Turkey - Restrictions on Imports of Textile and Clothing Products
Report of the Panel
(Continued)
(b) Arguments
- 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
- 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.
- 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.
- 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
- 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.
- 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.
- 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:
"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
- 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.
- 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.
- 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.
- 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).
- 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.
- 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
- 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.
- 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:
- 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.
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.
- 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.
- 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.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- India also noted that discriminatory import restrictions were
inconsistent with Articles XI and XIII, irrespective of whether the
relevant quotas were exhausted. 171
- 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."
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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