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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

(Continued)


  1. oral statement of india at the second substantive meeting of the panel

1. Introduction

4.268 The European Communities makes a number of arguments which if accepted would have considerable systemic consequences.

4.269 According to the European Communities, a tariff advantage is accorded "conditionally" if it is accorded as compensation for benefits received from another party. India would like to emphasize that, if the grant of tariff preferences conditional upon the situation or policies of exporting countries were regarded as being consistent with the most-favoured-nation requirement of Article I:1 of GATT 1994, this fundamental provision of the world trade order would be rendered inoperative.

4.270 The European Communities further invokes paragraph 2(a) of the Enabling Clause in its defence and argues that the term "non-discriminatory" in footnote 3 to the Enabling Clause allows developed country Members to differentiate between like products originating in developing countries under the Generalized System of Preferences ("GSP"). The European Communities' interpretation of the term "non-discriminatory" would have consequences as far-reaching as its interpretation of the term "unconditional". The WTO provides a forum and a legal framework for the negotiation of reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations. The application of tariffs on an MFN basis is a crucial factor in providing security and predictability to the multilateral trading system. If tariff reductions could be made conditional upon the situation or policies of the exporting country, the WTO legal system would no longer provide the required security and predictability and the WTO would lose its attraction as a forum for trade negotiations.

4.271 The GSP was negotiated and adopted at the UNCTAD for the benefit of developing countries. It was incorporated into the law of the GATT and the WTO through the 1971 Waiver and the Enabling Clause. The developed country Members knew, and accepted in advance, that any developed country Member may grant, under the GSP, preferential tariff treatment to products originating in developing countries without according the same treatment to like products originating in other developed country Members. That is why developed country Members are referred to as "donors" in the context of the GSP. However, the Enabling Clause reflects no similar acceptance on the part of developing countries that any developed country Member may grant preferential tariff treatment to products originating in some developing countries without according the same treatment to like products originating in other developing countries. If the arguments of the European Communities were accepted, developing countries would have to sacrifice market access opportunities in developed countries for the benefit of other developing countries and would therefore also become "donors" in the context of the GSP. Moreover, they would have to make these sacrifices on conditions determined by developed countries. The 1971 Waiver and the corresponding part of the Enabling Clause were never meant to bring about such consequences and there is no accepted principle of interpretation that would justify attaching a meaning to the term "non-discriminatory" that would entail such consequences.

4.272 If the European Communities' defence under paragraph 2(a) of the Enabling Clause were to be upheld, in the current tariff negotiations under the Doha Work Programme, developed country Members will continue to have the assurance that any advantage granted by any developing country Member to any product originating in any developed country will be accorded immediately and unconditionally to any like product of any other Member. However, developing country Members will not have the converse assurance. The creation of such a lop-sided legal framework would not merely be a disadvantage to developing country Members. The WTO's legal framework for tariff negotiations would be fundamentally altered as far as developing countries are concerned.

4.273 Thus, if the European Communities' defence under paragraph 2(a) of the Enabling Clause were to be upheld, the damage caused to the rules-based multilateral trading system would be serious and far-reaching - and most likely, irreparable.

2. The allocation of the burden of proof

4.274 The issue of the allocation of burden of proof has been rendered unnecessarily complex in the present case. The European Communities has at various times construed the Enabling Clause as conferring an "autonomous right", as conferring "a positive right", now as conferring "a negative right and a positive right". It alleges that the burden of proof should not be placed on the European Communities, a group of developed countries, because the Enabling Clause was adopted for the benefit of developing countries. The European Communities has occasionally drawn implications beyond the allocation of the burden of proof. For instance, by characterizing the Enabling Clause as an "autonomous right", it has attempted to characterize the Enabling Clause as part of the elements of a claim under Article I:1 of GATT 1994.

4.275 Paragraph 2(a) of the Enabling Clause is an affirmative defence because it does not impose any independent obligations. The requirements under paragraph 2(a) arise only after a Member has chosen to implement a GSP scheme. India has cited prior GATT cases that have treated the Enabling Clause as an affirmative defence.48 As India has explained, the allocation of burden of proof depends on whether the affirmative of a proposition is an essential element of a claim or a defence.49 The Enabling Clause is not an essential element of India's claim under Article I:1 of GATT 1994. Rather, it is an essential element of the European Communities' defence. Alternatively, in India's view, the material facts for the resolution of this dispute are uncontested. Therefore, the Panel need not even delve into the issue of allocation of burden of proof.

3. The relationship between the Enabling Clause and Article I:1 of GATT 1994

4.276 The European Communities argues that the phrase "notwithstanding the provisions of the General Agreement" in paragraph 1 of the Enabling Clause precludes the application of Article I:1 of GATT 1994 altogether. India has responded by explaining that the Enabling Clause provides only a limited exception to Article I:1 of GATT 1994, and that, in granting differential and more favourable treatment to the developing countries in the context of the GSP, it is not necessary that developed country Members be absolved from their obligation to accord MFN treatment to like products originating in developing countries. India notes that the European Communities has not responded to these arguments.

4. The legal interpretation of the term "non-discriminatory" and the UNCTAD arrangements

4.277 The interpretation of the term "non-discriminatory" in footnote 3 to the Enabling Clause is crucial to the European Communities' defence. The European Communities argues that, in the context of the GSP, the term "non-discriminatory" permits differentiation between developing countries that have different development needs (according to objective criteria). India is of the view that the term "non-discriminatory" in the context of preferential tariff treatment under the GSP means that there cannot be any differentiation between like products originating in developing countries.

4.278 The textual basis for India's interpretation of the term "non-discriminatory" is the following:

  • Paragraph 2(a) of the Enabling Clause refers to "preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences".

  • Footnote 3 refers to the GSP as that which is "described in the Decision of the CONTRACTING PARTIES of 25 June 1971, relating to the establishment of 'generalized, non-reciprocal and non discriminatory preferences beneficial to the developing countries'".

  • The GSP as described in the 1971 Waiver is therefore incorporated into the Enabling Clause by way of reference.

  • Paragraph (a) of the 1971 Waiver refers to "the preferential tariff treatment referred to in the "Preamble to this Decision �". Thus, the preferential tariff treatment referred to in the Preamble to the 1971 Waiver was incorporated by reference into the Enabling Clause.

  • The Preamble to the 1971 Waiver refers to the "mutually acceptable arrangements" � that "have been drawn up in the UNCTAD concerning the establishment of generalized, non-discriminatory and non-reciprocal preferential tariff treatment in the markets of developed countries for products originating in developing countries".

  • The term "non-discriminatory" in footnote 3 to the Enabling Clause therefore has the same meaning as that attributed to it in the arrangements that had been drawn up in the UNCTAD.

  • As evidence of those arrangements at the UNCTAD, India has presented the Agreed Conclusions, particularly that portion thereof which states that "there is agreement with the objective that in principle all developing countries should participate as beneficiaries from the outset".

  • As context to this agreement, India has likewise cited the statements of the developing countries and of the preference-giving countries that are annexed or referred to in the Agreed Conclusions which support its interpretation.

4.279 The European Communities dismisses the legal relevance of the UNCTAD arrangements, characterizing UNCTAD resolutions as "not legally binding". The European Communities likewise refers to the Agreed Conclusions as not reaching "the status of a formal UNCTAD resolution or decision". The Panel need not resolve the issue of the legal status of the UNCTAD resolutions and the Agreed Conclusions within the law of the UN. It is sufficient for the Panel to note that the Enabling Clause refers to the GSP referred to in the 1971 Waiver and that the 1971 Waiver in turn refers to the "mutually acceptable arrangements" that "have been drawn up in the UNCTAD". Regardless of the formal status of those mutually acceptable arrangements under the law of the UN, those arrangements define the legal scope of the Enabling Clause. The European Communities' dismissal of the legal relevance of the Agreed Conclusions renders footnote 3 incoherent or inoperative as it would be impossible to determine the nature of the "preferential tariff treatment" described in the preamble to the 1971 Decision without referring to the Agreed Conclusions. It is further noteworthy that the European Communities has not provided any evidence as to any mutually acceptable arrangements drawn up in the UNCTAD that support its position. In particular, the European Communities has not provided any evidence that the term "non-discriminatory" in the context of the GSP, as referred to in footnote 3 to the Enabling Clause and the 1971 Decision, was meant to permit developed country Members to differentiate between developing countries.

5. Paragraph 3(c) of the Enabling Clause

4.280 The European Communities argues that, if developing countries could not be treated differently, paragraph 3(c) of the Enabling Clause could not be complied with. The European Communities' understanding of paragraph 3(c) and its relationship with paragraph 2(a) is erroneous. As India has demonstrated in detail in its second written submission, the legal function of paragraph 2(a) is to permit tariff preferences under the GSP, and that of paragraph 3(c) is to ensure that the depth of tariff cuts and product coverage under GSP schemes are responsive to the needs of developing countries. A developed country can therefore perfectly well comply with the obligation to accord the same tariff cuts to all developing countries and the obligation to respond to the needs of developing countries.

4.281 The European Communities' argument depends on a reading of paragraph 3(c) as referring to the needs of "individual" developing countries. India has pointed out that neither the text nor the context of paragraph 3(c) supports such a reading. India pointed out in particular that other provisions of the Enabling Clause explicitly refer to "individual" needs of developing countries while paragraph 3(c) does not. The European Communities has not rebutted any of these arguments. India further pointed out that that the European Communities' reading of paragraph 3(c) would render most of its own GSP and that of all other developed countries inconsistent with this provision. In response, the European Communities argues that paragraph 3(c) "does not require that each preference must be responsive at the same time to the individual development needs of each and every developing country" and that "indeed that would be a logical impossibility".50 India submits that the European Communities is contradicting itself by claiming at the same time that paragraph 3(c) requires a positive response to the individual needs of developing countries and that this requirement would be a logical impossibility.

4.282 The European Communities contends that India has conceded that paragraph 3(c) refers to individual needs.51 India has not done so. In response to a specific question from the Panel, India merely pointed out that even if paragraph 3(c) were interpreted to refer to individual needs, this could be reconciled with the India's interpretation of the term "non-discriminatory" by variations in the choice of products so as to benefit particularly needy counties.52

4.283 The European Communities characterizes paragraph 3(c) in its second submission as "worded in rather imprecise terms", and it claims that "it may be argued that its is a purposive provision, which informs the interpretation of the other provisions of the Enabling Clause, but does not, of itself, impose any legally binding obligation".53 The European Communities thus relies on a provision which it characterizes as "worded in imprecise terms" that "does not impose any legally binding obligation" to justify an interpretation of "non-discriminatory" according to which the developing countries would loose their rights under Article I:1 of GATT 1994. The European Communities uses paragraph 3(c) as contextual support for an interpretation that expands the rights of developed countries but at the same time declares that this provision establishes no obligation for developed countries. The Panel should reject this attempt to have the cake and eat it.

4.284 The inclusion of paragraph 3(c) in the Enabling Clause cannot have the far reaching consequences that the European Communities assumes. Ultimately, the arguments of the European Communities for its negative conception of "non-discrimination" have no firm basis in paragraph 3(c). Instead, the European Communities' conception is based on a policy argument that a unilateral power to differentiate between developing countries would be beneficial.

4.285 The European Communities contends that there are considerable difficulties which result from accepting India's interpretation of "non-discriminatory" because it would "effectively deprive the developing countries with special needs from equal development opportunities".54

4.286 This policy argument is without merit. The neediest of the developing countries are already accommodated by the special provision for least-developed countries in paragraph 2(d). Moreover, in respect of other developing countries, where there is a good case for differentiation, the waiver mechanism is available. In fact, the WTO Members have granted waivers for measures similar to the Drug Arrangements and for trade measures benefiting the ACP countries. Thus, India's interpretation does not prevent accommodating differences between developing countries in accordance with the collective will of the Members. What India's interpretation merely prevents is that special needs of particular countries be unilaterally determined by developed countries. The question is thus not whether special needs can be accommodated through trade preferences, but (i) whether the developed countries should be able to do this unilaterally and in complete disregard of the legitimate interests of other countries with different but equally pressing needs or (ii) whether they should do so by resorting to the proper WTO procedures.

6. Alternative arguments on non-discrimination

4.287 The European Communities has so far failed to demonstrate that the Drug Arrangements are consistent with the concept of non-discrimination that it attempts to introduce into WTO law. Under the European Communities' interpretation, objective criteria have to be established by the preference-giving country, and the preferential tariff treatment must be granted equally to all developing countries meeting those criteria. The European Communities contends that the designation of the beneficiary countries under the Drug Arrangements is made in accordance with "objective, non-discriminatory criteria".55 The European Communities claims that these criteria capture the possibility of trafficking to the European Communities, as well as the effects of the drug problem on individual countries. However, the European Communities states that the criteria are not contained in a public document56 and that it is not necessary to publish the relevant criteria.57 The European Communities has not furnished these criteria to the Panel.

4.288 India would further like to note that:

  • The European Communities has not made available to India or to the Panel any documentation reflecting an evaluation of all developing countries' drug profiles for inclusion into the Drug Arrangements. It contends that this documentation is not public.58 However, elsewhere, the European Communities states that this evaluation is based on publicly available information.59

  • The European Communities has failed to furnish India with document 15083/01 concerning the inclusion of Pakistan as a beneficiary under the Drug Arrangements and has failed to furnish any document demonstrating why India was excluded from the Drug Arrangements.60

  • The European Communities states that its authorities do not utilize any "quantitative or qualitative threshold."61 The absence of a quantitative or qualitative threshold conclusively indicates that no objective criteria were applied.

4.289 The European Communities' concept of "non-discrimination" logically implies that there is a criterion equally applicable to all developing countries and justifying the more favourable treatment of some of them. In other words, its concept implies a right to rank the needs of developing countries in accordance with objective criteria. Yet, the European Communities has so far failed to indicate the criteria that it applied when deciding that the needs of the beneficiary countries rank higher than the needs of India and other developing countries. All that has been heard so far from the European Communities is that the needs of the beneficiary countries are different from those of India. However, the European Communities has not explained why the needs of the 12 beneficiaries deserve special preferences, while those of India and other developing countries do not.

4.290 The European Communities' concept of non-discrimination further implies that the increased market access opportunities accorded under the Drug Arrangements are in effect targeted to resolve the drug-related problems of the 12 beneficiaries. The factual underpinning of the European Communities' claim, on which it justifies the exclusion of India and other developing countries, is that Drug Arrangements resolve problems that India and other developing countries do not have. In fact however, the increased market access opportunities help resolve a large variety of development needs of the beneficiaries, including the need to reduce unemployment, the need to attract investments and the need to improve their external financial position. The Drug Arrangements thus help resolve to a large extent problems of the beneficiaries that are identical to those of India and other developing countries. The factual unpinning of the European Communities' claim is therefore baseless.

  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"

4.291 According to India, the Enabling Clause is not an "autonomous right" because the measures falling within its scope would otherwise be prohibited by Article I:1 of GATT 1994. However, the same is true of Article 27.2 of the SCM Agreement and Article 3.3 of the SPS Agreement. Yet, this did not prevent the Appellate Body from concluding that these two provisions are not affirmative defences. Rather, according to the Appellate Body, Article 27.2 of the SCM Agreement and Article 3.3 of the SPS Agreement exclude a priori the application of Articles 3.2 of the SCM Agreement and 3.1 of the SPS Agreement, respectively. Likewise, the Enabling Clause excludes the application of Article I:1 of GATT 1994 and, therefore, cannot be characterized as an affirmative defence justifying a violation of that provision.

4.292 India's argumentation with regard to Article 2.1 of the SPS Agreement falls short because Members have the right to apply customs duties consistently with their WTO obligations. Moreover, the Appellate Body nowhere referred to Article 2.1 but to Article 3.3 whose wording is equivalent to that of paragraph 1 of the Enabling Clause.

(ii) The Enabling Clause imposes "positive obligations"

4.293 According to India, the Enabling Clause does not impose "positive obligations" because developing countries cannot "compel" developed countries to establish a GSP scheme. However, the same could be said of many other WTO provisions, including Article I:1 of GATT 1994, which are not "affirmative defences" because Members are free to decide whether or not to levy customs duties on imports and, if so, at which level. Similarly, under the Enabling Clause, the right to grant differential and more favourable tariff treatment is subject to certain "positive obligations" set out in paragraphs 2 and 3 of the Enabling Clause, including the obligation that the preferences granted as part of a GSP scheme must be "non-discriminatory".

4.294 On India's interpretation, other WTO provisions which have been recognized not to be "affirmative defences" would be found to impose no "positive obligations" such as Article 27.4 of the SCM Agreement, Article 3.3 SPS Agreement, Article 6 of the Agreement on Textiles and Clothing or Articles VI and XIX of GATT 1994. Yet, in all these cases although they are not compelling they have been recognized by the Appellate Body as "positive obligation".

(iii) Previous panels have not treated the Enabling Clause as an affirmative defence

4.295 India's argument that previous disputes panels (US - Customs User Fee and US - MFN Footwear) have treated the Enabling Clause as an affirmative defence is not correct either because the Panel made no respective finding or because it was not invoked by the defendant.

(iv) The report of the Appellate Body in Brazil - Aircraft supports the European Communities position

4.296 India's interpretation on Article 27.4 falls short because the Appellate Body relied on the fact that Article 27 is intended to provide Special and Differential Treatment and in any event, like Article 27.4 of the SCM Agreement, the Enabling Clause does impose positive obligations. Finally, contrary to India's assertion, whether or not the Enabling Clause is an affirmative defence, cannot depend on the identity of the complaining party in each particular case. India's suggestion that the violation of the Enabling Clause will always be invoked by a developing country vis-�-vis a developed country is incorrect. The Enabling Clause also accords to developing countries the right to grant certain forms of differential and more favourable treatment. Thus, a developed country, or another developing country, could invoke a violation of the Enabling Clause by a developing country.

(b) India has the burden to prove that Article I:1 of the GATT applies to the Drug Arrangements

4.297 India further misinterprets that the burden of proof "must be assessed in relation to the material elements of the plaintiff's claim" and that since India's only claim in this dispute is that the Drug Arrangements are inconsistent with Article I:1 of GATT 1994, and not with paragraph 2(a), it is for the European Communities to prove that the Drug Arrangements fall within paragraph 2(a). A provision of the WTO Agreement either is or is not "in the nature of" an affirmative defence. The Enabling Clause is not "in the nature" of an affirmative defence, and it does not become one simply because it is invoked by the defendant in a particular dispute. This is evident from the cases Brazil - Aircraft and EC - Hormones.

4.298 Regarding the burden of proof, India's reference to the Appellate Body report in US - Wool Shirts and Blouses does not address the issue of what is an "affirmative defence", as opposed to the negative of the claim asserted by the complaining party. Based on the jurisprudence in Brazil - Aircraft India bears the burden of proving that Article I:1 of GATT 1994, and not the Enabling Clause, apply to the measure in dispute. India's interpretation would have other unacceptable consequences. For example, a Member complaining against an anti-dumping or a countervailing measure could limit itself to assert a claim based on Articles I or II of GATT 1994, and then it would be for the defendant to prove that such measure is consistent with Article VI of GATT 1994 and the Anti-Dumping Agreement or the SCM Agreement, respectively.

4.299 Finally, in view of India's assertion that it is not making any claims under the Enabling Clause, the European Communities would submit that, if the Panel were to agree that the Drug Arrangements fall within paragraph 2(a) of the Enabling Clause, rather than within Article I:1 of GATT 1994, it should refrain from examining whether the Drug Arrangements are consistent with paragraph 3(c) of the Enabling Clause.

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

4.300 India's contention that the Enabling Clause excludes the application of Article I:1 "only to the extent that the granting of tariff preferences under the GSP would be prevented if the introduction of a measure were not allowed" has no basis on the text of the Enabling Clause. Accordingly, the only issue before the Panel is whether the Drug Arrangements fall within paragraph 2(a). India's thesis is also contradicted by paragraphs 2(c) and 2(d) as these two subparagraphs allow differentiation between developing countries, even though such differentiation is no more "necessary" to provide differential and more favourable treatment to developing countries than it would be within the context of a GSP.

4.301 The European Communities would underline that the Enabling Clause is not an "exception" but one of the main forms of Special and Differential Treatment, which in turn is one of the pillars of the WTO Agreement. The purpose of Special and Differential Treatment is to respond to the special needs of developing countries. Differentiating between developing countries with different development needs is fully consistent with such an objective. In any event, the Appellate Body has made it clear that there is no presumption that "exceptions" should be interpreted "strictly" or "narrowly".

(d) The meaning of "unconditionally" in Article I:1 of the GATT

4.302 In its second written submission India limits itself to arguing that the Drug Arrangements are not covered by the Enabling Clause and, as a result, are inconsistent with Article I:1, inter alia because they are "not unconditional". Since the Drug Arrangements fall within the Enabling Clause, the Panel does not need not to reach the issue of whether they are "conditional" for the purposes of Article I:1.

4.303 In this respect, India's argument on the ordinary meaning of "unconditional" is of little value because it leaves undefined the meaning of "condition". As to the context, it is clear that MFN clauses can be either "conditional" or "unconditional". And that this notion must have identical meaning in relation to both types of clauses. Thus, the Draft Articles on the MFN Clause of the International Law Commission give a single definition of condition which applies to both conditional and unconditional MFN clauses. Finally, Article I:1 of GATT 1994 contains two different obligations, which are: first, to grant MFN treatment; and, second, to do so "immediately and unconditionally". To say that a distinction based on the "situation" of a country is not a "condition" is not the same as saying that such distinction is consistent with Article I:1.

2. The Enabling Clause

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

(i) The GATT context

4.304 Contrary to India's assertion, no definition of the term "non-discrimination" in the sense of equal competitive opportunities to like products originating in different countries exists under the GATT. India's quotation from the Appellate Body report in EC - Bananas III is not relevant here as emphasized in the same report by the Appellate Body. The term "discrimination" may have different meanings in different WTO contexts as noted by the panel in Canada - Pharmaceutical Patents. The Enabling Clause, like all the other provisions granting Special and Differential Treatment, does not seek to provide equal competitive opportunities for like products of different origins but it intends to create unequal competitive opportunities in order to respond to the special needs of developing countries.

(ii) Paragraph 2(d)

4.305 Contrary to India's argument, paragraph 2(d) is not an "exception" but is one of the forms of differential and more favourable treatment to which paragraph 1 "applies" and, therefore, stands on the same level as paragraph 2(a) with respect to paragraph 1. This does not render paragraph 2(d) "redundant and meaningless" but while the two provisions overlap, the scope of paragraph 2(d) is broader in some significant respects than that of paragraph 2(a), for example, with regard to "preferences/special treatment" and the context in which measure is provided. As for paragraph 2(b), it has a more limited scope than paragraph 2(d) and is intended to cover the Special and Differential Treatment provisions contained in the Tokyo Round plurilateral agreements while paragraph 2(d) covers any "special treatment" with regard to any non-tariff measure.

(iii) The use of "the" before "developing countries"

4.306 India's argument in this regard has the immediate a contrario implication that whenever the term "developing countries" is not preceded by the it means that the preferences may be granted to some developing countries. The use of the word "the" in the English, Spanish and French versions of the Enabling Clause is very disperse. Moreover, both in French and in Spanish, articles are more frequently used than in English and India's interpretation would render the Spanish and French versions internally inconsistent, in particular in view of paragraph 1, 2(c) and 2(d). In addition, India's interpretation of the term "other Members" in paragraph 1 as meaning "the developed Members" would lead to conflicting meanings when read in conjunction with each of the subparagraphs of paragraph 2.

(iv) The UNCTAD Arrangements

4.307 The Agreed Conclusions do not prohibit expressly such differentiation. The only provision in the Agreed Conclusions which is relevant to the issue of differentiation between developing countries is that the preferences should be "non-discriminatory". Thus, on the issue before the Panel, the Agreed Conclusions add nothing to what is already said in the Enabling Clause. The Agreed Conclusions do no purport to establish an exhaustive regulation of the GSP's but they take note of the statements of intentions made by the prospective donors and record the agreement (and sometimes the lack of agreement) of all the participants in the consultations sponsored by UNCTAD with regard to certain basic objectives. For that reason, the silence of the Agreed Conclusions on a certain issue can never be considered as dispositive.

4.308 As to the least-developed countries, Part V of the Agreed Conclusions records a series of agreed objectives and statements of intention by the prospective donor countries with a view to responding to the special needs of the least-developed countries. The donor countries are free to go beyond those objectives and statements of intentions, subject to the general requirement that preferences must be inter alia "non-discriminatory".

4.309 India's reference to the Agreed Conclusions that "in principle all developing countries should participate as beneficiaries from the outset" does not address the different question of whether the developing countries already designated as beneficiaries of a GSP should be granted the same preferences. The objective cited by India was aimed at preventing donor countries from excluding a priori certain developing countries from their GSPs on grounds unrelated to their development needs (namely, the fact that they granted reverse preferences to certain developed countries). The European Communities' interpretation of "non-discriminatory" does not allow differentiation on such grounds because under the European Communities' GSP all developing countries are recognized as beneficiaries and all of them benefit from preferences.

(v) Paragraph 3(c) and policy arguments

4.310 India has not provided new arguments on paragraph 3(c) and it has produced a series of unwarranted trade policy concerns. The European Communities, therefore, refers to its previous responses.

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

4.311 The European Communities has explained what are the criteria used in order to select the beneficiaries of the Drug Arrangements. India does not address the adequacy as such of those criteria. Nonetheless, it argues that they are not "objective" because they are not set out in the GSP Regulation. Yet, the fact that the selection criteria are not stated in the GSP Regulation does not prejudge of their objectivity. The European Communities has already explained why it is not necessary to publish the selection criteria or to lay down procedures to apply for inclusion or for removing countries from the Drug Arrangements. As to the selection of the beneficiary countries, the burden of proof is on India. Yet, the European Communities has explained why India, Indonesia, the Philippines, Thailand and Paraguay are not included in the Drug Arrangements.

3. Article XX of GATT 1994

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

4.312 By suggesting that a measure must be specifically designed to protect human life and health, India is introducing a requirement which is nowhere stated in Article XX(b). All that is required by that provision is that a measure must be "necessary" to protect human life or health. Article XX(b) does not require that the protection of human life or health must be the only, or even the main objective of the measure concerned. In any event, to the extent India refers to the Explanatory Memorandum, this is a preparatory document with no legal status. Yet, achieving the objective of combating drugs would have the necessary consequence of also achieving the objective of protecting the life and health of the European Communities' population.

4.313 As to the relevance of the "contribution", the European Communities has already explained that the Drug Arrangements are an "important" component of the European Communities' drug policy and, more specifically, that they are a "necessary complement" to the financial and technical assistance provided to the beneficiaries. India's assumption that the fight against drug production and trafficking is simply a matter of law enforcement is at odds with the relevant United Nations recommendations. These recommendations were recognized by the Indian delegation at the occasion of the adoption of the 1998 Action Plan.

4.314 In this context, it is important to develop other economic alternatives besides crop substitution in order to absorb the excess manpower generated by the eradication of drug cultivation in rural areas, as well to prevent the unemployed of the urban and transit areas from joining the drug industry. Finally, India's suggestion that the Drug Arrangements would provide an incentive for the beneficiaries to refrain from combating drug production and trafficking is as absurd as suggesting that the general GSP arrangements provide an incentive for India to refrain from adopting appropriate development policies. Finally, as for technical and financial assistance it is important that trade preferences are a necessary complement to such assistance, rather than an alternative. Licit alternative activities cannot be dependent indefinitely on foreign subsidies. They must be sustainable, and this requires the opening of foreign markets for the output of such activities.

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

4.315 With respect to the chapeau of Article XX, the European Communities recalls that the essential substantive feature of the measure in dispute, and the one which, according to India, makes it inconsistent with Article I:1 of GATT 1994, is the tariff differentiation between the beneficiaries and other countries which are not affected by the drug problem. The European Communities argues that such differentiation is "necessary" in order to protect the life and health of its population. If the Panel were to agree that such differentiation is "necessary" for that purpose and, therefore, that the measure is prima facie justified under Article XX(b), it would be illogical to examine again such differentiation under the chapeau. Rather, the issue to be examined under the chapeau is whether the application of such differentiation is discriminatory.

V. ARGUMENTS OF THE THIRD PARTIES

  1. the andean community

1. Introduction

5.1 The Governments of Bolivia, Colombia, Ecuador, Peru and Venezuela (referred to jointly as the Andean Community) submit that the Drug Arrangements do not constitute a violation of the European Communities' WTO obligations. The Enabling Clause must be seen as a self-standing regime which affirmatively establishes how developed countries are to assist developing countries. The Enabling Clause and the GSP that it authorizes are the most concrete and relevant forms of special and differential treatment granted by developed countries in favour of developing countries. As such, GSP schemes are key to the participation of developing countries in the world trading system. It is impermissible to see the Enabling Clause as just an exception.

5.2 The Andean Community contends that the European Communities system of tariff preferences, including the Drug Arrangements, does fall within the scope of the Enabling Clause. The Drug Arrangements do not violate the Enabling Clause; rather, they are a proper application of it.

5.3 The Andean Community argues that preference-giving countries can differentiate between developing countries, and the Drug Arrangements, in so differentiating, do not violate the Enabling Clause. The term "non-discriminatory" should not be equated with the most-favoured-nation (MFN) principle, rather, it should be interpreted in a way that allows for differentiation that addresses the drug-related development needs.

5.4 The Andean Community believes that drug problems are an internationally recognized problem and that the international community shoulder shared responsibility for the war on drugs. The European Communities' Drug Arrangements represent a positive response that contributes to alleviating the enormous burden of the drug problem by fostering the development of agriculture and industrial alternatives to drug production and trafficking.

2. The important implications of this dispute for the Andean Community

5.5 The Andean Community argues that it has a vital interest in the preservation of the Drug Arrangements and in the outcome of this case. The destabilizing effects of the production and trafficking of illicit drugs on economic and legal institutions, civil societies and political systems of countries of the Andean Community are notorious. The Drug Arrangements are intended to provide assistance to beneficiary countries with severe drug production and trafficking problems in their efforts to create alternatives to drug activities, while fostering sustainable development. Accordingly, Bolivia, Colombia, Ecuador, Peru and Venezuela are all beneficiaries of the Drug Arrangements and are all countries with severe drug-related problems.62

5.6 The Andean Community claims that the international community has recognized the multiple negative effects of drugs in Bolivia, Colombia, Ecuador, Peru and Venezuela. As the 2002 annual report of the International Narcotics Control Board (INCB) put it: "the drug problem in South America, particularly in the countries in the Andean sub-region has increasingly been linked to political issues and national security issues".63 The Andean Community states that the Andean region has very particular developmental challenges brought about by the continued cultivation and trafficking of illegal drugs. The degree of harm caused to the region's social and economic development by drug cultivation and trafficking is unparalleled in any other region of the world. The drug trade has been the root-cause of many of these problems. It has for many years, and continues today, to fuel activities aimed at destabilizing the region.

5.7 The Andean Community further notes that the negative impact of drug production and trafficking on the economic growth of Andean countries has been the subject of numerous studies64, pointing out that the sources-of-growth decomposition shows that this reversal can be accounted entirely by changes in productivity. The time series analysis suggests that the implosion of productivity is related to the increase in criminality which has diverted capital and labour to unproductive activities. In turn, the rise in crime has been the result of rapid expansion in drug trafficking activities, which erupted around 1980.

5.8 The Andean Community contends that the huge cost of the "War on Drugs" represents billions of dollars to the Andean countries in financial terms and prevents adequate and much needed spending on education, healthcare, environmental, infrastructure and other development-focused programmes. In addition to this heavy financial burden, the cost of the 'War on Drugs' to social and economic development may be unquantifiable. Over the years, the fight has cost countless lives and has led to the displacement of hundreds of thousands of people. According to the Andean Community, these and other adverse socio-economic consequences have all been well-documented by the world's major international aid donors, development agencies and human rights organizations.

5.9 The Andean Community further argues that shared responsibility for the problem of illicit drugs production and trafficking has been recognized by the General Assembly of the United Nations.65 According to the Andean Community, the Drug Arrangements were explicitly a response to a plea for support from countries comprising the Andean Community, which stressed to the European Communities that drug production and trafficking seriously undermines social integrity and impairs economies to the point of jeopardizing development.66 As such, the preferences are a positive response that alleviate the enormous cost to its economies and societies of this plague by fostering the development of alternatives (agricultural and industrial) to drug production and trafficking.

5.10 The Andean Community contends that the Drug Arrangements are meaningful to its members. In 2000, the Andean Community's exports to the European Communities under this special regime amounted to US$1.275 billion (22.8 per cent of the total exports of the Andean Community to the European Communities). Likewise, the gross value of the production under this regime was US$2.532 billion, generating around 159,000 jobs.67 More specifically, the gross value of the production under the GSP special regime represented in 2000, US$1 billion for Venezuela, US$678 million for Peru, US$494.5 million for Colombia, US$245 million for Ecuador, and US$78 million in the case of Bolivia. Likewise, the benefits of this regime in terms of direct and indirect employment in 2000 reached 53,100 jobs for Ecuador, 45,700 for Colombia 33,600 for Venezuela, 23,900 for Peru and around 3,000 for Bolivia.68

5.11 The Andean Community concludes that the removal of GSP benefits would not only have a detrimental impact on the economic and social development of Andean Community, but it will also impair the "War on Drugs". It jeopardizes vital tools for the economic and social development of the countries that comprise the Andean Community.

5.12 Bolivia states in its separate oral statement that from 1989 to 2002, there was an 80 per cent reduction in coca production in Bolivia from 40,000 hectares to 8,000 hectares. Meanwhile, a number of large cartels in Bolivian territory were dismantled, and 16,439 production plants and laboratories together with 25,579 maceration pits were destroyed. These results were obtained through the implementation of a series of programmes which could not have been financed by the National Treasury - indeed, 79 per cent is covered by international cooperation. Territories that were under illicit crops have now been replaced by alternative development product cultivation zones, and Bolivia has become a pioneer in the sustainable management of resources.69

5.13 Bolivia claims that a large proportion of the measures implemented to combat drug problem have been made possible through mechanisms such as the Drug Arrangements. Poverty and the lack of opportunities and alternatives have led a portion of its rural population to cultivate coca leaves. Without the alternative development programmes, the "New Commitment to Fight Drugs 2003-2008" that Bolivia presented at the 46th session of the Commission on Narcotic Drugs would be more difficult to implement.70

5.14 Colombia argues that drug production and trafficking takes on a particular and special form in each country and varies according to the geographical region. In Colombia, the combined problem of drugs and terrorism in recent years has evolved to such an extent that it presents a medium- and long-term threat not only to Colombia but also to the entire world. Drug trafficking has resulted in loss of productivity over the last ten years as well as many lives.71

5.15 Colombia considers that the principle of shared responsibility endorsed by the United Nations is an expression of the world's commitment to tackle this grave problem on a collective basis. This principle recognizes the situation of Colombia as having a special development need and links market access to the fight against the production and distribution of illicit substances. The practice of providing special preferences has existed for more than ten years. The preferences are of considerable significance in the fight against drug production and distribution. To deny the European Communities the possibility to respond positively to the needs of these developing countries would result in the loss of approximately 40,000 jobs in Colombia.72

5.16 Ecuador claims that as a poor country, the temptation of easy and much higher gains from drug trafficking compared to low profits from producing coffee or cacao is an important factor behind its drug problems. Government spending on eradication of illicit drug production has reduced financial input for other development-related programmes, such as poverty reduction, education, health, infrastructure and environment. The extent of damage caused by drug trafficking to Ecuador's social and economic development is unparalleled in any other part of the world.73

5.17 Ecuador points out that the Drug Arrangements have created a broader opportunity for diversifying its export production and generated greater income and more employment in the country. Nonetheless, the Drug Arrangements are only part of the response to the immense complications posed by drug trafficking. It is Ecuador's view that dismantling the Drug Arrangements would have adverse consequences for Ecuador's more vulnerable population.74

5.18 Peru contends that the harmful effects of the drug problem include the loss of export opportunities and the diversion of production efforts to illicit activities. Technical and financial assistance is not sufficient in the combat against drugs. Peru maintains that the Drug Arrangements regime is a key tool for the economic development of the beneficiary countries by helping them to diversify their crops and generate alternative and lawful economic activities. The dismantling of the preferences would obviously have undesirable effects on Peru's economy. In this regard, it has not been satisfactorily shown that the cost of these benefits is being assumed by other countries not benefiting from the Drug Arrangements.75

5.19 Venezuela states that it is facing a serious drug trafficking problem. Venezuela has been a beneficiary of the Drug Arrangements since 1995. The Drug Arrangements contribute to moderating the high economic and social costs that these drug-affected countries have had to assume, notably due to unemployment resulting from the reduction of illicit crops. The elimination of these preferences would have a negative impact on Venezuela's economic and social development and would aggravate underdevelopment and poverty.76

5.20 Venezuela argues that paragraph 3(c) of the Enabling Clause permits differentiation among developing countries and does not require that developed countries extend the preferences under the scheme to all developing countries in responding positively to the different development, financial and trade needs of a particular group of developing countries.7 7

3. The pivotal role of the Enabling Clause as part of the GATT/WTO regime for developing countries and as a self-standing regime

5.21 The Andean Community notes that the Enabling Clause was adopted during the Tokyo Round. The Enabling Clause replaced the 1971 waiver which permitted developed contracting parties to accord, for ten years, preferential tariff treatment to products originating in developing countries. By contrast, the duration of the Enabling Clause is not limited.

5.22 The Andean Community argues that the Enabling Clause is the centrepiece of the GATT/WTO framework for special and differential treatment to developing countries. The first effort was the amendment in 1955 of Article XVIII of the GATT, providing developing countries with tools to protect domestic industries. The addition in 1965 of Part IV of the GATT also marked an important step in the evolution of this framework.

5.23 According to the Andean Community, the GSP scheme was created under the auspices of the United Nations Conference on Trade and Development (UNCTAD) to address the concerns of developing countries. UNCTAD reached a final agreement to establish a "mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences" in 1968.78 Subsequent work in both UNCTAD and the Organization of Economic Co-operation and Development (OECD) ensured that developing countries and developed nations respectively agreed on the principles and the particulars of the GSP.79

5.24 The Andean Community notes that in 1971, the CONTRACTING PARTIES of the GATT adopted a waiver decision in order to 'enable' GSP regimes to coexist with the GATT rules.80 The 1971 Waiver Decision authorized the GSP schemes for a period of ten years. This waiver was transformed into a permanent regime by the 1979 Enabling Clause. The Enabling Clause thus put in place the cornerstone of the special and differential treatment for developing countries in the GATT/WTO regime. The GSP is the most concrete and relevant form of "special and differential" treatment that developed countries offer the developing countries. As such, GSP systems are key to the participation of developing countries in the world trading system.

5.25 The Andean Community is of the view that the evolution of the framework for special and differential treatment to developing countries is still an ongoing process. Development has been recognized explicitly as a prime concern for the WTO system. The preamble to the WTO Agreements highlight its importance. Ongoing negotiations are also dedicated to development issues81, and have been referred to as the "The Doha Development Round". While it is impossible to envisage what the "special and differential treatment" construction will be at the end of "The Doha Development Round", there has been no suggestion that the Enabling Clause should be removed.82 The Enabling Clause is indeed one of the very few elements that is generally accepted by both developing and developed countries. All recognize that the Enabling Clause and the existence of GSP schemes are fundamental to the continued participation of developing countries in the WTO.

5.26 The Andean Community disagrees with India's argument that the Enabling Clause is merely an exception to the MFN principle. According to the Andean Community, the Enabling Clause is a self-standing regime, affirmatively establishing the manner in which developed countries are to assist developing countries. Because the Enabling Clause is self-standing and has requirements and a terminology of its own, the MFN principle is not part of the Enabling Clause. Without express articulation, it cannot be taken for granted that the requirements and terms of the Enabling Clause are subservient to other WTO principles. The Enabling Clause contains no language to that effect.

5.27 The Andean Community argues that according to the ordinary meaning of the term "notwithstanding" set out in paragraph 1 of the Enabling Clause, Article I:1 of GATT 1994 simply does not apply when developed contracting parties grant preferences to developing countries. The Oxford dictionary defines "notwithstanding" as "without regard to or prevention by".83 In other words, when preferential treatment falls under the Enabling Clause, Article I:1 of GATT 1994 does not apply at all.

5.28 The Andean Community also contends that Article I:1 of GATT 1994 does not offer any useful 'context' in interpreting the Enabling Clause because there is no comparable language in the Enabling Clause to that of Article I:1 of GATT 1994. Particularly, the requirement of providing "unconditional" MFN treatment to all other Members does not appear in the text of the Enabling Clause.

5.29 In its oral statement made at the first substantive meeting of the Panel, the Andean Community argues that the non-discrimination requirement in the Enabling Clause is different from the MFN principle. Citing the 1978 Report on the Most Favored Nations Clause of the International Law Commission, it concludes that the standards of non-discrimination generally permit distinction on the basis of certain objective criteria.84

5.30 According to the Andean Community, the issue in this case is not the MFN principle, but the requirements of the Enabling Clause itself.85

5.31 The Andean Community claims that the notion of non-discrimination in the Enabling Clause is understood as a command not to treat equal situations differently or different situations equally, whereas the MFN principle requires treating like products from all exporting countries in the same way. Under the Enabling Clause, providing different treatment to developing countries with different economic position does not necessarily constitute discrimination.

5.32 The Andean Community further argues that the Enabling Clause is not a waiver from Article I:1 of GATT 1994. Unlike its predecessor - the 1971 Decision - the Enabling Clause is not described on its face as a waiver. Moreover, Article XXV of GATT 1994 refers to waivers of an obligation "imposed on a contracting party" [emphasis original] in "exceptional circumstances". The Enabling Clause does not refer to any exceptional circumstances, nor is it temporary. According to the Andean Community, it goes without saying that it would be inappropriate to apply a narrow or strict reading of exceptions or waivers that the Appellate Body promulgates when interpreting the Enabling Clause. The Enabling Clause is therefore a self-standing regime rather than an exception to Article I:1 of GATT 1994.

4. "Other contracting parties" in paragraph 1

5.33 The Andean Community considers that the phrase "other contracting parties" in paragraph 1 of the Enabling Clause refers to any other contracting parties, whether developed or developing countries. The text of the Enabling Clause is clear in that GSP donors are permitted to differentiate between developing countries. Paragraph 1 provides that the contracting parties may accord differential and more favorable treatment to some developing countries without according such treatment to "other contracting parties". The Enabling Clause allowed developing countries to offer them to any other contracting parties, whether developed or developing.

5.34 The Andean Community argues that this reading is confirmed by the fact that the request to add "developed" between "other" and "contracting parties" in paragraph 1 was not accepted in the GATT Council meeting adopting the 1971 waiver Decision.86

5. Paragraph 3(c) of the Enabling Clause

5.35 The Andean Community contends that paragraph 3(c) allows and requires developed countries to make distinctions between developing countries in their GSP schemes. It requires developed countries to "design" GSP schemes in such a way as to "facilitate and promote the trade of developing countries" and to "respond positively" to the development, financial and trade needs of developing countries. The developing country membership of the WTO is vast, and it is beyond doubt that not all developing countries have the same needs. In "designing" their GSP regimes, developed country Members have a positive obligation to take this into account. The European Communities' Drug Arrangements do exactly that.

5.36 The Andean Community submits that the European Communities' GSP regime properly acknowledges drug-related problems. The Andean Community points out that the production and trafficking of illicit drugs have far-reaching, unparalleled implications and compromise the economic and social development of the affected countries in a unique way. These unique development needs have been recognized internationally.87 The kind of increased market access provided by the Drug Arrangements has been internationally recognized as an effective tool to alleviate the special development needs of countries affected by drug production and trafficking. These unique problems have been recognized within the WTO as well. For instance, the preamble to the Agreement on Agriculture recognizes that increased market access is an effective response to drug-related development problems.88

5.37 The Andean Community claims that additional preferences granted to these countries by the European Communities is not only permissible, but also desirable under the Enabling Clause because they recognize the unique development needs and provide a response tailored to specific needs of these countries. The Drug Arrangements seek to displace or reduce the importance of drugs as an economic activity in the affected countries. Increased market access encourages the production of alternative agricultural crops, as well as the allocation of resources to industrial goods. Likewise, by raising standards of living, the Drug Arrangements help strengthen civil institutions, which in turn, further reduces the influence of the "drug economy" in these countries.

6. The interpretation of the term "non-discriminatory" in footnote 3 of the Enabling Clause

5.38 For the Andean Community, it goes without saying that enabling discrimination was not the intention of the Enabling Clause. The Andean Community contends that differentiating between developing countries - taking into account their different situations - does not constitute discrimination. In other words, different treatment of situations which are objectively different is not discriminatory. Contrarily, the Andean Community argues that discrimination can be found when treating "like" situations differently and in treating different situations the same. To follow India's theory of non-discrimination - making no distinction between different categories of developing countries - would actually institute a discrimination which would undermine the Enabling Clause.

5.39 The Andean Community posits that in order to comply with the requirements of paragraph 3 of the Enabling Clause, preferences must be designed to facilitate and promote the trade of individual or groups of developing countries and respond positively to their development needs. In other words, the standard of non-discrimination generally permits distinctions on the basis of certain objective criteria. Making no distinction between different categories of developing countries as India argues would actually institute discrimination, thus undermining the Enabling Clause.

5.40 In its oral statement at the first substantive meeting of the Panel, the Andean Community contends that paragraphs 3(a) and 3(c) inform the interpretation of the term "non-discriminatory". Both these subparagraphs require that the design of GSP scheme be fashioned "to promote the trade of developing countries" and "to respond positively to development, financial and trade needs of developing countries". These phrases can be seen to guide and limit the discretion of donor countries when designing their respective GSP schemes.89

5.41 The Andean Community disagrees with Paraguay's argument that discrimination is only envisaged for the benefit of the least-developed countries, as set out in paragraph 2(d) of the Enabling Clause and that differentiation between developing countries is not permitted by the Enabling Clause. The Andean Community argues that paragraph 2(d) refers to another field of application of the Enabling Clause unrelated to GSP. Paragraph 2(d) relates both to tariff and non-tariff measures, whereas paragraph 2(a) of the Enabling Clause only relates to preferential tariff treatment.90

5.42 The Andean Community takes issue with Paraguay's suggestion that it is not necessary for a donor like the European Communities to first establish objective criteria in the abstract - in this case, related to drug problems - then establish a separate procedure or criteria pursuant to which it would decide which developing countries would qualify for such preferences.91 The Andean Community argues that nothing suggests that a donor like the European Communities could not conduct a selection process and include the results of this process in its GSP regulation. What matters is that the choice of beneficiary countries reflected in the regulation corresponds with the criteria of the Enabling Clause, notably paragraphs 3(a) and 3(c). In other words, and contrary to Paraguay's assertion, the question of whether the Enabling Clause permits the European Communities to differentiate between developing countries on the basis of drug-related problems is appropriately before the Panel.

  1. costa rica

1. Introduction

5.43 Costa Rica submits that the European Communities' Drug Arrangements are fully consistent with the provisions of the Enabling Clause. Consequently, Costa Rica further submits that the Drug Arrangements are in conformity with the WTO Agreement, including the MFN principle set out in Article I:1 of GATT 1994.92

5.44 Costa Rica notes that one of several forms of preferential treatment authorized by the Enabling Clause is preferential tariff treatment granted by developed countries to products originating from developing countries pursuant to paragraph 2(a) and footnote 3 of the Enabling Clause. Costa Rica maintains that the Decision of the Contracting Parties of 25 June 1971, mentioned in footnote 3 of the Enabling Clause, exempted developed countries from Article I:1 of GATT 1947 to the extent necessary to accord generalized, non-reciprocal, non-discriminatory and beneficial preferential tariff treatment.93

5.45 Costa Rica submits that the Enabling Clause does not prohibit a developed country from granting preferential tariff treatment to some, but not all, developing countries. The European Communities fulfils its obligation under the Enabling Clause by designing its preferential tariff scheme in a way that responds to the different development and trade needs of beneficiary countries. The European Communities' Drug Arrangements comply with terms of the Enabling Clause because eligibility is determined based on objective and non-discriminatory criteria. Furthermore, Costa Rica argues that duty-free market access granted under these arrangements is necessary to respond to the different development needs of those countries whose economic, trade and financial development is hindered by drug production and/or trafficking.94

2. The important implications of this dispute for Costa Rica

5.46 Costa Rica emphasizes that it has a substantial interest in the outcome of this dispute since it is a beneficiary developing country under the European Communities' Drug Arrangements.95 Costa Rica reiterates its request for additional third-party rights in this dispute and submits that panels in the past have granted enhanced third-party rights on the basis of, inter alia, the economic effect that the measures in dispute can have on third parties.96 Accordingly, Costa Rica states that the extent of the dire economic and social consequences that could result from the modification of the European Communities' Drug Arrangements, especially in the absence of substantial tariff reduction or elimination on an MFN basis by developed countries, justify the granting of additional third-party rights to Costa Rica.97

5.47 Costa Rica points out that agricultural products that are included in the European Communities' special tariff arrangements comprise 30 per cent of its agricultural sector and Costa Rican exports to the European Communities in 2001 exceeded US$169 million (20 per cent of total exports to the European Communities) under the Drug Arrangements.98

3. The Enabling Clause does not prohibit the granting of preferential tariff treatment to some developing countries

5.48 According to Costa Rica, India's argument that developed countries are required to extend any advantage accorded under GSP schemes to all developing countries is based on a flawed interpretation of paragraph 1 of the Enabling Clause, since there is nothing in the Enabling Clause requiring that preferential treatment must be accorded to all developing countries or none.99 India's claim that the Enabling Clause excuses donor countries from according MFN treatment to other developed countries, but not to developing countries is mistaken.100 Costa Rica further dismisses India's interpretation that the words "other contracting parties" in paragraph 1 of the Enabling Clause means only developed countries.

5.49 In countering India's argument, Costa Rica argues that unlike Article I:1 of GATT 1994, which specifies that the advantage, favour, privilege, or immunity shall be accorded to the like products of "all other contracting parties", paragraph 1 of the Enabling Clause does not specify the number or category of contracting parties to which the donor country must accord preferential treatment. Costa Rica maintains that the drafters of the Enabling Clause would have simply added the word "developed" before "contracting party" if they had intended that developed countries extend preferential treatment to developing countries as a whole.101

5.50 Costa Rica posits that India's argument that tariff preferences must be granted to all developing countries lacks legal basis and is contrary to the object and purpose of the Enabling Clause. In this regard, Costa Rica notes that the Enabling Clause is a fundamental part of the rights and obligations of WTO members, which allows developed countries the right to grant preferential treatment to the developing countries. The Enabling Clause clarifies the scope of Article I:1 of GATT 1994 and as such, it does not require developed countries to grant preferential treatment to the "other contracting parties". According to Costa Rica, this means that those countries not benefiting from preferential treatment have no right to demand such treatment be granted to them on the basis of Article I:1 of GATT 1994.102 Costa Rica points out that the phrase "[n]otwithstanding the provisions of Article I of the General Agreement" in paragraph 1 of the Enabling Clause, clearly indicates that Article I:1 of GATT 1994 does not apply to preferential treatment accorded to developing countries under the terms of the Enabling Clause.103

5.51 Costa Rica states that India adopts an unjustifiably rigid interpretation of "developing countries" in paragraph 1 of the Enabling Clause. If the words "developing countries" require that the whole class of developing countries be included, then it would follow that in paragraph 2(a), where it states that paragraph 1 applies to "products originating in developing countries", it also refers to this whole class. According to Costa Rica, this would lead to an absurd interpretation insofar as developed countries would be able to grant preferential treatment only to products that originate in all developing countries without exception.104

5.52 According to Costa Rica, the issue of whether the GSP requires donor countries to accord the same preferential treatment to all developing countries was extensively discussed in 1971.105 Costa Rica argues that the negotiating history of the Decision of the Contracting Parties of 25 June 1971106 confirms that the Contracting Parties purposefully agreed to leave open the possibility of allowing developed contracting parties to accord preferential treatment to some, but not all countries. In this regard, Costa Rica refers to a failed amendment to the Decision of 1971, which proposed to add the word "developed" to paragraph (a) of the Decision of 1971. The proposal would have permitted developed contracting parties to accord preferential treatment to developing countries, "without according such treatment to the products of other developed contracting parties."107 Costa Rica construes the rejection of this proposal - limiting the category of contracting parties that can be deprived of preferential treatment - as a clear indication that the final text agreed upon allows donor countries to exclude both developed and developing countries.108 Costa Rica maintains, had the amendment been adopted, it would have meant that developed countries were still subject to the MFN obligation under Article I:1 of GATT 1994 and consequently would be obliged to grant MFN treatment to developing countries even under the GSP.109

5.53 In light of the negotiating history of the Decision of 1971, Costa Rica claims that India and other countries surely knew that the GSP would allow donor countries to grant preferential treatment to certain developing countries without needing to satisfy Article I:1 of GATT 1994 with respect to other developing countries.110

4. The Enabling Clause requires donor countries to differentiate between developing countries

5.54 Costa Rica contends that the word "shall" in paragraph 3(c) of the Enabling Clause requires affirmative action on the part of donor countries. As such, it is not merely a best endeavours clause that asks developed countries to take into account the different conditions prevailing in individual developing countries.111

5.55 According to Costa Rica, paragraph 3(c) of the Enabling Clause imposes on donor countries the obligation to design and, if necessary, modify the differential and more favourable treatment accorded, "to respond positively to the development, financial and trade needs of the developing countries."112 Costa Rica argues that paragraph 3(c) of the Enabling Clause constitutes irrefutable evidence that paragraphs 1 and 2(a) should not be interpreted as prohibiting donor countries from differentiating between developing countries when according preferential tariff treatment on the basis of objective criteria that recognizes and take into account the particular economic realities of potential beneficiary countries.113

5.56 Costa Rica argues that paragraphs 3(c) and 7 illustrate how India's interpretation of paragraphs 1 and 2(a) is inconsistent with the object and purpose of the Enabling Clause.114 Like paragraph 3(c), paragraph 7 of the Enabling Clause recognizes that the economic development of the less-developed contracting parties will proceed at a different pace, and as their economic situation improve, so too will their participation in the multilateral trading system.115 In dismissing India's premise that the Enabling Clause requires donor countries to accord identical treatment to all developing countries irrespective of the latters' particular level of development, Costa Rica questions how a donor country could comply with its obligation under paragraph 3(c) if it is prohibited from providing additional market access to those developing countries whose particular economic situation demand such preferential treatment.116

5.57 Costa Rica further alleges that India's inflexible and flawed interpretation of paragraph 3(c) of the Enabling Clause would result in pernicious practical consequences for developing countries. Accordingly, requiring developed countries to accord preferential treatment either to all developing countries or to none would discourage donors from extending preferential market access to the developing countries which require it the most. Consequently, these consequences would frustrate a priori the object and purpose of the Enabling Clause.117

5.58 According to Costa Rica, the European Communities' Drug Arrangements are without a doubt consistent with paragraph 3(c) of the Enabling Clause, as they allow farmers the opportunity to substitute illicit crops with duty-free eligible products, as well as providing the necessary resources and incentives to those countries faced with the problem of combatting drug trafficking.118

5. The Drug Arrangements provided by the European Communities are non-discriminatory

5.59 Costa Rica argues that the Enabling Clause also requires that the selection of eligible beneficiaries be based on objective, non-discriminatory criteria in accordance with the GSP, as described in the decision of 1971. Costa Rica is of the view that the European Communities' Drug Arrangements are based on this criteria and therefore are non-discriminatory.119

5.60 Costa Rica agrees with the European Communities that the principle of non-discrimination must not be equated to the MFN principle set out in Article I:1 of GATT 1994.120 Costa Rica notes that the European Communities interprets the term "non-discrimination" set out in footnote 3 of paragraph 2(a) of the Enabling Clause, as allowing donor countries to treat developing countries differently according to their developing needs based on objective criteria.121

5.61 Costa Rica reasserts that the evidence tendered by the European Communities demonstrates that duty-free access granted to the 12 beneficiaries under the Drug Arrangements is a necessary response to the different development needs of those developing countries whose economic, trade and financial development is hindered by drug production and/or trafficking.122

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

5.62 Costa Rica urges the Panel to take notice of the fundamental obligation set out in paragraph 3(b) of the Enabling Clause. This obligation not to design or use preferential arrangements under the GSP as an impediment to multilateral trade liberalization formed part of the original decision creating the GSP.123 Costa Rica states the purpose of allowing developed countries to grant preferential tariff treatment by virtue of the Enabling Clause is simply to accelerate the process of tariff elimination and the integration of developing countries in the multilateral trading system, as reflected by UNCTAD Resolution 21 (II). Therefore, preferential tariff treatment should not substitute or undermine the objective of tariff elimination on an MFN basis.124

  1. the central american countries of el salvador, Guatemala, honduras and nicaragua

1. Introduction

5.63 The Central American countries of El Salvador, Guatemala, Honduras and Nicaragua, participating as third parties in this dispute present a joint third-party written submission and a joint oral statement to the Panel.

5.64 The Central American countries stress that their countries have suffered greatly from drug trafficking. The efforts and costs associated with combatting this problem jeopardize their development agenda.125 The Central American countries submit that in accordance with the principle of shared responsibility, the European Communities is doing its part to eradicate the international problem of drugs through its Drug Arrangements. In light of their geographical location as a hub for drug trafficking, their designation as beneficiaries under the Drug Arrangements is objectively warranted. The Central American countries claim that the Enabling Clause does not annul the principle contained in Article I:1 of GATT 1994; simply it does not apply in this particular case because the Drug Arrangements are covered by the Enabling Clause. The Central American countries assert that the Drug Arrangements are a positive response to their development needs.126

2. The designation of the beneficiaries of the Drug Arrangements and the assessment of the gravity of the drug problem in Central America

5.65 The Central American countries state that Central America is a major transit route for drug traffickers transporting drugs from South America to the markets of North America.127 Accordingly, due to their geographical position, geomorphologic features and socio-economic and cultural situation, the Central American countries have been a target of international drug activities. The Central American countries emphasize that drug trafficking is a very deep-rooted problem and leads to instability, mainly in the areas of security, the economy and health..128

5.66 The Central American countries emphasize that the by-products that emerge from drug production and trafficking have afflicted their countries and have also hampered the development of the region. Accordingly, the region has experienced a significant increase in firearms trade along the trafficking routes, as well as other related crimes such as; trade in persons, stolen vehicles, money laundering and organized gangs. The substantial amount of resources allocated by the Central American countries to combat drug trafficking have been diverted away from vital development needs such as health and education.129 In this regard, the Central American countries point out that their respective poverty and illiteracy rates are alarming.130

5.67 The Central American countries argue that the determination of which developing countries are eligible under the European Communities' Drug Arrangements is based on objective criteria. The designation as a beneficiary also includes an assessment of the seriousness of the drug problem in each developing country and what efforts are made to combat against the problem.131 The conditions of those countries with drug production and trafficking problems differ from other countries not afflicted with such problems. Consequently, in light of the human, economic and social cost of drug trafficking in their countries, the Central American countries submit that they are eligible to benefit from the Drug Arrangements.132

3. The Enabling Clause is applicable to the Drug Arrangements

5.68 The Central American countries argue that consistent with the objective of the Enabling Clause of granting special and more favourable treatment, the Drug Arrangements have given developing countries an opportunity to expand and diversify exports and to eradicate the drug problem.133

5.69 The Central American countries note that the Enabling Clause authorizes special and more favourable treatment, "[n]otwithstanding the provisions of Article I".134 Therefore, since the Drug Arrangements are covered by the Enabling Clause, Article I:1 of GATT 1994 finds no application in this dispute.135

4. The Drug Arrangements are a positive response to the needs of developing countries

5.70 The Central American countries argue that paragraph 3(c) of the Enabling Clause suggests that special and differential treatment should be granted on a proactive basis, taking into account changes in the levels of development and the development, financial and trade needs of developing countries. Accordingly, the Drug Arrangements constitute a positive way of implementing special and differential treatment in accordance with the specific needs of developing countries. The Drug Arrangements have been designed to meet the special needs of countries whose performance and development has been jeopardized by drug problems.136

5.71 The Central American countries claim that the Drug Arrangements are a positive response to the needs of their countries pursuant to paragraph 3(c) of the Enabling Clause. The Central American countries assert that the Drug Arrangements have fostered the creation of alternative development programmes as well as the creation of licit jobs, this is testimony of the benefits accruing from the Drug Arrangements. Additionally, the Central American countries have witnessed a notable increase in exports of non-traditional products to the European Community as a result of the Drug Arrangements. Moreover, the market opportunities under the Drug Arrangements has helped to offset losses sustained as a result of the fall in prices of traditional exports. The Central American countries also emphasize how the spin-offs from the Drug Arrangements have led to economic benefits and better services for farmers and enterprises, which complement the efforts of their respective governments in these areas. Lastly, the Central American countries claim that the fiscal revenue gained as a result of the increase in production makes it possible to strengthen development programmes and government institutions.137 The Central American countries therefore consider that the social and economic benefits derived from the Drug Arrangements should be taken into account by the Panel.138

  1. mauritius

1. Introduction

5.72 Mauritius submits that the Panel should find no inconsistency with the European Communities' administration of its GPS scheme to the extent that it is consistent with the Enabling Clause, which Mauritius believes provides for differential treatment to developing countries based on their development, financial and trade needs.139 Mauritius is of the view that India bears the burden of proof in light of WTO jurisprudence on this issue. Also, the Drug Arrangements are consistent with the provisions of the Enabling Clause, as they provide for non-discriminatory treatment to products originating from developing countries where the same conditions prevail. Alternatively, the Drug Arrangements are justified under Article XX(b) of GATT 1994.

2. India bears the burden of proof

5.73 Mauritius argues that the complainant party bears the burden of proving that the respondent has acted inconsistently in light of the Appellate Body's ruling in US - Wool Shirts and Blouses. Mauritius also cites the Appellate Body's ruling in EC - Hormones as further support that there should be no presumption that a WTO Member has acted inconsistently with the covered agreements.140

5.74 Mauritius claims that even if one assumes that the Enabling Clause is an exception to Article I:1 of GATT 1994, the maxim "quinque exceptio invokat, ejusdem probare debet" (i.e. the burden of proof stays with the party invoking the exception) would not apply because what is at issue is not the Enabling Clause per se, but rather the conditions under which access to the Drug Arrangements is regulated. Accordingly, since India is claiming that the European Communities' Drug Arrangements violate the obligation of non-discrimination set out in the Enabling Clause by not extending such preferential treatment to all developing countries, India bears the burden of proof. In light of the EC - Hormones case, there is no reason to presume that the European Communities has not respected the obligation of non-discrimination.141

3. The Drug Arrangements are non-discriminatory

5.75 Mauritius submits that India's interpretation that paragraph 2(a) of the Enabling Clause precludes the European Communities from distinguishing between products originating from the beneficiaries of the Drug Arrangements and products originating from other developing countries is incorrect. From the onset of the analysis of "non-discriminatory", Mauritius notes that the GATT/WTO case law has not had the opportunity until now to rule on the interpretation of paragraph 2(a) of the Enabling Clause and asserts that the Panel will have to address whether India's interpretation is supported by a proper reading of the Vienna Convention on the Law of Treaties.142

5.76 Mauritius argues that paragraph 1 and footnote 3 of the Enabling Clause clearly indicate that the obligation of "non-discrimination" differs from the MFN obligation in Article I:1 of GATT 1994. Mauritius highlights that the terms "automatically" and "unconditionally" in Article I:1 of GATT 1994 are not found in the Enabling Clause and that only a footnote refers to "non-discriminatory". Mauritius is of the view that differentiation between countries does not automatically imply "discrimination" as long as such differentiation is based on objective and reasonable grounds. According to Mauritius, the concept of "discrimination" is elaborated in the chapeau of Article XX of GATT 1994, where it is unambiguously stated that discrimination is unjustifiable if it does not account for differences among countries. The chapeau calls for non-discrimination between products originating in countries "where the same conditions prevail". Mauritius claims that the foregoing should provide useful guidance when interpreting the principle of non-discrimination. Thus, Mauritius submits that the Drug Arrangements are consistent with the provisions of the Enabling Clause as they provide for non-discriminatory treatment to products originating from developing countries where the same conditions prevail.143

5.77 Mauritius argues that the Drug Arrangements grant more preferential treatment to some developing countries that are willing to make an extra effort and take positive measures to combat the serious drug problem the world is currently facing. Mauritius submits that the Enabling Clause allows donor countries to grant more preferential treatment to some developing countries. Firstly, the text of the Enabling Clause explicitly permits distinctions to be drawn between developing and least-developing countries. Secondly, since paragraph 3(c) clearly allows modifying a GSP scheme in order to "respond positively to the development, financial, and trade needs of developing countries", it follows that these needs are not the same for a heterogeneous group such as the developing countries. Thirdly, further support is found in paragraph 3(a) of the Enabling Clause.144

4. The Drug Arrangements are justified through recourse to Article XX(b) of GATT 1994

5.78 Mauritius submits that even if the Panel disagrees with the foregoing and reaches the opposite conclusion, the Drug Arrangements in any event are justified under Article XX(b) of GATT 1994 because they are a necessary means to help human health.145

  1. pakistan

1. Introduction

5.79 Pakistan states that it fully endorses the arguments advanced by the European Communities. In this regard, Pakistan disagrees with the following three points raised by India: (1) the Enabling Clause does not permit developed countries to discriminate between developing countries; (2) the Drug Arrangements required a waiver; and (3) Pakistan's inclusion in the Drug Arrangements is designed to respond to the policy objectives of the European Communities rather than the needs of the developing countries.

2. Article I:1 of the GATT 1994 does not apply to the Enabling Clause

5.80 Pakistan argues that Article I:1 of GATT 1994 is inapplicable to the Enabling Clause in light of the wording of paragraph 1 of the Enabling Clause. Pakistan contends that the Enabling Clause does not require that the same preferential treatment be granted to all developing countries since the entire GSP scheme is based on the granting of preferential treatment to different developing countries, taking into account their development needs. Accordingly, the Enabling Clause enables special and differential treatment of developing countries. Therefore, if preferential treatment is covered by any subparagraph of paragraph 2, then Article I:1 of GATT 1994 does not apply.146

3. The Drug Arrangements do not require a waiver

5.81 Pakistan rejects India's claim that the Drug Arrangements are not justified without a waiver. Pakistan argues that unlike Article XXV of GATT 1994 and Article IX of the WTO Agreement, which refer to waivers of obligations imposed on a Member in exceptional circumstances, the Enabling Clause does not mention exceptional circumstances nor is it temporary. Therefore, Pakistan submits that there is no need for the European Communities to obtain a waiver for its Drug Arrangements.147

4. The inclusion of Pakistan in the Drug Arrangements is not to further the policy objectives of the European Communities

5.82 Pakistan contends that India's claim that the circumstances in which Pakistan was included in the Drug Arrangements indicates that the Drug Arrangements are designed to respond to the policy objectives of the European Communities is not borne out by the facts. Pakistan argues that like the other beneficiaries of the Drug Arrangements, Pakistan is also particularly affected by drug trafficking, as it lies on a popular route for drug smuggling. With the increase of poppy cultivation in Afghanistan, Pakistan faces a continuous drug trafficking problem. According to Pakistan, in 2002, it seized a total of 9.5 tons of heroin - the largest annual seizure of heroin by any country in the world.148

5.83 According to Pakistan, the European Communities recognized at the time it included Pakistan, that the instability in Afghanistan invariably led to greater drug trafficking through Pakistan. Most of the poppy cultivation in Afghanistan is located in areas contiguous to the tribal belt of Pakistan. In this area of the country, Pakistan point out that poppy had been eliminated through sustained efforts. However, Pakistan states that without strong measures, poppy cultivation in the tribal belt may re-emerge. Pakistan asserts that its efforts to address drug production and trafficking have been acknowledged by the UNDCP, declaring Pakistan poppy-free and a role model in the region.149

5.84 Pakistan claims that the increase of exports is worth approximately US$300 million as a result of the Drug Arrangements, and has led to the creation of 60,000 job opportunities. Consequently, a vast majority of those possibly tempted by drug trafficking have been provided with alternative sources of income. In light of the foregoing, Pakistan submits its inclusion in the Drug Arrangements was not designed exclusively to respond to the policy objectives of the European Communities.150

  1. panama

1. Introduction

5.85 Panama asserts that it is necessary to maintain the preferential tariff treatment granted under the Drug Arrangements because it is a crucial instrument of support in the current struggle it is waging to combat drug trafficking.151

5.86 Panama disagrees with India's claim that paragraph 1 of the Enabling Clause requires developed countries to grant preferential treatment to all developing countries in conformity with Article I:1 of GATT 1994. Moreover, Panama argues that the Enabling Clause allows preferential treatment to be granted to developing countries on a selective basis, despite the MFN obligation.

2. The important implications of this dispute for Panama

5.87 Panama states that the following features of the country make it conducive for the trafficking of drugs: (1) geographical position; (2) inter-ocean canal; (3) international financial centre; (4) airport infrastructure; (5) maritime efficiency; (6) free circulation of the dollar as legal tender; and (7) the largest free-trade zone in the hemisphere.152

5.88 Panama points out that its authorities have made notable efforts in curbing drug trafficking. Accordingly, there has been a noteworthy increase in seizures of heroin in recent years. Panama points out that in 2001 the highest drug seizures were for cocaine followed by those for heroin and crack.153

5.89 Panama states that between 2000 and 2003 the primary destinations for these drugs were Spain (39 per cent), Mexico (34 per cent) and the United States (21 per cent).154

5.90 Panama is of the view that the Drug Arrangements send a strong message from the developed countries to Panama and the region that it is possible to emerge from poverty by undertaking modest, yet lawful activities.155

5.91 Panama states that in 2001 Panamanian exports to the European Community totalled US$162.9 million. Approximately 20 per cent of Panama's exports are directed to the European Community. Panama asserts that the tariff preferences under the GSP promote Panamanian exports to the European Community and have a direct impact on development in Panama.156 Consequently, the Drug Arrangements also diminish the degree of interdependence between Panama and the United States; Panama's traditional trading partner and accounting for more than 50 per cent of its exports.157

3. The Enabling Clause is drafted as a statute separate and distinct from the provisions of Article I:1 of GATT 1994

5.92 Panama argues that the Enabling Clause is special legislation governing the general legislation of the GATT 1994 with respect to differential and more favourable treatment of developing countries in accordance with the arrangements outlined in paragraph 2. Panama emphasizes that paragraph 1 begins by pointing out that the rules of Article I:1 of GATT 1994 have no bearing on the granting of differential and more favourable treatment to developing countries.158

5.93 Panama argues that paragraph 2 clearly identifies which schemes of preferences will be excluded from the provisions of Article I:1 of GATT 1994. Also, Panama contends that footnote 2 clearly establishes the right of Members to reserve their position in cases not covered by the Enabling Clause. According to Panama, India's interpretation seeks to confuse the cases explicitly cited in the Enabling clause with other schemes to which Article I:1 of GATT 1994 is applicable.159

5.94 Panama contends that paragraph 3 unambiguously states that the granting of "differential and more favourable treatment" is consistent with the Enabling Clause and proceeds to give an exhaustive list of requirements governing such treatment. Consequently, the fact of stating that preferential treatment shall be granted under the Clause [sic] itself and listing the relevant requirements clearly removes such treatment set out in paragraph 2 of the Enabling Clause from the scope of Article I:1 of GATT 1994.160

5.95 Panama submits that to disavow the status of the Enabling Clause as a separate and distinct statute is to disregard its special character by subsuming it within the very same provision from which it was excluded.161

4. The Drug Arrangements are not in contravention of Article I:1 of GATT 1994, and paragraph 2(a) of the Enabling Clause

5.96 Panama argues that the Enabling Clause allows preferential treatment to be granted to developing countries on a selective basis, despite Article I:1 of GATT 1994. Panama dismisses India's argument that the principle of unconditional MFN treatment found in Article I:1 of the GATT 1994 applies equally to the GSP schemes under the Enabling Clause. According to Panama, the MFN principle has been made subject to the special mechanism of the Enabling Clause.162

5.97 Panama contends that the discrimination alleged by India is based on an erroneous approach. The unilateral nature of the GSP allows donors the possibility of applying objective criteria in selecting the beneficiaries of preferential treatment. Panama states the criteria are determined on the basis of an overall assessment of the seriousness of the drug problem in each developing country. The selection of beneficiaries pursuant to paragraph 2(a) of the Enabling Clause should be interpreted as the exercise of the right of donor countries to grant preferential tariff treatment in the specific case, rather than being discriminatory. Panama contends that for India to claim that special and more favourable treatment covered by paragraph 1 should be accorded to all developing countries is to add an interpretative qualification not found in the text of the Enabling Clause.163

5. The Enabling Clause authorizes differentiation between beneficiaries without establishing discrimination

5.98 Panama disagrees with India's argument that the Drug Arrangements discriminate between developing countries because they do not extend to all developing countries. According to Panama, this flawed interpretation is based on the extension of Article I:1 of GATT 1994 to the Enabling Clause and would result in legal uncertainty and frustrate the offering of positive incentives. It would also undermine the purposes for which the Enabling Clause was established. Panama further contends that India's interpretation of extending preferences to all as opposed to the principle of generalization (to a number of beneficiaries) embodied in the Enabling Clause, would cause donor countries to considerably limit the scope of their GSP schemes in terms of the number of programmes as well as the coverage of benefits.164

5.99 Panama further argues that it is unable to agree with India's interpretation in light of paragraph 3(c) of the Enabling Clause. According to Panama, the provisions of paragraph 3(c) can never be complied with if India's interpretation that any differential benefit automatically constitutes discrimination is accepted. The needs of developing countries vary considerably from one region to another or even between countries of the same region. Panama claims that if paragraph 3(c) did not provide flexibility in designing incentive schemes, we would face inflexible schemes which might not be advantageous to those developing countries that derive no benefits from more generic schemes. Moreover, there would be no way of preventing more advanced developing countries from receiving benefits to the detriment of schemes designed for those developing countries whose size, capacities and infrastructure are infinitely less advanced. Therefore, Panama submits that paragraph 3(c) of the Enabling Clause provides for the possibility of designing different schemes of preferences and modifying them in accordance with the developments observed.165

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

5.100 Panama states that a major obstacle in accelerating economic growth and development of developing countries is the inability to compete on equal terms with the markets of developed countries. This impediment is compounded when a country must devote significant manpower and financial resources to combat drug trafficking and its many related nefarious by-products.166

5.101 Following an exhaustive analysis of the Drug Arrangements, it is Panama's position that they do not violate Article I:1 of GATT 1994 since they are fully covered by paragraphs 2(a) and 3(c) of the Enabling Clause.167

5.102 According to Panama, the Drug Arrangements also promote industrial development which simultaneously triggers a chain of social benefits, culminating in an improved quality of life as well as boosting commercial growth. This is reflected in improved production capacity which should lead to an increased land area being devoted to sowing, as well as the establishment of new domestic export firms, flows of investment capital, better employment conditions and a sooner than expected decline in criminal opportunities.168

5.103 Panama asserts that the positive effects of the Drug Arrangements in promoting local development can be witnessed by the fact that the majority of the more than 140 companies engaged in non-traditional export products that were registered in Panama in 2001 are located in rural areas.169

5.104 Panama states that the European Communities has directed this special stimulus scheme to those countries traditionally susceptible to drug trafficking problems in any of their criminal forms. Accordingly, Panama is of the view that the Drug Arrangements are consistent with the spirit of tariff preference schemes insofar as any additional favourable and differential treatment has trade and development objectives.170

  1. paraguay

1. Introduction

5.105 Paraguay states it has a substantial interest in this matter from two distinct standpoints. First, the matter before the Panel involves systemic issues that have a significant bearing on the interpretation and application of basic principles of the multilateral trading system, particularly the most-favoured-nation-treatment obligation ("MFN") and the proper application of the provisions concerning Special and Differential Treatment (S&D) to developing countries. It is in Paraguay's interest that the Panel does not create exceptions from the MFN principle that have not been negotiated among Members and preserves the rights and obligations of Members as stipulated in Article 3.2 of DSU.

5.106 On a more specific level, Paraguay states it has a particular interest in this dispute as one of the developing country Members adversely affected by the Drug Arrangements. Tariff preferences granted to some developing countries adversely affect the exports of all developing countries excluded from the tariff preferences. To that extent, the "cost" of the preferences granted to a limited group of developing countries is borne by the developing countries excluded from the Drug Arrangements, including Paraguay.

5.107 Paraguay states that it has suffered and continues to suffer from the discriminatory treatment accorded by the European Communities. Paraguay has consistently maintained in various fora of the WTO that tariff preferences accorded to developing countries under the Enabling Clause must, in accordance with its terms, be formulated and applied in a "generalized, non-reciprocal and non-discriminatory" manner.

2. Preliminary issue of joint representation

5.108 With respect to the preliminary issue of joint representation raised by the European Communities during the first panel meeting, Paraguay and India submitted a joint statement to the Panel on 14 May confirming that both India and Paraguay had consented to be represented simultaneously by the ACWL in this dispute.

5.109 In a communication to the Panel dated 28 May 2003 regarding this preliminary issue171, Paraguay stated that in light of the fact they are both developing countries, India and Paraguay are entitled to the support of the ACWL, whether as parties or as third parties. Paraguay also recalls the Appellate Body statement in EC - Bananas III that it, "can find nothing in the � WTO Agreement, the DSU or the Working Procedures, nor in customary international law or the prevailing practice of international tribunals, which prevents a WTO Member from determining the composition of its delegation in Appellate Body". Paraguay claims that the same observation applies equally to the composition of the delegation in panel proceedings.

5.110 Paraguay contends that the WTO dispute settlement procedures establish rules of ethics for panelists and members of the Appellate Body but not for lawyers representing the Members of the WTO, whether they are lawyers of a Member's legal service or lawyers engaged for a particular dispute. Paraguay is of the view that conflicts of interest concerns would normally be the primary concern of the individual Members involved. For these reasons, Paraguay believes that the request of the European Communities for the Panel to rule on the matter of legal ethics lacks basis and should be rejected.

3. Systemic concerns

(a) The elimination of discrimination is a primary objective of the multilateral trading system

5.111 Paraguay states that one of the primary objectives of the WTO Agreement, as stated in its preamble, is "the elimination of discriminatory treatment in international relations".

5.112 Paraguay argues the elimination of discriminatory treatment is a fundamental element of the rules of the multilateral trading system. The interpreter of the WTO Agreement must therefore assume that the principle of non-discrimination applies unless the Members of the WTO have explicitly and clearly agreed otherwise. Any departure from the MFN principle entails trade benefits for some and trade losses for others, and thereby modifies the negotiated balance of rights and obligations. Any departure from this principle can therefore only result from negotiations among Members. The Members of the WTO have never agreed that the developed countries may grant tariff preferences to a selected group of developing countries. The European Communities has sought the required agreement by requesting a waiver but has failed to obtain it. The Drug Arrangements have therefore remained unilateral and consequently are WTO-inconsistent departures from the MFN principle.

5.113 Paraguay also argues that developing countries had never given their consent that developed countries could discriminate between developing countries, except in favour of least-developed countries.172 Paraguay states that to its recollection, no developed country had ever taken the position that developed countries could differentiate between developing countries under the GSP during the Uruguay Round negotiations. Accordingly, Paraguay claims that there may have been violations of the Enabling Clause at the time the Uruguay Round negotiations were taking place, but Members had chosen to tolerate those violations then.173

(b) The issue of discrimination on the basis of "objective criteria" is not a matter before the Panel

5.114 The European Communities and India agree that under the Enabling Clause, preferential tariff treatment under the GSP must be "non-discriminatory"; however they differ in their interpretations of this term. The European Communities alleges that the Enabling Clause permits developed countries to treat differently "developing countries which, according to objective criteria have different development needs.174

5.115 According to Paraguay, this argument is not pertinent to the measures India decided to submit to the Panel.

5.116 Paraguay asserts the measures at issue are the Drug Arrangements as set out in the Regulation. Unlike the provisions governing the special incentive arrangements for the protection of labour rights or the special incentive arrangements for the protection of the environment, the provisions of the Regulation establishing the Drug Arrangements do not establish: (i) any "objective criteria" for the inclusion of developing countries in the Drug Arrangements; nor (ii) any procedure or criteria for their inclusion. The provisions simply state that a group of named countries are entitled to special preferences. Paraguay is not part of that group and nowhere does the Regulation state which "objective criteria" Paraguay would have to meet to become part of that group. Paraguay argues that the plain fact is that the incentives under the Drug Arrangements are confined to specific beneficiaries pre-designated by the European Communities, not to countries meeting certain criteria.

5.117 Paraguay argues that the measures at issue thus discriminate in favour of specified countries, not in favour of countries meeting defined criteria. The question of whether the Enabling Clause permits the European Communities to adopt GSP schemes that discriminate between developing countries on the basis of objective criteria is therefore not a matter before the Panel for purposes of Article 11 of the DSU. In any case, as elaborated below, the Enabling Clause does not authorize differentiation in treatment between developing countries.

5.118 Paraguay argues that the European Communities' interpretation of non-discrimination based on criteria of "legitimate objectives" and "reasonable means" is too open-ended to provide any assurances that abuses will not occur and that such abuses can be legally disciplined by panels in a consistent manner.175

(c) The Enabling Clause in any case does not permit differentiation in treatment between developing countries in the context of GSP schemes

5.119 Paraguay states that all developing countries have different development needs. The Enabling Clause does not permit developed countries to grant differential treatment to some developing countries on the basis that they have "different development needs". If this were the case, there would be no need to explicitly provide for paragraph 2(d) of the Enabling Clause, which specifically authorizes "special treatment of the least developed among the developing countries in the context of any general or specific measures in favour of developing countries". Thus, discrimination between developing countries is envisaged only for the least-developed countries, not for any group of developing countries having "different development needs", whether least developed or not. It is not sufficient for the European Communities to assert that its criterion for differentiation is "justified", it must show that the criterion for differentiation used by it is expressly envisaged under the Enabling Clause. Paraguay claims that it has manifestly failed to do so in the present case.

5.120 Paraguay contends that not only is the European Communities' interpretation contradicted by paragraph 2(d) of the Enabling Clause, it also runs contrary to the agreement reached between developing and developed countries in the context of the UNCTAD, as reflected in paragraph 2(a) of the Enabling Clause. Paragraph 2(a) limits the scope of departure from Article I:1 of GATT 1994 solely to preferential tariff treatment which is in accordance with the "Generalized System of Preferences" as described in the "Decision of the Contracting Parties of 25 June 1971" (the 1971 Waiver"). The 1971 Waiver authorizes a waiver from Article I:1 of GATT 1994 to allow "developed contracting parties � to accord preferential treatment to products originating in developing countries and territories generally the preferential tariff treatment referred to in the Preamble to this Decision". The preamble in turn states:

"� Recalling that at the Second UNCTAD, unanimous agreement was reached in favour of the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences beneficial to the developing countries in order to increase the export earnings, to promote the industrialization, and to accelerate the rates of economic growth in these countries;

Considering that mutually acceptable arrangements have been drawn up in the UNCTAD concerning the establishment of generalized, non-discriminatory, non-reciprocal preferential tariff treatment in the markets of developed countries for products originating in developing countries " (emphasis added)

5.121 Paraguay notes that the mutually acceptable arrangements drawn up in UNCTAD are contained in the "Agreed Conclusions of the Special Committee on Preferences"176 ("Agreed Conclusions") adopted by the Trade and Development Board on 13 October 1970. The Agreed Conclusions represent the outcome of negotiations held over a period of over two years pursuant to Resolution 21 (II) of the Second Conference held in New Delhi.

5.122 According to Paraguay, under the European Communities' interpretation, subgroups of developing countries can be singled out for preferential treatment as long as, "according to objective criteria they have different development needs", which implies that developed country Members can unilaterally determine those criteria. However, under the Agreed Conclusions, no such flexibility was envisaged. They merely envisaged that the developed countries could: (i) utilize "safeguard mechanisms"177; and (ii) arguably, exclude certain countries from beneficiary status altogether.178 However, Paraguay claims there is absolutely no reference to the notion that the developed countries should be able to distinguish between the countries that they have recognized to be developing countries. This is also clear from Part V of the Agreed Conclusions which expressly refers to "Special Measures in Favour of the Least Developed Among the Developing Countries". No further basis for differential treatment between developing countries was envisaged.

5.123 Paraguay submits that following the European Communities' reading of the Enabling Clause, it is possible to grant tariff preferences to a set of developing countries without granting the same tariff preferences to least-developed countries, as long as the set of developing countries have distinct development needs. This illustrates the difficulty with the standard proposed by the European Communities. According to Paraguay, least-developed countries could experience trade diversion to developing countries merely because these favoured developing countries have a "developmental need" considered to be especially pressing by a developed country. In the present case, it is difficulties faced on account of drug production and trafficking; but in others it could be, for example, "transition from military rule", "high population growth", "literacy rate", "high levels of corruption", or "degree of rural electrification". While developing countries have a variety of developmental needs; the Enabling Clause does not allow developed country Members to pick and choose amongst these needs in granting tariff preferences. Instead, it envisages one uncontroversial category of permissible differentiation in favour of the countries determined by the United Nations to be the most needy - special treatment for least-developed countries. Paraguay submits that the European Communities fails to explain how the developmental problems of countries confronting drug production and trafficking are unique and more pressing than the developmental problems faced by other developing countries on account of a host of other factors.

5.124 Paraguay further argues that if the European Communities' interpretation of the Enabling Clause is upheld, the GSP would be an instrument to exercise undue influence towards developing countries by granting tariff preferences selectively. This in turn would transform the GSP from an instrument of generosity of developed countries into a perversion of the GSP that is detrimental to the developing countries.179

5.125 Paraguay posits that the implication of the European Communities' approach is that developed countries could manipulate the GSP system so as to pursue their own political agenda and that the rule-based character of the multilateral trading system would be completely undermined. In this context, Paraguay emphasizes that the rules-based multilateral trading system was established precisely to ensure a level playing field in which all Members, regardless of their level of economic development or political power, conduct their trade relations in accordance with rules and norms established by the Members themselves acting through the WTO. Paraguay argues that the European Communities' approach further exacerbates the intrinsic disadvantages of developing countries.

5.126 Paraguay submits it is clear that the discriminatory nature of the Drug Arrangements results in obstacles to exports of the developing countries discriminated against. The Drug Arrangements have pernicious effects on current exports and also impede the creation of future trade opportunities. Any assessment of the measures before the Panel must take into account the need of investors and traders for clear and predictable rules permitting them to plan their activities. Paraguay asserts that creating the possibility for developed countries to distinguish between the developing countries on the basis of unilaterally determined criteria would remove all predictability in the trade relations between developed and developing countries.

5.127 Paraguay is of the view that the European Communities' interpretation of the concept of non-discrimination cannot therefore be reconciled with paragraph 3(a) of the Enabling Clause, which mandates that GSP schemes "shall be designed to facilitate and promote the trade of developing countries". Nor can it be reconciled with the requirements of paragraph 3(c) of the Enabling Clause which stipulates that GSP schemes shall be designed to respond positively to the "trade needs" of developing countries.

5.128 Paraguay rejects the European Communities' argument that paragraph 3(c) of the Enabling Clause provides a basis for it to effectively determine what the developing needs of developing countries are and consequently to provide differential treatment between developing countries on that basis.180 Accordingly, Paraguay argues that in EC - Bananas III the Appellate Body affirmed that the non-discrimination obligation of the GATT 1994 such as Article I:1 thereof, apply to imports of like products, except when these obligations are specifically waived. Therefore, Paraguay submits that the term "non-discrimination" pursuant to the Enabling Clause is the same as "non-discrimination" under Article I:1 of GATT 1994, since the Enabling Clause is part of the GATT 1994.181 Paraguay states that paragraph 3(c) deals with the design of the tariff preferences (e.g. product coverage, depth of tariff cuts) and not the principle of non-discriminatory treatment in the context of Article I:1 of GATT 1994.182

(d) The waiver mechanism provides the required flexibility

5.129 Paraguay argues that if Members wish to implement discriminatory measures inconsistent with their obligations under the WTO Agreement, they may do so only by resorting to Article IX of the WTO Agreement. Article IX of the WTO Agreement provides them with the flexibility to deviate from their WTO obligations. The waiver procedures give potentially affected Members the opportunity to redress any adverse effect of preferences favouring a group of countries by negotiating compensatory market access commitments. In this way, Article IX limits the damage caused to other Members by measures which are not consistent with the provisions of the WTO Agreement.

5.130 Paraguay states that in 1976 it was affected by the special and differential treatment granted only to ACP Countries under the Lom� Convention. Nonetheless, the European Communities resorted to the waiver mechanism in order to obtain the consent of the membership and redress the damage to the affected developing countries. As a result, other Members, including Paraguay, were given the opportunity to request compensatory concessions from the European Communities.

5.131 Paraguay maintains that the present situation is completely different. By unilaterally proceeding to implement the Drug Arrangements without the benefit of a waiver, the European Communities has disregarded the multilateral nature of the WTO system and has deprived Paraguay and other developing country Members of the opportunity to mitigate the damage created by the discriminatory character of the Drug Arrangements.

4. Concerns specific to the situation of Paraguay

5.132 Paraguay states that many developing countries which face drug problems are excluded from the coverage of the Drug Arrangements. The European Communities has even referred to some of these countries in paragraph 140 of its submission. As far as Paraguay is concerned, due to its specific geographical location, it faces severe drug trafficking problems. Paraguay points out that its government and society are engaged in combating this problem. Considerable resources have had to be reallocated from other social endeavours in order to deal with it. The situation of Paraguay in terms of drug trafficking is comparable to that of some of the countries included as beneficiaries under the Drug Arrangements. Yet, Paraguay recalls that it has not been included in the Drug Arrangements, which calls into question the European Communities' claim that the designation of beneficiary countries of the Drug Arrangements is "made in accordance with objective, non-discriminatory criteria".183

5.133 Paraguay states that it also is severely affected by drug-related problems. Paraguay's problems have been acknowledges by other countries in the region including some of the beneficiaries, which have signed various cooperation agreements with Paraguay in the fight against drug production and trafficking.184 However, despite its drug-related problems, Paraguay does not seek to benefit from measures which undermine the right of developing countries to MFN treatment.185 Paraguay states that it believes that the long-term interests of all the developing countries are better served by a secure and predictable trading system where the rules are consistently applied.186

5.134 Paraguay claims that the Drug Arrangements have caused trade diversion since its first inception in 1990. Prior to 1990, several Paraguayan goods were competitive export commodities to the European Communities. Paraguay states that after the introduction of the Drug Arrangements, exports of these products from Paraguay to the European Communities considerably declined. In contrast, exports of like products from some of the beneficiary countries have risen. Thus, Paraguay restates that the implementation of the Drug Arrangements has resulted in trade diversion in favour of the beneficiary countries.

5.135 Paraguay asserts that its enterprises are at a competitive disadvantage vis-�-vis their competitors in the beneficiary countries not only because they are denied equivalent market access opportunities. Paraguayan enterprises also have to bear the cost of combating drug trafficking (through internal taxes). Even within Paraguay's domestic market, the negative effects of the tariff preferences are felt. While several of Paraguay's products cannot enter the European Communities because of the competitive disadvantages resulting from the tariff preferences under the Drug Arrangements, producers in the beneficiary countries are able to enhance their export capacity and thereby attain economies of scale in production. Paraguayan producers are unable to attain similar economies of scale. As a result, Paraguay argues that producers in other beneficiary countries have enhanced their competitive position vis-�-vis Paraguayan producers even in the Paraguayan domestic market.

5.136 Paraguay states that 90 per cent of its exports are agricultural and that the discriminatory barriers encountered by Paraguayan exports in the European Community market have had a detrimental effect on its economy.187

5.137 Paraguay states that not only is there trade diversion both in the European Community market and in the Paraguayan domestic market. As a result of the discriminatory tariff preferences under the Drug Arrangements, there has also been an "investment diversion". The proximity between Paraguay and some of the beneficiary countries creates the incentive to shift investments away from Paraguay and towards these countries. Moreover, international investment flows in sectors benefiting from the Drug Arrangements are diverted away from Paraguay. Paraguay notes that in instance, three major industries which had previously invested in Paraguay had to transfer these investments to other developing countries enjoying preferential tariff treatment.188

5.138 Paraguay claims the damage that the implementation of the Drug Arrangements has caused to it is exacerbated by the particularities of the geographical location of Paraguay. As a land-locked nation, Paraguay has to bear higher transport costs in order to export its products to the European Communities. The development of Paraguay is critically affected by this factor. On the European Communities reading of the Enabling Clause, a GSP truly responsive to the needs of development can therefore not focus exclusively on the problems specific to a selected group of countries. Paraguay argues that it must take into account the considerable variety of problems facing the developing countries and therefore create benefits for all of them.

5. Conclusion

5.139 Paraguay submits that the Drug Arrangements are inconsistent with the requirements of the MFN obligation under Article I:1 of GATT 1994 and are not justified under the Enabling Clause. As a result, Paraguay has suffered from trade and investment diversions.

5.140 Paraguay requests the Panel to find that the measures at issue are inconsistent with the European Communities' obligations under the WTO Agreement. In the absence of a waiver agreed upon by the membership, Paraguay respectfully requests the Panel to suggest to the European Communities to apply the tariff preferences under the Drug Arrangements to all developing countries, as contemplated under the Enabling Clause.

  1. united states

1. Introduction

5.141 The United States asserts that it is participating in this dispute because of the systemic importance of the issues presented, and the potential implications of any recommendations and rulings by the DSB. The United States asserts that it takes no position on whether the Drug Arrangements are consistent with the European Communities' WTO obligations. The United States urges the Panel to adopt a careful, prudent approach in resolving this dispute, one which is confined to the specific facts in this case and which takes care to avoid going beyond the particular circumstances of this dispute.189

5.142 The United States is of the view that the Enabling Clause is not an affirmative defence, but rather a positive rule that authorizes Members to grant trade preferences to developing countries under certain circumstances.190 The United States disagrees with India that the wording of paragraph 1 of the Enabling Clause requires developed countries to extend any advantage accorded under a GSP scheme to all developing countries.191 The United States also disagrees with India's interpretation of "non-discriminatory" under the Enabling Clause.192 In addition, the United States addresses various issues regarding Article XX of GATT 1994193, as well as, the preliminary issue of legal representation raised by the European Communities during the first substantive meeting of the Panel.194

2. The preliminary issue of legal representation

5.143 The United States notes that the preliminary issue raised by the European Communities involves the common legal representation of a party to the dispute and a third party. The United States indicates that it would agree with the European Communities if its argument is that, as a general matter, third parties could not use common representation as a way to enhance their rights, role, or status in a dispute. However, the United States emphasizes that there is no indication that this is the case in this dispute. To address this concern, it should be made clear when the ACWL is speaking on behalf of India, and when it is speaking for other delegations. The United States asserts that it does not see a bar in principle to the ACWL representing more than one party in this particular dispute. The United States notes that conflicts of interest concerns would normally be the primary concern of the individual Members involved. The United States also states that given the decision on expanded third-party rights, it is not clear that there is a confidentiality issue in this case.195

3. The Enabling Clause excludes the application of Article I:1 of GATT 1994

5.144 The United States agrees with the European Communities that the Enabling Clause is not an affirmative defence justifying a violation of Article I:1 of GATT 1994. According to the United States, the Enabling Clause forms part of the GATT 1994 as an "other decision" pursuant to paragraph (1)(b)(iv) of GATT 1994. Therefore, the Enabling Clause has co-equal status with the GATT 1947 (part of the GATT 1994 pursuant to paragraph 1(a) thereof). In this regard, the Enabling Clause is part of the overall balance of rights and obligations agreed to in the GATT 1994 and the WTO Agreement, and is not merely an "affirmative defense" to Article I:1 of the GATT 1947.196

5.145 The United States points to the phrase, "[n]otwithstanding the provisions of Article I of the General Agreement" as excluding the application of Article I:1 of GATT 1994. The United States points out that the dictionary definition of the word "notwithstanding" is "in spite of", which in turn denotes that Members may grant preferential treatment under the Enabling Clause "in spite of" the obligation to extend MFN treatment unconditionally.197

5.146 The United States asserts that unlike the 1971 Waiver, the Enabling Clause contemplates a general, permanent and separate authorization that is available "notwithstanding" Article I:1 of GATT 1994. In this respect, there is no need to determine whether a measure is inconsistent with Article I:1 of GATT 1994 before applying the Enabling Clause. The Enabling Clause is a positive rule providing authorization and establishing obligations in itself.198

5.147 The United States likens the situation in this dispute with that of US - Wool Shirts and Blouses, where the Appellate Body held that a provision described by a party as an "exception" was not an affirmative defence, but rather was "an integral part" of the arrangement under the Agreement on Textiles and Clothing that "reflects an equally carefully drawn balance of rights and obligations."199

5.148 According to the United States, not only is India's legal position incorrect, but the consequences of its interpretation would be unfortunate. In this regard, the United States asserts that placing the burden on developed countries to defend actions that benefit developing countries would create a disincentive for developed countries to voluntarily grant preferential treatment under the Enabling Clause. Additionally, this would have the unfortunate effect of making treatment more difficult to defend. Accordingly, India would have the Panel conclude that preferential tariff treatment should be presumed not to be covered under the Enabling Clause, and that it is incumbent upon the developed country to prove otherwise.200

5.149 The United States claims that India's argumentation also suffers from internal contradictions. On the one hand, regarding the "affirmative defence" claim, India asserts that paragraph 2(a) does not impose positive obligations or positive rules establishing obligations in themselves, while on the other hand, India claims that preferential tariff treatment must be non-discriminatory and states, "[t]here is no dispute that this is a binding requirement."201 According to the United States, India cannot have it both ways, seeing legal requirements in the text when they benefit India, while denying the existence of obligations when it wants the European Communities to bear the burden of proof.202

5.150 In light of the foregoing, the United States rejects India's claim that the European Communities bears the burden of proving that the Drug Arrangements are consistent with the Enabling Clause because it is an "affirmative defence". The United States asserts that India's argument that the Drug Arrangements are inconsistent with Article I:1 of GATT 1994 is irrelevant, unless India can first establish that the Drug Arrangements are inconsistent with the Enabling Clause.203

4. "All" developing countries

5.151 The United States disagrees with India that the wording of paragraph 1 of the Enabling Clause requires developed countries to extend any advantage accorded under a GSP scheme to all developing countries. The text of the Enabling Clause leads to the opposite conclusion.204

5.152 According to the United States, India's argument that "developing countries" in paragraph 1 must be read as though the term "all" had been inserted before "developing countries" is groundless because the Enabling Clause refers in all cases either to "developing countries" or "the developing countries" and never to "all developing countries". Moreover, India's interpretative approach does not work in other parts of the Enabling Clause. The United States argues that India would certainly not support the parallel argument that the use of the word "parties" in "developed contracting parties" of paragraph 2(a) means that "all developed countries" must accord preferential tariff treatment in order for any developing country to take advantage of it.205

5.153 The United States agrees with the European Communities and other third parties that the reference in paragraph 1 of the Enabling Clause to "other contracting parties" cannot be limited to "other developed contracting parties", as India suggests. According to the United States, the Enabling Clause allows India and other developing countries to grant differential and more favourable treatment to other developing countries. The Enabling Clause specifically provides for developing countries to grant preferential treatment to other developing countries, as in the case of paragraph 2 (c).206

5.154 The United States contends that if India's interpretation of paragraph 1 were correct, it would render paragraph 2(c) a nullity, as less-developed countries that had entered into an arrangement under paragraph 2(c) would have to extend preferential treatment to all developing counties, including those that had not entered into such arrangement. In addition, the United States contends that paragraph 2(d) of the Enabling Clause is also directly at odds with India's argument that all developing countries must be treated the same. Lastly, the United States agrees with other parties in this dispute that paragraphs 3(c) and 7 of the Enabling Clause demonstrate that India's "one size fits all" approach is incompatible with the Enabling Clause.207

5. The Enabling Clause reference to "non-discriminatory"

5.155 The United States notes that paragraph (a) of the 1971 Decision permits developed country contracting parties to accord preferential tariff treatment to products originating in developing countries and territories "with a view to extending to such countries and territories generally the preferential tariff treatment referred to in the Preamble to this Decision." The 1971 Decision does not elaborate on the significance of the use of the term "with a view to", but rather simply requires that the treatment must be that referred to in the preamble. The preamble notes unanimous UNCTAD agreement on establishment of a (1) mutually acceptable system of (2) generalized, (3) non-reciprocal and (4) non-discriminatory preferences beneficial to the developing countries.208 The United States claims that India's arguments ignore the elements other than non-discriminatory.209

5.156 The United States disagrees with India's argument that "non-discriminatory" in the context of the Enabling Clause means "unconditionally" as the term is used in Article I:1 of GATT 1994. The United States notes, like other parties involved in this dispute, that the word "unconditionally" is simply not found in the text of the Enabling Clause. As previously mentioned, the United States asserts that the Enabling Clause excludes the application of Article I:1 altogether, including the "unconditionally" requirement of Article I:1 of GATT 1994. In light of the fact that the Enabling Clause excludes the application of Article I:1 of GATT 1994, and that the Enabling Clause does not include an "unconditionally" requirement, the United States claims it is not necessary for the Panel to address the European Communities' extended arguments on the meaning of the word "unconditionally."210

5.157 The United States contends that in the same way India seeks to import into the Enabling Clause the "unconditionally" requirement of Article I:1 of GATT 1994, it also seeks to import into the term "non-discriminatory" a "conditions of competition" test similar to that applied under some, but not all, of the provisions of Articles I and III of GATT 1994. However, the United States maintains that unlike Articles I and III of GATT 1994, the 1971 Decision simply employs the term "non-discriminatory," and there is no indication that the analysis of this term is intended to be the same as that under a "like product" analysis. The United States asserts that the Appellate Body has recognized that "discrimination" is not the same as the "national treatment" test under Article III of GATT 1994.211

5.158 The United States generally agrees with the European Communities that a GSP scheme may be described as "non-discriminatory" if it differentiates between unequal situations. As previously mentioned, paragraphs 3(c) and 7 of the Enabling Clause appear to contemplate explicitly that preferential treatment need not be granted on a "one size fits all" basis and that distinctions among developing countries tailored to their development, financial and trade needs are specifically contemplated. According to the United States, India's approach to "non-discriminatory" would appear to render "generalized" redundant or meaningless since "generalized" means "less than all".212

5.159 The United States does not disagree with the European Communities that a GSP scheme may be described as "non-discriminatory" if based on objective criteria and on an overall assessment of all relevant circumstances. The United States asserts that under India's approach, GSP schemes would have to be administered on a "lowest common denominator" basis. In this respect, a GSP scheme could be applied only to the extent it addressed needs that were identical among developing countries, and it could not be adapted with respect to particular needs of sub-sets of developing countries. The United States notes that the 1971 Decision calls for a "mutually acceptable system" of preferences, and that a Member has the right, not the obligation, to accord preferential treatment. Accordingly, the United States emphasizes that while a "one size fits all" obligation to grant any preferences to all developing countries may be acceptable to India for purposes of this dispute, it is doubtful that it would be acceptable to other beneficiary countries or to GSP donor countries, or even to India in a different dispute.213

5.160 The United States joins the many developing third party countries in this dispute that have pointed out the practical difficulty of reading legal obligations into the Enabling Clause not found in the text. The United States asserts that India is asking the Panel to read into the Enabling Clause an obligation that is not legally supported in the text and that, as a matter of trade policy, would, contrary to the purpose of the Enabling Clause, create a disincentive for Members to extend tariff preferences to developing countries.214

6. Article XX of GATT 1994

5.161 The United States asserts that it takes no position on whether the European Communities' measures are inconsistent with Article XX of GATT 1994. According to the United States, there is no need for the Panel to address this issue as the dispute should be decided on the basis of the Enabling Clause.215 Nonetheless, the United States comments that both the European Communities and India err in their use of the phrase "least trade restrictive measure" in addressing whether the Drug Arrangements are "necessary" under Article XX(b) of GATT 1994.216

5.162 The United States submits that nowhere in the ordinary meaning of "necessary" is there a meaning of "least trade restrictive", nor does "necessary" take on the meaning of "least trade restrictive" from the context of Article XX or the object and purpose of the GATT 1994. The United States notes that the concept of "not more trade-restrictive" appears in both the Agreement on Technical Barriers to Trade and the Agreement on the Application of Sanitary and Phytosanitary Measures. Therefore, the fact that the WTO drafters did not use this phrase in the GATT 1994 demonstrates, according to the United States, that they did not intend to include this concept in Article XX(b).217

5.163 The United States notes that the Appellate Body addressed the applicable standard for evaluating whether a measure is "necessary" under Article XX(b) of GATT 1994 in EC - Asbestos and did not use the standard of "least trade restrictive". The issue before the Appellate Body was whether an alternative measure is reasonably available that is "not inconsistent with" other GATT provisions, or if no such alternative measure is reasonably available, whether the measure chosen "entails the least degree of inconsistency with other GATT provisions". The United States argues that "less inconsistent" would require one to examine the degree of inconsistency with the Agreement, whereas "less trade restrictive" would require one to examine the degree of trade effect of a measure.218


To continue with VI. Interim Review  

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48 Panel Report, US - Customs User Fee, and Panel Report, US - MFN Footwear, see second written submission of India, para. 56.

49 Ibid., para. 48.

50 Replies of the European Communities to questions from the Panel to both parties and third parties, para. 167.

51 Second written submission of the European Communities, paras. 51-52.

52 Reply of India to question No. 15 from the Panel to both parties. The European Communities cites India's replies to questions Nos. 16 and 17 from the Panel to both parties which do not record any concession on this point.

53 Replies of the European Communities to questions from the Panel to both parties and third parties, para. 57.

54 First written submission of the European Communities, para. 84.

55 Ibid., para. 116.

56 Replies of the European Communities to questions from India, para. 5.

57 Replies of the European Communities to questions from the Panel to both parties and third parties, para. 136.

58 Replies of the European Communities to questions from India, para. 12

59 Replies of the European Communities to questions from the Panel to both parties and third parties, para. 144.

60 Replies of the European Communities to questions from India, para. 21.

61 Replies of the European Communities to questions from the Panel to both parties and third parties, para. 145.

62 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 5, where in footnote 3 it refers to the paras. 126-131of the First written submission of the European Communities.

63 [emphasis original] Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela And, para. 7, where in footnote 4 it refers to the para. 316 of the First written submission of the European Communities and the INCB 2002 Annual Report, annexed thereto as Exhibit (EC-5).

64 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 11, where in footnote 5 it refers to Exhibit (EC-7) annexed to the First written submission of the European Communities.

65 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 15, where in footnote 9 it cites the General Assembly of the United Nations, A/RES/56/124 of 19 December 2001.

66 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 12, where in footnote 6 it refers to the preamble of Council Regulation 3835/90 of 20 December 1990 amending Regulations (EEC) No 3831/90, (EEC) No 3832/90 and (EEC) No 3833/90 in respect of the system of generalized tariff preferences applied to certain products, OJ L 370/126.

67 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 13, where in footnote 7 it cites SG/di 416; 6 June 2002; Andean Community: The Advantages of the GSP Special Regime.

68 Ibid.

69 Oral statement of Bolivia, paras. 12, 13 and 15.

70 Oral statement of Bolivia, paras. 14 and 17.

71 Oral statement of Colombia, paras. 5, 7 and 12.

72 Oral statement of Colombia, paras. 9, 10, 13 and 15.

73 Oral statement of Ecuador, pp.1-2.

74 Oral statement of Ecuador, p. 2.

75 Oral statement of Peru, paras. 5, 9 and 12.

76 Oral statement of Venezuela, pp. 1 and 2.

77 Oral statement of Venezuela, p. 2.

78 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 24, where in footnote 15 it cites Resolution 21(II), 'Preferential or free entry of exports of manufactures and semi-manufactures of developing countries to the developed countries', adopted at UNCTAD II, 1968, reprinted in H.D. Shourie, UNCTAD II - A Step Forward, New Delhi (1968), 343-344.

79 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 24, where in footnote 16 it refers to statements made in: GATT, Minutes of meeting of the Council, C/M/69, 28 May 1971.

80 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 125, where in footnote 17 it cites the Decision of the Contracting Parties of 25 June 1971 (BISD 18S/24).

81 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 30, where in footnote 19 it cites the Doha WTO Ministerial 2001: Ministerial Declaration of 20 November 2001, WT/MIN(01)/DEC/1, at para. 2.

82 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 32, where in footnote 21 it refers to the re-affirmation of the Enabling Clause in the Doha Implementation decision, � 12.2.

83 [emphasis original] Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 37, where in footnote 24 it cites: The Concise Oxford Dictionary of Current English, 7th Edition.

84 First oral statement on behalf of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 3.

85 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 41.

86 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 51, where in footnote 31 it cites the GATT, Minutes of meeting of the Council, C/M/69, 28 May 1971.

87 As mentioned above, by the General Assembly of the United Nations. See also the 2002 annual report of the International Narcotics Control Board mentioned above, which specifically noted the enormity of the drug problem in South America.

88 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 63, where in footnote 37 it refers to para. 112 of first written submission of the European Communities.

89 First oral statement of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 4.

90 First oral statement of Bolivia, Colombia, Ecuador, Peru and Venezuela, paras. 8-9.

91 Joint third-party submission of Bolivia, Colombia, Ecuador, Peru and Venezuela, para. 6, where in footnote 2, it cites paragraph 9 of Paraguay's third party submission.

92 Third-party submission of Costa Rica, para. 1.

93 Third-party submission of Costa Rica, para. 13.

94 Third-party submission of Costa Rica, paras. 1 and 2.

95 Third-party submission of Costa Rica, para. 9.

96 Third-party submission of Costa Rica, paras. 7 and 11.

97 Third-party submission of Costa Rica, para. 9.

98 Third-party submission of Costa Rica, para. 9.

99 Third-party submission of Costa Rica, para. 16; Oral statement of Costa Rica, paras. 6 and 9.

100 Oral statement of Costa Rica, para. 3.

101 Third-party submission of Costa Rica, para. 18.

102 Oral statement of Costa Rica, para. 4.

103 Oral statement of Costa Rica, para. 5.

104 Third-party submission of Costa Rica, para. 19

105 Oral statement of Costa Rica, para. 9.

106 Third-party submission of Costa Rica, para. 20, where in footnote 15 Costa Rica states: "The Decision of 1971 still possesses legal authority, albeit limited. It is incorporated, by direct reference, into the Enabling Clause. It defines and sets the parameters of the GSP pursuant to which the developed countries may grant preferential tariff treatment to developing countries notwithstanding the provisions of Article I of GATT."

107 [emphasis original] See third-party submission of Costa Rica, para. 20, where in footnote 16 Costa Rica cites: Council of the GATT, Minutes of Meeting held in the Palais des Nations, Geneva, on 25 May 1971, C/M/69, 28 May 1971 (Exhibit CR -1).

108 Third-party submission of Costa Rica, para. 20.

109 Oral statement of Costa Rica, para. 14.

110 Oral statement of Costa Rica, para. 17.

111 Third-party submission of Costa Rica, para. 22.

112 Oral statement of Costa Rica, para. 20.

113 Third-party submission of Costa Rica, para. 21.

114 Third-party submission of Costa Rica, para. 25.

115 Third-party submission of Costa Rica, para. 24.

116 Third-party submission of Costa Rica, para. 25.

117 Third-party submission of Costa Rica, para. 26.

118 Third-party submission of Costa Rica, para. 23.

119 Third-party submission of Costa Rica, para. 27.

120 Oral statement of Costa Rica, para. 20.

121 Third-party submission of Costa Rica, para. 28, where in footnotes 19, 20 and 21, Costa Rica refers to and cites paras. 28, 61 and 75 respectively of the First written submission of the European Communities.

122 Oral statement of Costa Rica, para. 29.

123 Third-party submission of Costa Rica, paras. 30-31, where Costa Rica refers to the "Agreed Conclusions of the Special Committee on Preferences", UNCTAD, Document TD/B/330, p. 7 at para. 2 (ii) (b) of Part IX (Exhibit CR-2).

124 Third-party submission of Costa Rica, para. 32.

125 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 2.

126 Joint oral statement of El Salvador, Guatemala, Honduras and Nicaragua, p. 1.

127 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 8 and para. 9, where an excerpt of the 2001 Report of the International Narcotics Control Board is cited stating that almost 50 per cent of cocaine arriving into the Unites States annually transits through Central America and Mexico.

128 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 10.

129 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, paras. 11-15.

130 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 16, where in footnote 4 the following poverty and illiteracy figures are provided for each of the four countries: In El Salvador, 39 per cent of the population lives in poverty and 16 per centin extreme poverty. As regards education, the illiteracy rate for those aged over 15 years is 15 per cent (2001 data). In Guatemala, 79.9 per cent of the population and 75.5 per cent of households live in conditions of poverty; 59.3 per cent of them in conditions of extreme poverty. As regards education, the rate of illiteracy among the population aged over 15 is 32.7 per cent. In Honduras, 64 per cent of households live in poverty. Regarding education, in 2001, the rate of illiteracy among the population aged over 15 years was 20 per cent. In Nicaragua, 75 per cent of the population lives in conditions of poverty, according to the index of unsatisfied basic needs. Almost one third (31.2 per cent) lives in some degree of poverty, while the remaining households live in extreme poverty (43.6 per cent) because they lack from two to four basic needs. Only one quarter of households (25 per cent) are not in the poverty category. Sixty per cent of the population is in urban areas and 40 per cent in rural areas, but 75 per cent of poor people are in rural areas. As regards education, the urban rate of school attendance is 79, whereas in rural areas it is 69 per cent.

131 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 6.

132 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 7.

133 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 21.

134 Joint oral statement of El Salvador, Guatemala, Honduras and Nicaragua, p. 2.

135 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, para. 22.

136 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, paras. 23-27.

137 Joint third-party submission of El Salvador, Guatemala, Honduras and Nicaragua, paras. 28.

138 Joint oral statement of El Salvador, Guatemala, Honduras and Nicaragua, p. 2.

139 Third-party submission of Mauritius, p. 1.

140 Third-party submission of Mauritius, p. 1.

141 Third-party submission of Mauritius, pp. 1-2.

142 Third-party submission of Mauritius, p. 3.

143 Third-party submission of Mauritius, pp. 4-5.

144 Third-party submission of Mauritius, pp. 5-6.

145 Third-party submission of Mauritius, p. 6.

146 [emphasis original] Oral statement of Pakistan, para. 2.

147 [emphasis original] Oral statement of Pakistan, para. 3.

148 Oral statement of Pakistan, para. 4.

149 Oral statement of Pakistan, paras. 4-5.

150 Oral statement of Pakistan, paras. 6-8.

151 First oral statement of Panama, p. 3.

152 Third-party submission of Panama, p. 7.

153 Third-party submission of Panama, p. 7, where Panama provides the following data: Seizures in 2001 of cocaine, heroin, and crack were 2,655,984.49, 87,231.32 and 4 434.55 grams respectively.

154 Third-party submission of Panama, p. 7

155 First oral statement of Panama, p. 3.

156 Third-party submission of Panama, p. 6.

157 First oral statement of Panama, p. 3.

158 Third-party submission of Panama, p. 3.

159 Third-party submission of Panama, p. 3.

160 Third-party submission of Panama, p. 3.

161 First oral statement of Panama, p. 2.

162 Third-party submission of Panama, p. 3.

163 Third-party submission of Panama, p. 4.

164 Third-party submission of Panama, pp. 4-5.

165 Third-party submission of Panama, p. 5.

166 Third-party submission of Panama, p. 5.

167 Third-party submission of Panama, p. 5.

168 Third-party submission of Panama, p. 6.

169 Third-party submission of Panama, p. 6 and footnote 8 where is stated: The basic exports of these companies were melons, watermelons, leather etc. Panamanian plant product exports amounted to B 173.7 million in 2001. The final destination of 85.5 per cent of those exports (B 139.4 million) was the European Union, from which it must be concluded that the emergence of those companies was due to the development of Panama's relations with the market concerned during that period.

170 Third-party submission of Panama, p. 6.

171 Letter of 28 May 2003 from the Permanent Mission of Paraguay to the Panel regarding the role of the Advisory Centre on WTO Law as counsel to both India and Paraguay.

172 Second oral statement of Paraguay, para. 6.

173 Second oral statement of Paraguay, para. 7.

174 First written submission of the European Communities, para. 84.

175 Second oral statement of Paraguay, para. 17.

176 Report of the Special Committee on Preferences on the second part of its fourth session, 21 September - 12 October 1970 ( TD/B/ 329/ Rev.1).

177 Part III of the Agreed Conclusions.

178 Part IV of the Agreed Conclusions.

179 First oral statement of Paraguay, para. 9.

180 First oral statement of Paraguay, para. 16.

181 First oral statement of Paraguay, para. 18.

182 First oral statement of Paraguay, para. 19.

183 First written submission of the European Communities, para. 116.

184 First oral statement of Paraguay, para. 19.

185 First oral statement of Paraguay, para. 20.

186 First oral statement of Paraguay, para. 21.

187 First oral statement of Paraguay, para. 26.

188 First oral statement of Paraguay, para. 24.

189 Third-party submission of the United States, para. 2; first oral statement of the United States, para. 14.

190 Third-party submission of the United States, paras. 4-9; second oral statement of the United States, paras. 2-4.

191 First oral statement of the United States, paras. 2-6.

192 First oral statement of the United States, paras. 7-14.

193 Third-party submission of the United States, para. 10; second oral statement of the United States, paras. 6-8.

194 First oral statement of the United States, para. 15.

195 First oral statement of the United States, para. 15.

196 Third-party submission of the United States, paras. 4-5.

197 [emphasis original] Third-party submission of the United States, para. 6.

198 Third-party submission of the United States, para. 7.

199 Third-party submission of the United States, para. 8, where in footnote 5 it cites, US - Wool Shirts and Blouses, DSR 1997:1, 323, at 337 .

200 [emphasis original] Second oral statement of the United States, para. 3.

201 Second oral statement of the United States, para. 4, where in footnote 4 it refers to para. 79 of India's second submission.

202 Second oral statement of the United States, para. 4

203 Third-party submission of the United States, para. 9.

204 First oral statement of the United States, para. 3.

205 [emphasis original] First oral statement of the United States, para. 4.

206 [emphasis original] First oral statement of the United States, para. 5.

207 [emphasis original] First oral statement of the United States, para. 6.

208 First oral statement of the United States, para. 8.

209 First oral statement of the United States, para. 9.

210 First oral statement of the United States, para. 10.

211 First oral statement of the United States, para. 11 and footnote 12 where it cites the Appellate Body Report, US - Gasoline, p. 23.

212 First oral statement of the United States, para. 12 and footnote 14 where it cites, The New Shorter Oxford Dictionary, 4th Edition, p. 1074 (defining "generalize" as "Bring into general use; make common, familiar, or generally known; spread or extend; apply more generally; become extended in application.").

213 [emphasis original] First oral statement of the United States, para. 13.

214 [emphasis original] First oral statement of the United States, para. 14.

215 Third-party submission of the United States, para. 10; second oral statement of the United States, para. 6.

216 Second oral statement of the United States, para. 6.

217 Second oral statement of the United States, para. 7.

218 Second oral statement of the United States, para. 8 and footnote 7 where it cites the Appellate Body Report, EC - Asbestos, paras. 170-171.