The Agreement on Import Licensing Procedures ⁵⁵

72. Brazil submitted that there had been some debate on the extent to which the Licensing Agreement applied to TRQs. This debate had been to a large measure resolved in the findings of the Banana III panel according to which the Licensing Agreement did apply to TRQs. The Community had chosen to operate a non-automatic licensing system within the terms of Article 3 of the Licensing Agreement. The EC poultry licensing system was therefore subject to the disciplines set out in Articles 1 and 3 of the Licensing Agreement and to the principles of transparency and certainty which underlay the Agreement. Article 1.3 of the Licensing Agreement provided that Members had to ensure that the administrative procedures used to implement licensing regimes were not operated inappropriately so as to give rise to trade distortions. This general prohibition, Brazil argued, was repeated and amplified in Article 3.2 which provided that non-automatic licensing should not have trade restrictive or distortive effects on imports additional to those caused by the imposition of the restriction. The licensing procedures set out in Commission Regulation 1431/94, as amended, for administering the frozen chicken TRQ did not, in the opinion of Brazil, meet the strict requirements of the Licensing Agreement and in fact distorted trade within the TRQ. As will also be seen below, the licensing system operated as to distort non-quota trade.

73. The EC replied that in its Banana III report ⁵⁶, the Appellate Body had clarified the nature of the obligations imposed on the Members by the Licensing Agreement. In particular, the Appellate Body had stated that the Licensing Agreement pertained to the application and administration of import licensing procedures, and required that this application and administration be "neutral ... fair and equitable". ⁵⁷ The Appellate Body continued: "As a matter of fact, none of the provisions of the Licensing Agreement concerns import licensing rules, per se. As is made clear by the title of the Licensing Agreement, it concerns import licensing procedures. The preamble of the Licensing Agreement indicates clearly that this agreement relates to import licensing procedures and their administration, not to import licensing rules. Article 1.1 of the Licensing Agreement defines its scope as the administrative procedures used for the operation of import licensing regimes". ⁵⁸ In the light of this clarification, it was clear to the EC that the only issue before the Panel in this case was whether the EC's licensing regime for the TRQ complied with the administrative procedures set out in the Licensing Agreement.

74. Brazil submitted that the Appellate Body report on Banana III ⁵⁹ made clear that the Licensing Agreement required that the "application and administration (of licensing rules) be neutral ... fair and equitable". The Appellate Body found that this terminology was equivalent to the terms of Article X:3(a) of GATT which provided that rules be "neutral in application and administered in a fair and equitable manner". These were substantive obligations which had to be respected by Members. Secondly, the Appellate Body had ruled that subsequent panels should examine the context in which particular findings of previous panels or the Appellate Body were made. ⁶⁰ The object of the Appellate Body in Banana III was to determine the extent to which the EC was entitled to design different licensing rules for the same product from different origins. The Appellate Body found that different rules could apply to the same product from different origins. On the reasoning of the Appellate Body in Shirts and Blouses it was open to this Panel, in the view of Brazil, to find that the provisions of the Licensing Agreement, mentioned in paragraph 75 below, were mandatory and that the EC had failed to comply with these provisions.

75. Brazil submitted further that the Licensing Agreement had extensive provisions to guide panels in the interpretation of what was neutral, fair and equitable in the administration of licensing procedures. These included the requirements: not to distort trade (Article 1.3); that licences be allocated on the basis of import performance (Article 3.5(j)); that traders and their governments should be able to become familiar with the licensing procedures (Articles 1.4, 3.3, 3.5(b), 3.5(c) and 3.5(d)); that nothing should hinder the full utilization of licences (Article 3.5(j)); that licences be issued in economic quantities (Article 3.5(i)); and that provision be made for newcomers (Article 3.5(j)). If these provisions of the Licensing Agreement were not mandatory then, it appeared to Brazil, they should still be taken into consideration by panels when determining what was the nature of the obligation of neutrality, fairness, equality, impartiality and uniformity in the administration of the licensing procedures. Brazil maintained that the EC had not complied with the Licensing Agreement whether or not it was considered that the substantive provisions contained therein were mandatory or were instances of uniformity, fairness and neutrality.

(i) Notification

76. Brazil submitted that Article 1.4 of the Licensing Agreement provided that all the rules and regulations had to be published and the place of publication notified to the WTO Committee on Import Licensing in such a manner that governments and traders could become familiar with them. Articles 1.4, 3.3, 3.5(b), 3.5(c), 3.5(d) made repeated reference to the need for traders to become acquainted with the terms and conditions of licensing procedures. The EC appeared to have failed to comply with the terms of the Licensing Agreement and had not notified to the Committee on Import Licensing the sources in which EC licensing provisions were published and the specific import licensing rules for frozen chicken products. The Community had, however, published the licensing procedures in the Official Journal of the EC and thus, it could be said, had allowed governments and traders to become familiar with them. Brazil maintained, however, that the constant and contradictory amending of the regulations was such as to nullify the requirements of transparency set out in Article 3.3 of the Licensing Agreement.

77. The EC submitted that in the Banana III report, the Appellate Body had confirmed that import licensing procedures for tariff quotas fell within the scope of application of the Licensing Agreement. ⁶¹ The EC observed in this respect that notification was a procedural, rather than a substantive, requirement and since the question of whether the Licensing Agreement applied to TRQs had only been clear as from the date of the Appellate Body's decision in the Banana III case, the mere fact of non-notification of the licensing regime at issue in this case could not be considered to render this regime illegal in any way. All details relating to the licensing system had been published in the Official Journal of the European Communities in all official languages, including Portuguese, thus ensuring transparency and that both governments and traders were aware of the requirements of the regime.

78. Brazil submitted that the object of notification was that governments and traders should become familiar with the rules and procedures governing imports. Non-notification invalidated the underlying objective of transparency in the Licensing Agreement. Notification in the Official Journal or Gazette did not satisfy the transparency requirement. Governments and traders of a Member could not be expected to read, on a regular basis, the official publications of all Members just in case a new provision in relation to trade was published. Notification to the WTO removed this need and ensured that governments and their traders did become familiar with the import rules and procedures. Notification was a substantive obligation which the EC had failed to satisfy.

79. The EC replied that Brazil had fully utilized its allocation under the frozen poultry meat TRQ during its period of application. The licensing procedures at issue in this Panel related only to the management of the TRQ. There was no evidence whatsoever that a distortion or reduction of trade in the products at issue had been caused by operation of the import licensing system. The evidence was rather to the contrary: the licensing system had never prevented the Brazilian poultry products from fully exploiting the tariff reduction under the TRQ. Moreover, even if the market (in- and out-quota) was taken as a whole, volumes of Brazilian imports in frozen poultry meat had steadily increased during the period of application of the TRQ. Brazil's submissions appeared to be based on a misunderstanding of the transparency provision of the Licensing Agreement. What was important, EC said, and as was clear from the text of Article 1.4, was that licensing procedures were published. Moreover, the EC had notified to the WTO the administration of all its agricultural tariff quotas including the frozen poultry meat TRQ. ⁶²

(ii) Changes to the licensing rules

80. Brazil submitted that the EC had changed the licensing rules and procedures at least seven times, making it difficult for governments and traders to become familiar with the rules. The changes themselves were evidence of a lack of certainty and transparency in the EC's licensing procedures. In addition, the changing rules only acted to confuse traders. Brazil observed that not all the changes had been for the purpose of the elimination of speculation. Those changes that had addressed the issue of speculation had not resulted in its elimination. The combination of these two considerations was that the changes in the licensing rules did not allow traders and their governments to become familiar with them as required by the Licensing Agreement.

81. The EC replied that if the EC were to have changed the system and not published the changes effected, this would have led to lack of transparency in the system. But that the changes, of themselves, created lack of transparency, the EC had difficulties in understanding. Moreover, there was nothing in the Licensing Agreement which said that import licensing procedures could not be changed. Brazil would have been the first to complain if the system had remained identical during the entire period of the TRQ and the Community could have been accused of not taking account of the realities of the commercial situation. The Community noted, furthermore, that the "100 tonnes rule" had in fact not been changed since 1 June 1996. The changes in market access conditions effected by the Commission were designed to ensure a reasonable distribution of licences amongst an ever increasing number of applicants. The changes made to these criteria were necessary to ensure the proper functioning of the licensing system and, as was clear from the motivation given in the various Regulations, were necessary to take account of experience gained in the operation of the regime.

(iii) Distortion of trade

82. Brazil asserted that its percentage share in the EC market had been falling since the introduction of the TRQ in 1994. ⁶³ Prior to the opening of the TRQ, Brazil had a fairly constant market share of 45 per cent to 47 per cent. In 1993, Brazil's percentage market share was 45.6 per cent. After the opening of the TRQ, in 1994, Brazil's total market share (made up of both quota and non-quota trade) fell to 42.5 per cent; in 1995 it fell further to 36.2 per cent and in 1996 to 33.2 per cent. Brazil considered that the fall in overall market share, made up of both in-quota and out-quota product, was evidence of the distortion of trade resulting from the introduction of the TRQ contrary to the provision of Article 1.2 of the Licensing Agreement. In normal trading circumstances, Brazil would have been expected to increase market share as a result of the introduction of the TRQ. This did not occur. Brazil considered that the principal cause of the fall in market share was the disturbance in trading relations which had been built up over time. Brazil was not arguing that only traditional importers should be entitled to benefit, nor was Brazil suggesting what the appropriate number of importers should be. Brazil argued that the administration of the TRQ had resulted in speculation and in a sharp decline in its market share. The cause in the decline in market share was not competition from competing supplying countries. The statistics showed that, in 1993, despite the marked increase in exports from China, Brazil maintained its market share. The statistics also showed that there was no correlation between the fall in Brazil's market share and an increase in market share of any one other source.

83. The EC replied that Brazil had not contested the EC's evidence that there had been full utilization of the TRQ. Despite the decrease in market share of Brazil, the overall volumes of imports from Brazil had increased (from 21,493 to 28,701 tonnes). Brazil had not explained how it considered that the overall market share was relevant to trade within the TRQ. It appeared itself to concede that factors such as the competitivity of Brazilian exports vis-à-vis other exporters were relevant to overall market share. The EC had noted that another relevant factor was the harmonization of veterinary standards within the Community which had contributed to the opening up of the Community market to imported products (imports had almost doubled over the period 1992-1997). The EC submitted that Brazil had not demonstrated a prima facie case. Its allegations regarding distortions of trade were vague and unsubstantiated. There had been full use of the TRQ and volumes of trade had increased.

84. Brazil submitted that Members were required, under Article 1.2 of the Licensing Agreement, to ensure that the administrative procedures were in conformity with the relevant provisions of GATT 1994 so that trade distortions, arising from the inappropriate operation of the import licensing procedures, did not occur. This appeared to be a mandatory requirement that distortions to trade be avoided. The requirement not to distort trade was not limited to trade within the TRQ. It applied to all trade, whether within the TRQ or outside it. Article 3.2 provided that non-automatic licensing "shall not have trade-restrictive or -distortive effects on imports additional to those caused by the imposition of the restriction". The word "shall" was not "should" or "might" or "best efforts". By means of the word "shall", the Agreement set out an obligation which had to be respected.

85. The EC submitted that during the period of application of the TRQ, Brazil's exports of poultry products into the EC had increased substantially. In the EC's view, Brazil had failed to discharge the burden of proof incumbent on it to show that the procedures used in the application of the TRQ had caused distortions of trade. The statistics which Brazil claimed constituted prima facie evidence appeared to relate to its overall market share rather than to imports within the TRQ. The EC considered that these statistics could not constitute probative evidence in demonstrating that the licensing procedures for the TRQ had been responsible for what Brazil alleged were distortions in trade. The TRQ had been fully utilized, hence the licensing procedures had not affected the possibility for Brazilian traders to benefit completely from the advantageous conditions provided under the TRQ. Trade outside the TRQ was not subject to any licensing procedures. During the period of application of the TRQ, the overall volume of imports from Brazil into the Community had increased. As Brazil itself appeared to concede, increases in market share could be due to other factors unrelated to the TRQ. Thus, decreases in market share could also be attributable to other factors including the overall competitivity of Brazilian imports and harmonization of veterinary standards within the EC which had contributed to the opening up of the Community market to imports from third countries.

(iv) Licence entitlement based on export performance

86. Article 1.3 of the Licensing Agreement provided that the procedures should be administered in a neutral, fair and equitable manner. It could not be said, Brazil argued, that the EC's allocation of import licences on the basis of export performance was neutral and fair. It automatically biased the licensing system in favour of Community traders and producers who were exporters. The terms of Article 3.5(j) and the underlying intent of the Licensing Agreement were that licence entitlement should be based on import performance and not on export performance. The very inclusion of exports as a criteria for licence entitlement was a de facto and de jure breach of the provisions of the Licensing Agreement.

87. The EC recalled that the Licensing Agreement applied only in respect of the procedures and not the rules applied to licensing systems. The EC argued that the question of whether a licensing system functioned through import or export licences constituted a rule relating to the operation of the system and not a procedure relating to its administration. Hence, this issue was not regulated by the Licensing Agreement, which contained no provisions detailing the criteria to be applied to the operation and functioning of licensing systems. The EC would note, in any event, that as a matter of fact, export performance was only taken into account for the period from 26 June 1994 to 1 June 1995. ⁶⁴ In consequence, the EC argued, this claim should be dismissed as inadmissible, firstly because it fell outside the scope of application of the Licensing Agreement, and secondly because it related to a situation which as a matter of fact no longer existed and therefore there could be no nullification or impairment of any of Brazil's rights under the WTO. There were, according to the EC, no continuing effects of the previous use of export performance. Eligibility was based only on import performance.

88. In the event that the Panel were to consider, contrary to the primary submission of the EC on this point, that Brazil's claim was admissible, in the view of the EC, Article 1.3 of the Licensing Agreement stated no more than that rules for import licensing should be neutral in application and administered in a fair and equitable manner. It was not possible, as Brazil asserted, to discern from the plain wording of Article 1.3, read in the light of the objective and purpose of the Licensing Agreement, that any inclusion of criteria relating to export automatically biased the system in favour of importers. The only relevant provision in the Licensing Agreement, in the view of the EC, was Article 3.5(j) which stipulated that Members should "consider the import performance of the applicant" and "in this regard, consideration should be given as to whether licences issued to applicants in the past have been fully utilized". Hence, the requirement to take account of import performance was linked to the need to ensure full utilization of licences issued. The EC had adapted its administration of the licensing system on a number of occasions in order to fulfil this requirement. Furthermore, Article 3.5(j) did not stipulate that licence entitlement should be based only on import performance and that any criterion relating to export was precluded. That provision simply required that Members should "consider the import performance of the applicant". Article 3 of Commission Regulation 1431/94 fulfilled this requirement in that it stipulated that import performance should be taken into account.

89. Brazil maintained that during the time that rules in relation to exports were in force there was distortion and because licences were allocated on the basis of past performance, those distortions carried forward into the present (see also paragraph 153).

90. The EC replied that there were no continuing effects of the previous use of export performance. Eligibility was based only on import performance and so the EC failed to see how the previous inclusion of export performance could have any continuing effects.

(v) Speculation in licences

91. Brazil noted that the third subparagraph of Article 5 of Commission Regulation 1431/94 provided that licences should not be transferable. This requirement was to ensure that licences were only used by those to whom licences were allocated and to avoid speculation. Article 3.5(j) of the Licensing Agreement required that licences issued be fully utilized. According to Brazil, speculation in licences discouraged their full utilization in contradiction of the requirement in Article 3.5(h) of the Licensing Agreement. When licences became the object of trade in themselves, it was not certain that they would be used to effect import. A speculative market gave rise to its own rules and logic and in these circumstances licences could be used to disrupt the behaviour of competitor importers or could be bought up by EC exporters who produced on the domestic market so as to protect the market. Most importantly, Brazil argued, the rapid movement of licences among importers and non-importers (i.e. EC exporters who had never imported from Brazil) made it impossible for Brazilian exporters to make contact with, and effect sales to, importers, so as to effect trade and ensure that there was full utilization of the licences. Finally, Article 3.5(j) provided that in allocating licences, Members should consider the import performance of the applicants. This obligation did not only refer to making licence entitlements dependant on past import performance but also to ensuring that licences issued in the past to applicants had been fully utilized. The EC had not shown that all licences had in fact been used.

92. The EC submitted that the above-mentioned provisions were exhortatory in nature and did not impose mandatory requirements: Article 3.5(h) said Members "shall not discourage full utilization of quotas" and Article 3.5(j) that Members should "give consideration" to whether licences issued in the past have been fully utilized during a representative period". As a matter of commercial reality, it would be impossible for a Member to control the behaviour of economic operators so as to ensure full utilization of licences granted. Moreover, as mentioned above, the legal reality was, the EC asserted, that commitments exchanged under the WTO agreements related to conditions of competition for trade and to market access opportunities and not to volumes of trade. The EC stressed that Article 5 of Regulation 1431/94 stipulated that licences were not transferable with a view to avoiding speculation in licences. The EC had done nothing to discourage the full utilization of licences; indeed Brazil's claims as regards utilization of the quota appeared to be entirely unfounded since according to the statistics available to the Commission, the TRQ had in fact been fully utilized (see Annex II). Brazil had been informed of this during the consultations. Regulation 1431/94 had been modified on a number of occasions to take account of experience gained in the operation of the licensing system. This demonstrated that the system was subject to constant monitoring and adaptation, if necessary, to ensure that it operated in a fair and equitable manner and to fulfil the obligations imposed under Article 3.5(h) and (j) of the Licensing Agreement. Moreover, the EC submitted, no responsibility of the EC could be incurred as a result of the alleged action of private companies or bodies that had no direct or indirect relation or connection with the EC authorities. The EC confirmed, and this was not contested by the complainant, that there were no legal requirements imposing charges or duties additional to those which were bound in the EC Schedule of commitments.

93. Brazil submitted that the EC had not shown that the quota had been filled in all of 1994 and in the first quarter of 1996. The EC did not provide this information during consultations. Speculation in licences distorted patterns of trade. Established trading relationships could not be maintained. Furthermore, exporters would not know whether or not they had trading relations with serious or non-serious importers.

94. The EC replied that the Community's information gathering and processing of statistics had been improved during the operation of the TRQ. However, in 1994, Member States did not supply a breakdown of utilization of the quota by country of origin. For the first quarter of 1996, the data was lost because of internal data bank problems.

95. Brazil submitted that there was speculation in licences and that the value of a licence was between 2.30 and 3 DM per kilo. The speculation in licences had not stopped even with the changes to the rules. More and more operators were applying for licences. This both decreased the licence volume and increased the speculation. Brazil had set out the average number of importers in each quarter in 1997. Similar analysis revealed that the average number of importers in 1996 was 181, and for 1995 was 187. It was clear that the number of importers was increasing and thus the rate of speculation.

96. The EC replied that because there had been an increase in the number of importers this did not mean, ipso facto, that speculation had increased. There had been an across-the-board increase in the number of importers in the frozen poultry meat market. This was due to the Community's enlargement and the fact that importers had established legally separate subsidiary companies.

(vi) Economic quantities

97. Referring to Article 3.5(h) which provided that Members should not discourage the full utilization of quotas, and in particular to Article 3.5(i) which stated that Members had to take into account the desirability of issuing licences in economic quantities, Brazil considered that the allocation of licences such that each applicant received a licence allowing imports of about 5 tonnes could not be considered to be an economic quantity. Article 3.5(i) did not mandate that licences always had to be issued in economic quantities but it recognized the desirability that they should be so. Article 3.5(i) should be read within the context of the requirement that the licensing system should not distort trade. If a licence was for an uneconomic quantity it became difficult and uneconomic for exporters to make sales especially from distant supplier countries. Moreover, the economic consequences for an importer not to utilize the licence were not severe. ⁶⁵

98. The EC replied, as mentioned above, that the licensing system had been constantly modified in order to ensure that licences were allocated on the basis of economic quantities amongst what had been an ever increasing number of importers. Amongst the 200 "serious" importers, the Commission had made efforts to ensure that there was a minimum distribution of 5 per cent of the quantity requested. The EC submitted that the reality that the quota had been fully utilized provided corroboration of the fact that the level of security required (ECU 500 per tonne, or 38 per cent of the duty payable) was sufficient to ensure full use of the licences granted. The quarterly average licence quantity for imports from Brazil under the TRQ in 1997 was 5.6 tonnes. This resulted from the fact that the maximum quantity an operator could apply for in accordance with Article 3 of Regulation 1431/94 was 10 per cent of the quarterly volume (1,775 tonnes) and the average attribution percentage as published every quarter was 3.17 per cent. On the basis of these figures 315 importers applied for licences in 1997. As could be seen from the table in ANNEX II the licence quantity for 1997 was not representative of the licence quantities for the period of application of the TRQ. Two hundred was the number of importers in the Community when the TRQ was established. The Community had already observed above that the number of importers over the period of the TRQ had increased.

99. Brazil replied that importers did not get a minimum of 5 per cent of the quantity requested. Commission Regulation EC No 2120/97 ⁶⁶ of 28 October 1997, set the percentage figure for the acceptance of licence applications for the fourth quarter of 1997, the Annex of which provided that only 3.24 per cent of the licence applications for Brazil had been accepted, a figure which did not amount "a minimum distribution of 5 per cent of the quantity requested". (The figure for the third quarter 1997 was 3.13 per cent, 3.13 per cent for the second quarter and 3.19 per cent for the first quarter.) Brazil maintained that the licence volume of 5,751 tonnes was uneconomic. Trade in frozen chickens between Brazil and the EC was by container ship. Containers were either 20 or 40 foot which held 16-18 tonnes or 26-28 tonnes, respectively. The cost of shipping 5.5 tonnes per tonne alone in a container was US$320 while the cost per tonne of shipping a full container was US$115. It was therefore uneconomic to ship at US$320 a tonne. In addition, an importer had to show imports of 100 tonnes in a previous two year representative period for eligibility for licences. An importer who wished to import from Brazil only was not in a position to obtain entitlement on the basis of TRQ imports alone but had to import from other sources or over the quota. In each quarter there were, on average, 315 licences issued to, on average, 315 importers. Thus, if the EC considered that there were 200 "serious" importers, there were, on average, 115 non-"serious" importers. Brazil did not understand what the EC meant by the word "serious" in relation to the importers. Did this mean that the EC accepted that, on average, 115 importers were applying for licences for the purposes of trade in licences as opposed to imports from Brazil?

100. The EC submitted that the quarterly average licence quantity for imports from Brazil under the TRQ in 1997 was 5.6 tonnes. This resulted from the fact that the maximum quantity an operator could apply for in accordance with Article 3 of Regulation 1431/94 was 10 per cent of the quarterly volume (1,775 tonnes), and the average attribution percentage as published every quarter was 3.17 per cent. On the basis of these figures 315 importers applied for licences in 1997. Moreover, the Community considered that since the quota had been fully utilized there was no evidence to suggest that the licence quantities were uneconomic or that importers had, as a result of the licence quantity, been deterred from making use of the advantages in trading conditions offered under the TRQ. Article 3.5 (i) of the Licensing Agreement stated that Members "should take into account the desirability of issuing licences for products in economic quantities" (emphasis added). This was, however, merely one factor to be taken into account in ensuring that the licensing procedure was administered, in accordance with Article 1.3, in a neutral, fair and equitable manner. Consideration should also be given to the factors enumerated in Article 3.5(j), in particular, the need to "give consideration" to ensuring a reasonable distribution of licences to new importers. The EC was, furthermore, of the view that the size of consignments of poultry was irrelevant. There was nothing in the Licensing Agreement which supported Brazil's suggestion that the volume of a licence should be determined by reference to the method of transportation of a product. Moreover, since a licence could be used for part of a consignment and needed not cover the consignment in its entirety, average consignment size was of no relevance when considering the use made of the TRQ. The EC understood that the companies of Brazilian origin which had, in Brazil's words, "a traditional presence on the EC market" were in fact the most important exporters of poultry meat products. As already explained elsewhere, the number of importers in the Community had increased mainly because of the enlargement of the Community and the establishment by traditional importers of legally separate subsidiary companies.

(vii) Newcomers

101. Brazil submitted that there were no provisions in the EC rules in relation to newcomers. Article 3.5(j) of the Licensing Agreement provided, however, that consideration should be given to ensuring that there was a reasonable distribution of licences to newcomers. The absence of the newcomer provision meant that Brazilian exporters could not begin importing by establishing themselves in the Community and qualifying as new importers.

102. The EC replied that the TRQ was not restricted only to traditional importers who had imported from Brazil. The requirements imposed relating to quantities imported over a two calendar year period were designed to ensure a balance between access to the TRQ for all importers and the need to issue licences in economic quantities. The EC argued that there was no incompatibility with the provisions of Article 3.5(j) of the Licensing Agreement. The number of importers had increased over the period of application of the TRQ. Furthermore, according to evidence available to the Commission, contrary to the assertion made by Brazil, most of the important Brazilian exporters had, in fact, established sales offices in the EC from which they too applied for import licences.

103. Brazil responded that not many Brazilian exporters had become EC importers, contrary to the EC assertions. Only two companies of Brazilian origin had, in association with EC companies, a traditional presence in the EC market. The allocation of import licences on the basis of past performance meant that it was not economic for Brazilian exporters to establish themselves in the EC for the purposes of importing and applying for licences.

104. The EC retorted that it was a matter of mathematical impossibility, to expect that the licence quantities could be increased without reducing the number of importers who had access to the TRQ. The requirements imposed in respect of access to the TRQ were designed to ensure a balance between access to the TRQ for all importers and the need to issue licences in economic quantities. If the rules were to be adjusted so that the licence quantity were to be the size of a container as Brazil asserted (16-18 tonnes or 26-28 tonnes) this would have the effect of rendering it impossible to ensure "a reasonable distribution of licences to new importers" as required by Article 3(5)(j) of the Licensing Agreement.

(viii) Transparency

105. Brazil argued that underlying the Licensing Agreement was the principle of transparency. The publication provisions in Articles 1.4 and 3.2 along with the consultation and information provisions in Articles 1.4 and 3.5 were specific instances of this right of transparency. Under the licensing and trade monitoring system in place for frozen chicken, it had not been possible for the EC, let alone Brazil, to determine definitively whether or not there were distortions of trade due to the operation of the licensing system. However, there was prima facie evidence of such distortion and the EC had done nothing to address the issues raised by Brazil in this regard. The inability to determine which consignments were being imported within or outside the TRQ and the failure of the EC to confirm to Brazil that that part of the TRQ which had been allocated to Brazil had in fact been fulfilled meant, in the opinion of Brazil, that the EC was not administering the licensing system in a transparent manner.

106. The EC replied that the claim that there was "prima facie evidence" of trade distortion was entirely unsubstantiated and failed to meet the standards of evidence determined by the Appellate Body as set out below. This claim should therefore be rejected as inadmissible by the Panel. With respect to Brazil's claims that the EC had not complied with the Licensing Agreement's provisions on transparency in respect of the changes made to the criteria relating to licence entitlement, the EC submitted that the changes in market access conditions effected by the Commission were designed to ensure a reasonable distribution of licences amongst a number of applicants who had serious intentions of importing poultry products into the EC. As Brazil itself noted, full details of the licensing procedures, including the criteria used in their application, had been published in the Official Journal of the European Communities. In consequence, transparency in the criteria applied for the allocation of licences had been assured. The changes made to these criteria were necessary to ensure the proper functioning of the system and as was clear from the motivation given in the various Regulations were necessary to take account of experience gained in the operation of the regime.

107. Brazil submitted that the EC was obliged under Article 3.5(a)(iii) and (iv) of the Licensing Agreement to provide complete and relevant information on the distribution of licences among supplying countries and statistics on volumes and values. In the view of Brazil, the EC had failed to do so. In addition, the transparency provisions underlying the Licensing Agreement were not respected by the EC. Exporters did not know what trade measures were applicable in respect of any one consignment of frozen chicken sent to the EC. For exports within the TRQ, no duties or additional duties were payable. For exports outside the TRQ full bound duties were payable and in addition the imports were subject to price safeguards. Price safeguards could result in additional duties if the exporter did not maintain a c.i.f. price at the Community frontier. The licensing system was administered in such a way that the exporter did not know what trade rules applied in breach of the fundamental objective of the Licensing Agreement. ⁶⁷ It was imperative that the licensing system be administered in a transparent manner such that exporters were not inhibited in achieving full market access and prices.

108. The EC replied that the requirement to supply statistics was subject to a request from a WTO Member. The EC had produced the relevant information when requested to do so. Moreover, the EC's system was by its very nature transparent. The figures relating both to the allocation of the quota and the percentage of the licence applications granted had been published. In consequence, as Brazil's submissions to the panel had amply demonstrated, it was very well able to determine the distribution of licences and their volumes.

(ix) Compensation

109. Brazil submitted that compensation should serve to re-establish the original overall balance of concessions. It did so by providing for an improvement in the conditions of competition under which the product in question could be sold on the importing market. This could be achieved either through improved price concession ⁶⁸ or - in the case of a TRQ - through the concession of a financial benefit to the exporters. If there was no improvement in the conditions of competition and the financial benefits failed to materialize, then it could be considered that no compensation had in fact been provided. Moreover, Brazil considered that it was in the nature of a zero tariff compensatory-TRQ, that the Member entitled to benefit from the TRQ should be allowed to compete on an equal footing with local producers in the importing market. This meant that the exporters had to be able to benefit from the competitive conditions prevailing on the import market. The price obtainable on the import market was one such benefit. So the exporter had to be able to obtain that price. Lack of transparency of the TRQ had, however, the effect that the exporter could not obtain that price. If the cost of production on the exporting market was less than the average cost of production in the importing market, this was a benefit that should be available to the exporter. Any administration of the TRQ which attempted to prevent the exporter from benefiting from the cost advantages that he had was, in the opinion of Brazil, a denial of the compensation which the TRQ was designed to create.

110. The EC replied that without any clear reference to a relevant provision of the Licensing Agreement or indeed any other WTO provision, the EC found it difficult to reply to a vague assertion concerning "no compensation" and therefore simply recalled that the provisions of the General Agreement had been consistently interpreted as provisions establishing conditions of competition. Consequently, the commitments exchanged in such negotiations were "commitments on conditions of competition" for trade, not on volumes of trade. ⁶⁹ Brazil's assertions were, in the opinion of the EC, contrary to this basic principle to the extent that they required that the exporter had to be able to obtain a particular price on the market of the importing country.

111. In conclusion, Brazil argued, the combination of all these elements had the effect of undermining the objectives of the Licensing Agreement, in particular the requirements as to transparency, non-distortion of trade and that the licensing system be the least burdensome possible. It was this combination of inconsistencies alongside the individual inconsistencies which had a negative effect on trade both within and outside the TRQ and which impeded the achievements of the principles underlying the Agreement on Agriculture.

To continue with European Communities - Measures Affecting the Importation of Certain Poultry Products, (c) Article 31 of the Vienna Convention, section (x) Burden of proof

⁵⁵ Hereafter the Licensing Agreement.

⁵⁶ Appellate Body Report on Banana III, op. cit.

⁵⁷ Ibid, paragraph 197.

⁵⁸ Ibid.

⁵⁹ Ibid, paragraphs 192 to 198.

⁶⁰ As the Appellate Body stated in United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from India (Shirts and Blouses): "Given the explicit aim of dispute settlement that permeates the DSU, we do not consider that Article 3.2 of the DSU is meant to encourage either panels or the Appellate Body to 'make law' by clarifying existing provisions of the WTO Agreement outside the context of resolving a particular dispute. A panel need only address those claims which must be addressed in order to resolve the matter in issue in the dispute."

⁶¹ Appellate Body Report on Banana III, op. cit., paragraph 195.

⁶² See documents G/AG/N/EEC/1, G/AG/N/EEC/3 and G/AG/N/EEC/3/Corr.1.

⁶³ Brazil confirms the Panel's understanding that the statistics provided refer both to TRQ and non-TRQ trade in the products under consideration.

⁶⁴ As from the adoption of Regulation No. 1244/95 on 1 June 1995, the criterion of export performance no longer applied.

⁶⁵ ECU 50 per 100 kg.

⁶⁶ L 295/21, published in the Official Journal of 29 October 1997.

⁶⁷ The Licensing Agreement provided in its Preamble:

⁶⁸ Panel Report on European Economic Community - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-feed Proteins, adopted on 25 January 1990, BISD 37S/86, paragraph 148.

⁶⁹ See, for example, Ibid, paragraphs 150-151.