(b) Object and purpose of the Oilseeds Agreement

212. Brazil's claim that the total TRQ should be reserved exclusively for its products derives from its understanding on the object and purpose of the Oilseeds Agreement as compensatory adjustment within the meaning of Article XXVIII:2 of GATT, which reads as follows:

Brazil argues that the MFN principle under Articles I and XIII of GATT does not necessarily apply to TRQs opened as a result of the compensation negotiations under Article XXVIII of GATT. ¹²¹ According to Brazil, since the purpose of the Oilseeds Agreement was to compensate Brazil for the modification of EC concessions on oilseeds, Brazil is entitled to an exclusive benefit in the modified tariff schedule. The EC responds that the nature of compensation cannot change the legal reality under the GATT/WTO agreements: i.e. the EC was bound, on an MFN basis, by its tariff commitments. ¹²²

213. First, we examine whether Brazil's argument is supported by specific provisions in the WTO agreements, decisions of the Ministerial Conference/General Council or "the decisions, procedures and customary practices followed by the CONTRACTING PARTIES". ¹²³ We note that, despite Brazil's assertions that there are examples of country-specific TRQs in practice and that those TRQs are well recognized by academic writers, ¹²⁴ there is no provision in the WTO agreements that allows departure from the MFN principle in the case of TRQs resulting from Article XXVIII negotiations. ¹²⁵ Nor is there any decision of the CONTRACTING PARTIES or of the Ministerial Conference/General Council, or any adopted panel or Appellate Body report that permits such departure.

214. In our view, past GATT practice supports the applicability of the MFN principle in these situations. For instance, in response to a complaint of the Benelux countries regarding the failure by Germany to bring down to the level of the Benelux rates the German duties on cereal starch and potato flour as well as on some derivatives, a panel in 1955 made the following observation:

Although not technically a result of Article XXVIII negotiations, the TRQ opened by Germany in this case could be characterized as a form of compensation for not fulfilling its tariff commitments in the previous round. In the application of the TRQ, Germany followed the MFN principle contained in Article XIII and the panel (and the CONTRACTING PARTIES) accepted it as a positive move toward the solution of the dispute. Thus, we find that Brazil's argument is not supported either by the text of the WTO Agreement or past GATT practices.

215. Second, and more importantly, we note that the concessions modified as the result of the Oilseeds Agreement regarding soya beans and other oilseeds were MFN commitments to bind the tariff rates on those products as duty-free. In view of the EC's obligations under Article XXVIII:2 to "maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade than that provided for" in its previous tariff schedule, compensation for the withdrawal or modification of MFN commitments should be given in an MFN manner also. If a preferential treatment of a particular trading partner not elsewhere justified is permitted under the pretext of "compensatory adjustment" under Article XXVIII:2, it would create a serious loophole in the multilateral trading system. Such a result would fundamentally alter the overall balance of concessions Article XXVIII is designed to achieve.

216. Brazil argues that by failing to respect the balance between the withdrawal of a concession and the offering of compensation in another product, the EC has denied Brazil's rights within the multilateral system. ¹²⁷ In our view, however, the balance must be sought not only bilaterally but also within the multilateral context, as required under Article XXVIII:2 of GATT. Indeed, most tariff concessions are negotiated bilaterally, but the results of the negotiations are extended on a multilateral basis. The fact that the poultry TRQ was opened as a result of bilateral negotiations between the EC and Brazil does not mean that the EC was obligated to accord the benefit exclusively to Brazil. In conclusion, we find that the object and purpose of the Oilseeds Agreement does not support Brazil's argument that the total TRQ should be reserved exclusively for its products.

(c) Preparatory work of Article XXVIII

217. The conclusion that the EC is bound, on an MFN basis, by its tariff commitments for frozen poultry meat under the Oilseeds Agreement is confirmed by the preparatory work of Article XXVIII of GATT. ¹²⁸ Regarding the provision which eventually became Article XXVIII:3, the Chairman of the Tariff Agreements Committee at Geneva in 1947 concluded as follows:

(iv) Summary

218. To sum up our findings in this section, we find no proof (either in the text or in the object and purpose of the Oilseeds Agreement) in support of the Brazilian claim that the poultry TRQ opened as the result of the Oilseeds Agreement was intended to be a country-specific tariff quota with Brazil being the sole beneficiary. In other words, we find that the EC is bound, on an MFN basis, by its tariff commitments for frozen poultry meat. We also reject Brazil's argument that Articles I and XIII of GATT do not necessarily apply to TRQs given as compensation under Article XXVIII.

C. LEGITIMATE EXPECTATIONS

219. Before moving on to the examination of Brazil's alternative claim on Article XIII of GATT, we address Brazil's supplementary claim regarding legitimate expectations by Brazil concerning the tariff treatment of the poultry products by the EC. ¹³⁰ Brazil does not invoke particular provisions of the WTO agreements to support its claim. In this regard, we note that the Appellate Body in a recent report emphasized the importance of distinguishing between (a) the concept of protecting the expectations of Members as to the competitive relationship between their products and the products of other Members and (b) the concept of the protection of the reasonable expectations of Members relating to market access conditions. According to the Appellate Body, the former was developed in the context of violation complaints involving Articles III and XI of GATT, while the latter was developed in the context of non-violation complaints. ¹³¹

220. In the present case, because Brazil does not invoke specific provisions and makes no distinction between "expectations as to the competitive relationship" and "reasonable expectations relating to market access conditions", in the absence of any further elaboration, we are not able to reach a finding on this point.

D. ARTICLE XIII OF GATT

222. Article XIII of GATT generally requires the non-discriminatory administration of quantitative restrictions. Article XIII also applies to tariff quotas, as provided in paragraph 5, which reads:

These points were affirmed by the Appellate Body in the Banana III case¹³², and are not contested by the parties. However, the parties have divergent views on the application of Article XIII to the actual operation of the TRQ in this particular case.

(i) Agreement on the allocation of the TRQ

223. Brazil claims that the EC reached an agreement with Brazil in 1993 on the allocation of the total TRQ to Brazil within the meaning of Article XIII:2(d). ¹³³ The EC rejects this claim. ¹³⁴

224. Consistent with the views on the burden of proof put forward by the Appellate Body in the Shirts and Blouses case¹³⁵, we first examine evidence produced by Brazil to determine whether it has successfully raised a presumption that an agreement regarding the allocation of tariff quotas exists.

225. Brazil has demonstrated that it complained about the operation of the TRQ as early as 28 March 1994. ¹³⁶ The first letter of complaint - from the Brazilian Ambassador in Brussels to a senior EC official - reads as follows (emphasis added):

Another letter of 20 May 1994 from the Ambassador to another EC official reads in part as follows (emphasis added):

Finally, on 15 April 1997, the Ambassador wrote to the Vice-President of the European Commission, stating (emphasis added):

226. It is also worth noting here that Brazil at this point had not explicitly claimed that the total TRQ was to be reserved exclusively for Brazil. Rather, Brazil refers to the "intent and spirit" of the Oilseeds Agreement and appears to protest against the way in which the tariff quota is distributed or allocated.

227. It appears from these letters that there was no explicit agreement regarding the allocation of tariff quotas between Brazil and the EC.

(ii) Participation of non-Members and East European countries in the TRQ

228. Brazil additionally claims that the EC has failed to follow the rules of Article XIII:2(d) by granting China, which is a non-Member, access to the TRQ ¹³⁷ and also by allocating licences to products from Members in East Europe, which have privileged access to the EC market. ¹³⁸ We address these two issues separately.

(a) Non-Members

229. We first examine the issue of non-Members. Brazil claims that the EC cannot unilaterally grant to non-Members the right to participate in a compensatory TRQ. The EC claims that there is no obligation to discriminate against non-Members under Article XIII:2(d). According to the EC, if the EC were to exclude non-Members from the scope of the allotment, the resulting share of Brazil would be higher than "the shares which the various Members might be expected to obtain in the absence of such restrictions" under the opening sentence ("chapeau") of Article XIII:2. ¹³⁹

230. We note that Article XIII carefully distinguishes between Members ("contracting parties" in the original text of GATT 1947) and "supplying countries" or "source". There is nothing in Article XIII that obligates Members to calculate tariff quota shares on the basis of imports from Members only. ¹⁴⁰ If the purpose of using past trade performance is to approximate the shares in the absence of the restrictions as required under the chapeau of Article XIII:2, exclusion of a non-Member, particularly if it is an efficient supplier, would not serve that purpose.

231. This interpretation is also confirmed by the use in Article XIII:2(d) of the term "of the total quantity or value of imports of the product" without limiting the total quantity to imports from Members.

232. The conclusion above is not affected by the fact that the TRQ in question was opened as compensatory adjustment under Article XXVIII because Article XIII is a general provision regarding the non-discriminatory administration of import restrictions applicable to any TRQs regardless of their origin.

233. For these reasons, we find that the EC has not acted inconsistently with Article XIII of GATT by calculating Brazil's tariff quota share based on the total quantity of imports, including those from non-Members.

(b) Members in East Europe

234. Now we move on to the issue of Members in East Europe. According to the evidence submitted by the EC, licences in the "others" category are allocated to poultry products originating in East Europe, notably Hungary and Poland. We note in this regard that the EC and the then Czech and Slovak Republic, Hungary and Poland in 1992 jointly notified the CONTRACTING PARTIES that the Interim Agreements aimed at the establishment of free trade areas under Article XXIV of GATT came into force as of 1 March 1992. ¹⁴¹ Brazil claims that the allocation of licences to imports of poultry products from East European countries is inconsistent with Article XIII of GATT because the EC has reduced the benefit to other Members by allowing these countries to participate in the TRQ.

235. In addressing this issue, we first note that the calculation of tariff quota shares and the participation of supplying countries in the tariff quota are two distinct issues. As noted above, it is clear from the chapeau of Article XIII:2 that the share calculation must approximate the shares which the exporting Members might be expected to obtain in the absence of the restrictions. However, such calculated shares do not necessarily determine which Members are permitted to participate in the actual allocation of licences, particularly in an "others" category.

236. In the present case, the total TRQ quantity of 15,500 tonnes is a given figure for the purposes of Article XIII, not contested by the parties. Brazil has not taken a position on the EC assertion that the annual figure of 7,100 tonnes allocated for imports from Brazil corresponds to Brazil's share among the total imports into the EC during the representative period. ¹⁴² In this context, Brazil does not specifically address the calculation of tariff quota shares. Rather, it claims that the participation of East European countries in the "others" category is inconsistent with Article XIII:2.

237. We note that Brazil cites the Newsprint panel as a precedent. ¹⁴³ The factual basis of the Newsprint case was as follows. The European Economic Community (EEC) opened a duty-free tariff quota of 500,000 tonnes for newsprint for the year 1984 whereas the commitment of the EEC in its tariff schedule provided for an annual duty-free tariff quota of 1.5 million tonnes. The reason for the reduction in the scope of the tariff quota was to take account of the free access to the EEC market of suppliers from the European Free Trade Association (EFTA), which was agreed upon subsequent to the tariff schedule. In response to a complaint by Canada, the EEC noted that if it were required to respect the 1.5 million-tonne level, it might count EFTA exports against that level. In respect of this course of suggested action by the EEC, the panel made the following statement:

238. There is some similarity between the Newsprint case and the present case regarding this specific issue. As in the Newsprint case, the purpose of the poultry TRQ is to allow specified quantities (15,500 tonnes) of imports into the EC duty-free which would otherwise be dutiable. However, there are three important factual differences. First, in the Newsprint case, EFTA suppliers were accorded duty-free access to the EEC market without restriction. In the present case, imports from Hungary and Poland under the Interim Agreements are still dutiable. ¹⁴⁵ Second, in the Newsprint case, the level of the MFN duty-free quota was reduced in order to make room for preferential access while in the present case no such reduction has occurred. Third, in the Newsprint case, the EFTA agreement was concluded after the opening of the MFN quota whereas in this case the Interim Agreements preceded the opening of the poultry TRQ.

239. Thus, the present case lacks the basis that led to the conclusion by the Newsprint panel. We also note that before making the statement cited in paragraph 237 above, the Newsprint panel stated that "the Panel could find no GATT specific provision forbidding such action". ¹⁴⁶ If Brazil had intended to claim a violation of Article XIII:2 on this specific issue, at a minimum, it should have elaborated on the nature of preferences accorded to poultry products imported from East Europe and should have tied it to inter alia "any special factors which may have or may be affecting the trade in the product" referred to in Article XIII:2(d). It has not done so.

240. Accordingly, we do not find that the EC has acted inconsistently with Article XIII with respect to the tariff quota allocation for imports from Members in East Europe.

E. LICENSING AGREEMENT

241. Brazil's claim regarding the Licensing Agreement can be sub-divided into issues involving (i) notification; (ii) changes to the licensing rules; (iii) distortion of trade; (iv) licence entitlement based on export performance; (v) speculation in licences; (vi) issuance of licences in economic quantities and newcomers; and (vii) transparency. ¹⁴⁷ We examine these issues in turn.

(i) Notification

242. Brazil claims that the EC has failed to notify the necessary information regarding the poultry TRQ to the WTO Committee on Import Licensing under Article 1.4(a) of the Licensing Agreement. ¹⁴⁸ The EC responds that it did not make a notification because it was unclear whether the Licensing Agreement applied to TRQs before the Appellate Body report on the Banana III case. The EC further claims that the mere fact of non-notification cannot be considered to render the whole regime illegal. ¹⁴⁹

243. Article 1.4(a) of the Licensing Agreement reads as follows:

244. While we note the EC's explanation for non-notification, we find this omission to be inconsistent with Article 1.4(a) of the Licensing Agreement. The fact that all the relevant information is published and that the administration of all agricultural TRQs in the EC has been notified to the WTO Committee on Agriculture does not in our view excuse the EC from notifying the sources of publication pursuant to this subparagraph.

(ii) Changes to the licensing rules

245. Brazil claims that frequent changes to the licensing rules and procedures regarding the poultry TRQ have made it difficult for governments and traders to become familiar with the rules, contrary to the provisions of Articles 1.4, 3.3, 3.5(b), 3.5(c) and 3.5(d). Brazil further notes that not all the changes have been for the purpose of the elimination of speculation in licences and that those changes that addressed the issue of speculation have not resulted in the elimination of speculation. ¹⁵¹ The EC responds that there is nothing in the Agreement that prohibits changes in licensing procedures. ¹⁵²

246. We note that the transparency requirement under the cited provisions is limited to publication of rules and other relevant information. While we have sympathy for Brazil regarding the difficulties caused by frequent changes to the rules, we find that changes in rules per se do not constitute a violation of Article 1.4, 3.3, 3.5(b), 3.5(c) or 3.5(d).

(iii) Distortion of trade

247. Brazil claims that its percentage share in the EC poultry market has been falling since the introduction of the TRQ in 1994, contrary to Brazil's expectations. In Brazil's view, this is attributable to the distortions of trade caused by the operation of the TRQ. ¹⁵³ In particular, Brazil claims that the EC has violated the provisions of Articles 1.2 and 3.2 of the Licensing Agreement.

248. Article 1.2 of the Licensing Agreement provides as follows (emphasis added):

Article 3.2 of the Licensing Agreement further provides:

249. In examining these claims, we first note that Brazil's reference to the percentage share relates to its total exports of poultry products to the EC market, the majority of which consists of over-quota (duty paid) trade. The Licensing Agreement, as applied to this particular case, only relates to in-quota trade. Second, the licences issued to imports from Brazil are fully utilized, which strongly suggests that any trade-distortive effects of the operation of the licensing rules have been overcome by exporters. Third, the total volume of poultry exports from Brazil has generally been increasing (see Annex I). Therefore, we fail to understand the relevance of the decline in the percentage share in total trade to a violation of the Licensing Agreement. Thus, based on the evidence presented by Brazil regarding its percentage share of the EC poultry market, we do not find that the EC has acted inconsistently with Articles 1.2 and 3.2 of the Licensing Agreement.

(iv) Licence entitlement based on export performance

250. Brazil claims that the EC's allocation of import licences on the basis of export performance is inconsistent with Articles 1.3 and 3.5(j) of the Licensing Agreement. ¹⁵⁴ The EC responds that nothing in the Licensing Agreement prohibits the use of a criterion relating to exports and that in any event the alleged measure is no longer in place (export performance was only taken into account for the period from 26 June 1994 to 1 June 1995). ¹⁵⁵

251. Article 1.3 of the Licensing Agreement provides:

Article 3.5(j) in relevant part provides:

252. Although the measure is no longer in place, Brazil claims that there are certain lingering effects. ¹⁵⁶ Therefore, we do not reject this claim on the grounds of mootness.

253. The requirement of export performance for the issuance of import licences on its face does seem unusual. However, Brazil has not elaborated on how the export performance requirement was administered and how it has affected the in-quota exports of poultry products from Brazil.

254. We also note that the Appellate Body in the Banana III case made the following observation:

In our view, the issue of licence entitlement based on export performance is clearly that of rules, not that of application or administration of import licensing procedures. Thus, Article 1.3 is not applicable on this specific issue.

255. Furthermore, the provision of Article 3.5(j) in this regard is hortatory and does not necessarily prohibit the consideration of other factors than import performance.

256. For these reasons, we do not find that the EC has acted inconsistently with Article 1.3 or Article 3.5(j) of the Licensing Agreement in this regard.

To continue with European Communities - Measures Affecting the Importation of Certain Poultry Products, Chapter VI, section (v) Speculation in licences

¹²¹ Paragraphs 37 and 59.

¹²² Paragraph 55.

¹²³ Article XVI:1 of the Agreement Establishing the World Trade Organization.

¹²⁴ Paragraph 54.

¹²⁵ We do not consider Brazil's reference to GATT Articles XIX:3 and XXIII:2 (paragraph 54) to be relevant to this case. Those provisions address withdrawal of concessions in specific situations involving safeguard measures or dispute settlement.

¹²⁶ Panel Report on German Import Duties on Starch and Potato Flour, noted by the CONTRACTING PARTIES on 16 February, BISD 3S/77, para. 7.

¹²⁷ Paragraph 40.

¹²⁸ Article 32 of the Vienna Convention provides: "Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31...".

¹²⁹ EPCT/TAC/PV/18, p. 46, reproduced in the Analytical Index (1995) at p. 947.

¹³⁰ Paragraph 46.

¹³¹ Appellate Body Report on India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, adopted on 16 January 1998, WT/DS50/AB/R, para. 36.

¹³² Appellate Body Report on Banana III, op. cit., para. 160.

¹³³ Paragraph 64.

¹³⁴ Paragraph 65.

¹³⁵ Appellate Body Report on United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India, adopted on 23 May 1997, WT/DS33/AB/R, p. 14. The report also states: "... a party claiming a violation of a provision of the WTO Agreement by another Member must assert and prove its claim" (p. 16).

¹³⁶ Letters of complaint attached to Brazil's first written submission. We note that the EC did not respond to any of these letters in writing.

¹³⁷ Paragraph 66.

¹³⁸ Paragraphs 68 and 70.

¹³⁹ Paragraph 71. We note that if the EC were to exclude non-Members from the basis of the calculation of tariff quota shares, such an exclusion in itself would not constitute a violation of Article XIII:2. The question we need to address here is whether the EC is required to exclude non-Members from the basis of the calculation of tariff quota shares.

¹⁴⁰ We note in this regard that in the Banana III case, the panel made the following observation (which was not affected by the subsequent appeal): "The consequence of the foregoing analysis is that Members may be effectively required to use a general ‘others’ category for all suppliers other than Members with a substantial interest in supplying the product. The fact that in this situation tariff quota shares are allocated to some Members, notably those having a substantial interest in supplying the product, but not to others that do not have a substantial interest in supplying the product, would not necessarily be in conflict with Article XIII:1. While the requirement of Article XIII:2(d) is not expressed as an exception to the requirements of Article XIII:1, it may be regarded, to the extent that its practical application is inconsistent with it, as lex specialis in respect of Members with a substantial interest in supplying the product concerned". See panel reports on European Communities - Regime for the Importation, Sale and Distribution of Bananas, op. cit., para. 7.75. The quoted passage, particularly the use of the phrase "all suppliers other than Members with a substantial interest in supplying the product" (emphasis added), indicates that the Banana III panel did not take the view that allocation of quota shares to non-Members under Article XIII:2(d) was not permitted.

¹⁴¹ L/6992, 3 April 1992.

¹⁴² Paragraph 53.

¹⁴³ Panel on Newsprint, adopted on 20 November 1984, BISD 31S/114.

¹⁴⁴ Ibid, para. 55.

¹⁴⁵ According to the annexes attached to the notification referred to in paragraph 234, one category of poultry meat (0207 41 10) originating in Hungary and Poland benefit from certain special non-MFN quotas under the Interim Agreements. However, imports under these quotas are dutiable at reduced rates. See Official Journal No L 348/1. Since Brazil has submitted no evidence regarding the nature of preferences on poultry products from East Europe, we are not in a position to know what kind of preferential treatment, if any, is given to other categories (0207 41 41 and 0207 41 71).

¹⁴⁶ Panel Report on Newsprint, op. cit., para. 55.

¹⁴⁷ In addition to these seven issues, Brazil refers to the nature of compensation in the context of the Licensing Agreement also. See paragraph 109. However, since we have already addressed this issue in our analysis of the Oilseeds Agreement, we do not consider it necessary to repeat the discussion.

¹⁴⁸ Paragraph 76. We note that Brazil does not refer to Article 5 of the Licensing Agreement, which is a more general provision about notification. Article 1.4(a) only deals with the sources of publication.

¹⁴⁹ Paragraph 77.

¹⁵⁰ Footnote 3 to this subparagraph reads as follows: "For the purpose of this Agreement, the term 'governments' is deemed to include the competent authorities of the European Communities."

¹⁵¹ Paragraph 80. See also paragraph 76.

¹⁵² Paragraph 81.

¹⁵³ Paragraphs 82 and 84.

¹⁵⁴ Paragraph 86.

¹⁵⁵ Paragraphs 87 and 88.

¹⁵⁶ Paragraph 89.

¹⁵⁷ Appellate Body Report on the Banana III, op. cit., para. 197.