it difficult to negotiate upon a uniform set of
rules and regulations to govern developed, developing and least developed nations. On the contrary, in
case of regionalism, countries parties to such blocs are more or less on the same level of development.
In addition, given the fact that regionalism involves a smaller group of countries, in comparison to a
multilateral agreement, regionalism thus becomes more favored among nations desirous of speedy and
more effective negotiations.
turn leads to the lowering of political power of independent nations with the
heightening of trade integration. In other words, Members would no longer be
independent, but rather mutually interdependent, and consequently lead to peace and
security across the world.13 Another motivating factor for nations to negotiate RTA’s:
either in the form of a Customs Union or Free Trade Area is that such negotiation
assists such nations to improve their bargaining power vis-à-vis the other nations
engaging in international trade. This factor assumes more significance given the fact
that nations of the international trade community have begun to find the
multilateralism somewhat arduous. 14 To that end, the most significant reasons that
prompt nations to negotiate RTA’s are those that help in achieving politically
motivated pursuits. This often results in nations being better able to foster and
strengthen their relations vis-à-vis other countries, consequently also improving the
bargaining relations between such nations.15 In a related vein, Finger et al (1996)
draw a comparison between the bargaining positions of Uruguay and Paraguay with
India, South Africa and Australia. In particular, they state that due to the fact that
Uruguay and Paraguay were actively involved in RTA’s, they were in a better
bargaining position at the time of the Uruguay Rounds that led to the formation of the
WTO.16 Similarly, Hudec (1993) states that RTA’s have increased the market power
of the participating countries. Therefore, he corroborates that by virtue of being a
Member of an RTA, such membership is able to increase the leverage during a WTO
dispute when such country is the disputant. 17
13
Richardson, M. (1993). Endogenous Protection and Trade Diversion. Journal of International
Economics, 34(3-4), 309-324.
14
Whalley J., (1998), Why Do Countries seek Regional Trade Agreements? In Jeffery Frankey (Ed),
The Regionalism of the World Economy (pp.63-83). National Bureau of Economic Research, Chicago
University Press; Bagwell, K. & Staiger, R. (2001). Reciprocity, Non-discrimination and Preferential
Agreements in the Multilateral trading System, European Journal of Political Economy, 17(2), 281-
325.
15
Bhagwati, J. & Panagariya, P. (1996) Preferencial Trading Areas and Multilateralism – Strangers,
Friends or Foes. In Jagdish Bhagwati & Arvind Panagariya (Ed.), The Economics of Preferential Trade
Agreements (pp. 1 – 78). Washington D.C.: AEI Press. Retrieved from:
academiccommons.columbia.edu/download/.../ac.../econ_9596_004.pdf; Mansfield, E. (1998), The
Proliferation of Preferential Trading Arrangements, Journal of Conflict Resolution, 42(5), 523-543.
16
Finger, M.J., Ingco, M.D. & Reineke, U. (1996) The Uruguay Round: Statistics on Tariff
Concessions Given and Received. The World Bank Publications, Washington D.C.
17
Hudec, R.E. (1993). Enforcing international Trade Law: The Evolution of the Modern GATT Legal
System. Butterworths Legal Publishers. Retrieved from
http://www.wto.org/english/news_e/pres00_e/pr180_e.htm; Bagwell, K. & Stagier, R. (2001).
16.7.3. Stepping Stone or Stumbling Bloc?
As discussed in the previous paragraphs, members of the international trade

community have over the recent years grown to perceive regionalism as the preferred
method to trade with one another; as a result of which there have been some serious
implications on the functioning of the multilateral trade regime as regulated by the
WTO.
While the most compelling reasons that drive nations to politically re-organize
themselves on the lines of either a Customs Union or a Free Trade Area has been the
deep seated frustration in the multilateral trading regime over the past couple of years.
This shift in favor of regionalism has thus led to the “domino effect of regionalism.”
For most, this so-called “domino effect” in terms of regionalism has occurred with the
increased tendency of nations in the international community to re-organize
themselves, politically. In this bargain, various other nations tend to be left out from
being included in these regional trading blocs. As a result, Baldwin (1994), who
supports this view, elaborates that trade is often diverted away from such nations who
are not party to such blocs. This fear of having trade being diverted away, therefore
leads nations (which are left out from these regional trading blocs) to re-organize
Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral trading System,

European Journal of Political Economy, 17(2), 281-325.
themselves; and thus trade among one another. Consequently, this factor has marked
the birth of various RTA’s in the international trade community; thereby creating a
some-what “domino effect” with the eruption of numerous regional trade blocs.
Baldwin further provides the example of MERCOSUR, a prominent RTA, by
throwing light on how the members of the MERCOSUR decided to re-organize
themselves regionally by virtue of being requested by the United States before any of
the members of the MERCOSUR could negotiate a Free Trade Area with the United
States.18
The “domino effect of regionalism” has further led to the operation of simultaneous
regulatory regimes of trade. While numerous RTA’s exist in the current era, each of
them is governed by their own rules, regulations and regulatory regimes; therefore
leading to simultaneously operating regimes. The effect of simultaneously operating
regimes has often been referred to as the “spaghetti bowl impact”, with a mix of
rules.19 As a result, there is no uniform set of rules and regulations; in contrast to the
multilateral trade regime regulated by the WTO.
Nevertheless, the most striking implication on multilateralism has been the capability
of regional trading blocs to cause “trade diversion.” Viner explains that the creation of
regional trading blocs have led to the diversion of trade. In other words, these blocs,
in the attempt to liberalize “substantially all trade” among its members divert trade
away from the non-members towards the members of such blocs. In such
circumstances, trade is normally diverted away from more efficient trading partners
towards less efficient trading partners, which are now members of the regional trade
bloc. This factor thus works to the detriment of international trade; and is also an anti-
thesis top the fundamentals of the multilateral trade regime regulated by the WTO.
Hence, where on the one hand, the WTO promote fair competition among trade
between its Members (being Governments), regional trade blocs, on the other hand
are less competitive as trade is in such circumstances merely between the Members
18
Baldwin, R.E. (1994). A Domino Theory of Regionalism. In R. Baldwin, P Haarparanta & J.
Kianden (Ed.). Expanding Membership of European Union, CUP, Cambridge.
19
Baldwin, R. E. (2006). Multilateralizing Regionalism: Spaghetti Bowls As Building Blocs on the
Path to Global Free Trade (Working Paper 12545). Retrieved from National Bureau of Economic
Research website: http://www.nber.org/papers/w12545; Bhagwati, J.(1993), Regionalism and
Multilateralism: An Overview. In Jamie de Melo and Arvind Panagriya(Eds), New Dimensions in
Regional Integration, Centre for Political Research.
which may even be less efficient than the non-members.20 In a related vein, Bhagwati
and Panagaria (1996) corroborate this eventuality by stating that despite the fact that
regionalism is also likely to cause trade creation; it will in all probability have a
dominant effect on trade diversion.21
Another vital aspect of trade diversion on free trade is the capability of such trade
diversion caused by FTA’s to be able to significantly impact trade in intermediates.
Because trade is so fine-sliced by nature and because nations in the international
community are so mutually dependant on each other, they often rely on each other for
supplying intermediates or inputs in the production of the final product. When trade is
multilateral, countries party to the multilateral trade regime would rely on each other
for the supply of inputs. However, when trade becomes regional, members of the
regional agreement rely only on other members for the supply of intermediates or
inputs. In addition, the members of the PTA qualify for the preferences only when
they adhere to the rules of origin of that agreement. In other words, members must
even purchase intermediates or inputs from other members to such PTA in order to be
able to receive the benefits of the PTA. 22 In a related vein, FTA’s have often
perceived to have a substantial impact on the prices of exports. When members of the
FTA begin to divert trade away from non-members to members of such an FTA, the
export prices of the excluded members is bound to rise.23 24 Apropos, nations of the
international community are sometimes compelled to regionalize themselves in a bid
to save themselves from losing access to the markets of countries which are already
party to RTA’s.25
20
Viner, J. (1950). The Customs Union Issue. New York: Carnegie Endowment for International peace.
21
Bhagwati, J. & Panagariya, P. (1996) Preferencial Trading Areas and Multilateralism – Strangers,
Friends or Foes. In Jagdish Bhagwati & Arvind Panagariya (Ed.), The Economics of Preferential Trade
Agreements (pp. 1 – 78). Washington D.C.: AEI Press. Retrieved from
academiccommons.columbia.edu/download/.../ac.../econ_9596_004.pdf
22
Krishna, P. (2012). Preferential Trade Agreements and the World Trade System: A Multilateralist
View. In Feenstra, R. & Taylor, A. (Ed.), Globalization in an Age of Crisis: Multilateral Co-operation
in the Twenty First Century. University of Chicago Press, Forthcoming.
23
Chang, W. & Winters, A. (2002). How Regional Trade Blocs Affect Excluded Countries: The Price
Effects of MERCOSUR. The American Economic Review, 92, 889-904.
24
Saloni Khanderia-Yadav, Is Regionalism „Softly‟ Killing the WTO‟s Multilateral Agenda:
Forthcoming, South Texas Currents’ International Trade Law Journal. (Texas, United States).
25
Panagariya, A. (2000) Preferential Trade Liberalisation : The Traditional Theory and New
Developments. Journal of Economic Literature, 38 (6), 287-331. Retrieved from
http://www.armeconomist.com/lecture/wto/12pta/Panagariya.pdf; Baldwin, R.E. (1994). A Domino
While these appear to be some of the trade-offs of regionalism, regionalism has
certainly contributed to the growth and development of international trade among
nations. While regionalism has led to some form of trade diversion, Viner (1950)
suggests that regionalism does on the other hand also promote trade creation. Hence,
as compared to trade diversion, trade creation occurs when nations come to be in a
better position to trade with one another as a result of regionalism. Hence, in contrast
to trade diversion, nations now divert trade away from non-efficient trade partners to
more efficient trade partners; thus creating international trade.
At the same time, albeit the fact that it may be true that the recent proliferation of
RTA’s has raised certain serious implications on multilateral trade, in terms of
whether the former is a stepping stone or a stumbling bloc; it cannot be denied that
regionalism has also served the cause of free trade in the recent years. This is
moreover due to the recent impasses in the multilateral trade negotiations over issues
such as intellectual property, competition, and more recently over agricultural issues
and food security, to name a few. This frustration is more to do with the diverse
nature of the members of the WTO which in turn makes it difficult to reach any form
of consensus.26 On the other hand, given the fact that RTA’s involve the interests of a
smaller group of countries, which are more or less on the same level of development;
negotiating RTA’s obviously becomes easier in comparison. In a related vein, RTA’s
have been able to provide sufficient “normative value” while negotiating
multilaterally; thus reinforcing a more favourable climate for multilateralism of
trade.27
In a related vein, Summers corroborates the aspect that FTA’s can often be beneficial
to the cause of free trade; and states that
Economists should maintain a strong, but rebuttable presumption in favour of all
lateral reductions in trade barriers; whether they be multi-, uni-, bi-, tri-, plurilateral.
Theory of Regionalism. In R. Baldwin, P Haarparanta & J. Kianden (Ed.). Expanding Membership of

European Union, CUP, Cambridge.
26
A speech by the ex-Director General, Mr. Pascal Lamy additionally highlights the fact that RTA’s
have been able to complement and supplement the multilateral trading regime.
27
For instance, issues and areas such as competition policy have been previously addressed under
various FTA’s which have served as a base upon which the issue may further be deliberated at a
multilateral level.
Global liberalization may be best, but regional liberalization is very likely to be good
(Summers, 1991).
In addition, Barfield refers to this aspect pointed out by Summers, and states that
Summers and other proponents of regionalism base their case on a belief that total
trade creation will outweigh trade diversion in most cases, that the multilateral
process is too slow to produce substantial progress toward further trade
liberalization; and that regional free trade arrangements will allow some nations to
speed up liberalization and ultimately produce a self-reinforcing process toward
more open markets (Barfield, 1995).
Hence, despite the common perception that FTA’s tend to hamper the goals of
multilateral trade; this may not really be the case given the current scenario with
respect to multilateralism under the ambit of the WTO, which seems to be at the
crossroads. Hence with nations finding it difficult to reach some form of consensus
within the WTO, FTA’s are certainly the next best option.
Against this backdrop, even though FTA’s do have their trade-offs and do in this
respect led to trade diversion towards the members of the group due to their very
nature; it must be acknowledged that they certainly lead to deeper integration and are
able to offer consensus in areas which the multilateral trade regime currently finds
difficult. In other words, it is not true that FTA’s are completely impeding the benefits
of the multilateral trade regime; but in fact have a mixed impact on the latter. For
most, the benefits of FTA’s in terms of being able to offer deeper integration and
being able to negotiate and also act as a pedestal to multilateral trade negotiations, on
certain issues like investment, competition and environment are far more and
outweigh the trade-offs. In addition, while it is true that FTA’s create multiple
regulatory regimes which often clash with one another; and in this sense negate the
benefits of coherent system of rules and regulations under the dispute settlement
procedures of the WTO; the former is able to successfully complement and
supplement the goals of the WTO; i.e. free trade.
16.8. Summary:
With this module we have understood the following concepts:
Customs Union (Article XIV: 8(a)) Free Trade Area (Article XIV: 8(b))
It is the substitution of two or more customs It is a group of two or more customs territory
territories for a single customs union. for a single union: known as a free trade area.
Substantially all trade (meaning of which is Substantially all trade (meaning of which is
not defined) is free; with duties and not defined) is free; with duties and
regulative restriction of commerce being regulative restriction of commerce being
eliminated. eliminated.
Only those duties and regulative restrictions Only those duties and regulative restrictions
of commerce permitted as per the of commerce permitted as per the
requirements of Articles XI, XII, XIII, XIV, requirements of Articles XI, XII, XIII, XIV,
XV and XX) XV and XX)
Substantially the same duties with territories Each member of the free trade area is free to
not part/Members of such customs unions. decide the duties it wants to levy with third
party nations. Hence, the duties that such
Members of the FTA levy are not required to
be uniform towards third party states.
Both Customs Unions and Free Trade Areas do have their trade-offs; and have in the
past distracted Members from multilateralism. However, they have been as beneficial.
This is primarily because multilateralism requires consensus among all the Members
of the WTO: which is certainly an uphill task. On the contrary, regionalism requires
the consensus of a small group of nations of the international community; thereby
making decision making relatively easier. In addition, regionalism has served as a
guiding map in terms of various international trade topics, such as competition,
intellectual property and trade and environment to name a few.
Law

The Agreement on Agriculture
Delhi
Content Writer/Author Prof. A. Jayagovind National Law University,
Delhi
Content Reviewer Dr. Sheela Rai National Law University,
Orissa
Delhi
PERSONAL DETAILS

Subject Name Law
Module Name/Title The Agreement on Agriculture
Module Id 17
Pre-requisites  Agriculture under the GATT
 The concept of Market access, domestic
support, export subsidies and food security
 The provisions for trade in agriculture under the

GATT, 1947;
 The significance of the Agreement on Agriculture
under the auspices of the WTO.
Keywords GATT, Protocol of Provisional Application, Agreement on

Agriculture.
E-TEXT
Introduction
The Agreement on Agriculture
Market Access
Special Safeguard Measures
Domestic Support
India and Food Security
Bali Solution
Export Subsidies
Peace Clause
Conclusions
TEXT
Introduction
The Agreement on Agriculture (AoA) is the most complicated of all multilateral trade
agreements (MTAs), constituting the WTO system. This is because of the context in
which it was negotiated. While all other MTAs seek to lay down codes of conduct
prospectively for members in their commercial relations with one another, the AoA
was worked out as a solution to a raging trade war between the USA and the
European Community (EC); and the uneasy compromise between the USA and the
EC, arrived at after prolonged negotiation, was imposed upon the rest of the world as
a normative order to be followed by every country. In this sense, it was an arrogant
exercise of political power over those who were not in a position to resist.
The Preamble to the AoA provides, inter alia, that the purpose of the AoA “is to
establish a fair and market-oriented agricultural trading system”. Market-orientation
signifies that members should subject themselves to externally imposed discipline.
But agriculture is too fundamental to community life for most of the countries to
subject themselves to such discipline. This is true for both developed and developing
countries; and this fact explains the complexity of the agreement and the difficulty in
enforcing it.
The GATT, 1947 was applicable to all products: agricultural and industrial. But
within a few years, agriculture was taken out of the GATT discipline despite the fact
that agricultural products were subject matters of tariff negotiations. Section 22 of the
U.S. Agricultural Assistance Act, 1933 enables the U.S. Government to impose
restrictions on imports of agricultural goods, whenever such imports hampered certain
domestic support programs; and the USA insisted on the inclusion of Article XI: 2(c)
to the GATT to ensure the smooth exercise of this power. In 1951, the Netherlands
complained to the GATT that the USA had been restricting the importation of dairy
products in violation of Article XI:2(c); and the GATT upheld this complaint. Instead
of complying with the GATT ruling, the USA sought a waiver under Article XXV : 5
of the GATT with reference to agricultural products in general. Given the
predominance of the USA, other members were simply not in a position to reject this
demand. The EC used this opportunity to claim exemption for its Common
Agricultural Policy. With two important members opting out, agriculture was
unceremoniously pushed out of the GATT. As Warley put it:
At a time when other exporters were highly agitated about agricultural

trade restrictions, the architect of the trading system and the custodian
of liberalism was itself giving primacy to national interests and
demanding sanction for the use of a barrier which the Agreement had
set out to control and eliminate, namely quotas1.
In 1958, the GATT had set up a committee of experts under Prof. Haberler to study
the trends in international trade. Among various other matters, the Haberler Report
highlighted the high level of agricultural protectionism prevailing in developed
countries; and the protectionism made it impossible for developing countries to access
the markets of developed countries2. This situation continues even to this day.
The Agreement On Agriculture

In 1986, when the Uruguay Round was launched, the USA was the biggest exporter
and the second biggest importer of agricultural products. The EC was the biggest
importer and the second biggest exporter. These were made possible by the huge
agricultural subsidies doled out to farmers; and to meet the high cost of agriculture,
they were bent upon prising open the markets of each other and other countries. The
Cairns Group of countries which were major agricultural exporters were interested in
broadening market access. They were pressurizing the USA and the EC to open their
markets. It may be noted that the EC was using all the known devices of import
restrictions.
The Uruguay Round went on nearly for 8 years, i.e. from 1986 to 1994. The main
reason for this prolongation was the failure of the USA and the EC to break the
deadlock over agriculture. In 1992, in a meeting held at Blair House, Washington,
D.C., they finally arrived at some kind of delicately balanced compromise. All those
mathematical formulations such as aggregate measurement of support, 30% reduction
over 6 years, fixed external reference price etc., should be understood in the specific
context of this uneasy and delicate balancing. The disastrous consequence of this
episode was that the agreement was forced down the throats of developing countries
to whom it was irrelevant.
The problem of the USA and the EC was the huge agricultural surplus resulting from
reckless subsidization. They were finding it hard to take on the farm lobbies in their
own countries. The alternative solution was to dump their products in other countries.
The problem for developing countries has always been to increase their agricultural
productivity to feed their burgeoning population.
The Preamble to the AoA speaks about “achieving specific binding commitments in
each of the following areas: market access, domestic support and export competition”.
The actual reduction commitments for a member are spelled out in the provisions of
the AoA which must be read along with another document, namely, “Modalities for
the establishment of Specific Binding Commitments under the Reformed Programme”
and supplemented by the respective schedules of members. It must be noted that this
“Modalities” was part of the main text under the Dunkel Draft; and for some
inexplicable reason, it was taken out of the main Agreement in the final version.
Market Access
The basic principle of market access commitment was that all members must convert
their non-tariff barriers to international trade in agricultural products into tariffs and
these tariffs have to be reduced over a period of time according to the formulas
spelled out in the Modalities. The process of converting non-tariff barriers into tariffs
is known as tariffication. According to footnote 1 of the AoA, non-tariff barriers
would include quantitative restrictions, variable import levies, minimum import prices,
discretionary import licensing, voluntary export restraints, non-tariff measures
maintained through state trading enterprises etc. Annex 3 of the Modalities describes
the process of tariffication. Para 2 of Annex 3 of the Modalities provides:
The calculation of tariff equivalents, whether expressed as ad valorem

or specific rates, shall be made using the actual difference between
internal and external prices in a transparent manner using data, data
resources and definitions as specified in Annex 2. Data used shall be
for the years 1986 to 1988.
According to Modalities, the developed countries shall reduce their tariffs on an

average of 36% over a period of 6 years starting from 1995. The corresponding
figures for developing countries are 24% over 10 years. If these provisions had
honestly been implemented, there would have been considerable liberalization. What
actually happened was that developed countries fixed their tariffs at much higher level
than what was justified. Secondly, “average reduction” was interpreted by developed
countries to mean that they could pick and choose tariff lines and manipulate figures
to achieve 36% over a period of 6 years. In other words, they could reduce tariff on
sensitive items by a small percentage and on other items by a larger percentage.
Hence what came out at the end of implementation was meager liberalization. The
entire process came to be known as “dirty tariffication”. Most of the developing
countries, on the other hand, had a few non-tariff barriers and their tariffs were fixed
at low level.
The most categorical obligation under the AoA can be found in Article 4.2. It reads:
Members shall not maintain, resort to or revert to any measures of the

kind which have been required to be converted into ordinary customs
duties…
The above provision means that the tariffication is mandatory; and once the non-tariff
barriers are removed, they cannot be reintroduced. Hence the developing countries
cannot use even quantitative restrictions. However, India had been using quantitative
restrictions for balance of payments reasons under Article XVIII: Section B of the
GATT. It could continue them for some more time.
Special Safeguard Measures
Taking into account the sensitivity of agriculture, the AoA provides for special
safeguard measures, different from that provided under the Agreement on Safeguards.
According to Article 5.1 of the AoA, two conditions have to be fulfilled to invoke this
special safeguard provision:
1. It can be invoked only in respect of tariffied items as per Article 4; and

2. the member concerned must have designated the product in question
with the symbol “SSG” in its Schedule.
In brief, it can be invoked only in respect of goods which a member considers as

sensitive.
The safeguard mechanisms are of two types: (a) based upon the volume of imports,
exceeding the trigger level as explained in Article 5; and (b) based on the price at
which the imports may enter into the customs territory. A member may invoke either
type of measures, but it cannot invoke both the measures at the same time.
The volume safeguard measure may remain in force until the end of the year in which
it was imposed; and it shall not exceed one-third of the regular tariff. The trigger
level is defined in Article 5.4 by reference to market access opportunities. i.e. imports
as percentage of domestic consumption for the last three years of available data. Base
trigger levels 125%, 110% and 105% are set when the market access opportunities for
a product are respectively less than or equal to 10%, between 10% and 30% and
higher than 30%. The special safeguard duty may be imposed whenever the imports
of a given product exceed the sum of (a) base trigger level multiplied by the average
quantity of imports in the three preceding years; and (b) the absolute volume of
change in domestic consumption of the product in the most recent year for which the
data is available compared with the preceding year.
To illustrate the above, suppose the import of rice during previous three years
averaged 1000 tons reflecting 10% of domestic consumption, the base trigger level
would be 125%. Let us also assume that the domestic consumption has increased by
250 tons in the most recent year. The trigger level for the imposition of additional
duty will be:
(1000 x 125 )+ 250 = 1500.

( 100 )
In other words, if the import in the given year exceeds 1500 tons, the special
safeguard duty may be imposed. Such duty can be up to one-third of the regular tariff.
Under Article 5.1(b), the additional duty may be imposed based on the difference
between import price and average reference price during 1986-88. If the import price
falls below the reference price, the additional duty may be imposed as per the sliding
scale set out in Article 5.5. If the difference is less than 10% of trigger price, no
special safeguard duty may be imposed. As the difference increases, the amount of
additional duty also increases as explained in Article 5.5.
There is no definition of import price; and Article 5.1(b) only provides that import
price will be determined on the basis of c.i.f. import price. What is the exact import
of the expression “on the basis of”? This is explained by the Appellate Body in the
EC: Poultry Case as follows:
In customary usage in international trade, the c.i.f. import price does

not include any taxes, customs duties or other charges that may be
imposed on a product by a member upon entry into its customs
territory. We think it significant that ordinary customs duties are not
mentioned as a component of the relevant import price in the text of
Article 5.1 (b). … Accordingly, to read the inclusion of customs
duties into the definition of c.i.f. import price requires us to read the
words into the text of that provision that simply are not there.5
In brief, “on the basis of c.i.f. import price” shall be read as “c.i.f. import price”. This
conclusion is further strengthened by Article 5.5 of the AoA which uses only c.i.f.
import price for the calculation of additional duty.
As was pointed out above, the trigger price is defined as “average 1986-88 reference
price”. The footnote to this provision provides that “it (i.e. the reference price) shall,
following its initial use, be publicly specified and available to the extent necessary to
allow other members to assess the additional duty that may be levied”. Fixing the
reference price based on the average of price prevailing 1986 and 1988 was the
European idea, in the course of Uruguay Round negotiations, intended to fix a firm
standard. But this ignores the changes in World market prices and currency values.
For this reason, price-based special safeguard measures have rarely been used.
Domestic Support
Denial of food = denial
of livelihood = denial to
live.
Failure to eradicate
Public distribution and
poverty = failure to
mid-day meals are
secure farmers rights
corollary to this right.
to livelihood.
In turn depends on
farmers rights and
social security schemes
for farmers.
The AoA aims at market-oriented agricultural trading system. It implies that trade-
distorting subsidies shall be eliminated, while safeguarding a country’s freedom to
pursue legitimate objectives through various means which may include those
subsidies with zero or minimum trade effects. As de Zeeuw Framework Agreement
which provided the basis for AoU, in the course of Uruguay Round negotiations, put
it:
A substantial and progressive reduction of internal support to

agriculture shall be implemented so as to minimize trade distortion and
increase the market orientation of production, while maintaining the
possibility for contracting parties to pursue national policy goals
affecting agriculture through policies with minimal trade effects.6
The Formula:
The Framework Agreement articulated the concept of Aggregate Measurement of
Support (AMS) but it proposed to use 1988 as the base year to calculate the levels of
support.7 And countries were expected to reduce their support to agriculture using
1988 as the base year. All major participating countries, while endorsing the idea of
AMS, had their own ideas regarding the base year. The EC suggested 1986 as the
base year, while the USA came out with 1986-88 average as the base. During 1986-
88, the agricultural prices were relatively high, and also to determine the reduction
commitments which were to begin from 1995, 1986-88 as base was reasonable.
Somehow this idea of base period subsequently seeped into several other areas
wherein the contemporary world price was relevant as a reference point. We do not
know whether such seepage was deliberate or oversight. However, it may be noted
that a GATT Secretarial Survey of the offers made by States in response to the
Framework Agreement hinted at the dangers of the obsession with technical details
ignoring the substantive problems. Among various other things, it highlighted the use
of fixed reference points such as 1986, 1988, 1986-88 etc., instead of moving
reference price linked to the World prices.
Food security and PDS
is a Green Box Measure
Green Box Measures: with a caveat of being
Measures which require government
support and are non trade distorting. limited up to 10% for
the purpose of
calculating the AMS.
Other means of support

(direct payments) out of
purview of the 10%
limit.
The AoA enumerates four types of agricultural subsidies:
1. Amber Box subsidies: subsidies which distort international trade; and

they must be removed or somehow accounted for; e.g. price support.
Unlike other subsidies, these subsidies are not specifically enumerated; and
they were considered as a residual category in the sense that those subsidies falling
outside Green Box and Blue Box subsidies were considered as trade distorting;
2. Blue Box subsidies: income support and production limiting subsidies fall
under this category. They are considered as moderately trade distorting; and
they could be used with lots of qualifications intended to mitigate trade distortion;
3. Green Box subsidies: subsidies for research, marketing, infrastructural

development etc., do not distort international trade; and hence they are
allowed without any quantitative limit;
4. Development Box subsidies: subsidies provided under Article 6.2 of the

AoA for rural development programs; and they were available only to
developing countries.
Annex 2 of the AoA contains a detailed list of 13 subsidies which are exempt from
reduction commitments. This list includes both Green Box and Blue Box remedies.
Para 1 of the AoA lays down the principles with which a subsidy must comply in
order to get exemption from reduction commitments. They are:
a) the subsidy shall be provided through a publicly-funded government

programme (including government revenue foregone) not involving
transfers from customers; and
b) the subsidy shall not have the effect of providing price support to producers.
As for the price support, the WTO holds that it would distort market signals; and
hence the producers may be guided by non-market considerations. Annex 2 provides
for price support only in one place; and this is the basis on which India’s food security
programme is challenged.
The Aggregate Measurement of Support (AMS) is the key concept of AoA. Article
1(a) defines AMS as “the annual level of support, expressed in monetary terms,
provided for an agricultural product in favour of the producers or non- product-
specific support provided in favour of agricultural products in general”. According to
Annex 3 of the AoA, AMS consists of all non-exempt payments; and it is to be
calculated on product specific basis for such product, receiving any kind of non-
exempt payments. The total aggregate measurement of support (TAMS) is the
aggregate of all product specific supports plus all non-product specific support.
The TAMS, so arrived at, shall be reduced over a period of time as specified in the
Modalities. Each developed member is committed to reduce its TAMS by 20% over a
period of six years starting from 1995. Developing countries shall reduce their
TAMS by 13.3% over 10 years starting from 1995. The least developed members are
exempt from reduction commitments.
According to Article 6.4, any product-specific domestic support, in so far as it does
not exceed 5% of the total value of production of that particular product shall be
exempt from the calculation of TAMS. Similarly, non-product specific support shall
be exempt from TAMS, if such support does not exceed 5% of the value of the total
production of commodities, covered by the payments for non-product specific support.
For a developing country, this de minimis percentage would be 10%. In case, the
value of a product-specific support exceeds 5% (or 10% as the case may be) of the
value of the total production of that commodity, the entire value of the product-
specific support – and not the value above 5% or 10% of the total production – shall
be included in the calculation of TAMS.
Para. 1 of Annex 2 provides that only those subsidies which have, no, or at most
minimal, trade-distorting effects or effects on production are exempt from reduction
commitments. According to an OECD report, “trade-distorting effects” means
interference in free market determination of prices and “effects on production” means
influencing farmers’ decisions on production. Price support measures, according to
the AoA, distort both trade and production decisions. On the other hand, Blue-Box
measures, intended to limit the production, are supposed to have minimal effects on
trade or production9. The essential point is that the problems faced by developing and
developed countries are quite different from each other. Developing countries want to
increase the production, which developed countries are planning to limit the
production. Unlike in developed countries, in most developing countries, the farming
is carried on by a large number of small land holders who are vulnerable to vagaries
of nature and market. In the absence of financial network to reach out to the farmers,
the only way to help the farmers is to assure them decent returns to their produce
through price support mechanism. On the other hand, the U.S.A. : Upland Cotton
Case10 demonstrated the difficulties involved in defining so-called Blue-Box
measures and their abuse. They have absolutely no relevance to developing countries.
It is nobody’s case that price support measures are perfect; but developing countries
must be given freedom to determine the most feasible way to help their farmers.
India And Food Security

India has been operating price support program for wheat and paddy under which the
Government would procure these gains from farmers at “minimum support price”
(MSP). This MSP is fixed by the Ministry of Agriculture on the recommendation by
the Commission on Agricultural Costs and Prices (CACP). The CACP fixes MSP in
such a way as to cover costs and reasonable returns to farmers. The Food Corporation
of India procures and stores these food grains which are sold through fair price
shops11. This was originally designed as a welfare measure to help the weaker
sections of the society. But the Government is planning to make it universal. Under
these circumstances, the procurement bill is likely to cross 10% de minimis limit of
total production. India is worried about this possibility. In the Bali meeting held in
December 2013, it argued that the costs incurred in ensuring food security must be
exempt from reduction commitments.
The relevant legal provisions in this regard are Para. 3 and footnote 5 of Annex 2 of
the AoA. Para. 3 provides for public stockholding for food security purposes and the
expenditure incurred in this regard would be exempt from reduction commitments.
But food purchases and sales must be at the market prices. The intention is to provide
for buffer stocks to meet contingencies. Obviously, it is not a welfare measure
designed to meet the needs of weaker sections of the society. For this purpose, the
footnote 5 provides for an alternative food security scheme. It reads:
For the purpose of Para.3 of this Annex, governmental stockholding
programmes for food security purposes in developing countries… shall
be considered to be in conformity with the provisions of this paragraph,
including programmes under which stocks of food stuffs for food
security purposes are acquired and released at administered prices,
provided that the difference between the acquisition price and external
reference price is accounted for in the AMS.
Indian food security program is covered by the above provision. The problem here is
the interpretation of the expression “external reference price”. The proper way of
interpreting this provision in the light of the objective thereof is to equate it with
international market price for that product at the time of relevant public procurement.
Suppose there is a free market in food grains wherein goods can move freely across
national frontiers, the domestic price would have been approximately at the same
level as international price. The gap between procurement price and contemporary
international market price multiplied by the amount of food grains acquired by the
Food Corporation of India should give the figure for domestic support; and if it is
more than 10% of total production of that particular food grain, it would be subject to
reduction commitments. India would be comfortable with this interpretation even
when it universalizes food security program.
The above interpretation is subverted by paras. 8 and 9 of Annex 3, describing the

method of calculating the Aggregate Measurement of Support. Para. 8 reads:
Market price support: market price support shall be calculated using

the gap between a fixed external reference price and applied
administered price multiplied by the quantity of production eligible to
receive the applied administered price.
Para. 9 reads:
The fixed external reference price shall be based on the years 1986 to
1988 ----.
In WTO circles, there is an attempt to link footnote 5 of Annex 2 with paras. 8 and 9
of Annex 3 and argue that the expression “external reference price” occurring at the
end of footnote 5 must be interpreted as “fixed external reference price” as per para. 9
of Annex 3. It is submitted that such an interpretation is wrong textually, contextually
and teleologically. To read the word “fixed” before “external reference price” is
against the textual interpretation. Contextually, footnote 5 provides for a food
security programme which is exempt from reduction commitment. Teleologically
speaking, if the purpose of finding out the gap between administered price and
external reference price is to account for the subsidy, the external reference price
should be contemporary international market price. There is no rhyme or reason for
bringing in 1986 and 1988 reference price. As was pointed out already, the average
of 1986 and 1988 price was relevant only to the determination of obligations of
members in the 1990s.
The formula: Excludes

ERP based
MSP- ERP * direct
on the prices
Total payments
prevalent Skewed
Quantity of while
between result.
Agricultural calculating
1986-88
produce < AMS. (Annex
(base year).
10. 2.5)
The main thrust of G-33 proposal is that the expenditure incurred in providing food
security must be exempt from reduction commitments. It is submitted that this is
already implicit in para. 3 and footnote 5 of Annex 2 of the AoA. Para.3 is titled as
“Public Stockholding for Food Ssecurity Purposes”. All expenditures incurred in this
regard are exempt from reduction commitments. Footnote 5 is a footnote to para. 3;
and it envisages an alternative mechanism to ensure food security for weaker sections
of the society. In other words, both para. 3 and footnote 5 provide for food security:
one in the context of a reasonably affluent society by way of a buffer stock to meet
contingencies and another as a welfare measure focusing upon poorer sections who
cannot afford market prices. Acquisition of food grans at administered price in the
latter case may incidentally work as a price support mechanism; but it cannot deprive
its character as a mechanism to ensure food security. And it is clear from paras. 3 and
4 of Annex 2 that all expenditures incurred in connection with food security are
exempt payments.
Market price support envisaged under Annex 3 should be applied only to those
programmes not connected with food security. In India, for example, the MSP
programme covers commercial crops such as sugarcane, cotton, tobacco and jute.
These products may be important from overall economic point of view; but they
cannot be treated as food security programmes.
There is another significant difference between footnote 5 of Annex 2 and para. 8 of

Annex 3. Footnote 5 only says that the gap between the administered price and the
external reference price must be accounted for in the AMS. Its direct meaning is that
the gap between the two prices must be multiplied with the quantity of the grains
acquired by paying administered price. On the other hand, para. 8 of Annex 3 speaks
about “the quantity of production eligible to receive the applied administered price”.
This expression was interpreted in Korea-Beef case. The panel interpreted this
provision to mean “total eligible production of all producers which is eligible to
benefit from market price support even though the proportion of production which is
actually purchased by a government agency may be relatively small or even nil”12.
This interpretation was upheld by the Appellate Body.13 The effect of this
interpretation is that the gap between the support price and fixed reference price must
be multiplied by the entire marketable production. In the context of India, under
footnote 5 of Annex 2, the gap must be multiplied by the actual amount procured by
the Food Corporation of India; but under para. 8 of Annex 3, the gap has to be
multiplied by practically the entire crop of the particular food grain. This could mean
that practically any country, providing price support would breach its obligations in
no time.
Bali Solution
It was surprising that very few countries such as Cuba, Venezuela and Bolivia
supported India in Bali Round. One reason for this isolation, as was highlighted in
foreign media, is that India’s burgeoning food stocks have caused anxiety in
international circles. Indian media have highlighted the deplorable situation of
storage wherein rats feed on them. The Supreme Court, shocked by this report
accompanied by pictures, asked the Government why it cannot simply distribute the
food grains among the beggars. However, the news, not very much reported in Indian
media, is that India has been selling these grains at a lower price in international
markets.
India took a firm stand in Bali meeting that all expenditures incurred in providing
food security must fall under exempt payments; and it refused to accept Trade
Facilitation Agreement unless its demand is conceded. Finally, Bali Ministerial
Conference suggested a solution, modeled on Peace clause:
In the interim, until a permanent solution is found and provided that

the conditions set out below are met, Members shall refrain from
challenging through the WTO Dispute Settlement Mechanism,
compliance of a developing member with its obligations under Articles
6.3 and 7.2 (b) of the Agreement on Agriculture in relation to support
provided for traditional stable food crops in pursuance of public
stockholding programmes for food security purposes existing as on the
date of this Decision that are consistent with paragraph 3, footnote 5
and 6 of Annex 2 to the AoA when the developing member complies
with the terms of this Decision.14
“Conditions set out below” refers to procedural requirements of notification and

reporting. The matter of concern however is the freezing of stockholding programs as
of the date of the Decision, i.e.7th December, 2013. This could mean that if India
acquires and stores more food grains than what was existing on this date, India may
not be able to avail itself of the protection provided by this Decision. And given the
consensus mode of arriving at decisions in the WTO, it is quite possible that the
stalemate will persist. Meanwhile to provide universal food security, the Food
Corporation may have to procure more and more food grains. Hence this solution is
unsatisfactory from India’s point of view.
Export Subsidies
Article XVI was the only provision in the GATT, 1947 dealing with subsidies. It
provided that if subsidies, given by one country, causes serious prejudice to the
interests of another, both parties shall consult with each other to explore the
possibility of limiting the subsidization. In 1955, Section B was added to Article XVI
specifically focusing on tackling the problems caused by export subsidies. However,
in Tokyo Round Code on subsidies we find the further elaboration of the concept of
subsidies. The issue was discussed in great detail in Uruguay Round; and an
elaborate Agreement on Subsidies and Countervailing Measures was adopted. But
agricultural subsidies are dealt under the AoA. The AoA lays special emphasis on
export subsidies; and achieving specific binding commitments in the area of export
competition is one of the three pillars of the AoA.
Article 9.1 of the AoA lists six types of export subsidy that are subject to reduction
commitments. They are:
i) Direct subsidies including payments in kind contingent upon

export performance;
ii) Sale or disposal for export by governments of non-commercial
stocks of agricultural products at a price lower than domestic price
for like products;
iii) Payments on the export of an agricultural product that are

financed by virtue of governmental action;
iv) Subsidies to reduce the costs of marketing exports of agricultural

products;
v) Internal transport and freight charges on export shipments;
vi) Subsidies on agricultural products contingent on their

incorporation in exported products.
Under the Modalities Agreement, over six years implementation period, developed
countries are required to reduce their expenditure on export subsidies to a level of
30% below the levels existing in 1986-90 base period and also to reduce the export
quantities benefitting from export subsidies by 21%. The developing countries, on the
other hand, are required to reduce their subsidies by 24% over a period of 10 years
and export quantities benefitting from subsidies by 14%. Least developed countries
are exempt from any undertaking. Under Article 10.1 of the AoA, export subsidies,
not listed in Article 9.1 “shall not be applied in a manner which results in, or which
threatens to lead to, circumvention of export subsidy commitments.
Peace Clause
Article 13 of the AoA, titled as Due Restraint, is generally known as Peace Clause. It
is peculiar to the AoA and thereby affirms the temporary character of the AoA. It
essentially provides that during the Implementation period, i.e. a period of 9 years,
starting from 1995, domestic support measures and export subsidies, which are in
compliance with the AoA, shall not be challenged under the GATT 1994 or the
Agreement on Subsidies and Countervailing Measures. The implications of Peace
Clause have been discussed in a number of WTO cases such as Brazil - Desiccated
Cotton, Argentina – Footwear and the EC – Bananas III, and the USA – Upland
Cotton. The pronouncement in all these cases can be summed up as follows:
The WTO Agreement constitutes an integrated legal system. Therefore, the AoA and
another closely related MTA, namely Agreement on Subsidies and Countervailing
Measures (ASCM) must be read together. The domestic support and export subsidies
under the AoA constitute exceptions to the ASCM for a period of 9 years. Thereafter,
all these measures have to comply with the relevant provisions of the ASCM. Strictly
speaking, there could have been plethora of challenges to domestic support measures
and export subsidies after the expiry of Peace Clause; but such challenges have not
been made.
It may be noted that under Article 13(b) and (c ), countervailing measures could be
initiated against measures covered by the AoA, if there is a determination of injury as
per the Part IV of the ASCM. This could mean that ASCM would apply to those
measures despite that they are protected by the AoA. The AoA, however, provides
that “due restraint” shall be shown in initiating any such countervailing duty
investigations”. In practice, members have treated the Peace Clause as if it continues
to exist despite the expiry of Implementation Period.
Conclusions
Agriculture went out of the GATT discipline because of the insistence by the USA
duly followed by the EC. It is back as part of the WTO because these countries
wanted it to be back to sort out their problems. The various mathematical
formulations, found in the AoA, were worked out in the context of U.S. – EC
economic relations. The tentative nature of the Agreement is both explicit and
implicit. It is explicit in Article 20; and implicit in the way the commitments for
market access, domestic support and export subsidies were formulated. What would
happen after the expiry of 6 years or 10 years from 1995 is not clear. The so-called
Peace Clause is supposed to last for 9 years; and from strict legal point of view, after
the expiry of Peace Clause, the ASCM would apply to agriculture sector. But
member states seem to carry on as if the AoA continues to exist.
Market access, domestic support and export subsidies are three pillars of the AoA. In
all these areas, members of the WTO had undertaken commitments to be fulfilled
over a period of time defined in the Agreement. But in the case of market access and
domestic support, though the way the commitments were formulated seemed to give
some concessions to developing countries, in practice the developing countries found
themselves in the receiving end.
According to Article 20, the whole AoA should be reviewed in 2000 i.e. one year
before the end of Implementation Period of 6 years. But nothing significant has come
out of this review so far.
************
Law

Trade Related Investment Measures
Delhi
Content Writer/Author Mr. Pratyush Kumar National Law University,
Delhi
Delhi
Delhi
Module: TRADE RELATED INVESTMENT MEASURES

Subject Name Law
Module Name/Title Trade Related Investment Measures
Module Id
Pre-requisites  Concept of Trade Related Investment Measures
 National Treatment and Quantitative Restrictions
 Only trade related investment measures
 What constitutes TRIMs

 The FIRA Panel case bringing trade related invest
issues within the ambit of GATT
 Uruguay Round negotiations on TRIMs
 Salient Features and issues of contention
 Future scope of coverage
Keywords sanitary, phytosanitary, health, conformity, tariff, non –

tariff, harmonization.
E-TEXT
Topics (Index)
1. TRIMs: its Objectives and some Essential Features

2 A Brief History that led to the Agreement on Trade-Related Investment Measures
3 The need For TRIMs
4 Uruguay round negotiations on TRIMs
5 Some Salient Features
6 Issues of Contention
7 Themes which should be covered
8 Objective Type Questions
9 Useful Links
10 References
TRADE RELATED INVESTMENT MEASURES

TRIMs: its Objectives and some Essential Features
TRIMs refer to investment measures related to trade in goods only.
TRIMs ARTICLE – I
- Applies to investment measures related to trade in goods only.
- Therefore, does not apply to services.
The Agreement on Trade-Related Investment Measures was contracted because of the

following reasons:
 Promotion of the expansion and progressive liberalisation of world trade and

facilitation of investment across international frontiers
 Dealing with the trade restrictive and distorting effects of investment measures put in
force by Member countries.
Through the agreement and its illustrative list, it only strengthened Article III
requirement of National Treatment and Article XI requirement of quantitative
restrictions under GATT. It therefore, in no way is as comprehensive and liberalizing
as GATT, GATS or TRIPS for that matter. TRIMs has a very narrow focus. It
The objectives of TRIMS can be culled from its preamble which includes the following
points:
- the expansion and progressive liberalisation of world trade
- to facilitate investment across international frontiers
essentially concerns itself with National Treatment and Quantitative Restrictions and
does not provide a comprehensive investment regime for WTO member countries.
A Brief History that led to the Agreement on Trade-Related Investment

Measures
The period of decolonization of Asia and Africa began in the 1940s. It was during this
phase, when the world economy led by colonial, formerly colonial and presently the
developed world was trying to recover from the effects and after-effects of Second
World War. The initial plan of Havana Charter in 1948 was to form International
Trade Organization (ITO) which had investment also as a component in its
formulation. This charter never saw the light of day and only commercial policy was
adopted in GATT 1947(“General Agreement on Tariffs and Trade”).
The resolution on international investment for economic development
It was only during the Uruguay Round of negotiations that investment received
attention and then became part of the jurisprudence evolved by WTO. Though the
principle of protection of investment is quite old, going back to the days of laissez
faire of 19th century U.S. and U.K., but in its present form it has evolved after the
Second World War. In 1955, through the resolution on international investment for
economic development, the GATT contracting parties were encouraged to conclude
bilateral agreements to promote and protect foreign investment. Later on through
GATT national treatment principle entered the investment law regime.
Multilateral Agreement on Investment
The developed countries got together under the aegis of OECD (Organization for
Economic Cooperation and Development) to develop a comprehensive agreement on
investment in the 1990s which is known as Multilateral Agreement on Investment
(MAI). This agreement never took off as developing countries were not made a party
to the negotiations and they became deeply suspicious of the manner and motives of
such an agreement. Furthermore, OECD is a closed organization of developed nations
which made it more difficult for them to sell the idea of MAI. It was disbanded in
1998.
Doha Development Agenda
Then again developed countries wanted to have a multilateral initiative under the
aegis of World Trade Organization (“WTO”) through Doha round of negotiations.
Here again there was a clash of priorities. The developing countries had other
pressing issues to be concerned with like agriculture, textiles, special and differential
treatment across the board for developing and least developed countries, access to
medicines and life – saving drugs and a multilateral agreement on Investment went on
a back – burner under the aegis of WTO. In fact, the whole Doha Development
Agenda got derailed.
FDI Policies at National, Bilateral and Regional Levels
This did not restrict states from developing an FDI policy at national, bilateral and
regional level and pass off as an exception under Article XXIV of GATT. Trade
liberalizing measures (GATT, GATS, and TRIPS) have a direct impact on even
investment like for exporting companies to set up customer services centre (covered
under GATS) in importing countries to facilitate trade. This is a kind of investment in
the services sector.
Uruguay Round and Negotiation of TRIMs
In this backdrop, through the Uruguay round when under the auspices of WTO,
TRIMs was negotiated it had a very limited scope of application.
The need For TRIMs
Challenging the Canada Foreign Investment Review Act 1973
It all began with the 1982 case concerning Canada Foreign Investment Review Act
1973 which was challenged by the U.S. as trade restrictive under GATT. The
Canadian legislation was enacted because of an element of ‘national concern’ to
counter and reverse the trend of Canadian industry, trade and commerce being
dominated by non-Canadians.
The Relevant Provisions
The relevant provisions of FIRA 1973 are sections 2.2 to 2.7. They are as follows:
2.2 The Foreign Investment Review Act. In December 1973 the Parliament of Canada
enacted the Foreign Investment Review Act. According to Section 2(1) of this Act, the
Parliament adopted the law "in recognition that the extent to which control of Canadian
industry, trade and commerce has become acquired by persons other than Canadians and the
effect thereof on the ability of Canadians to maintain effective control over their economic
environment is a matter of national concern" and that it was therefore expedient to ensure that
acquisitions of control of a Canadian business or establishments of a new business by persons
other than Canadians be reviewed and assessed and only be allowed to proceed if the
government had determined that they were, or were likely to be, of "significant benefit to
Canada".
2.3 Section 2(2) lists five factors to be taken into account in assessing whether a proposed
investment is or is likely to be of significant benefit to Canada. These are:
(a) The effect of the acquisition or establishment on the level and nature of economic
activity in Canada, including, without limiting the generality of the foregoing, the
effect on employment, on resource processing, on the utilization of parts, components
and services produced in Canada, and on exports from Canada;
(b) the degree and significance of participation by Canadians in the business

enterprise or new business and in any industry or industries in Canada of which the
business enterprise or new business forms or would form a part;
(c) the effect of the acquisition or establishment on productivity, industrial efficiency,

technological development, product innovation and product variety in Canada;
(d) the effect of the acquisition or establishment on competition within any industry
or industries in Canada; and
(e) the compatibility of the acquisition or establishment with national industrial and
economic policies, taking into consideration industrial and economic policy
objectives enunciated by the government or legislature of any province likely to be
significantly affected by the acquisition or establishment.
2.4 Written undertakings given by investors. The Act provides that investors may submit
written undertakings on the conduct of the business they are proposing to acquire or establish,
conditional on approval by the Canadian government of the proposed acquisition or
establishment. The submission of undertakings is not required under the Act but, as the
administration of the Act evolved, they are now routinely submitted in support of nearly all
larger investment proposals. Many undertakings are the result of negotiations between the
investor and the Canadian government. Undertakings given by investors may deal with any
aspect of the conduct of a business, including employment, investment, research and
development, participation of Canadian shareholders and managers, productivity
improvements as well as practices with respect to purchasing, manufacturing and exports.
There are no pre-set formulas or prescriptions for the undertakings.
2.5 Purchase undertakings. Undertakings with respect to the purchase of goods have been
given in a variety of forms:
- Some involve best efforts to seek Canadian sources of supply;
- some specify a percentage or amount of purchases of Canadian products;
- some envisage replacement of imports with Canadian-made goods in a specific

dollar amount;
- some refer to the purchase of Canadian products, others only to the purchase from
Canadian suppliers (whether of domestic or imported goods);
- some involve a commitment to set up a purchasing division in the Canadian
Subsidiary; and
- some involve a commitment to consult with federal or provincial industry specialists

in drawing up tender lists.
Undertakings on purchases are often but not always conditional on goods being "available",
"reasonably available" or "competitively available" in Canada with respect to price, quality,
and delivery or other factors specified by the investor.
2.6 Manufacturing undertakings. Some firms have given undertakings to manufacture in

Canada products or components of a product used or sold by the firm.
2.7 Export undertakings. The undertakings involving the export of goods have been given in a
variety of forms:
- Some involving development of natural resources are predicated on the

development of offshore markets;
- some involve a specific export target, expressed as a percentage of output or sales,

often to be achieved within a specified time frame;
- some involve assigning to the Canadian business exclusive rights to export either all
its products to certain countries or specified products on a world basis;
- some involve a commitment by the investor to assist the Canadian subsidiary in

selling its products in foreign markets; and
- some involve commitments that the Canadian business will not be restricted from
seeking out and taking advantage of any export opportunities.
Effect of Canada Foreign Investment Review Act 1973 (U.S.’s and Canada’s
respective Claims)
Such legislation placing restrictions on investment in this manner would effectively
hit national treatment requirement (Articles III: 4 and III: 5 of GATT); quantitative
restrictions requirement (Article XI GATT) and non-discrimination by state trading
enterprises (Article XVII: 1(c) GATT). Another claim by U.S. was how such an act
would also lead to nullification and impairment under Article XXIII of GATT. In the
U.S’s claim, it was not the act per se which was contested (because it was out of the
purview of GATT) but only the trade related issues. Contrary to the U.S.’s claim we
see how the decision in this case actually ended up intruding into the area of
international investment. Canada claimed its actions to be an exception under Article
XX (d) GATT as part of its “laws and regulations not being inconsistent with the
provisions of GATT 1947”.
The Decision of the Panel and the Conception of TRIMs
The Panel decided in favour of U.S., and as a result of it, Article III (4) of GATT
1994 was specifically incorporated as part of the larger WTO trade regime. Trade
Related Investment Measures (“TRIMs”) is a result of the ratio of this case. TRIMs
only codified the law evolved under article III (4) of GATT. These are some of the
churnings which profoundly influenced the future WTO’s character through the
Marrakesh Agreement in 1994.
Two main ideas emerged from the FIRA panel decision:

- National treatment principle got upheld in the investment
context (through its inclusion of local content requirement)
- Export performance requirements were not covered by GATT
thus there was a restrictive reading of trade – related
requirements which expanded phenomenally in the Uruguary
Uruguay round negotiations on TRIMs
round of negotiations leading to the formation of WTO
The Uruguay round of negotiations limited the scope of TRIMs to articles III and XI
of GATT 1994, in fact, more specifically to clause 4 of Article III and clause I of
Article XI mentioned in the annexure to TRIMs which has given the same as an
illustrative list (not necessarily exhaustive). The panel’s holding of Local Content
Requirement (“LCR”) to be inconsistent with the National Treatment Requirement
became an established principle through the FIRA panel case which precedes the
formation of WTO despite opposition from developing countries.
TRIMs covers three broad areas which are trade restrictive:

(a) Local content requirements;
(b) Trade balancing requirements;
(c) Export restrictions
Indonesia – Autos case.

After the formation of WTO, one of the first cases to deal with the issue of LCR was
Indonesia – Autos case.
Facts:
In Indonesia, by its 1993 Programme and then again by the 1996 National Car
Programme provided car companies (almost always benefiting Indonesian car
companies) using local content:
a. Import duty reductions;
b. Exemptions on imported automotive parts having local content;
c. Luxury tax exemption;
d. Import duty exemption.
Even when such national car companies imported parts and components they received
customs duty benefits. The only requirement which they needed to fulfil was to have a
certain percentage value of domestic products/local contents in their cars.
Issues:
Two questions had to be looked into by the WTO panel. They were:
a. Whether the Indonesian measures at issue are “investment measures”?
b. Whether these measures are “trade related”?
The panel found the measures to be “investment measures” because they aimed at
encouraging the development of local manufacturing of finished motor vehicles as
well as their parts and components. The panel held the measures to have a significant
impact on investment inherently.
The panel decided the second question also in the affirmative by mentioning how if
such measures are LCR they would invariably tantamount to “trade related” because
they adversely affect trade by favouring domestic products over imported products.
Argentina — Measures Affecting the Importation of Goods
Facts:
The complainants including Japan, Australia, Canada and the United States identified
a number of measures as Trade Restrictive that has been put in place by Argentina:
(a) to export a certain value of goods from Argentina related to the value of imports;
(b) to limit the volume of imports and/or reduce their price;
(c) to refrain from repatriating funds from Argentina to another country; to make or
increase investments in Argentina (including in production facilities); and/or,
(d) to incorporate local content into domestically produced goods.
These measures inter alia were claimed to be violative of Articles 2 of the TRIMs
Agreement.
Panel Report:
The Panel reported that the impugned measure is inconsistent with Article XI:1 of
GATT (and hence, by extension, Article 2 of TRIMS) because it has limiting effects
on the importation of goods into Argentina.
It also reported that the measure, with respect to the requirement to incorporate local
content, is inconsistent with Article III:4 of the GATT 1994 because it modifies the
conditions of competition in the Argentine market to the detriment of imported
products. Hence, this measure too violates Article 2 of TRIMS.
Issues not Covered by TRIMs
Some issues were not included in TRIMs as a result of Uruguay round of
negotiations:
- Export performance
- Technology transfer requirements.
Some Salient Features

- “Trade Related Investment Measures” is not defined in the agreement. It provides a
set of measures in its annexure which would be inconsistent with GATT thus
definitely itself negatively. Therefore, the measures should not be inconsistent with
Article III: 4 or Article XI: 1 of GATT 1994.
- The agreement is not concerned with regulation of foreign investment
- The focus of TRIMs is on non – discrimination between imported and exported

products and/or creation of import or export restrictions.
- It restricts the imposition of Local Content Requirement even if National Treatment

Principle is followed because it would invariably restrict investor production for trade
and tantamount to discriminatory treatment of imported goods in favour of domestic
goods.
- Disputes under TRIMs are covered by DSU (“Dispute Settlement Understanding”)

vide Article VIII TRIMs.
Article 8: Consultation and Dispute Settlement

The provisions of Articles XXII and XXIII of GATT 1994, as elaborated and
applied by the Dispute Settlement Understanding, shall apply to consultations
and the settlement of disputes under this Agreement.
Article 6: Transparency
1. Members reaffirm, with respect to TRIMs, their commitment to obligations on

transparency and notification in Article X of GATT 1994, in the undertaking on
“Notification” contained in the Understanding Regarding Notification, Consultation,
Issues of Contention
On the issue of investment, both the developed as well as developing countries are
deeply divided. The contradictions concern some of the following issues:
a. Freedom of investment and its after effects of increase in foreign exchange and
resultant inflation and other problems;
b. “Denationalization” of national assets – there is constant fear among developing
nations that their sovereignty over their own natural resources would be usurped by
MNCs and once their purpose is served these host countries would be left high and
dry.
c. Less FDI in new companies and more as mergers and acquisitions of companies
which already exist. This is seen as predatory capitalism of MNCs which would then
be the sole players thus discouraging competition which was the initial trigger factor
for allowing greater investments;
d. Lack of transparency;
e. Local Content Requirement;
f. Currency controls;
g. Issues not just of FDI but also portfolio investment and extensions of credit;
h. Expropriation;
i. Problems of natural resources and infrastructure;
j. Environment;
k. Balance of payment problems and financial crises
l. Capital account convertibility (flight of capital leading to South – East Asian
economic Crises beginning with Thailand in 1997. Countries like Indonesia have
taken years to recover. The case in point is highlighted by Professor Jagdish
Bhagwati in his work “In Defense of Globalization” which highlights how countries
like China and India were not affected by the economic crisis of 1997 because they
charted their own individual economy policy as against being governed by the duo of
World Bank and IMF. The 1999 economic crisis in Argentina is also a lesson for all
developing countries.)
m. Monopoly of MNCs leading to inflation and resource inefficiencies adversely
affecting social indices and public welfare.
Themes Which Should Be Covered

Some of the themes which any investment policy will have to cover would be:
1. Expropriation and nationalization – any investor wants some predictability in the
investment policy of a country which ensures their investment is not just secured but
also gives them their projected returns. Such expropriation would include any kind of
creeping or indirect expropriation as well.
2. Repatriation of capital – the profit generated through investment is expected to
generate “host country’s development” and there are some restrictions on the capital
flow out of the country. Such capital could be reinvested. It becomes a matter of
concern for the host country as a sudden flight of capital might wreck havoc in the
host country’s economy.
3. Workers’ rights – Poor working conditions and weak labour rights are sometimes
reasons for MNCs to invest in developing countries in order to escape the stricter
labour rights in their own country. These are issues of concern which needs to be
addressed. Developing countries are faced with this challenge. But labour rights
cannot be used to scuttle trade. A fine balance has to be struck.
4. Harm to the environment – The same issues which afflict labour also besieges the
environment. Poor environmental standards coupled with governmental corruption
can be a catastrophic combination for developing countries. As far as India is
concerned, the Bhopal gas tragedy resulting in the death of hundreds of civilians and
injuring in hundreds of thousands apart from polluting the environment for a long
time to come, is a live example to learn from.
Law

Agreement on Technical Barriers to Trade
Delhi
Delhi
Delhi
Delhi
Module XIX: TECHNICAL BARRIERS TO TRADE

Subject Name Law
Module Name/Title Agreement on Technical Barriers to Trade
Module Id 20
Pre-requisites  Concept of Technical Barriers to Trade
 Regulations and Standards
 Conformity Assessment Procedures
 What constitutes Technical Barriers to Trade

 What are technical regulations and standards
 What are conformity assessment procedures
 Objectives
 Harmonization
 Equivalence
 Transparency
Keywords sanitary, phytosanitary, health, conformity, tariff, non – tariff,

harmonization.
E-TEXT
Topics & Sub-Topics covered (Index)

1. Introduction
2. Objectives
3. Keywords
4. Preamble
5. (a) Technical regulations and standards
(b) Conformity assessment procedures
6. Objectives
7. Provisions
8. Harmonization
9. Equivalence
10. Transparency
11. Objective Type Questions
12. Useful Links
13. References
1.1 INTRODUCTION:
What is Technical Barriers to Trade (“TBT”)?
- With increase in standards of living and greater awareness and sensitivity to
environment fueling the demand for high – quality products by consumers worldwide
made it necessary to address the issue of product standards.
- TBT is an agreement under the aegis of World Trade Organization (“WTO”)

governing product standards which do not fall under the ambit of SPS agreement.
- Even though the TBT agreement concerns itself with health issues of human, animal
and plant life and health but it does the same through technical regulations,
standards and conformity assessment procedures.
- Through the Uruguay (1986 – 94) round TBT is an intrinsic part of WTO. Earlier it
was called the Standards Code and which emerged after a long and protracted Tokyo
Round of negotiations which finally reached culmination in 1979.
- The Most Favoured Nation (“MFN”) principle and National Treatment (“NT”)
principle are part of TBT as they are part of GATT and every agreement entered into
under the auspices of WTO. (Art. 2.1 includes aspects of both MFN as well as NT in
it.) MFN and NT apply to technical regulations as well as conformity assessment
procedures.
Article 2.1 Members shall ensure that in respect of technical

regulations, products imported from the territory of any Member
shall be accorded treatment no less favourable than that accorded to
like products of national origin and to like products originating in any
2.1 Objectives: To get an overview of TBT Agreement
other country.
3.1 Keywords:
4.1 The preamble to TBT sets the agenda for it as follows:
i. To further the objectives of GATT 1994;
ii. To encourage the development of such international standards and
conformity assessment systems;
iii. To ensure that technical regulations and standards, including packaging,
marking and labeling requirements, and procedures for assessment of
conformity with technical regulations and standards do not create unnecessary
obstacles to international trade;
4.2 The TBT agreement does not apply to Sanitary and Phytosanitary Measures
Agreement (“SPS”) (Annex A of SPS Agreement).
4.3 If implemented with the intent to promote trade TBT measures are helpful.
Technical regulations and standards are necessary for:
i. Consumer information,
ii. Information for cross – border traders,
iii. Environmental protection,
iv. National security and the like.
4.4 Product standards developed under TBT could be:

a. Voluntary;
b. Mandatory;
c. Development of procedures to determine whether a particular product meets such
standards.
5.1 What are technical regulations and standards?

The size, shape, design, functions, performance, labeling and packaging of a product
before it is put on sale in a particular country are the components of technical
regulations and standards. While technical regulations are mandatory, standards
employed are voluntary.
Technical regulations would determine whether a particular product would be allowed
entry and sale in a particular market or not. Standards would determine consumer
behavior.
E.g. Technical regulations would determine whether a particular product contains cane
sugar or corn syrup as a sugaring agent in its labeling. Whereas standards would be,
using or not using cane or corn syrup as a sugaring agent to sweeten a particular
product depending on consumer behavior of a particular market as well as the health
5.2 What are conformity assessment procedures?
implications of cane sugar vs. corn syrup.
These are technical procedures like testing, verification, inspection and certification
confirming whether the products exported fulfills the regulations and standards of the
importing country. These conformity assessment procedures can act as the chicken –
neck to restrict trade. Therefore, these procedures need to be predictable, transparent
and non – discriminatory in order not to affect trade adversely.
Article 2.2
- Members shall ensure that technical regulations are not prepared, adopted or applied
with a view to or with the effect of creating unnecessary obstacles to international
trade.
- For this purpose, technical regulations shall not be more trade-restrictive than
necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment
would create.
- Such legitimate objectives are, inter alia: national security requirements; the
6.1 Objectives of TBT
a. Protection of human life and health: different regulations and standards protecting
human life and health.
Protection of animal and plant life or health

i. Sugar percentage and composition in different
food products (also ISO mark or these days
organic mark on eatables);
ii. Regulations for having statutory warning in
cigarettes for it being harmful for health;
b. Protection of environment iii. Automobile manufacturing companies to
–
Regulations and standards to protect animals and plant

species from extinction due to soil, air and water pollution
c. Prevention ofStandard
deceptive practices
of technology adopted by automobile industry to
reduce emission levels to reduce pollution; promoting
To avoidrecycling technology
any deceptive practice:
Labelling requirements of products
Classification and definition of products
Packaging requirements
Measurements (size, weight, shape etc.)
d. Other objectives
Quality (size of fruits and vegetables)

Technical harmonization (configurations,
telecommunications)
Trade facilitation
Global harmonization of standards is very important to facilitate and develop global

trade to its optimum. If standards are divergent costs of exporters would become very
high and they would also have to skip some of the markets where they would
otherwise have exported. Therefore, rules and standards need to transparent
predictable and informed well in advance. If rules are all divergent and if the Code of
Good Practice for the Preparation, Adoption and Application of Standards (TBT
Annex 3) is not followed it becomes specially debilitating for small and medium
enterprises. Small and medium enterprises not just provide maximum employment but
also lead to a more sustainable and environment friendly economic growths in
developing country like India.
Standards requirements vary from countries to countries depending on the levels of
income, levels of awareness of consumers, taste, geographical factors and the like.
Eg.
a. Countries with high level of salination in arable land and soil pollution or a higher
income developed country might restrict use of insecticide, pesticide and fertilizers.
b. Countries with high level of air pollution would restrict air polluting industries and
products or have higher norms and standards than other countries.
Therefore, TBT agreement allows room for difference in standards among

different countries but it should not be implemented just for unnecessary
restriction for trade.
Unnecessary obstacles to trade can result when

(i) when it does not fulfill a legitimate policy objective;
(ii) a regulation is more restrictive than necessary to achieve the policy objective
which could be achieved by a less restrictive regulation.
7.1 Provisions:
1. Article 2 concerns itself with Preparation, Adoption and Application of Technical
Regulations by Central Government Bodies.
2. Article 3 concerns itself with Preparation, Adoption and Application of Technical
Regulations by Local Government Bodies and Non-Governmental Bodies.
3. Article 4 concerns itself with Preparation, Adoption and Application of Standards.
4. Articles 5 to 9 concern itself with “Conformity with Technical Regulations and
Standards”.
Case : EUROPEAN COMMUNITIES –MEASURES AFFECTING ASBESTOS

AND ASBESTOS –CONTAINING PRODUCTS
Brief relevant facts:

The dispute concerned certain measures including Decree No. 96-
1133 of 24 December 1996, issued pursuant to the Labour Code and the Consumer
Code taken by France that banned asbestos and asbestos containing products from
entry into its market. According to the said Decree, import of anything containing
asbestos fibres was prohibited with the exception of certain existing materials
containing chrysotile fibre when there is no substitute available which is more health
and environment friendly than chrystolite fibre.
Claims of the Parties:
Canada claims inter alia that the measures adopted by France
are violative of Article 2.1, 2.2, 2.4 and 2.8 of the Agreement on Technical Barriers to
Trade (hereafter TBT).
Findings of the Panel:

First, the Panel discussed whether the impugned measures
constitute technical barriers to trade. Interpreting the definition of “Technical
Regulation" Annex 1.1 of the TBT Agreement, the Panel came to the conclusion that
“technical regulation as envisaged under the said definition means those documents
which characterize specific or generic products. But characterization is essential. And
because the impugned Decree wasn’t specifying any characteristics for the products
and was just banning them, hence, the panel concluded that the part of the decree
putting a blanket ban on all asbestos containing products is not a “Technical
Regulation”. However, the part of the Decree, which did characterize the products
that fell into the category of exceptions, constitutes a “technical regulation” within the
meaning of Annex 1.1 to the TBT Agreement.1
The Appellate Body Findings:

The Appellate Body, on the other hand, held that “the
proper legal character of the measure at issue cannot be determined unless the
measure is examined as a whole”2 and reversed the Panel’s two-stage interpretation.
They were of the view that the Decree does prescribe characteristics for products that
might contain asbestos fibres in it; the characteristics being the absence of asbestos
fibres in them.3 Hence, the Decree, they hold constitutes a “technical regulation”.4
Article 5 requires:
1 Paras 8.34-8.73
2 Appellate Body Report, Para 64
3 Ibid, Para 74
4 Ibid, Para 75
 conformity assessment procedures by governmental bodies should be non-
discriminatory for like products (MFN and NT principles);
 conformity assessment procedures shall not be more strict or be applied more
strictly than necessary;
 necessary to assess conformity and determine fees;
 confidentiality is respected in the same way (NT);
 a complaints and corrective action procedure should exist; and
 international harmonization is sought for
Article 6 requires:
- Members shall accept conformity assessment procedures in other member

countries (NT);
- There should be level of equivalence;
- Prior consultations;
- May be necessary to assess technical competence of the relevant conformity
assessment bodies and agree on limitations of the acceptance of the conformity
assessment results of those produced by designated bodies in the exporting
member country.
Articles 8 and 9 require:
- NGOs and international systems within a member country comply with Articles
5 and 6.
- Central government bodies of member countries should rely on NGOs and
international systems only if those bodies and NGOs comply with Articles 5 and
6.
- NGOs are exempt from the obligation to notify proposed conformity assessment
procedures.
5. Articles 10 to 12 concern itself with information and assistance.
6. Articles 13 and 14 concern itself with institutions, consultation and dispute settlement
8.1 Harmonization
- Technical harmonization is required for greater consumer welfare. Eg. Countries with
left – hand driving and those with right – hand driving have to have vehicles with
right – hand steering and left- hand steering respectively and all automobiles have to
comply with this regulation. The regulation varies from country to country.
Something as simple as this involves huge adjustments for automobile industries,
affecting their import and export as well.
- Participation in international standardizing bodies would further the cause of
harmonization of standards among member countries.
- Special and differential treatment is given to developing country members to conform
to different sets of standards and assistance is provided to develop their own
standards. (Article 12).
9.1 Equivalence
Harmonization would take years to be negotiated. Till the time a universal
harmonization of standards is achieved equivalence is used to eliminate technical
barriers to trade. If two technical standards are different but they reach the same
conclusion and the same policy objectives are achieved by it then it cannot be a
reason to impose technical barriers as it leads to equivalence.
Under article 11 of TBT agreement technical assistance is provided to developing
country members for:
i. preparation of technical regulations
ii. establishment of national standardizing bodies to the participation in international
standardizing bodies
iii. Steps to be taken by developing country Members to gain access to regional
international conformity assessment systems.
iv. Helping firms in developing country members to manufacture products in
accordance with the technical requirements existing in an importing country to
ensure its acceptance and create a market for it.
10.1 Transparency is required in

- Technical regulations and conformity assessment procedures
- Statements on the implementation and administration of the Agreement
- Bilateral or plurilateral agreements
- Implementation of Code of Good Practice
- Enquiry points
- Existence of a TBT committee
CODE OF GOOD PRACTICE

The Code of Good Practice is contained in Annex 3 of the WTO
TBT Agreement.
It provides rules related to
a. Transparency;
b. For the preparation, adoption and application of standards by
all central governmental, local government, non-governmental
and regional standardizing bodies.
CASE : EUROPEAN COMMUNITIES – PROTECTION OF TRADEMARKS
AND GEOGRAPHICAL INDICATIONS FOR AGRICULTURAL PRODUCTS
AND FOODSTUFFS
Brief facts:
A certain regulation5 in the European union required all products using
a GI to comply with certain product specifications. The issue of the dispute, inter alia
were that these regulations were allegedly trade restrictive.
Claims by the Parties:

Australia claimed that the impugned Regulation puts in place
certain inspection structures that are inconsistent with Article 2.2 of the TBT
Agreement. It also claimed that the Regulation is a "technical regulation" within the
definition in Annex 1.1 of the TBT Agreement because it requires that GI products
comply with the product characteristics in the GI registration. They claim that the
process of checking compliance with the specifications is a regular sequence of
actions, i.e. a process, and falls within the meaning of "product characteristics or their
related processes".6 On the other hand, the European Communities claim that none of
these provisions fall within the meaning of a “technical regulation” defined in the
TBT Agreement.7
Findings of the Panel:
The Panel succinctly discusses the meaning of the word
“process” to mean a series of instructions or steps undertaken towards a common end 8
and “conformity assessment procedures” to mean procedure used to determine that
relevant requirements in technical regulations are fulfilled.
Coming to the question of whether the impugned process in the Regulation qualifies
as a “Technical Requirement”, the Panel noted that the TBT Agreement comprises of
two main parts: Articles 2 to 4 relate to technical regulations and Articles 5 to 9 relate
5 Council Regulation (EEC) No. 2081/92 of 14 July 1992

6 European communities – protection of trademarks and geographical indications for agricultural
products and foodstuffs, Report of the Panel, Para 7.492, 7.493
7 Ibid, Para 7.500
8 Ibid, Para 7.510
to conformity assessment procedures. So, if Australia’s claims were to be accepted,
then, it would embed measures subject to Articles 5 to 9 into Articles 2 to 4 (in other
words, “Technical Requirements”). And the result would be unreasonable. 9 Hence,
the Panel concludes that the Regulations do not constitute “Technical Regulation”
within the meaning of Article 2.2 of the TBT Agreement.
9 Ibid, Para 7.6513

Law

Agreement on Sanitary and Phytosanitary measures
Delhi
Delhi
Delhi
Delhi
Module XX: SANITARY AND PHYTOSANITARY MEASURES (“SPS”)

Subject Name Law
Module Name/Title Agreement on Sanitary And Phytosanitary Measures (“SPS”)
Module Id 20
Pre-requisites  Concept of Sanitary and Phytosanitary measures
 Role of precautionary principle
 Recent jurisprudential developments
 Linkage between sanitary - phytosanitary measures

and trade
 Why such an agreement evolved
 Is there a universal standard on SPS
 Salient features of SPS agreement
 The Fault lines
Keywords sanitary, phytosanitary, health, conformity, tariff, non –

tariff, harmonization.
E-TEXT
Topics & Sub-Topics covered (Index)
1. Introduction
2. Emergence of SPS
3. a. Why SPS ?
b. Universal Standard
4. International organizations providing assistance
5. Basic concepts
6. Salient Features
7. Useful Links
8. References
TEXT
1.1 Introduction:
With the establishment of World Trade Organization (“WTO”), leading to
growth in trade and standardization of trade norms, the common methods of trade
restriction through border measures (arbitrarily high tariff measures) could not be
invoked. Some of the non – tariff barrier measures like customs duty etc. could also
not be arbitrarily invoked. Therefore, nations developed other means of trade
restriction like developing complex and complication health norms and their own
standards of product norms. One such norm was having a complex and sometimes
unreasoned set of sanitary and phytosanitary norms. Sanitary concerns “human and
animal life and health issues” and phytosanitary concerns “plant life and health
issues”. These measures are not necessarily implemented with the intent for trade
restrictions but often they have been used as means to restrict trade.
1.2 Objective: To get an overview and functioning of SPS agreement. SPS agreement
emerged out of Article XX (b) exception of GATT 1994. The purpose of this chapter
is to give an overview of the jurisprudence of SPS Agreement which has evolved into
a very complex legal – scientific document and one of the areas where WTO
countries are deeply divided.
1.3 Keywords: sanitary, phytosanitary, health, conformity, tariff, non – tariff,
harmonization.
2.1 Emergence: Why did such an issue creep into the world trading system?
The World Trade Organization effectively reduced tariff and then non-tariff
barriers to trade. Market access improved significantly (GATT Art. III: National
Treatment Principle; GATT Art. XI: Quantitative Restrictions) and tariffs were
reduced progressively (GATT Art. I: Most Favoured Nation Treatment Principle read
with Art II: Schedules of Concessions) which made it impossible for countries to use
these means for trade restriction. Then what was left for trade protectionism and
arbitrary and unjustifiable discrimination against foreign goods entering into the
importing country. It were the exceptions under Article XX of General Agreement on
Tariffs and Trade (“GATT”) which were ingeniously used or rather misused by
countries to restrict trade under the WTO regime. And this difference concerns
“national product standards”.
And as far as human, animal and plant life and health are concerned GATT
Art. XX (b) exception was invoked for a disguised restriction on trade by having a
different set of product standards for protection.
GATT Art. XX : Subject to the requirement that such measures are not applied in a
manner which would constitute a means of arbitrary or unjustifiable discrimination
between countries where the same conditions prevail, or a disguised restriction on
international trade, nothing in this Agreement shall be construed to prevent the
adoption or enforcement by any contracting party of measures: (b) necessary to
3.1 protect
Why SPS Agreement?
human, animal or plant life or health;
Now public health and health of the local or national varieties of plants and
animals is of paramount concern of any member country of WTO. Though it becomes
insidious if its real purpose is to restrict trade but it masquerades as a measure to
protect human, animal and plant life and health.
Therefore, an agreement needed to be reached which brought some level of
semblance, uniformity and harmonization in such product standards amongst member
countries of WTO. Thus came about the SPS Agreement. It does not provide for
specific measures or does not provide an exhaustive list of exact do’s and don’ts for
different WTO member – countries. What it does provide is a number of general
principles, requirements and procedures which shall govern invoking of any
protectionist measure under Art XX (b) read with the SPS Agreement.
3.2 Is there a universal standard for SPS?
A universal harmonization has not been reached as far as product standards
are concerned and there is a high likelihood that exact and specific product standards
might never be reached or cannot be reached in the near future. This does not rule out
harmonization where possible. A certain biological or chemical condition or usage
might be absolutely benign or relatively benign in a certain geographic and climatic
condition but could be lethal in a certain different geographic and climatic condition
(Art. 6, SPS Agreement). And this means that there could be a wide variety of
variations even within a certain member country of WTO. For example, a certain pest
might be absolutely ineffective or relatively less effective in a certain geographic –
climatic condition but might be very active and destructive in a certain other
geographic – climatic condition. Any product standard which is evoked has to take all
this into account by a WTO member country.
4.1 International organizations providing assistance
Annex A of SPS agreement concerning “international standards, guidelines,
and recommendations” provides a list of international organizations which could be
referred for setting up product standards for a relevant subject. The organizations are:
Codex Alimentarius Commission, under the aegis of Food and Agricultural
Organization (“FAO”) of UN for food safety measures; International Office of
Epizootics for animal health; and Secretariat of the International Plant Protection
Convention for plant health. Other additional and relevant international organizations
could be added to help develop international harmonization by the SPS committee
established under Art. 12.1 of the SPS agreement.
5.1 BASIC CONCEPTS
Sanitary and Phytosanitary measure
Under Annex A,
SPS measures would include:
(i) Sanitary criteria; measure — Any measure applied:
or phytosanitary
End product
(ii) Processes and production methods;
(a) to protect animal or plant life or health within the territory of the
(iii) Testing, inspection, certification, or approval procedure;
Member from risks arising from the entry, establishment or spread of pests,
(iv) Relevant statistical
diseases, method; organisms or disease-causing organisms;
disease-carrying
(v) Sampling procedure;
(vi) Method
(b) oftorisk assessment;
protect human or animal life or health within the territory of the
(vii) Packaging and labellingarising
Member from risks from additives,
requirement contaminants,
directly related toxins or disease
to food safety;
causing organisms
(viii) Quarantine treatment; in foods, beverages or feedstuffs;
Therefore, what (c)we to

observe
protectishuman
what life
the or
“intent
healthof the measure”
within is?of the Member from
the territory
If the intent is to protect plant, animal or human life and health it products
risks arising from diseases carried by animals, plants or thereof,
would fall underorthe
from the entry, establishment or spread of pests; or
SPS agreement. If the intent is not to protect against one of the risks, it becomes trade
restrictive, and(d)
would to not be aorsanitary
prevent or phytosanitary
limit other damage within measure.
the territory of the Member from
6.1 SOME SALIENT FEATURES
the entry, establishment or spread of pests.
i. SPS agreement applies to measures which have trade effect (Art. 1.1 scope and
coverage of SPS agreement);
ii. Art. 2.1 recognizes the rights of governments, including state and local
governments, to take SPS measures;
iii. SPS measures can be applied only to the extent necessary for protection of human,
animal and plant life and health and must be based on scientific principles (Art.
2.2; exceptions under Art. 5.7);
iv. The term scientific is not defined in the agreement but would generally signify a
measure which is having or appearing to have an exact, objective, factual,
systematic or methodological basis;
v. Scientific certainty is rare and SPS agreement gives room to differing scientific
views by different governments;
CASE: JAPAN – MEASURES AFFECTING AGRICULTURAL PRODUCTS

The present dispute came in appeal to the Appellate body from the decision of the
Panel and there is a beautiful discussion of Article 2.2 and 5.1 and their relationship in
the report of the Appellate body.
Brief Facts:
Japan had put in place a few quarantine measures for Codling moth (Cydia
pomonella) which is a pest which invades apples, cherries, nectarines and other fruit
crops.1 Under the said quarantine measures any imported plant or plant product upon
1
Japan – Measures Affecting Agricultural Products, WT/DS76/AB/R, para 2.1
entering the Japanese territory have to be inspected by plant quarantine officers at one
of the 101 major ports (or airports) of entry for any quarantine pest (in this case,
Codling moth). In certain cases, a growing-site inspection by the foreign authorities
was also to be carried out.2 Japan also require each variety to be tested separately
(hereinafter varietal testing method) for Codling Moth, which was the main issue for
the dispute.
Claims of the Parties:
It was alleged by the US inter alia that the “Varietal testing Method” used by Japan to
screen certain varieties of products being imported from the U.S. was inter alia
violative of
Articles 2.2, as the Japanese varietal testing requirement was maintained without
“sufficient scientific evidence” as mandated in Article 2.2.
Articles 5.1 and 5.2, because the Japanese varietal testing requirement was not based
on an “assessment of risk” as mandated by Article 5.1 and 5.2.
On the other hand, it was claimed by Japan that Article 5.7 has to be looked into
before any measure be called violative of SPS Agreement because of its non-
conformity with Article 2.2.
Some of the key findings of The Panel’s Report
(a) After weighing the evidence put forward by both the countries, the Panel concluded
that though there might be varietal differences in plants, but they do not produce any
difference in the test results done for quarantine risk assessment. So, the differences
do not have any casual relationship with the result sought to be achieved. Hence, they
concluded that Japan's varietal testing requirement is maintained without sufficient
scientific evidence in violation of Article 2.2.3
(b) Again with respect to Article 5.6, the Panel broke up Article 5.6 to define a measure
"more trade-restrictive than required" if there is another phytosanitary measure
which:
 "reasonably available taking into account technical and economic feasibility";
 "achieves [Japan's] appropriate level of ... phytosanitary protection"; and
 is "significantly less restrictive to trade" than the varietal testing requirement.
And as there was another method available as was ascertained by various expert
depositions, hence, Japan was also held to violate Article 5.6.4
(c) With respect to Article 5.7, the Panel distinctly noted the requirements to invoke the
said Article:
 "where relevant scientific information is insufficient", and
 “the measure is adopted on the basis of available pertinent information".
In addition, the party is also under an obligation to
2
Plant Protection Law, enacted on 4 May 1950, Plant Protection Law Enforcement, enacted 30
June1950
3
Japan – Measures Affecting Agricultural Products, Report of the Panel, WT/DS76/R, para 8.42
4
Ibid, paras 8.72, 8.104
 "seek to obtain the additional information necessary for a more objective
assessment of risk" and
 "review the … phytosanitary measure accordingly within a reasonable period
of time".
In the present case, Japan was unable to furnish any evidence which proved
that it has met the obligations enumerated hereinabove. So, they held that
Japan had violated Article 5.7 as well.5
vi. Art. 2.3 actually reinforces National Treatment (“NT”) and Most Favoured
Nation (“MFN”) Treatment Principle and wants to weed out obstacles to trade.
Restrictions have to be a rarity and based on sound scientific rationale rather than
as a rule.
CASE: AUSTRALIA – MEASURES AFFECTING IMPORTATION OF

SALMON
This dispute which was later settled between the Parties by Arbitration concerned
inter alia violation of Article 2.3 to the effect that Australia imposed stringent
restrictions on dead, imported finfish purportedly to prevent the spread of disease
while imposing no restrictions whatsoever on the domestic movement of dead finfish.
The Panel Findings
The Panel, while discussing the possible effects of Article 5.5 and 2.3 reiterated the
Appellate Body in EC - Hormones6 and concluded that Article 2.3 prohibits two
things: (a) Phytosanitary measure that arbitrarily or unjustifiably “discriminate
between Members where identical or similar conditions prevail” and (b) Application
of phytosanitary measures that would constitute a “disguised restriction on
international trade” and an important element of Article 5.5 is that it “requires that the
measure in dispute results in discrimination or a disguised restriction on trade.” Hence,
if this element of Article 5.5 is not fulfilled, automatically, Article 2.3 will also be
violated.7
In the present case, the Panel reached the conclusion that Australia was acting in
violation of Article 5.5 by violating all the three elements of the Article and hence, by
extension, was violating Article 2.3.
Appellate body Findings
The Appellate body on the other hand did not accept the above mentioned logic of the
Panel Report and concluded that it would first of all be necessary to determine the risk
to Australia's salmonid population resulting from diseases which are endemic to some
parts of Australia but exotic to others. But because there were no factual findings by
the Panel or undisputed facts between the parties on the matter, it was impossible to
5
Ibid, paras 8.54, 8.58
6
European Communities — Measures Concerning Meat and Meat Products (Hormones), DS26.
7
Australia - Measures Affecting Importation of Salmon- Report of The Panel, WT/DS18/R, Para 8.109
determine if the quarantine mechanisms constitute an arbitrary or unjustifiable
discrimination within the meaning of Article 2.3.8
Compliance Panel Findings
The Appellate body points out clearly the “identical or similar conditions” that is to
be compared here, viz. the risk to salmonids and other fish population from imported
fresh chilled or frozen salmon from Canada with the risk to salmonids and other fish
arising from endemic diseases.
On finer analysis, the Appellate body came to the finding that Canada was seeking
“equivalency” of measures without assessing the risks. The domestic fish population
that has been alleged to be unregulated were actually not disease causing at all or at
least they do not cause the diseases caused by dead imported finfish from Canada. So,
the Appellate body held that Canada has the burden of proof to establish a prima facie
presumption that different measures arbitrarily or unjustifiably discriminate between
Australia and Canada in respect of the measures taken to comply. And that Article 2.3
first sentence does not impose a requirement of equivalence in measures.9
vii. SPS agreement does not entail acceptance of “downward harmonization”

(harmonization is standardization of SPS measures which is acceptable by all
member nations of WTO) under international standards, guidelines or
recommendations by any government (Art. 3.3); Individual countries can and do
have their own standards;
viii. If a national measure is in conformity with international standard, measure or

guideline it is deemed to be necessary and it is considered to be consistent with
GATT 1994 (Art. 3.2);
ix. Under Art. 4.1, if the exporting country has the same level of protection as the
importing country, then they reach an equivalence, but such equivalence does
not violate against the importing country’s right of inspection, testing and other
relevant procedures to establish equivalency;
x. Art. 5.1 requires each government to ensure that its SPS measures are based on
risk assessment; annex A provides a general definition of “risk assessment”;
xi. When a member country conducts risk assessment, it has to take a number of
factors into consideration (under Arts. 5.2 and 5.3) like available scientific
evidence, relevant processes and production methods, relevant inspection,
sampling and testing methods, and relevant ecological and environmental
conditions.
8
Australia – Measures Affecting Importation Of Salmon- Report of the Appellate Body,
WT/DS18/AB/R, Para 255
9
Australia – Measures Affecting Importation Of Salmon- Recourse To Article 21.5 By Canada -Report
Of The Panel, WT/DS18/RW, Para 4.348
CASE: JAPAN – MEASURES AFFECTING THE IMPORTATION OF
APPLES, WT/DS245/AB/R
On 1 March 2002, the United States requested consultations with Japan regarding
restrictions allegedly imposed by Japan on imports of apples from the United States.
Brief Introduction:
The present dispute, which was again settled between the parties, arose out of
quarantine restrictions imposed by Japan on imported apples for protection against
introduction of fire blight. The quarantine restriction consisted of prohibition of
import of apples from orchards which where fire blight would be detected during
three tests conducted in a year and also if they were detected within a 500 meter
buffer zone surrounding such orchard.
Article 2.2: On the question of burden of proof, Japan seemed to be harping on the
proposition that U.S. could not prove anything in apples other than mature
asymptomatic apples and hence, have not made a prima facie case against Japan. The
Appellate Body held that it is sufficient establishment of prima facie case if the
“normal” imported product has been proved to be subjected to arbitrary and trade
restrictive phytosanitary norms.10
Further, the Appellate body also noted that it is not essential for the Panel to judge the
sufficiency of scientific evidence from the point of view of the importing country and
they can easily rely on the opinion of experts in the field.11
Hence, the Panel's findings, in that Japan's phytosanitary measure at issue is
maintained "without sufficient scientific evidence"12 within the meaning of Article 2.2
of the SPS Agreement is upheld.
Article 5.1: Specificity of risk Assessment: The Panel found the risk assessment not
"sufficiently specific" because it did “... not purport to relate exclusively to the
introduction of the disease through apple fruit, but rather more generally, apparently,
through any susceptible host/vector.”13 In this case, the Appellate Body reached the
finding that because the spread of the disease varies significantly depending on the
host and vectors, so, the “risk assessment” undertaken for apples only, which were
only one possible vector for fire blight, were not “sufficiently specific”. So, the
evaluation of the risks do not qualify as risk assessment under the SPS Agreement for
the evaluation of the “likelihood of entry, establishment or spread of fire blight in
Japan through apple fruit.”14
xii. Articles 5.4 and 5.5 provide minimal disciplines for establishing levels of
protection; Art. 5.5 further provides that an SPS committee established under SPS
agreement should develop guidelines to further the practical implementation of
that provision;
xiii. Under Art. 5.6, member countries shall ensure that such measures are not more
trade-restrictive than required to achieve their appropriate level of sanitary or
phytosanitary protection, taking into account technical and economic feasibility
10
Japan – Measures Affecting The Importation Of Apples, WT/DS245/AB/R Para 153
11
Ibid, Para 160
12
Panel Report, Para 8.199 and 9.1(a)
13
Ibid., Para 8.27
14
Supra Note 12, Para 216
(measures achieving the appropriate level of sanitary or phytosanitary protection
and is significantly less restrictive to trade);
xiv. The complaining member would have to show three pre-conditions to prove that
the concerned country enacting SPS measures is more trade restrictive than
required (under the explanatory footnote to Art. 5.6): (a)A specific alterative
measure was reasonably available; (b) achieves the level of protection the
concerned country determines is appropriate; (c) the alternate measure is
significantly less restrictive to trade;
xv. Under Art. 5.8, the importing country is obligated to provide on request an
explanation of the reasons for its SPS measure;
xvi. Transparency requirements (Art. 7 and Annex B): concerned parties get to know
what requirements apply and how to adapt production and other activities to the
said requirement; Annex B requires all governments to publish SPS measures
promptly, those SPS measures which are not based on international standard
should be provided to other members on an advance notice and an opportunity to
comment on the proposal except where some “urgent problems of health
protection is involved”; time should be allowed for producers in exporting
countries to harmonize their products and methods of production to the proposed
SPS measure unless it is urgent;
xvii. Article 8 and Annex C provides specific disciplines on control, inspection and
approval procedures.
Law

Trade Facilitation and the WTO

Co.P.I Dr. G.S. Bajpai Registrar, National Law
University, Delhi
Delhi
Content Reviewer Advocate Anuradha R.V Clarus Law Associates,
Delhi
Delhi

Subject Name Law
Module Name/Title Trade Facilitation and the WTO
Module Id 21
Pre-requisites  Understanding of Article V, VIII & X of GATT,
1947
 Understanding of Singapore Issues, July Package,
Uruguay Round of Negotiations & the Bali Package
 Understanding of the special and differential regime
within the WTO framework
 The need for a special framework for trade

facilitation under the WTO
 The provisions under the Trade Facilitation
Agreements and the nature in which they supplement
the existing GATT rules
 The approaches of developed v. developing countries
towards the final round of ratification of the Trade
Facilitation Agreement
Keywords Consumer welfare, supply change, capacity building, advance

rulings, transparency, food security
II. E-text
Introduction
The terms of the Trade Facilitation Agreement (TF Agreement) of the World Trade
Organisation were negotiated during the 9th Ministerial Conference in Bali, Indonesia.
The TF Agreement would into force by way of an amendment into the Annex 1A of
the WTO Agreement, after two-thirds of WTO members complete their domestic
ratification process. However at present, the WTO members witness an impasse in the
final adoption of the protocol on the TF Agreement.
It is apt to note that it was only after the Uruguay Rounds of negotiations concluded
20 years ago, that the issue of trade facilitation gained momentum. The reasons for
this were several- the uncertainty over the time taken to clear borders tends to create
unpredictability which adds to the cost of trade and makes goods unaffordable for the
consumers. Since the issue of trade facilitation is directly linked to both consumer
welfare and investor’s gains, it became a relevant issue for the developing and
developed countries.
This module discusses the various provisions under the concluded TF Agreement
which facilitates the goal of simplifying trade and investment. Yet some developing
countries including India have been concerned about issues, inter-alia the potential
costs of implementing the trade facilitation commitments, and the bargain involved
due to the intermingling of the TF Agreement with other issues under the Bali
Package that have at present delayed the adoption process of the TF Agreement.
Learning Outcome
 Understanding the need for a separate framework for trade facilitation agreement
 Tracing the evolution of the trade facilitation agreement
 An insight into the nature and scope of the concluded trade agreement framework
under the WTO
 The issues within the implementation of the trade facilitation agreement and the
approaches of various countries.
 Trade Facilitation- Evolution & Meaning
 Existing WTO Framework and rules on trade facilitation
 Legal Developments in the adoption of the Trade Facilitation Agreement
 Trade Facilitation Agreement- Key provisions
o Publication & Availability of information

o Advance Rulings & Other formalities
o Appeal/Review
o Impartiality, Non-Discrimination & Transparency
o Transit of Goods
o Customs Co-operation & Institutional Arrangements
o Special & Differential Treatment Principle
 Predicted Benefits of Trade Facilitation

 Trade Facilitation: Developing v. Developed countries
 Summary
Text
1. Trade Facilitation- Evolution & Meaning

Traders from both developing and developed countries have long pointed to the vast
amount of ‘red tape’ that still exists in movement of goods across borders.
International stakeholders of cross-border trade often complaint that documentation
requirements in countries lack transparency and are vastly duplicated in many places.
This problem is often compounded by a lack of cooperation between traders and
official agencies. 1 These situations tend to have several adverse implications on
international trade. For instance, the uncertainty over how long it will take to clear a
border crossing creates unpredictability and adds cost to business, costs which are
eventually passed onto consumers in countries where consumers are least able to
afford them. Uncertainty in supply chains also acts as a disincentive to potential
business investors, who rely on efficient supply chains to minimise inventory costs.
Therefore, a need for a regulatory framework to tackle these issues was felt after the
conclusion of the Uruguay rounds of Agreement.2
The existing WTO legal framework lacked specific provisions in areas of customs
procedures, documentation and transparency; though a few Articles concluded during
the Uruguay rounds touch upon these aspects. The increase in the volume of trade
coupled with advances in technology and computerisation of business transactions
added a sense of urgency for the WTO members to negotiate on more uniform, user-
friendly and efficient rules.3
It is vital to note that with the conclusion of this agreement, WTO would embrace
rules relevant for the actual conduct and practice of international trade. So far, the
WTO discipline has been primarily considered as the public regime for international
trade law. The actual trade practice is conducted in the private realm of international
trade law, wherein the merchants and international enterprises have developed rules
governing their day to day trade transactions. The Trade Facilitation Agreement is a
breakthrough effort in this regard as it aims to strengthen and govern the practical
aspects of conducting international trade.
2. Existing WTO Framework and rules on trade facilitation
Before we analyse the key features and negotiation history of the trade facilitation
agreement, let us take an overview of the existing WTO rules pertaining to trade
facilitation. Articles V, VIII and X of GATT 1994 are relevant provisions which form
the basis for the new Trade Facilitation Agreement. Article V deals with the freedom
of transit of goods from another member, and states that all charges imposed on goods
1
WTO Website, Trade Facilitation, available at:
http://www.wto.org/english/thewto_e/minist_e/mc9_e/brief_tradfa_e.htm
2
WTO Trade Facilitation Agreement: A Business Guide for Developing Countries, Doc No. BTP-13-
239.E, International Trade Centre, Geneva, Switzerland (2013) page 1 [hereinafter, WTO TFA: A
Business Guide].
3
ibid.
in transit must be ‘reasonable’. Article VIII says that fees and formalities connected
with importation and exportation must be about equal to the cost of the services
rendered, so that they do not constitute a form of indirect protection. The provision
also calls for reducing the number and diversity of such fees. GATT Article X is a
vital provision requiring trade regulations to be clearly published and fairly
administered.4 Let us examine each of these provisions in more detail.
Freedom of transit (Article V)
The aim of Article V is to ensure that WTO Member States allow freedom of transit
through their territory for transportation to or from the territory of other WTO
Member States. It does this by setting out two main obligations:
 Not to hinder traffic in transit by imposing unnecessary delays or restrictions or by
imposing unreasonable charges;
 To grant Most-Favoured-Nation (MFN) treatment to all transit goods of WTO
Member States.
WTO has interpreted this to mean that Member States may only impose charges on
traffic in transit in only two ways: charges for transportation and charges for
administrative expenses arising from transit or related services. Such charges must be
reasonable (undefined) and non-discriminatory. In this regard, each Member State is
obliged to treat products which have been in transit through the territory of any other
Member State no less favourably than would have been the case if such products had
been transported from their place of origin to their destination without going through
the territory of the Member State concerned.5
Fees and formalities (Article VIII)
The aim of Article VIII is to limit the costs and complexity of the import and export
process. It imposes specific legal obligations on Member States with respect to the
fees and charges that may be charged in connection with importation and exportation,
and the penalties that may be imposed for minor breaches of customs procedures. It
also explicitly recognizes the need to reduce the number and complexity of import
and export-related fees and formalities, although it provides no legal requirement to
do so.6 The lack of a mandatory nature of this provision should be borne in mind,
while comparing the existing WTO rules with the proposed new rules under the Trade
Facilitation Agreement.
Transparency (Article X)
The main obligations arising from Article X are for Member States to publish their
trade laws in a prompt and accessible manner, to refrain from enforcing measures
prior to publication, and to administer such measures in a uniform, impartial and
reasonable manner. Member States are also required to institute or maintain tribunals
4
Trade Facilitation, Doha Round Briefing Series, ICTSD and IISD (November 2005) available at:
http://www.ictsd.org/downloads/2013/08/6-tr_facilitation.pdf
5
WTO TFA: A Business Guide, p. 6
6
or other procedures for prompt review and correction of administrative action relating
to customs matters.7
Though wide in its coverage, Article X lacks practical provisions setting out rules for
publicizing laws and regulations, establishment of inquiry points and advance rulings
or appeal procedures to strengthen the mandate of transparency, predictability and
uniformity within the WTO.
This aspect should further be kept in mind, while understanding the advancements
made through the new Trade Facilitation Agreement.
3. Legal Developments in the adoption of the Trade Facilitation Agreement

Barely was the ink dry on the Uruguay Round of multilateral trade negotiations
concluded in 1993 than some WTO Member States were already thinking about the
next round. Amongst the issues that featured in this thinking was trade facilitation.8
As a separate discipline of international trade, Trade Facilitation is relatively new to
the GATT/WTO regime. The birth of Trade Facilitation can be traced to the
Singapore Ministerial Conference in December 1996, when WTO members directed
the Council for Trade in Goods “to undertake exploratory and analytical work…on
the simplification of trade procedures in order to assess the scope of WTO rules in
this area”.9
The mandate for these negotiations was set out in Annex D (‘Modalities for
Negotiations on Trade Facilitation’) of the ‘July Package’ of 2004, as:
GATT rules: The negotiations ‘shall aim to clarify and improve relevant aspects of
Articles V, VIII and X of the GATT 1994 with a view to further expediting the
movement, release and clearance of goods, including goods in transit’;
Technical assistance and capacity building: The negotiations also aim at ‘enhancing
technical assistance and support for capacity building in this area,’ and at developing
‘provisions for effective cooperation between customs or any other appropriate
authorities on trade facilitation and customs compliance issues’. The results ‘shall
take fully into account the principle of special and differential treatment for
developing and least developed countries’;
Infrastructure: Developing and least developed countries would not be obliged ‘to
undertake investments in infrastructure projects beyond their means’.
In October 2004, a WTO Negotiating Group on Trade Facilitation (NGTF) was

established. In December 2013, WTO members concluded negotiations on a Trade
Facilitation Agreement at the Bali Ministerial Conference (9th Ministerial Conference,
WTO), as part of a wider “Bali Package”. Since then, WTO members have
undertaken a legal review of the text. The decision was to be adopted in Bali pursuant
7
8
WTO TFA: A Business Guide, p.1
9
Singapore WTO Ministerial 1996: Ministerial Declaration, WT/MIN(96)/DEC, 18 December 1996,
Paragraph 21.
to which the WTO members would draft a Protocol of Amendment to insert the new
Agreement into Annex 1A of the WTO Agreement. Therefore, the TF Agreement
would become a part of the existing WTO regime by way of an amendment. The TF
Agreement will enter into force once two-thirds of members have completed their
domestic ratification process. 10
Post the negotiations in December, 2013, the WTO members had set a deadline of
July 31, 2014 for the adoption of the protocol on the Trade Facilitation Agreement.
However, this deadline was missed as Member states including India, backed by Cuba,
Venezuela and Bolivia, declined to sign the agreement. India’s main opposition with
the TF Agreement arose as the Agreement caps the yearly subsidies in developing
countries at 10 percent of the value of agricultural production. India, both during and
since the Bali round of negotiations, had opposed this limit and demanded a parallel
pact, which would allow developing countries to continue subsidizing and stockpiling
food. While a temporary truce was reached in Bali last year in 2013 as the WTO
members agreed to not file complaints against India’s food-subsidy program until a
permanent solution is worked out by December 2017, India demanded a more
immediate solution, preferably by the end of 2014, in exchange for signing the TF
Agreement. Therefore was an evident failure to achieve consensus on this issue,
which led to the stall of the enforcement of the TF Agreement.
Since entry into force of the TF Agreement would require an amendment to the WTO,
it was not viable for the WTO members to proceed with the TF Agreement, given the
fact that India’s dissent could become problematic during the amendment process.
The present status of the TF Agreement thus demonstrates a dead-lock. While India
demands concrete changes to the cap on subsidy, WTO Director General, Roberto
Azevedo has mentioned that “no workable solution on the table” has been reached so
far.11 The entry into force of the TF Agreement thus creates uncertainty with respect
to its future. However, the terms that have been negotiated during the Bali Ministerial
Conference remain vital. Even though the international politics has detracted the
conclusion of the TF Agreement, the legal provisions finalised would get
implemented at some stage. Therefore, understanding of these provisions becomes
useful for scholars of international trade.
4. Trade Facilitation Agreement- Key provisions
Interestingly, there is no commonly-used definition of trade facilitation. Former
United States Trade Representative Robert Zoellick was once quoted as describing
trade facilitation measures as ‘basically an extension of market access procedures that
lower transaction costs and increase timeliness of transit.’12 The WTO’s definition,
which has formed the basis for the new WTO agreement, defines trade facilitation as:
“The simplification and harmonization of international trade procedures, with trade
procedures being the activities, practices and formalities involved in collecting,
10
Article X:3, Marrakesh Agreement Establishing the World Trade Organisation, 15 April 1994, 1867
U.N.T.S. 154, 33 I.L.M. 746 (2002).
11
WTO Trade Agreement Falls Through As India Toughens Stand, International Business Times, 1
August, 2014, available at: http://www.ibtimes.com/wto-trade-agreement-falls-through-india-toughens-
stand-1645698
12
WTO TFA: A Business Guide, p. 1.
presenting, communications and processing data required for the movement of goods
in international trade.”13
The TF Agreement as concluded during Bali negotiations provides for two sections:
 As discussed above, Section I contains provisions for expediting the movement,
release and clearance of goods. It clarifies and improves the relevant articles (V, VIII
and X) of GATT, 1994.
 Further, Section II contains special and differential treatment provisions for
developing and least-developed countries aimed at helping them implement the
provisions of the agreement.
A brief overview of the entire TF agreement shows its expansive nature and coverage.
The agreement entails provisions covering:
 Internet Publication of Practical Steps to Import, Export and Transit Goods
 Enquiry Point for Trade Information
 Information on New Laws & Regulations Before their Implementation
 Provision of Advance Rulings
 Enhanced Right of Appeal
 Notification of Detained Goods
 Disciplines on Fees and Charges
 Penalty Disciplines to Prevent Conflicts of Interest
 Pre-Arrival Processing of Goods
 Use of Electronic Payment
 Use of Guarantees to Allow Rapid Release
 Promoting Risk Management
 Creation of Authorized Operator Schemes
 Procedures for Expedited Shipments
 Quick Release of Perishable Goods
 Reduced Documents and Formalities
 Utilizing Common Customs Standards
 Promoting use of Single Window
 Uniformity in Border Procedures & Documents
 Temporary Admission of Goods
 Simplified Transit Procedures
 Customs Cooperation
 Facilitate Developing Country Implementation
13
ibid.
Publication&
Consultation
Advance
Rulings, Fees,
Customs
Transit
Cooperation &
Formalities,
Institutional
Release &
Arrangements
Clearance of
Goods
Section I
Freedom of Appeal,
Transit Review
Impartiality,
Non-
Discrimination
Transparency
Figure 1- A Representation of various provisions under Section I, Trade

Facilitation Agreement
A few of these provisions of the Trade Facilitation Agreement have been discussed
below:
3.1 Publication & Availability of information- Under this provision, members are
obligated to publish information in a non-discriminatory manner which is accessible
to different stakeholders including government, traders and other interested parties.
The provision is couched in mandatory terms, indicated by the use of the term ‘shall’
which obligates members to publish the following:
 importation, exportation, transit procedures,
 applied rates of duties and taxes,
 other fees and charges imposed in connection with importation, exportation or transit,
 rules for classification or valuation of products
 laws, regulations and administrative rulings relating to rules of origin
 import, export or transit restrictions,
 penalty provisions against breaches of such formalities,
 appeal procedures,
 agreements with countries relating to such procedures
 procedures relating to administration of tariff quotas.14
Similarly, the updated description of importation, exportation and transit procedures
as well as forms and documents necessary for these procedures must be made
available through the internet, to the extent possible and appropriate by the members
and the official places of publications as well as the URL of websites must be notified
to the WTO Committee.15 Furthermore, members must ensure the establishment and
maintenance of one or more enquiry points to answer reasonable enquiries of
governments, traders and other interested parties pertaining to importation,
14
Article 1.1, Trade Facilitation Agreement.
15
exportation and transit procedures. Such information must be provided without
charging fees or charging limited fees within a reasonable time period.16
The Agreement also provides for regular consultations between borer agencies,
traders and other stakeholders.17
It must be noted that previously, GATT Article X had referred specifically to only
some of these requirements (such as customs valuation and classification, rates of
duty, taxes and other charges), as referred under Article 1 of the TF Agreement. These
additional specific transparency requirements further aims to assist business in
obtaining up-to-date information about all import and export procedures and
requirements.18
3.2 Advance Rulings & Other formalities- Advance rulings are binding decisions
by customs, at the request of the person concerned, on specific aspects of goods, in
particular the classification and origin of the goods in preparation for importation or
exportation. Advance rulings facilitate the declaration, and consequently ease the
release and clearance process, as the classification of the goods has already been
determined in the advance ruling, and is binding on all customs offices for the
specified period of its validity – which may be three months or a year.19
The TF agreement defines advance rulings as: ‘written decision provided by a

Member to an applicant prior to the importation of a good covered by the application
that sets forth the treatment that the member shall provide to the good at the time of
importation with regards to the good’s classification and origin’.20
The TF Agreement regulates the issuance and effect of such advance rulings.21 The
Agreement also lays out a general discipline on fees and charges imposed in
connection with importation and exportation.22
The penalties for breaches of custom law, regulation or procedural requirements have
also been described. Upon imposition of penalty, a written explanation specifying the
nature of the breach and applicable law under which the penalty has been drawn must
be specified.23
The Agreement further strengthens electronic payment (to the extent practicable) and
trade facilitation measures for authorized operators defining the specified criteria for
compliance based on international standards. These international standards should
also be used a basis for importation, exportation and other transit formalities. It is
vital to note that the use of international standards is couched in the language of ‘best
endeavours’ and is thus not mandatory.24
Special provisions have also been made for preventing the loss to perishable goods
provided all regulatory requirements have been met.25
16
17
Article 2, Trade Facilitation Agreement .
18
19
20
Article 3.9(a), Trade Facilitation Agreement.
21
Article 3, Trade Facilitation Agreement.
22
23
24
25
The TF Agreement requires members to endeavour towards establishment of a single
window to enable traders to submit documentation for importation, exportation or
transit of goods through a single entry point to the participating authorities or
agencies.26 It further introduces the use of customs broker in the countries, as long as
it does not prejudice member’s policy concerns.27
Figure 2- Single Window Model of Trade Facilitation

Source- UNECE, UN/CEFACT28
The new agreement is therefore a major advance for trade facilitation. The obligations
imposed on Member States include:
 To issue an advance ruling in a reasonable, time-bound manner to an applicant that

has submitted a request in writing containing the necessary information; or to explain
in writing the relevant facts as to why an advance ruling has been declined (some
examples are contained in the article);
 To guarantee the advance ruling for a reasonable period of time and to be bound by it;
 To publish requirements for how an applicant may apply for an advance ruling and
for how long it shall be valid; and how an applicant may request a review of an
advance ruling;
 To publish such advance rulings as may be of interest to other traders.29
3.3 Appeal/Review- The TF Agreement provides for the setting up of an
administrative and judicial mechanism of appeal or review which must be carried out
in a non-discriminatory manner.30
26
27
28
29
30
3.4 Impartiality, Non-Discrimination & Transparency- The TF Agreement
strengthens the control and inspection mechanism in place and test procedures
involved in the release and clearance of goods.31
The provision entails vital policy considerations. For example, traders that import
goods must know that the goods are subject to health controls that aim to protect
consumers from products that may be unfit for consumption being placed on the
market. Where any food which is unsafe is part of a batch, lot or consignment, control
authorities often assume that the whole batch, lot or consignment is unsafe. This also
applies to animal feed, which are subject to controls preventing the placement of
unsafe feed on the market or being fed to any food-producing animals. Health risk
analysis should be based on the available scientific evidence and is carried out in an
independent, objective and transparent manner. Given the costs to traders of losing
consignments deemed to be unsafe, they may wish to seek a second opinion. This
article provides for such an opportunity to be provided to the Member States.32
3.5 Transit of Goods- The article repeats the provision in GATT Article V that each
Member State is to treat products in transit no less favourably than if they were being
transported to their destination without going through the territory of that Member
State. Member States are also required to remove any regulations or formalities on
traffic in transit that are either no longer needed or whose obligations can be
addressed in a less trade-restrictive way. Further the TF Agreement provides for the
following:
 Encouraging Member States to provide physical separation between traffic in transit

and other imports (e.g. by the use of special lanes, berths or similar infrastructure);
 Ensuring that formalities, documentation requirements and customs controls on
traffic in transit are no more burdensome than necessary to identify the goods and
ensure fulfilment of transit requirements;
 Ensuring that once goods have been put under a transit procedure they will not be
subject to further customs controls until they conclude their transit within a Member
State’s territory, nor will they be subject to technical regulations and conformity
assessment while in transit;
 Requiring Member States to allow advance filing and processing of transit
documents;
 Requiring Member States to terminate the transit operation promptly once the traffic
in transit has reached the destination where it exits the territory of the Member State;
 Requiring Member States to discharge any guarantees without delay.
 Obligation on Member States to cooperate with each other to enhance freedom of
transit.33
The Agreement specifies that regulations or formalities in connection with traffic in

transit shall not constitute a disguised restriction on traffic in transit and may give
away if a reasonably available less trade restrictive method exist.34 This provision
31
32
33
34
may have vital implications for trade in goods, especially pharmaceutical drugs which
have been subjected to seizure during transit.35
3.6 Customs Co-operation & Institutional Arrangements- The TF Agreement
provides for both borders and customs cooperation. For instance, it seeks for
alignment of working days and hours,36 in-order to overcome the problems that arise
when border authorities on either side of a border open at different times.37
The TF Agreement encourages members to share information on best practices in

managing customs compliance, through the Committee on Trade Facilitation. 38 It
must be noted that WTO members countries over years have entered into such
cooperation agreements at a bilateral and plurilateral levels. The TF Agreement
recognises the value of these bilateral/plurilateral efforts of members and does not
prevent a member from entering into such agreements or alter their rights or
obligations under such agreements. 39
The TF Agreement establishes a Committee on Trade Facilitation which may
establish its own subsidiary bodies as may be required. The Committee shall develop
the procedures for sharing information and best practices amongst members. The TF
Agreement provides that the Committee shall maintain close contact with other
international organisations, such as the World Customs Organisation, for better
implementation and administration of the TF Agreement. Members shall in-turn
establish and/or maintain a national committee on trade facilitation or designate an
existing mechanism to facilitate both domestic coordination and implementation of
the provisions of the TF Agreement.
3.7 Special & Differential Treatment Principles- Apart from these basic obligations,
Section II of the TF Agreement provides special provisions for developing countries
and least developed country members. The countries have been classified in different
groups and specific rules govern each category of countries. The focus of these
provisions is to build capacity of these members and provide them some time to
implement the provisions of this Agreement.
In-order to accommodate the needs of developing countries and LDCs, the proposed
Agreement provides for staged implementation, over long periods where necessary.
The Agreement provides for assessment of national needs in-order to determine the
assistance needs and costs, and a scheduling of commitments at individual Member
State level. The Agreement enables the developing countries and LDCs to link their
commitments to the receipt of technical assistance and support for capacity building,
monitored by WTO.
The flexibility provisions in the implementation provided to the developing countries
and LDCs is far-reaching. Although the agreement is binding in its entirety on all
developed countries from its entry into force, it recognizes that some Member States
will require technical assistance before they can implement some or all of the
obligations to which it binds them. Consequently, it has been agreed that
35
India wants EU to stop seizure of generic drugs, The Financial Express, May 3, 2013 at:
http://www.financialexpress.com/news/india-wants-eu-to-stop-seizure-of-generic-drugs/1110796 (last
accessed on 12 October, 2014)
36
37
38
39
commitments by developing and least developed country members will be
implemented according to different categories of commitments.
The Agreement provides the flexibility to each developing and least developed
Member State to determine the timing and entry into force of its commitments,
according to the following categories:
 Category A commitments are those that a Member State has designated for
implementation upon entry into force of the agreement;
 Category B commitments are those that a Member State has designated for
implementation on a date after a transitional period;
 Category C commitments are those that a Member State has designated for
implementation on a date after a transitional period and the acquisition of
implementation capacity through the provision of technical assistance and support for
capacity building.40
The rules provide that each developing country and least-developed country Member
shall self-designate, on an individual basis, the provisions it is including under each of
the Categories A, B and C.41
This will be done on a 'negative list' basis, in that a country will specifically identify
and notify to WTO its category B and C commitments. Any commitments not notified
will be deemed to fall under Category A. For Category C commitments, each country
concerned will seek from donor agencies the technical assistance and/or capacity
building that it requires, with a view to securing an agreement to provide it.
Once such agreements have been reached, each country concerned would notify the
WTO of its expected implementation date. Developing countries have to notify at
entry into force their B and C commitments and they have to provide indicative dates
and, for the C commitments, the relative technical assistance needs. Only after 12
months do they notify the definitive dates for implementation of their B commitments.
Definitive dates are only notified after a period of bilateral negotiations with donors
over technical assistance arrangements and progress in the TA delivery. Least
developed countries only have to notify the B and C commitments 1 year after the
entry into force of the Agreement. They have another 2 years to notify the definite
dates for the B commitments and only notify the final dates for implementation after a
period of max. 4, 5 years during which they submit information on technical
assistance needs, conduct bilateral negotiations with donors and start implementing
the reform and technical assistance projects.42
Similarly, a complex early-warning procedure has been established to cover situations
where a country experiences difficulty in obtaining the support required, or where it
experiences difficulty in implementation without technical assistance, and needs to
transfer certain commitments from Category B to Category C. In such cases,
notification to the Committee on Trade Facilitation is envisaged.
The S&D provisions recognize technical assistance delivery as a precondition for the
mandatory implementation and compliance with obligations assigned to category C. It
is vital to note that while the Agreement is subject to the Dispute Settlement Rules,
different grace periods are defined for the different category of commitments. Finally,
40
Article 14.1, Trade Facilitation Agreement
41
Article 14.2, Trade Facilitation Agreement
42
Special and Differential Treatment (S&DT), Trade Facilitation Implementation Guide,
http://tfig.unece.org/contents/sdt.htm
the Agreement formulates a notification procedure for technical assistance delivery by
donor country members and other countries providing technical assistance for the
implementation of the Agreement.
Furthermore, the Agreement provides that commitments would form part of the
agreement. Individual schedules of commitments will therefore be published. Overall,
the Agreement becomes business-friendly as the publication of these details would aid
private traders and business communities in the following manner:
 Understanding when a country intends to implement a commitment gives business an
indication of when to expect trade facilitation improvements, and avoids creating
unrealistic expectations;
 The publication of schedules exposes a country’s plans to stakeholder scrutiny – for
example, business may know of existing reforms in the country that are not reflected
in the scheduled implementation timetables;
 It may be possible to implement the consultation and dialogue obligations earlier than
other commitments that are more technical or that require changes in national laws or
regulations. This would enable business to discuss implementation within national
committees, and raise the possibility for business to contribute technical assistance or
capacity-building support.43
5. Predicted Benefits of Trade Facilitation

It is predicted that the cost savings of trade facilitation would pay real dividends. The
OECD estimates indicate that for every 1% reduction in global trade costs, global
incomes go up by $40 billion. The TF Agreement has the potential to cut trade costs
by almost 14.5% for low-income countries, 10 % for high-income countries. Other
studies estimate that significant trade facilitation like that supported in this agreement
could increase global GDP by almost $1 trillion.44
6. Trade Facilitation: Developing v. Developed countries
As discussed in the section above, whilst all countries acknowledge the utility of the
binding guidelines to facilitate trade, some countries, especially the developing
countries have been apprehensive of this agreement. Their reasons for apprehension
emanate from the huge expenses involved in the implementing this agreement and the
likely increase of imports in their countries, especially for the lower-income
developing countries. Further, they are apprehensive that they might be pressured into
implementing the commitments on a permanent basis when they may not have the
sustained implementation capacity and when they have more pressing national
priorities to deal with.
Furthermore, the fact that the Trade Facilitation agreement will come into force as a
part of a package agreement, i.e. Bali Package also raises some concerns on part of
the developing countries, especially India. It must be noted that the Bali round of
negotiations involved within its scope issues including- public stockholding for food
security purposes, list of general services (Agreement on Agriculture), Tariff Rate
Quota Administration, Export Competition and the two sections of Trade Facilitation.
The developing countries including India have not been in consonance with respect to
the rule on public stockholding for food security. This rule as present in the
43
WTO TFA: A Business Guide, p. 22-23.
44
USTR Fact Sheet on WTO Trade Facilitation Agreement, 9 December 2013, available at:
http://iipdigital.usembassy.gov/st/english/texttrans/2013/12/20131209288675.html#ixzz3DBmchEF8
Agreement on Agriculture considers the differences between price and historical low
price of 1986-88 as a subsidy, even if the purchase is made at market prices. The new
WTO agreement limits the value of food subsidies at 10% of the total food grain
production. India has raised its concerns that because subsidies have been calculated
by WTO taking 1986 as base year into account, it would largely affect food
procurement programme through Minimum Support Price.
This in the views of the developing countries affects their domestic food security
concerns when the developed countries continue to maintain different forms of
subsidy, as per the negotiations in Uruguay Rounds of negotiations. Several legal and
political commentaries indicate that during the Uruguay round of negotiations,
developing countries could not receive an equivalent deal as that of the developed
countries, especially on issues such as agriculture, subsidy, intellectual property rights
etc.45 Therefore, the same apprehensions arise in their approach towards accepting
the TF agreement which is to be implemented as a part of a package agreement.
Therefore, amidst these complex issues, the TF agreement as on date has achieved an
impasse. The deadline of July 31, 2014 set for the adoption of the protocol for
amendment of WTO to accept the TF has unsuccessfully passed as certain members
including India raised demands for re-negotiation of certain terms in the Bali Package.
While some have chided India’s conduct as it has led to a ‘missed opportunity’ in
international trade negotiations, others hold it as a strong negotiating tactic to achieve
a long term permanent solution. Thus the future of these negotiations given the
intense political turmoil remains uncertain.
7. Summary
The TF Agreement concluded its negotiations during the 9th Ministerial Conference of
WTO held in Bali in December, 2013. The Agreement is yet to enter into force, as it
waits the necessary voting required for the amendment into the WTO along with
internal ratification of member states. The TF Agreement is a broad framework which
extends the basic GATT rules entailed in Article V, VIII and X of GATT, 1947. The
TF Agreement has introduced innovations in terms of advance rulings, single window
clearance mechanism, organising the penalty structure and other fees formalities. Yet
some issues of conflict persist in the implementation of this Agreement. The success
of TF Agreement thus depends on the consonance of approaches between the
developed and developing countries.
45
See generally, J. Michael Finger, Implementing the Uruguay Round Agreements: Problems for
Developing Countries, Blackwell Publishers, 2001, available at:
http://policydialogue.org/files/publications/Implementing_Uruguay_Round_Finger.pdf (last accessed
on 12 October, 2014)
Law

The General Agreement on Trade in Services
Principal Investigator Prof (Dr.) Ranbir Singh Vice Chancellor, National
Paper Coordinator
Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Reviewer Ms. Anuradha R.V. Partner, Clarus Law
Associates
Delhi
I. Personal Details

Subject Name Law
Module Name/Title The General Agreement on Trade in Services
Module Id 22
Pre-requisites Knowledge of core principles of GATT and international law
such as:
 Most favoured nation & National treatment
 GATT exceptions under Article XX, and the
jurisprudence on the „necessity test‟
 Regional integration agreement‟s clause under
GATT (Article XXIV)
 Principles of interpretation under laws of treaties, i.e.
Vienna Convention on the laws of treaty, 1956

 The differences between liberalisation of trade in
goods and trade in services based on comparative
legal principles and policy rationale
 The application and scope of GATS
 The nature of conditional and unconditional
obligations imposed by GATS
 The exceptions and regional integration clause under
the GATS
Keywords Built in agenda, modes of supply, schedule of commitments,

positive list approach, market access obligations, zero quotas
III. E-text
Introduction
While liberalisation of trade in goods had remained a core agenda of the post-world
war order, the framework for liberalisation of services entered into the multilateral
trading system only after five decades. The General Agreement on Trade in Services
(GATS) was negotiated in 1995 as a part of the Uruguay round of negotiations.
The enforcement of GATS has been one of the most remarkable achievements of the
institution of WTO. GATS negotiations like the GATT involved complex and
protracted processes. However, unlike trade in goods which is a uni-dimensional
process, trade in services remains multi-dimensional. GATS requires deeper
integration and wider commitments spread across various sectors of economic
relevance. Liberalisation of services under GATS to be meaningful also requires
development of necessary frameworks in respect of recognition of quality, licensing
and qualification requirements of service providers from different jurisdictions, as
well as social and infrastructure developments. Since the domestic regulatory
frameworks of developing countries were largely at an evolutionary stage, several
members especially, the developing countries were reluctant to make significant
liberalising commitments in during the Uruguay Rounds of WTO negotiation in 1994.
In this light, it was finalised that liberalisation under GATS would be an on-going
process as countries would have the flexibility to accommodate policy regimes
affecting trade in services and gradually open relevant modes of their sectors. This is
also known as the „built-in-agenda‟ of GATS.
The current module outlines the basic differences between the legal disciplines of
GATT and GATS and explains the application of core principles of GATS, i.e. Most
Favoured Obligation (MFN), National Treatment (NT) premised on the understanding
of concepts such as Schedule of Commitments under GATS and market access
obligations imposed on the GATS members.
Learning Outcome
 Differences between liberalisation of trade in goods and services
 The nature and scope of conditional and unconditional obligations under GATS
 The legal framework of GATS and its comparison with the GATT

1. GATT and GATS: Basic differences
2. GATS: A brief overview of the Agreement
3. Application & Scope of GATS
i. “Services”
ii. “measures by Members”
iii. “affecting”
iv. “trade in services”- understanding the modes of supply under GATS
4. Obligations under GATS
i. Market Access Obligation
ii. National Treatment Obligation
iii. GATS Schedule of Commitments
iv. Unconditional Obligation
5. Exceptions under GATS
6. Other provisions under GATS
Text
1. GATT and GATS: Basic differences
Though GATT and GATS share similar objectives of promoting progressive
liberalisation and creating a credible and reliable system of international trade, the
two disciplines also bear certain differences.
First, Trade in services, unlike trade in goods characterises coverage of more than the
cross-border exchange of a service and includes consumer movements and factors
flows such as movement of investment and labour.
Unlike trade in goods which covers only the products, i.e. the goods sector, the
discipline of GATS extends to services as well as supply of services.
Second, in-order to accommodate the extensive coverage of GATS, member countries
agreed on various flexibilities to be offered under GATS. For example, unlike the
GATT, there does not exist a wholesale ban on using quantitative restrictions under
GATS.
Similarly, flexibilities are even offered pertaining to the core principles of trade
liberalisation, i.e. NT and MFN. While members may restrict the application of NT
under GATS, they are also allowed to seek exemptions from the application of MFN
obligations. These flexibilities will be covered extensively in the later part of the
module.
Indeed, one may conclude that the flexibilities provided by the GATS give
considerable scope to member states to accommodate their policy needs and balance
diverse interests that arose during the negotiations preceding GATS.
2. GATS: A brief overview of the Agreement
The GATS consists of two main parts: (i) the text of the Agreement (comprising of a
Preamble, 29 articles arranged in six Parts and various Annexes); and (ii) and a
schedule of specific commitments for each WTO Member.
While, the text provides a framework of disciplines and obligations that apply to all
Members, a schedule contains member-specific commitments on individual sectors
(together with a list of any MFN exemptions). The representation below explains the
general application of GATS.
The main body of the Agreement outlines Members‟ obligations concerning their use
of measures affecting trade in services. These measures may be in the form of laws,
rules, regulations, procedures, decisions or administrative actions.
These obligations essentially fall into two main groups:
(i) “unconditional obligations” that must be adhered to by all Members in all sectors
covered by the GATS, e.g. MFN obligation and
(ii) “conditional obligations” whose scope is confined to those sectors and modes for
which a Member has undertaken specific commitments, e.g. Market Access and NT
obligation.
Apart from the main text, the annexes and the schedules also form an integral part of
the GATS.
3. Application & Scope of GATS
Article I of GATS clarifies the nature and scope of application of the GATS. In
Article I.1 it is stipulated that GATS applies to “measures by Members affecting trade
in services”.
3.1 “Services”
The term “services” is not defined under GATS. Practice suggests that WTO
Members have relied on the Services Sectoral Classification List1 developed during
the Uruguay Round largely based on the United Nations Central Product
Classification System. The recognised services in this list include: Business and
professional, Communications (all types), Construction, Distribution, Education,
Environment, Financial, Health and social, Tourism, Recreation & cultural, Transport
(all types) and a final category of „Other Services Not Included Elsewhere‟. Therefore,
GATS can be said to have a universal coverage, spreading across various sectors.
It is vital to note that the UN classification list has been used as supplementary means
of interpreting GATS schedule under the principles of Article 32 of Vienna
Convention on Laws of the Treaties, 1969. For instance, the Appellate Body has
resorted to “document W/120” and the “1993 Scheduling Guidelines” 2 as
“supplementary means of interpretation” under Article 32 of the VCLT, in-order to
conclude that “other recreational services (except sporting)”, in the US Schedule must
be interpreted as including “gambling and betting services”. 3 These Scheduling
Guidelines therefore provide valuable assistance in understanding the nature and
extents of commitments that Members states have undertaken in their GATS
Schedules. It is vital to note that the 1993 Scheduling Guidelines have now been
replaced by the 2001 Guidelines.4
3.2 “measures by Members”
In Article I.3, “measures by Members” are defined as those taken by central, regional
or local governments; and non-governmental bodies in the exercise of powers
delegated by central, regional or local government or authorities. In other words,
GATS extends to measures by all levels of government, as well as those of
“non-governmental bodies” acting with delegated powers. However, purely private
measures are outside the scope of the Agreement.
Furthermore, in accordance with Article I:3(b), all services supplied in the exercise of
governmental authority are outside the scope of the Agreement. Such services are
further defined in Article I:3(c) as those that have been supplied neither on a
commercial basis nor in competition with one or more service suppliers. Both
conditions have to be fulfilled for the service to be exempted. While Article I:3(c)
does not specify a list of services, it would be normal to expect a range of key
governmental functions such as fire protection, basic health, police and security
services, to fall under the carve-out in the economies of virtually all Members.
3.3 “affecting”
1
MTN.GNS/W/120.
2
“W/120”, entitled “Services Sectoral Classification List”, was circulated by the GATT Secretariat in
1991. It contains a list of relevant service “sectors and subsectors”, along with “corresponding CPC”
numbers – from the UN Provisional Product Classification – for each subsector. The “1993 Scheduling
Guidelines” were set out in an “Explanatory Note” issued by the Secretariat in 1993.
3
United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services,
WT/DS285/AB/R adopted on 20 April 2005 [hereinafter, US-Gambling].
4
Guidelines for the Scheduling of Specific Commitments under the General Agreement on Trade in
Services (GATS), World Trade Organisation, S/L/92, 28 March 2001.
It may be interesting to analyse, when does a measure “affect” trade in services? The
Appellate Body, in EC – Bananas has clarified that the “affecting” is interpreted to
have a broad scope of application. It‟s scope is wider than mere “regulating” or
“governing”.5 Therefore, the term “affecting” may be interpreted liberally construing
a wide ambit of application of GATS.
3.4 “trade in services”- understanding the modes of supply under GATS
Article I.2 defines “trade in services” as the supply of a service through four possible
modes of supply. The four “Modes of Supply” in the GATS can be understood as
explained below:
Mode 1 (Cross-Border Supply): from the territory of one Member into the territory of
any other Member
Under Mode 1, a service is transacted across a border without either the producer or
consumer moving. The service supplier is not present within the territory of the
Member where the service is supplied. Such a transaction is conceptually similar to
the movement of a good across a border. Examples include distance learning,
e-banking, telemedicine, as well as many other services conveyed across a border.
Mode 2 (Consumption Abroad): in the territory of one Member to the service

consumer of any other Member
This mode of supply is often referred to as the “movement of the consumer”. The
service consumer crosses the border to where the supplier is located to obtain services.
Examples include holidays abroad, foreign education, and overseas health care. The
essential feature of this mode is that the service is delivered outside the territory of the
Member making the commitment. Although the actual movement of the consumer is
often necessary, activities such as ship repair abroad, where only the property of the
consumer “moves”, or is situated abroad, are also covered.
Mode 3 (Commercial Presence): supply of a service by a service supplier of one

Member, through commercial presence in the territory of any other Member
Under this mode, the service supplier establishes a commercial presence through a
foreign owned affiliate, subsidiary, representative office or branch in the country
5
European Communities – Regime for the Importation, Sale and Distribution of Bananas,
WT/DS27/AB/R, adopted on 25 September 1997.
where the consumer is located. Examples include establishment of branches or
subsidiaries of foreign banks, setting up of a subsidiary company engaged in
telecommunications services, or consultancy services, etc. Mode 3 typically involves
investment flows in the relevant service sector.
Mode 4 (Presence of Natural Persons): supply of a service by a service supplier of

one Member, through presence of natural persons of a Member in the territory of any
other Member
This mode covers natural persons who are themselves service suppliers, as well as
natural persons who are employees of foreign service suppliers in the host country. In
schedules, Members have taken commitments based on the following categories of
persons: independent professionals; intra-corporate transferees; business visitors;
and contractual service suppliers.
4. Obligations under GATS
As discussed above, GATS covers two sets of obligations- unconditional and

conditional. The unconditional obligations are in the nature of Most-Favoured Nation
(MFN), discussed in detail at a later part of the module. The conditional obligations
include Market Access (Article XVI) and National Treatment (Article XVII). These
obligations apply on specific commitments that members have undertaken in their
schedules of commitments annexed to GATS, pursuant to which members are
allowed to maintain restrictions on trade in services. Thus, understanding the
conditional obligations also requires a study of GATS Schedule of Commitments
which determine the nature and scope of these conditional obligations. We begin to
discuss each of these concepts.
4.1 Market Access Obligation
Article XVI:2 provides an exhaustive list of six categories of restrictions that must not
be maintained, unless scheduled as a market access limitation in a country‟s Schedule
of Commitments. The restrictions relate to:6
6
World Trade Organisation, Trade in Services in the WTO, GATS-WTO E Learning, February, 2012
http://ecampus.wto.org/admin/files/Course_254/CourseContents/GATS-R7-E-Print.pdf accessed on 25
August, 2014, p. 107 [hereinafter „GATS, WTO E-Learning Portal‟].
a. the number of service suppliers;
b. the value of service transactions or assets;
c. the number of operations or quantity of output;
d. the number of natural persons supplying a service;
e. the type of legal entity or joint venture;
f. the participation of foreign capital.
The first four restrictions (a to d) are quantitative as they deal with quota-type limits.
These limits may be expressed either as an absolute number or in the form of an
economic needs test. If it takes the form of the latter, Members should specify the
approval criteria that are being applied to such tests.
Pursuant to the Appellate Body decision in US-Gambling, a complete ban on
importation of services (betting and gambling in this case) has been interpreted as
zero quota, thereby falls within the scope of prohibition under Article XVI:2(a) and
XVI:2(c) of GATS.
It is interesting to note that in Article XVI (a) to (e) no distinction is made between
measures that are targeted only at foreign services or service suppliers, and those that
are applied to nationals as well. In other words, both discriminatory and non-
discriminatory measures are covered. For example, a measure may state that in the
banking sector licenses will be issued for a maximum of six banks with no nationality
criteria specified. Although this measure is non-discriminatory, it remains a restriction
in the sense of Article XVI and would need to be scheduled if it is to be maintained.7
The other two restrictions, the second element of (e) and (f), are by their very nature
discriminatory. One relates to measures requiring joint ventures, while the other
refers to limits on foreign capital participation. Since both restrictions apply only to
foreign-service suppliers, they are also limitations on NT.8
It must be noted that the six types of restrictions under Article XVI are exhaustive.
Only measures that fall under these categories are subject to scheduling. Other
measures, although may be deemed to have an economic effect on access, are outside
the scope of Article XVI. For instance, a high non-discriminatory tax on a particular
service may act as a barrier to entry, but it is not a restriction which falls under any of
the categories listed under Article XVI.2.9
4.2 National Treatment Obligation
Like the market access obligation, the NT obligation also applies to sectors where
commitments have been made. However, unlike Article XVI on market access,
Article XVII does not provide an exhaustive list of discriminatory measures that
would be inconsistent with full NT. The Article on NT simply requires a Member to
accord to services and service suppliers of any other Member, in respect of all
measures affecting the supply of services, treatment “no less favourable than that it
accords to its own like services and service suppliers”. Therefore, the benchmark for
NT is not whether there has been formally identical or different treatment of domestic
and foreign services and service suppliers, but if conditions of competition have been
modified as a result of the measure.
Treatment that is “no less favourable” is in turn defined in Article XVII:3 to mean
that treatment which ensures that conditions of competition are not biased in favour of
7
ibid.
8
ibid.
9
ibid.
domestic services and service suppliers. Typical examples of discriminatory measures
include restrictions on foreign land ownership, tax benefits only for nationals, training
requirements imposed only on foreign suppliers, or language requirements that are not
directly relevant to the exercise of a profession.10
In some cases while a measure applies irrespective of the national origin of the
service or service suppliers, it is possible that the domestic provider is nevertheless
favoured. For instance, a measure may require a services supplier to have prior
residency in order to apply for a licence. Although the measure applies to both
domestic and foreign service suppliers, de facto foreign service suppliers are treated
less favourably because they are less likely to have prior residency than like service
suppliers of national origin.
4.3 GATS Schedule of Commitments
A schedule under the GATS records the specific commitments undertaken by a
member country. Comprehending a schedule is central to one‟s understanding of how
the GATS operates, especially with respect to the conditional obligations, i.e. Market
Access and National Treatment, as discussed above.
The starting point of the scheduling exercise lies in the choice of sectors members
wish to commit and the extent of coverage they wish to provide.
In other words, the relevant question is- will all possible services be included in the
schedule or only certain sectors, or sub-sectors? Once that choice has been made, the
Member has to decide for each mode of supply:
 what limitations, if any, it wishes to maintain on market access (Article XVI);
 what limitations, if any, it wishes to maintain on NT (Article XVII); and
 what additional commitments, relating to measures affecting trade in services not
subject to scheduling under Articles XVI and XVII, it wishes to undertake under
Article XVIII.
Schedules would not provide legal cover for measures inconsistent with other
provisions of the Agreement such the MFN requirement of Article II or the disciplines
on domestic regulation of Article V, as these obligations are unconditional under
GATS. The schedule of commitment becomes relevant only for measures that
constitute limitations in the sense of Article XVI and Article.
Any other trade-impeding measures do not call for scheduling per se. By the same
token, there is no need to schedule access restrictions, such as sales bans on arms or
pornographic material and the like, that fall under the General Exceptions of
Article XIV or prudential measures aimed to ensure the stability and integrity of the
financial services sector.11
A typical schedule of commitment has the following structure:
10
ibid, p. 108.
11
WTO E-Learning portal, p. 306.
Sector or Limitations Limitation Additional
sub-sector on market s on commitment
access national s
treatment
I. HORIZONTAL SECTION
ALL Inscriptio Inscriptio Can inscribe
SECTORS n of any n of any in this
INCLUDE market national column any
D IN THIS access treatment additional
SCHEDUL limitation limitation commitments
E s s that are not
Positive List according according subject to
Approach: to modes to modes market
Selection of of of supply. access and
sectors or supply. (1)....... national
sub-sectors (1)........ (2)....... treatment
where (2)........ (3)....... provisions.
market (3)........ (4).......
access (4)........
and/or
national
treatment is
granted.
II. SECTOR-SPECIFIC COMMITMENTS
(1) (1)
(2) (2)
(3) (3)
(4) (4)
As explained above, each schedule of commitment has a common format of 4

columns:12
The first column is used to indicate the sector covered. The GATS does not prescribe
any particular sector focus and it is up to each Member to make that choice. The
scheduling method used by the GATS is often called a “bottom-up” or “positive-list”
approach since market access and NT commitments are undertaken only for sectors
that have been included. Sectors that are not included in the schedule are
automatically outside the scope of market access (Article XVI) and NT (Article XVII)
provisions. For unscheduled sectors, only unconditional obligations apply, including
in particular the most-favoured nation treatment principle and certain transparency-
related obligations. The positive list approach thus allows Members to customize
their commitments according to national policy choices and constraints.
12
Ibid, p. 103-104.
The second and third columns are used to specify the market access and NT
conditions for each mode of supply. This is done by listing any relevant limitations to
the requirements specified in Articles XVI and XVII of the GATS.
If there are no limitations, the term “none” is inscribed to indicate that full market
access and/or NT is being granted. On the other hand, should a Member wish to retain
full flexibility to introduce any limitation, for any particular mode, it would inscribe
the term “unbound”. This indicates that no commitment has been taken for that mode.
It is vital to note that similar to the tariff bindings under the GATT, commitments in
schedules guarantee minimum levels of treatment under GATS. These guarantees are
known as “bindings” since they secure a certain level of market access and NT. A
Member has the choice of either:
(i) liberalizing access by taking bindings that require it to lower its applied regime;
(ii) maintaining the status quo by binding the applied services regime; or
(iii) take bindings that are more restrictive than those measures currently in force.
If it chooses the latter option, it creates a margin between the bound conditions and
the applied regime, thus giving itself some room for manoeuvre.
Any additional commitments that do not fall under the market access and NT
provisions of the Agreement are undertaken in the fourth column. These additional
commitments, often relate to the adherence by the government to certain regulatory
standards or competition-related disciplines. A classic example of a service sector
where such additional commitments are commonly made is telecommunication.
4.4 Unconditional Obligation
The MFN requirement under Article II of GATS is in the nature of an unconditional
obligation. It is applicable to any measure that affects trade in services in any sector
falling under the Agreement, irrespective of whether specific commitments have been
taken or not. For instance, a Member may have chosen not to commit its private
education sector since it wishes to keep the sector closed to foreign services and
service suppliers. In such a case, in order to be consistent with Article II, it cannot
subsequently decide to open the market to providers of some Members but not to
others.13
A discussion of the MFN obligation under GATS requires us to re-visit the
differences between GATT and GATS, especially pertaining to the MFN obligation.
The MFN obligation under GATT and GATS bear certain similarities. Both get
triggered in case of de-jure and de-facto discrimination. However, there are some vital
differences in the scope of MFN obligation.
Unlike GATT which covers only „like products‟, GATS encompasses both „like
services‟ and „like service providers‟. Similarly, unlike GATT where MFN obligation
is considered paramount and has no exception, except in limited cases (such as Article
XXIV GATT) where GATS offers some flexibility in its operation of MFN. Under
the Annex on Article II Exemptions under GATS, there is a possibility for Members,
at the time of entry into force of the Agreement (or date of accession), to seek
exemptions not exceeding a period of ten years in principle. Exemptions are to be
reviewed every 5 years and are subject to negotiations in subsequent trade rounds. At
present, exemptions are maintained for over 500 measures concerning sectors
13
ibid, p. 112.
including, road transport and audiovisual services, followed by maritime transport and
banking services.14
5. Exceptions under GATS
Akin to the exceptions clause under Article XX of the GATT, GATS Article XIV
covers a list of exceptions. Similar to the GATT, Article XIV GATS affirms the right
of Members to adopt measures which would otherwise be inconsistent with WTO
obligations set out in other provisions, provided that certain conditions are met. In the
GATS, the policy purposes for which a Member may invoke a general exception are
specified in Article XIV (a) - (e).
Sub-paragraphs (a), (b) and (c) of Article XIV of the GATS indicate that the measure
must, in similar terms to Article XX of the GATT, be “necessary” either to protect
public morals, or to maintain public order15; to protect human health , animal or plant
life or health; or to secure compliance with certain laws or regulations. Thus, for
these three categories, which are virtually identical to some of those in Article XX of
the GATT, a “necessity” test applies.
The GATS jurisprudence on Article XIV is more or less similar to the GATT
jurisprudence under Article XX. There have been fewer cases under GATS and the
most remarkable case-law is that of US-Gambling which involved the ban of online
gambling sites in the US by way of certain regulations, which mainly targeted
countries such as Antigua and Barbuda, chief exporters of these services. The US
tried to defend this ban on account of „public morals exception‟ as the addictive
nature of gambling affected the social fabric of the society. The Appellate Body
upholding the Panel's finding held that the US measures was designed “to protect
public morals or to maintain public order” within the meaning of Art. XIV(a). The
AB, reversing the Panel‟s decision also held that the United States had been able to
make a prima facie case showing of “necessity” and Antigua had failed to identify
any other alternative measures that might be “reasonably available”. However, the
ban on the whole did not sustain as the AB held that the measures did not meet the
requirements of the chapeau under Article XIV, because the United States had
discriminated in the enforcement of those measures.
6. Other provisions under GATS
Similar to the GATT, the security exception in Article XIV bis GATS, have been
based on Article XXI of the GATT. This provision allows for measures to be taken
which are considered necessary for the “protection of its essential security interests”.
Similarly, like Article XXIV of the GATT, GATS Article V provides room for
economic integration agreements outside the framework of GATS for further
liberalisation in services. By insisting on “substantial sectoral coverage” and removal
of “substantially all discrimination”, the GATS is essentially indicating that such
discriminatory agreements will be permitted only if they contribute to further
lowering trade barriers by making a substantial contribution to the integration of
participants service economies. At the same time, the overall level of barriers to trade
in services must not be raised vis-à-vis non-participants in the sectors covered.
14
ibid, p. 142.
15
The term public order is finds an elaboration in footnote 5 of Article XIV (a). The footnote states:
“The public order exception may be invoked only where a genuine and sufficiently serious threat is
posed to one of the fundamental interests of society.”
Should an agreement lead to the withdrawal of commitments, appropriate
compensation must be negotiated with the Members affected.16
Another vital GATS provision is entailed in Article VI titled „Domestic Regulation‟.
This article provides for both conditional and unconditional obligations. In sectors
where commitments are undertaken, members must adopt reasonable, objective and
impartial administration of measures of general application, and take decisions within
a reasonable period. Similarly, in all sectors with or without commitments, members
are required to undertake procedures for the review of administrative decisions
affecting trade in services. Such a discipline within the GATS ensures transparency,
reduces burden and ensure that procedures, such as licensing requirements do not in
themselves become a restriction on supply. GATS Article VII titled „Recognition‟
also enables members to attain recognition with respect to education, experience,
licensing or certification granted in a particular country, to be recognised else-where.
Therefore, thus provision eliminates discrimination between countries in the
application of its standards or criteria for authorisation licensing or certification of
services suppliers or a disguised restriction on trade in services.
Amongst the several important annexes to GATS, the annex of movement of natural
persons supplying services under the GATS is hotly debated owing to its implications
on visa norms across the globe. The annex ensures that members do not apply
measures to prevent entry of natural persons, their temporary stay or border
movements thereby adversely affecting the benefits that members have committed to
undertake under the terms of a specific GATS commitment.
IV. Summary
The conclusion of GATS in 1994 followed a complex and protracted negotiation

process. Owing to the deeper and wider commitments involved in liberalising services
as compared to goods, several member states were reluctant to liberalise services.
Therefore, liberalisation of services under GATS has been agreed to be a work in
progress which is also known as the built in agenda of GATS. Consequently,
members have been given several flexibilities in complying with the core obligations
of GATS such as MFN and NT. The market access obligation also requires prior
scheduling of services in member countries‟ schedule of commitments. These
schedules form an integral part of GATS. GATS also provides for provisions
including inter-alia an exception clauses and economic integration provisions.
16
GATS, WTO E-Learning portal, p. 119.
Law

The TRIPS: A Primer
Principal Investigator Prof (Dr.) Ranbir Singh Vice Chancellor, National
Paper Coordinator
Dr. Saloni Khanderia-Yadav National Law University,
Delhi
Content Writer/Author Mr. Yogesh Pai National Law University,
Delhi
Content Reviewer Dr. Saloni National Law University,
Khanderia-Yadav Delhi
Delhi
I. Personal Details
Description of the module

Subject name Law
Paper name Trade Law
Module name/ Title TRIPS- A Primer
Module Id 23
Pre- requisites Basic legal knowledge about intellectual
property and WTO law
Objectives to understand the context of TRIPS
Agreement and the response of
developing countries
to understand the nature of objectives

and principles of the TRIPS Agreement
to understand the basic principles of

international IP agreements, including
TRIPS
to understand the nature of IP

protection mandated under the TRIPS
agreement
to understand the structure of IP

enforcement
to understand the nature of linkages

between TRIPS and dispute settlement
Key words TRIPS, WTO, Dispute Settlement,

Pharmaceutical patents, compulsory
licences, Doha Declaration
Trade-Related Aspects of Intellectual Property Rights- A Primer
Introduction
One of important hallmarks of the success of the Uruguay round was establishing the
World Trade Organisation (WTO). While intellectual property (IP) has traditionally
not been a subject of trade negotiations, the Uruguay Round was able to deliver a
common minimum standards agreement on IP with a binding dispute settlement. The
TRIPS agreement is radically different from previous international IP agreements
(primarily, the Paris Convention on industrial property, 1883 and the Berne
Convention, 1886), inasmuch as it lay down standards of protection linked with an
elaborate chapter on IP enforcement.
These standards of protection as laid down in different sections of the TRIPS
agreement are in the area of copyrights, trademarks, geographical indications, patents,
plant variety protection, industrial designs, layout designs, trade secret protection and
protection of regulatory and test-data. These provisions are backed by a regime of IP
enforcement which mandates, administrative, civil and criminal measures, including
border measures. Some of these standards, including some other new measures like
data exclusivity and patent linkage for pharmaceutical and agrochemical products,
patent term extensions and stronger protection of trade secrets is sought to be
achieved through regional and bilateral free trade and investment agreements.1
While the TRIPS Agreement has been heavily criticised creating a one-size fits all
approach to IP, it has had different effects on different economies. 2 Some
commentators have argued that due to the possibility of cross-retaliation through
TRIPS being by the WTO Dispute Settlement Understanding, TRIPS has some
surprisingly different effects in seeking compliance for violations of WTO by smaller
economies and developing countries.3 However, there is no conclusive evidence of
any immediate benefits of the TRIPS Agreement on FDI or local innovation. Critics
fear the both the long term and short term effects on access to pharmaceutical drugs
are central to the nature of patent monopoly mandated under the TRIPS Agreement.
The Doha Declaration on TRIPS and Public was a small attempt by WTO member
states to repatriate the both innovation and access to medicines must be sought to be
achieved through the implementation of the TRIPS agreement. At the same time,
flexibilities in the TRIPS agreement also must not be lost sight off. Doha Declaration
was particularly important for countries with low or no capacities in pharmaceutical
production since an exclusive compulsory licence for the purpose of exports was
sought to be achieved by amending Article 31(f) of the TRIPS Agreement.
In the module, we will study the overall structure of the TRIPS, including their
obligations. We will proceed to briefly discuss the situation on international IP pre-
TRIPS within the GATT framework and the WIPO. We will discuss the context of
Uruguay Round and how TRIPS came to be negotiated, followed with a brief
description of roles played by developing countries. Some important general
provisions like national treatment and most-favoured nation treatment will also be
studied in some detail by briefly looking into jurisprudence of the WTO. A brief
summary of standards of protection in different areas of IP will be discussed. A
section on IP enforcement will discuss some critical mandate that WTO members
must comply. Finally, a brief study on the working of WTO dispute settlement in the
TRIPS context will offer a perspective on the nature of disputes in the TRIPS.
1
An elaborate discussion on TRIPS-plus agreements is beyond the scope of this module. For an
elaborate discussion see,
2
Dreyfuss, TRIPS and essential medicines: must one size fit all? Making the WTO responsive to the
global health crisis pp. 35-55, Cambridge University Press, 2010
3
Rachel Brewster, Surprising Benefits to Developing Countries of Linking International Trade and
Intellectual Property, 12 Chi J. Int’l L. 1 (2011-2012)
Situation pre-TRIPS
The Paris Convention, 1883 offers protection for different kinds of industrial property
in a widest sense to include patents, trademarks and trade names, industrial designs,
indications of source, protection against unfair competition. Paris Convention had
been revised five times since its inception. However, Paris Convention does not lay
any minimum standards of IP protection. In other words, countries are required to
give effect to the terms of the treaty only when they have a domestic system for
industrial property protection. The Paris Convention was negotiated in response to
foreign inventors refusing to participate in a scientific exposition in Austria in during
the 1880’s owing to lack of national treatment. Hence the important pillar of Paris
Convention was national treatment principle, which basically requires and Union
member to provide same treatment offered to nationals to be extended to foreign
nationals. Paris convention also allowed preservation of novelty in patent in industrial
design applications by claiming a right to priority (12 months for patents and 6
months for industrial designs). Similarly, an important principle on territoriality of
patents and trademarks is also laid down (also called as independence of protection),
by which any member of the Union cannot rely on denial or grant of the IP right by
another jurisdiction to deny protection within its jurisdiction. Apart from this, Paris
Convention has provisions that impose certain conditions in cases of compulsory
licence on the ground of working, and revocation/ forfeiture of patents. However, no
minimum standards for IP protection or grounds for grant or refusal for compulsory
licences or revocation is prescribed.
The Berne Convention, 1886 underwent five revisions, including an appendix being
negotiated in response to post-colonisation demands by developing countries to have
cheaper access to translated works. Berne Convention is distinct from Paris
convention not only interms of its application to copyright law, but also in terms of its
legal effect. Berne does establish some minimum standards of protection. Hence
Union members are required to give effect to the terms of the treaty. Berne
Convention was seen as largely over encompassing the concerns of developed
countries during the Uruguay Round. Hence very little was added in TRIPS in
relation to copyrights. Berne convention establishes the national treatment principle,
however, with a major exception. It exempts countries to allow deviations from
national treatment provision in relation to the term of protection based on the country
of the origin requirement. However, minimum obligation to provide life+ 50 years in
mandatory under the convention. The convention also talks about rights of copyright
holder, including moral rights (right to paternity and right to integrity of the work). It
must be noted that there is mandatory fair dealing provision with reference to
quotation in the Berne Convention, apart from the three-step test. Berne convention
also has a provision on independence of protection on the lines of the Paris
Convention.
Prior to the TRIPS Agreement, very few provisions in GATT Agreement dealt with
IPRs. IP was viewed more as an obstacle to free trade. However, Article XX(d) of the
agreement allowed GATT members to take measures necessary to prevent IP
infringing goods from being imported into the borders of a GATT contracting parties.
However, there were no obligations with reference to standards of protection or
enforcement. In one of the panel reports, 4 the United States was found to have
violated national treatment principle by treating foreigners discriminatorily in matters
of patent infringement. European Communities claims that provisions in Section 337
led to discriminatory treatment to imported goods in terms of counterclaims for patent
infringement, protective orders on confidential information, time-limits, decision-
making by the USITC, simultaneous proceedings in district courts, in rem orders,
Limitation of availability of Section 337 to United States producers. US invoked
Article XX d defence; however, the panel came to Section 337 of the US Trade Act
moved beyond the exceptions. United States adopted the report to comply with the
GATT panel report.5
Uruguay Round and TRIPS Negotiations:

It is now clear the TRIPS was an outcome of intense lobbying by private corporations
with the United States Trade Representative. This has been extensively documented
and noted that:6
“Without private sector activism there would be no TRIPS today. However, it
is important to place this activism into a broader economic, historical and
political context....Several trends, emerging in the 1970's and accelerating in
the early 1980's began to weigh heavily on U.S. policymakers' minds. First of
all, policymakers were preoccupied by perceived American "decline," as
reflected in twin budget and trade deficits. Worries over trade deficits in
particular elevated the importance of trade in American policymaking.
Competitiveness concerns dominated policy debates as Japan and East Asia
appeared to be overtaking the United States in trade competition. Second, the
increasing importance of high technology sectors in the global economy
heightened U.S. policymakers' interest in IP as an important component of
competitive advantage.”
The formation of a tripartite alliance of United States, Europe and Japan
through their respective Industry groups representing different sectors like
pharmaceutical, music, software, semiconductors, GIs were largely
responsible for impressing upon their respective government that they are
losing the trade edge due to rise in counterfeit and pirated products in
developing countries.
However, it is important to note that countries like India did offer some initial
resistance. When it was realised that there was no much scope for articulating
developing countries positions due to single undertaking clauses in the WTO
agreements, India led developing countries into negotiating key flexibilities in the
TRIPS Agreement. As noted by a commentator:7
4
UNITED STATES - SECTION 337 OF THE TARIFF ACT OF 1930 Report by the Panel adopted on
7 November 1989 (L/6439 - 36S/345)
5
Office of the United States Trade Representative, Ambassador Hills Announces Gatt Council's
Adoption of Panel Report on Section 337 (Nov. 7, 1989)
6
http://www.ata.boun.edu.tr/scanneddocuments/Course_Material/ATA_582/sell.pdf
7
http://www.wipo.int/edocs/pubdocs/en/intproperty/wipo_journal/wipo_journal_3_1.pdf
“Having recognised the writing on the wall with respect to pharmaceutical product
patents, India wanted to safeguard its policy options with respect to compulsory
licensing. The Indian proposal backed the approach first proposed by the EC, and
made these conditions common to both government use and compulsory licences of
patents, in exchange for an absence of restrictions on the grounds for such measures.
From the mid-November 1990 Brussels text, successive TRIPs texts did not refer
separately to compulsory licences and government use but instead used the broader
term proposed by India, “use without the authorisation of the right holder”. By
insisting on the same set of conditions for both types of non-voluntary use of patent
rights, the Indian negotiating tactic—supported by the EC, Japan and Canada (three of
the then Quad, excluding only the US)—forced some dilution of conditions and
achieved considerable flexibility for developing countries in having no restrictions on
the grounds of such authorisation. On the other hand, many other “flexibilities” came
about because of the inability of developed countries to agree to specificities during
this period..... However, in large part, the TRIPs language reflects the texts put
forward in the first half of 1990 by developed countries due to the relatively united
positions adopted by them from the early stages of the negotiations, as against the
largely divided South, who could only enunciate very general positions....”
Thus TRIPS was negotiated during the Uruguay round with developing countries
realising that it was impossible to continue impasse on linking trade and intellectual
property.
General Provisions in TRIPS

In many ways, TRIPS was a landmark because the preamble also realised the valued
of balanced protection, which was surprisingly missing in the WIPO administered
treaties. TRIPS reflects competing concerns placed by developed and developing
countries on innovation and access. Although certain provisions like MFN were new
to international IP agreements, the general provisions in TRIPS are reflective of the
nature of flexibilities available under the agreement.
The key provision in the preamble of TRIPS is noteworthy. It reads:
“Emphasizing the importance of reducing tensions by reaching strengthened
commitments to resolve disputes on trade-related intellectual property issues through
multilateral procedures” This provision was reflective of the commitment of WTO
member not to unilaterally resort to trade sanctions as conducted during the pre-WTO
era. US Super 301 process unilaterally pursued by the United States against IP
offending nations towards imposing trade sanctions. Although this provision came to
be successfully challenged at the WTO, the US is still allowed to maintain the
provision provided that take no unilateral enforcement action based on any unilateral
determination.8 Sections 301-310 of the US Trade Act, 1974 were challenged for
being violative of Article 23 of the DSU. Section 304 allowed certain actions by the
Office of the USTR that could lead to suspension or withdrawal of concessions or the
imposition of duties or other import restrictions, in response to trade barriers imposed
by other countries. The panel found that while statutory language was violative, US
had committed to render its unilateral findings and unilateral enforcement in
compliance with all WTO obligations. The 301 process has gained notoriety since
8
DISPUTE DS152 United States — Sections 301–310 of the Trade Act 1974
USTR list several countries as “priority foreign countries” for violations of US
intellectual property abroad. However, the domestic standards for determination of
under such a process are not clear.9 In 2014, India figured in the priority watch list,
but not a priority foreign country, but an out-of –cycle review is under process at the
time of submission of this module.10
Article 1:1 of the TRIPS Agreement requires that WTO members must give effect to
the terms of the agreement. However, members are free to determine the ways and
means to carry out the obligations in their domestic law. Members are also allowed to
conclude TRIPS-plus agreements (standards of IP protection moving beyond TRIPS)
provided they are not inconsistent with the provisions of the TRIPS Agreement.
Hence, TRIPS does not impose any maximum ceilings on international IP standards.11
In one of the important cases launched against India soon after the signing of the
TRIPS agreement was with reference to India’s non-compliance with certain
obligation pertaining to mailbox facility and exclusive marketing rights (Article 70:8
and 70:9 of TRIPS).12 India had not complied with these obligations by amending the
patent law. However, India claimed that it had issued administrative instructions to
receive the mailbox applications. But Section 5 of the Patents Act, 1970 was contrary
to such an administrative action. US pointed that such an executive action was
inconsistent with India’s own internal legal system since it was contrary to a statute.
However, India argued that since it was “free to determine” ‘means” that could
implement the provisions of Article 70:8 and 70:9, the administrative action should be
valid. Both the panel and appellate body (AB) conclude that Article 1:1 although
allowed free for members, such freedom should be exercised in a way which is
consistent with India’s own domestic legal system.
Article 1:2 is important in a sense that it clarifies that the term “intellectual property”
refers to all categories of intellectual property that are the subject of Sections 1
through 7 of Part II of the agreement. Hence IP items beyond the scope of this
agreement are not governed by provisions of TRIPS. It may be noted that while
GATT applies to discrimination with reference to foreign v. Domestic goods and
services apply to foreign v. Domestic services, TRIPS applies to discrimination vis-à-
vis nationals. Article 2 links relevant substantive provisions of existing WIPO
administered treaties like the Paris Convention, Berne Convention and the Rome
Convention with the TRIPS Agreement mutatis mutandis.
National Treatment (NT) is one of the foundational pillars of international IP treaties.
TRIPS also provides for national treatment by using the language of “no less
favourable treatment” rather than the “same treatment” principle of the Paris
Convention. However, existing exceptions to NT under Paris and Berne convention
9
http://spicyip.com/2014/05/special-301-report-india-not-downgraded-to-priority-foreign-country-will-
receive-ocr-though.html
10
USTR Section 301 Report (2014)
http://www.ustr.gov/sites/default/files/USTR%202014%20Special%20301%20Report%20to%20Congr
ess%20FINAL.pdf
11
Henning Grosse Ruse-Khan, Enough is Enough, the Notion of Binding ceiling in Internaitonal
Intellectual Property Protection (2008) Max Planck Institute for IP and Competition & Tax Law,
Research paper series No. 9-01. Available
at: http://ssrn.com/abstract=1326429or http://dx.doi.org/10.2139/ssrn.1326429
12
DISPUTE DS50 India — Patent Protection for Pharmaceutical and Agricultural Chemical Products
are saved by operation of article 3 of TRIPS. This principle of non-discrimination has
a huge jurisprudential basis in GATT/WTO law and practice. As per a panel in the
EC-GIs dispute in interpreting no less favarouable treatment came to a conclusion
that:13
“The examination of whether a measure involves ‘less favourable treatment’ of
imported products within the meaning of Article III:4 of the GATT 1994 must be
grounded in close scrutiny of the ‘fundamental thrust and effect of the measure itself’.
This examination cannot rest on simple assertion, but must be founded on a careful
analysis of the contested measure and of its implications in the marketplace. At the
same time, however, the examination need not be based on the actual effects of the
contested measure in the marketplace.”
It is also important to note that while TRIPS is a self contained agreement, resort may
be had to other provisions of WTO law. In EC-GIs case, the panel noted that:14
“The Panel notes that there is no hierarchy between the TRIPS Agreement and
GATT 1994, which appear in separate annexes to the WTO Agreement. The ordinary
meaning of the texts of the TRIPS Agreement and GATT 1994, as well as Article II:2
of the WTO Agreement, taken together, indicates that obligations under the TRIPS
Agreement and GATT 1994 can co-exist and that one does not override the other.
This is analogous to the finding of the Panel in Canada — Periodicals, with which the
Appellate Body agreed, concerning the respective scopes of GATS and GATT 1994.
Further, a “harmonious interpretation” does not require an interpretation of one that
shadows the contours of the other. It is well established that the covered agreements
apply cumulatively and that consistency with one does not necessarily imply
consistency with them all.
Article 4 dealing with Most-favored nation (MFN) is an important pillar of WTO,
which was previously missing in WIPO administered treaties. It provides that “With
regard to the protection of intellectual property, any advantage, favour, privilege or
immunity granted by a Member to the nationals of any other country shall be
accorded immediately and unconditionally to the nationals of all other Members.”
Certain exemptions to MFN are provided in Article 4, and most relate to
grandfathering clauses of existing international commitments that allow preferential
treatment of IP rights of WTO members entered into before the signing of the TRIPS
Agreement. Similarly, article 5 allows members to maintain preferential treatment
with reference to multilateral IP acquisition agreements (like PCT, Hague and Madrid
Agreements) administered by the WIPO. These agreements are to be notified with the
WTO.
Importantly, unlike Article 24 of GATT which allows preferential trade
agreements (and FTAs), 15 Article 4 does not provide any MFN exemption to
prospective preferential TRIPS-plus treaties. One reason why there is no such
exception carved for FTAs is because TRIPS is not a market access agreement
and hence any increase in monopoly by way of preferential agreement may create
13
DISPUTE DS174, European Communities — Protection of Trademarks and Geographical
Indications for Agricultural Products and Foodstuffs
14
Ibid.
15
http://www.wto.org/english/res_e/publications_e/wtr11_forum_e/wtr11_8feb11_e.htm
barriers to legitimate trade. However, this does not mean that members cannot
enter into PTAs/FTAs involving TRIPS-plus IP provisions. Lack of FTA
exception to MFN only means that whatever preferential treatment that is
provided by any member to nationals of other countries shall be immediately and
unconditionally be extended to all WTO members.
Article 6 provides that while members should implement Article 3 and 4 with
reference to any regime of exhaustion that they employ, such regime of exhaustion
shall however not be called into dispute at the WTO.
Exhaustion refers to a situation where IP holder’s power to pursue his right after the
first sale are exhausted. First sale doctrine has basis in property theory which
prohibits absolute conditions on sale. If such exhaustion is by virtue of first sale
domestically, it is called as national exhaustion. If international first sale is recognised,
such IP rights are treated as being internationally exhausted. Hence countries can
maintain a national/regional or international regime of exhaustion of rights. When
countries allow parallel imports, such countries are said to provide international
exhaustion within their domestic law. Such parallel imports are beneficial to
consumers only when IP products are price discriminated. However, there is no WTO
jurisprudence on this particular issue. Article 6 is silent on the issue of exhaustion
since it is not clear whether banning international exhaustion would be against free
trade. At the same time, firms may be discouraged to engage in global price
discrimination if many countries allow international exhaustion. There is huge
difference among WTO members regarding different regimes of exhaustion with
reference to different categories of IPRs.
Article 7 lays down the objectives of the TRIPS Agreement. It states:
“The protection and enforcement of intellectual property rights should contribute to
the promotion of technological innovation and to the transfer and dissemination of
technology, to the mutual advantage of producers and users of technological
knowledge and in a manner conducive to social and economic welfare, and to a
balance of rights and obligations.”
However, there are certain key problems with this formulation:
a. It is not clear how this provision can be made actionable at the WTO since the
provision is broadly worded.
b. The idea of balance is at a theoretical level rather than at a conceptual level.
c. It applies to patents and not to non-technical aspects of IP law like GIs and
trademarks or industrial designs.
d. Its usefulness as an interpretative aid is also limited owing to a panel decision
which refused to resort to Article 7 in interpreting the three-step test in Article
30 because it would lead to double counting of policy objectives on standards
already negotiated during the Uruguay Round. The argument is that such
double counting will re-open the balance that has already been struck in
several provisions of the WTO-TRIPS Agreement.16
Article 8 discusses principles of the TRIPS Agreement. However, essentially, it is not

very clear as to why member choose to offer titles as objectives and principles, when
they were already provide for in the preamble. However, unlike Article 7, Article 8 is
actionable since it allows members to “adopt measures”. Article 8:1 states “Members
may, in formulating or amending their laws and regulations, adopt measures
necessary to protect public health and nutrition, and to promote the public interest in
sectors of vital importance to their socio-economic and technological development,
provided that such measures are consistent with the provisions of this Agreement.”
Invoking this provision will require members to pass certain important thresholds like
“necessity” and “consistency with the TRIPS Agreement”. This offers little leeway in
taking non-violation measures, which are anyway beyond the purview of the TRIPS
Agreement.
Article 8:2 of the TRIPS Agreement states:
“Appropriate measures, provided that they are consistent with the provisions of this
Agreement, may be needed to prevent the abuse of intellectual property rights by right
holders or the resort to practices which unreasonably restrain trade or adversely affect
the international transfer of technology.”
However, this provision has not been interpreted by any panel of the WTO dispute
settlement. While certain conditions like what amounts to “appropriate” are flexible,
such measures taken must be “consistent with the provisions” of the TRIPS
Agreement. This provision primarily allows non-violation and measures that may be
taken under Article 40 with reference to practices that IP right holders resort to in
imposing “unreasonably restrain trade or adversely affect the international transfer of
technology.” The concept of “abuse of intellectual property rights by right holders” is
particularly not clear. Some have questioned the concept of abuse underlying IP in the
sense that if IP do not provide a positive right to exclude but only a negative right,
how it would have the capability of causing abuse?17 It is important to note that such a
view is quite narrow looking to the possibility of IP holder choosing to harm
competition by exercising his rights in several different ways.18
In the context of Principles laid down in Article 8, a WTO panel has come to a
conclusion that
“These principles reflect the fact that the TRIPS Agreement does not
generally provide for the grant of positive rights to exploit or use certain
subject matter, but rather provides for the grant of negative rights to prevent
certain acts. This fundamental feature of intellectual property protection
inherently grants Members freedom to pursue legitimate public policy
objectives since many measures to attain those public policy objectives lie
16
DISPUTE DS114 Canada — Patent Protection of Pharmaceutical Products
17
Nuno Pires De Carvalho, The TRIPS Regime of Patent Rights, Kluwer International, 2010
18
Lemley (2007)
outside the scope of intellectual property rights and do not require an
exception under the TRIPS Agreement.”19
Article 8:2 must be read with Article 40. Article 40 is largely based on comity, where
a member whose feels that an IP holder that is national or domiciliary of another
member is suspected of having violated competition law. However, nothing more than
a consultation is required by the provisions of this section. In most cases, members
are free to adopt measures consistent with TRIPS to remedy the abuses of IP.
However, it is interesting to note that whether TRIPS allows members to have a
structural presumption (per se rule) in cases of violation of competition law and
policy is debatable in the light of Article 40:2 which states that “Nothing in this
Agreement shall prevent Members from specifying in their legislation licensing
practices or conditions that may in particular cases constitute an abuse of intellectual
property rights having an adverse effect on competition in the relevant market.”
The concept of “licensing practices or conditions that may in particular cases” is more
likely to be interpreted as a rule of reason requiring competition authorities to assess
pro-competitive benefits versus anticompetitive ones, rather than a structural
presumption for or against all practices. TRIPS does not provide an exhaustive list of
practices, however, it is important to note that grant back conditions, conditions
preventing challenges to validity and coercive package licensing are identified as the
type of practices that may be abusive. In this context it is important to note that
Article 40 gives wide latitude to members to introduce take any measure consistent
with TRIPS. Since there is a moratorium on non-violation complaints (Article 64:2),
many practices may form part of the standard antitrust analysis as applied to IP.
Moreover, Article 31 allows compulsory licence as a remedy for violations of IP.
It is important to note that while Article 7 and 8 are guiding principles on the
objectives and principles sought in the Agreement, there is no special and differential
treatment (SDT) offered to developing members in the TRIPS Agreement.20 The only
differential treatment was with reference to transition measures to implement certain
provisions delayed implementation of TRIPS provisions and those relating to product
patent regime for pharmaceuticals/agrochemicals for developing countries and LDCs
and a provision on technology transfer for LDCs under Article 65 and 66 of the
Agreement. While LDCs are under transition until 2021, all transition periods for
19
In EC — Trademarks and Geographical Indications in explaining Article 8:1.
20
http://www.wto.org/english/tratop_e/devel_e/dev_special_differential_provisions_e.htm
developing countries have expired in 2005. However, discussions in Article 66 have
not led to any substantive benefits in favour of LDCs.21
The Doha Declaration on TRIPS and Public Health was in response to the global HIV
crises where private companies sued governments over use of TRIPS flexibilities. The
political declaration affirmed the commitment of WTO members by stating that “We
agree that the TRIPS Agreement does not and should not prevent members from
taking measures to protect public health. Accordingly, while reiterating our
commitment to the TRIPS Agreement, we affirm that the Agreement can and should
be interpreted and implemented in a manner supportive of WTO members' right to
protect public health and, in particular, to promote access to medicines for all.” It
however made another important contribution in terms of allowing an exclusive
export based compulsory licence. Prior to this declaration, a compulsory licence could
not be issued by a WTO member exclusively for the purpose of export since Article
31(f) imposed a legal condition which required that products produced under a
compulsory licence are predominantly for the supply of domestic markets. With para
6 of the Doha Declaration, the WTO was asked to find a solution for countries with
insignificant or no manufacturing capacity. Hence, it resolved a major access issue by
allowing compulsory licences. But this system has been used on once in the case of
Rwanda where Canadian company Abbott supplied drugs under the export
compulsory licence to Rwanda. Some have criticised this system for being
complicated. In furtherance of para 6 decision, the WTO negotiated the August 2003
decision, which has now lead to permanent amendment of the TRIPS agreement by
way of Article 31 bis. The amendment clearly the way by prescribed a procedure to
operationise compulsory licences for export purposes.
Standards of protection and enforcement: key points:

Article 9:1 requires compliance with substantive provisions of Berne convention
except moral rights. Since such moral rights are not trade-related (economic in
character), the United States opposed their inclusion in TRIPS. Article 10 of TRIPS
also requires protection of computer programmes as literary works and protection of
original databases (original for their sequence, structure and organisation and not for
the data itself). Similarly, idea-expression dichotomy in copyright protection is also
recognised in TRIPS (Article 9:2), which was negotiated in the context of protection
for computer programmes which are essentially functional in nature. There is a
provision for rental rights (Article 11) in relation to software and cinematographic
film, which may be complied if certain conditions are fulfilled. Such rental rights act
more like an exception to the first sale doctrine specifically in relation to the above
copyrigtable works. TRIPS also extends protection to neighbouring rights/ related
rights (article 14). These rights arise from exploitation of existing works due to new
technological means. Hence rights of performs, producers of phonograms (sound
21
http://www.wto.org/english/tratop_e/trips_e/techtransfer_e.htm
recordings) and broadcasting organisations are secured for a period of 50 years
(performs and sound recordings) and 25 years for broadcasting organisations.
However, since provisions of Rome Convention may benefit certain WTO members
who are not party to Rome Convention, Article 14 specifically provides for the
minimum level of protection in this regard.
The three-step test in Article 13 is similar to article 9:2 of Berne Convention, with an
exception that it applies not to authors but to right holders- since TRIPS is about right
holders (trade-related). The three-step test containing the limitations and exceptions
states: “Members shall confine limitations or exceptions to exclusive rights to certain
special cases which do not conflict with a normal exploitation of the work and do not
unreasonably prejudice the legitimate interests of the right holder.” A WTO panel has
interpreted this test quite narrowly by relying on the dictionary meaning of these
terms to give it normative effect. In US- Section 110 of US Copyright Act dispute22,
the panel has held that The panel found that:23
““Homestyle exemption”: The Panel found that the homestyle exemption
met the requirements of Art. 13, and, thus, was consistent with Berne
Convention Art. 11bis(1)(iii) and 11(1)(ii) as incorporated into the TRIPS
Agreement (Art. 9.1): (i) the exemption was confined to “certain special
cases” as it was well-defined and limited in its scope and reach (13-18 per
cent of establishments covered); (ii) the exemption did not conflict with a
normal exploitation of the work, as there was little or no direct licensing
by individual right holders for “dramatic” musical works (i.e. the only
type of material covered by the homestyle exemption); and (iii) the
exemption did not cause unreasonable prejudice to the legitimate interests
of the right holders in light of its narrow scope and there was no evidence
showing that the right holders, if given opportunities, would exercise their
licensing rights.
“Business exemption”: The Panel found that the “business exemption” did
not meet the requirements of Art. 13: (i) the exemption did not qualify as a
“certain special case” under Art. 13, as its scope in respect of potential
users covered “restaurants” (70 per cent of eating and drinking
establishments and 45 per cent of retail establishments), which is one of
the main types of establishments intended to be covered by Art.
11bis(1)(iii); (ii) second, the exemption “conflicts with a normal
exploitation of the work” as the exemption deprived the right holders of
musical works of compensation, as appropriate, for the use of their work
from broadcasts of radio and television; and (iii) in light of statistics
demonstrating that 45 to 73 per cent of the relevant establishments fell
within the business exemption, the United States failed to show that the
business exemption did not unreasonably prejudice the legitimate interests
22
DISPUTE DS160 United States — Section 110(5) of US Copyright Act
23
http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds160_e.htm
of the right holder. Thus, the business exemption was found inconsistent
with Berne Convention Art. 11bis(1)(iii) and 11(1)(ii).”
TRIPS is Paris-plus in relation to obligations involving trademarks, too. However,

TRIPS simply clarified some existing Paris (1967) standards, very few new
obligations were set (Art. 15-21). A trademark is a sign or a combination of signs that
is used to distinguish the goods or services of one enterprise from those of another.
Trademarks safeguards consumers against confusion relating to the source of origin of
the product or service. Trademark system also serves to protect producers against
unfair competition from other producers seeking to free ride on the goodwill and
positive reputation earned by the trademark owner. TRIPS covers service marks also-
signifying growing importance of global services economy. The idea is to protect the
trademark owner by exclusive use of registered trademarks with respect to same of
similar products for which it is registered- concept of registration for same class
Trademarks can both be registered and non registered (common law protection based
on use)
i. TRIPS applies only to registered trademarks
ii. Article 16.1 states that Members may protect non –registered trademarks on the
basis of use
iii. However, well-known marks must be mandatorily protected. This is the only
exception to the principle of territorially of trademark protection
iv. Many international treaties have been concluded on global acquisition of

trademarks by simplifying application process
While Members may require that they are visibly perceptible (graphical
representation), there is no obligations relating to non-conventional marks (sounds,
smells etc...). Shapes have also been registered in some countries (shape of Tobrelone
chocolate, Coco Cola bottle shape etc... ) Colours have also been registered (magenta
for Deutsche Telekom). Obligations to provide rights only with reference to registered
trademarks (and well-known marks) but may provide rights to non-registered marks
on the basis of actual use. The Exclusive right to prevent – the use of his or her
trademark against those that are similar or confusing similar on similar and identical
products With reference to from using in the course of trade – there is no obligation
to protect against use in a private context.
However, where such use would result in the likelihood of confusion
 of a sign that is similar or identical to that registered as a trademark
 On products similar or identical in respect of those of which the

trademark is registered
 That is likely to confuse the relevant group of consumers
 TRIPS requires presumption of likelihood of confusion for identical

sign used on identical products
 When signs and products not identical, likelihood of confusion has to
be assessed on cases by case basis.
 Overall consumer impression considered in ascertaining likelihood of

confusion
 Phonetic or linguistic similarity may be considered
 Similarity of products may be assessed through factors like whether

they compete in similar markets, distribution channels etc...
 Strong similarity of signs must be balanced against strong dissimilarity

of goods/ services
Well known marks must be protected against use on ex-officio basis by competent
authorities (if domestic legislation permits) or at least must be available when action
initiated by the parties. Competent authorities will have to consider from the view
point of consumers of products to which the well known mark is applied to include
knowledge obtained through promotion of trademark among the relevant sections of
the public. Assignment of trademarks as independent assets must be allowed, but no
transfer of business or goodwill required. It is important to note that no compulsory
licences will be granted by members. Term of protection is 7 years initially and
perpetual renewal
In Australia – Tobacco Plain-packing dispute 24 which is currently pending at the
WTO, the question of Australian regulation (a health measure) which mandates plain
packaging and hence encumbrance to the use of a trademark or trade name has been
challenged as being violative of TRIPS. In this context it would be important to note
that the permissible exceptions (Article 17 three-step test) must be limited, take
account of legitimate interest of the owner and those of third parties. It remains to be
seen how this dispute will led to allowing or disallowing such an important health
measure Since Article 20 deals with use of trademark in the course of trade must “Not
be unjustifiably encumbered, use with another trademark (twining requirement), use
in special form, or use in a manner detrimental to trademark’s ability to distinguish.
Geographical Indications is another important area where very little international
protection was available prior to the TRIPS Agreement. The TRIPS Agreement
follows differential level of protection for GI products. With reference to all products
other than wines and spirits, countries may require that consumers are actually
mislead by virtue of use of a registered GI. But in case of wines and spirits there is
higher level of protection afforded under TRIPS by which any use of a GI irrespective
of its ability to mislead is considered as an infringement. TRIPS agreement also
defined GIs for the first time. However, TRIPS does not require countries to have a
Sui Generis GI law. The level of protection required in TRIPS for both wines and
spirits and other products can be offered through alternative regimes like collective
marks, certification marks, unfair competition law/passing off, consumer law, GI
24
DISPUTE SETTLEMENT: DISPUTE DS434 Australia — Certain Measures Concerning
Trademarks and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging
product regulation etc.... TRIPS also includes certain provisions to resolve the
potential conflict between trademark and GIs.
While what is a patent is not defined in TRIPS- but generally understood as rights to
protect new inventions, it definitely imposes a lot of conditions on qualifying subject
matter. TRIPS is Paris-plus (Article 2:1 establishes the relationship). The Patentability
Criteria (Article 27:1) with reference to the term invention is not defined – but
generally understood as a new solution to a technical problem. Members generally
exclude inventions based on abstractness, basic scientific theories, products of nature
etc... A recent example includes the United States refusing patents on human genes25
and certain type of business methods or software.26 Whether the criteria for novelty
are local v. Global is not defined. Novelty broadly involves comparison with prior art
(prior publication and prior use) and determining whether the patent application is
anticipated by prior art. Similarly, TRIPS is silent on Inventive step / non-obviousness.
This test generally involves comparing invention with prior art with reference to steps
taken to reach from a problem to a solution. Here combined readings of prior art is
allowed, unlike in case of novelty. Usually, members require primary (technical
advance) and secondary factors (commercial success, unmet demand etc...) KSR v.
Teleflex (US 2007) – the US Supreme court held that teaching suggestion and
motivation test not the sole test for judging combination patents. The invention is
judged from the perspective of PHOSITA test (a notional person having ordinary
skilled in the art). Industrial application/ usefulness is again not defined. It is
generally understood that invention must not require some commercial utility per se,
but must have some character that allows it to be applied to any product or process of
industrial character.
Article 27:1 (availability and enjoy ability of patent rights without discrimination) as
to Place of invention, Field of technology, Whether products are imported or locally
produced. It is not clear if lack of local manufacturing than be a ground for
compulsory licence by virtue of this provision. An Indian provision requiring local
working has proved controversial, but there is little guidance on this issue. 27
Unfortunately, the WTO was not able to adjudicate in Brazil- US dispute at the WTO
DS since there was a mutually agreed solution among the parties. Similarly, some
commentators believe that India’s section 3(d) of the patents Act, 1970 may fall foul
of the discrimination ground.28 It may be noted that the WTO has held in Canada
pharmaceuticals that differentiation is not discrimination and hence it may be allowed.
Members may exclude based on grounds of ordre public and morality (Article 27:2).
However, it must be based on commercial exploitation and not inherent problem with
the invention (for. E.g. Cloning); Members may exclude methods of treatment –
diagnostic, therapeutic or surgical methods for treatment of human and animals (only
methods) US provides patents but limits liability in cases of infringement by
individual doctors. Furthermore, while Members may exclude plants, animals and
essentially biological processes they cannot exclude micro-organisms and non-
biological and microbiological processes. However, protection for plants if not
25
ASSOCIATION FOR MOLECULAR PATHOLOGY ET AL. v. MYRIAD GENETICS, INC.
(2013) http://www.supremecourt.gov/opinions/12pdf/12-398_1b7d.pdf
26
ALICE CORPORATION PTY. LTD. v. CLS BANK INTERNATIONAL ET AL. (2013)
http://www.supremecourt.gov/opinions/13pdf/13-298_7lh8.pdf
27
http://spicyip.com/2012/10/guest-post-bayer-natco-decision-trips.html
28
http://spicyip.com/2009/11/harmonizing-interpretation-of-efficacy.html
provided through patents must be provided through effective sui generis plant variety
protection or a combination of patents and PVP. TRIPS does not clearly point to
whether UPOV 1978 and 1991 is effective, although none is required by TRIPS).
With reference to review of Article 27.3 (b) – Work of the WTO secretariat in
compiling information from members on patent protection for plants and animals/
effective sui generis regime. Some members have argued that discussions on TRIPS-
CBD relationship must be undertaken under this rubric which aims to amend article
29 (relating to disclosure) by requiring patent holders to disclose the source of
biological origin of the genetic material cited in the patent application. This
developing country members assert is a good way to prevent bio-piracy of traditional
knowledge associated genetic resources- more in the sense of a defensive mechanism.
TRIPS also provide for limited exceptions (Article 30) through the Three Step test.
Any exception to patent rights granted under Article 28 must be:
b. Be limited
c. Not unreasonably conflict with the normal exploitation of the patent
d. Not unreasonably prejudice the legitimate interest of the right holder
taking into account interests of third parties
Examples in Members domestic law may be with reference to research exemption,

regulatory review etc... In Canada-Pharmaceuticals,29 a WTO panel was of the view
that “Canada practically conceded that the stockpiling provision violated Art. 28.1,
which sets out exclusive rights granted to patent owners. Concerning Canada's
defence under Art. 30, the Panel found that the measure was not justified under Art.
30 because there were no limitations on the quantity of production for stockpiling
which resulted in a substantial curtailment of extended market exclusivity, and, thus,
was not “limited” as required by Art. 30. Accordingly, the Panel concluded that the
stockpiling provision was inconsistent with Art. 28.1 as it constituted a “substantial
curtailment of the exclusionary rights” granted to patent holders”. 30 On regulatory
review exception, “The Panel found that Canada's regulatory review provision was
justified under Art. 30 by meeting all three cumulative criteria: the exceptional
measure (i) must be limited; (ii) must not “unreasonably conflict with normal
exploitation of the patent”; and (iii) must not “unreasonably prejudice the legitimate
interests of the patent owner”, taking account of the legitimate interests of third
parties. These three cumulative criteria are necessary for a measure to be justified as
an exception under Art. 30.”31
Article 31 provides for other use without authorisation of the right holder. Broadly,
Article 31 lays down conditions only and not grounds. Hence a compulsory licence or
government use can be only any ground. However, there are important conditions like
field of use, payment of adequate remuneration to the right holder, negotiations for a
voluntary licence prior to a compulsory licence, and factual assessment on cases by
case basis. Furthermore, in situations of national emergency, circumstances of
extreme urgency and public non-commercial use, some of these provisions may be
delayed in terms of implementation to take care of an imminent danger.
29
DISPUTE DS114, Canada — Patent Protection of Pharmaceutical Products
30
http://www.wto.org/english/tratop_e/dispu_e/cases_e/1pagesum_e/ds114sum_e.pdf
31
http://www.wto.org/english/tratop_e/dispu_e/cases_e/1pagesum_e/ds114sum_e.pdf
Articles 35-38 deal with Layout Design (Semiconductor Chip Protection). WTO
members have agreement to be in compliance with substantive provisions of the
Treaty on IP in Respect of Integrated Circuits and in addition comply with other
requirement like scope of rights, acts not requiring consent of the right holder and the
term of protection.
One of the important provisions in the area of pharmaceuticals/agrochemicals was the

requirement in Article 39.3 for protection of test and regulatory data. Article 39.3
states: Members, when requiring, as a condition of approving the marketing of
pharmaceutical or of agricultural chemical products which utilize new chemical
entities, the submission of undisclosed test or other data, the origination of which
involves a considerable effort, shall protect such data against unfair commercial use.
In addition, Members shall protect such data against disclosure, except where
necessary to protect the public, or unless steps are taken to ensure that the data are
protected against unfair commercial use.”The exact nature of obligation has been
quite controversial with developed countries claiming a data exclusivity standard and
developing countries interpreting it as a permissive reliance standard based on trade
secret protection. However, it may be noted that Article 39.2 already provides distinct
protection for trade secret, which include test and regulatory data. Hence it is
pertinent to note that the unfair competition standard is uniquely different from the
trade secret protection standard required in Article 39.2. However, many developing
countries, including India, do not provide data exclusivity protection since these may
impede access to medicines. As such, some of these demands for data exclusivity type
of protection are now demanded through FTAs.
Article 41 of TRIPS requires that “Members shall ensure that enforcement procedures
as specified in this Part are available under their law so as to permit effective action
against any act of infringement of intellectual property rights covered by this
Agreement, including expeditious remedies to prevent infringements and remedies
which constitute a deterrent to further infringements. These procedures shall be
applied in such a manner as to avoid the creation of barriers to legitimate trade and to
provide for safeguards against their abuse”. Article 44 mandates that courts shall have
to power to grant injunctions. Similarly, TRIPS also requires availability of civil and
administrative remedies. In relation to border measures (custom measures), the
mandatory obligation is only with reference to copyright pirated goods and trademark
counterfeit good. However, the TRIPS-plus obligations in this area where certain
countries have allowed seizure of goods in transit has proved controversial when
certain Indian drug consignments were seized by EU port authorities. India initiated a
dispute at the WTO, but agreed for a mutually agreed solution.32
Dispute settlement and TRIPS

As noted earlier, the one of the greatest achievement during the Uruguay was linking
intellectual property standards with a strong and binding dispute settlement
mechanism. Article 64 provides that GATT provisions on dispute settlement will
apply to the TRIPS Agreement. However, article 64.2 places a moratorium on non-
violation and situation complaints, which has been extended on timely basis. The
reason for a moratorium on non-violation complaints is owing to lack of any practical
guidance as to how an Agreement like TRIPS will implicate measures taken by
developing countries in using flexibilities inherent in the TRIPS Agreement since the
concept of “nullification” and “impairment” can move much beyond the hard
negotiated mandate during the Uruguay Round. As per the WTO website:33
“The aim is to help preserve the balance of benefits struck during multilateral
negotiations. For example, a country may have agreed to reduce its tariff on a
product as part of a market access deal, but later subsidized domestic
production so that the effect on the conditions of competition are the same as
the original tariff. A non-violation case against this country would be allowed
to restore the conditions of competition implied in the original deal.
Non-violation complaints are possible for goods and services (under GATT
for goods and market-opening commitments in services). However, for the
time being, members have agreed not to use them under the TRIPS
Agreement. Under Article 64.2 this “moratorium” (i.e. the agreement not to
use TRIPS non-violation cases) was to last for the first five years of the WTO
(i.e. 1995–99). It has been extended since then.
At the same time, the TRIPS Council has discussed whether non-violation
complaints should be allowed in intellectual property, and if so, to what
extent and how (“scope and modalities”) they could be brought to the WTO’s
dispute settlement procedures.
At least two countries (the US and Switzerland) say non-violation cases

should be allowed in order to discourage members from engaging in “creative
legislative activity” that would allow them to get around their TRIPS
32
Baker, Brook K. 2012. Settlement of India/EU WTO Dispute re Seizures of In-Transit Medicines:
Why the Proposed EU Border Regulation Isn't Good Enough. PIJIP Research Paper no. 2012-02
American University Washington College of Law, Washington, D.C.
33 http://www.wto.org/english/tratop_e/trips_e/nonviolation_background_e.htm
commitments. Most would like to see the moratorium continued or made
permanent. Some have suggested additional safeguards.”
In addition, certain countries have been effectively using TRIPS linkages with dispute
settlement by seeking legal suspension of TRIPS mandate as a cross-retaliatory
measure. It is particularly helpful to developing countries, LDCs and small/vulnerable
economies, where do not have enough trade balances in other sectors to deal with in a
way that is detrimental to scofflaw country. In the past, this cross retaliatory remedy
has been invoked in three cases- i. By Ecuador in EC-Bananas, Antigua and Barbados
in US-Gambling, and by Brazil in US- Cotton. 34 However, countries are yet to realise
the impact of
34
http://www.ictsd.org/themes/innovation-and-ip/research/cross-retaliation-in-trips-options-for-
developing-countries

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Law

International Trade Law

Items Description of Module

Objectives To understand the following:

 The origins of international trade law;

Keywords GATT, Protocol of Provisional Application.

Thanks to the emergence of multinational corporations and global production chains,

Enduring peace and welfare of nations are indissolubly connected

The GATT was essentially conceived as a stop-gap arrangement pending the

It is the maxim of every prudent master of a family never to attempt to

What is prudence in the conduct of every private family can scarce be

DEVELOPING COUNTRIES AND FREE TRADE

They (World Bank economists) talk about comparative advantage, as

If the doctrine of comparative advantages is to be used as a prescription, as Dr.Kurien

There were two kinds of reactions against market fundamentalism advocated by

In brief, Prebisch advocated strategies combining free trade with protectionism.

Modern system of transnationalized production has further complicated the system.

International Trade Law

Items Description of Module

Objectives To understand the following:

 Justifications of the international trade system;

Keywords GATT, Protocol of Provisional Application, Tokyo Round,

Topics & Sub-Topics covered

1.1 Bretton Woods Conference

1.2. Provisional application of GATT

2. Guiding principles of GATT

4.1 The terms-of-trade school

4.2 Political incentivization

4.3 Existing bilateral and discriminatory trade policies

5. Evaluation of GATT and its impact on modern trade rules

1.1. Bretton Woods Conference

Failed attempts to set

1 Accession in perspective, Handbook on Accession to the WTO, Chapter 1 at

There were two reasons for the same:

2UN ECOSOC Res. 13, UN Doc. E/22 (1946).

4 Id, p. 17-18 in Van den Bossche & Zdouc, supra n. 1, p. 77.

2. Guiding principles of GATT

i. Non-discrimination: the Most Favored Nation (MFN) principle

iii. Tariff reduction

3. Expansion of the GATT agenda

Year Place/name Subjects covered Countries

It is estimated that tariffs on manufactured products fell from a trade-weighted average of

3.1. Kennedy Round (1964-67)

i. Measures for the expansion of trade of developing counties as a means of furthering

3.2. Tokyo Round (1973-79)

i. Tariff negotiations using the formula method,

11 The GATT Years: From Havana to Marrakesh at

Beggar Thy Competitive High tariffs

4.1. The terms-of-trade school:

4.2. Political incentivization:

4.3. Existing bilateral and discriminatory trade policies:

5. Evaluation of GATT and its impact on modern trade rules

(2000) in Pauwelyn, supra n. 14.

Trade 37 (1969) in Pauwelyn, supra n. 14.

Eur. J. Pol. Econ. 233, 234-36 (2001).

iv. Low levels of discipline and law as evidenced by the following:

a) The GATT included broadly defined substantive exceptions - Article XII

c) The ―existing legislation clause‖ in the GATT's Protocol of Provisional

22 Pauwelyn, supra n. 14.

Prof. Pauwelyn‘s view of GATT as a ―gentleman‘s club‖ as opposed to a legal regime is