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Turkey - Restrictions on Imports of Textile and Clothing Products

Report of the Panel

(Continued)


    (b) Arguments

  1. India noted that the presumption that measures inconsistent with the GATT impaired the benefits accruing to a Member under the GATT could not be rebutted with a demonstration that the restrictions had no trade effect. 154 It was not possible to balance the adverse impact of the (discriminatory ) quotas against any favourable impact of the (MFN) tariff reductions for the purpose of determining the consistency of the quotas with Articles XI and XIII of GATT and Article 2.4 of the ATC. 155
  2. India submitted further that the import restrictions which Turkey had imposed since 1 January 1996 in the context of its trade agreement with the European Communities on textiles and clothing products from India impaired benefits accruing to India under Articles XI and XIII of GATT and Article 2.4 of ATC.
  3. India noted later that, though Turkey claimed (in answering a question from India) that the restrictions at issue had "no economic substance" and that India was therefore not subject to nullification or impairment, it had not elaborated this point in its defense. India considered as violating the principle of due process recognized by the Appellate Body to be inherent in the DSU if the defendant were permitted to present a defense in its first submission but leave the presentation of all the facts and arguments substantiating that defense to its rebuttal submission, thereby either depriving the complainant of the opportunity to respond to that defense in its rebuttal submission or delaying the panel procedures if such an opportunity was granted.
  4. India therefore did not know how Turkey would later substantiate its claim. It had assumed, for the purposes of the argument, that Turkey would attempt to demonstrate on the basis of trade statistics that no impairment had occurred. India was of the view that such an attempt could not succeed. 156
  5. India noted that, in 1960, the CONTRACTING PARTIES to GATT 1947 decided that a GATT-inconsistent measure was presumed to cause nullification or impairment and that it was up to the party complained against to demonstrate that this was not the case. 157 This principle was taken over in the dispute settlement procedures adopted at the end of the Tokyo Round, 158 and was now reflected in Article 3.8 of the DSU. In this context, Turkey might claim that the "adverse impact" to which this provision referred was the trade impact caused by its failure to carry out its obligations under Articles XI and XIII of GATT and Article 2.4 of the ATC and that, therefore, a demonstration that the exports of India did not decline was sufficient to rebut the presumption. However, Article 3.8 of the DSU needed to be interpreted in the light of GATT 1947 jurisprudence reflected in this provision. According to this jurisprudence, the "adverse impact" of the violation of a provision prescribing conditions of competition could not be determined on the basis of the actual impact of the violation on trade flows.
  6. India recalled that in the Japan-Measures on Imports of Leather panel proceedings, Japan argued that, since the quotas had not been fully utilised, they had not restrained trade and had consequently not caused a nullification or impairment of benefits accruing under Article XI of GATT. The panel rejected the argument on the grounds that the existence of a QR "should be presumed to cause nullification or impairment not only because of any effect it had on the volume of trade but also for other reasons, e.g., it would lead to increased transaction costs and would create uncertainties which could affect investment plans". 159 This ruling indicated that a demonstration that no adverse trade impact had as yet occurred was insufficient to rebut the presumption. The rationale of prohibiting QRs required a demonstration that there was no potential future impact.
  7. This reasoning was carried further in the United States-Taxes on Petroleum and Certain Imported Substances case. The United States argued that the tax differential between domestic and imported petroleum products was not causing nullification or impairment because it was so small that it could not possibly cause trade effects. However, the panel ruled that Article III did not protect expectations on trade volumes but expectations on competitive conditions accorded to imported products, and that a measure establishing conditions of competition less favourable for imported products than for domestic products was therefore ipso facto a nullification of the benefits accruing under that provision, whether or not trade volumes were adversely affected. The panel explained its ruling as follows:
  8. "An acceptance of the argument that measures which have only an insignificant effect on the volume of exports do not nullify or impair benefits accruing under Article III:2, first sentence, implies that the basic rationale of this provision - the benefit it generates for the contracting parties - is to protect expectations on export volumes. That, however, is not the case. Article III:2, first sentence, obliges contracting parties to establish certain competitive conditions for imported products in relation to domestic products ... It is conceivable that a tax consistent with the national treatment principle (for instance a high but nondiscriminatory excise tax) has a more severe impact on the exports of other contracting parties than a tax that violates that principle (for instance a very low but discriminatory tax). The case before the Panel illustrates this point: the United States could bring the tax on petroleum in conformity with Article III:2, first sentence, by raising the tax on domestic products, by lowering the tax on imported products or by fixing a new common tax rate for both imported and domestic products. Each of these solutions would have different trade results, and it is therefore logically not possible to determine the difference in trade impact ... resulting from the nonobservance of this provision. For these reasons, Article III:2, first sentence, cannot be interpreted to protect expectations on export volumes; it protects expectations on the competitive relationship between imported and domestic products. A change in the competitive relationship contrary to that provision must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement." 160

  9. In its report on EC-Bananas III, the Appellate Body ruled that the reasoning in the GATT panel report cited above applied also in that case, 161 which concerned, inter alia, the EC obligations under Articles XI and XIII of GATT. It thereby rejected the argument of the European Communities that the benefits accruing to the United States under these provisions had not been impaired because the United States had not exported a single banana to the European Communities, nor was it in a position to do so. The Appellate Body thereby rejected as untenable the idea that a measure might be inconsistent with a GATT provision prescribing certain conditions of competition but nevertheless not impair benefits accruing under it for lack of any trade effect. India observed that the provisions at issue in the present dispute - Articles XI and XIII of GATT and Article 2.4 of the ATC - were all provisions prescribing conditions of competition. Any attempt by Turkey to rebut the presumption of Article 3.8 of the DSU with trade statistics could not therefore but fail.
  10. India also referred to the case involving an Italian scheme under which credit facilities were accorded to farmers in a manner discriminating against imported agricultural machinery, where the panel reacted to Italy�s claim that the measure had no adverse trade effects by stating: "If the considered view of the Italian Government was that these credit facilities had not influenced the terms of competition on the Italian market, there would not seem to be a serious problem in amending ... the law so as to avoid any discrimination". 162 With this case in mind, India asked why the Turkish authorities did not eliminate the restrictions at issue in this dispute if their considered view was that they had no economic substance.
  11. Although India considered trade statistics completely irrelevant for the resolution of the present dispute, it nevertheless highlighted a few features in the evolution of India exports to Turkey. During the year before the imposition of Turkey�s restrictions, exports of the clothing items that were now restricted had grown by 57 per cent compared to the previous year. During the year immediately following the imposition of the measures, they declined by 74 per cent. In respect of textiles, the situation was even more extreme. Here, the growth rate in the year prior to the introduction of the measures was 200 per cent and the decline in the subsequent year 48 per cent. 163 Against this background, India questioned the validity of Turkey's allegation that its complaint was without economic substance.
  12. Finally, India recalled that it was not seeking in these proceedings findings specific to particular restricted items, nor had Turkey presented any defense specific to any particular restricted items. The dispute could therefore be settled by a ruling on all restrictions imposed by Turkey on textile and clothing products imported from India as from 1 January 1996 (that is, to the knowledge of India, the items included in the 19 product categories).
  13. Turkey noted that it followed from the text of Article 3.8 of the DSU that (i) a proceeding brought by a complaining party against a violation of a WTO rule was and remained based on the purpose to protect benefits against nullification or impairment; and (ii) a violation of a WTO rule was not in and by itself a nullification or impairment of benefits of a Member complaining about such violation, but constituted only a presumption of nullification or impairment.
  14. Turkey also noted that a WTO rule could be seen as an obligation for one Member and a right for another one. The concept of nullification and impairment made clear that for a complaint to succeed there needed to be more than a breach of a complainant Member's right. That such a concept appeared in GATT 1947 and was maintained in the DSU was hardly surprising. Many domestic jurisdictions required an "interest to sue", i.e. that a complainant should show more than that his right was breached. Similarly in international law a complainant had to show a legal interest. 164
  15. Turkey considered that the requirement that a benefit be nullified or impaired made it clear that the alleged breach of a Member's right had to have an economic impact on the complaining Member. This had been confirmed in several panel reports, in particular US-Superfund, and in the Appellate Body Report on EC-Bananas III.
  16. In Turkey's view, the quantities that could be exported by India to Turkey under the restrictions of the Turkey-EC customs union exceeded on the average by 134 per cent India's exports to Turkey in 1994, the last full year before the tariff reductions provided by the Turkey-EC customs union were phased in over 3 separate instalments in 1995. Moreover, India's exports to Turkey in the years 1996-1998 of the products covered by the measures challenged remained significantly below the possibilities opened under these measures. 165 It seemed obvious to Turkey that the way in which the panel in the US-Superfund case and the Appellate Body in the EC-Bananas III case defined nullification or impairment, and the reasons for which they considered that the presumption had not been rebutted could be of no assistance to India in the present case:
    1. In the US-Superfund case the panel considered that Article III:2 GATT "protects expectations on the competitive relationship between imported and domestic products. A change in the competitive relationship contrary to that provision must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement". 166 In that case, the competitive relationship between the imported and the domestic gasoline, whose change to the detriment of the imported gasoline was considered as a nullification or impairment of benefits accruing to the complaining GATT Contracting Parties, resulted from the imposition of a rate of tax applied to imported gasoline that was 3.5 cents/barrel higher than the rate applied to domestic gasoline which competed on the United States market. As this higher tax rate was passed through to consumers, its trade impact was obvious.
    2. The present case did not concern Indian products subjected on the Turkish market to a discriminatory taxation rendering them more expensive on that market than similar Turkish products. The measures challenged had no impact on the competitive relationship between Indian and Turkish textiles and clothing products on the Turkish market. In fact, the competitive relationship improved in view of the substantial reduction of tariff protection resulting from the customs union.

    3. In EC-Bananas III, the Appellate Body referred to a "potential export interest by the United States" that "cannot be excluded". On this point the Appellate Body report was far from clear and did not explain why this potential export interest amounted to "an expectation of a competitive relationship" that needed to be protected against the EC measures. 167

    The present case did not relate to a situation in which India was a potential exporting country faced with measures that effectively prevented exports to Turkey. The measures challenged were manifestly not preventing India from exporting to Turkey. As already indicated, the quantities that might be imported from India into Turkey far exceeded India's exports in 1994, the last complete year before the entry into force of the Turkey-EC customs union. Moreover India's current exports to Turkey were significantly below the effectively more favorable possibilities opened by the measures challenged. As indicated earlier, the quantities India stated it would export to Turkey were quite unrealistic.

  17. Turkey also drew attention to some particular developments of the WTO law relating to the concept of nullification and impairment that were relevant to this case. Though in 1987 the panel in the US-Superfund case noted that "there was no case in the history of the GATT in which a contracting party had successfully rebutted the presumption" and concluded that "the presumption had in practice operated as an irrefutable presumption", 168 later developments made it clear that Members did not share or endorse that view. On the contrary, when they agreed on the DSU, they expressly confirmed in Article 3.8 that a violation was only a prima facie case of nullification and impairment. They even added a qualification: "This means that there is normally a presumption" (emphasis added). This was all the more significant as in the WTO Agreement on Subsidies and Countervailing Measures a claim of nullification or impairment of benefits no longer needed to be made in dispute settlement procedures concerning prohibited subsidies, as appeared from Article 4.1 of the Agreement. Similarly, the concept of a violation as a rebuttable presumption of nullification or impairment was absent from the GATS, as a Member which considered "that any other Member fails to carry out its obligation or specific commitments under this Agreement may have recourse to the DSU" (GATS Article 23:1). In light of these developments, Turkey was of the view that US-Superfund could no longer be considered as good law and that a recommendation or a ruling of the DSB that would treat the presumption of nullification and impairment as irrefutable would add to the rights of a complaining party and diminish those of a respondent party.
  18. Turkey concluded that its alleged violation, if any, of the relevant WTO rules, should be treated fully as a rebuttable presumption of a nullification or impairment of India's benefits and that it had demonstrated that prima facie the alleged violation, if any, of the relevant WTO rules had not resulted in a nullification or impairment of India's benefits.
  19. Turkey also put forward an additional argument against a finding of nullification and impairment in the present case. By introducing the presumption that a violation of a WTO rule by a Member constituted nullification and impairment of benefits accruing to the complaining Member, Article 3.8 of the DSU made also clear that there was necessarily a causal link between the violation of a WTO rule and the nullification or impairment. Assuming arguendo that India's exports would have been higher but for the measures challenged and from this that Turkey had not rebutted the presumption of Article 3.8 of the DSU, according to Turkey, it was highly relevant that India repeatedly rejected Turkey's offer to negotiate and preferred to do otherwise than the 24 countries that accepted to negotiate with Turkey and obtained satisfactory adjustments. This meant in effect that, even if India's benefits were nullified or impaired, the chain of causation between the measures challenged and the nullification and impairment would be broken by India's rejection of the opportunity to negotiate adjustments.
  20. Turkey submitted that there was a general principle of law, that could be expressed in a variety of doctrines and could take a variety of forms, according to which one could not seek redress for harm that one had brought onto oneself by not taking measures that would have prevented or at least mitigated the harm caused by another party. This general principle was inter alia reflected in the International Law Commission's Draft Articles on State Responsibility, whose Article 6bis (paragraph 2) provided that "[i]n the determination of reparation, account shall be taken of the negligence or the wilful act or omission � of the injured State".169
  21. Turkey also argued that a WTO case consisted of the violation element and the resulting nullification and impairment element; if the complainant failed in either one of the elements, a panel ought to reject the complaint without addressing the other element. According to Turkey, in the present case, it had rebutted the presumption that the alleged violation resulted in nullification or impairment of India's benefits. Therefore, India's complaint could be rejected without addressing the issue of the alleged violation of the relevant WTO rules.
  22. To this last argument, India responded that the question of nullification or impairment was legally and logically subsidiary to the question of violation. 170 The Panel had first to examine whether an infringement occurred. India considered that this followed also from Article 11 of the DSU, which did not entitle panels to deny the complainant the right to a ruling on the conformity of the measures at issue on the grounds that they had no adverse effects. To the knowledge of India, there was no case in the history of the GATT and the WTO in which a panel examined the question of whether the presumption of impairment had been rebutted before the question of whether the presumption applied.
  23. India also questioned the validity of Turkey's argument that India was partly responsible for the damage it incurred, because it had refused to accept Turkey's offer to negotiate a settlement based on an increase in the quotas. In India's view, the principle of international law cited by Turkey could not apply when a WTO Member refused to accept a partial implementation of the obligation incurred by another Member.
  24. India also noted that discriminatory import restrictions were inconsistent with Articles XI and XIII, irrespective of whether the relevant quotas were exhausted. 171
  25. India argued that Turkey had essentially claimed that the customs union was on balance beneficial to India because any adverse effect of the quantitative restrictions adopted in the framework of the EC-Turkey trade agreement was offset by the effect of the tariff reductions. India, according to Turkey, was therefore incorrect when it argued that the evidence demonstrated "that the customs union has impaired benefits to which it claims entitlement."
  26. India remarked that at issue in this complaint was not whether the EC-Turkey trade agreement was consistent with Article XXIV and consequently also not whether benefits accruing to India were impaired as a result of the customs union that the European Communities and Turkey alleged to have formed under that agreement. At issue were the restrictions which Turkey had imposed since 1 January 1996 on imports of textiles and clothing products from India and consequently whether these restrictions impaired benefits accruing to India under the GATT and the ATC. The overall impact of the customs union on India�s exports was therefore irrelevant to the measure at issue.
  27. India added that implied in Turkey�s argumentation was the assertion that discriminatory import restrictions inconsistent with Articles XI and XIII of GATT and Article 2.4 of the ATC did not impair benefits accruing under these provisions if the Member imposing the restrictions voluntarily reduced its import tariffs and thereby accorded offsetting trade benefits to other Members. However, in India's view, ordinary customs tariffs applied on an MFN basis have an impact on the conditions of competition that was completely different from that of prohibited discriminatory QRs. Tariff reductions tended to improve India's opportunities to engage in price competition but Articles XI and XIII of GATT and Article 2.4 of the ATC guaranteed India the right to engage in price competition without being hampered by discriminatory quantitative limitations. It was this benefit accruing to India which was being impaired by the measures at issue. India pointed out that, in its Third Party Submission, the United States had noted that Turkey said that the reduction in average tariffs resulting from the customs union agreement meant that the agreement "cannot be described as having raised barriers" to trade with Turkey. In the first place, the evaluation under Article XXIV of the level of trade barriers went beyond an evaluation of tariffs. Moreover, implicit in Turkey�s argument was the assertion that India should accept the discriminatory QRs unilaterally imposed by Turkey because of the tariff reductions Turkey voluntarily granted to all WTO Members under the agreement, since the net effect of the two measures taken together was an increase in India�s exports. This argument was fundamentally flawed for two reasons.
  28. Firstly, as made clear by the reasoning of the US-Superfund panel, 172 endorsed by the Appellate Body in the EC-Bananas III case, 173 the benefit accruing to India under Articles XI and XIII of GATT and Article 2.4 of the ATC was not the protection of its expectations on the volume of textiles and clothing products to Turkey. These provisions protected India�s expectations regarding the competitive conditions for its exports of textiles and clothing products to Turkey. The competitive conditions prescribed by the provisions of the GATT governing multilateral tariff reductions were completely different from those prescribed by the provisions governing QRs. The former were designed to ensure that all Members could equally engage in price competition, the latter were intended to ensure that price competition was not subject to quantitative limits, to the extent that such limits were permitted, that they did not differ between Members. Turkey�s calculations demonstrating that "a net profit" resulted from the grant of tariff reductions and the imposition of discriminatory quotas were irrelevant.
  29. Secondly, implicit in Turkey�s claim was the assertion that India had the obligation to accept the denial of benefits to which it was entitled under the rules governing discriminatory restrictions because of the reductions of duties consequent upon the formation of a customs union. There was no WTO provision nor any principle of law that supported this proposition. Paragraph 6 of the Understanding on Article XXIV confirmed that the advantages accruing to third Members as a result of the formation of a customs union did not entail any obligations on their part. If this was the principle that governed Article XXIV:6 negotiations, a different principle could not govern the assessment of the adverse impact of an illegal measure in the context of Article 3.8 of the DSU.
  30. India also noted that Turkey had recognized that past panels and the Appellate Body in the EC-Bananas III case had consistently ruled that the provisions of the GATT on non-tariff measures protected expectations on conditions of competition and not on trade volumes and that, consequently, the presumption that a measure inconsistent with such a provision impaired benefits accruing under the GATT could not be rebutted with a demonstration that the complainant�s exports did not decline.
  31. In response to Turkey's claim that these precedents were no longer "good law" because they had been superseded by legal developments that dictated another approach and that rejection of these precedents was implicit in the inclusion of Article 3.8 into the DSU, India noted that the wording of Article 3.8 of the DSU was in substance identical to the wording of the third and fifth sentences in paragraph 5 of the Annex to the 1979 Dispute Settlement Understanding. If the drafters of Article 3.8 of the DSU had meant to negate the continued validity of the principles on nullification and impairment developed under GATT jurisprudence, they would surely not have adopted language identical to the terms of the provision under which that jurisprudence was developed.
  32. India noted that the Appellate Body had confirmed in the EC - Bananas III case the continued validity of the jurisprudence developed under the GATT 1947, in particular the principles developed in the US - Superfund case. 174 In response to Turkey's allegation that the present case was distinct from the EC - Bananas III case, India pointed out that India was actually an exporting country faced with measures by Turkey that effectively prevented exports to Turkey.
  33. India also stated that Turkey had apparently further misunderstood India�s argument. India had not questioned the existence of Article 3.8 of the DSU. The 1979 Decision also had the same provision. There were two aspects: Firstly, India disagreed with Turkey when Turkey argued that the Panel had to first discuss whether nullification and impairment had occurred and that the question of violation could be taken up later. In India's view, the first issue was whether a violation had occurred. In this context, India noted that implicit in the remarks by Turkey was an admission that there was a case of violation. India certainly had demonstrated it. Secondly, India had pointed out on the basis of the available jurisprudence, that the provisions of the GATT on non-tariff measures protected expectations on conditions of competition and not on trade volumes and that, consequently, the presumption that a measure inconsistent with such a provision impaired benefits accruing under the GATT could not be rebutted with a demonstration that the complainant�s exports did not decline. Trade volumes were not relevant. Even assuming that trade volumes were relevant, India had already supplied data to the Panel which clearly demonstrated that the discriminatory QRs imposed by Turkey had adversely affected India�s textile and clothing exports to Turkey.

To continue with Summary of Arguments Presented by Third Parties


154 See also the arguments reported in paras. 6.159 and 6.160 below.

155 See the rulings of the panel on United States - Section 337 of the Tariff Act of 1930 (BISD 36S/386-387), which clearly rejected such a "balancing test" for the purposes of Article III. The reasoning of this panel applied equally to the balancing the benefits of voluntary tariff reductions against the adverse impact of quotas imposed inconsistently with Articles XI and XIII of GATT and Article 2.4 of the ATC.

156 For a complete review of the jurisprudence on non-violation cases, see the following publications cited by the Appellate Body in its report on India - Patent (footnote 26): Ernst-Ulrich Petersmann, "Violation-Complaints and Non-Violation Complaints in Public International Trade Law", in German Yearbook of International Law, Volume 34, 1991, pp. 175 - 229; and Frieder Roessler, "The Concept of Nullification and Impairment in the Legal System of the World Trade Organization", in Ernst-Ulrich Petersmann (ed.), International Trade Law and the GATT/WTO Dispute Settlement System, Studies in Transnational Economic Law, Volume 11, Kluwer Law and Taxation Publishers (Deventer and Boston: 1997), pp. 123-142.

157 See BISD 11S/99-100.

158 See para. 5 of the Annex to the Understanding on Dispute Settlement adopted on 28 November 1979.

159 Panel Report on Japan - Measures on Imports of Leather, BISD 31S/94 ("Japan - Leather"), para. 55.

160 Panel Report on United States - Taxes on Petroleum and Certain Imported Substance, BISD 34S ("US - Superfund"), p. 159.

161 Appellate Body Report on EC - Bananas III.

162 Panel Report on Italy - Discrimination Against Imported Agricultural Machinery, BISD 7S/67.

163 See also paras. 6.148 and 6.149 above, Table II.4 and the Annex to this report, Appendix 3a.

164 See ICJ, South West Africa Cases (Second Phase), ICJ Report 1966, p. 47; ICJ, Barcelona Traction Light and Power Co. Ltd, ICJ Report 1970, p 32.

165 In 1996, for 12 out of the 19 categories the amounts licensed remained below 50 per cent of the quotas , and for 8 out of these 19 categories even below 10 per cent. In 1997 for 6 out of the 19 categories the amounts licensed remained below 50 per cent of the quotas. In 1998 for 9 out of 19 categories the amounts licensed remained below 50 per cent of the quotas.

166 Panel Report on US - Superfund, para. 5.1.9.

167 Appellate Body Report on EC - Bananas III, para. 252.

168 Panel Report on US - Superfund, paras. 5.1.6 and 5.1.7.

169 Yearbook of the International Law Commission (1993), Vol. II, Part II, Chapter IV.

170 The presumption in Article 3.8 of the DSU only applying "in cases in which there is an infringement of the obligations assumed under a covered agreement".

171 BISD 31S/113.

172 Panel Report on US - Superfund, p.158.

173 Appellate Body Report on EC - Bananas III, paras. 249-253.

174 Appellate Body Report on EC - Bananas III, paras. 249-253.