What's New?
 - Sitemap - Calendar
Trade Agreements - FTAA Process - Trade Issues 

español - français - português

World Trade


22 December 1999
Original: English



Report of the Panel


4. Article 23.2(a) of the DSU interpreted in accordance with the Vienna Convention Rules on Treaty Interpretation

(a) "A treaty shall be interpreted … in accordance with the ordinary meaning to be given to the terms of the treaty …"

7.58   First, then, the raw text of Article 23.

7.59   The text of Article 23.1 is simple enough:  Members are obligated generally to (a) have recourse to and (b) abide by DSU rules and procedures.  These rules and procedures include most specifically in Article 23.2(a) a prohibition on making a unilateral determination of inconsistency prior to exhaustion of DSU proceedings.   As a plain textual matter, therefore, could it not be said that statutory language of a Member specifically authorizing a determination of inconsistency prior to exhaustion of DSU procedures violates the ordinary meaning of Members' obligations under Article 23?

7.60   Put differently, cannot the raw text of Articles 23.2(a) and 23.1 be read as constituting a mutual promise among WTO members giving each other a guarantee enshrined in an international legal obligation, that certain specific conduct will not take place?  Does not the text of Article 23.1 in particular suggest that this promise has been breached and the guarantee compromised when a Member puts in place legislation which explicitly allows it to do that which it promised not to do?

7.61  On this reading, the very discretion granted under Section 304, which under the US argument absolves the legislation, is what, in our eyes, creates the presumptive violation. The statutory language which gives the USTR this discretion on its face precludes the US from abiding by its obligations under the WTO.  In each and every case when a determination is made whilst DSU proceedings are not yet exhausted, Members locked in a dispute with the US will be subject to a mandatory determination by the USTR under a statute which explicitly puts them in that very danger which Article 23 was intended to remove.660

7.62   It could be said that this is a danger which can never be entirely removed.   After all, even those Members which do not have any internal "trade legislation" can any day of the week decide to violate their WTO obligations including the obligations under Article 23.

7.63  In our view, when a WTO Member has not enacted specific legislation providing for procedures to enforce WTO rights, normally only the first type of violation of Article 23 can occur, i.e. a breach of the promise not to make determinations of inconsistency before the adoption of DSB findings in specific disputes.   Certain WTO Members, however, including the US and the EC, have enacted legislation for seeking redress of WTO inconsistencies.  There can be very good reasons related to norms of transparency, democracy and the rule of law which explain why Members may wish to have such legislation.  However, when a Member adopts any legislation it has to be mindful that it does not violate its WTO obligations.  Trade legislation, important or positive as it may be, which statutorily reserves the right for the Member concerned to do something which it has promised not to do under Article 23.2(a), goes, in our view, against the ordinary meaning of Article 23.2(a) read together with Article 23.1.

(b) "A treaty shall be interpreted in good faith …"

7.64  It is notoriously difficult, or at least delicate, to construe the requirement of the Vienna Convention that a treaty shall be interpreted in good faith in third party dispute resolution, not least because of the possible imputation of bad faith to one of the parties.  We prefer, thus, to consider which interpretation suggests "better faith" and to deal only briefly with this element of interpretation.  Applying the good faith requirement to Article 23 may not lead to a conclusive result but impels us in the direction suggested by our examination of the ordinary meaning of the raw text.

7.65  Imagine two farmers with adjacent land and a history of many disputes concerning real and alleged mutual trespassing.  In the past, self help through force and threats of force has been used in their altercations.  Naturally, exploitation of the lands close to the boundaries suffers since it is viewed as dangerous terrain.   They now sign an agreement under which they undertake that henceforth in any case of alleged trespassing they will abjure self help and always and exclusively make recourse to the police and the courts of law.  They specifically undertake never to use force when dealing with alleged trespass.  After the entry into force of their agreement one of the farmers erects a large sign on the contested boundary: "No Trespassing.  Trespassers may be shot on sight".

7.66   One could, of course, argue that since the sign does not say that trespassers will be shot, the obligations undertaken have not been violated.  But would that be the "better faith" interpretation of what was promised?  Did they not after all promise  always and exclusively to make recourse to the police and the courts of law?

7.67   Likewise, is it a good faith interpretation to construe the obligations in Article 23 to allow a Member that promised  its WTO partners – under Articles 23.1 and 23.2(a) – that it will generally, including in its legislation, have recourse to and abide by the rules and procedures of the DSU which specifically contain an undertaking not to make a determination of inconsistency prior to exhaustion of DSU proceedings, to put in place legislation the language of which explicitly, urbi et orbi, reserves to its Executive Branch the right to make a determination of inconsistency – that which it promised it would not do?  This Panel thinks otherwise. 

7.68   The good faith requirement in the Vienna Convention suggests, thus, that a promise to have recourse to and abide by the rules and procedures of the DSU, also in one's legislation, includes the undertaking to refrain from adopting national laws which threaten prohibited conduct.

7.69   We do not wish to argue that this reading of Article 23 based on the raw text and the good faith consideration referred to in Article 31 of the Vienna Convention, but not yet read in the light of the DSU's and the WTO's object and purpose, is necessarily compelling.  It is, however, in our view a perfectly plausible reading.  Whilst we reject the US argument which would construe the interdiction in Article 23.2(a) to refer exclusively to actual determinations of inconsistency or legislation mandating such determinations, we do not think that it, too, based on the raw text alone, is implausible.

7.70   Any doubts one might have, however, between these two possible interpretations are dispelled when we consider the other interpretative elements found in Article 31 of the Vienna Convention. For presentational and narrative reasons we will deal with object-and-purpose before we deal with context.

(c) "… the ordinary meaning … in the light of [the treaty's] object and purpose"

7.71   What are the objects and purposes of the DSU, and the WTO more generally, that are relevant to a construction of Article 23?  The most relevant in our view are those which relate to the creation of market conditions conducive to individual economic activity in national and global markets and to the provision of a secure and predictable multilateral trading system.

7.72   Under the doctrine of direct effect, which has been found to exist most notably in the legal order of the EC but also in certain free trade area agreements, obligations addressed to States are construed as creating legally enforceable rights and obligations for individuals.  Neither the GATT nor the WTO has so far been interpreted by GATT/WTO institutions as a legal order producing direct effect.661 Following this approach, the GATT/WTO did not create a new legal order the subjects of which comprise both contracting parties or Members and their nationals.

7.73   However, it would be entirely wrong to consider that the position of individuals is of no relevance to the GATT/WTO legal matrix.  Many of the benefits to Members which are meant to flow as a result of the acceptance of various disciplines under the GATT/WTO depend on the activity of individual economic operators in the national and global market places.  The purpose of many of these disciplines, indeed one of the primary objects of the GATT/WTO as a whole, is to produce certain market conditions which would allow this individual activity to flourish.

7.74   The very first Preamble to the WTO Agreement states that Members recognise

"that their relations in the field of trade and economic endeavour should be con­ducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services".662

7.75   Providing security and predictability to the multilateral trading system is another central object and purpose of the system which could be instrumental to achieving the broad objectives of the Preamble.  Of all WTO disciplines, the DSU is one of the most important instruments to protect the security and predictability of the multilateral trading system and through it that of the market-place and its different operators.  DSU provisions must, thus, be interpreted in the light of this object and purpose and in a manner which would most effectively enhance it.  In this respect we are referring not only to preambular language but also to positive law provisions in the DSU itself.  Article 3.2 of the DSU provides:

"The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system.  The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements …".663

7.76   The security and predictability in question are of "the multilateral trading system".  The multilateral trading system is, per force, composed not only of States but also, indeed mostly, of individual economic operators. The lack of security and predictability affects mostly these individual operators.

7.77   Trade is conducted most often and increasingly by private operators.   It is through improved conditions for these private operators that Members benefit from WTO disciplines.  The denial of benefits to a Member which flows from a breach is often indirect and results from the impact of the breach on the market place and the activities of individuals within it.  Sections 301-310 themselves recognize this nexus.  One of the principal triggers for US action to vindicate US rights under covered agreements is the impact alleged breaches have had on, and the complaint emanating from, individual economic operators.

7.78   It may, thus, be convenient in the GATT/WTO legal order to speak not of the principle of direct effect but of the principle of indirect effect.

7.79   Apart from this name-of-convenience, there is nothing novel or radical in our analysis. We have already seen that it is rooted in the language of the WTO itself.   It also represents a GATT/WTO orthodoxy confirmed in a variety of ways over the years including panel and Appellate Body reports as well as the practice of Members.

7.80   Consider, first, the overall obligation of Members concerning their internal legislation.  Under traditional public international law a State cannot rely on its domestic law as a justification for non-performance.664 Equally, however, under traditional public international law, legislation under which an eventual violation could, or even would, subsequently take place, does not normally in and of itself engage State responsibility.  If, say, a State undertakes not to expropriate property of foreign nationals without appropriate compensation, its State responsibility would normally be engaged only at the moment foreign property had actually been expropriated in a given instance.  And yet, even in the GATT, prior to the enactment of Article XVI:4 of the WTO Agreement explicitly referring to measures of a general nature, legislation as such independent from its application in specific instances was considered to constitute a violation.  This is confirmed by numerous adopted GATT panel reports and is also agreed upon by both parties to this dispute.  Why is it, then, that legislation as such was found to be inconsistent with GATT rules?  If no specific application is at issue – if, for example, no specific discrimination has yet been made – what is it that constitutes the violation? 

7.81   Indirect impact on individuals is, surely, one of the principal reasons.   In treaties which concern only the relations between States, State responsibility is incurred only when an actual violation takes place.  By contrast, in a treaty the benefits of which depend in part on the activity of individual operators the legislation itself may be construed as a breach, since the mere existence of legislation could have an appreciable "chilling effect" on the economic activities of individuals.

7.82   Thus, Article III:2 of GATT 1947, for example, would not, on its face, seem to prohibit legislation independently from its application to specific products.   However, in light of the object and purpose of the GATT, it was read in GATT jurisprudence as a promise by contracting parties not only that they would abstain from actually imposing discriminatory taxes, but also that they would not enact legislation with that effect.

7.83   It is commonplace that domestic law in force imposing discriminatory taxation on imported products would, in and of itself, violate Article III irrespective of proof of actual discrimination in a specific case.665 Furthermore, a domestic law which exposed imported products to future discrimination was recognized by some GATT panels to constitute, by itself, a violation of Article III, even before the law came into force.666 Finally, and most tellingly, even where there was no certainty but only a risk under the domestic law that the tax would be discriminatory, certain GATT panels found that the law violated the obligation in Article III.667 A similar approach was followed in respect of Article II of GATT 1994 by the WTO panel on Argentina – Textiles and Apparel (US) when it found that the very change in system from ad valorem to specific duties was a breach of Argentina's ad valorem tariff binding even though such change only brought about the potential of the tariff binding being exceeded depending on the price of the imported product.668

7.84   The rationale in all types of cases  has always been the negative effect on economic operators created by such domestic laws. An individual would simply shift his or her trading patterns – buy domestic products, for example, instead of imports – so as to avoid the would-be taxes announced in the legislation or even the mere risk of discriminatory taxation.  Such risk or threat, when real, was found to affect the relative competitive opportunities between imported and domestic products because it could, in and of itself, bring about a shift in consumption from imported to domestic products:   This shift would be caused by, for example, an increase in the cost of imported products and a negative impact on economic planning and investment to the detriment of those products.  This rationale was paraphrased in the Superfund case as follows:

"to protect expectations of the contracting parties as to the competitive relationship between their products and those of the other contracting parties.  Both articles [GATT Articles III and XI] are not only to protect current trade but also to create the predictability needed to plan future trade".669

Doing so, the panel in Superfund referred to the reasoning in the Japanese Measures on Imports of Leather case.  There the panel found that an import quota constituted a violation of Article XI of GATT even though the quota had not been filled.  It did so on the following grounds:

"the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had had on the volume of trade but also for other reasons e.g. it would lead to increased transaction costs and would create uncertainties which could affect investment plans".670

7.85   In this sense, Article III:2 is not only a promise not to discriminate in a specific case, but is also designed to give certain guarantees to the market place and the operators within it that discriminatory taxes will not be imposed.  For the reasons given above, any ambivalence in GATT panel jurisprudence as to whether a risk of discrimination can constitute a violation should, in our view, be resolved in favour of our reading.671

7.86   Similarly, Article 23 too has to be interpreted in the light of these principles which encapsulate such a central object and purpose of the WTO.  It may have been plausible if one considered a strict Member-Member matrix to insist that the obligations in Article 23 do not apply to legislation that threatens unilateral determinations but does not actually mandate them.  It is not, however, plausible to construe Article 23 in this way if one interprets it in the light of the indirect effect such legislation has on individuals and the market-place, the protection of which is one of the principal objects and purposes of the WTO.

7.87   To be sure, in the cases referred to above, whether the risk materialised or not depended on certain market factors such as fluctuating reference prices on which the taxation of the imported product was based by virtue of the domestic legislation. In this case, whether the risk materializes depends on a decision of a government agency.   From the perspective of the individual economic operator, however, this makes little difference.  Indeed, it may be more difficult to predict the outcome of discretionary government action than to predict market conditions, thereby exacerbating the negative economic impact of the type of domestic law under examination here.

7.88   When a Member imposes unilateral measures in violation of Article 23 in a specific dispute, serious damage is created both to other Members and the market-place.  However, in our view, the creation of damage is not confined to actual conduct in specific cases.  A law reserving the right for unilateral measures to be taken contrary to DSU rules and procedures, may – as is the case here – constitute an ongoing threat and produce a "chilling effect" causing serious damage in a variety of ways.

7.89   First, there is the damage caused directly to another Member. Members faced with a threat of unilateral action, especially when it emanates from an economically powerful Member, may in effect be forced to give in to the demands imposed by the Member exerting the threat, even before DSU procedures have been activated.  To put it differently, merely carrying a big stick is, in many cases, as effective a means to having one's way as actually using the stick.  The threat alone of conduct prohibited by the WTO would enable the Member concerned to exert undue leverage on other Members.  It would disrupt the very stability and equilibrium which multilateral dispute resolution was meant to foster and consequently establish, namely equal protection of both large and small, powerful and less powerful Members through the consistent application of a set of rules and procedures.672

7.90   Second, there is the damage caused to the market-place itself.  The mere fact of having legislation the statutory language of which permits conduct which is WTO prohibited – namely, the imposition of unilateral measures against other Members with which it is locked in a trade dispute – may in and of itself prompt economic operators to change their commercial behaviour in a way that distorts trade.  Economic operators may be afraid, say, to continue ongoing trade with, or investment in, the industries or products threatened by unilateral measures.  Existing trade may also be distorted because economic operators may feel a need to take out extra insurance to allow for the illegal possibility that the legislation contemplates, thus reducing the relative competitive opportunity of their products on the market.   Other operators may be deterred from trading with such a Member altogether, distorting potential trade.  The damage thus caused to the market-place may actually increase when national legislation empowers individual economic operators to trigger unilateral State action, as is the case in the US which allows individual petitioners to request the USTR to initiate an investigation under Sections 301-310. This in itself is not illegal.  But the ability conferred upon economic operators to threaten their foreign competitors with the triggering of a State procedure which includes the possibility of illegal unilateral action is another matter. It may affect their competitive economic relationship and deny certain commercial advantages that foreign competitors would otherwise have.  The threat of unilateral action can be as damaging on the market-place as the action itself.

7.91  In conclusion, the risk of discrimination was found in GATT jurisprudence to constitute a violation of Article III of GATT – because of the "chilling effect" it has on economic operators.   The risk of a unilateral determination of inconsistency as found in the statutory language of Section 304 itself has an equally apparent "chilling effect" on both Members and the market-place even if it is not quite certain that such a determination would be made.  The point is that neither other Members nor, in particular, individuals can be reasonably certain that it will not be made. Whereas States which are part of the international legal system may expect their treaty partners to assume good faith fulfillment of treaty obligations on their behalf, the same assumption cannot be made as regards individuals. 

7.92   It is a circumspect use of the teleological method to choose that interpretation of Article 23 of the DSU that provides this certainty and eliminates the undesired "chilling effects" which run against the object and purpose of the WTO Agreement.

(d) "…in their context…"

7.93  Construing a WTO obligation as prohibiting a domestic law that "merely" exposes Members and individual operators to risk of WTO inconsistent action should not be done lightly. It depends on the specific WTO obligation at issue, the measure under consideration and the specific circumstances of each case. We are, however, confirmed in our view that Article 23 contains such an obligation not only by textual and teleological considerations but also by systemic ones, namely the context of Article 23 and the DSU in the overall WTO system.673

7.94  The more effective and quasi-automatic dispute settlement system under the WTO has often been heralded as one of the fundamental changes and major achievements of the Uruguay Round agreements. Because of that, the relevance of Article 23 obligations for individuals and the market-place is particularly important since they radiate on to all substantive obligations under the WTO. If individual economic operators cannot be confident about the integrity of WTO dispute resolution and may fear unilateral measures outside the guarantees and disciplines which the DSU ensures, their confidence in each and every of the substantive disciplines of the system will be undermined as well. The overall systemic damage and the denial of benefits would be amplified accordingly. The assurances thus given under the DSU may, in our view, be of even greater importance than those provided under substantive WTO provisions. For that reason, the preservation of the specific guarantees provided for in Article 23 is of added importance given the spill-over effect they have on all material WTO rights and obligations.

5. Preliminary Conclusion after the Panel's Examination of the Statutory Language of Section 304

7.95  Our textual interpretation of Article 23.2(a) is thus confirmed when taking account also of the other elements referred to in Article 31 of the Vienna Convention.674 Under this reading the duty of Members under Article 23 to have recourse to and abide by the rules and procedures of the DSU and to abstain from unilateral determinations of inconsistency, is meant to guarantee Members as well as the market-place and those who operate in it that no such determinations in respect of WTO rights and obligations will be made.

7.96  Consequently, the statutory language of Section 304 – by mandating a determination before the adoption of DSB findings and statutorily reserving the right for this determination to be one of inconsistency – must be considered presumptively to be inconsistent with the obligations in Article 23.2(a). The discretion given to the USTR to make a determination of inconsistency creates a real risk or threat for both Members and individual economic operators that determinations prohibited under Article 23.2(a) will be imposed. The USTR's discretion effectively to make such determinations removes the guarantee which Article 23 is intended to give not only to Members but indirectly also to individuals and the market place. In this sense, the USTR's discretion under Section 304 does not – as the US argued – ensure the consistency of Section 304. On the contrary, it is the core element of the prima facie inconsistency of the statutory language of Section 304.

7.97  Therefore, pursuant to our examination of text, context and object-and-purpose of Article 23.2(a) we find, at least prima facie, that the statutory language of Section 304 precludes compliance with Article 23.2(a). This is so because of the nature of the obligations under Article 23. Under Article 23 the US promised to have recourse to and abide by the DSU rules and procedures, specifically not to resort to unilateral measures referred to in Article 23.2(a). In Section 304, in contrast, the US statutorily reserves the right to do so. In our view, because of that, the statutory language of Section 304 constitutes a prima facie violation of Article 23.2(a).675



660  We reject the notion that this danger is removed by virtue of the international obligation alone.  Even in the EC where EC norms may produce direct effect and thus give far greater assurance, an EC Member State is not absolved by this fact from its duty to bring national legislation into compliance with its transnational obligations under, say, an EC directive (Commission v. Belgium, Case 102/79, [1980] European Court Reports 1473 at para. 12 of the judgment).

661 We make this statement as a matter of fact, without implying any judgment on the issue.  We note that whether there are circumstances where obligations in any of the WTO agreements addressed to Members would create rights for individuals which national courts must protect, remains an open question, in particular in respect of obligations following the exhaustion of DSU procedures in a specific dispute (see Eeckhout, P., The Domestic Legal Status of the WTO Agreement:  Interconnecting Legal Systems, Common Market Law Review, 1997, p. 11; Berkey, J., The European Court of Justice and Direct Effect for the GATT:  A Question Worth Revisiting, European Journal of International Law, 1998, p. 626).  The fact that WTO institutions have not to date construed any obligations as producing direct effect does not necessarily preclude that in the legal system of any given Member, following internal constitutional principles, some obligations will be found to give rights to individuals.  Our statement of fact does not prejudge any decisions by national courts on this issue.

662 See also similar language in the second preambles to GATT 1947 and GATS.  The TRIPS Agreement addresses even more explicitly the interests of individual operators, obligating WTO Members to protect the intellectual property rights of nationals of all other WTO Members.  Creating market conditions so that the activity of economic operators can flourish is also reflected in the object of many WTO agreements, for example, in the non-discrimination principles in GATT, GATS and TRIPS and the market access provisions in both GATT and GATS.

663 The importance of security and predictability as an object and purpose of the WTO has been recognized as well in many panel and Appellate Body reports.  See the Appellate Body report on Japan – Alcoholic Beverages, op. cit., p. 31 ("WTO rules are reliable, comprehensible and enforceable.  WTO rules are not so rigid or so inflexible as not to leave room for reasoned judgements in confronting the endless and ever-changing ebb and flow of real facts in real cases in the real world.  They will serve the multilateral trading system best if they are interpreted with that in mind.  In that way, we will achieve the 'security and predictability' sought for the multilateral trading system by the Members of the WTO through the establishment of the dispute settlement system").  It has also been referred to under the TRIPS Agreement.  In the Appellate Body Report on India – Patents (US), op. cit., it was found, at para. 58, that "India is obliged, by Article 70.8(a), to provide a legal mechanism for the filing of mailbox applications that provides a sound legal basis to preserve both the novelty of the inventions and the priority of the applications as of the relevant filing and priority dates" (italics added).  See also the WTO Panel Report on Argentina – Textiles and Apparel (US), op. cit., para. 6.29 and the GATT Panel Reports on United States Manufacturing Clause, adopted 15/16 May 1984, BISD 31S/74, para. 39; Japan – Measures on Imports of Leather ("Japan – Leather"), adopted 15/16 May 1984, BISD 31S/94, para. 55; EEC – Imports of Newsprint, adopted November 20 1984, BISD 31S/114, para. 52;  Norway – Restrictions on Imports of Apples and Pears, adopted 22 June 1989, BISD 36S/306, para. 5.6.

664 See Article 27 of the Vienna Convention.

665 A change in the relative competitive opportunities caused by a measure of general application as such, to the detriment of imported products and in favour of domestically produced products, is the decisive criterion.

666 In the Panel Report on US –  Superfund (op. cit., paras. 5.2.1 and 5.2.2) tax legislation as such was found to violate GATT obligations even though the legislation had not yet entered into effect.  See also the Panel Report on US - Malt Beverages (op. cit., paras. 5.39, 5.57, 5.60 and 5.69) where the legislation imposing the tax discrimination was, for example, not being enforced by the authorities.

667 See Panel Report on US – Tobacco, op. cit., para. 96:

"The Panel noted that an internal regulation which merely exposed imported products to a risk of discrimination had previously been recognized by a GATT panel to constitute, by itself, a form of discrimination, and therefore less favourable treatment within the meaning of Article III.  The Panel agreed with this analysis of risk of discrimination as enunciated by this earlier panel".

A footnote to this paragraph refers to the Panel Report on EEC - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal Feed Protein, adopted 25 January 1990, BISD 37S/86, para. 141, which reads as follows:

"Having made this finding the Panel examined whether a purchase regulation which does not necessarily discriminate against imported products but is capable of doing so is consistent with Article III:4.  The Panel noted that the exposure of a particular imported product to a risk of discrimination constitutes, by itself, a form of discrimination.  The Panel therefore concluded that purchase regulations creating such a risk must be considered to be according less favourable treatment within the meaning of Article III:4.  The Panel found for these reasons that the payments to processors of Community oilseeds are inconsistent with Article III:4".

668 Op. cit., paras. 6.45-6.47, in particular para. 6.46:  "In the present dispute we consider that the competitive relationship of the parties was changed unilaterally by Argentina because its mandatory measure clearly has the potential to violate its bindings, thus undermining the security and the predictability of the WTO system" (emphasis added).  This was confirmed by the Appellate Body (op. cit., para. 53): 

"In the light of this analysis, we may generalize that under the Argentine system, whether the amount of the DIEM [a regime of Minimum Specific Import Duties] is determined by applying 35 per cent, or a rate less than 35 per cent, to the representative international price, there will remain the possibility of a price that is sufficiently low  to produce an ad valorem equivalent of the DIEM that is greater than 35 per cent.  In other words, the structure and design of the Argentine system is such that for any DIEM, no matter what ad valorem rate is used as the multiplier of the representative international price, the possibility remains that there is a "break-even" price below which the ad valorem equivalent of the customs duty collected is in excess of the bound ad valorem rate of 35 per cent".

On that basis, the Appellate Body found that the application of a type of duty different from the type provided for in a Member's Schedule is inconsistent with Article II:1(b), first sentence, of the GATT 1994.  In this respect, see also the Panel Report on United States – Standards for Reformulated and Conventional Gasoline, adopted 20 May 1996, WT/DS2/R, para. 6.10. 

669 Op. cit., para. 5.2.2.

670 Panel Report on Japan – Leather, op. cit., para. 55. In this respect, see also Panel Report on US – Malt Beverages (op. cit., para. 5.60), where legislation was found to constitute a GATT violation even though it was not being enforced, for the following reason:

"Even if Massachusetts may not currently be using its police powers to enforce this mandatory legislation, the measure continues to be mandatory legislation which may influence the decisions of economic operators.  Hence, a non-enforcement of a mandatory law in respect of imported products does not ensure that imported beer and wine are not treated less favourably than like domestic products to which the law does not apply" (emphasis added).

671 As a result, we do not consider that the general statements made in certain GATT panels are correct in respect of all WTO obligations and in all circumstances, for example, the statement in Panel Report on EEC – Parts and Components (op. cit., para. 5.25) that "[u]nder the provisions of the [GATT] which Japan claims have been violated by the EEC contracting parties are to avoid certain measures; but these provisions do not establish the obligation to avoid legislation under which the executive authorities may possibly impose such measures" and in Panel Report on Thai – Cigarettes (op. cit., para. 84), the statement that "legislation merely giving the executive the possibility to act inconsistently with Article III:2 [of GATT] could not, by itself, constitute a violation of that provision".  In respect of this ambivalence in GATT jurisprudence, see Chua, A., Precedent and Principles of WTO Panel Jurisprudence, Berkeley Journal of International Law, 1998, p. 171, in particular at p. 193.   

672 In this respect, see the statements made by third parties to this dispute in Section V of our Report.

673 We realise that the possibility for a Member to breach its obligations under Article 23.2(a) will always remain. In that sense, guarantees can never be completely assured.  However, remote possibilities that obligations may be breached, i.e. normal risks to be accepted in all trade relations, should be distinguished from explicit risks or threats created by statute, i.e. where a Member makes it known to all its trade partners that they may be subjected to an internal procedure under which the right to breach WTO obligations is reserved.  

674 Since an examination of the elements referred to in Article 31 does not leave the meaning of Article 23.2(a) "ambiguous or obscure" nor leads to a result which is "manifestly absurd or unreasonable" in the sense of Article 32 of the Vienna Convention, we do not need to evaluate the supplementary means of interpretation referred to in Article 32.

675 We would like to emphasize again that this finding does not require the wholesale reversing of earlier GATT and WTO jurisprudence on mandatory and discretionary legislation. The classical test under previous jurisprudence was that only legislation mandating a WTO inconsistency or precluding WTO consistency, could, as such, violate WTO provisions (see paras. 4.173 ff. and 7.51 of this Report). The methodology we adopted was to examine first and with care the WTO provision in question and the obligation it imposed on Members. It could not be presumed, in our view, that the WTO would never prohibit legislation under which a national administration would enjoy certain discretionary powers.  If it were found upon such examination that certain discretionary powers were in fact inconsistent with a WTO obligation, then legislation allowing such discretion would, on its face, fail the classical test: it would preclude WTO consistency.