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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)


2. Paragraph 3(c)

(a) Arguments of the parties

7.66 India argues that paragraph 3(c) requires that developed countries "respond positively" to the development, financial and trade needs of developing counties by ensuring that the product coverage and depth of tariff cuts are of a nature and magnitude that respond to the development, financial and trade needs of developing countries as a whole, not individually or in terms of sub-groups.292 According to India, the preferential tariff treatment must be applied without discrimination to like products originating in all developing countries.293 India maintains that, through ensuring sufficient breadth of product coverage and depth of tariff cuts, developed countries are able to address the needs of individual developing countries.294

7.67 In India's view, there is nothing in the Enabling Clause that allows a developed country unilaterally to modify its scheme to take certain products off the scheme for individual developing countries.295 The issue whether a developed country can take individual countries off the scheme altogether, India states, is an issue related to the concept of "beneficiaries" in the "Agreed Conclusions", which is not an issue in this dispute and need not be decided by the Panel.296 In any case, it is India's view that preference-giving countries do not have a legal right to exclude any country claiming developing country status.297

7.68 India argues that the phrase "development, financial and trade needs" in paragraph 3(c) has to be considered in a comprehensive manner, as the conjunctive "and" has a different meaning from that of "or".298 India goes on to say that paragraph 3(c) does not permit discrimination between developing countries. Rather, it merely mandates that "any differential and more favourable treatment � shall respond positively to � the needs of [the] developing countries". India points out that the French and Spanish versions of the Enabling Clause both use the article "the" before "developing countries". India posits that this means the category as a whole. India considers that when the drafters wanted to mean "individual � needs", they used the word "individual" expressly, such as in paragraph 5. In India's view, it was always the intention of the drafters that the benefits of GSP schemes be extended, without discrimination, to all developing countries.299 Should paragraph 3(c) mandate that developed countries respond to the needs of individual developing countries, as suggested by the European Communities, then, India argues, a logical conclusion would be that a GSP scheme which eliminates all duties on products from all developing countries would be inconsistent with paragraph 3(c), as it would not respond to the different levels of individual needs of developing countries. Such interpretation would render GSP schemes which do not provide differentiation among developing countries illegal, an obviously perverse result.300

7.69 On the status of the Agreed Conclusions in relation to the Enabling Clause, India argues that the Enabling Clause incorporated the Agreed Conclusions through the 1971 Waiver Decision and that, therefore, the Agreed Conclusions are part of the terms of the Enabling Clause, because they were agreed by consensus in UNCTAD and the 1971 Waiver Decision refers to the mutually acceptable arrangement drawn up at UNCTAD. The Enabling Clause, in turn, incorporated the 1971 Waiver Decision by footnote 3.301

7.70 The European Communities, in contrast, argues that paragraph 3(c) permits developed countries to respond to the development needs of individual developing countries according to "objective criteria".302 The European Communities maintains that this does not mean that any difference related to development needs should be taken into account; in the European Communities' view, this would be an impossible task. Rather, the European Communities proposes two criteria for responding to the development needs in a "non-discriminatory" manner: (i) the difference in treatment must pursue a legitimate aim; and (ii) the difference in treatment must be a reasonable means to achieve that aim. The Drug Arrangements, according to the European Communities, meet these criteria.303

7.71 The European Communities argues that, in designing GSP schemes, it is reasonable to take into account all relevant needs, including the individual needs of each country, as well as those which are common to all or to certain sub-categories of developing countries, but paragraph 3(c) does not require taking into account each developing country's special needs. In the European Communities' view, the argument that preferences must apply equally to all like products originating in all developing countries has no basis in paragraph 3(c) and stems from a wrong interpretation of footnote 3.304

7.72 The European Communities argues that India's view that paragraph 3(c) only permits taking into account the needs of all the developing countries in general, and not their individual interests, is not supported by the text since the term "developing countries" is not preceded by qualifying terms which might suggest that only collective needs of the developing countries must be taken into account. The omission of the term "individual" or "particular", the European Communities believes, is not dispositive, as the Enabling Clause is not consistent when using such terms.305

7.73 The European Communities also argues that India's interpretation of paragraph 3(c) would make it impossible for paragraph 3(c) to apply to paragraph 2(d) which allows for more favourable treatment to be provided to the least-developed countries. Moreover, the European Communities considers that if paragraph 3(c) required responding to the development needs of all developing countries in terms of appropriate product coverage and depth of tariff cuts, then a GSP scheme that provided a narrower product coverage and a smaller tariff margin would be illegal, an implication not intended by the drafters.306

7.74 The European Communities also states that it might be argued that paragraph 3(c) is a purposive provision, not setting out any specific legal obligations.307 As such, it must be interpreted so as to make it workable for the developed countries. In particular, developed countries should not be prevented from taking into account the most important needs. They should not be prevented from applying, in their GSP schemes, horizontal graduation mechanisms or from defining sub-categories of developing countries which capture the most significant differences between them, and providing special preferences to such sub-groups of developing countries.308

7.75 The European Communities also argues that since the developed countries are free to decide whether or not to provide GSP schemes, they are also free to decide whether or not to grant preferences with respect to certain products and to choose the depth of the tariff cuts that they wish to offer.309

7.76 On the status of the Agreed Conclusions, the European Communities argues that they are not context of either the 1971 Waiver Decision or the Enabling Clause, because the Agreed Conclusions are not a binding agreement and were not made "in connection with the conclusion of" the 1971 Waiver Decision or the Enabling Clause. Rather, in the European Communities' view, the Agreed Conclusions and other UNCTAD texts are preparatory work for the 1971 Decision and, as such, they are supplementary means of interpretation.310

7.77 The Andean Community argues that nothing in the Enabling Clause requires developed countries to respond to all or any particular development needs in establishing GSP.311 The United States argues that, under paragraph 3(c), GSP schemes need not be extended on a "one size fits all" basis and that distinctions based on the unequal development situations of developing countries are permitted.312 Otherwise, the United States argues, the term "generalized" would be redundant and paragraph 7 of the Enabling Clause would not work in practice.313

(b) Panel's analysis

(i) Introduction

7.78 The Panel notes that a textual reading of the language of paragraph 3(c) - whereby GSP schemes shall be designed and modified "to respond positively to the development, financial and trade needs of developing countries" - does not reveal whether the "needs of developing countries" refers to the needs of all developing countries or to the needs of individual developing countries. A simple textual reading does not divulge whether the scheme should respond to the needs of different developing countries in such a manner as to provide the same set of product coverage and the same level of preference margin to all developing countries, as India suggests, or, whether a scheme may respond to special development needs of certain developing countries based on objective criteria, as proposed by the European Communities. In the Panel's view, the understanding that India suggests cannot on first appearances be reconciled with paragraph 2(d), which permits special preferences to be provided to the least-developed countries. On the other hand, the interpretation that the European Communities proposes cannot be supported by the absence of the word "individual" in paragraph 3(c) whereas this word does appear in paragraph 5 of the Enabling Clause. The parties come out with very different readings of the meaning of paragraph 3.

7.79 Under these circumstances, the Panel considers it is necessary to have recourse to the context of paragraph 3(c) and other relevant means of interpretation, in line with Articles 31 and 32 of the Vienna Convention on the Law of Treaties ("Vienna Convention").

7.80 The Panel notes that nothing exists in the GATT or the WTO relating to GSP arrangements, other than the 1971 Waiver Decision and the Enabling Clause. It notes, however, the GSP arrangements were initially drawn up in UNCTAD and transferred into the GATT through the 1971 Waiver Decision. The Panel therefore considers it helpful to review the drafting history in UNCTAD and to identify the intention of the drafters on issues relating to the GSP arrangements. In this regard, the Panel recalls that the parties disagree on whether or not the Agreed Conclusions are context for the Enabling Clause. The Panel is of the view that it should therefore consider the status of the Agreed Conclusions with respect to the interpretation of the Enabling Clause.

(ii) Status of the Agreed Conclusions for the interpretation of the Enabling Clause

7.81 The Enabling Clause, in its footnote 3, refers to the Generalized System of Preferences "[a]s described in [the 1971 Waiver Decision], relating to the establishment of 'generalized, non-reciprocal and non-discriminatory preferences beneficial to the developing countries'". The 1971 Waiver Decision recalls that "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" and that "mutually acceptable arrangements have been drawn up in the UNCTAD concerning [GSP]". The mutually acceptable arrangements referred to in the 1971 Waiver Decision are the Agreed Conclusions. The Agreed Conclusions actually set out the details and institutional arrangements of GSP. Consequently, an analysis of the significance of the Agreed Conclusions for the interpretation of the Enabling Clause is of critical importance.

7.82 The Agreed Conclusions resulted from negotiations mandated by Resolution 21(II) of the Second Session of UNCTAD, passed on 26 March 1968. It was in this Resolution that UN member States agreed to "the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences which would be beneficial to the developing countries". It should be noted that Resolution 21(II) itself did not set up the details of the GSP arrangements although it did set out its objectives and principles. The Resolution established a Special Committee on Preferences as a subsidiary organ of the Trade and Development Board, with the express mandate to settle the details of the GSP arrangements.

7.83 The outcome was the Agreed Conclusions, mutually agreed in the Special Committee on Preferences, "recogniz[ing] that these preferential arrangements are mutually acceptable and represent a cooperative effort which has resulted from the detailed and intensive consultations between the developed and developing countries which have taken place in UNCTAD".314 Included in these Agreed Conclusions was a recommendation "that the Trade and Development Board at its fourth special session adopt the report of the Special Committee on its fourth session, take note of these conclusions [and] approve the institutional arrangements proposed in section VIII � ".315

7.84 Thus, the details for the establishment of generalized, non-reciprocal and non-discriminatory preferences beneficial to developing countries were set out in the Agreed Conclusions and in related documents incorporated by reference in these Agreed Conclusions. The fact that the Agreed Conclusions themselves were noted, not adopted, by the Trade and Development Board does not change their legal status as an instrument containing the agreed detailed arrangements of the GSP.

7.85 The Agreed Conclusions also provide "that no country intends to invoke its rights to most-favoured-nation treatment � and that the contracting parties to the General Agreement on Tariffs and Trade intend to seek the required waiver or waivers as soon as possible". During the GATT Council meeting adopting the 1971 Waiver Decision, the countries requesting this waiver expressly mentioned (i) that, in Resolution 21(II) of the Second Session of UNCTAD, "there has been unanimous support for the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences which would be beneficial to the developing countries"; (ii) that the Agreed Conclusions worked out in UNCTAD "were mutually acceptable to and represented a co-operative effort of both developing countries and developed countries"; (iii) that "it has been agreed that the prospective preference-giving countries would seek as rapidly as possible the necessary legislative or other sanctions with the aim of implementing the preferential arrangements"; and (iv) that "it was a part of this undertaking that the prospective preference-giving countries were now seeking a waiver in the GATT". The representative of the preference-giving countries emphasized that "the waiver was to cover the arrangements as set forth in the Agreed Conclusions reached in UNCTAD".316 With the above considerations in mind, the Panel is of the view that the Agreed Conclusions were incorporated by reference into the 1971 Waiver Decision.

7.86 From the above factual review, the Panel considers that the 1971 Waiver Decision is intended to cover the Agreed Conclusions. According to Article 31.2(a) of the Vienna Convention, an "agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty" constitutes context of the treaty. The Panel considers that Resolution 21(II) and the Agreed Conclusions establish such an agreement relating to the conclusion of the 1971 Waiver Decision; therefore, they are context for the 1971 Waiver Decision in the sense of Article 31.2(a) of the Vienna Convention. This is confirmed by the fact that the 1971 Waiver Decision itself does not contain any specifics on GSP arrangements.

7.87 The fact that the Enabling Clause incorporates GSP "as described in the Decision of the CONTRACTING PARTIES of 25 June 1971, relating to the establishment of generalized, non-reciprocal and non-discriminatory preferences to developing countries", also strongly suggests that Resolution 21(II) and the Agreed Conclusions were carried over from the 1971 Waiver Decision into the 1979 Enabling Clause so as to constitute a context for the Enabling Clause in relation to GSP arrangements, and paragraphs 2(a) and 3(c) in particular. The Panel notes that on the occasion of the discussion and approval of the 1979 Enabling Clause, there was no discussion at all in the GATT as to the nature and characteristics of the GSP.

7.88 The Panel recalls that both India and the European Communities agree that Resolution 21(II) and the Agreed Conclusions can be considered as preparatory work for the 1971 Waiver Decision, but that India argues that the Agreed Conclusions are also context for the 1971 Waiver Decision and the Enabling Clause. The Panel recalls its finding in paragraphs 7.86 and 7.87 that Resolution 21(II) and the Agreed Conclusions are context for the 1971 Waiver Decision and the Enabling Clause. The Panel considers that, because Resolution 21(II) and the Agreed Conclusions record the history and results of the negotiations on GSP arrangements, they are also preparatory work for both the 1971 Waiver Decision and the Enabling Clause, in the sense of Article 32 of the Vienna Convention.

(iii) Product coverage and depth of tariff cuts as part of the Agreed Conclusions

7.89 In interpreting paragraph 3(c), the Panel considers that Section I of the Agreed Conclusions is particularly helpful in understanding the mechanisms in GSP arrangements relating to "responding to the development needs of developing countries". Paragraph 3 of Section I states that

"[the Special Committee on Preferences] welcomes with appreciation the revised submissions by the developed market-economy countries317, which should be read in conjunction with the preliminary submissions of November 1969.318 These submissions represent an important success in the efforts and endeavours in UNCTAD in order to put a generalized system of preferences into operation and an important element in the fulfilment of the aims and objectives of Conference Resolution 21(II) mentioned above and in the international strategy for development in the 1970s".319

7.90 The submissions referred to above are the documents "Tariff Preferences for Developing Countries �- Documentation Forwarded by OECD to UNCTAD"320 (14 November 1969) and "Tariff Preferences for Developing Countries �- Revised Documentation Forwarded by OECD to UNCTAD" (19 September 1970).321 These submissions contain the principles and GSP schemes offered by preference-giving countries based on consultations with developing countries. Because these documents are expressly referenced in the Agreed Conclusions, the principles and offers expressed therein faithfully reflect the common understanding on GSP schemes between the developed and developing countries.

7.91 Of particular interest in these two documents are the sections providing agreed offers on the part of the developed countries with respect to the product coverage and the depth of tariff cuts. It was agreed that GSP schemes should apply in principle to all industrial semi-manufactured and manufactured products, as prescribed in chapters 25-99 of the Brussels Nomenclature; other products, including agricultural products in chapters 1-24, could be included on a case-by-case basis in the form of positive lists provided by donor countries; and donor countries could make limited exceptions, excluding from their GSP offers a limited number of products under chapters 25-99 or reserving their rights to make such limited exceptions.322

7.92 For products in chapters 25-99, it was also stated that preferences would take the form of exemptions from custom duties, but a few donor countries offered linear tariff reductions or variable preferential duties .323 It was further stated by one donor country that preferential duties would in general be at the same levels as those existing in the special preferences that certain donor countries had been providing to certain developing countries.324

7.93 For those selected products in chapters 1-24 which would be included by donor countries in their GSP schemes, some donor countries offered duty-free preferences, while others offered variable tariff reductions at different depths of tariff cuts.325

7.94 The Panel notes: (i) that the Agreed Conclusions "welcomed" these submissions and referred to them as an important element in the fulfilment of the aims and objectives of Conference Resolution 21(II); and (ii) that the fact that the Agreed Conclusions did not repeat any "conclusions" on the product coverage and on the depth of tariff cuts, means that the offers proposed by developed countries in these submissions were acceptable to and agreed by all countries involved. The same arrangements were also covered by the 1971 Waiver Decision in view of the intention of Members, as expressed in the GATT Council, to cover in that instrument all arrangements set out in the Agreed Conclusions.

7.95 Further, the Panel notes that because the levels of product coverage and depth of tariff cuts contained in the GSP offers were negotiated and mutually agreed between developed and developing countries, it cannot be assumed that GSP schemes providing for lesser product coverage or depth of tariff cuts would have been acceptable to the developing countries. Also, in relation to future implementation of GSP schemes, the Panel sees no basis for concluding that the level of product coverage and depth of tariff cuts in general could be less than the level and depth offered and accepted in the Agreed Conclusions.

7.96 The Panel notes that the original negotiated offers also contained exceptions mechanisms where the preference-giving countries reserved their rights to exclude a limited number of products from their schemes.326 But, as the Panel understands it, these limited exceptions did not change the basic requirements that the level of product coverage and depth of tariff cuts in general could not be less than those provided in the negotiated offers.

7.97 From the 1979 UNCTAD Review, the Panel notes that the arrangements on product coverage and depth of tariff cuts were implemented during the period 1971-1979 by Members in their respective GSP schemes. Improvements were also made voluntarily by certain donor countries with regard to the depth of tariff cuts in their respective schemes.327 The Panel considers that the practice of Members in the implementation of GSP schemes confirms its understanding that the general level of product coverage and depth of tariff cuts should not be reduced.

(iv) Responding positively to development needs of developing countries

7.98 There is no express mention in the Enabling Clause of any change to the details of the GSP arrangements earlier agreed in the Agreed Conclusions and incorporated into the 1971 Waiver Decision, nor is there any other record in GATT or in the WTO of any action in connection therewith. Therefore, the Panel considers that the arrangements on product coverage and depth of tariff cuts agreed upon in the Agreed Conclusions are still valid elements dealing with the design of GSP schemes in the Enabling Clause.

7.99 Since paragraph 3(c) is the relevant provision in the Enabling Clause addressing the design and modification of GSP schemes, the Panel finds that paragraph 3(c) requires that, in designing and modifying GSP schemes, preference-giving countries provide product coverage and tariff cuts at levels in general no less than those offered and accepted in the Agreed Conclusions. In addition, the Panel considers that paragraph 3(c), by requiring preference-giving countries to "respond positively to the development, financial and trade needs of developing countries", does not exclude, but actually encourages, further improvements in the levels of product coverage and depth of tariff cuts, commensurate with development needs of developing countries.

(v) Whether a GSP scheme can be accorded to less than all developing countries

7.100 With respect to the issue of whether paragraph 3(c) allows GSP schemes to be extended to less than all developing countries, responding to the specific development needs of these countries, not the specific needs of other developing countries, the Panel finds nothing in the text of the Enabling Clause or in its drafting history to support the European Communities' argument that paragraph 3(c) permits developed countries to respond to similar development needs of selected developing countries "according to objective criteria". Moreover, if the Panel were to uphold the European Communities' argument, it would be faced with having to decide what constitutes "objective criteria" justifying the selective inclusion of only certain development needs, to the exclusion of others. The Panel notes that there has never been any collective guidance by GATT Contracting parties or the membership of the WTO in this respect.

7.101 The European Communities provides two elements as constituting the objective criteria for differentiating among developing countries. It indicates that: (i) the difference in treatment must pursue a legitimate aim; and (ii) the difference in treatment must be a reasonable means to achieve that aim. Should such criteria be used, however, then any differentiation favouring one or a few selected developing countries, not other developing countries, could be justified because, firstly, each developing country has its different development needs caused by different problems, for which any measure addressing such problem could be said to be for a legitimate aim and, secondly, any higher margin of tariff preferences (higher than that provided to other developing countries) on products of export interest to these favoured developing countries would serve the legitimate aim of supporting development in these favoured developing countries.

7.102 Tariff preferences would very often be a "reasonable means" to achieve that legitimate aim of promoting development. For example, providing tariff preferences would help to solve the development problem of some developing countries stemming from the size of population, by creating more jobs in labour-intensive industries. If the Panel were to uphold the European Communities' interpretation, the way would be open for the setting up of an unlimited number of special preferences favouring different selected developing countries. The end result would be the collapse of the whole GSP system and a return back to special preferences favouring selected developing countries, precisely the situation that negotiators aimed to eliminate back in the late 1960s.

7.103 Indeed, the Panel cannot discern any "objective criteria" according to which preference-giving countries may treat different developing countries differently under GSP schemes. There is no reasonable basis to distinguish between different types of development needs, whether they are caused by drug production and trafficking, or by poverty, natural disasters, political turmoil, poor education, the spread of epidemics, the magnitude of the population, or by other problems. There could be no reasonable explanation why certain causes of the problem of development should be addressed through GSP and why other causes of the same development problem should not be so addressed.

7.104 Given the practical difficulties in elaborating any reasonable "objective criteria", the Panel cannot assume that paragraph 3(c) envisages the existence of such "objective criteria" allowing for differentiation in GSP schemes. The only differentiation that is clearly understood to have been agreed among GATT Contracting parties is the special treatment to the least-developed countries, as set out in paragraph 2(d). Without explicit provision, agreed multilaterally, for other bases for differentiation among developing countries, the Panel does not think it can be assumed that Members intended to permit such differentiation.

7.105 The Panel considers that the appropriate way of responding to the development needs of developing countries is to take into account each and every developing countries' development needs by including, in the GSP schemes, a breadth of products of export interest to developing countries and by providing sufficient margins of preferences for such products. There is a requirement of responsiveness of GSP schemes, even if there are no specific criteria for measuring the responsiveness of individual GSP schemes.

7.106 The Panel, however, notes that GSP schemes contain mechanisms for differentiating among developing countries in certain prescribed situations, one being that of safeguard mechanisms and the other being special treatment of the least-developed countries.

(vi) Safeguard mechanisms

7.107 The safeguard mechanisms originated in the Agreed Conclusions which permits: (i) a priori limitations on imports from developing countries; and (ii) escape-clause type measures for the purpose of retaining a certain degree of control over the trade which may be generated by new tariff advantages.328

7.108 The a priori limitations are measures that set import ceilings so as to exclude certain imports originating in individual developing countries where the products concerned reach a certain competitive level in the market of the preference-giving country.

7.109 From the very beginning of GSP implementation, the a priori measures were used by a number of countries on non-agricultural products covered under their respective GSP schemes. For example, the scheme offered in 1970 by the EEC stated that "preferential imports will be effected up to ceilings in value terms to be calculated for each product on a basis common to all products" and that "in order to limit the preferences granted to the more competitive developing country or countries and to reserve a substantial share for the less competitive, preferential imports of a given product from a single developing country should not as a general rule exceed 50 percent of the ceiling fixed for that product".329 Thus, under this scheme, GSP benefits are available for any given product only up to a value that is no more than 50 per cent of the ceiling value.

7.110 With regard to safeguard mechanisms, the Agreed Conclusions also state that "the preference-giving countries reserve the right to make changes in the detailed application as in the scope of their measures (under safeguard mechanisms), and in particular, if deemed necessary, to limit or withdraw entirely or partly some of the tariff advantages granted".330 Nevertheless, the preference-giving countries, in the Agreed Conclusions, also "declare that such measures would remain exceptional and would be decided on only after taking due account in so far as their legal provisions permit, of the aims of the generalized system and the general interests of developing countries".331

7.111 The Panel notes that these a priori limitations still exist today, in different forms, in the GSP schemes of a number of preference-giving countries.332

7.112 The Panel notes that the "escape-clause" type safeguard mechanisms are applicable to all beneficiaries without differentiation and therefore do not have any bearing on the interpretation of paragraph 3(c). What are relevant are the "a priori" limitations as provided for expressly in the Agreed Conclusions. The Panel accordingly only addresses how the a priori limitations impact the interpretation of paragraph 3(c).

7.113 Since: (i) the a priori limitations are mainly based upon notions of competitiveness of products or countries in particular export markets; (ii) paragraph 3(c) is the provision in the Enabling Clause that addresses how GSP schemes should respond to development needs; and (iii) nothing during the negotiations of the Enabling Clause suggests that the safeguard mechanisms were changed, the Panel considers that paragraph 3(c) incorporates the a priori limitations under the safeguard mechanisms section of the Agreed Conclusions into the Enabling Clause.

7.114 Whether a particular a priori limitation measure in a GSP scheme complies with the terms of paragraph 3(c) is a matter that can only be decided in light of the particular factual setting of the measure, and this is not a matter before this Panel.

(vii) Paragraph 2(d)

7.115 As required by the text of paragraph 3, "any differential and more favourable treatment provided under this clause" shall comply with, inter alia, subparagraph (c). Thus, paragraph 3(c) also applies to paragraph 2(d) which permits special treatment to the least-developed countries. Accordingly, the Panel considers that the interpretation of paragraph 3(c) has to accommodate the implementation of paragraph 2(d). The Panel is of the view that, in designing and modifying GSP schemes, paragraph 3(c) does allow for differentiation among developing countries, in the case of special treatment to the least-developed countries.

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

7.116 Based on the above analysis in paragraphs 7.89-7.115 above, the Panel finds that the elements relevant to "respond[ing] positively to the development, financial and trade needs of developing countries" under paragraph 3(c) include the following: (i) the level of product coverage and depth of tariff cuts in general should be no less than the level and depth offered and accepted in the Agreed Conclusions, with the possibility of providing further improvements333; (ii) the design and modification of a GSP scheme may not result in a differentiation in the treatment of different developing countries, except as provided in points (iii) and (iv); (iii) a priori limitations may be used to set import ceilings so as to exclude certain imports originating in individual developing countries where the products concerned reach a certain competitive level in the market of the preference-giving country; and (iv) differentiation is permitted among developing countries, in designing and modifying GSP schemes, in the case of special treatment to the least-developed countries, pursuant to paragraph 2(d). No other differentiation among developing countries is permitted by paragraph 3(c).

3. "Non-discriminatory" in footnote 3

(a) Arguments of the parties

7.117 India states that the ordinary meaning of the term "discriminate" is "to make or constitute a difference in or between; distinguish" and "to make a distinction in the treatment of different categories of peoples or things". In India's reading, "non-discriminatory" does not allow for the making of distinctions between different categories of developing countries.334

7.118 India argues that the context of the term "non-discriminatory" in footnote 3 of the Enabling Clause is to be found in Article I:1 of GATT 1994 only, not in Articles III:4, X, XIII, XVII or XX of GATT 1994 or in Article XVII of GATS.335 For India, the term "notwithstanding" in paragraph 1 of the Enabling Clause means that the developed countries waive their MFN rights vis-�-vis the developed country Member providing GSP to developing countries. However, India considers that there is nothing in paragraph 1 to indicate that developing countries also waive their MFN rights vis-�-vis other developing countries receiving GSP benefits from a developed country. According to India, the assumption that developing countries waive such MFN rights is inconsistent with the very purpose of the GSP.336 Consequently, the notion of non-discrimination as used in Article I:1 of GATT 1994 - that of protecting equal competitive opportunities for like products originating in different countries - is relevant and is not waived.337

7.119 India also argues that use of the article "the" before "developing countries" in footnote 3 means "all" when defining a plural noun. India maintains that if "non-discrimination" in footnote 3 were not to refer to "all" developing countries, there would be no need to have paragraph 2(d) in addition to paragraph 2(a); the non-tariff measures implicated in paragraph 2(d) in favour of the least-developed countries could then have been included in paragraph 2(b).338

7.120 India maintains that unless the Enabling Clause expressly so provides, there can be no valid basis for differentiation among developing countries. To interpret it otherwise would curtail the benefits accruing to developing countries under Article I:1 and run counter to the very purpose of the GSP.339 The meaning of the term "non-discriminatory" in the Enabling Clause, India believes, is identical to its meaning in the Agreed Conclusions. The Agreed Conclusions contains no reference to the notion that developed countries should be allowed to distinguish between developing countries. The Agreed Conclusions do not even authorize developed countries to provide more favorable tariff preferences to the least-developed countries to the exclusion of other developing countries.340

7.121 India also cites certain other texts from the UNCTAD documents to support its contention that the term "non-discrimination" in footnote 3 indicates a requirement to provide equal tariff preferences to all developing countries. The Agreed Conclusions state that "there is agreement with the objective that in principle all developing countries should participate as beneficiaries from the outset". General Principle Eight of the First UNCTAD Session calls for preferential treatment to "developing countries as a whole". Resolution 21(II) also states that the objective of the GSP is to set up a system "in favour of the developing countries" which, in India's understanding, means in favour of all developing countries.341 With these supporting texts and other UNCTAD documents to the similar effect, India argues that Members intended that the benefits of GSP apply to all developing countries, not just to some developing countries.342 For India, this conclusion is also confirmed by the 1979 UNCTAD GSP Review Report. On all matters relating to GSP, India maintains, the Enabling Clause does not change the 1971 Decision, with one exception that paragraph 2(d) permits special treatment be given to the least-developed countries.343

7.122 The European Communities argues that the word "discriminate" has a neutral meaning and a negative meaning. It notes the statement by the panel in Canada - Pharmaceutical Patents that the term "discrimination" may have different meanings in different WTO contexts. The full definition in the legal context, in the European Communities' view, is "to make a distinction in the treatment of different categories of people, or thing, esp. unjustly or prejudicially against the people on grounds of race, colour, sex, social status, etc".344

7.123 The European Communities also argues that the appropriate context of the term "non-discriminatory" in the Enabling Clause is found in paragraphs 1, 2 and 3 of the Enabling Clause, and particularly in paragraphs 2(a) and 3(c) and in the term "generalized" in footnote 3.345 In the European Communities' view, Article I:1 and many other substantive provisions of GATT 1994 and GATS are concerned with providing equal conditions of competition for imports of like products originating in all Members. In contrast, the European Communities believes, the Enabling Clause, like other special and differential treatment provisions, seeks to create unequal competitive conditions in order to respond to the special needs of developing countries. Having regard to that objective, the European Communities argues that differential treatment between developing countries according to their development needs is no more discriminatory than differentiating between developed and developing countries.346

7.124 The European Communities maintains that "non-discriminatory" is not synonymous with formally equal treatment. Rather, in the European Communities' view, there is discrimination if equal situations are treated unequally or if unequal situations are treated equally. The European Communities also maintains that there is a two-part standard for measuring whether "non-discrimination" exists: (i) whether the difference in treatment pursues a legitimate objective; and (ii) whether the distinction is a reasonable means to achieve the legitimate objective, i.e., whether the measure is both apt to achieve that objective and proportionate.347 For the European Communities, the meaning of discrimination differs from provision to provision. The meaning of discrimination under Article III of GATT 1994 is different from the meaning of discrimination under the chapeau to Article XX of GATT 1994.348 Under the Enabling Clause, the term "non-discriminatory" in paragraph 2(a) does not prevent Members from treating differently developing countries which, according to objective criteria, have different development needs.349

7.125 The European Communities maintains that General Principle Eight, Resolution 21(II) and the Agreed Conclusions themselves are not context of the Enabling Clause, but are "preparatory work" of the 1971 Decision and, as such, constitute supplementary means of interpretation, as specified in Article 32 of the Vienna Convention.350 Moreover, the European Communities considers that the UNCTAD texts that India relies upon do not support India's position on the meaning of non-discrimination. Those texts, according to the European Communities, address the issue of whether all developing countries should be recognized as beneficiaries, which is linked to the meaning of the term "generalized", rather than the issue of whether all beneficiaries should be granted identical preferences, which is to be addressed by the term "non-discriminatory" in footnote 3. The European Communities considers that India's interpretation renders one of the terms "non-discriminatory" or "generalized" redundant.351

(b) Panel's analysis

(i) Introduction

7.126 The Panel considers that the ordinary meaning of "discriminate", depending on the context, can have either a neutral meaning of making a distinction or a negative meaning carrying the connotation of a distinction that is unjust or prejudicial. As India indicates, the neutral meaning is "to make or constitute a difference in or between; distinguish" and "to make a distinction in the treatment of different categories of peoples or things".352 As the European Communities indicates, the negative meaning is "to make a distinction in the treatment of different categories of people or things, esp. unjustly or prejudicially against people on grounds of race, colour, sex, social status, age, etc."353

7.127 In order to determine the appropriate meaning of this term in footnote 3, it is necessary to consider the term in its context and in light of the object and purpose of the GATT.

7.128 The relevant context of "non-discriminatory" includes paragraphs 2(a), 2(d) and 3(c) in the text of the Enabling Clause. In paragraph 2(a), as the Panel has already found in paragraph 7.87, the most relevant elements of context are Resolution 21(II) and the Agreed Conclusions. Leading up to Resolution 21(II), there are two formal submissions from the OECD Group354 and the Group of 77.355 There is also the earlier Recommendation from the First Session of UNCTAD356, which represents the first call for the establishment of GSP. The Panel considers that all these documents constitute preparatory work for the Agreed Conclusions and, therefore, also for the 1971 Waiver Decision, and for paragraph 2(a) of the Enabling Clause by virtue of footnote 3.

7.129 The Panel notes that it is in Resolution 21(II) of the Second Session of UNCTAD that the concept of establishing a "generalized, non-reciprocal and non-discriminatory" system of preferences is first set out. The details of GSP arrangements were decided in the Agreed Conclusions, which were carried over into the 1971 Waiver Decision and thereafter into paragraph 2(a) of the Enabling Clause by virtue of footnote 3. The Panel therefore will proceed with an analysis of Resolution 21(II) in order to explore the relevant context and preparatory work in UNCTAD.

(ii) Resolution 21(II)

7.130 The Panel notes that Resolution 21(II) indicates the "unanimous agreement in favour of the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences", and establishes the Special Committee on Preferences to elaborate the details of GSP. The "unanimous agreement" on these principles is evident from the documents annexed to Resolution 21(II), setting out the positions taken by the developing countries in the Charter of Algiers357 and the positions taken by the developed countries in the Report of the Special Group on Trade with Developing Countries submitted by the OECD.358 Resolution 21(II), by stating in its preamble that it "tak[es] cognizance of the Charter of Algiers and the Report of the Special Group on Trade with Developing Countries submitted by the Organization for Economic Cooperation and Development", effectively recognizes the relevant contents of these reports for the Resolution itself.

7.131 Both developed and developing countries set out certain principles for the establishment of GSP. Those stated by the developing countries in the Charter of Algiers include the following:

"(a) � provide for unrestricted and duty-free access to the markets of all the developing countries for all manufactures and semi-manufactures from all developing countries;

(d) All developed countries should grant such preferences to all developing countries;

(g) The new system of generalized preferences should ensure at least equivalent advantages to developing countries enjoying preferences in certain developed countries to enable them to suspend their existing preferences on manufactures and semi-manufactures".359

7.132 The principles for the GSP system as stated in the Report by the Special Group on Trade with Developing Countries of the OECD360, include, inter alia, the following:

"(3) Such new arrangements should aim to accord broadly equivalent opportunities in all developed countries to all developing countries;

(5) Any new arrangements for the grant of special tariff treatment cannot be put into effect without the support of developing countries, and their views should be taken into account in the formulation of any such arrangements".361

7.133 On the phasing out of existing special preferences, the OECD Special Group report states that

"it is recognized that many countries would see as an important objective of the new arrangements a movement in the direction of equality of treatment for the exports of all developing countries in developed country markets. At the same time, developing countries at present receiving preferences in some such markets would expect the arrangements to provide them with increased export opportunities to compensate for their sharing of their present advantages".362

7.134 The Panel is of the view that the "unanimous agreement", as stated in Resolution 21(II) and emanating from the above-mentioned positions of developing and developed countries, is that the existing special preferences provided to a limited number of developing countries would be replaced by a generalized system of preferences which would be provided to all developing countries equally, without the possibility of differentiation in treatment among developing countries by preference-giving countries.

(iii) Agreed Conclusions

7.135 The Agreed Conclusions, addressing the issue of "Reverse Preferences and Special Preferences", states in Section II: "[T]he Special Committee notes that, consistent with Conference Resolution 21(II), there is agreement with the objective that in principle all developing countries should participate as beneficiaries from the outset". This statement addresses the issue of special preferences whereby some preference-giving countries were providing preferential tariff treatments only to certain designated developing countries, and not to others. Reading this sentence in that light, the Panel considers that the "agreement" refers to that of extending preferential tariff treatment to all developing countries.

7.136 In addressing the impact of the elimination of special preferences between certain developed countries and a limited number of developing countries, the Agreed Conclusions state: "[D]eveloping countries which will be sharing their existing tariff advantages in some developed countries as the result of the introduction of the generalized system of preferences will expect the new access in other developed countries to provide export opportunities at least to compensate them". In other words, for developing countries enjoying special preferences in the past, the possible loss of market share in one developed country, previously providing special preferences to them, would be compensated by the fact that other developed countries not previously providing special preferences to them, would provide preferential treatment to them upon the establishment of GSP.

7.137 There is little doubt that these statements implied that all special preferences existing before the establishment of GSP would thereafter be extended to all developing countries without differentiation. Logically, if differentiation in treatment among different developing countries were permitted in the Agreed Conclusions, such differentiation would have defeated the requirement of elimination of existing special preferences and would have caused the same problems as those caused by the existence of the special preferences prevailing before the establishment of the GSP, namely, discrimination among developing countries.363

7.138 In addressing the special measures in favour of the least-developed countries, Section V of the Agreed Conclusions states: "[T]he preference-giving country will consider, as far as possible, on a case-by-case basis, the inclusion in the generalized system of preferences of products of export interest mainly to the least developed among the developing countries, and, as appropriate, greater tariff reductions on such products". At that time, there was no possibility of providing wider product coverage or deeper tariff cuts only for the least-developed countries.

7.139 The approach taken to ensuring benefits to the least-developed countries was to: (i) include products of export interest to these countries in the scope of product coverage of the GSP schemes; and (ii) provide greater tariff cuts on such products when appropriate. However, in its design, the scheme as a whole was to be provided to all developing countries so that although the GSP would provide formally equal treatment to all developing countries, it would respond to the needs of the least developing countries more effectively. Under the Agreed Conclusions, there was no possibility to provide formal differentiation in GSP schemes to favour the least-developed countries.

7.140 However, as the Panel concluded in its analysis under paragraph 3(c) of the Enabling Clause, the Agreed Conclusions permit a priori limitations. The Panel considers, accordingly, that the Agreed Conclusions do not provide a legal basis for differentiation among developing countries other than that for the implementation of a priori limitations.

(iv) Recommendation A.II.1 of the First Session of UNCTAD

7.141 It is worth noting that at the conclusion of the First Session of UNCTAD, Members adopted general principles and recommendations relating to the abolishment of special preferences and the establishment of GSP. These principles and recommendations directly led to the adoption of Resolution 21(II) in the Second Session of UNCTAD.

7.142 General Principle Eight of the First Session of UNCTAD provides:

"International trade should be conducted to mutual advantage on the basis of the most-favoured-nation treatment and should be free from measures detrimental to the trade interests of other countries. � New preferential concessions, both tariff and non-tariff, should be made to developing countries as a whole and such preferences should not be extended to developed countries. � Special preferences at present enjoyed by certain developing countries in certain developed countries should be regarded as transitional and subject to progressive reduction. They should be eliminated as and when effective international measures guaranteeing at least equivalent advantages to the countries concerned come into operation".364

7.143 Recommendation A.II.1. provides:

"Preferential arrangements between developed countries and developing countries which involve discrimination against other developing countries, and which are essential for the maintenance and growth of the export earnings and for the economic advancement of the less developed countries at present benefiting therefrom, should be abolished pari passu with the effective application of international measures providing at least equivalent advantages for the said countries. These international measures should be introduced gradually in such a way that they become operative before the end of the United Nations Development Decade."365

7.144 From the above analysis of Resolution 21(II), the Agreed Conclusions and the relevant preparatory work leading to the establishment of GSP, the Panel considers that the clear intention of the negotiators was to provide GSP equally to all developing countries and to eliminate all differentiation in preferential treatment to developing countries, with the exception of the implementation of a priori limitations in GSP schemes. The Panel concludes, from its review of the context and preparatory work, that the requirement of non-discrimination, as a general principle formally set out in Resolution 21(II) and later carried over into the 1971 Waiver Decision and then into the Enabling Clause, obliges preference-giving countries to provide the GSP benefits to all developing countries without differentiation, except for the implementation of a priori limitations in GSP schemes.

(v) Paragraph 2(d)

7.145 The fact that the Enabling Clause expressly allows developed countries to provide special treatment to the least-developed countries in paragraph 2(d) also suggests that, in the context of GSP, it is only due to paragraph 2(d) that special treatment to the least-developed countries is permitted. If the Agreed Conclusions in themselves allowed such more preferential treatment, there would have been no need to include paragraph 2(d) in the Enabling Clause. Accordingly, it is clear that formally identical treatment is required to be given to all developing countries under the non-discrimination requirement of footnote 3, as applied to paragraph 2(a).

7.146 The Panel notes the European Communities' arguments that paragraph 2(d) covers both tariff and non-tariff measures, that the term "non-discriminatory" in paragraph 2(a) allows developed countries to differentiate between developing countries according to objective criteria, but that this provision only deals with tariff preferences, and that, accordingly, there is still a need to provide for special treatment in favour of least-developed countries through paragraph 2(d). The Panel also notes India's argument that if paragraph 2(a) allowed differentiation between developing countries, in the same way paragraph 2(b) would also allow differentiation among developing countries; it would thus have been more logical to combine paragraphs 2(b) and 2(d) into one paragraph rather than to have a separate paragraph 2(d) allowing for both tariff and non-tariff measures favouring the least-developed countries.

7.147 The Panel considers that if the term "non-discriminatory" in paragraph 2(a) allowed developed countries to differentiate between developing countries according to objective criteria, paragraph 2(a) would cover tariff measures favouring the least-developed countries. There might then still be a need to have a separate paragraph to permit special non-tariff measures in favour of the least-developed countries, beyond those "governed by the provisions of instruments multilaterally negotiated under the auspices of the GATT" under paragraph 2(b). However, this separate paragraph would have excluded tariff preferences from its scope since these would have already been covered by paragraph 2(a). The fact that paragraph 2(d) does not exclude tariff preferences from its scope further confirms the understanding that the term "non-discriminatory" in paragraph 2(a) does not permit differentiation among developing countries. Therefore, paragraph 2(d) functions as an exception to paragraph 2(a), authorizing special treatment to the least-developed countries, inter alia, in GSP schemes.

(vi) Paragraph 3(c)

7.148 In light of its findings in paragraph 7.116 in respect of paragraph 3(c), specifically, that the design and modification of a GSP scheme may not result in a differentiation in the treatment of developing countries, except for the implementation of a priori limitations, the Panel considers that paragraph 3(c) provides no basis to read "non-discriminatory" in footnote 3 in a way allowing for differentiation among developing countries, except for the implementation of a priori limitations.

7.149 The Panel recalls the argument of the United States to the effect that GSP schemes need not be extended on a "one size fits all" basis and that distinctions based on unequal development situations are permitted.366 However, the Panel has previously found that the only appropriate way of responding to the differing development needs of developing countries is for preference-giving countries to ensure that their schemes have sufficient breadth of product coverage and depth of tariff cuts to respond positively to those differing needs.

(vii) Relevance of Article I:1 of GATT 1994

7.150 The Panel recalls India's arguments that: (i) there is nothing in the Enabling Clause that exempts the European Communities from the obligation under Article I:1 of GATT 1994 to extend tariff preferences accorded under the Drug Arrangements unconditionally to all developing countries; and (ii) the term "unconditional", as interpreted by the panel in Canada - Autos, means independent of the situation or conduct of the exporting country. The Panel further recalls the European Communities' arguments that: (i) the Enabling Clause does not require the granting of differential and more favourable treatment unconditionally; (ii) the meaning of "conditional" under Article I:1 is the granting of tariff preferences in exchange for some form of compensation; and (iii) the Enabling Clause only prohibits the condition of reciprocity, not other conditions providing for non-reciprocal compensation.

7.151 In addressing the relevance of Article I:1 for the interpretation of the Enabling Clause, the Panel recalls its earlier findings that: (i) the Enabling Clause is an exception to Article I of GATT 1994; and that (ii) the Enabling Clause does not exclude the applicability of Article I but rather Article I and the Enabling Clause apply concurrently, with the Enabling Clause prevailing to the extent of inconsistency between the two provisions. From these findings, the Panel considers that in the absence of express authorization, no further derogation from Article I:1 can be assumed. The Panel's approach to the interpretation of "non-discriminatory" follows this general consideration as to the relevance of Article I:1 in that the Panel has not interpreted this term to permit preferential treatment to less than all developing countries without an explicit authorization. Such explicit authorization is only provided for the benefit of the least-developed countries in paragraph 2(d) of the Enabling Clause and for the implementation of a priori limitations, as set out in the Agreed Conclusions.

7.152 The Panel considers that, following the rules of interpretation as provided in Articles 31 and 32 of the Vienna Convention, it has already found sufficient guidance to determine the meaning of "non-discriminatory" in footnote 3. There is no need at this stage to search for further interpretative guidance from Article I:1 of GATT 1994.

(viii) Relevance of other GATT provisions

7.153 The Panel recalls that both parties cite other GATT and GATS provisions to assist the understanding of the term "non-discriminatory" in footnote 3, including Articles III, XIII, XVII and XX of GATT 1994, as well as Article XVII of GATS. The European Communities also mentions the panel statement in Canada - Pharmaceutical Patents that "discrimination" may have different meanings in different WTO contexts. While the Panel agrees that the term "discrimination" may have different meanings under different WTO provisions, the Panel does not consider that these different provisions contribute significantly to the understanding of the term "non-discriminatory" in GSP and, more particularly, in footnote 3 of the Enabling Clause.

(ix) Object and purpose

7.154 The Panel recalls the European Communities' arguments: (i) that the object and purpose of paragraph 2(a) of the Enabling Clause, that of promoting the trade of all developing countries commensurate with their development needs, is expressed in Article XXXVI:3 of GATT 1994 and in the preamble of the 1971 Waiver, as well as in the preamble of the WTO Agreement; and (ii) that the interpretation of the term "non-discriminatory" should further the objectives of the Enabling Clause and the WTO Agreement by allowing provision of additional preferences to developing countries with special development needs, so that they can secure a share of international trade commensurate with those special needs.

7.155 The Panel notes that one of the objectives recited in the preamble of the WTO Agreement is to secure, for the developing countries, a share in the growth in international trade commensurate with their development needs, and that the 1971 Waiver Decision and Article XXXVI:3 of GATT 1994 set out similar objectives. These objectives are directly reflected in the Enabling Clause.

7.156 At the same time, the Panel notes that other objectives in GATT 1994 and the WTO Agreement are also relevant, particularly since the Enabling Clause forms a part of GATT 1994. Both GATT 1994 and the WTO Agreement contain multiple objectives, none of which should be viewed in isolation.

7.157 For the purpose of interpreting the term "non-discriminatory" in footnote 3 of the Enabling Clause, the Panel considers that one of the most important objectives of GATT 1994, as stated in the preamble, is "expanding the production and exchange of goods". In order to achieve this objective, the preamble sets out the principle of "elimination of discriminatory treatment in international commerce". This principle is reflected mainly in Articles I and III of GATT 1994.

7.158 The Panel considers that the function of the term "non-discriminatory" in footnote 3 is to prevent abuse caused by discrimination in the granting of GSP among developing countries. While both the objective of promoting the trade of developing countries and that of promoting trade liberalization generally are relevant to the interpretation of the term "non-discriminatory", the Panel is of the view that the latter contributes more to guiding the interpretation of "non-discriminatory", given its function of preventing abuse in providing GSP.

(x) Practice of preference-giving countries

7.159 The Panel considers that the overall practice of preference-giving countries confirms the common and consistent understanding of Members as to the term "non-discriminatory". In UNCTAD, during the negotiation of the Agreed Conclusions of the Special Committee on Preferences, none of the GSP schemes offered by preference-giving countries actually contained any differentiation in treatment to different developing countries, except for a priori limitations.367 This fact suggests that there was a common understanding of "equal" treatment to all developing countries except for a priori measures, and that it was on this basis that the 1971 Waiver Decision was adopted.

7.160 The Panel also notes that the practice of contracting parties after the 1971 Waiver Decision continued to reflect this common understanding, so that where a developed country wished to provide more favourable treatment to a limited number of developing countries, a waiver was sought from the GATT or the WTO. If the 1971 Waiver Decision and the Enabling Clause, other than through paragraph 2(d) and the a priori limitation mechanism, allowed for differentiation among developing countries in GSP schemes, there clearly would not be such a large number of requests for waivers and grants of those waivers.368

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

7.161 For the reasons set out in paragraphs 7.126-7.160, the Panel finds that the term "non-discriminatory" in footnote 3 requires that identical tariff preferences under GSP schemes be provided to all developing countries without differentiation, except for the implementation of a priori limitations.

4. Paragraph 2(a)

(a) Arguments of the parties

7.162 India argues that nothing in the Enabling Clause indicates that developing countries have waived their MFN rights vis-�-vis other developing countries. Such an assumption, according to India, would be inconsistent with the very purpose of paragraph 2, which is to create additional benefits for the developing countries. India maintains that the drafting history of the GSP in UNCTAD indicates an intention that the GSP be provided to all developing countries, not just to some of them. India points out that the GSP was intended to replace special preferences which preceded the adoption of the 1971 Waiver Decision. India also argues that the article "the" appearing before "developing countries" in footnote 3 of the Enabling Clause makes clear that GSP is to be provided to all developing countries.369

7.163 India maintains that the term "discriminatory" refers to the denial of equal competitive opportunities to like products originating in different countries and that with regard to tariff matters in the context of the Enabling Clause, the meaning of "non-discriminatory" must refer to the identical application of duties to all countries.370

7.164 India states that the Enabling Clause did not change the GSP arrangement that existed under the 1971 Waiver Decision, with the one explicit exception of permitting special and more favorable treatment to the least-developed countries in accordance with paragraph 2(d).371

7.165 The European Communities, in contrast, argues that India's interpretation of "developing countries" under paragraph 2(a) as meaning "all developing countries" would render redundant the terms "generalized" and "non-discriminatory" in footnote 3. Also, according to the European Communities, India's interpretation would mean that the objective of paragraph 3(c) of responding positively to the development, financial and trade needs of developing countries could not be achieved without differentiation. The European Communities maintains further that the situation envisaged in paragraph 7, that of developing countries participating more fully in the GATT framework with the progressive development of their economies, would never be possible.372

7.166 The European Communities also argues that the concept of non-discrimination has different meanings under different provisions or covered agreements.373

(b) Panel's analysis

7.167 In order to determine whether the term "developing countries" in paragraph 2(a) means all developing countries, it is necessary to interpret this provision in the context of the Enabling Clause as a whole, including in particular the drafting history, footnote 3, paragraph 3(c) and paragraph 2(d). In giving meaning to this term in paragraph 2(a), it is important that this meaning be harmonized with the rest of the Enabling Clause so as to ensure that the GSP system as a whole can function effectively. In this connection, the Panel recalls the Appellate Body's statement that "it is the duty of any treaty interpreter to 'read all applicable provisions of a treaty in a way that gives meaning to all of them, harmoniously'. An important corollary of this principle is that a treaty should be interpreted as a whole, and, in particular, its sections and parts should be read as a whole".374

7.168 As noted, the parties disagree as to whether a developed country may give preferential tariff treatment to less than all developing countries. They disagree in particular on whether the presence of the article "the" before "developing countries" in paragraph 2(a) and in footnote 3 makes a difference in this regard. The Panel considers, however, that the presence or absence of the article "the" before developing countries by itself does not provide sufficient guidance on the underlying question. More useful guidance can be found in the drafting history of the GSP system.

7.169 As the Panel previously discussed in relation to the relevant context and preparatory work leading to the Agreed Conclusions and the establishment of GSP, it considers that the intention of the negotiators was to provide GSP equally to all developing countries and to eliminate all differentiation in preferential treatment to developing countries, with the exception for the implementation of a priori limitations. Given this clear intention of the drafters of the GSP system, the Panel considers that it should not interpret "developing countries" or "the developing countries" in a manner contrary to this intention.

7.170 The Panel recalls its earlier finding on footnote 3 that the term "non-discriminatory" requires identical tariff preferences under GSP schemes to be provided to all developing countries without differentiation, with the exception of the implementation of a priori limitations. Thus, footnote 3 as context for paragraph 2(a) does not authorize preference-giving countries to differentiate among developing countries in their GSP schemes, with the exception of the implementation of a priori limitations.

7.171 Paragraph 3(c) provides additional context to the interpretation of paragraph 2(a). As previously found by the Panel in paragraph 7.116, the elements relevant to "respond[ing] positively to the development, financial and trade needs of developing countries" under paragraph 3(c) include, inter alia, that: " � (b) the design and modification of a GSP scheme may not result in a differentiation in the treatment of different developing countries; (c) a priori limitations may be used to set import ceilings so as to exclude certain imports originating in individual developing countries where the products concerned reach a certain competitive level in the market of the preference-giving country; and (d) differentiation is permitted among developing countries, in designing and modifying GSP schemes, in the case of special treatment to the least-developed countries, pursuant to paragraph 2(d). No other differentiation among developing countries is permitted by paragraph 3(c)".

7.172 Paragraph 3(c) thus allows for a priori limitations, as an exception to the general requirement of providing benefits to all developing countries. While, textually, this form of safeguard was negotiated and accepted in the Agreed Conclusions and carried over into the 1971 Waiver Decision, nothing in the Enabling Clause suggests that there was any intention to change the legal status of such a safeguard. The a priori limitations contemplated in the GSP system and incorporated into paragraph 3(c) impart meaning to paragraph 2(a), allowing a priori limitations as an exception to the general prohibition on differentiation among developing countries. For the Panel, in order to read paragraphs 2(a) and 3(c) harmoniously, what is permitted under paragraph 3(c) cannot be prohibited by paragraph 2(a).

7.173 The Panel further notes that paragraph 2(d) permits developed countries to discriminate between developing and the least-developed countries, by authorizing developed countries to grant "special treatment" to the least-developed countries. This provision was negotiated during the Tokyo Round and agreed explicitly in the Enabling Clause. The Panel considers that the function of paragraph 2(d), reflecting the intention of negotiators, is to create an additional exception to the requirement in paragraph 2(a) of providing GSP to all developing countries.

7.174 Based on the above analysis, the Panel finds that the term "developing countries" in paragraph 2(a) should be interpreted to mean all developing countries, with the exception that where developed countries are implementing a priori limitations 375 "developing countries" may mean less than all developing countries.

7.175 The Panel does not agree with the European Communities' argument that if "developing countries" in paragraph 2(a) were to mean all developing countries, it would render the term "generalized" in footnote 3 redundant. Based on the context and the preparatory work of the Enabling Clause, the term "generalized" in footnote 3 has two meanings: (i) providing GSP to all developing countries; and (ii) ensuring sufficiently broad coverage of products in GSP. The fact that there may be at least a partial overlap in the meaning of "generalized" and the meaning of "developing countries" in paragraph 2(a) does not make either of these terms redundant.

5. Conclusion on the Enabling Clause

7.176 From the above analysis, the Panel finds that: (i) the European Communities has the burden of demonstrating that its Drug Arrangements are consistent with the Enabling Clause; (ii) the term "non-discriminatory" in footnote 3 requires that identical tariff preferences under GSP schemes be provided to all developing countries without differentiation, except for the implementation of a priori limitations; (iii) the term "developing countries" in paragraph 2(a) means all developing countries, with the exception that where developed countries are implementing a priori limitations, "developing countries" may mean less than all developing countries; and (iv) paragraph 2(d), as an exception to paragraph 2(a), allows developed countries to provide special treatment to the least-developed countries.

7.177 Accordingly, the Panel finds that the European Communities' Drug Arrangements, as a GSP scheme, do not provide identical tariff preferences to all developing countries and that the differentiation is neither for the purpose of special treatment to the least-developed countries, nor in the context of the implementation of a priori measures. Such differentiation is inconsistent with paragraph 2(a), particularly the term "non-discriminatory" in footnote 3, and cannot be justified by paragraph 3(c) of the Enabling Clause.

  1. article XX(b) of gatt 1994 as a justification for the drug arrangements

1. Introduction

7.178 The Panel recalls its findings that the Drug Arrangements are not consistent with Article I:1 of GATT 1994 and are not justified under the Enabling Clause. The Panel further recalls the European Communities claim that the Drug Arrangements are justified by Article XX(b) of GATT 1994. Accordingly, the Panel will proceed to examine whether the Drug Arrangements are justified under Article XX(b).

7.179 Three issues arise in relation to the European Communities' invocation of Article XX(b) of GATT 1994 as justification for its Drug Arrangements: (i) whether the tariff preferences under the Drug Arrangements constitute a measure to protect human life or health in the European Communities; (ii) whether the tariff preferences under the Drug Arrangements are "necessary" within the meaning of Article XX(b); and (iii) whether the Drug Arrangements are applied in a manner constituting arbitrary or unjustifiable discrimination in violation of the chapeau of Article XX.

2. Arguments of the parties

7.180 The European Communities maintains that it is beyond dispute that narcotic drugs pose a risk to human life and health in the European Communities and that tariff preferences contribute to the protection of human life and health by supporting the measures taken by other countries against the illicit production and trafficking of those substances, thereby reducing their supply to the European Communities.376

7.181 On the assessment of the necessity of the measure, the European Communities maintains that according to Korea - Various Measures on Beef, "the more vital or important the common interests or values pursued, the easier it would be to accept as necessary the measures designed to achieve those ends". It argues that the protection of human life and health is the most vital and important value, and that, accordingly, the test of "necessary" in such a case should be given the broadest possible meaning.377

7.182 The European Communities cites a number of UN conventions, resolutions and other texts in support of its claim that the United Nations has established a comprehensive and well-defined international strategy against the drug problem. The European Communities indicates that this UN strategy calls for the adoption of comprehensive measures, implemented in accordance with the principle of shared responsibility. The European Communities indicates that in order to fight the drug problem, it is necessary to combine initiatives to reduce illicit demand for drugs with those to reduce their illicit supply. The latter requires complementing eradication of drug production and trafficking with the promotion of alternative economic activities.378 Providing greater market access is one of the components recommended.379 The European Communities thus argues that the Drug Arrangements, along with financial aid and other means, are part of a comprehensive strategy to combat drug abuse, and are one of the indispensable means..380

7.183 The European Communities contends that tariff preferences under the Drug Arrangements contribute to the development of the beneficiary countries while also reducing the supply of drugs into the European Communities. Consequently, the European Communities maintains, these tariff preferences contribute to the health objective of combating drug abuse in the European Communities.381 The European Communities also argues that other drug-affected developing countries do not need to be included under the Drug Arrangements because they receive the same or better tariff treatment under other European Communities' tariff schemes.382 The European Communities states as well that other developed countries do not need the assistance of the European Communities in combating drugs, and that the battle against drugs is a shared responsibility.383

7.184 The European Communities also maintains that, as part of a balanced and comprehensive approach, as recommended by the United Nations, it is indispensable to provide greater market access to support the alternative development activities of the beneficiary countries. In this regard, the European Communities states that it is not aware of any alternatives that would be equally effective but yet less trade-restrictive to provide effective market access to the products from the beneficiary countries.384

7.185 On whether the European Communities' measure complies with the chapeau to Article XX, the European Communities argues that the exclusion of other developing countries is not part of the "design and structure" of the Drug Arrangements, but rather of its application and, therefore, should be examined under the chapeau of Article XX.385

7.186 The European Communities maintains that the countries excluded from the Drug Arrangements do not pose a threat to the health of European Communities' citizens because they are not a significant source of supply.386

7.187 The European Communities argues that the designation of the beneficiary countries under the Drug Arrangements is based on an overall assessment of the gravity of the drug problem in each developing country in accordance with objective, non-discriminatory criteria. The assessment takes into account the importance of the production and/or trafficking of drugs in each country, as measured on the basis of available statistics, as well as their effects.387

7.188 The European Communities also maintains that the procedure for granting and withdrawal of special preferences is also non-discriminatory. According to the European Communities, the exclusion of the least-developed and Cotonou countries, as well as the bilateral free-trade partners is because they already benefit from other preferential tariff arrangements. The exclusion of developed countries is because the prevailing conditions are different in those countries.388

7.189 India argues that the Drug Arrangements "are not designed to achieve" the protection of human life and health in the European Communities. The European Communities merely asserts this but fails to substantiate its assertion. An examination of the design, structure and architecture of the Drug Arrangements shows that there is no express relationship between the objectives stated by the European Communities and the Drug Arrangements. India points to EC Council Regulation 2501/2001 and the Explanatory Memorandum of the Commission to the EC Council to illustrate that the declared objectives of the Drug Arrangements relate to "sustainable development" rather than the protection of health.389 .

7.190 India maintains that if Article XX(b) could be used to justify preferential tariff arrangements, the multilateral framework of trade negotiation would be undermined. Members would be able to accord preferential tariff treatment to selected WTO Members if this made a necessary contribution to the resolution of a health problem. Such Members would not be under an obligation to implement the market access concessions multilaterally negotiated.390

7.191 On the "necessity" requirement, India contends that the link between the Drug Arrangements and Article XX(b) is remote. India also contends that the simultaneous characterization of the Drug Arrangements as a measure providing more favourable treatment to developing countries and as a measure to protect human health in the European Communities is logically contradictory and based on several flawed assumptions, specifically, that all drug-producing countries export their illegal crops to the European Communities, that preferential tariff treatment will lead drug producers to produce other products covered by the tariff preferences and that traffickers will switch to trading products covered by the preferences.391 The effect of the measure, according to India, is contingent upon several external factors which are not in the control of the European Communities and which bring uncertainty. Furthermore, India contends that drug production and trafficking are organized crimes, motivated by profit alone, and preferential tariffs would not eradicate such crimes.392

7.192 In addition, India states that the Drug Arrangements cannot be deemed "necessary" because they are not granted to other developing countries affected with drug problems, such as Myanmar and Thailand, and other drug-affected developing countries and developed countries. India argues that the European Communities fails to demonstrate that tariff preferences under the Drug Arrangements are "necessary" for the 12 beneficiary countries but not "necessary" for other drug-affected countries.393

7.193 India also argues that the European Communities has not established that the Drug Arrangements are "the least trade restrictive measure" available to pursue its health objective. The Drug Arrangements restrict both the present and the future trade of excluded Members. India also submits that there are many alternative, less trade-restrictive measures that the European Communities could take to achieve its objective, for example, direct technical and financial assistance for the drug control efforts of affected countries or development aid and initiatives that do not restrict trade from other WTO Members.394

7.194 With regards to the chapeau, India argues that the European Communities fails to show how the tariff preferences do not constitute arbitrary or unjustifiable discrimination or a disguised restriction on international trade.395 India contends that the fact that the Drug Arrangements are only limited to a closed set of 12 beneficiary countries is clear evidence of discrimination. Moreover, India maintains that the selection process for the Drug Arrangements is not transparent and that there is no published procedure for the application and selection of beneficiaries.396 There is no evidence to show that the European Communities has in fact conducted an objective assessment based on objective criteria. In India's view, based on the European Communities' explanation, it is not possible to determine why, for instance, Pakistan was included while India and Paraguay were excluded. India mentions that, in the ex post justification that the European Communities presents to the Panel, it uses statistics that became available after the beneficiaries were selected.397

3. Panel's analysis

7.195 In considering the jurisprudence on the approach of analysing measures claimed to be justified under Article XX, the Panel recalls the following ruling of the Appellate Body in Korea - Various Measures on Beef:

"For a measure � to be justified provisionally under paragraph (d) of Article XX, two elements must be shown. First, the measure must be designed to 'secure compliance' with laws and regulations that are not themselves inconsistent with some provisions of the GATT 1994. Second, the measure must be 'necessary' to secure such compliance".398

7.196 Although the Panel notes that the Appellate Body ruling in Korea - Various Measures on Beef was made in the context of the invocation of Article XX(d), not Article XX(b), the Panel is of the view that the same considerations apply to both these subparagraphs of Article XX because the structure of Articles XX(b) and XX(d) is very similar. The Panel considers that the approach of analysis followed by the Appellate Body in Korea - Various Measures on Beef� is also appropriate for the analysis of a measure under Article XX(b).

7.197 Indeed, previous panels in the WTO have followed the same approach in their analysis of Article XX(b). In US - Gasoline, the panel stated that the United States had to establish three elements to demonstrate consistency of its measure with Article XX(b):

"(1) that the policy in respect of the measures for which the provision was invoked fell within the range of policies designed to protect human � life or health;

(2) that the inconsistent measures for which the exception was being invoked were necessary to fulfil the policy objective; and

(3) that the measures were applied in conformity with the requirements of the introductory clause of Article XX".399

7.198 In EC - Asbestos, the panel followed the same approach as used in US - Gasoline: "We must first establish whether the policy in respect of the measure for which the provisions of Article XX(b) were invoked falls within the range of policies designed to protect human life or health".400

7.199 Following this jurisprudence, the Panel considers that, in order to determine whether the Drug Arrangements are justified under Article XX(b), the Panel needs to examine: (i) whether the policy reflected in the measure falls within the range of policies designed to achieve the objective of or, put differently, or whether the policy objective is for the purpose of, "protect[ing] human � life or health". In other words, whether the measure is one designed to achieve that health policy objective; (ii) whether the measure is "necessary" to achieve said objective; and (iii) whether the measure is applied in a manner consistent with the chapeau of Article XX.

(a) Whether the Drug Arrangements constitute a measure under Article XX(b)

7.200 In examining whether the Drug Arrangements are designed to achieve the stated health objectives, the Panel needs to consider not only the express provisions of the EC Regulations, but also the design, architecture and structure of the measure, as set out by the Appellate Body's reasoning in Japan - Alcoholic Beverages II. There, the Appellate Body stated that "the aim of a measure may not be easily ascertained, nevertheless, its protective application can most often be discerned from the design, the architecture and the revealing structure of a measure".401 The same analytical approach was followed by the Appellate Body under Article XX in US - Shrimp.402

7.201 Examining the design and structure of Council Regulation 2501/2001403 and the Explanatory Memorandum of the Commission404, the Panel finds nothing in either of these documents relating to a policy objective of protecting the health of European Communities citizens. The only objectives set out in the Council Regulation (in the second preambular paragraph) are "the objectives of development policy, in particular the eradication of poverty and the promotion of sustainable development in the developing countries". The Explanatory Memorandum states that "[t]hese objectives are to favour sustainable development, so as to improve the conditions under which the beneficiary countries are combatting drug production and trafficking.405

7.202 Examining the structure of the Regulation, the Panel notes that Title I provides definitions of "beneficiary countries" and the scope of product coverage for various categories of beneficiaries. Title II then specifies the methods and levels of tariff cuts for the various preference schemes set out in the Regulation, including for the General Arrangements, Special Incentive Arrangements, Special Arrangements for Least Developed Countries and Special Arrangements to Combat Drug Production and Trafficking. Title II also provides Common Provisions on graduation. Title III deals with conditions for eligibility for special arrangements on labour rights and the environment. Title IV provides only that the European Communities should monitor and evaluate the effects of the Drug Arrangements on drug production and trafficking in the beneficiary countries. There are other titles dealing with temporary withdrawal and safeguard provisions, as well as procedural requirements. From an examination of the whole design and structure of this Regulation, the Panel finds nothing linking the preferences to the protection of human life or health in the European Communities.

7.203 The Panel recalls the European Communities' argument that providing market access is a necessary component of the comprehensive international strategy to fight the drug problem. In this regard, the Panel notes in particular the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the "1988 Convention") submitted by the European Communities as Exhibit 8. Most of the provisions in this Convention relate to commitments on law enforcement against drug trafficking, and the obligation of international cooperation. For example, there are international obligations relating to extradition and technical assistance. At the same time, Article 14.3(a) of the Convention encourages - but does not require - cooperation in relation to drug eradication efforts. It provides that "[s]uch cooperation may, inter alia, include support, when appropriate, for integrated rural development leading to economically viable alternatives to illicit cultivation. Factors such as access to markets, the availability of resources and prevailing socio-economic conditions should be taken into account before such rural development programmes are implemented. The parties may agree on any other appropriate measures of co-operation".

7.204 The Panel also notes the 1998 UN Resolution on "Measures to Enhance International Cooperation to Counter the World Drug Problem", adopting the "1998 Action Plan".406 In the preamble to the Action Plan, the General Assembly reaffirms that "the fight against illicit drugs must be pursued in accordance with the provisions of the international drug control treaties, on the basis of the principle of shared responsibility, and requires an integrated and balanced approach in full conformity with the purposes and principles of the Charter of the United Nations and international law". The preamble goes on to state that "effective crop control strategies can encompass a variety of approaches, including alternative development, law enforcement and eradication". "[A]lternative development" is defined in the preamble of the Action Plan as "a process to prevent and eliminate the illicit cultivation of plants containing narcotic drugs and psychotropic substances through specifically designed rural development measures in the context of sustained national economic growth and sustainable development efforts in countries taking action against drugs � ".407

7.205 The Panel notes that in the operative sections of the 1998 Action Plan, alternative development is stated to be an important component of the comprehensive strategy.408 The international community is encouraged to provide adequate financial and technical assistance for alternative development, with the objective of reducing illicit drug crops. The international community is also encouraged to provide greater access to markets for alternative development products.409

7.206 From its examination of these international instruments, including the 1988 Convention and the 1998 Action Plan, the Panel understands that alternative development is one component of the comprehensive strategy of the UN to combat drugs. The Panel has no doubt that market access plays a supportive role in relation to alternative development, but considers that market access is not itself a significant component of this comprehensive strategy. As the Panel understands it, the alternative development set out in the Action Plan depends more on the long-term political and financial commitment of both the governments of the affected countries and the international community to supporting integrated rural development, than on improvements in market access.

7.207 Even assuming that market access is an important component of the international strategy to combat the drug problem, there was no evidence presented before the Panel to suggest that providing improved market access is aimed at protecting human life or health in drug importing countries. Rather, all the relevant international conventions and resolutions suggest that alternative development, including improved market access, is aimed at helping the countries seriously affected by drug production and trafficking to move to sustainable development alternatives.

7.208 The Panel recalls India's argument that Article XX(b) cannot be used to justify tariff preferences that burden the trade of Members that are not the source of a health problem. In other words, according to India, Article XX cannot be used to authorize measures that would have the effect of transferring resources from a country that is not the source of the health problem to countries that are actually the source of the problem.410 India also contends that if the tariff preferences are necessary to protect the health of European Communities citizens, the logical implication is that the European Communities would not be able to implement the market access concessions negotiated in the Doha Work Programme.411 For India, if the European Communities' Article XX(b) defence were to be upheld, it would be exempted from the obligations under Articles I and II, and other developing country Members would not have the assurance that the European Communities would apply tariffs on an MFN basis in the future. This would necessarily undermine the multilateral tariff reduction negotiation process of the WTO.412

7.209 The Panel is of the view that this issue needs to be assessed through a weighing and balancing of the level of contribution of such a measure in achieving the health objectives and the level of damage of the measure to the multilateral negotiating framework. In the Panel's view, tariff preferences should not be lightly assumed to be an appropriate means to achieve health objectives under Article XX(b) because any tariff preferences deviating from obligations assumed in the multilateral framework would necessarily have a direct and negative impact on the multilateral system. Even under the Enabling Clause, where tariff preferences are authorized within the multilateral framework as a deviation from Article I:1, paragraph 3(b) prohibits GSP schemes that "constitute an impediment to the reduction or elimination of tariffs � on a most-favoured-nation basis".

7.210 In light of its analysis in paragraphs 7.200-7.209, the Panel finds that the policy reflected in the Drug Arrangements is not one designed for the purpose of protecting human life or health in the European Communities and, therefore, the Drug Arrangements are not a measure for the purpose of protecting human life or health under Article XX(b) of GATT 1994. Nevertheless, the Panel considers it would be appropriate to go on to examine whether the measure is "necessary" within the meaning of Article XX(b).

(b) Necessity of the measure

7.211 The Panel recalls the Appellate Body ruling in Korea - Various Measures on Beef that "the term 'necessary' refers, in our view, to a range of degrees of necessity. At one end of this continuum lies 'necessary' understood as 'indispensable'; at the other end, is 'necessary' taken to mean as 'making a contribution to'.413 We consider that a 'necessary' measure is, in this continuum, located significantly closer to the pole of 'indispensable' than to the opposite pole of simply 'making a contribution to". In order to determine where the Drug Arrangements are situated along this continuum between "contribution to" and "indispensable", the Panel is of the view that it should determine the extent to which the Drug Arrangements contribute to the European Communities' health objective. This requires the Panel to assess the benefits of the Drug Arrangements in achieving the objective of protecting life or health in the European Communities.

7.212 The Panel notes the Report of the Commission pursuant to Article 31 of Council Regulation No. 2820/98 of 21 December 1998 applying a multiannual scheme of generalized tariff preferences for the period 1 July 1999 to 31 December 2001. The assessment of the effects of the Drug Arrangements in this report reveals that the product coverage under the Drug Arrangements decreased by 31 per cent from 1999 through 2001. It also shows that the volume of imports from the beneficiary countries under the Drug Arrangements decreased during the same period. As the Panel understands it, this decrease in product coverage and in imports from the beneficiaries is due to the reduction to zero - or close to zero - of the MFN bound duty rates on certain products, including coffee products.414

7.213 The Panel considers that the above-referenced decreases in product coverage and depth of tariff cuts reflect a long-term trend of GSP benefits decreasing as Members reduce their import tariffs towards zero in the multilateral negotiations. Given this decreasing trend of GSP benefits, the contribution of the Drug Arrangements to the realization of the European Communities' claimed health objective is insecure for the future. To the Panel, it is difficult to deem such measure as "necessary" in the sense of Article XX(b). Moreover, given that the benefits under the Drug Arrangements themselves are decreasing, the Panel cannot come out to the conclusion that the "necessity" of the Drug Arrangements is closer to the pole of "indispensable" than to that of "contributing to" in achieving the objective of protecting human life or health in the European Communities.

7.214 A further point relevant to assessing the necessity of the measure under Article XX(b) is the fact that the EC Regulation provides for no monitoring mechanism on the effectiveness of the Drug Arrangements for protecting human life or health in the European Communities. The European Communities confirms that, while it monitors the impact of the Drug Arrangements on the drug-affected beneficiary countries, it has no monitoring mechanism relating to the impact of this measure on the protection of human life or health in the European Communities. In the Panel's view, the level of necessity of a measure must be linked to its effectiveness in achieving its objectives. Given that the European Communities has not considered it necessary to monitor and assess the effectiveness of the Drug Arrangements in achieving its health objective, it is difficult to assume that the level of necessity of this measure is closer to the pole of "indispensable" than to the pole of "contributing to".

7.215 The Panel also considers that it should examine the temporary suspension mechanism in EC Regulation No. 2501/2001. The Panel notes that Article 26 of this same Regulation provides a number of bases for temporary withdrawal of preferential arrangements. The reasons for suspension include, inter alia, the practice of slavery or forced labour, violations of labour standards as defined in the relevant ILO Conventions, shortcomings in customs controls on export or transit of drugs, unfair trading practices and the infringement of the objectives of certain fishery conservation conventions. This signifies that the Drug Arrangements and other preferential trade arrangements can be suspended for any one of these reasons at any time, regardless of the seriousness of the drug problem in the country concerned. Given this fact, it is difficult to see how the Drug Arrangements can be seen to be a "necessary" means to achieve such an important objective as the protection of human life or health.

7.216 Assuming a beneficiary country under the Drug Arrangements was not ensuring sufficient customs controls on export of drugs, or was infringing the objectives of an international fisheries conservation convention, the European Communities could then suspend the tariff preferences under the Drug Arrangements to this country, for reasons unrelated to protecting human life or health. Given that this beneficiary would be a seriously drug-affected country, the suspension of the tariff preferences would arrest the European Communities' support to alternative development in that beneficiary and therefore also stop efforts to reduce the supply of illicit drugs into the European Communities. The whole design of the EC Regulation does not support the European Communities' contention that it is "necessary" to the protection of human life and health in the European Communities, because such design of the measure does not contribute sufficiently to the achievement of the health objective.

7.217 The European Communities confirms that while Myanmar is one of the world's leading producers of opium, it is not necessary to separately include this country under the Drug Arrangements since it is already accorded preferential tariff treatment as a least-developed country. The Panel notes that the European Communities has suspended tariff preferences for Myanmar. The Panel notes, moreover, that EC Regulation 2501/2001 provides: the "[t]emporary withdrawal of tariff preferences in respect of imports of products originating in Myanmar should remain in force".415

7.218 Recalling that the European Communities confirms that it is required to continue its suspension of tariff preferences for Myanmar through the expiration of the EC Regulation on 31 December 2004, the Panel notes that any of the 12 beneficiaries is also potentially subject to similar suspension under the same Regulation, regardless of the seriousness of the drug problems in that country. With one or more of the main drug-producing or trafficking countries outside the scheme, it is difficult to see how the Drug Arrangements are in fact contributing sufficiently to the reduction of drug supply into the European Communities' market to qualify as a measure necessary to achieving the European Communities' health objective.416

7.219 In order to consider where the Drug Arrangements are situated along the continuum between "contributing to" and "indispensable", the Panel considers that it should also examine whether there are less WTO-inconsistent or less trade-restrictive measures reasonably available to the European Communities that would achieve the same objective.

7.220 The Panel notes the European Communities' arguments that it is not aware of any less trade-restrictive alternatives and that extending the preferences to all developing countries would make the Drug Arrangements much less effective. The European Communities also argues that the provision of financial assistance is not a true alternative to tariff preferences because, without market access, the alternative development would not be sustainable.417

7.221 The Panel also notes India's argument that financial and technical assistance, combined with initiatives consistent with WTO obligations, are reasonably available alternatives to the European Communities. In the view of the Panel, such initiatives could include, for example, GSP schemes or MFN tariff reductions that cover products of particular export interest to drug-affected countries. In fact, the preamble to the Agreement on Agriculture calls for WTO Members to provide greater market access on "[agricultural] products of particular importance to the diversification of production from the growing of illicit narcotic crops".

7.222 The Panel thus considers that at least one, less-inconsistent alternative is available to the European Communities to achieve its health objective, that of financial and technical assistance combined with multilaterally negotiated tariff reductions that provide sufficient tariff reductions on products of export interest to drug-affected countries. While the European Communities states that tariff reductions, offered more generally, would dilute the effect of the preferences to the beneficiary countries, the European Communities has not demonstrated to the satisfaction of the Panel that such alternatives are not reasonably available to it and would not achieve the equivalent effect as the Drug Arrangements. To the Panel, multilaterally negotiated tariff reductions on products for which the drug-affected countries have a real export interest would provide equivalent benefits to these countries. After all, such an approach to taking care of the interests of a certain group of countries was already sanctioned in the Agreed Conclusions for the least-developed countries.418

7.223 Based on the analysis in paragraphs 7.211-7.222, the Panel finds that: (i) the decrease in benefits under the Drug Arrangements does not support a finding that the measure is closer to the pole of "indispensable" than to that of "contributing to"; (ii) the temporary withdrawal mechanism, as well as its application to Myanmar, constitute an element of insecurity and do not contribute sufficiently to the achievement of the health objective; and (iii) the European Communities has not demonstrated that no less WTO-inconsistent alternative measure is reasonably available to it. Accordingly, the Panel finds that the Drug Arrangements are not "necessary to protect human � life or health", in accordance with Article XX(b) of GATT 1994.

7.224 Despite these findings, the Panel considers it would be appropriate to go on to examine whether the application of the Drug Arrangements is consistent with the chapeau of Article XX.

(c) "Chapeau"

7.225 Turning to the "chapeau" of Article XX, the Panel notes that it requires that health measures "not [be] applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail". In this respect, the Panel recalls the Appellate Body's analysis in US - Shrimp regarding the constitutive elements of the concept of "arbitrary or unjustifiable discrimination between countries where the same conditions prevail":

"In order for a measure to be applied in a manner which would constitute 'arbitrary or unjustifiable discrimination between countries where the same conditions prevail', three elements must exist. First, the application of the measure must result in discrimination. As we stated in US - Gasoline, the nature and quality of this discrimination is different from the discrimination in the treatment of products which was already found to be inconsistent with one of the substantive obligations of the GATT 1994, such as Articles I, III or XI. Second, the discrimination must be arbitrary or unjustifiable in character. � Third, this discrimination must occur between countries where the same conditions prevail".419

7.226 In line with this statement by the Appellate Body, the Panel will examine the consistency of the Drug Arrangements with the chapeau.

7.227 On what constitutes discrimination under the chapeau of Article XX, the Panel further recalls the Appellate Body statement in US - Shrimp that "discrimination results not only when countries in which the same conditions prevail are differently treated, but also when the application of a measure at issue does not allow for any inquiry into the appropriateness of the regulatory programme for the conditions prevailing in those exporting countries".420 Applying these standards for determining discrimination under the chapeau, the Panel notes the following.

7.228 First, the Panel notes the European Communities' argument that the assessment of the gravity of the drug issue is based on available statistics on the production and/or trafficking of drugs in each country. The Panel notes, however, from the statistics provided by the European Communities itself in support of its argument that the 12 beneficiaries are the most seriously drug-affected countries, that the seizures of opium and of heroin in Iran are substantially higher than, for example, the seizures of these drugs in Pakistan throughout the period 1994-2000.421 Iran is not covered as a beneficiary under the Drug Arrangements. Such treatment of Iran, and possibly of other countries, in the view of the Panel, is discriminatory. Bearing in mind the well-established rule that it is for the party invoking Article XX to demonstrate the consistency of its measure with the chapeau, the Panel notes that the European Communities has not provided any justification for such discriminatory treatment vis-�-vis Iran. Moreover, the European Communities has not shown that such discrimination is not arbitrary and not unjustifiable as between countries where the same conditions prevail.

7.229 Second, the Panel also notes, based upon statistics provided by the European Communities, that seizures of opium in Pakistan were 14,663 kilograms in 1994, as compared to 8,867 kilograms in 2000.422 Seizures of heroin in Pakistan were 6,444 kilograms in 1994 and 9,492 kilograms in 2000. The overall drug problem in Pakistan in 1994 and thereafter was no less serious than in 2000. The Panel considers that the conditions in terms of the seriousness of the drug problem prevailing in Pakistan in 1994 and thereafter were very similar to those prevailing in Pakistan in the year 2000. Accordingly, the Panel fails to see how the application of the same claimed objective criteria justified the exclusion of Pakistan prior to 2002 and, at the same time, its inclusion as of that year. And, given that the Panel cannot discern any change in the criteria used for the selection of beneficiaries under the Drug Arrangements since 1990, the Panel cannot conclude that the criteria applied for the inclusion of Pakistan are objective or non-discriminatory. Moreover, the European Communities has provided no evidence on the existence of any such criteria.

7.230 The Panel recalls the European Communities' argument that production of opium in neighbouring Afghanistan was revived following the events of 11 September 2001 due to the collapse of the Taliban regime. According to the European Communities, the ban imposed by the Taliban on drug production in 2001 resulted in a substantial decrease in opium production in that year but, with the collapse of the Taliban, and despite a new ban imposed by the new government in January 2002, most opium poppy fields had already started to sprout and the harvest in 2002 of this crop regained the pre-2001 levels. Consequently, the European Communities argues, these changes in Afghanistan were expected to have a considerable impact on Pakistan.

7.231 Despite these arguments, the Panel notes that the situation affecting Pakistan has been serious at least since 1994, including during the period before the Taliban banned drug production in 2001. Moreover, the European Communities' argument that the reimposition of a ban by the government in January 2002 could not prevent the production of opium poppies in that year does not explain why the ban could not work in subsequent years. Yet, as the Panel understands it, Pakistan will continue to be a beneficiary through at least the end of 2004.

7.232 Given the European Communities' unconvincing explanations as to why it included Pakistan in the Drug Arrangements in 2002 and the fact that Iran was not included as a beneficiary, the Panel is unable to identify the specific criteria and the objectivity of such criteria the European Communities has applied in its selection of beneficiaries under the Drug Arrangements.

7.233 The Panel notes that the European Communities has not provided any evidence on the existence of procedures or criteria, whether published or other, relating to the periodic selection of beneficiaries under the Drug Arrangements. While the European Communities provided a description of its selection process during this litigation, stating that it is based on the "overall assessment of the gravity of the drug problem in each developing country in accordance with objective criteria"423, and also referred to UN statistics on drug production and seizures, the Panel has no evidence before it to identify whether or not the European Communities actually conducted a selection process as described by the European Communities and whether such selection process, if it occurred, was actually based upon these UN statistics.

7.234 The Panel finds no evidence to conclude that the conditions in respect of drug problems prevailing in the 12 beneficiary countries are the same or similar, while the conditions prevailing in other drug-affected developing countries not covered by any other preferential tariff schemes are not the same as, or sufficiently similar to, the prevailing conditions in the 12 beneficiary countries.

7.235 Based on its analysis in paragraphs 7.225-7.234, the Panel finds that the European Communities has not demonstrated to the Panel's satisfaction that the application of the Drug Arrangements, with the exclusion of Iran and the inclusion of Pakistan, does not constitute arbitrary and unjustified discrimination between countries where the same conditions prevail. The lack of evidence to that effect makes it impossible for the Panel to assess the justifiability and non-arbitrariness of the measure. For these reasons, the European Communities has not established to the Panel's satisfaction that the application of the measure does not constitute "a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail".

4. Summary of findings on Article XX

7.236 For the reasons discussed in paragraphs 7.195-7.235, the Panel finds that the European Communities has not demonstrated that: (a) the Drug Arrangements are a measure designed for the purpose of protecting human life or health in the European Communities; or that (b) the Drug Arrangements are "necessary" for the protection of human life or health in the European Communities. Consequently, the Panel finds that the Drug Arrangements are not provisionally justifiable under Article XX(b). The Panel also finds that the European Communities has not demonstrated that the Drug Arrangements are not being applied in a manner constituting arbitrary or unjustifiable discrimination between countries where the same conditions prevail.

VIII. Conclusions and recommendations

8.1 The Panel concludes as follows:

(a) India has the burden of demonstrating that the European Communities' Drug Arrangements are inconsistent with Article I:1 of GATT 1994;

(b) India has demonstrated that the European Communities' Drug Arrangements are inconsistent with Article I:1 of GATT 1994;

(c) the European Communities has the burden of demonstrating that the Drug Arrangements are justified under paragraph 2(a) of the Enabling Clause;

(d) the European Communities has failed to demonstrate that the Drug Arrangements are justified under paragraph 2(a) of the Enabling Clause;

(e) the European Communities has failed to demonstrate that the Drug Arrangements are justified under Article XX(b) of GATT 1994;

(f) under Article 3.8 of the DSU, in cases where there is infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification of benefits under that agreement. Accordingly, because the Drug Arrangements are inconsistent with Article I:1 of GATT 1994 and not justified by Article 2(a) of the Enabling Clause or Article XX(b) of GATT 1994, the European Communities has nullified or impaired benefits accruing to India under GATT 1994.

8.2 The Panel recommends that the Dispute Settlement Body request the European Communities to bring its measure into conformity with its obligations under GATT 1994.

8.3 The Panel recalls India's request to the Panel to suggest to the European Communities that it bring its measure into conformity with its obligations under GATT 1994 by obtaining a waiver. The Panel further recalls the European Communities' statement that it has requested a waiver and that this waiver request is still pending. In light of the fact that there is more than one way that the European Communities could bring its measure into conformity with its obligations under GATT 1994 and the fact that the European Communities has requested a waiver which is still pending, the Panel does not consider it appropriate to make any particular suggestions to the European Communities as to how the European Communities should bring its inconsistent measure into conformity with its obligations under GATT 1994.

8.4 As a final concluding remark, the Panel notes that, in their written submissions and in the course of the hearings, the beneficiary countries of the Drug Arrangements have repeatedly emphasized the benefits of sustainable development for these countries derived from the operation of the Drug Arrangements. The Panel sympathizes with these concerns. At the same time, the Panel recalls that its terms of reference are not to determine the benefits to these countries derived from the Drug Arrangements, but to examine India's claim and the European Communities' defence regarding Article I:1 of GATT 1994 and the Enabling Clause.

IX. Dissenting opinion by one member of the panel

9.1 The Enabling Clause, like the 1971 Waiver, is a carefully negotiated decision by the CONTRACTING PARTIES to permit developed countries to afford preferential tariff treatment to imports from developing countries so that the multilateral trading system can provide equivalent benefits to developing and developed countries in reality as well as textually. The legal mechanism chosen to accomplish this, first in the 1971 Waiver and subsequently in the Enabling Clause, is to restore the right to developed countries to offer more favourable tariff treatment to exports from developing countries, with the expectation that the exercise of the right would result in development and an increase in exports from developing countries, factors reflected in paragraph 3 of the Enabling Clause. The preferences authorized under the Enabling Clause are a continuation of the "positive efforts designed to ensure that developing countries, and especially the least-developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development".424 They complement Part IV of the GATT 1994.425

9.2 As explained below, the CONTRACTING PARTIES did not create a general rule-exception relationship between the Enabling Clause and Article I. In the Enabling Clause the CONTRACTING PARTIES in effect made the 1971 Waiver permanent, expanded the scope of authorized preferences to address other aspects of the "system" developed within UNCTAD and added several important factors related to development and trade liberalization. The text of the Enabling Clause, its context (including the 1971 Waiver) and preparatory work make clear that it is the applicable WTO rule regarding tariff preferences for developing countries. Consequently, it is my view that India's claim should have been brought under the Enabling Clause.

9.3 In addition, this dispute poses a dilemma regarding how the Panel should view its terms of reference, when they seem to be broader than the claim made by the complaining party. This issue will be addressed following the discussion of the Enabling Clause.

9.4 The 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries426 (the formal title of the Enabling Clause) is a result of joint action by the CONTRACTING PARTIES during the Tokyo Round of multilateral trade negotiations. The Decision enables a Member to accord certain special and differential treatment to developing countries and authorizes limited forms of cooperation among developing countries. The Enabling Clause is a direct and immediate successor to the 1971 Waiver427, which permitted a generalized system of tariff preferences but was about to expire. There is no available negotiating history or explanation of the Enabling Clause. However, the 1971 Waiver and its history help to understand the object and purpose of the Enabling Clause and its relationship to Article I.

9.5 In the late 1960s and 1970s developing countries argued in UNCTAD that the benefits expected to result from freer trade had not occurred and that a new approach was needed.428 Eight years of discussions between developed and developing countries followed in UNCTAD and led to the 1971 Waiver permitting the implementation of the generalized system of preferences. The representative of the prospective donor countries described it as "a new experiment" and "a great step forward, a historic move".429

9.6 The 1971 Waiver, which is expressly cross-referenced in paragraph 2(a) and footnote 3 of the Enabling Clause, was created to permit a rebalancing, to improve trade benefits for the many developing countries that had joined the multilateral trading system during the 1960s and 1970s and to supplement Part IV of the General Agreement. The Waiver implemented a carefully negotiated "system"430, "scheme"431 or "arrangements"432 that permitted a range of special and differential treatment and that was expected to allow developing countries also to reap the benefits of market access opportunities.

9.7 The uniqueness and significance of the agreed action was noted by many representatives in the GATT Council meeting that considered the developed countries' request for a waiver of their Article I obligations so that they could implement the UNCTAD generalized system of preferences. The approval of a system of trade preferences was described as "an historical event",433 "an historic event"434, "considerable potential which the Scheme embodied for the improvement in the conditions governing international trade of developing countries"435, a decision of "enormous importance, not only for the future of international trade relations, but in terms of the interpretation and meaning of the General Agreement itself"436, of "historic importance"437, "an historic occasion in the field of international trade relations, representing at the same time an important evolutionary step in the history of GATT".438 The representative of Greece described it as a "movement of solidarity for the benefit of world trade".439The representative from Uruguay noted that "it was obvious that after this waiver was voted upon, the General Agreement would be different from what it had been so far."440 These statements reflect the change anticipated and an evolving discussion within the United Nations system about the then existing and potential trade rules and the developing countries.441

9.8 The developed countries were asked by UNCTAD to obtain the necessary legislative or other sanction in order to implement the generalized system of preferences.442 In the GATT, they chose to request a waiver of their Article I obligation443, as made possible by Article XXV:5. They applied for, and were granted, a ten-year waiver from the "provisions of Article I" to implement tariff preferences as described in the terms of the Waiver.444

9.9 This lifting of the Article I obligation of the preference-granting countries was widely understood and intended. The Chairman of the GATT Council had introduced the matter by stating that the application was for a waiver "from the obligations under Article I of the General Agreement".445 The spokesman for the prospective preference-granting countries asked the GATT Council to consider the proposed waiver "from the obligations under Article I of the General Agreement so as to make possible the implementation of a system of generalized preferences". He described it as a "departure from the basic most-favoured-nation principle incorporated in Article I of the General Agreement".446

9.10 The representative of Turkey called it a "deviation from the most-favoured-nation principle".447 If there had been a dispute under the waiver, the complaining party would not have claimed under Article I because its rights under that provision had been relinquished, as had the contractual MFN obligation of the preference-giving country.448

9.11 As was true regarding the 1971 Waiver, the object and purpose of the Enabling Clause are to benefit developing countries and to promote their trade. The language of the Clause describes actions by the developed, or donor, countries that grant the preferences. It enables on a permanent basis Members to accord "differential and more favourable treatment" to developing countries without according the same treatment to other contracting parties. Four types of treatment are authorized, including preferential tariff treatment as described in the 1971 Waiver. Members maintain discretion to determine, for example, whether to offer tariff preferences, the scope of product coverage and the applicable tariff levels. All of these prerogatives had been carefully negotiated in UNCTAD and were reflected in the texts of the 1971 Waiver and the Enabling Clause.

9.12 The Enabling Clause continues the relationship between trade preferences for developing countries and Article I that was agreed in UNCTAD and in the 1971 Waiver. There is no evidence that the CONTRACTING PARTIES intended to alter this relationship in 1979. A new Decision was agreed primarily because GATT practice limited the duration of Article XXV waivers. The legal nature of the Enabling Clause and the proper reading of the word "notwithstanding" in its paragraph 1 result from this very particular history and from the link between the Enabling Clause and the 1971 Waiver.

9.13 The words "Notwithstanding the provisions of Article I of the General Agreement �" indicate the relationship between the Enabling Clause and Article I. "Notwithstanding" means nevertheless or in spite of a hindrance of some kind449, in this case in spite of the commitments Members had made under Article I. It is a traditional legal term that, even when standing alone, has a long history. The word derives from the Latin term "non obstante", indicating that the king or ruler had granted a licence, charter or some other right despite the law, not as an exception to the law. This certainly was the relationship envisaged by the preference-giving countries, as stated in the OECD report450 and during the meeting of the GATT Council that had considered the 1971 Waiver. Again, there is no indication that the CONTRACTING PARTIES intended to alter this relationship in 1979.

9.14 Such a reading of "notwithstanding" does not undermine the WTO goals of an improved multilateral trading system and economic development.451 Paragraph 3 and footnote 3 of the Enabling Clause insert factors that will promote the trade of developing countries yet protect the multilateral system.

9.15 While the Appellate Body has at times followed the traditional rule-exception analysis, it has also recognized that legal relationships can differ from, and can be more complex than, the traditional general rule (e.g., Article I or III) - exception (e.g., Article XX or XXIV) relationship. EC - Hormones452 and Brazil - Aircraft453 are illustrative. As explained above, the relationship between the Enabling Clause and Article I is not a general rule-exception relationship. The Enabling Clause remains in the nature of a waiver from developed countries' obligations under Article I although, because the Enabling Clause is permanent, it cannot be covered by Article XXV:5. The CONTRACTING PARTIES, through their 1979 Decision, continued the then existing relationship between the Enabling Clause and Article I.

9.16 Another important consideration is that the CONTRACTING PARTIES expected and desired that the right to grant tariff preferences be exercised. That expectation continues. Although the granting of tariff preferences under the Enabling Clause is optional and a matter for each Member to decide and is not an obligation, it was understood that only simultaneous, concerted action by most developed countries would create the trade benefits intended and discussed in UNCTAD and later in the GATT.454 The discussions in UNCTAD concluded with the expectation of simultaneous offerings of special and differential tariff treatment by developed countries, whose joint impact would be to increase significantly the trade benefits available to developing countries.455 Consequently neither the Enabling Clause nor the 1971 Waiver were limited exceptions. Both are major changes in approach and intended to have a major change for the good in the effect of trade rules.456

9.17 In this sense, the Enabling Clause permits a series of individual, preferential measures each of which contributes to the goal of better market access for exports from developing countries and, consequently, increased world trade. In its anticipation of simultaneous actions the Enabling Clause is more like the group action contemplated by Article II of GATT 1994457 than the individual action described in many provisions of the WTO agreements. Action under the Enabling Clause benefits the trading system, in contrast to some other permitted individual actions, such as those under Article VI, Article XIX, or even Article 3.3 of the SPS Agreement.458

9.18 Turning to the second issue, although India has couched its claim in somewhat ambiguous and artful language, it is apparent from its submissions and from its statement at the oral hearing that it has made a claim under Article I of GATT 1994 regarding an aspect of the European Communities' tariff preferences programme for developing countries. It considers the 1979 Enabling Clause an exception to Article I and, as such, an affirmative defence. India argued in its first submission and subsequently that the Drug Arrangements are not justified under the Enabling Clause.459 In contrast the European Communities characterizes the Enabling Clause as an autonomous right, similar to Article 3.3 of the SPS Agreement.

9.19 Given the terms of reference of this Panel, we are confronted with the dilemma of either following the mandate from the Dispute Settlement Body and thereby considering a claim that India says is not its position, or accepting the theory put forward by India in these proceedings and thereby considering the Enabling Clause as a possible defence but not a claim as envisaged by the terms of reference. If we adopt the broader reading of the terms of reference, the Panel will add a claim regarding the Enabling Clause to India's case and will consider a claim that India says it is not making. Also, in deciding the scope of the "matter", the Panel must preserve the "rights and obligations" of Members under the covered agreements460, one of which is the Enabling Clause, and must assess the applicability of the relevant covered agreements.461

9.20 The Dispute Settlement Body established this Panel with the standard terms of reference: "To examine, in the light of the relevant provisions of the covered agreements cited by India in document WT/DS246/4, the matter referred to the DSB by India in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."462 India had requested the DSB to establish a panel to examine whether the Drug Arrangements, any implementing rules and regulations, any amendments and their application "are consistent with Article I:1 of GATT 1994 and the requirements set out in paragraphs 2(a), 3(a) and 3(c) of the Enabling Clause."463 While it appears that India made two claims (an Article I:1 claim and an Enabling Clause claim), India's subsequent explanation of its request is limited to the MFN claim. India calls the MFN issue its "material" claim. It asserts that the Enabling Clause is an affirmative defence - not a claim - and concludes that the European Communities has not complied with the conditions of the Enabling Clause.464 In arguing that the Enabling Clause is an affirmative defence, India must admit that it is not a claim and that its reference to the Enabling Clause is an argument in response to the anticipated defence.

9.21 The scope of India's claim is important because, under my analysis, India's claim should be raised under the Enabling Clause. If India's claim is limited to Article I - as India says - it has chosen the wrong theory to characterize this matter and the complaint should be dismissed. A panel may not address legal claims falling outside its terms of reference and, to protect the rights of Members whose measures are challenged, should not add claims and theories to those put forward by the complaining party.

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Return to Table of Contents


292 Reply of India to question No. 47 from the Panel to both parties; second written submission of India, para. 105.

293 Reply of India to question No. 12 from the Panel to both parties.

294 Second written submission of India, para. 105; second oral statement of India, para. 13.

295 Reply of India to question No. 14 from the Panel to both parties.

296 Reply of India to question No. 14 from the Panel to both parties.

297 Reply of India to question No. 18 from the Panel to both parties.

298 Reply of India to question No. 16 from the Panel to both parties; second written submission of India, paras. 106-112

299 Reply of India to question No. 19 from the Panel to both parties; second written submission of India, para. 104.

300 Second written submission of India, paras. 109-112.

301 Second written submission of India, paras. 75 and 97; reply of India to question No. 44 from the Panel to both parties.

302 Reply of the European Communities to question No. 12 from the Panel to both parties; second written submission of the European Communities, para. 51.

303 Reply of the European Communities to question No. 12 from the Panel to both parties.

304 Reply of the European Communities to question No. 17 from the Panel to both parties; reply of the European Communities to question No. 8 from the Panel to India, para. 106; second written submission of the European Communities, para. 51.

305 Reply of the European Communities to question No. 8 from the Panel to India, paras 101, 102-106.

306 Reply of the European Communities to question No. 17 from the Panel to both parties; reply of the European Communities to question No. 8 from the Panel to India, para. 109.

307 Reply of the European Communities to question No. 17 from the Panel to both parties.

308 Reply of the European Communities to question No. 17 from the Panel to both parties, paras. 57, 62-64.

309 Reply of the European Communities to question No. 8 from the Panel to India, para. 110.

310 Second written submission of the European Communities, para. 37; reply of the European Communities to question No. 44 from the Panel to both parties.

311 Reply of the Andean Community to question No. 10 from the Panel to all third parties.

312 Reply of the United States to question No. 6 from the Panel to all third parties; first oral statement by the United States, para. 12.

313 Reply of the United States to questions Nos. 6 and 10 from the Panel to all third parties.

314 Agreed Conclusions, Section 1, para. 9.

315 Ibid., Section I, para. 11.

316 C/M/69, pp. 1-2.

317 TD/B/AC.5/34.

318 TD/B/AC.5/24.

319  TD/B/330.

320 TD/B/AC.5/24, 14 November 1969.

321 TD/B/AC.5/34, 19 September 1970.

322 TD/B/AC.5/24, para. 15.

323 TD/B/AC.5/24, para. 18.

324 TD/B/AC.5/24, para. 18.

325 TD/B/AC.5/24, para. 19.

326 TD/B/AC.5/24, paras. 20-21.

327 Review and evaluation of the generalized system of preferences, 9 January 1979, TD/232, paras. 19-20).

328 TD/B/330, Section III.

329 TD/B/AC.5/34/Add.1, Annex 1, Section I.

330 Agreed Conclusions, Section III, para.1.

331 Ibid.

332 See "The Generalized System of Preferences", Note by the Secretariat, WT/COMTD/W/93. Several of the GSP schemes mentioned in this Note contain different forms of "graduation" mechanisms.

333 However, according to paragraph 3(b) of the Enabling Clause, the requirement as to the general level of product coverage and the depth of tariff cuts shall not constitute an impediment to the reduction or elimination of tariffs and other restrictions to trade on an MFN basis.

334 First written submission of India, para. 57.

335 Reply of India to question No. 10 from the Panel to both parties.

336 Reply of India to question No. 9 from the Panel to both parties.

337 Reply of India to question No. 9 from the Panel to both parties.

338 Reply of India to question No. 9 from the Panel to both parties; second written submission of India.

339  Reply of India to question No. 9 from the Panel to both parties.

340 Second written submission of India, paras. 97-100.

341 Reply of India to question No. 9 from the Panel to both parties; Reply of India to question No. 16 from the Panel to India.

342 Reply of India to question No. 9 from the Panel to both parties; Reply of India to question No. 16 from the Panel to India.

343 Reply of India to question No. 9 from the Panel to both parties.

344 First written submission of the European Communities, para. 66.

345 Reply of the European Communities to question No. 9 from the Panel to both parties, paras. 26-27.

346 Reply of the European Communities to question No. 10 from the Panel to both parties, paras. 36 and 39.

347 Reply of the European Communities to question No. 9 from the Panel to both parties, paras. 31-32; Reply of the European Communities to question No. 33 from the Panel to both parties, para. 5.

348 Reply of the European Communities to question No. 10 from the Panel to both parties, paras. 38-40.

349 First written submission of the European Communities, para. 85.

350 Second written submission of the European Communities, para. 37.

351 Second written submission of the European Communities, para. 38; Reply of the European Communities to question No. 52 from the Panel to both parties, para. 57; European Communities' comment on India's reply to question No. 16 from the Panel to India; Reply of the European Communities to question No. 9 from the Panel to both parties, para. 27.

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

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

354 Report by the Special Group on Trade with Developing Countries of the Organization for Economic Cooperation and Development, 29 January 1968, TD/56.

355 Charter of Algiers, adopted on 24 October 1967, TD/38.

356 First Session of UNCTAD, Final Act and Report, Rec. A.II.1.

357 TD/38.

358 TD/56.

359 See Part Two, B. Expansion of Exports of Manufactures and Semi-manufactures, para. 1, Charter of Algiers, adopted on 24 October 1967, in: Proceedings of the Second Session of UNCTAD, Vol. I: Reports and Annexes, TD/38, p 434.

360 TD/56.

361 See Part One, Report by the Special Group on Trade with Developing Countries submitted by the OECD on 29 January 1968 to UNCTAD, in: Proceedings of the Second Session of UNCTAD, Vol. I: Reports and Annexes, TD/56, p. 79.

362 Ibid, Part One, "H - Preferences received by some developing countries in the markets of some developed countries", p. 79.

363 See "the Problems of special preferences - trade policy aspects, Reports by the secretariat of UNCTAD" on 12 January 1968, in Proceedings of the Second Session of UNCTAD, Vol. V, Special problems in world trade and development, pp. 39-49.

364 Proceedings of UNCTAD, Vol.1, Final Act and Report adopted on 16 June 1964. (Emphasis added)

365 First Session of UNCTAD, Final Act and Report, Rec. A.II.1.II.A.6. (Emphasis added)

366 Reply of the United States to question No. 6 from the Panel to all third parties; first oral statement by the United States, para. 12.

367 TD/B/AC.5/34.

368 See Annex V.

369 Reply of India to question No. 9 from the Panel to both parties.

370 Reply of India to question No. 9 from the Panel to both parties.

371 Reply of India to question No. 9 from the Panel to both parties.

372 Reply of the European Communities to question No. 9from the Panel to both parties; second written submission of the European Communities, para.16.

373 Reply of the European Communities to question No. 10 from the Panel to both parties, para. 10.

374 Appellate Body Report, Korea - Dairy, para. 81.

375 A detailed description of a priori limitations is provided in paras. 7.108 and 7.109.

376 Executive summary of the first written submission of the European Communities, paras. 50 and 55.

377 Executive summary of the first written submission of the European Communities, para. 54.

378 Executive summary of the first written submission of the European Communities, paras. 30-33.

379 Reply of the European Communities to question No. 25 from the Panel to both parties; first written submission of the European Communities, para. 192.

380 Reply of the European Communities to question No. 25 from the Panel to both parties.

381 Reply of the European Communities to question No. 21 from the Panel to both parties.

382 Reply of the European Communities to question No. 24 from the Panel to both parties.

383 Second written submission of the European Communities, paras. 66-70.

384 Executive summary of the second written submission of the European Communities, paras. 52-55.

385 Executive summary of the first written submission of the European Communities, para. 60; executive summary of the second written submission of the European Communities, para. 44.

386 Executive summary of the second written submission of the European Communities, para. 48; reply of the European Communities to question No. 15 from the Panel to the European Communities.

387 Executive summary of the first written submission of the European Communities, para. 34.

388 Executive summary of the first written submission of the European Communities, para. 61.

389 Executive summary of second written submission of India, para. 27.

390 Executive summary of second written submission of India, para. 33.

391 Second written submission of India, para. 155; reply of India to question No. 21 from the Panel to both parties.

392 Executive summary of second written submission of India, para. 28.

393 Reply of India to question No. 24 from the Panel to both parties.

394 Executive summary of second written submission of India, paras. 30-31; reply of India to question No. 21 from the Panel to both parties.

395 Second written submission of India, paras. 159-162.

396 Ibid., para. 32.

397 First oral statement of India, para. 24; Executive summary of second written submission of India, para. 25.

398 Appellate Body Report, Korea - Various Measures on Beef, para. 157.

399 Panel Report, US - Gasoline, para. 6.20.

400 Panel Report, EC - Asbestos, para. 8.184.

401 Appellate Body Report, Japan - Alcoholic Beverages II, p. 29; see also Appellate Body Report, Argentina - Textiles and Apparel, para. 55.

402 Appellate Body Report, US - Shrimp, para. 137. There the Appellate Body stated: "We must examine the relationship between the general structure and design of the measure here at stake, Section 609, and the policy goal it purports to serve, that is, the conservation of sea turtles".

403 Exhibit India-6.

404 Exhibit India-7.

405 Explanatory Memorandum, para. 35, Exhibit India-7.

406 Exhibit EC-9.

407 Ibid.

408 Ibid., para. 8.

409 Ibid.

410 Reply of India to question No. 55 from the Panel to both parties.

411 Second written submission of India, para. 163.

412 Comments of India to Replies of the European Communities to question No. 55 from the Panel to both parties.

413 Appellate Body Report, Korea - Various Measures on Beef, para. 161.

414 Exhibit EC-24.

415 Council Regulation (EC) No. 2501/2001, Preamble (23).

416 Appellate Body Report, Korea - Various Measures on Beef, paras. 164-166.

417 Replies to Panel Questions to EC, No. 52

418 Agreed Conclusions, TD/B/330, Section V, para. 2.

419 Appellate Body Report, US - Shrimp, para. 150.

420 Appellate Body Report, US - Shrimp, para. 165.

421 First written submission of the European Communities, para. 123. In this regard, the Panel recalls that, according to the European Communities, its inclusion of Pakistan in the Drug Arrangements is due to the seriousness of drug trafficking, based on statistics of drug seizures, not of drug production. First written submission of the European Communities, para. 136.

422 Ibid.

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

424 Preamble, Agreement Establishing the World Trade Organization.

425 It is understood that the value of these tariff preferences has lessened because of tariff reductions resulting from multilateral trade negotiations and regional arrangements, in particular. Nevertheless, generalized tariff preferences remain an important type of special and differential treatment.

426 L/4903, BISD 26S/203-205.

427 L/3545, BISD 18S/24-26.

428 Several representatives made statements at the GATT Council meeting such as "economically unequal countries had to be treated unequally" (Peru) and "equal rules for unequal partners did not bring about equality of trading opportunities" (Israel). C/M/69.

429 C/M/69.

430 The Waiver is entitled "Generalized System of Preferences". The same term was used by UNCTAD. See Resolution 21(II), Preamble and para. 1 and Statement by the Group of 77 in Part II.B of the Charter of Algiers.

431 Statement of the Chairman, C/M/69.

432 OECD, Report by the Special Group on Trade with Developing Countries of the Organisation for Economic Cooperation and Development, 29 Jan. 1968. OECD also referred to "treatment".

433 Statement of India, C/M/69.

434 Statement of Argentina, C/M/69.

435 Statement of Jamaica, C/M/69.

436 Statement of Uruguay, C/M/69.

437 Statement of Greece, C/M/69.

438 Statement of the United Arab Republic, C/M/69.

439 C/M/69.

440 C/M/69.

441 See, e.g., Article 30 of its Draft Articles on Most-Favoured-Nation Clauses, which were submitted to the United Nations General Assembly between the 1971 Waiver and the 1979 Enabling Clause by the International Law Commission: "The present articles are without prejudice to the establishment of new rules of international law in favour of developing countries."

442 UNCTAD Trade and Development Board, Decision 75(S-IV), Generalized System of Preferences.

443 No country has a right to MFN treatment unless a country with which it trades has undertaken an Article I obligation toward it. Given Article I, the preference-giving countries had an obligation to accord MFN treatment to all the GATT contracting parties and the other contracting parties had rights within the limits of that clause.

Only the developed or preference-giving countries had obligations that would be contravened by the offer of preferences. Under the waiver, where the "provisions of Article I shall be waived", the contracting parties relinquished their right to demand MFN treatment for their products when the preference giving country complied with the conditions of the waiver.

444 Decision of 25 June 1971. The waiver had a ten year duration and was granted only "to the extent necessary" to implement the preferential tariff treatment.

445 C/M/69, para. 1.

446 C/M/69. The preference giving countries had adopted the notion of a "departure" from Article I in OECD, Report by the Special Group on Trade with Developing Countries, Part Two, para. 1. (1968).

447 C/M/69. Moreover, the countries affected by this system of preferences agreed not to invoke their rights to MFN treatment.

448 In EC - Bananas III, the Appellate Body considered, among many other issues, the scope of the EC's 1994 waiver from the "provisions of paragraph 1 of Article I � to the extent necessary". In analyzing the matter, the Appellate Body concluded that Article I.1 was waived so considered not Article I but whether the EC had complied with the conditions of the Lom� waiver. Paras. 164 et seq.

449 Notwithstanding is defined as "in spite of, without regard to or prevention by". The New Shorter Oxford English Dictionary, 4th Edition, p. 1947.

450 The Report refers to the "rights granted to them by any General Agreement waiver" (para. 14) and states that the "special tariff treatment was a waiver from the basic General Agreement on Tariffs and Trade rule and therefore not an obligation" (para. 35).

451 Paragraph 3 of the Enabling Clause is particularly significant. It requires that preferential treatment be "designed to facilitate and promote the trade of developing countries" and "respond effectively to the development, financial and trade needs of developing countries." Preferences may neither raise barriers to or create undue difficulties for the trade of other Members nor constitute an impediment to broader MFN reductions or elimination of tariffs and other trade restrictions.

452 Appellate Body Report, EC - Hormones. In both EC - Hormones and EC - Sardines, the Appellate Body found no general rule-exception relationship even though the word "except" was used in both Article 3.1 of the SPS Agreement and Article 2.4 of the TBT Agreement. As stated by the Appellate Body in EC - Hormones, Article 3.1 "simply excludes from its scope of application the kinds of situations covered by Article 3.3 � ." Appellate Body Report, EC - Hormones, para. 104.

453 Appellate Body Report, Brazil - Aircraft.

454 The representative of Argentina mentioned the "basic assumption" that "all donor countries would give preferences and thus share the burden". C/M/69.

455 This contrasts with individual actions for domestic purposes under exceptions to Article I, such as Article VI measures.

456 This contrasts with the somewhat limited derogation at issue in US - Wool Shirts and Blouses.

457 Article XXIV, considered an exception to Article I, is a more limited form of joint action, which often raises questions about the contribution of the Article XXIV arrangement to trade liberalization.

458 The Appellate Body described Article 3.3 of the SPS Agreement as an "autonomous right" in the EC - Hormones dispute . In disputes involving these Articles, the Appellate Body appears to begin its analysis not with Article I or Article III but with the exception, the autonomous right or the specific agreement at issue.

459 Cf. the distinction between a claim and an argument as explained by the Appellate Body in EC - Sardines, para. 280 and EC - Hormones, para. 156.

460 DSU, Article 3.2.

461 DSU, Article 11.

462 European Communities - Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/5 (6 March 2003).

463 European Communities - Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/4 (9 December 2002). Cf. India's Request for Consultations. WT/DS246/1 (12 March 2002).

464 Both parties made arguments about the Enabling Clause.