What's New?
 - Sitemap - Calendar
Trade Agreements - FTAA Process - Trade Issues 

español - français - português
Search

WORLD TRADE
ORGANIZATION

WT/DS246/R
1 December 2003

(03-6284)

Original: English

EUROPEAN COMMUNITIES - CONDITIONS FOR
 THE GRANTING OF TARIFF PREFERENCES
 TO DEVELOPING COUNTRIES


Report of the Panel



TABLE OF CONTENTS

I. INTRODUCTION

II. FACTUAL ASPECTS

  1. the scheme of generalized tariff preferences adopted by the european communities
  2. the general arrangements 
  3. the drug arrangements

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

IV. ARGUMENTS OF THE PARTIES

  1. first written submission of india
  1. Factual background
  2. Legal arguments

(a) The Drug Arrangements are inconsistent with Article I:1 of GATT 1994 
(b) The European Communities requested a waiver and implemented the Drug Arrangements without obtaining a waiver
(c) The European Communities bears the burden of justifying its Drug Arrangements under the Enabling Clause
(d) The Drug Arrangements cannot be justified under the Enabling Clause

  1. first written submission of the european communities
  1. The Enabling Clause

(a) The Enabling Clause excludes the application of Article I:1 of the GATT

(b) The Enabling Clause does not impose an obligation to accord unconditional MFN treatment to the developing countries

(i) The Enabling Clause does not impose an obliation to grant "differential and more favourable treatment" to all developing countries on an MFN basis
(ii) The Enabling Clause does not impose an obligation to grant differential and more favourable treatment "unconditionally"
(iii) In any event, the Drug Arrangements are "unconditional" 
The case law on the interpretation of the term "unconditionally" 
The ordinary meaning of "unconditionally"
The meaning of "unconditionally" in the context of MFN clauses 

(c) The Drug Arrangements are consistent with the Enabling Clause

(i) The Drug Arrangements are "non-discriminatory" 
The interpretation of the term "non-discriminatory" in paragraph 2(a) 
Treating differently the developing countries that are particularly affected by the drug problem is not "discriminatory"
The application of the Drug Arrangements is "non-discriminatory"
(ii) The Drug Arrangements are "beneficial to the developing countries" 
(iii) The Drug Arrangements respond positively to the needs of developing countries

  1. Article XX(b) of GATT 1994

(a) Introduction 
(b) The Drug Arrangements are necessary for the protection of human life or health 

(i) Drugs pose a risk to human life or health
(ii) The Drug Arrangements are "necessary" to fight drug production and trafficking
The "values" pursued by the Drug Arrangements
Contribution of the Drug Arrangements to the protection of human life and health
Trade impact of the Drug Arrangements

(c) The Drug Arrangements are applied consistently with the chapeau 

(i) Arbitrary or unjustifiable discrimination
(ii) Disguised restriction

  1. oral statement of india at the first substantive meeting of the panel
  1. Procedural arguments 

(a) Joint representation of India and Paraguay by the same staff of the Advisory Centre on WTO Law 

  1. Substantive arguments

  1. oral statement of the european communities at the first substantive meeting of the panel 31
  1. Procedural arguments

(a) Joint representation of India and Paraguay by the same staff of the Advisory Centre on WTO Law 31

  1. Substantive arguments

(a) The implications of this dispute
(b) The Enabling Clause
(c) Article XX of GATT 1994

  1. second written submission of india
  1. The Drug Arrangements are inconsistent with Article I:1 and the European Communities bears the burden of proof under the Enabling Clause

  2. The Enabling Clause does not exclude the application of Article I:1 but authorizes limited derogation 

  3. "non-discriminatory"

(a) Introduction
(b) GATT 1994 as context
(c) Paragraph 2(d) and 2(b) as context
(d) "the developing countries" in paragraph 2(a) as context
(e) UNCTAD instruments as context and drafting history
(f) Paragraph 3(c) as context 
(g) "Generalized" as context 
(h) Implications for the WTO multilateral system

  1. The application of the Drug Arrangements is not "non-discriminatory" 
  2. The Drug Arrangements are not justified under Article XX 

(a) The Drug Arrangements do not constitute a measure under Article XX(b)
(b) Drug Arrangements are not "necessary" within the meaning of Article XX(b)
(c) Drug Arrangements do not meet the requirements of the chapeau of Article XX

  1. second written submission of the european communities
  1. Relationship between GATT Article I:1 and the Enabling Clause

(a) Special and differential treatment
(b) Drafting history of the 1971 Decision
(c) "Positive rights"/"exceptions"
(d) "Autonomous right"/"affirmative defence"

  1. The Enabling Clause

(a) Paragraph 1 

(i) "Other Members"
(ii) "Unconditionally"

(b) "Non-discriminatory" in paragraph 2(a) 

(i) The ordinary meaning 
(ii) The context 
(iii) The object and purpose 
(iv) Drafting history
(v) The Appellate Body report in EC - Bananas III 

(c) "Non-reciprocal" in paragraph 2(a) 
(d) "Beneficial" in paragraph 2(a)
(e) Paragraph 3(c) 

  1. Article XX of GATT 1994 

(a) Drugs pose a risk to human life or health

(b) The Drug Arrangements are necessary to fight drug production and trafficking

(i) The values pursued by the Drug Arrangements
(ii) Contribution of the Drug Arrangements to the protection of human life and health 
Tariff preferences are an appropriate response to the drug problem
The Drug Arrangements apply to all developing countries affected by the drug problem which do not benefit from more favourable tariff treatment under other arrangements
The inclusion of developed countries in the Drug Arrangements would be unnecessary
The countries not included in the Drug Arrangements do not pose a threat to the sanitary situation within the European Communities
It is unnecessary to require that the beneficiaries implement certain anti-drug policies 
(iii) There are no less restrictive alternatives 

(c) The Drug Arrangements are applied consistently with the chapeau 

  1. oral statement of india at the second substantive meeting of the panel 
  1. Introduction
  2. The allocation of the burden of proof 
  3. The relationship between the Enabling Clause and Article I:1 of GATT 1994 
  4. The legal interpretation of the term "non-discriminatory" and the UNCTAD arrangements
  5. Paragraph 3(c) of the Enabling Clause
  6. Alternative arguments on non-discrimination 
  1. oral statement of the european communities at the second substantive meeting of the panel   

1. Relationship between Article I:1 of the GATT and the Enabling Clause

(a) The Enabling Clause is not an "affirmative defence" 

(i) The Enabling Clause recognizes an "autonomous right" 
(ii) The Enabling Clause imposes "positive obligations"
(iii) Previous panels have not treated the Enabling Clause as an affirmative defence
(iv) The report of the Appellate Body in Brazil - Aircraft supports the European Communities position

(b) India has the burden to prove that Article I:1 of the GATT applies to the Drug Arrangements
(c) The Enabling Clause excludes the application of Article I:1 of the GATT
(d) The meaning of "unconditionally" in Article I:1 of the GATT

2. The Enabling Clause

(a) The meaning of "non-discriminatory" in paragraph 2(a)

(i) The GATT context
(ii) Paragraph 2(d)
(iii) The use of "the" before "developing countries"
(iv) The UNCTAD Arrangements
(v) Paragraph 3(c) and policy arguments

(b) The Drug Arrangements are "non-discriminatory"

3. Article XX of GATT 1994

(a) The Drug Arrangements are "necessary" for the protection of human life and health 64

(b) The Drug Arrangements are applied consistently with the chapeau 64

V. ARGUMENTS OF THE THIRD PARTIES

  1. the andean community
  1. Introduction
  2. The important implications of this dispute for the Andean Community
  3. The pivotal role of the Enabling Clause as part of the GATT/WTO regime for developing countries and as a self-standing regime  
  4. "Other contracting parties" in paragraph 1 
  5. Paragraph 3(c) of the Enabling Clause 
  6. The interpretation of the term "non-discriminatory" in footnote 3 of the Enabling Clause
  1. costa rica
  1. Introduction
  2. The important implications of this dispute for Costa Rica
  3. The Enabling Clause does not prohibit the granting of preferential tariff treatment to some developing countries
  4. The Enabling Clause requires donor countries to differentiate between developing countries
  5. The Drug Arrangements provided by the European Communities are non-discriminatory
  6. Paragraph 3(b) of the Enabling Clause precludes preferential treatment from constituting an impediment to the reduction or elimination of tariffs and other restrictions to trade on an MFN basis
  1. the central american countries of el salvador, Guatemala, honduras and nicaragua
  1. Introduction
  2. The designation of the beneficiaries of the Drug Arrangements and the assessment of the gravity of the drug problem in Central America  
  3. The Enabling Clause is applicable to the Drug Arrangements
  4. The Drug Arrangements are a positive response to the needs of developing countries 
  1. mauritius
  1. Introduction
  2. India bears the burden of proof 
  3. The Drug Arrangements are non-discriminatory 
  4. The Drug Arrangements are justified through recourse to Article XX(b) of GATT 1994 
  1. pakistan
  1. Introduction
  2. Article I:1 of the GATT 1994 does not apply to the Enabling Clause
  3. The Drug Arrangements do not require a waiver
  4. The inclusion of Pakistan in the Drug Arrangements is not to further the policy objectives of the European Communities
  1. panama
  1. Introduction 
  2. The important implications of this dispute for Panama 
  3. The Enabling Clause is drafted as a statute separate and distinct from the provisions of Article I:1 of GATT 1994
  4. The Drug Arrangements are not in contravention of Article I:1 of GATT 1994, and paragraph 2(a) of the Enabling Clause 
  5. The Enabling Clause authorizes differentiation between beneficiaries without establishing discrimination  
  6. The Drug Arrangements are a positive response to the development needs of Panama and are supported by paragraph 3(c) of the Enabling Clause 
  1. paraguay
  1. Introduction 
  2. Preliminary issue of joint representation
  3. Systemic concerns 

(a) The elimination of discrimination is a primary objective of the multilateral trading system
(b) The issue of discrimination on the basis of "objective criteria" is not a matter before the Panel
(c) The Enabling Clause in any case does not permit differentiation in treatment between developing countries in the context of GSP schemes
(d) The waiver mechanism provides the required flexibility 

  1. Concerns specific to the situation of Paraguay
  2. Conclusion
  1. united states
  1. Introduction
  2. The preliminary issue of legal representation
  3. The Enabling Clause excludes the application of Article I:1 of GATT 1994 
  4. "All" developing countries
  5. The Enabling Clause reference to "non-discriminatory" 
  6. Article XX of GATT 1994

VI. INTERIM REVIEW

  1. introduction
     
  2. Comments by the European Communities 
  1. Joint Representation of India and Paraguay 
  2. Paragraph 3(c) 
  3. "Non-discriminatory" in footnote 3
  4. Paragraph 2(a) 
  5. Dissenting Opinion 

VII. FINDINGS

  1. procedural issues
  1. Joint representation of India and Paraguay 

(a) Introduction
(b) Conflict of interest 
(c) Confidentiality 
(d) Blurring the distinction between parties and third parties 

  1. claims of the parties 
     
  2. the nature of the enabling clause and its relationship to article i:1 of gatt 1994
  1. Introduction
  2. Arguments of the parties
  3. Panel's analysis

(a) Nature of the Enabling Clause
(b) Burden of proof under the Enabling Clause
(c) Applicability of Article I:1
(d) Relevant jurisprudence
(e) Relevance of the importance of the policy objective pursued

  1. Summary of findings on the nature of the Enabling Clause and its relationship to Article I:1
  1. whether the drug arrangements are inconsistent with article i:1 
     
  2. whether the drug arrangements are justified under the enabling clause
  1. Introduction 
  2. Paragraph 3(c) 

(a) Arguments of the parties
(b) Panel's analysis

(i) Introduction
(ii) Status of the Agreed Conclusions for the interpretation of the Enabling Clause
(iii) Product coverage and depth of tariff cuts as part of the Agreed Conclusions
(iv) Responding positively to development needs of developing countries
(v) Whether a GSP scheme can be accorded to less than all developing countries
(vi) Safeguard mechanisms
(vii) Paragraph 2(d)

(c) Summary of findings on the interpretation of paragraph 3(c)

  1. "Non-discriminatory" in footnote 3

(a) Arguments of the parties
(b) Panel's analysis

(i) Introduction
(ii) Resolution 21(II)
(iii) Agreed Conclusions
(iv) Recommendation A.II.1 of the First Session of UNCTAD
(v) Paragraph 2(d)
(vi) Paragraph 3(c)
(vii) Relevance of Article I:1 of GATT 1994
(viii) Relevance of other GATT provisions
(ix) Object and purpose
(x) Practice of preference-giving countries

(c) Summary of findings as to the meaning of "non-discriminatory"

  1. Paragraph 2(a)

(a) Arguments of the parties
(b) Panel's analysis

  1. Conclusion on the Enabling Clause
  1. article XX(b) of gatt 1994 as a justification for the drug arrangements
  1. Introduction 
  2. Arguments of the parties 
  3. Panel's analysis 

(a) Whether the Drug Arrangements constitute a measure under Article XX(b)
(b) Necessity of the measure
(c) "Chapeau"

  1. Summary of findings on Article XX

VIII. CONCLUSIONS  AND RECOMMENDATIONS

IX. DISSENTING OPION BY ONE MEMBER OF THE PANEL

 

table of cases cited in this report
 

Short Title

Full Case Title and Citation

Argentina - Textiles and Apparel Appellate Body Report, Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/AB/R and Corr.1 adopted 22 April 1998, DSR 1998:III, 1003
Belgium - Family Allowances Panel Report, Belgian Family Allowances (allocations familiales), adopted 7 November 1952, BIDS 1S/59
Brazil - Aircraft Appellate Body Report, Brazil - Export Financing Programme for Aircraft, WT/DS46/AB/R, adopted 20 August 1999, DSR 1999:III, 1161
Canada - Aircraft Appellate Body Report, Canada - Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377
Canada - Autos Panel Report, Canada - Certain Measures Affecting the Automotive Industry, WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified by the Appellate Body Report, WT/DS139/AB/R, WT/DS142/AB/R, DSR 2000:VII, 3043
Canada - Autos Appellate Body Report, Canada - Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2995
Canada - Pharmaceutical Patents Panel Report, Canada - Patent Protection of Pharmaceutical Products, WT/DS114/R, adopted 7 April 2000, DSR 2000:V, 2295
EC - Asbestos Appellate Body Report, European Communities - Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001
EC - Bananas III Appellate Body Report, European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591
EC - Hormones Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135
EC - Sardines Appellate Body Report, European Communities - Trade Description of Sardines, WT/DS231/AB/R, adopted 23 October 2002
India - Patents (US) Appellate Body Report, India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9
Indonesia - Autos Panel Report, Indonesia - Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3, and 4, adopted 23 July 1998, DSR 1998:VI, 2201
Japan - Alcoholic Beverages II Appellate Body Report, Japan - Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
Korea - Dairy Appellate Body Report, Korea - Definitive Safeguard Measure on Imports of Certain Dairy Products, WT/DS98/AB/R, adopted 12 January 2000, DSR 2000:I, 3
Korea - Various Measures on Beef Appellate Body Report, Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001
Turkey - Textiles Appellate Body Report, Turkey - Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, adopted 19 November 1999, DSR 1999:VI, 2345
US - Customs User Fee Panel Report, United States - Customs User Fee, adopted 2 February 1988, BISD 35S/245
US - Gasoline Appellate Body Report, United States - Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3
US - FSC Appellate Body Report, United States - Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619
US - FSC (Article 21.5 - EC) Appellate Body Report, United States - Tax Treatment for "Foreign Sales Corporations" - Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002
US - Offset Act (Byrd Amendment) Appellate Body Report, United States - Continued Dumping and Subsidy Offset Act of 2000, WT/SD217/AB/R, WT/DS234/AB/R, adopted 27 January 2003
US - Section 337 Panel Report, United States Section 337 of the Tariff Act of 1930, adopted 7 November 1989, BISD 36S/345.
US - Shrimp Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755
US - Wool Shirts and Blouses Appellate Body Report, United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R and Corr.1, adopted 23 May 1997, DSR 1997:I, 323
US - MFN Footwear Panel Report, United States - Denial of Most-Favoured-Nation Treatment as to Non-Rubber Footwear from Brazil, adopted 19 June 1992, BISD 39S/128

LIST OF ANNEXES
 

 

Page

ANNEX A

Annex A Decision of the Panel on the Request for Enhanced Third Party Rights A-2

ANNEX B

Parties

Annex B-1 Replies of India to Questions from the Panel after the First Panel Meeting B-2
Annex B-2 Replies of the European Communities to Questions from the Panel after the First Panel Meeting B-36
Annex B-3 Replies of the European Communities to Questions from India after the First Panel Meeting B-68
Annex B-4 Replies of India to Questions from the Panel after the Second Panel Meeting B-83
Annex B-5 Replies of the European Communities to Questions from the Panel after the Second Panel Meeting B-111
Annex B-6 Comments of India to the Replies of the European Communities to Question from the Panel after the Second Panel Meeting B-141
Annex B-7 Comments of the European Communities to the Replies of India to Questions from the Panel after the Second Panel Meeting B-159

ANNEX C

Third Parties

Annex C-1 Replies of the Andean Community Collectively to Questions from the Panel and from India after the First Panel Meeting C-2
Annex C-2 Replies of Members of the Andean Community Separately to Questions from the Panel and from India after the First Panel Meeting C-9
Annex C-3 Reply of Brazil to the Question from India after the First Panel Meeting C-14
Annex C-4 Replies of Costa Rica to Questions from the Panel and from India after the First Panel Meeting C-15
Annex C-5 Replies of El Salvador, Guatemala, Honduras and Nicaragua to Questions from the Panel after the First Panel Meeting C-20
Annex C-6 Replies of Panama to Questions from the Panel and from India after the First Panel Meeting C-21
Annex C-7 Replies of Paraguay to Questions from the Panel and from India after the First Panel Meeting C-27
Annex C-8 Replies of the United States to Questions from the Panel and from India after the First Panel Meeting

C-40

ANNEX D

Annex D-1 Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (the "Enabling Clause") D-2
Annex D-2 Decision on Generalized System of Preferences (the "1971 Waiver Decision") D-4
Annex D-3 Resolution of the Second Session of UNCTAD on the Expansion and Diversification of Exports of Manufactures and Semi-Manufactures of developing countries ("Resolution 21 (II)) D-6
Annex D-4 Agreed Conclusions of the Special Committee on Preferences ("Agreed Conclusions") D-8

ANNEX E

Annex E List of Waivers for Preferences

E-I

I. INTRODUCTION

1.1 On 5 March 2002, pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (hereafter the "DSU"), Article XXIII:1 of the General Agreement on Tariffs and Trade 1994 (hereafter the "GATT 1994") and paragraph 4(b) of the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of the Developing Countries1, (hereafter the "Enabling Clause"), India requested consultations with the European Communities regarding the conditions under which the European Communities accords tariff preferences to developing countries under the scheme of generalized tariff preferences formulated under Council Regulation (EC) No.. 2501/2001. The request was circulated to Members on 12 March 2002. 2

1.2 Consultations were held on 25 March 2002, but did not lead to a mutually satisfactory resolution of this matter.

1.3 On 6 December 2002, India requested the Dispute Settlement Body ("DSB") to establish a panel pursuant to Articles 4.7 and 6 of the DSU and Article XXIII:2 of GATT 1994. 3 On 16 January 2003, India requested the establishment of a panel for the second time. On 27 January 2003, the DSB established the Panel with the following terms of reference:

"To examine, in the light of the relevant provisions of the covered agreements cited by India in document WT/DS246/4, the matter referred to the DSB by India in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements." 4

1.4 On 24 February 2003, India requested the Director-General to determine the composition of the Panel pursuant to Article 8.7 of the DSU.

1.5 In its request for the establishment of a panel, India made claims not only with respect to the European Communities' special arrangements to combat drug production and trafficking, but also with respect to the European Communities' special incentive arrangements for the protection of the environment and labour rights. On 28 February 2003, during the meeting with the Director-General regarding the composition of the Panel, India informed both the European Communities and the Director-General that it had decided to limit the present complaint to the tariff preferences granted by the European Communities under its Drug Arrangements. India noted that no preferences had so far been granted under the special incentive arrangements for the protection of the environment and that only one country, Moldova, had thus far been accorded preferences under the special incentive arrangements for the protection of labour rights. India made it clear that it reserved its right to bring separate new complaints on the environmental and labour arrangements if the European Communities were to apply them in a manner detrimental to India's trade interests or if the European Communities were to renew them after the lapse of its current General System of Preferences scheme on 31 December 2004. India confirmed the above in writing in a communication to the European Communities, dated 3 March 2003.

1.6 On 6 March 2003, the Director-General determined the composition of the Panel as follows:

Chairman: Mr Julio Lacarte-Muró
Members: Professor Marsha A. Echols
Professor Akio Shimizu 5

1.7 Bolivia, Brazil, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mauritius, Nicaragua, Pakistan, Panama, Paraguay, Peru, Sri Lanka, the United States and Venezuela reserved their respective right to participate in the panel proceedings as third parties. 6

1.8 On 31 March 2003, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Peru and Venezuela requested the Panel's permission to attend all the Panel meetings, to present arguments at such meetings, to receive copies of all submissions to the Panel, to make submissions to the Panel at its second meeting and to review the draft summary of arguments in the descriptive part of the Panel Report.

1.9 On 8 April 2003, the Panel asked for comments from the parties and third parties regarding the above request. On 17 April 2003, Pakistan also joined in the request for additional third-party rights. Brazil, Cuba, Mauritius, Paraguay and the United States stated that all third parties should be given the same treatment in the event that the Panel decides to grant such additional rights to third parties.

1.10 On 7 May 2003, the Panel decided to provide the following additional rights to all third parties:

  • observe the first substantive meeting with the parties;

  • receive the second submissions of the parties;

  • observe the second substantive meetings with the parties;

  • make a brief oral statement during the second substantive meetings with the parties;

  • review the summary of their respective arguments in the draft descriptive part of the Panel Report. 7

1.11 The Panel met with the parties on 14 and 16 May 2003 as well as on 8 and 9 July 2003. The Panel met with the third parties on 15 May 2003. Further to the decision of 7 May 2003, third parties were given the opportunity to observe the meeting of the Panel with the parties on 14 and 16 May 2003 and on 8 and 9 July 2003 as well as make brief statements on 9 July 2003.

1.12 The Andean Community consisting of Bolivia, Colombia, Ecuador, Peru and Venezuela, the Central America countries of El Salvador, Guatemala, Honduras and Nicaragua, forming respective groups for the purposes of this dispute, as well as Costa Rica, Mauritius, Panama, Paraguay and the United States presented third-party submissions at the first substantive meeting of the Panel. These countries/groups, as well as Bolivia, Colombia, Ecuador, Peru and Venezuela individually, and Pakistan, made oral statements during the first substantive meeting of the Panel. Only the Andean Community, Colombia, Panama, Paraguay and the United States made oral statements during the second substantive meeting of the Panel.

1.13 The Panel issued its interim report to the parties on 5 September 2003. The Panel issued its final report to the parties on 28 October 2003.

II. FACTUAL ASPECTS

2.1 This dispute concerns the special arrangements to combat drug production and trafficking (the Drug Arrangements) as provided in Council Regulation (EC) No. 2501/2001 of 10 December 2001, applying a scheme of generalized tariff preferences for the period from 1 January 2002 to 31 December 2004, as well as the implementation of the Drug Arrangements.

  1. the scheme of generalized tariff preferences adopted by the european communities

2.2 The European Communities applies a scheme of tariff preferences for certain goods from developing countries and economies in transition under Council Regulation (EC) No. 2501/2001 8 ("the Regulation"). The Regulation provides for five different tariff preference arrangements:

(i) the General Arrangements;

(ii) the Special Incentive Arrangements for the protection of labour rights;

(iii) the Special Incentive Arrangements for the protection of the environment;

(iv) the Special Arrangements for least-developed countries; and

(v) the Special Arrangements to combat drug production and trafficking (the "Drug Arrangements").

2.3 Tariff preferences under the General Arrangements are accorded to the countries listed in Annex I to the Regulation. The additional preferences under the Special Incentive Arrangements for the protection of labour rights and the protection of the environment are accorded exclusively to countries which are determined by the European Communities to comply with certain labour and environmental policy standards. The additional preferences under the Special Arrangements for least-developed countries are limited to the least-developed countries listed in Annex I to the Regulation. The Drug Arrangements currently apply to 12 countries. These various arrangements differ in the depth of the tariff cuts provided, the products covered and the requirements that must be met by eligible countries.

  1. the general arrangements

2.4 Under the General Arrangements, all the countries and territories listed in Annex I to the Regulation are eligible to receive tariff preferences. The products covered are listed in Annex IV to the Regulation. These products are divided into two categories: non-sensitive and sensitive.

2.5 Article 7 of the Regulation specifies that non-sensitive products will enjoy duty-free access while sensitive products are subject to reduced tariffs. For sensitive products, the tariff duty reduction is calculated by applying: (i) a flat rate reduction of 3.5 percentage points to the Common Customs Tariff duties in the case of ad valorem duties (except for products of Chapters 50 to 63 where the ad valorem duty is reduced by 20 per cent); or (ii) a 30 per cent reduction to the Common Customs Tariff duties in the case of specific duties (except for products of CN code 2207 where the specific duty is reduced by 15 per cent). Wherever the Common Customs Tariff duty is expressed as a combination of an ad valorem duty and a specific duty, the preferential reduction is limited to the ad valorem duty.

  1. the drug arrangements

2.6 Article 10 of the Regulation states:

"1. Common Customs Tariff ad valorem duties on products, which according to Annex IV, are included in the special arrangements to combat drug production and trafficking referred to in Title IV and which originate in a country that according to Column I of Annex I benefits from those arrangements, shall be entirely suspended. For products of CN code 0306 13, the duty shall be reduced to a rate of 3.6 per cent.

2. Common Customs Tariff specific duties on products referred to in paragraph 1 shall be entirely suspended, except for products for which Common Customs Tariff duties also include ad valorem duties. For products of CN codes 1704 10 91 and 1704 10 99 the specific duty shall be limited to 16 per cent of the customs value."

2.7 The benefits under the Drug Arrangements currently apply to 12 named countries: Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru and Venezuela. The products included under the Drug Arrangements are listed in column D of Annex IV to the Regulation (the "covered products"). This list comprises products that are included in the General Arrangements as well as several products which are not included under the General Arrangements. The covered products enjoy duty-free access to the European Communities' market, except for products of CN codes 0306 13, 1704 10 91 and 1704 10 99, for which Article 10 of the Regulation prescribes different tariff cuts. 9

2.8 The result of the Regulation is that the tariff reductions accorded under the Drug Arrangements to the 12 beneficiary countries are greater than the tariff reductions granted under the General Arrangements to other developing countries. In respect of products that are included in the Drug Arrangements but not in the General Arrangements, the 12 beneficiary countries are granted duty free access to the European Communities' market, while all other developing countries must pay the full duties applicable under the Common Customs Tariff. In respect of products that are included in both the Drug Arrangements and the General Arrangements and that are deemed "sensitive" under column G of Annex IV to the Regulation with the exception for products of CN codes 0306 13, 1704 10 91 and 1704 10 99, the 12 beneficiary countries are granted duty-free access to the European Communities' market, while all other developing countries are entitled only to reductions in the duties applicable under the Common Customs Tariff.

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

3.1 India requests the Panel to find that the Drug Arrangements set out in Article 10 of Council Regulation No 2501/2001 are inconsistent with Article I:1 of GATT 1994 and are not justified by the Enabling Clause. 10

3.2 India requests the Panel to find that the Drug Arrangements have nullified or impaired benefits accruing to India under the GATT 1994. India argues that under Article 3.8 of the DSU, in cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered to constitute a prima facie case of nullification or impairment of benefits under that agreement. 11

3.3 India states that according to Article 19.1 of the DSU, where a panel concludes that a measure is inconsistent with a covered agreement, it shall recommend that the Member concerned bring the measure into conformity with that agreement. Accordingly, India requests the Panel to recommend that the DSB request the European Communities to bring the measure at issue into conformity with the GATT 1994.

3.4 India also indicates that according to the second sentence of Article 19.1 of the DSU, the Panel may suggest ways in which the European Communities could implement the Panel's recommendation. For the reasons set out in the introduction in its first submission, India requests the Panel to suggest that the European Communities brings its measure into conformity with its obligations under the WTO Agreement by:

(a) extending the tariff preferences granted under the Drug Arrangements to all other developing country Members consistently with the Enabling Clause; or

(b) obtaining a waiver from its obligations under Article I:1 of GATT 1994 on terms and conditions satisfactory to Members. 12

3.5 The European Communities maintains that the Enabling Clause is an autonomous right not an affirmative defence and it excludes the application of Article I. Consequently, in order to establish a violation of Article I:1 of GATT 1994 or a violation of the Enabling Clause, India bears the burden to establish the following:

(a) the Drug Arrangements are not covered by paragraph 2(a) of the Enabling Clause but covered by Article I:1 of GATT 1994; or that,

(b) the Drug Arrangements are covered by paragraph 2(a) of the Enabling Clause but are inconsistent with paragraph 3(c). 13

3.6 In light of its position on the issue of allocation of burden of proof in this dispute, the European Communities requests the Panel to find:

(a) that the Drug Arrangements fall within the scope of paragraph 2(a) of the Enabling Clause, not within that of Article I:1, and therefore dismiss India's claim under that provision; 14

(b) that since India asserts that it is not making any claim under the Enabling Clause, the Panel should refrain from further examining whether the Drug Arrangements are consistent with paragraph 3(c) of the Enabling Clause; 15 and,

(c) that all the claims brought by India in this disputes should be dismissed based on reasons given by the European Communities in the proceedings. 16

3.7 If the Panel were to find that the Drug Arrangements fall within Article I:1of GATT 1994, and that they are prima facie inconsistent with that provision, the European Communities requests the Panel to find that they are justified under Article XX(b) of GATT 1994 and therefore dismiss all the claims brought by India in this disputes. 17

IV. ARGUMENTS OF THE PARTIES

  1. first written submission of india

1. Factual background

4.1 The European Communities applies a scheme of tariff preferences for certain goods from developing countries and economies in transition under Council Regulation (EC) No. 2501/2001 of 10 December 2001 applying a scheme of generalized tariff preferences for the period from 1 January 2002 to 31 December 2004. 18 The Regulation provides for five different tariff preference arrangements:

(a) the General Arrangements;

(b) the Special Incentive Arrangements for the protection of labour rights;

(c) the Special Incentive Arrangements for the protection of the environment;

(d) the Special Arrangements for least-developed countries; and

(e) the Special Arrangements to combat drug production and trafficking (the "Drug Arrangements").

4.2 Tariff preferences under the General Arrangements are accorded to the countries listed in Annex I to the Regulation. The additional preferences under the Special Incentive Arrangements for the protection of the labour rights and the protection of the environment are accorded exclusively to countries that are determined by the European Communities to comply with certain labour and environmental policy standards. The additional preferences under the Special Arrangements for least-developed countries are limited to the least-developed countries listed in Annex I to the Regulation. The Drug Arrangements are limited to Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru and Venezuela (the "preferred Members"). These various arrangements differ in the depth of the tariff cuts provided, the products covered, the requirements that must be met by eligible countries and the grounds on which tariff preferences can be reduced or removed.

4.3 Under the General Arrangements, all the countries and territories listed in Annex I to the Regulation are eligible to receive tariff preferences. The products covered are listed in Annex IV to the Regulation. These products are divided into two categories: non-sensitive and sensitive.

4.4 Article 7 of the Regulation specifies that non-sensitive products will enjoy duty-free access while sensitive products are subject to reduced tariffs. For sensitive products, the tariff duty reduction is calculated by applying: (i) a flat rate reduction of 3.5 percentage points to the Common Customs Tariff duties in the case of ad valorem duties (except for products of Chapters 50 to 63 where the ad valorem duty is reduced by 20 per cent); or (ii) a 30 per cent reduction to the Common Customs Tariff duty if that tariff is expressed as a specific duty (except for products of CN code 2207 where the specific duty is reduced by 15 per cent). Wherever the Common Customs Tariff duty is expressed as a combination of an ad valorem duty and a specific duty, the preferential reduction is limited to the ad valorem duty.

4.5 Article 10 of the Regulation states:

"1. Common Customs Tariff ad valorem duties on products, which according to Annex IV, are included in the special arrangements to combat drug production and trafficking referred to in Title IV and which originate in a country that according to Column I of Annex I benefits from those arrangements, shall be entirely suspended. For products of CN code 0306 13, the duty shall be reduced to a rate of 3.6 per cent.

2. Common Customs Tariff specific duties on products referred to in paragraph 1 shall be entirely suspended, except for products for which Common Customs Tariff duties also include ad valorem duties. For products of CN codes 1704 10 91 and 1704 10 99 the specific duty shall be limited to 16 per cent of the customs value."

4.6 The benefits under the Drug Arrangements are limited to the preferred Members. The products included under the Drug Arrangements are listed in Column D of Annex IV to the Regulation (the "covered products"). This list comprises products that are included in the General Arrangements as well as several products which are not included under the General Arrangements. The covered products enjoy duty-free access to the European Communities' market, except where specifically provided in Article 10 of the Regulation.

4.7 It follows from the above that the tariff reductions accorded under the Drug Arrangements to the preferred Members are greater than the tariff reductions granted under the General Arrangements. In respect of products that are included in the Drug Arrangements but not in the General Arrangements, the preferred Members are granted duty-free access to the European Communities' market, while all other developing countries must pay the full duties applicable under the Common Customs Tariff. Furthermore, in respect of products that are included in both the Drug Arrangements and the General Arrangements and that are deemed "sensitive" under Column G of Annex IV to the Regulation, the preferred Members are granted duty-free access to the European Communities' market, while all other developing countries are entitled only to reductions in the duties applicable under the Common Customs Tariff.

2. Legal arguments

(a) The Drug Arrangements are inconsistent with Article I:1 of GATT 1994

4.8 The tariff preferences granted under the Drug Arrangements are inconsistent with Article I:1 of the GATT, which requires the European Communities to accord unconditional MFN treatment to products originating in the territories of all Members. The MFN principle is a fundamental norm of the rules-based multilateral trading system of the WTO. As pointed out by the Appellate Body, this principle has "long been a cornerstone of the GATT and is one of the pillars of the WTO trading system". Embodying this principle, Article I:1 of GATT 1994 provides in relevant part:

"With respect to customs duties …, any advantage ... granted by any [Member] to any product originating in … any other country shall be accorded ... immediately and unconditionally to the like product originating in … the territories of all other [Members]." (emphasis added)

4.9 The MFN principle embodied in the GATT thus comprises two equally important requirements: first, advantages related to customs duties must be extended to all other Members and, second, the extension must be immediate and unconditional.

4.10 The corresponding adjective of the adverb "unconditionally" is "unconditional", which is defined as: "Not subject to or limited by conditions; absolute, complete." 19 In applying Article I:1 of the GATT, in Canada - Autos, the Appellate Body referred to the undisputed finding of the panel that the "term 'unconditionally' refers to advantages conditioned on the 'situation or conduct' of exporting countries". 20 The panel had found that:

"The purpose of Article I:1 is to ensure unconditional MFN treatment. In this context, we consider that the obligation to accord 'unconditionally' to third countries which are WTO Members an advantage which has been granted to any country means that the extension of that advantage may not be made subject to conditions with respect to the situation or conduct of those countries. This means that an advantage granted to the product of any country must be accorded to the like product of all WTO Members without discrimination as to origin." 21 (emphasis added)

4.11 It follows from the above that a Member granting any advantage to any product originating in any other country has the obligation to accord that advantage to like products of all other Members regardless of their situation or conduct.

4.12 The tariff preferences granted to covered products originating in the preferred Members constitute an "advantage". Under the Drug Arrangements, the European Communities imposes customs duties on imports of covered products originating in the preferred Members at rates lower than those imposed on like products originating in all other Members. 22 This accords an advantage 23 to covered products originating in the preferred Members.

4.13 The advantages under the Drug Arrangements are available only to the 12 preferred Members. The tariff preferences granted to the covered products originating in the preferred Members are consequently not accorded to like products originating in the territories of all other Members.

4.14 The European Communities fails to accord the advantage of the tariff preferences to like products originating in the territories of other Members unconditionally. The EC Regulation establishing the current GSP scheme does not indicate on the basis of which criteria the preferred Members were selected. The 1998 Regulation extending the previous GSP scheme indicates that the Drug Arrangements were intended to benefit "countries undertaking effective programmes to combat drug production and trafficking". 24 Whether or not the European Communities has in fact applied this criterion uniformly to all Members is legally irrelevant because Article I:1 of GATT 1994 does not permit the European Communities to make the extension of the advantages under the Drug Arrangements conditional upon the situation or conduct of the exporting countries.

(b) The European Communities requested a waiver and implemented the Drug Arrangements without obtaining a waiver

4.15 Under Article IX:3 of the Marrakesh Agreement Establishing the World Trade Organization, a Member may apply for a waiver from its obligations under that Agreement or any of the multilateral trade agreements, including the obligations under Article I:1 of GATT 1994 .

4.16 The European Communities itself acknowledges that a waiver from its obligations under Article I:1 of GATT 1994 was required before it could apply the tariff preferences under the Drug Arrangements. On 24 October 2001, the European Communities submitted a request for a waiver with the following explanation:

"The revised special arrangements to combat drug production and trafficking that should apply from 1 January 2002 will be open to eligible products listed in Annex I originating in Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru and Venezuela.

Because the special arrangements are only available to imports originating in those Members, a waiver from the provisions of paragraph 1 of Article I of GATT 1994 appears necessary before they can effectively enter into force for reasons of legal certainty." 25 (emphasis added)

4.17 The need to obtain a waiver has also been acknowledged by the preferred Members that are member countries of the Andean Community, namely Bolivia, Colombia, Ecuador, Peru, and Venezuela. This acknowledgement is recorded in the Aide-Memoire of the Joint Andean Community-European Commission Technical Evaluation Meeting on the Profitable Use of the Andean GSP, as follows:

"In this context the CAN [Andean Community] pointed out the need for the EC to obtain a waiver in order to continue granting preferences to the drug-related regime in the face of pressure brought to bear by countries that consider themselves affected by that regime." 26

4.18 The European Communities has thus far failed to obtain the required waiver. Notwithstanding the absence of a waiver, the European Communities decided to implement the Drug Arrangements.

4.19 As noted by the Appellate Body, "[T]he prohibition of discrimination in Article 1:1 also serves as an incentive for concessions, negotiated reciprocally, to be extended to all other Members on an MFN basis". 27 Any derogation from the obligation under Article I:1 of GATT 1994 upsets the balance of rights and obligations resulting from market access negotiations. It is therefore essential that any derogation from the MFN obligation is based on conditions that maintain that balance. By implementing the Drug Arrangements without the benefit of a waiver, the European Communities unilaterally upset the balance of right and obligations under the GATT 1994 and deprived all other Members, particularly the developing countries excluded from these arrangements, of their right to compensation for the trade diversion to which they are subjected.

(c) The European Communities bears the burden of justifying its Drug Arrangements under the Enabling Clause

4.20 The European Communities bears the burden of demonstrating that the Drug Arrangements are consistent with the Enabling Clause. The Enabling Clause allows Members to derogate from their obligations under Article I:1 of GATT 1994. The Enabling Clause therefore constitutes an affirmative defence that the European Communities might invoke to justify an inconsistency with Article I:1 of GATT 1994. The Member invoking an affirmative defence has the burden of proving that defence. 28 Thus, should the European Communities invoke the Enabling Clause as a defence, it bears the burden of establishing that the Drug Arrangements are justified under the Enabling Clause.

4.21 For the sake of procedural efficiency, India will present its views on this issue in this first submission.

4.22 The Enabling Clause does not absolve developed country Members from their obligation to accord MFN treatment to products originating in developing countries. Paragraph 1 of the Enabling Clause allows Members, notwithstanding Article I of GATT 1994, to accord differential and more favourable treatment to developing countries without according such treatment to other Members under the situations enumerated in paragraph 2. In this dispute, the relevant situation is that described under paragraph 2(a), i.e., preferential tariff treatment accorded by developed country Members to products originating in developing countries in accordance with the GSP. Paragraphs 1 and 2(a) can be paraphrased as follows:

Notwithstanding the provisions of Article I of the GATT, developed country Members may accord preferential tariff treatment to products originating in developing countries in accordance with the GSP without according such treatment to other Members.

4.23 Under Article I:1 of GATT 1994, any advantage, favour, privilege or immunity granted to a product originating in any country shall be granted immediately and unconditionally to the like product originating in all other Members. "Other Members" include both developed and developing country Members. Thus, under this rule there can be no discrimination between like products of both developed and developing countries.

4.24 The Enabling Clause allows developed country Members to accord preferential tariff treatment to products originating in developing countries in accordance with the GSP without according such treatment to "other Members". The Enabling Clause distinguishes between "developing countries" and "other Members". The term "other Members" in this context thus refers to other developed country Members. The phrase "notwithstanding the provisions of Article I of the GATT" thus allows developed country Members to derogate from the obligation to grant MFN treatment to products originating in developed countries. However, nothing in the Enabling Clause modifies their obligation to extend to all developing countries any advantage accorded to one of them.

4.25 This reading of paragraph 2(a) of the Enabling Clause is confirmed by the exception made in paragraph 2(d) which permits:

"Special treatment of the least developed among the developing countries in the context of any general or specific measures in favour of developing countries."

4.26 There would be no need to permit in paragraph 2(d) special treatment of the least-developed countries within the category of "developing countries receiving favourable treatment" if paragraph 2(a) of the Enabling Clause permitted developed country Members to accord advantages to a selected group of developing countries

4.27 As pointed out above, the MFN principle embodied in Article I:1 of GATT 1994 comprises two equally important requirements: First, advantages related to customs duties must be extended to all other Members and, second, the extension must be unconditional, that is independent of the situation or conduct of the exporting country. The only function of paragraph 2(a) of the Enabling Clause is to provide a partial exemption from the first of these two requirements. There is nothing in the Enabling Clause that addresses the second requirement. There is consequently nothing in the terms of the Enabling Clause that provides a legal basis for preferences on conditions related to the situation or conduct of the beneficiary developing countries.

4.28 The sole purpose of the Enabling Clause is to permit Members to "accord differential and more favourable treatment to developing countries without according such treatment to [other Members]." The Enabling Clause provides for an exception from a fundamental principle of WTO law and cannot therefore be interpreted to authorize measures that need not be taken to achieve that purpose. In order to accord treatment to developing countries that is more favourable than that accorded to developed countries, Members need not limit their GSP preferences to a few selected developing countries and need not accord GSP preferences conditional upon the situation or conduct of the developing countries.

4.29 The Appellate Body has stated that panels should base their interpretations on the terms of the WTO agreements and has ruled that the process of interpretation cannot be used to introduce concepts into an agreement that are simply not there. 29 The Enabling Clause establishes a carefully negotiated exception from a fundamental norm of the rules-based multilateral trading system. This requires the Panel to apply the principles of interpretation developed by the Appellate Body with particular care. If the Panel were to interpret the Enabling Clause to permit developed countries to discriminate between developing countries by making the extension of tariff preferences subject to conditions with respect to the situation or conduct of those countries, it would introduce a concept that the drafters of this Clause never contemplated. The Enabling Clause would then no longer be the legal basis for GSP schemes beneficial to all developing countries but for tariff preferences under which market access benefits are diverted from some to other developing countries to realize the foreign policy objectives of the developed countries. There is no clear and explicit wording on which the Panel could base an interpretation with such serious consequences. Furthermore, the Panel cannot adopt an interpretation that promotes discrimination. The Preamble to the Marrakesh Agreement Establishing the World Trade Organization, which forms part of the "context … object and purpose" 30 of the WTO Agreement, provides, inter alia:

"Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous arrangements directed … to the elimination of discriminatory treatment in international trade relations," (emphasis added)

4.30 Consequently, the Enabling Clause does not absolve the European Communities from its obligation to accord MFN treatment to products originating in developing countries.

(d) The Drug Arrangements cannot be justified under the Enabling Clause

4.31 The Enabling Clause justifies only preferences that do not discriminate between developing countries. Paragraph 2(a) of the Enabling Clause authorizes preferential treatment "in accordance with the Generalized System of Preferences". Footnote 3 defines the term "Generalized System of Preferences" as the system described in the 1971 Waiver relating to the establishment of "generalized, non-reciprocal and non-discriminatory preferences beneficial to the developing countries." (emphasis added)

4.32 While the Enabling Clause does not establish the obligation to grant preferences, it does not permit any preference under any scheme called GSP but only preferences accorded in the framework of GSP schemes as described in the 1971 Waiver. This means, inter alia, that the preferences must be non-discriminatory between developing countries. Developed country Members applying preferential schemes that do not meet this requirement have often obtained a waiver. 31

4.33 The preferences under the Drug Arrangements discriminate between developing countries because they are not extended to all developing countries. The benefits under the Drugs Arrangements are limited to the 12 preferred Members specifically designated by the European Communities. The ordinary meaning of the verb "discriminate" is "to make or constitute a difference in or between; distinguish; differentiate" and "to make a distinction in the treatment of different categories of people or things". 32 Hence, "non-discriminatory" preferential treatment of developing countries means treatment that does not make a distinction between different categories of developing countries. Preferential tariff schemes limited to a named group of developing countries cannot be characterized as "non-discriminatory" on any reasonable construction of this term. By limiting the Drug Arrangements to the 12 preferred Members, the European Communities discriminates between developing countries.

4.34 Even if the European Communities were to establish that the preferred Members are the only developing countries that are undertaking effective programmes to combat drug production and trafficking, the Drug Arrangements would still not be consistent with the requirement of non-discrimination set out in the Enabling Clause. As pointed out above, there is nothing in the Enabling Clause that exempts the European Communities from the obligation under Article I:1 of GATT 1994 to extend the tariff preferences accorded under the Drug Arrangements unconditionally to all developing countries. GSP preferences conditional upon the beneficiaries' drug-related situation and conduct are therefore not covered by the Enabling Clause. Furthermore, making a distinction in the treatment of developing countries on the basis of their drug-related situation is discriminatory.

4.35 The Enabling Clause covers only preferences that are beneficial to all developing countries and are designed to respond positively to their needs. As pointed out above, paragraph 2(a) of the Enabling Clause covers only preferences that are "beneficial to the developing countries". 33 The use of the definite article "the" with reference to "developing countries" makes clear that the GSP schemes must benefit all developing countries.

4.36 Furthermore, paragraph 3(c) of the Enabling Clause provides:

"3. Any differential and more favourable treatment provided under this clause:

(c) shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified to respond positively to the development, financial and trade needs of developing countries."

4.37 The requirement that the differential and more favourable treatment of developing countries be designed to respond positively to their needs is phrased as an obligation ("shall") that developed countries must observe when applying the preference schemes authorized under paragraph 2(a), that is GSP schemes as described in the 1971 Waiver.

4.38 The Drug Arrangements are not beneficial to all developing countries. As pointed out in the introductory section of this submission, the tariff preferences accorded by the European Communities to the 12 beneficiary countries do not involve a transfer of resources from the European Communities to those countries. The main effect of the preferences is to shift market access opportunities from the developing countries that are excluded from the regime to the countries selected by the European Communities. To that extent, the true "donor" under the Drug Arrangements is not the European Communities but each of the countries in the Americas, Africa and Asia that suffers from the trade diversion caused by the preferences. For example, in the case of the tariff preferences accorded to textiles and clothing products from Pakistan, the true "donor" countries are India and other developing countries that compete directly with Pakistan's exports to the European Communities. The tariff preferences under the Drug Arrangements are beneficial to some developing countries and detrimental to others and consequently do not comply with paragraph 2(a) of the Enabling Clause.

4.39 The Drug Arrangements are not designed to respond positively to the development, financial and trade needs of developing countries. The Drug Arrangements cover countries that are a source of production and export of illegal drugs consumed in the European Communities. The European Communities depends on the cooperation of these countries to resolve its own drug problems. The preferences accorded under the Drug Arrangements have therefore been designed to respond positively to the needs of the European Communities rather than those of developing countries.

4.40 In summary, there are three basic conditions that a developed country Member applying a GSP scheme must observe: first, the scheme must not discriminate between developing countries; second, it must be beneficial to all developing countries; and third, it must be designed to respond positively to the needs of developing countries. These conditions all have the same basic function, namely to ensure that GSP schemes operate as instruments to promote development and not as instruments to promote the foreign or commercial policy objectives of the developed countries. It is therefore important that the provisions of the Enabling Clause establishing these conditions are observed by developed country Members that have decided to accord preferences to developing countries.

4.41 The Drug Arrangements do not meet any of these conditions. They discriminate between developing countries because they apply only to 12 developing countries. They are not beneficial to the developing countries because they create market access opportunities for some of them at the expense of others. And, finally, they are not designed to respond positively to the needs of developing countries but those of the European Communities. The Drug Arrangements have for these reasons no resemblance with the GSP schemes authorized under the Enabling Clause.

  1. first written submission of the european communities

1. The Enabling Clause

(a) The Enabling Clause excludes the application of Article I:1 of the GATT

4.42 The Enabling Clause is not an "affirmative defence" justifying a violation of Article I:1. It is a self-standing regime which excludes the application of Article I:1. Unlike its predecessor, the Decision of the CONTRACTING PARTIES of 25 June 1971 (the "1971 Waiver"), the Enabling Clause is a not a temporary waiver from Article I:1 of GATT 1994. The Enabling Clause confers an autonomous and permanent right to grant certain types of "differential and more favourable treatment" to developing countries "notwithstanding Article I:1 of the GATT". This right is one of the most important and tangible expressions of the principle of "special and differential treatment" for developing countries included in the WTO Agreement.

4.43 Similarly, in Brazil - Aircraft the Appellate Body held that Article 27 of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), a provision granting "special and differential treatment" to developing countries with respect to export subsidies, was not an "affirmative defence", but rather excluded the application of Article 3.1(a) of the same Agreement. Like Article 27 of the SCM Agreement, the Enabling Clause provides "special and differential treatment" to developing countries by conferring to all Members the right to accord certain types of "differential and more favourable treatment" to developing countries.

4.44 The fact that the Enabling Clause is not an "affirmative defence" but an autonomous right has two important implications for this dispute, namely, first, in order to establish a violation of Article I:1 of GATT 1994, India must establish first that the Drug Arrangements are not covered by paragraph 2(a) of the Enabling Clause; and second, as the complaining party, India bears the burden of proving that the Drug Arrangements are not covered by paragraph 2(a) and, if covered, that they are inconsistent with paragraph 3(c).

(b) The Enabling Clause does not impose an obligation to accord unconditional MFN treatment to the developing countries

(i) The Enabling Clause does not impose an obliation to grant "differential and more favourable treatment" to all developing countries on an MFN basis

4.45 In paragraph 1 the term "developing countries" is not preceded by any qualifying term suggesting that "differential and more favourable treatment" must be granted necessarily to all developing countries. If a Member grants "differential and more favourable" treatment to some developing countries, such treatment falls within the ordinary meaning of the phrase "differential and more favourable treatment to developing countries".

4.46 India's reading whereby the term "other Members" in paragraph 1 refers to "developed countries" is not warranted by the ordinary meaning of that term. If a Member grants preferences to some developing countries, any Member that does not receive such preferences (whether developed or developing) falls within the ordinary meaning of the term "other Members". Contextually, this is confirmed in particular by footnote 3 to paragraph 2(a), as well as by paragraphs 2(c) and 2(d) of the Enabling Clause.

4.47 Footnote 3 provides that the preferences granted under paragraph 2(a) must be "non-discriminatory". This does not imply that all developing countries must be granted identical preferences and it does not prevent developed countries from treating differently developing countries which, according to objective criteria, have different development needs.

4.48 Paragraph 2(d) allows developed Members to give "special treatment" to the "least developed among the developing countries". This is not an "exception" to paragraph 1 but one of the types of measures authorized by paragraph 1 as evidenced by the introductory clause of Paragraph 2. The "following" includes letter (d) of Paragraph 2. Therefore, Paragraph 1 "applies" also to that letter. If paragraph 1 prohibited differentiation between developing countries, it would be impossible to reconcile paragraph 2(d), which expressly envisages such differentiation, with paragraph 1.

4.49 Paragraph 2(d) would not become redundant if paragraph 2(a) allowed differentiation among developing countries. While paragraph 2(a) is concerned exclusively with "preferential tariff treatment", paragraph 2(d) covers any kind of "special treatment", including therefore non-tariff preferences. Furthermore, paragraph 2(d) applies in the context of "any general or specific measures" in favour of developing countries, while the preferences envisaged in paragraph 2(a) must be part of a generalized system of preferences.

4.50 Finally, paragraph 2(c) allows developing countries to enter into "regional or global arrangements" for the "mutual reduction or elimination of tariffs". By definition, these "regional" arrangements do not include all developing countries. Thus, if paragraph 1 did not allow the granting of "differential and more favourable treatment" to some developing countries, the regional arrangements mentioned in paragraph 2(c) would fall outside the scope of paragraph 1.

(ii) The Enabling Clause does not impose an obligation to grant differential and more favourable treatment "unconditionally"

4.51 Nothing in paragraphs 1, 2 or 3 imposes an obligation to grant preferential treatment "unconditionally". Quite to the contrary, such requirement could not be reconciled with footnote 3 to paragraph 2(a) and paragraph 2(c) of the Enabling Clause.

4.52 A tariff preference is "conditional" within the meaning of Article I:1 of GATT 1994 when it is provided in exchange for some form of compensation. On the other hand, the notion of "reciprocity" involves a mutual exchange of the same or similar benefits. Thus, in the specific context of a trade agreement such as the WTO Agreement, the term "reciprocal" refers to those conditions which require the granting of equivalent trade concessions by way of compensation for the trade benefits received from another Member.

4.53 Footnote 3 to paragraph 2(a) of the Enabling Clause only prohibits conditions of reciprocity. It does not prohibit other conditions providing for non-reciprocal compensation. If the preferences granted under the Enabling Clause had to be "unconditional" in any event by virtue of Article I:1 GATT 1994, it would have been superfluous to specify in paragraph 2(a) that the preferences granted as part of a GSP scheme must be "non-reciprocal".

4.54 Additionally, "regional or global arrangements" for the "mutual reduction or elimination of tariffs" under paragraph 2(c) are, by definition, "conditional" because they consist of a reciprocal exchange of tariff concessions. If any preferences granted to developing countries under the Enabling Clause had to be "unconditional", any "global" or "regional" arrangement entered into under paragraph 2(c) would be in breach of Article I:1 of GATT 1994.

(iii) In any event, the Drug Arrangements are "unconditional"

The case law on the interpretation of the term "unconditionally"

4.55 The term "unconditionally" has not been interpreted yet by the Appellate Body. It has been addressed in two panel reports, Indonesia - Autos and Canada - Autos, which have reached different and conflicting interpretations. Both interpretations are incorrect. In Indonesia - Autos, the panel cited a 1952 panel report, Belgian Family Allowances, which is notoriously unclear. Belgian Family Allowances is not relevant for the interpretation of "unconditionally" but instead for the interpretation of the term "like". It stands for the proposition that differences in treatment of imports cannot be based on differences in characteristics of the exporting country which do not result in differences in the goods themselves, because such differences do not make the goods "unlike".

4.56 The interpretation made in Indonesia - Autos was effectively rejected in Canada - Autos. However, the Panel also failed in this case to give meaning to the term "unconditionally" because Article I:1 does not say that conditions must be imposed on an MFN basis, but instead that MFN treatment must be accorded "unconditionally". This means that certain "conditions" are prohibited per se, irrespective of whether they are applied discriminatorily. However, contrary to the findings of the panel in Indonesia - Autos, the prohibited conditions are not those which are unrelated to the imported goods, but instead those which require providing some form of compensation for receiving the MFN treatment.

The ordinary meaning of "unconditionally"

4.57 An obligation or a right is "conditional" when its existence is dependent upon the occurrence of a certain event as evidenced by various dictionary definitions. Legal classifications that distinguish among persons, things or countries based on inherent or relatively permanent characteristics are not, properly speaking, "conditions". Indeed, if such distinctions were considered as "conditions", all laws or regulations would have to be characterized as "conditional" because it is in the nature of laws or regulations to draw that kind of distinction.

4.58 The selection of the beneficiary countries of the Drug Arrangements is made by the European Communities' authorities on the basis of an overall assessment of the gravity of the drug problem in each developing country. Whether or not a developing country is particularly affected by the drug problem at the time when the selection of the beneficiaries is made is not a "future" or "uncertain" event. It is an existing and relatively permanent situation which is both certain and known to the European Communities authorities and, therefore, cannot be considered as a "condition".

4.59 India's view that treating differently, Members which are in a different "situation", amounts to a "condition", together with India's contention that paragraph 1 of the Enabling Clause does not "exempt" from the obligation to accord the preferences "unconditionally", leads to an absurd result when applied to paragraph 2(d) of the Enabling Clause. The distinction between least-developed countries and other developing countries envisaged by paragraph 2(d), like the distinction between developing countries particularly affected by the drug problem and other developing countries, is also related to the "situation" of those countries. Thus, on India's construction, any preferences granted to the least-developed countries would be "conditional" and, therefore, prohibited by Article I:1 of GATT 1994.

4.60 India's interpretation of the term "unconditionally" is based upon a passage included in the panel report in Canada - Autos, which is a mere obiter dictum insofar as it alludes to the situation of countries. Moreover, the Appellate Body did not endorse the dictum but neither did it address at all the meaning of "unconditionally".

The meaning of "unconditionally" in the context of MFN clauses

4.61 In the context of MFN clauses, the term "unconditionally" alludes to a specific type of "condition", namely to those conditions that require providing some concession by way of compensation for receiving MFN treatment. Article I:1 of GATT 1994 was modelled on the standard MFN clause of the League of Nations, which in turn derived from similar clauses included in bilateral trade agreements. This was preceded by various "conditional" and "unconditional" treaties which were concluded by the United States and European countries. The difference between the "unconditional" and "conditional" form of the MFN clause was already explained by the U.S. Department of State and in the reports of the Economic Committee of the League of Nations. Additionally, the same notion of conditional MFN is reflected in the Draft Articles on the Most-Favoured-Nation Clause of the International Law Commission. They distinguish between, on the one hand, MFN clauses that are "not made subject to compensation" and, on the other hand, two types of conditional MFN clauses: those "subject to reciprocal treatment" and those "subject to a condition of compensation" other than a condition of reciprocity. The term "condition of compensation" is defined as a "condition providing for compensation of any kind", whereas "condition of reciprocal treatment" is defined as "condition of compensation providing for the same or, as the case may be, equivalent treatment".

4.62 Contrary to this traditional understanding of "conditionality" the beneficiaries of the Drug Arrangements are not required to grant any trade concessions or to provide any other compensation of any kind to the European Communities.

(c) The Drug Arrangements are consistent with the Enabling Clause

(i) The Drug Arrangements are "non-discriminatory"

4.63 The "non-discrimination" standard set out in paragraph 2(a) is different from the MFN standard in Article I:1 of GATT 1994. While Article I:1 of GATT 1994 is concerned with providing equal conditions of competition for imports from all Members, the purpose of the Enabling Clause is to promote the trade of all developing country Members commensurately with their respective development needs.

4.64 Paragraph 2(a) does not prevent Members from treating differently developing countries which, according to objective criteria, have different development needs. Treating differently situations that are objectively different is not discriminatory. Different treatment may even be necessary in order to avoid indirect discrimination, as well as to comply with the requirement in paragraph 3(c) of the Enabling Clause that the preferences must respond positively to the development needs of developing countries.

The interpretation of the term "non-discriminatory" in paragraph 2(a)

4.65 In the English language, the verb "discriminate" has a neutral and a "negative" meaning with the latter the most common when used in a legal context. This is evidenced by relevant literature and jurisprudence of international and municipal tribunals. "Discrimination" only occurs if equal situations are treated unequally (or if unequal situations are treated equally). This requires considering whether the distinction pursues a legitimate aim and whether there is a "sufficient" connection between that objective, the nature of the distinction and the differences between the situations concerned on which the distinction is based.

4.66 Contextually, paragraph 3(c) of the Enabling Clause refers to "development, financial and trade needs of developing countries" which are the individual needs of those countries. Those needs may vary between different categories of developing countries, as well as over time. In fact, the provision that the preferences shall be "modified, if necessary", assumes that those needs will vary.

4.67 Additional contextual guidance is provided by Article III:4 as interpreted by US - Section 337 and Korea - Various Measures on Beef. Equally, Article XVII of the General Agreement on Trade in Services ("GATS") provides that the national treatment standard in that provision does not require formally equal treatment. These provisions illustrate that in some cases formally unequal treatment may be required in order to achieve a given standard of equality. The chapeau of Article XX of GATT 1994 also confirms that in assessing the existence of "discrimination" between countries it must be taken into account whether the same conditions prevail in the countries concerned. It is implicit in the chapeau that there is no "discrimination" if two countries are treated differently because different conditions prevail in each of them and, by the same token, that equal treatment of unequal conditions may amount to discrimination. This was recognized by the Appellate Body in US - Shrimp.

4.68 Finally, Article XIII shows that in the context of the GATT formal inequality is not synonymous with "discrimination". The existence of discrimination must be established having regard to the specific objective of each provision where the non-discrimination requirement is found. The objective of the Enabling Clause is to promote the exports from the developing countries commensurately with their respective development needs. Having regard to that objective, it is not discriminatory to grant additional preferences to those developing countries that have special development needs.

4.69 The object and purpose of paragraph 2(a) the Enabling Clause is expressed in the first recital of the 1971 Waiver, to which footnote 3 of the Enabling Clause refers as corroborated by Paragraph 3 of Article XXXVI of GATT 1994 and the Preamble to the WTO Agreement. The above provisions set forth the objective of promoting the trade of all developing countries, and not just of the most "competitive" amongst them. Furthermore, the growth in trade must be commensurate with their development needs. That objective is best achieved if tariff preferences are designed so as to take into account that some developing countries have special development needs.

4.70 The European Communities' interpretation of the term "non-discriminatory" furthers the above objectives of the Enabling Clause and the WTO Agreement because it allows providing additional preferences to the developing countries with special development needs, so that they can secure a share of international trade which is commensurate with those special needs.

Treating differently the developing countries that are particularly affected by the drug problem is not "discriminatory"

4.71 The General Assembly of the United Nations recognized that the drug problem is often related to development problems and that those links and the promotion of the economic development of countries affected by the illicit drug trade require, within the context of shared responsibility, strengthened international cooperation in support of alternative and sustainable development activities. The International Narcotics Control Board (INCB) also concludes that illicit drug production and trafficking prevents long-term growth in the developing countries affected by that problem. It destabilises the economy and the political system as well as the civil society. Finally, the United Nations International Drug Control Programme ("UNDCP") concluded that the short-term gains of illicit drug production and trafficking "are far outweighed by the social and economic ills ushered in by illicit drugs", such as lower productivity, the spread of AIDS, environmental decay and the increased risk of armed conflicts.

4.72 In order to fight effectively the drug problem it is necessary to apply a balanced approach, which combines initiatives to reduce the illicit demand for drugs with those to reduce their illicit supply. In turn, the latter requires complementing the actions to eradicate illicit production and suppress illicit trafficking with the promotion of alternative economic activities. Trade preferences support those alternative activities and, therefore, constitute an appropriate response to the special development needs of those developing countries which are particularly affected by the drug problem.

4.73 This strategy is in line with the relevant UN Conventions, in particular with the 1988 Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, which envisages expressly that the parties may cooperate to increase the effectiveness of efforts to control the supply of drugs by supporting alternative economic activities. It is also in line with the guidelines adopted by the International Conference on Drug Abuse and Illicit Trafficking held in Vienna in 1987 or the Political Declaration adopted by the General Assembly of the United Nations on 23 February 1990. Of particular importance is the Action Plan on International Co-operation on the Eradication of Illicit Drug Crops and on Alternative Development adopted by the General Assembly of the United Nations in 1998 (the "1998 Action Plan"). This plan provides that the States concerned should adopt national crop reduction and elimination strategies and that such strategies should include "comprehensive measures such as programmes in alternative development, law enforcement and eradication". According to the 1998 Action Plan, "the development and implementation of alternative development is primarily the responsibility of the State in which illicit cultivation takes place". Nevertheless, the 1998 Action Plan recognizes that the success of alternative development depends on the support of the international community. Accordingly, other States and the UN organizations are encouraged to provide adequate financial and technical assistance. As a complementary measure, other States are also encouraged to provide greater access to their markets.

4.74 The call to provide greater market access was renewed by the General Assembly of the United Nations in its resolution of 19 December 2001 and the resolution of the UN Commission on Narcotic Drugs of 15 March 2002. The importance of providing greater access to international markets has also been acknowledged in the preamble of the Agreement on Agriculture. Finally, the European Communities recalls that another WTO Member, the United States, grants trade preferences to the Andean countries under the Andean Trade Preference Act ("ATPA") with the same objective as the European Communities under the Drug Arrangements. The ATPA was granted a waiver in 1992, that was renewed in 1996.

The application of the Drug Arrangements is "non-discriminatory"

4.75 The designation of the beneficiary countries of the Drug Arrangements is based on an overall assessment of the gravity of the drug problem in each developing country made in accordance with objective, non-discriminatory criteria. That assessment takes into account the importance of the production and/or trafficking of drugs in each country, as measured on the basis of available statistics, as well as their effects. In this regard, it is recalled that the implications of the drug problem are multifaceted. The selection of beneficiary countries thus aims at taking into account all relevant circumstances, including in particular: the impact on the economic situation; the health and environmental impact; and the impact on the stability of the State and the civil society.

4.76 Coca products (coca leaf, coca paste, cocaine, crack, free base) and opium products (opium, morphine, heroin) account for the bulk of the global illicit drug trade in monetary terms and are the illicit drugs that have the most socio-economic impact world-wide. Accordingly, the selection of the beneficiaries is based on data relating two those types of narcotic drugs.

4.77 The geographical patterns of drug trafficking are less stable than those of drug production. Nevertheless, the amount of drug seizures in the various countries allows charting of certain trafficking routes. Thus, opiates come mainly from Afghanistan via Pakistan and Iran into the European Union, while cocaine is shipped from the Andean countries to North America and the European Union via Central America and the Caribbean. Seizures of cocaine are concentrated in the Americas, with the Central American and Andean countries playing a preponderant role.

4.78 The selection of the 12 beneficiary countries of the Drug Arrangements is non-discriminatory. The relevant statistics on the production and seizures of drugs support European Communities' contention. 34

(a) The main opium production figures are as follows: 35

Fig. 1 Production of opium (in metric tonnes)

  1999 2000 2001 2002 (estim.) Average
Afghanistan 4,565 3,276 185 3,422 2,862
Myanmar 865 1,087 1,097 829 970
Laos 124 167 134 124 137
Colombia 88 (102) 88 88 n.a. 88 (93)

(b) The main coca leaf producers and their production figures are: 36

Fig. 2 Production of coca leaf (in metric tons)

  1999 2000 2001 Average
Colombia 260,995
 (195,000)
266,161 236,035 254,397
(232,340)
Peru 69,200
(72,500)
54,400 49,260 54,903
 (56,003)
Bolivia 22,800 13,400 20,200 18,800


(c) The figures for the main opium seizures are:

Fig. 3 Seizures of opium (in kgs.) 37

  1994 1995 1996 1997 1998 1999 2000
Iran 117,095 126,554 149,577 162,414 154,454 204,485 179,053
Pakistan 14,663 109,420 7,423 7,300 5,022 16,320 8,867


(d) The figures of the main seizures of heroin are shown as below:

Fig.4 Seizures of heroin and morphine (in kgs.) 38

  1994 1995 1996 1997 1998 1999 2000
Iran 13,767 13,121 11,235 20,936 25,186 28,794 26,953
Pakistan 6,444 10,760 5,872 6,156 3,364 4,974 9,492


(e) The figures for the main cocaine seizures are:

Fig.5 Seizures of cocaine (in kgs.) 39

  1994 1995 1996 1997 1998 1999 2000
Colombia 69,592 59,030 45,779 42,044 107,480 63,945 110,428
Mexico 22,117 22,708 23,835 34,952 22,597 34,623 23,196
Panama 5,177 7,169 8,168 15,177 11,828 3,140 7,400
Bolivia 10,021 8,497 8,305 13,689 10,102 7,707 5,559
Peru 40 10,634 22,661 19,695 8,796 9,937 11,307 11,848
Guatemala 1,900 956 3,951 5,098 9,217 9,965 1,518
Venezuela 6,035 6,650 5,906 16,741 8,159 12,149 14,771
Costa Rica 1,411 1,170 1,873 7,857 7,387 1,999 5,781
Brazil 12,028 5,815 4,071 4,309 6,560 7,646 5,517
Nicaragua 1,338 1,507 398 2,790 4,750 833 961
Ecuador 1,790 4,284 9,534 3,697 3,854 10,162 3,308
El Salvador No report 65 99 234 45 38 432
Honduras 930 408 3,275 2,187 4,750 833 1,215

(ii) The Drug Arrangements are "beneficial to the developing countries"

4.79 India's argument that the use of the definite article the before the term "developing countries" in footnote 3 "makes clear that the GSP schemes must benefit all developing countries" is by no means required by the ordinary meaning of footnote 3. To say that the preferences must be "beneficial to the developing countries" is not the same as saying that they must be beneficial to all developing countries, let alone that they must be beneficial to each and every developing country. The phrase "beneficial to the developing countries" means simply that the preferences must be beneficial to the developing countries which receive them, rather than to the developed countries which grant them. The question of whether preferences may be granted to some developing countries is specifically addressed by the requirement that preferences must be "non-discriminatory". As shown above, that term does not require that the same preferences be granted to each and every developing country.

4.80 In the alternative, the European Communities submits that it would be entirely consistent with the ordinary meaning of the phrase "beneficial to the developing countries" to consider that this requirement is met if, overall, a preference is beneficial to all the developing countries taken together.

4.81 Furthermore, potentially, the Drug Arrangements are "beneficial" to each and every developing country because the list of beneficiaries may be extended to cover any developing country which, following a change of circumstances, qualifies as a country particularly affected by the production or trafficking of drugs.

4.82 Contextually, first, the requirement that the preferences must be "non-discriminatory" does not imply that identical preferences must be granted to all developing countries. Yet, if the preferences had to be "beneficial" to each and every developing country, it would be necessary to accord identical preferences to all developing countries. Thus, India's interpretation would render redundant the requirement that the preferences must be "non-discriminatory".

4.83 Second, footnote 3 is attached to paragraph 2(a) which refers to "preferential tariff treatment accorded … to products originating in developing countries", rather than "… in the developing countries". In turn, paragraph 2(a) applies within the framework of paragraph (1), which authorizes "differential and more favourable treatment to developing countries", and not to "the developing countries". By India's own logic, the omission of the word "the" before "developing countries" in paragraphs (1) and 2(a) would confirm that, as argued by the European Communities, developed countries are authorized to grant preferences to some developing countries. Thus, India's interpretation of the phrase "beneficial to the developing countries" would give rise to a conflict between footnote 3 and those two provisions.

4.84 Third, India's interpretation would prevent developed countries from responding to the individual development needs of developing countries, contrary to the requirement set forth in paragraph 3(c) of the Enabling Clause.

4.85 Finally, it is recalled that the Implementation Decision adopted by the WTO Ministerial Conference at Doha reaffirms that "preferences granted to developing countries pursuant to the Decision of the Contracting Parties of 28 November 1979 ('Enabling Clause') should be generalized, non-reciprocal and non-discriminatory." The fact that the Ministerial Conference did not deem it necessary to reaffirm that the preferences should be "beneficial to the developing countries" is evidence that this phrase cannot have the far-reaching implications asserted by India. Furthermore, by referring to "preferences granted to developing countries", rather than to "the developing countries" the Implementation Decision provides further confirmation that preferences do not have to be granted to each and every developing country.

4.86 India's interpretation of the phrase "beneficial to developing countries" would run contrary to the object and purpose of the Enabling Clause and the WTO Agreement to promote the exports of developing countries commensurately with their respective development needs.

(iii) The Drug Arrangements respond positively to the needs of developing countries

4.87 India's argument that the Drug Arrangements are not designed to respond positively to the needs of developing countries is manifestly unfounded and illogical. It amounts to saying that because drug abuse is a concern of the European Communities, drug production and trafficking can have no bearing on the development needs of the countries affected by that problem. This is an obvious non-sequitur.

4.88 There is a close link between drugs and development, with the consequence that the countries which are particularly affected by the drug problem have special development needs. As demonstrated above, the Drug Arrangements have been designed to respond to those needs by supporting alternative economic activities, a strategy which is in conformity with UN recommendations.

4.89 Furthermore, the European Communities recalls that the Agreement on Agriculture has recognized that providing greater access to the markets of the developed countries is an appropriate response to the particular development needs of the countries most affected by the drug problem.

4.90 It is recalled also that, when granting the ATPA waiver, the WTO recognized expressly that those preferences responded to the development needs of the beneficiary countries. There is no fundamental difference between the ATPA preferences and the European Communities' Drug Arrangements, other than the country coverage, and, therefore, no valid reason to consider that the Drug Arrangements, unlike the ATPA preferences, do not respond to the development needs of the beneficiaries.

2. Article XX(b) of GATT 1994

(a) Introduction

4.91 In the event that the Panel were to find that the Drug Arrangements fall outside the scope of paragraph 2(a) of the Enabling Clause, or that they are inconsistent with paragraph 3(c), the European Communities submits that the Drug Arrangements would be justified under Article XX(b) of GATT 1994 as being necessary for the protection of human life or health in the European Communities.

(b) The Drug Arrangements are necessary for the protection of human life or health

(i) Drugs pose a risk to human life or health

4.92 The European Communities considers to be beyond dispute that narcotic drugs pose a risk to human life or health in the European Communities. Indeed, as recognized by the General Assembly of United Nations, "drugs are a grave threat to the health and well-being of all mankind". The narcotic drugs which are produced in, or which transit through, the territories of the beneficiary countries, i.e. coca products (coca leaf, coca paste, cocaine, crack, free base) and opium products (opium, morphine, heroin) pose particularly serious risks to human life and health as described by the United Nations Office on Drugs and Crime ("UNODC").

4.93 According to the European Monitoring Centre for Drugs and Drugs Addiction (the "EMCDDA"), between 7,000 and 8,000 direct or "acute" drug-related deaths are reported every year in the whole of the European Communities. To this must be added a much larger number of indirect drug related deaths, which are the consequence of associated risks, such as infectious diseases acquired through a drug using habit/way of life, e.g. HIV/AIDS, complications arising from an infection acquired through long-term drug misuse, e.g. hepatitis causing liver failure, violent deaths related to the supply and/or use of illegal drugs and accidents (including road traffic accidents) arising from impaired judgement as a result of the consumption of drugs.

4.94 The EMCDDA has estimated that, as a result of the direct and indirect risks posed by drugs, the overall mortality rate among problem drug users in the European Communities is up to 20 times higher than among the general population of the same age.

4.95 The concern with the health and other social problems caused by narcotic drugs is universal and has led to the adoption of a comprehensive system of international control of those substances. At present, that system is based on the Single Convention on Narcotic Drugs, 1961, as amended by the 1972 Protocol (the "1961 Convention") and the Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 (the "1988 Convention"). As India is also a party to the 1961 and the 1988 Conventions, India would be estopped from arguing in this dispute that narcotic drugs do not pose a serious risk to human health or life for the purposes of Article XX(b).

(ii) The Drug Arrangements are "necessary" to fight drug production and trafficking

The "values" pursued by the Drug Arrangements

4.96 The Appellate Body held in Korea - Various Measures on Beef that "the more vital or important the common interests or values pursued, the easier it would be to accept as necessary the measures designed to achieve those ends". As emphasized by the Appellate Body in EC - Asbestos, the preservation of human life and health is "both vital and important in the highest degree". Accordingly, in the present case the term "necessary" should be interpreted by the Panel according to its broadest possible meaning.

Contribution of the Drug Arrangements to the protection of human life and health

4.97 The Drug Arrangements contribute to the objective of preserving the life and health of the European Communities' population against the risks from the consumption of narcotic drugs by supporting the measures taken by other countries against the illicit production and trafficking of those substances, thereby reducing their supply to the European Communities.

4.98 There is a clear link between drug control and economic development as recognized by the General Assembly of United Nations and the INCB. The Drug Arrangements take account of that link. They seek to promote the development of alternative economic activities to replace illicit drug production and trafficking and, more generally, to raise the overall level of economic development of the countries concerned, so as that they can generate the resources and capacity required for enforcing an effective system of drug control.

4.99 The Drug Arrangements are embedded in a strategy that encompasses four different but related types of actions: (i) reducing the demand of drugs, through prevention, treatment and rehabilitation; (ii) preventing drug supply through law enforcement action; (iii) reducing illicit cultivation by actions such as the promotion of alternative development; and (iv) promoting international cooperation. Technical and financial assistance to the developing countries affected by drug production or trafficking does not render the Drug Arrangements unnecessary but rather the Drug Arrangements are a necessary complement to such technical and financial assistance.

Trade impact of the Drug Arrangements

4.100 As required by paragraph 3(a) of the Enabling Clause, the Drug Arrangements have been designed to promote trade from the beneficiary countries and not to raise barriers to the trade of other countries. There is no evidence that, in practice, the Drug Arrangements have displaced imports from other developing countries to any significant extent. The trade preferences granted under the Drug Arrangements are also subject to the general "graduation" mechanism provided for in the GSP Regulation.

(c) The Drug Arrangements are applied consistently with the chapeau

4.101 The chapeau of Article XX establishes three standards regarding the application of measures for which justification under Article XX may be sought. First, there must be no arbitrary discrimination between countries where the same conditions prevail; second, there must be no unjustifiable discrimination between countries where the same conditions prevail; and third, there must be no disguised restriction on international trade. These three standards, while distinct, must "be read side-by-side" and "impart meaning to one another".

4.102 The standards embodied in the chapeau are different from the standard used in determining whether a measure violates the substantive rules of the GATT (in casu the Enabling Clause) as observed by the Appellate Body in US - Shrimp. The standards embodied in the chapeau are also different from the standard used in determining whether the measure is provisionally justified under one of the particular exceptions listed in Article XX. As emphasized by the Appellate Body in US - Gasoline, the chapeau is not concerned with the measure for which justification is sought but instead with the application of such measure. According to the Appellate Body, the general structure and design of the measure and its declared policy objective must be examined under the exception listed in Article XX and not under the chapeau. In turn, when considering the chapeau, the treaty interpreter must determine whether the application of a measure provisionally justified under one of the exceptions listed in Article XX constitutes an abuse or misuse of such provisional justification.

(i) Arbitrary or unjustifiable discrimination

4.103 In this case, India's allegations do not relate to the "application" of the measure but it is the essential substantive feature of the "structure and design" of the measure in dispute. Therefore, the alleged discrimination between the two categories of developing countries is irrelevant for the purposes of the chapeau. In any case, however, the designation of the beneficiary countries of the Drug Arrangements is made according to objective, non discriminatory criteria. An inclusion of least-developed countries and other developing countries which are parties to the Cotonou Agreement or to bilateral free-trade agreements with the European Communities would have been pointless because they already benefit from duty-free access under these regimes. Equally, developed countries are not included because the "prevailing conditions" in developed countries are not the same as those prevailing in developing countries. Procedural aspects of granting and withdrawal of the special preferences are also non-discriminatory.

(ii) Disguised restriction

4.104 Any restriction on imports from developing countries not especially affected by the drug problem which are an inherent effect of the exclusion of that category of countries from the Drug Arrangements cannot be relied upon in order to establish that the application of the Drug Arrangements leads to a "disguised restriction" of trade. Instead, in order to establish that the Drug Arrangements fail to comply with that standard, it would have to be shown that imports from India are restricted because, as a matter of application of the Drug Arrangements, India has been unduly excluded from the list of beneficiaries of the Drug Arrangements even though it qualifies as a country that is especially affected by the drug problem. However, the selection of the beneficiaries of the Drug Arrangements has been made according to objective, non-discriminatory criteria.



1 GATT Document, L/4903, BISD 26S/203.

2 Request for Consultations by India, European Communities - Conditions for the Granting of Tariff Preferences to Developing Countries, 12 December 2002 (WT/DS246/1).

3 Request for the Establishment of a Panel by India, European Communities - Conditions for the Granting of Tariff Preferences to Developing Countries, 9 December 2002 (WT/DS246/4).

4 WT/DS246/5, 6 March 2003, para. 2.

5 Ibid.

6 Ibid.

7 See Annex 1 to this Report.

8 [2001] OJ L346/1 (Exhibit India-6).

9 Additionally, covered products do not enjoy duty-free access where they are subject to exceptions external to the Drug Arrangements, e.g., sector graduation under Article 12 of the Regulation and temporary withdrawal under Article 26 of the Regulation.

10 First written submission of India, para. 67.

11 First written submission of India, para. 68.

12 First written submission of India, para. 70.

13 First written submission of the European Communities, para.19.

14 First written submission of the European Communities, para.20 and 217; second oral statement of the European Communities, para.81.

15 Second oral statement of the European Communities, para.25.

16 First written submission of the European Communities, para. 217.

17 Second oral statement of the European Communities, para. 81.

18 [2001] OJ L346/1 (Exhibit India-6).

19 The New Shorter Oxford English Dictionary, 4 th Edition, p. 3465.

20 Appellate Body Report, Canada - Autos, para. 76.

21 Panel Report, Canada - Autos, para. 10.23.

22 With the exception of like products from least-developed countries covered under the Special Arrangements for least-developed countries. Hereinafter (as regards First written submission of India), unless the context otherwise requires, "all other Members" excludes least-developed country Members.

23 The relevant ordinary meaning of "advantage" is "I. superior position 1. The position, state, or circumstance of being ahead of another, or having the better of him or her…2. A favouring circumstance; something which gives one a better position" The New Shorter Oxford English Dictionary, 4th Edition, p. 31.

24 Introductory clause No. 17, Council Regulation (EC) No.. 2820/1998 of 21 December 1998 applying a multiannual scheme of generalized tariff preferences for the period 1 July 1999 to 31 December 2001 [1998] OJ L367/1.

25 Request for a WTO Waiver - New EC Special Tariff Arrangements to Combat Drug Production and Trafficking, 24 October 2001 (G/C/W/328) (Exhibit India-2[a]) as revised on 23 November 2001 (G/C/W/328/Add. 1) (Exhibit India-2[b]).

26 "Aide-Memoire of the Joint Andean Community-European Commission Technical Evaluation Meeting on the Profitable Use of the Andean GSP,21-22 November 2002" <http://www.comunidadandina.org/ingles/common/europa_2.htm> (last accessed 6 March 2003) (Exhibit India-3).

27 Appellate Body Report, Canada - Autos, footnote 4, para. 84.

28 Appellate Body Report, US - Wool Shirts and Blouses, DSR 1997:1; 323, at 337; Appellate Body Report, US - FSC (Article 21.5 - EC), para. 133.

29 Appellate Body Report, India - Patents (US), para. 45.

30 As used in Article 31.1 of the Vienna Convention on the Law of Treaties.

31 United States Caribbean Basin Economic Recovery Act waiver adopted 15 February 1985 (L/5579, BISD 31S/20) (renewed 15 November 1995 [WT/L/104]); Canada CARIBCAN waiver adopted 26 November 1986 (L/6102, SR42/4) (renewed 14 October 1996 [WT/L/185]); United States Andean Trade Preference Act waiver adopted 19 May 1992 (L/6991) (renewed 14 October 1996 [WT/L/183 and WT/L/184]); European Communities Fourth ACP-EEC Convention of Lomé waiver adopted 9 December 1994 (L/7604) (renewed 14 October 1996 [WT/L/186 and WT/L/187]); European Communities - The ACP-EC Partnership Agreement waiver adopted 14 November 2001 (WT/MIN [01]/15).

32 The New Shorter Oxford English Dictionary, 4th Edition, p. 689.

33 The Spanish and French texts of footnote 3 likewise use the definite article "the". The Spanish text provides: "Tal como lo define la Decisión de las PARTES CONTRATANTES de 25 de junio de 1971, relativa al establecimiento de un 'sistema generalizado de preferencias sin reciprocidad ni discriminación que redunde en beneficio de los países en desarrollo'" The French text provides: "Tel qu'il est défini dans la décision des PARTIES CONTRACTANTES en date du 25 juin 1971 concernant l'instauration d'un système généralisé de préférences, 'sans réciprocité ni discrimination, qui serait avantageux pour les pays en voie de développement'" (emphasis added).

34 First written submission of the European Communities, paras. 120-124.

35 UNDCP, World Drug Report, 2000, p. 160.; UNDCP, Global Illicit Drug Trends 2002, p. 45 et seq. (figure in bracket is based on the World Drug Report). The estimates for 2002 are found in UNODC, The Opium Economy in Afghanistan, p. 30.

36 UNDCP, World Drug Report, 2000, p. 161; UNDCP, Global Illicit Drug Trends 2002, p. 55 et seq. (figures in brackets are based on the World Drug Report).

37 Figures for 1994 to 1998 are from UNDCP, World Drug Report, 2000, p. 167; figures for 1999 from UNDCP, Global Illicit Drug Trends, 2001, p. 94; and figures for 2000 from UNDCP, Global Illicit Drug Trends, 2002, p. 80.

38 Figures for 1994 to 1998 are from UNDCP, World Drug Report, 2000, p. 168; figures for 1999 from UNDCP, Global Illicit Drug Trends 2001, p. 107; and figures for 2000 from UNDCP, Global Illicit Drug Trends, 2002, p. 94.

39 Figures for 1994 to 1998 from UNDCP, World Drug Report, 2000, p. 169; figures for 1999 and 2000 from UNDCP, Global Illicit Drug Trends 2002, p. 119 et seq.

40 According to the statistics of the Organization of American States, the figures for Peru are generally much higher. 1995: 29,147; 1996: 20,398; 1997: 11,111; 1998: 21,989; 1999: 32,846.