IV.22 In the specific case of the EC banana concession, the EC argued that the CONTRACTING PARTIES had agreed for the first time at the end of the Uruguay Round to the EC new banana regime based on the establishment of the EC tariff quota after the deconsolidation of the old and obsolete 20 per cent ad valorem bound rate and the creation of the EC-wide internal banana market. All the parties had agreed explicitly, knowingly and deliberately to this new concession: nothing could subsequently justify any Member reopening the negotiations by contesting the internal balance of the negotiation that had recently ended. In the EC view, this would be violating the fundamental principle "pacta servanda sunt" as expressed in the Vienna Convention on the law of the Treaties and the customary international law.

IV.23 The provision of Article I of GATT thus could not be considered applicable as such to the actual content of the EC banana tariff quota without taking into account the results of the Uruguay Round negotiations. Members had negotiated their commitments on bananas during the Uruguay Round in the framework of the agreed "agricultural specificity" and, therefore, no violation of Article XIII of GATT could be claimed with respect to the consolidated EC banana regime.

(iii) The non-applicability of the Agreement on Import Licensing Procedures to tariff quotas

IV.24 The EC submitted the opinion that, as far the Agreement on Import Licensing Procedures (Licensing Agreement) was concerned, the text specified that its scope was to regulate all the procedures, others than customs operations, prior to the importation. The provisions of that agreement appeared then as further specifications of some of the rules contained in Article XIII of GATT in which, inter alia, explicit reference was made "to import licences issued in connection with import restrictions". However, nothing in the Licensing Agreement specified (like Article XIII:5 of GATT) that it applied also to cases, such as the banana tariff quota, where no import restriction was applied at the border. In the view of the EC, the Licensing Agreement could not, therefore, be deemed applicable to cases where no import restriction was applied at the border and, specifically, the banana tariff quota.

IV.25 Furthermore, the EC argued that the existence of the licence could not be confused with the physical importation of bananas: the licences were only needed to benefit from a particular duty rate within the tariff quota, but not to physically import bananas, from any origin, into the EC customs territory. Licences were tradable, and traded, and were not a "prior condition" to any importation as referred to in Article 1.1 of the Licensing Agreement; they were needed only for the application of a specific duty rate. The fact that no limitation in quantities existed under the GATT-bound commitments was of paramount importance and, in the view of the EC should be sufficient to dismiss the applicability of the Licensing Agreement to tariff quotas.

(iv) The non-applicability of Articles III:4 and X of GATT to border measures

IV.26 The EC submitted that the banana tariff quota was a set of border measures ensuring the correct management of the regime, and not a set of rules applicable to bananas after they had cleared customs. In the view of the EC, practically all measures concerning the functioning and the administration of the tariff quota which concerned operators while importing bananas into the EC market were border measures and not internal rules applicable to all bananas after they had been introduced in the EC market. This simple and undisputable reality had an important legal implication when applying GATT: the internal sale and distribution system pertained to the internal rules applicable to that market and was relevant to the imported goods only if and when those goods had cleared customs.

IV.27 On the contrary, provisions like Articles XI and XIII of GATT and the Licensing Agreement clearly applied only to border measures at the moment of the importation or the exportation of a product and did not concern any alleged discrimination in the application of internal measures after the product had been cleared through customs. Consequently, the EC argued, it was impossible to allege that a specific measure violated at the same time Articles III:4 and X of GATT and Article XIII of GATT and/or the Licensing Agreement.

(v) The Lomé waiver

IV.28 On the basis of the responses outlined above and specific arguments made by the EC, the EC requested the Panel to find that the EC banana regime was not incompatible with GATT and other instruments of Annex 1A of the WTO Agreement. In so far as the Panel might arrive at the opposite conclusion, the EC argued that the Panel should find that the EC banana regime was covered by the Lomé waiver. The EC submitted that the Lomé Convention was one of the most important instruments of the EC's policy of development cooperation and as such was intended to "promote and expedite the economic, cultural and social development of the ACP States". The Convention covered various fields of cooperation, one of the most important being trade. Various provisions of the Convention dealt directly with trade and, all these provisions, aims and objectives applied equally to trade in bananas. Moreover, the Convention also included a Protocol which covered bananas specifically and stated, inter alia, that "no ACP State shall be placed, as regards access to its traditional markets and its advantages on those markets, in a less favourable situation than in the past or at present". On 19 December 1994, the GATT Council, at the request of the EC, decided that "Subject to the terms and conditions set out ..., the provisions of paragraph 1 of Article I of the General Agreement shall be waived, until 29 February 2000, to the extent necessary to permit the European Communities to provide preferential treatment for products originating in ACP States as required by the relevant provisions of the Fourth Lomé Convention, without being required to extend the same preferential treatment to like products of any other contracting party".

IV.29 In the view of the EC, in analysing the waiver the following elements had to be taken into account:

IV.30 Furthermore, the EC submitted that the parties to the Lomé Convention understood their agreement as implying that the EC was subject to the obligations of: (a) contributing to remedy the instability in the revenues flowing from the marketing of ACP agricultural products by promoting trade between those parties and by taking measures ensuring a treatment more favourable than the one accorded to other countries benefiting of the MFN treatment for the product concerned; and (b) ensuring that no ACP States shall be placed, as regards access to its traditional banana markets and its advantages on those markets, in a less favourable situation than in the past or at present. The Lomé waiver, therefore, covered any measure taken by the EC in order to fulfil its legal obligations as indicated under the Lomé Convention with regards to any product originating in ACP countries, including bananas. In the case of bananas, the legal obligations were fulfilled by the EC by: (a) creating a specific and separate regime for the importation to the EC market of the ACP traditional banana production; (b) by the allocation to ACP countries of a limited share of the bound tariff quota at a duty-free rate, that was lower that the MFN bound rate; (c) by a marginal reduction of the tariff rate applicable for the importation of bananas outside the tariff quota; and (d) by facilitating trade and commercial relations between the EC and the ACP countries through the creation of the so-called Category B operator licences to ensure that the quantities for which access opportunities were given could actually be sold and that the EC could thus fulfil its obligations to guarantee traditional ACP bananas their existing advantages, while not providing by this mean any incentive to purchase ACP bananas.

IV.31 The EC also argued that the Panel was not empowered to give authoritative interpretation on any agreement other than those under the agreements covered by the Uruguay Round of multilateral trade negotiations as relevant for the settlement of the dispute within the terms of reference agreed by the DSB in its meeting of the 8 May 1996. In particular it could not interpret the extent of reciprocal obligations under an agreement especially any interpretation that contradicted the common understanding of the contracting parties to that agreement.

2. DETAILED ARGUMENTS

(a) Tariff issues

IV.32 This section outlines the case concerning issues involving tariff matters. After a presentation of the claims of the Complaining parties, the responses of the EC are outlined. As such, this section contains the major arguments, including background and general interpretative issues, of the EC and the Complaining parties surrounding the Lomé waiver, which was the main argument presented by the EC in response to the claims of the Complaining parties. Further arguments concerning the Lomé waiver also appear in the following sections: (b) allocation issues; and (c) import licensing issues, although in these cases, the basic arguments presented in this section are not repeated in detail.

IV.33 The Complaining parties submitted that the tariff quota tariff structures arising out of Regulation 404/93 were challengeable in that those structures imposed differential rates as between third-country bananas, on the one hand, and non-traditional ACP bananas, on the other. In addition, Guatemala and Honduras submitted that the rates applicable to third-country bananas breached the long-standing 20 per cent ad valorem EC GATT-bound rate, to which Guatemala continued to hold a claim.

(i) Tariff preferences for non-traditional ACP banana imports

Arguments of the Complaining parties

IV.34 The Complaining parties argued that the EC granted preferential treatment to so-called non-traditional ACP bananas, which designation had come to mean not only countries that had not been traditional suppliers, but amounts for traditional suppliers over and beyond the excessive quantities already allocated to them. Within the tariff quota for third countries, 90,000 tonnes of non-traditional ACP bananas entered duty free, while third-country bananas were dutied at the rate of ECU 75 per tonne. Over-quota, non-traditional ACP bananas received a ECU 100 per tonne reduction below the MFN rate applied to Latin American bananas. The Complaining parties considered that this differential treatment was a violation of the most-favoured-nation obligation treatment and therefore, in their opinion, was inconsistent with Article I of the GATT.

IV.35 Guatemala and Honduras submitted that the preferential tariffs for non-traditional ACP bananas were not included in the EC's Uruguay Round Schedules or other parts of the Uruguay Round Agreements. The application of such differential customs duties on the basis of foreign source contradicted in a direct way the GATT's most fundamental guarantee of tariff non-discrimination set forth in Article I:1. Guatemala and Honduras argued that GATT panels had strictly construed this tariff non-discrimination requirement, disallowing exceptions to be read into it that were never negotiated or agreed to by the contracting parties. In Spain - Tariff Treatment of Unroasted Coffee, the panel ruled that differences in the entered product arising from geographical or other factors could not be considered a basis for avoiding Article I obligations. ⁴⁵⁵ In EEC - Member States' Import Regimes for Bananas, the panel further found that the trade impact of discriminatory tariff rates was irrelevant to an Article I:1 violation. ⁴⁵⁶ In both that banana case and the subsequent one involving bananas, the panels condemned preferential tariff rates accorded ACP bananas under Article I:1. ⁴⁵⁷ According to Guatemala and Honduras, the EC ignored that legal standard by conferring a trade advantage on non-traditional ACP bananas over third-country bananas "in order to ensure satisfactory marketing of bananas ... originating in the ACP States." ⁴⁵⁸ Admitted tariff discrimination had thus occurred, for which no legitimate WTO defence could be shown.

Arguments of the EC

IV.36 The EC submitted it was clear that non-traditional ACP bananas had been allocated a consolidated share of the tariff quota up to 90,000 tonnes. However, non-traditional ACP bananas benefited from a preferential treatment which was covered, just as the ACP traditional allocation, by the Lomé waiver, consisting in duty-free importation for the quantities indicated in the tariff quota. Moreover, non-traditional ACP bananas benefited from a preferential treatment of ECU 100 per tonne reduction from the bound rate for imports outside the tariff quota. This preferential treatment was equally covered by the Lomé waiver.

The Lomé waiver

IV.37 The EC submitted that the Lomé IV Convention was an extremely broad treaty between the EC and its member States on the one hand and 70 States of Africa, the Caribbean and the Pacific (ACP States) on the other hand. It was one of the most important instruments of the EC's policy of development co-operation and as such was intended to "promote and expedite the economic, cultural and social development of the ACP States" (Article 1 of the Convention). The Convention had existed in one form or another since the moment that many of these countries became independent from one of the member States of the Community in the early 1960s, and there was the need for the replacement of the Association regime for overseas territories as laid down in Article 131 of the EC Treaty. Originally called the Yaoundé Convention, the treaty had evolved through many versions following the latest insights of development policy into the present instrument for development cooperation, including provisions on free trade, accompanied by many variegated cooperation provisions, a stabilization system for agricultural commodities ("Stabex" ⁴⁵⁹), a special financing system for countries which were very dependent on mining activities ("Sysmin"), as well as a development fund ("EDF") of considerable size.

IV.38 Among the various fields covered by the Convention, the EC considered that trade was certainly among the most important. Especially with respect to the trade issues involved in the present case, the EC referred to the following provisions of the Convention:

Article 15(a) of the Convention:

Title I on Trade Cooperation stated further in Article 167, which was one of the instruments of trade development:

IV.39 Moreover, attached to the Lomé Convention was Protocol 5 on bananas. Under this Protocol, the EC had made another undertaking (in Article 1) to ensure that:

IV.40 The EC noted that originally the free trade provisions of the Yaoundé Conventions were reciprocal; later, at the insistence of the ACP States themselves, as well as some third states, including the United States, they were made unilateral in favour of the ACP States. This was presently the case and this system of free trade in favour of the ACP States, with the exception of some primarily agricultural products (for which favourable tariff quotas were opened) was laid down in Article 168 of the Lomé Convention. This Article also stipulated that even for those products which were not subject to full free trade treatment by the Community, inter alia, because after the entry into force of the Convention they had been made subject to a common organization of the market under the common agricultural policy, a preference should be given to the ACP countries (Article 168(2)(a)(ii) together with 168(2)(d)). This was the case for bananas.

IV.41 During the negotiations of the Lomé Convention, the EC single market programme was already under way and it could be foreseen that this would have some repercussions on the way in which the Banana Protocol was going to be applied. Hence a Joint Declaration relating to Protocol 5 was agreed and included in Annex LXXIV to the Lomé Convention. According to this interpretative declaration, the Community was not prevented by Article 1 of Protocol 5 from establishing common rules for bananas, as long as no ACP State which was traditional supplier to the Community, was placed as regards access to and advantages in the Community, in a less favourable situation than in the past or at the time of conclusion of the Lomé Convention. This interpretative declaration, while leaving the liberty to the Community to unify the heterogeneous national rules which were in place at the time when the Lomé Convention was concluded, put an obligation on the Community to preserve the pre-existing situation as far as access to and advantages in the Community market for traditional ACP bananas were concerned. ⁴⁶¹

IV.42 The EC further noted that in the autumn of 1994 it took the initiative to obtain a waiver for the Fourth Lomé Convention. Although the Community disagreed thoroughly with the report of the so-called second Banana panel and could not accept that the Lomé Convention did not respond to the criteria of Article XXIV, it nevertheless availed itself the possibility to obtain such a waiver. This was in the interest of legal security both for the Community and for its partners in the Lomé Convention. The most important provision of the waiver (L/7604), point 1, was as follows:

IV.44 In reaching this position, the EC submitted that the following elements should be taken into account. Firstly, the Lomé waiver clearly stated that the provisions of paragraph 1 of Article I of GATT shall be waived to the extent necessary to permit the EC to provide preferential treatment for products originating in ACP States. By this first part of paragraph 1 of the waiver, the CONTRACTING PARTIES accepted the principle that the EC should be put in the position of fully respecting its obligations, vis-à-vis ACP countries, to provide the preferential treatment for products originating in those countries. Bananas were products originating in those countries. Further, the preferential treatment, waived from the application of Article I:1 of GATT, was "... designed to promote the expansion of trade and economic development of beneficiaries in a manner consistent with the objectives of the General Agreement and with the trade, financial and development needs of the beneficiaries..." while not raising "undue barriers" or creating "undue difficulties for the trade of the other contracting parties". Consequently, in the view of the EC, any measure necessary to permit it to fulfil its obligations under the Lomé Convention to provide preferential treatment to ACP countries for products originating in those countries was covered by the waiver.

IV.45 The EC submitted that the second element to be taken into account related to the second part of paragraph 1 of the waiver. The GATT Council, had indicated that the preferential treatment to be accorded by the EC within the limits explained above was limited to what was required by the relevant provisions of the Lomé Convention. The relevant provisions of the Lomé Convention as regards bananas were, inter alia, Articles 15a, 24, 168 and Protocol 5.

IV.46 Before the entry into force of the common organization of the markets (COM) for bananas, ACP bananas entered the Community duty free under Article 168(2)(a)(i) of the Lomé Convention. These traditional quantities were therefore to be marketed enjoying the same advantages on the Community market as "in the past or at present", as guaranteed in Protocol 5, they had to therefore, in the view of the EC, continue to enjoy duty-free access. As regards non-traditional quantities, the EC submitted that since the entry into force of the COM, these fell under the scope of Article 168(2)(a)(ii) which stated: "the Community shall take the necessary measures to ensure more favourable treatment than that granted to third countries benefiting from the most-favoured-nation clause for the same products". Moreover, Article 168(2)(d) first indent stated: "if during application of the Convention, the Community subjects one or more products to common organisation of the market, [which is the case for bananas] it shall reserve the right to adapt the import treatment for those products originating in the ACP States, following consultations within the Council of Ministers".

IV.47 When the common organization of the markets for bananas was set up, the Council of Ministers, in accordance with the above provision, decided that non-traditional ACP quantities would enjoy duty-free access (Article 18.1 of Council Regulation 404/93) within the tariff quota, thus ensuring that they were treated more favourably than other third-country supplies which were subject to a duty of ECU 75 per tonne. Outside the tariff quota, more favourable treatment was also ensured as non-traditional ACP imports were subject, in 1995, to a duty rate of ECU 722 per tonne as opposed to ECU 822 per tonne for other third-country supplies.

IV.48 In summary, the EC submitted that the Parties to the Lomé Convention understood their agreement as implying that the EC was subject to the obligations of: (a) contributing to remedy the instability in the revenues flowing from the marketing of ACP agricultural products by promoting trade between those parties and by taking measures ensuring a treatment more favourable than the one accorded to other countries benefiting of the MFN treatment for the product concerned; and (b) ensuring that no ACP States shall be placed, as regards access to its traditional banana markets and its advantages on those markets, in a less favourable situation than in the past or at present. The EC argued, therefore, that the Lomé waiver should be deemed to cover any measure taken by the EC in order to fulfil its legal obligations as indicated under the Lomé Convention with regards to any product originating in ACP countries, including bananas.

IV.49 The EC argued that the legal obligations it set out were fulfilled by: (a) creating a specific and separate system for the importation in the EC market of the ACP traditional banana production; (b) by the allocation to ACP countries of a limited share of the bound tariff quota at a duty free rate, that is lower that the MFN bound rate; (c) by a marginal reduction of the tariff rate applicable for the importation of bananas outside the tariff quota; (d) by facilitating trade and commercial relations between the EC and the ACP countries through the creation of the so-called Category B operator licences so as to ensure that the quantities for which access opportunities were given could actually be sold and that the EC could thus fulfil its obligations to guarantee traditional ACP bananas their existing advantages, while not providing by this mean any incentive to purchase ACP bananas.

IV.50 The EC went on to remind the Panel that the scope of the present procedure was to consider the extent of the reciprocal obligations for the Members, parties to this procedure, under the Agreements covered by the Uruguay Round of Multilateral Trade Negotiations as relevant for the settlement of the dispute within the terms of reference agreed by the DSB in its meeting of 8 May 1996. On the contrary, the Panel was not empowered, in the EC view, to give authoritative interpretation on any other agreement, in particular regarding the extent of the reciprocal obligations under an agreement for the contracting parties to that agreement, let alone any interpretation contradicting the common understanding of the contracting parties to that agreement of their own reciprocal obligations.

IV.51 In the view of the Complaining parties, not one measure at issue in the action fell within the narrow parameters of the Lomé waiver. The Lomé waiver accordingly was not a defence for the measures that were the subject of this dispute that were inconsistent with Article I of GATT.

IV.52 The Complaining parties argued that the waiver only applied to violations of Article I "to the extent necessary to permit the EC to provide preferential treatment" to ACP products "as required by the relevant provisions" of the Lomé Convention. The waiver did not apply to all measures that the EC might adopt under the Lomé Convention�s objectives. In their view, the Lomé Convention left the EC with broad discretion permitting it to comply with its WTO obligations as it sought to develop common rules for bananas. In order to determine whether an EC measure which might violate Article I was covered by the waiver, the Panel had therefore to reach a conclusion that such a measure was "required" by the Lomé Convention.

IV.53 The Complaining parties submitted that the EC had attempted to portray this dispute as being "all about" the EC�s need to meet its obligations under the Lomé Convention. The EC was subject to numerous requirements under the Lomé Convention, many of which involved direct assistance and development. ⁴⁶² However, the Convention did not, according to the Complaining parties, cover non-traditional ACP bananas at all, did not require the kind of licensing arrangements applied to Latin American bananas, did not "guarantee" any specific level of imports from ACP countries, and was therefore not covered by the GATT waiver obtained in 1994 for violations of GATT Article I "required" by the relevant provisions of the Convention. Moreover, the EC provided trade preferences with respect to a broad variety of exports, but had not seen fit to impose the kinds of licensing requirements in its MFN trade with respect to those other products.

IV.54 According to the Complaining parties, the EC had misidentified the provisions of the Lomé Convention that were covered by the waiver and ignored the long-standing GATT interpretive framework requiring the strict construction of waivers. Upon proper analysis, in the view of the Complaining parties, the Panel could only conclude that the EC�s Lomé obligations with respect to trade in bananas did not require it to adopt the measures for banana imports that were the subject of this dispute. The Complaining parties submitted that GATT panels had consistently considered that waivers from GATT obligations were granted only in exceptional cases and should be construed narrowly within their explicit terms. In the Sugar Headnote case, for example, the panel noted that because waivers abrogated obligations under the basic rules of the GATT, they "are granted according to Article XXV:5 only in `exceptional circumstances'," and "their terms and conditions consequently have to be interpreted narrowly." ⁴⁶³ This approach was consistent with the approach of past panels in interpreting GATT exceptions. ⁴⁶⁴

IV.55 The Complaining parties further submitted that the Lomé waiver had been precisely and narrowly drawn up by the CONTRACTING PARTIES to waive only Article I:1, ⁴⁶⁵ and only "to the extent necessary ... to provide preferential treatment for ... ACP States as required by the relevant provisions of the Fourth Lomé Convention." ⁴⁶⁶ In October 1994, the EC originally had requested a broader waiver, one that extended to "preferential treatment ... as foreseen by the relevant provisions of the Fourth Lomé Convention." The United States and Guatemala had insisted that the originally-proposed language be changed to "preferential treatment ... as required by the relevant provisions of the Fourth Lomé Convention." ⁴⁶⁷ The deletion of the term "foreseen" had clarified the intent to exclude from the Lomé waiver�s coverage any measure based solely upon an "authorization" or "exhortation" in the Lomé Convention. The insertion of the term "as required" had further clarified that only those measures that were mandatory and legally binding under the Lomé Convention were to be protected by the waiver. This drafting correction, combined with the GATT principles of waiver interpretation, did not permit the Lomé waiver to cover EC legislation allegedly based on Lomé Convention objectives, authorizations and exhortations. These were not, in the opinion of the Complaining parties, "requirements" of the Lomé Convention. As also observed in the context of Article XIII of the GATT, the Lomé waiver�s explicit application to Article I could not be read to extend directly or indirectly beyond Article I to include other GATT or WTO obligations. The waiver for the Lomé Convention was not drafted to take care of the banana problem; it applied to all products covered by the treaty. It could not be presumed, in disregard of its explicitly limited application to Article I, to legitimize all EC banana measures in force as of December 1994. This would be contrary to the drafting history of the Lomé waiver and GATT practice. As stated by the working party examining the United States Section 22 waiver:

IV.57 The EC reiterated that it requested the waiver on 10 October 1994 with the aim "to improve legal certainty for the trade of ACP countries". In response to a question by the Panel, the EC noted that while the word "foreseen" in the original request was replaced by "required", the change was not a substantial one since the word "foreseen" was supposed to describe exactly the same intention as "required". Both words covered the preferential treatment which had been mutually agreed between the parties to the Lomé Convention, ACP on the one side and EC on the other. Subject to minor modifications, the text approved by the CONTRACTING PARTIES corresponded to the one proposed by the EC. Indeed, during the procedure for approval under Article XXV, Guatemala asked for consultations in a letter dated 22 November 1994. Consultations were held the 30 November 1994 in the presence of a representative from Jamaica on behalf of the other ACP countries. During that meeting, Guatemala had asked for some amendments to the text, in particular: preferential treatment in paragraph 1 to be limited to "customs duties"; the word "unduly" in paragraph 3 to be deleted; and that the waiver not to cover fresh bananas. None of these suggestions were retained by the Contracting parties. In the EC view, this meant, inter alia, that no doubt whatsoever could be raised on the fact that the waiver covered preferential treatment resulting from measures taken by the EC other than customs duties and that it concerned fresh bananas.

IV.58 In the EC view it was clear from the text of the waiver itself, that the Lomé waiver concerned "'preferential treatment' for products originating in ACP States as required by relevant provisions of the Fourth Lomé Convention...". The waiver did not refer to measures of any kind, let alone measures of mandatory nature which should be allegedly present in the Lomé Convention. As already stated, the EC and the ACP countries had undertaken a certain number of obligations. Among them, the EC considered it was bound: (i) to ensure that no ACP State shall be placed, as regards access to its traditional markets and its advantages on those markets, in a less favourable situation than in the past or at present (Protocol 5, Article 1); (ii) to ensure more favourable treatment than that granted to third countries benefiting from the most-favoured-nation clause for the same product (Article 168(2)(a)(ii)); (iii) to use all means available under the Convention, including trade cooperation and those on financial and technical cooperation, for the achievement of the objective of trade development aimed at developing, diversifying and increasing the ACP States' trade and improving their competitiveness (Article 15a); and (iv) to provide special arrangements for the EC import of certain ACP products in order to promote and diversify trade between the contracting parties (Article 24, second indent).

IV.59 In the EC view, what the Lomé waiver was about was the possibility for the EC not to extend a particular preferential treatment, required by the Lomé Convention under the above mentioned provisions, to the other Members. What the Lomé waiver was not about was the examination of the possible violation of any WTO provision by the measures taken by the EC to fulfil its obligations under the Lomé Convention. There was therefore no reason why the Complaining parties (and the Panel) should examine the content of the single measures taken by the EC with respect to the waiver and Article I:1 of GATT 1994 and not their end result, the preferential treatment, which was the only matter that was covered by the waiver. Even less evident was the argument raised that the measures taken by the EC to fulfil its obligations under the Lomé Convention should be linked to any "mandate", "exhortation" or "authorization". The word "required" was grammatically and logically linked to the words "to provide preferential treatment" in the Lomé waiver. The preferential treatment was therefore the central issue for the interpretation of the scope of the Lomé waiver: the Panel should verify if and when preferential treatment was required by the Lomé Convention and, according to this verification, if that preferential treatment should be extended on an MFN basis to the other Members in application of Article I:1 or be waived from this obligation. The means by which the preferential treatment was achieved was of no avail for Article I:1 and, accordingly, for the interpretation of the scope of the waiver. For this reason, any reference to EC secondary legislation was ill placed and not relevant in this context. The EC submitted that the Panel should consider only the treatment for ACP bananas which was the result of such legislation. Any different interpretation would radically change a posteriori the understanding among the CONTRACTING PARTIES on the scope of the waiver and undermine the legal certainty that was the paramount reason that convinced the EC to request it in the first place. The Lomé Convention allowed full discretion, therefore, as to which means (and specific measures) the EC used to fulfil its obligations, in order that the overall objectives were met.

IV.60 Furthermore, the term "preferential treatment" were not a generic expression but the evidence of a specific will of the CONTRACTING PARTIES to waive that treatment from the obligations of Article I:1, irrespective of the measures taken by the EC to achieve it. Previous waivers of similar nature like United States - Caribbean Basin Countries, United States - Andean Trade Preferences Act, United States - Imports of Automotive Products, Canada - Commonwealth Caribbean Countries referred much more specifically to "... provide duty-free treatment" and not to "preferential treatment". The different wording underlined the extended scope of the waiver covering any preferential treatment required by the Lomé Convention. A precedent in the same line could be found in the waiver United States - Former Trust Territory of the Pacific Islands.

IV.61 According to the EC, this interpretation was indisputable: the whole text of the waiver referred only to the preferential treatment. The EC referred in particular to the language in paragraph 5 where reference was made to a requirement for an "annual report on the implementation of the preferential treatment for products originating in ACP States", and paragraph 2 where an obligation was imposed upon the parties to the Lomé Convention to "promptly notify the contracting parties of any changes in the preferential treatment to products originating in ACP States". Thus, the object of the Panel's examination was, according to the EC, limited to the verification of two elements: (i) the existence of a provision in the Lomé Convention requiring that a preferential treatment be granted to bananas originating in ACP States; and (ii) that the preferential treatment accorded did not manifestly "raise undue barriers or create undue difficulties for the trade of other contracting parties" as indicated in the third considering clause of the preamble to the waiver.

IV.62 The EC suggested that the Panel, having verified the existence of the obligations for the EC to grant a preferential treatment for the bananas originating in ACP countries, accept that treatment could not be extended to other Members unless evidence was submitted by the Complaining parties that undue barriers or undue trade difficulties were created for the bananas imported from those Complaining parties. According to the EC, this had never been shown by any of the Complaining parties. On the contrary, the legal and factual reality showed that while Latin American bananas entered the EC market making full use of the EC tariff quota - whose size was not affected at all by the existence of a completely separate regime for ACP traditional bananas - the ACP traditional bananas were not able to fill their quota under the ACP regime in spite of the preference granted to those countries by the EC.

IV.63 The Complaining parties noted that past reports had considered that the party invoking an exception bore the burden of demonstrating that each measure inconsistent with the GATT met every condition of the exception. ⁴⁶⁹ Both the EC and the ACP countries had sought to avoid this rigorous examination by arguing that the Lomé Convention could only be interpreted by its signatories. The second Banana panel had rejected a similar argument in the context of the Lomé Convention�s consistency with GATT Article XXIV, finding that review of the Lomé Convention was required in order to determine the EC�s obligations. The panel declared:

IV.65 The Complaining parties thus contested the EC's right to preclude the Panel from deciding what was and what was not required or relevant under the Lomé Convention, by reserving for Lomé signatories an exclusive right to interpret the treaty. This view was plainly inconsistent with the nature of the Panel proceedings; if the waiver was conditioned on a particular application of the Lomé Convention's relevant provisions (and the waiver was clearly a relevant provision of the WTO), the Lomé Convention's relevant provisions effectively amended the EC�s WTO obligations, and therefore, were obviously within the Panel's terms of reference. Just as domestic laws and regulations were routinely reviewed by GATT dispute settlement panels, the meaning of another agreement simply presented a question of fact for the Panel to determine. If the Panel were to accept the argument put forth by the EC, it would mean that the parties to the Lomé Convention could unilaterally determine the scope of coverage of a WTO waiver, while Members or any panel interpreting the WTO could not. This would be absurd in the Complaining parties view. The Complaining parties claimed that as an exception to the General Agreement, a waiver must be strictly construed and the party invoking the waiver bore the burden of showing that it applied. In this particular instance, the burden was heavy indeed, since the waiver was only for "required" violations. In the opinion of the Complaining parties, the waiver did not give the EC carte blanche to adopt any discriminatory banana measure that it considered consistent with the objectives of the Lomé Convention.

IV.66 The EC returned to its opinion that the Panel was not empowered to provide an interpretation of an international agreement, on which it has no jurisdiction, which was different from the one upon which the parties to that international agreement agree. In the EC view, the situation was legally different from the one described by the Complaining parties. When Panels were requested to judge on an alleged violation of certain WTO rules by measures implemented by a Member which were adopted in application of domestic laws or regulations, those laws or regulations were an element of the violation itself and therefore should be taken into the picture. In the present case, on the contrary, the Lomé Convention was not an element of any alleged violation of any WTO provision. Moreover, with respect to the Complaining parties' argument, those laws or regulations concerned only one Member and not an agreed provision between two Members, or, between a Member and a non-member, as was also the case here. In the particular case, an agreed interpretation about the extent of reciprocal obligations - as the Vienna Convention stipulated in Article 31.3(a) and (b) and 31.4 - was an essential element of the correct interpretation (and implementation) of the content of the agreement. Contrary to the description provided by the Complaining parties, the Lomé waiver was concerned with preferential treatment accorded by the EC to products originating in ACP countries. No measure was referred to in the waiver since no specific measure was actually "required" by the Lomé Convention.

IV.67 What the Panel should therefore verify when examining the scope of the waiver and its application, was if a certain preferential treatment accorded by EC to ACP originating bananas was "required" by the Lomé Convention itself; that was if it was founded on an obligation flowing from that Treaty. The provisions quoted earlier were of plain and direct comprehension, the EC argued, and did not need any interpretative exercise so one might suggest that the Roman wisdom should be (easily) followed: "in claris non fit interpretatio". However, should any doubt concerning the interpretation of a specific provision be raised, then only the parties to the Lomé Convention should be the ultimate authorities for the authentic interpretation of that clause. This was even more necessary, in the EC view, considering that the other parties to the Lomé Convention - that is the ACP States -did not have the opportunity fully to defend their case in front of the Panel. It could not be admitted that a party to an international agreement should be bound to an interpretation of that agreement that the contracting parties might not share and against which they were not even allowed to exercise completely their right of defence.

IV.68 In response to a question posed by the Panel, the EC further submitted that the last paragraph of the Lomé waiver meant that any Member could complain of a lack of observance of the terms or conditions of the waiver. If the terms and conditions of a waiver were not fulfilled, this constituted a breach of the waiver and a panel could make any rulings and recommendations pertaining to such waiver, just as it can make such rulings and recommendations in respect of a breach of the GATT and Annex IA Agreements. The EC was, however, firmly convinced that a panel could not rule on a non-violation complaint in respect of a waiver. Article 3(b) of the 1994 Understanding in Respect of Waivers was clearly decided in error, because it was incoherent with standing case law on non-violation complaints. Non-violation complaints could only be granted if the complaining party had reasonable expectations that certain benefits would accrue to it, but they had been nullified or impaired by an act which was lawful under the GATT. ⁴⁷¹ In the case of bananas, such reasonable expectations had been entirely destroyed by the granting of the Lomé waiver as recently as 1994, when the banana regime was already in force. The only reasonable expectation that a Member could have, in the EC's view, was that the terms of the waiver would be respected and this could lead to a complaint concerning the violation of the waiver. In the case the question did not arise as the Complaining parties had never seriously advanced a non-violation claim, whether during consultations, in their request for the establishment of a panel, in their submissions, or during the first meeting with the panel. Moreover, the Complaining parties had failed to discharge their special burden of justification under Article 26(a) of the DSU. All this demonstrated, the EC argued, that the Panel should not entertain a non-violation claim.

IV.69 The Complaining parties considered that the EC�s assertion that the waiver covered any and all kinds of preferential treatment that the EC decided to attribute to its Lomé Convention obligations was alarming and without any basis. They asked how many measures, and with respect to how many products, the EC would attempt to slip under such a broad waiver. In the view of the Complaining parties, after having accepted a WTO waiver in terms of certain preferential treatment required by the Lomé Convention, the EC could not now demand that dispute settlement panels refrain from any examination of the relationship between the two sets of obligations, in particular what was "required by" the Convention. The EC�s theory that the waiver covered ACP benefits negotiated between the parties to the Convention (allegedly pursuant to broad Convention objectives) provided no security to Members that had provided the waiver. Granting the EC the exclusive right to interpret the waiver would only encourage future violations of GATT Article I which would be inconsistent with WTO objectives and practice. This was wholly contrary to the purpose of WTO obligations; only the WTO could interpret the Lomé waiver, and in order to do so, the Panel was required to examine what was strictly required by the Lomé Convention.

IV.70 With respect to the specific provisions of the Lomé Convention, Guatemala and Honduras argued that both Protocol 5 and Annex LXXIV, the two Lomé Convention provisions that most directly addressed the treatment of ACP bananas, pointedly emphasized that Lomé Convention benefits extended only to traditional ACP suppliers. Article 1 of Protocol 5 contained the statement that:

TO CONTINUE WITH EC - REGIME FOR IMPORTATION OF BANANAS - COMPLAINT BY ECUADOR

⁴⁵⁵ BISD 28S/102, para. 4.4 (adopted 11 June 1981); see also "EEC - Member States' Import Regimes for Bananas", DS32/R, paras. 211, 375 (issued May 1993).

⁴⁵⁶ DS32/R, paras. 214, 364-375 (issued 3 June 1993) (wherein the panel gave no weight to Respondent's argument that the 20 per cent ad valorem tariff discrimination among suppliers could not be considered discriminatory because the rate had no trade effect). See also "United States - Taxes on Petroleum and Certain Imported Substances", BISD 34S/136 (adopted 17 June 1987) (wherein the panel rejected an analogous argument by the United States that its discriminatory taxes and tax differential were de minimis, and therefore did not nullify or impair benefits under the General Agreement).

⁴⁵⁷ "EEC - Member States' Import Regimes for Bananas", DS32/R, para. 375 (issued 3 June 1993); "EEC - Import Regime for Bananas", DS38/R, para. 155 (issued 11 February 1994).

⁴⁵⁸ Council Regulation (EEC) No. 404/93, recital fifteen.

⁴⁵⁹ Stabex could be applied for a shortfall in income from banana exports to the Community (Article 187). Because Stabex resources were finite and many products were covered by it, in reality it could not, and was not intended to, fully compensate for such shortfalls. It aimed at stabilization instead of compensation. It provided a temporary cushion in case shortfalls were very abrupt.

⁴⁶⁰ Yaoundé I: BISD 14S/22 and 100; Yaoundé II: BISD 18S/1333; Lomé I: BISD 23S/46; Lomé II: BISD 29S/119; Lomé III: BISD 35S/321.

⁴⁶¹ The Community made a declaration, contained in Annex LXXV to the Lomé IV Convention to the effect that the new ACP States party to the Convention (i.e. Haiti and the Dominican Republic) were not considered as traditional suppliers.

⁴⁶² See Article 186, guaranteeing export earnings under Stabex and the Financial Protocol, which required specific amounts of EC aid to be earmarked for regional projects and emergency assistance.

⁴⁶³ See "United States - Restrictions on the Importation of Sugar and Sugar-Containing Products Applied under the 1955 Waiver and under the Headnote to the Schedule of Tariff Concessions", adopted 7 November 1990, BISD 37S/228, para. 5.9; see also, E/PC/T/C.V/PV/9, p.8.

⁴⁶⁴ See "United States - Countervailing Duties on Fresh, Chilled and Frozen Pork from Canada", adopted 11 July 1991, BISD 38S/30, para. 4.4 (Article VI:3); "United States - Measures Affecting Alcoholic and Malt Beverages", adopted 19 June 1992, BISD 39S/206, para. 5.41 (Article XX(d)); "Canada - Import Restrictions on Ice Cream and Yoghurt", adopted 5 December 1989, BISD 36S/68, para. 59 (Article XI:2(c)).

⁴⁶⁵ Working Parties have been careful in writing the text of waivers to ensure that the language covered only those measures for which the waiver was sought. See e.g. "United States - Caribbean Basin Economic Recovery Act", adopted 15 February 1985, BISD 31S/20, para. 1 (wherein the language of the waiver specifically limited it to duty-free treatment for products of Caribbean Basin countries benefiting from the CBI).

⁴⁶⁶ Lomé waiver, para. 1.

⁴⁶⁷ See Minutes of the CONTRACTING PARTIES, SR 50/1.

⁴⁶⁸ "Import Restrictions Imposed by the United States Under Section 22 of the United States Agricultural Adjustment Act", 5 March 1955, BISD 3S/141, para. 10.

⁴⁶⁹ "EEC - Restrictions on Imports of Dessert Apples - Complaint by Chile", adopted 22 June 1989, BISD 36S/93, and "EEC - Restrictions on Imports of Apples - Complaint by the United States", adopted 22 June 1989, BISD 36S/135, para. 12.3. See also "Canada - Administration of the Foreign Investment Review Act", para. 5.20; "United States - Countervailing Duties on Fresh, Chilled and Frozen Pork from Canada", para. 4.4.

⁴⁷⁰ Second Banana panel, paras. 156-158.

⁴⁷¹ See "Treatment by Germany of Imports of Sardines", BISD 1S/58, para. 16 and "EEC - Payments and Subsidies Paid to Processors and Producers of Oilseeds", BISD 37S/86, paras. 128-129.

⁴⁷² See "Report of the ACP-EEC Council of Ministers", 1976-1980, Brussels, 1980, p.44. See also Manganza, G., "La Convention de Lomé", Collection Mégret-droit de la CEE, vol. 13, p.317.