2.  Legal Arguments

(a) Article XVI:4 of the WTO Agreement

5.8  Brazil recalls that the European Communities draws a distinction between mandatory and discretionary actions under Sections 301-310. The European Communities then proceeds to claim that those sections which require actions that are in themselves contrary to WTO provisions – unilateral determinations to the effect that a violation has occurred and that benefits have been nullified or impaired, or that measures taken to comply with findings adopted by the DSB are not satisfactory – as well as those actions which the USTR will be required to perform under certain circumstances – "further actions" in cases where a unilateral determination of non-compliance is made – amount to violations of various provisions of the WTO Agreement and thereby nullify or impair benefits accruing to the European Communities under the DSU, the GATT 1994 and the WTO Agreement.

5.9  In Brazil's view, the European Communities has placed undue emphasis on previous GATT practices and decisions, such as the 1987 panel on United States – Taxes on Petroleum and Certain Imported Substances,⁵⁰⁸ the 1989 panel on United States – Section 337 of the Tariff Act of 1930,⁵⁰⁹ and the 1992 panel on United States – Measures Affecting Alcoholic and Malt Beverages.⁵¹⁰ Under GATT 1947 – and no doubt under the influence of the Protocol of Provisional Application – only mandatory legislation was found liable to a judgement of inconsistency by a panel. It should be noted, however, that even then, a mandatory law that was not enforced was found to constitute a violation of GATT obligations.

5.10  Brazil argues that it would be wrong to assume that this part of GATT 1947 practice was carried into the WTO unchanged. Article XVI:1 of the WTO Agreement, which is the foundation for incorporating the legal history and experience under the GATT 1947 into the WTO,⁵¹¹ contains a proviso:

"Except as otherwise provided under this Agreement or the Multilateral Trade Agreements, the WTO shall be guided by the decisions, procedures and customary practices followed by the GATT CONTRACTING PARTIES and the bodies established in the framework of GATT 1947".(emphasis added)

5.11  Brazil contends that the adoption of Article XVI:4 should lead to a review of previous practice. It states unequivocally that:

"Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements".

5.12  Brazil points out that GATT 1947 had no equivalent provision. To interpret Article XVI:4 in the old spirit would be to deprive it of meaning.

5.13  In Brazil's view, whilst the European Communities may have restrained its claims, it would be clearly out of order to deduct from such restraint new terms of reference for the Panel, as the United States would have it. The task before the Panel still is "to examine, in the light of the relevant provisions of the covered agreements cited by the European Communities in document WT/DS152/11, the matter referred to the DSB in that document and to make such findings and recommendations as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements". The matter referred by the European Communities is whether Sections 301-310 of the US Trade Act of 1974 is inconsistent with various provisions of the DSU, the WTO Agreement and GATT 1994. This is the burden of proof incumbent upon the European Communities. The European Communities did not request a ruling on the consistency of Sections 301-310 with previous GATT practice, let alone with the US interpretation of what such previous practice meant.

5.14  Brazil recalls that the United States bases its rebuttal solely on GATT 1947 practice. According to the United States, previous panels had come to the conclusion that (1) only mandatory legislation may be found inconsistent with WTO obligations and (2) legislation must not only be mandatory, it must preclude a Member from acting consistently with those obligations. The United States then proceeds to claim that in effect the whole of Sections 301-310 is either discretionary or mandates action that may, at times, be WTO consistent.

5.15  Brazil disagrees with the notion that GATT practice was carried unchanged into the WTO. Brazil disapproves even more of the proposition that no law may be found inconsistent unless "it does not allow" a government to act in accordance with its WTO obligations, in particular if "does not allow" is understood as "never allows". If such had been the practice in the past, the argument to the effect that Article XVI:4 of the WTO Agreement has abrogated jurisprudence in this respect becomes even more compelling than it already is. There is no possible interpretation of Article XVI:4, in light of the criteria laid down in Article 31 of the Vienna Convention on the Law of Treaties, that would warrant such an extravagant reading.⁵¹²

5.16  Brazil argues that it is worth noting that the US First Submission did not reply to the EC's claim of violation of Article XVI:4. The United States invoked "past practice", and claimed that the European Communities has not proven that Sections 301-310 are mandatory in a way that precludes WTO-consistency at all times and "deducts" that Sections 301-310 are therefore consistent with Article XVI:4. Thus, at a stroke, almost extempore, past practice developed in the absence of any provision similar to Article XVI:4 is used to interpret Article XVI:4 of the WTO Agreement, in a way which would render it meaningless. In addition to the questionable validity of the premises, this is a good example of the logical fallacy known as ignoratio elenchi: arguing for one thing as if it proved another thing.

5.17  Brazil notes that the European Communities recognizes that "[Article XVI:4] is not a 'best endeavors' clause, applicable only to cases where changes to domestic laws are required, but an unqualified obligation". Article XVI:4 requires that internal law be brought into conformity with obligations under the WTO Agreements.

5.18  Brazil recalls that Article 22 of the Agreement on Implementation of Article VII of the GATT 1994 contains a similar provision:

"Each Member shall ensure, not later than the date of application of the provisions of this Agreement for it, the conformity of its laws, regulations and administrative procedures with the provisions of this Agreement".

5.19  Brazil contends that if a WTO Member country were to include in its legislation on customs valuation a section "authorizing", but not requiring, Customs "to make a determination, based on an investigation initiated at the request of a private party, determining that the importation of goods below a certain price would be unreasonable and burden or restrict" that Member's commerce, such a provision would be consistent with Article 22 of the Agreement on Customs Valuation and with Article XVI:4 of the WTO Agreement. Or the uncertainty that would ensue from such an "authorization" would not be deemed unacceptable. Yet, the Agreement on Implementation of Article VII of the GATT 1994 is not "a central element providing security and predictability to the multilateral trading system". The DSU, however, is.⁵¹³

5.20  Brazil notes that its argument is far from stating that any law authorizing actions that might result in violations of the WTO Agreements would, in themselves, be inconsistent with obligations under those Agreements. The dichotomy suggested by the United States is a non sequitur. What is necessary, is lawful. For example, in the Agreement on the Application of Sanitary and Phytosanitary Measures, one of the basic obligations is that "Members shall ensure that any sanitary or phytosanitary measure is applied only to the extent necessary to protect human, animal or plant life or health, is based on scientific principles and is not maintained without scientific evidence, except as provided".⁵¹⁴ No internal law could, however, be drafted in a manner that would a priori ensure conformity with WTO obligations without impinging upon "the right to take sanitary and phytosanitary measures necessary for the protection of human, animal or plant life or health".⁵¹⁵ In such cases, conformity must necessarily be assessed in relation to specific measures, on a case by case basis.

5.21  Brazil argues that the distinguishing feature of Section 301(b) is that if any action is ever undertaken under its authority, it will necessarily lead to violations of GATT and GATS, including, inter alia, the most-favored-nation provisions of those agreements. In addition to that, there are no legitimate "reserved domain" considerations that might justify it. Legislation whose only possible application is the threat of illegal WTO action can hardly be deemed to be compatible with Article 23 of the DSU and with Article XVI:4 of the WTO Agreement.

5.22  Brazil points out that as regards Section 301(a), the question is not whether it precludes at all times WTO-consistent actions, but rather whether it mandates actions which will eventually result in WTO violations.

5.23  According to Brazil, it has been noted that "arising from the nature of treaty obligations and from customary law, there is a general duty to bring internal law into conformity with obligations under international law … however, in general a failure to bring about such conformity is not in itself a direct breach of international law, and a breach arises only when the state concerned fails to observe its obligations on a specific occasion. … In some circumstances legislation could of itself constitute a breach of a treaty provision and a tribunal might be requested to make a declaration to that effect".⁵¹⁶ Article XVI:4 requires that legislation be brought into conformity, and failure to do so is in itself a breach of the WTO Agreement. There is no need to look at any specific cases, or to the mandatory of discretionary nature of the legislation.

5.24  Brazil further argues that in any event, the bona fide argument with regard to the non-violation status of a discretionary law rests solely on its non-utilization.⁵¹⁷ This is not, however, the intention of the United States. To invoke the "discretionary" label as its defense, whilst pronouncing its intention to utilize the law, can hardly be deemed as an act in good faith.

5.25  In Brazil's view, lest there be any doubt, the Statement of Administrative Action which accompanies the Uruguay Round Agreements Act,⁵¹⁸ and which represents "an authoritative expression by the Administration concerning its views regarding the interpretation and application of the Uruguay Round Agreements, both for purposes of US international obligations and domestic laws",⁵¹⁹ gives notice of the "Administration's intent to expand the focus of possible action under Section 301 to areas that are not within the scope of US obligations under the Uruguay Round Agreements".⁵²⁰

5.26  Brazil notes that this "expansion of focus" is explained in further detail:

"The Administration intends to use section 301 to pursue vigorously foreign unfair trade barriers that violate US rights or deny benefits to the United States under the Uruguay Round Agreements. The Administration equally intends to use section 301 to pursue foreign unfair trade barriers that are not covered by those agreements". ⁵²¹

"Neither section 301 nor the DSU will require the Trade Representative to invoke DSU dispute settlement procedures if the Trade Representative does not consider that a matter involves a Uruguay Round Agreement. Section 301 will remain fully available to address unfair practices that do not violate US rights or deny US benefits under the Uruguay Round Agreements and, as in the past, such investigations will not involve recourse to multilateral dispute settlement procedures…. For example, with minor exceptions, the Uruguay Round Agreements do not address government measures that encourage or tolerate private, anticompetitive practices.…. Section 301 will also remain available to address persistent patterns of conduct by foreign governments that deny basic worker rights and burden or restrict US commerce….  Moreover, the mere fact that the Uruguay Round agreements treat a particular subject matter – such as intellectual property rights – does not mean that the Trade Representative must initiate DSU proceedings in every section 301 investigation involving that subject matter. In the event that the actions of the foreign government in question fall outside the disciplines of those agreements, the section 301 investigation would proceed without recourse to DSU procedures".⁵²²

5.27  Brazil then recalls the scope of authority available to the US Administration to proceed without recourse to DSU procedures in Section 301(c):

"For purposes of carrying out the provisions of subsections (a) or (b), the Trade Representative is authorized to –

(A) suspend, withdraw, or prevent the application of, benefits of trade agreement concessions to carry out a trade agreement with the foreign country referred to in such subsection;

(B) impose duties or other import restrictions on the goods of, and, notwithstanding any other provision of law, fees or restrictions on the services of, such foreign country for such time as the Trade Representative determines appropriate…".

5.28  Brazil contends that in other words, to pursue the removal of practices that do not violate US rights, the US threatens to violate the rights of WTO Members.

5.29  Brazil argues that it would have been positively anomalous to include a provision in the DSU stating that WTO Members would have to make recourse to a panel and to the DSB to make a determination of non-violation. Yet, the United States seems to use this as a pretext for unilateral action. WTO Members are, of course, entitled to make unilateral determinations of non-violation and of any interests they may have that are not currently covered by the WTO Agreements. What they may not do in such instances is to take unilateral action equivalent to that foreseen under Article 22 of the DSU.

5.30  Brazil stresses that WTO Members are entitled, in accordance with Article 23 of the DSU, not to be subject to suspension of concessions unless "the Member concerned fails to bring the measure found to be inconsistent with a covered agreement into compliance therewith or otherwise comply with the recommendations and rulings within the reasonable period of time".⁵²³ A fortiori, they are entitled not to be subject to suspension of rights and concessions in the absence of a determination of violation by the DSB.

5.31  Brazil further asserts that along the same lines, it is a well recognized general principle of law that a prohibition to do less encompasses a prohibition to do more. The United States would turn the principle upside down: where the United States has a right, arising from denial of benefits under the WTO Agreements, the Statement of Administrative Action acknowledges the limits for action imposed by the DSU. Yet, it unaccountably comes to the conclusion that in cases where it has no rights, it faces no limits under the DSU.

5.32  According to Brazil, the fact that the USTR is not required to take action in such circumstances at all times should not shield it from a judgement of non-compliance with its WTO obligations. As stated by the European Communities, "a party does not act in good faith if it accepts an obligation stipulating one behavior, but adopts a law explicitly stipulating another. The fact that it might exceptionally apply that law in a way that is not inconsistent with its WTO obligations does not affect the above conclusion, particularly where there is no legal entitlement to obtain such an exceptional 'act of grace'".

5.33  Brazil recalls that in 1988 the United States threatened and then imposed sanctions, in the guise of 100 per cent duties against imports of more than 20 products from Brazil under Section 301, in a determination of "unreasonable measures" related to patent protection for pharmaceuticals. The sanctions remained in place for two years, and were only lifted after Brazil undertook to grant patent protection to pharmaceutical products.

5.34  Brazil emphasizes that the issue before this Panel is not the application of Section 301, but its inherent inconsistency with the WTO obligations of the United States. This example is given as background, which the panel may wish to consider in connection with the US assertion that "it was consistent US practice, even before the conclusion of the Uruguay Round, to rely on dispute settlement results when determining whether US agreement rights were denied". In the case involving Brazil, no US rights under any agreement had been denied. This may have given the USTR a sense of unbounded freedom to act as it did in violation of Brazil's rights under the GATT 1947.

5.35  According to Brazil, the freedom to threaten to negate unilaterally the benefits of WTO Agreements may be effective,⁵²⁴ but it is not compatible with a rule-based multilateral trading system. The system cannot survive if its most powerful Members wish to enjoy its benefits, but reject its responsibilities: qui habet comoda, ferre debet onera.⁵²⁵ Brazil recalls the following dictum of the Permanent Court of Justice in Certain German Interest in Polish Upper Silesia:

"The Court is certainly not called upon to interpret the Polish law as such; but there is nothing to prevent the Court's giving judgement on the question whether or not, in applying that law, Poland is acting in conformity with its obligations towards Germany under the Geneva Convention".⁵²⁶

5.36  Brazil contends that in those cases under the GATT 1947 when a law was found to be inconsistent with GATT obligations, a prospective judgement on the application of the law was made, in contrast with the retrospective judgement made with regard to specific measures. There is nothing to prevent the same prospective judgement of the discretionary sections of a law, specially when the application of that law will necessarily lead to violation of the WTO Agreements.

(b) Distinction between mandatory law and discretionary law

5.37  Brazil further contends that even if the panel were to find incorrectly that the distinction established by previous GATT panels regarding mandatory versus discretionary legislation remains valid, it should flatly reject the US interpretation of such past practice. The United States alleges that "legislation explicitly directing action inconsistent with GATT principles does not mandate inconsistent action so long as it provides the possibility for authorities to avoid such action" and cites, as the basis for this extraordinary conclusion, excerpts of the panel reports on United States – Taxes on Petroleum and Certain Imported Substances,⁵²⁷ Thailand – Restrictions on importation of and Internal Taxes on Cigarettes⁵²⁸ and United States – Measures Affecting the Importation, Internal Sale and Use of Tobacco.⁵²⁹

5.38  Brazil argues that none of the panels cited came to the conclusion espoused by the United States. The US – Superfund panel gave US authorities the benefit of doubt, pending the completion of the applicable legislation. It did not say that the US tax authorities could retain forever the discretion to deny the equivalence prescribed in Article III:2 of GATT. In fact, the panel recommended that the CONTRACTING PARTIES "take note of the statement by the United States that the penalty rate would in all probability never be applied".⁵³⁰ WTO Members might take some solace if the United States were to argue, in these panel proceedings, that the WTO-inconsistent provisions of Sections 301-310 would in all probability never be applied. In that case, however, the assertion would have to be pondered against the evidence of the views presented in the Statement of Administrative Action.

5.39  Brazil further alleges that the panel on United States – Measures Affecting the Importation, Internal Sale and Use of Tobacco came to a similar finding. Given that the United States had as yet neither changed the fee structure nor promulgated rules implementing Section 1106(c), it gave the United States the benefit of doubt, in light of its declared intention to promulgate regulations that would be GATT-consistent:

"The United States had indicated that it was the intention of the U.S. Government and the requirement of U.S. law that any new inspection fees promulgated by USDA would be commensurate with the cost of services rendered. The United States had further indicated that the amendment requiring the fees for inspecting imported tobacco to be comparable to those imposed on domestic tobacco did not require the fees to be identical and did not preclude a fee structure under which the fees for inspection of imports were less than those imposed on domestic products and at the same time commensurate with the cost of services rendered".⁵³¹

5.40  In the view of Brazil, the example of the panel on Thailand – Restrictions on importation of and Internal Taxes on Cigarettes⁵³² is even less appropriate. In this case, regulations had already been issued stipulating that an excise tax would be applied to domestic and imported cigarettes at a single rate of 55 per cent.⁵³³ Thus, in reading the conclusion cited by the United States, it must be borne in mind that whilst the Thai Tobacco Act continued to enable the executive authorities to levy discriminatory taxes, regulations already issued prevented such discrimination.

5.41  According to Brazil, no GATT panel has ever come to the conclusions alleged by the United States. Under GATT 1947, panels made a distinction regarding mandatory and discretionary legislation, but mandatory was never understood as "precluding all possibility of consistency" at all times.

5.42  In Brazil's view, the US arguments therefore attempt to introduce a confusion with regard to the seemingly clear meaning of "mandatory". In addition to that, it also attempts to confuse the meaning of "discretionary". Thus, the United States argues that "the Trade Representative has substantial discretion, including discretion to take no action at all. The Trade Representative is explicitly not required to take action: (1) when the DSB has adopted report findings that US rights have not been violated; (2) when the foreign country "is taking satisfactory measures to grant the rights of the United States under a trade agreement", has agreed to eliminate or phase out the practice which violated US rights, or has agreed to provide compensation; (3) when action would have "an adverse impact on the United States economy substantially out of proportion to the benefits of such action;" (4) or when action would cause "serious harm to [US] national security".

5.43  Brazil further argues that apart from noting that the heading under which these provisions are listed is entitled "Mandatory action", one must also recall that, to the extent that past practice is invoked as relevant to discern the content of treaty obligations, its concepts must also be interpreted in good faith, in accordance with the ordinary meaning of the terms.

5.44  Brazil points out that according to Black's Law Dictionary,⁵³⁴ "when applied to public functionaries, discretion means a power or right conferred upon them by law of acting officially in certain circumstances, according to the dictates of their own conscience uncontrolled by the judgement or conscience of others". If a condition must be fulfilled before the effect can follow, the preceding definition is not applicable. If the lack of action is made contingent upon a WTO Member, for instance, "agreeing to an imminent solution to the burden or restriction on United States commerce",⁵³⁵ the "discretion" takes on a very special meaning.

5.45  Brazil concludes that ex re sed non ex nomine is a principle of good faith. This principle precludes, inter alia, a party from using the form of the law to cover the commission of what in effect is an unlawful act.