9 June 1989

1.1 In a communication circulated as L/6337 of 22 April 1988, the Commission of the European Communities advised the CONTRACTING PARTIES that it had taken action concerning dessert apples under Article XI:2 of the General Agreement, i.e., the establishment of import quotas applicable until 31 August 1988. It offered consultations with any substantially interested contracting party concerning the details of these measures.

1.2 In a communication circulated as L/6371 of 8 July 1988, the United States set out a complaint under Article XXIII:2 of the General Agreement concerning the quantitative restrictions applied by the European Economic Community to imports of dessert apples. It stated that consultations had been held under Article XXIII:1, but that these had not resulted in a mutually satisfactory settlement of the issue.

1.3 The United States recourse to Article XXIII:2 was considered by the Council on 22 September 1988. The representative of the United States stated that further consultations had been held, to no satisfactory result, and requested the prompt establishment of a panel under Article XXIII:2 to examine the complaint. The Council agreed to establish a panel to examine the matter referred to the CONTRACTING PARTIES by the United States and authorized its Chairman to draw up the terms of reference and to designate the Chairman and members of the Panel in consultation with the parties concerned (C/M/224). As announced to the Council by its Chairman on 20 October 1988 (C/M/226), the agreed terms of reference were:

The composition of the Panel was:

1.4 The Panel met on 9-11 November 1988, and on 13-15 February 1989 and 28 April 1989. In the course of its work the Panel held consultations with the European Economic Community and the United States, as well as with an interested third party (Canada). Chile, Argentina, Australia and New Zealand also reserved their rights to make submissions to the Panel (C/M/224).

1.5 The Panel submitted its report to the parties to the dispute on 25 May 1989.

2.1 The common organization of the EEC market for dessert apples (and for other fruit and vegetables) is based on Council Regulation 1035 of 1972 (Official Journal L 118 of 20.5.72), as subsequently amended. This regulation replaced similar measures in place since 1966. The basis of the external régime is set out also in Regulation 2707/72 (OJ L 291 of 1972). These regulations were described in an earlier panel report in 1980. ¹ Despite a number of amending regulations since 1980 the essential features of the system established under Regulation 1035/72 have not changed. At the internal level, therefore, the main elements of the market continue to be:

Producer Groups, which are a basic structural element;

Quality Standards, which apply both to the marketing of Community products and to imports;

Prices and Intervention System. Before the start of each marketing year, the EEC Council of Ministers fixes a basic price and a buying-in price under Article 16 of Regulation 1035/72. The basic price is a guide price which determines the buying-in and withdrawal prices, explained below. It is fixed for quality class I of certain pilot varieties, and applies for the period August through May. For the 1987-88 marketing year, the basic prices were fixed as follows (ECU/100 kg.):

The buying-in price is fixed at between 40 and 55 per cent of the basic price. For the 1987/88 marketing year the buying-in prices were as follows (ECU/100 kg.):

2.2 Market intervention takes the form of withdrawal from the dessert apple market of apples meeting certain quality standards. Community regulations prescribe two possible methods; "buying-in" by member state authorities and "withdrawal" by producer organizations.

(a) Buying-in

(b) Withdrawal by producer groups

Withdrawals by producer organizations, offering a somewhat higher price, account in practice for the major share of apples withdrawn. It is also Community policy to encourage the development of producer organizations and their role in market intervention.

2.3 Under Article 21 of Regulation 1035/72, member states shall ensure that products withdrawn are used for:

2.4 The EEC has not enacted restrictions on the planting of apple trees. It did not operate a grubbing-up programme for apple orchards during the period in which the import restrictions in question were applied.

2.5 Imports are subject to a customs duty and the application of a reference price. The customs duty is bound and varies according to the period:

2.6 Under Regulation 1035/72 (Article 22 et. seq.), the Commission fixes the reference price for each marketing year, or seasonal sub-divisions thereof, on the basis of an average of Community producer prices, plus marketing costs. An "entry price" is calculated daily for third country imports. If this falls below the reference price, a countervailing charge (in addition to the customs duties) may be levied to make up the difference.

2.7 The Community regulations also provide the possibility of recourse to protective measures against imports. In the case of actual or threatened disruption of the Community market by imports, or in the case of heavy EEC interventions or market withdrawals, Article 29 of Regulation 1035/72 (as amended by Council Regulation 2454/72) ² authorizes the application of "appropriate measures" to trade with third countries. These measures, and conditions for their application, are defined in Regulation 2707/72. Under Article 3 of that Regulation, they may take the form either of suspension of imports or the levying of a prescribed amount additional to the customs duties and any countervailing charges. The Regulation goes on to state that such measures may only be taken insofar, and for as long, as they are strictly necessary. They should "take account of the special position of goods in transit to the Community". They may be limited to products exported from certain countries.

2.8 At the Commission's request, southern hemisphere countries have in recent years supplied forecasts of their apple exports to it in confidence before each export season.

2.9 On 3 February 1988, in Commission Regulation No. 346/88 (published in Official Journal L 34 of 6.2.1988), the EEC Commission introduced a system of surveillance through import licensing of (dessert) apple imports from outside the Community valid until 1 September 1988. Characteristics of this system were:

2.10 The licensing system was modified by two subsequent Commission Regulations. Regulation 871/88 of 30 March 1988 (OJ L 87 of 31.3.88) extended, inter alia, the validity period of the licences to 40 days with the proviso that no licence would be valid after 31 August 1988. Regulation 1155 of 28 April (OJ L 108 of 29.4.1988) extended, on a trader's request, the 40-day validity period to licences requested before 31 March 1988 and issued from that date.

2.11 On 20 April, the Commission adopted Reg. 1040/88 (OJ L 102 of 21.4.88) which suspended until 31 August 1988 the issue of import licences for third-country imports in respect of tonnages which exceeded a prescribed quantity.

2.12 The "reference quantities" fixed in Regulation 1040/88 were:

The United States was included in the "other countries" allocation. N° provision was made for sub-quotas within this allocation.

2.13 By Commission Regulation 1128/88 of 27 April 1988, ³ the EEC gave notice that the applications for import licences under the "other countries" category had exceeded the quantities fixed in Regulation 1040/88, and that the issue of licences requested after 22 April for apples originating in these countries would therefore be suspended until 31 August 1988. On 22 April licence applications for import of apples from the United States totalled 11,935 tons.

2.14 The import licence suspension expired on 31 August 1988 as specified.

3.1 The United States recalled that Article XI:1 generally prohibited quantitative restrictions on imports and exports, and held that the EEC's measures fixing quantitative limits on the import of dessert apples constituted a restriction under that Article.

3.2 The EEC did not argue that its measures on imports were consistent with Article XI:1, per se, but that they constituted a justified use of the exception to that general provision made available under Article XI:2(c).

3.3 The United States noted that Article XI:2(c) provided a narrowly-drawn exception to the general prohibition on quantitative restrictions. The party invoking such an exception had the burden of demonstrating that each and every one of its requirements were met. The United States cited previous panel findings in illustration of this point. ⁴ The United States summarized the conditions which must be satisfied to justify an invocation of this exception as follows:

The quantitative restrictions in question must:

In addition, an exception under Article XI:2(c)(i) must also:

While an exception under Article XI:2(c)(ii) must also:

The United States argued that the EEC did not fulfil these conditions.

3.4 The EEC argued that the question of whether the Community restrictions on apple imports were consistent with Article XI had already been dealt with by a panel set up in 1980 at the request of Chile to examine EEC measures, equivalent to those applied in 1988, on the same product, dessert apples. ⁵ The report of that panel was adopted without reservation at the time by the CONTRACTING PARTIES, including the United States of America. It should therefore be taken into account, in particular, in assessing the legality of the Community measures in relation to Article XI, particularly as, on certain points of law, it changed the interpretation previously established when the "European Tomatoes" case was examined. ⁶ By invoking the burden of proof, the United States was attempting to sidestep the precedent of the 1980 panel in favour of other panel reports. The Community had based its approach on the 1980 precedent, particularly as that panel dealt specifically with the subject of the dispute, whereas the others did not. Furthermore, however relevant the other panels might be, the "1980 apple" panel created a "legitimate expectation" for the contracting parties concerned, particularly with regard to the Community's rights under Article XI. It was generally accepted that, when legitimate expectation existed, it affected the burden of proof. It therefore followed that the evidence should be examined in the light of the conclusions of the 1980 report. The EEC referred the Panel, in this connection, to the arguments it had recently made before another panel. ⁷

3.5 It was important, therefore, that the conclusions of the panel set up in 1979 for the same product and for similar Community measures be taken into account; furthermore, the conclusions of that panel replied to the arguments advanced by the United States concerning the consistency of the Community measures with Article XI of the General Agreement. The United States had also adopted the arguments and criteria concerning compliance with Article XI:2(c) set out in the report of the panel set up to examine Japanese measures concerning certain agricultural products. ⁸ Given the conclusions of the 1980 panel, the Community could refute the arguments advanced by the United States concerning non-observance of these criteria. Nonetheless it wished to stress that these criteria did not apply in the present case. First, because the Community measures were short-term measures, even if they were based on long-term regulations; second, because the conclusions of the Japanese Agriculture panel could not replace the report of a panel established to deal specifically with apples; and, above all, because that panel's conclusions with regard to Article XI:2(c) criteria could not be considered to constitute any kind of prior ruling in this respect because they were the subject of express reservation on the part of many contracting parties.

3.6 The United States rejected the EEC's claim of "legitimate expectations" arising from the 1980 panel report. Accepting the EEC argument would lead to a GATT that would quickly lose touch with present reality. To be credible, a dispute settlement system must take account of new facts, new knowledge about facts, and new interpretations of law. Much more was known about the EEC intervention system than did the parties or the panel in 1980, and there had been several significant interpretations of Article XI since then (particularly the 1987 Japanese Agriculture report). The Panel and the CONTRACTING PARTIES could not be precluded from taking these developments into account. In addition, there was the as yet unexplained contradiction in reasoning between the 1980 Apples report and the 1978 European Tomatoes report. This Panel needed to resolve that contradiction, to explain which report provided better precedent here.

3.7 The United States averred that the 1980 panel report was not dispositive of this case. Panels under GATT Dispute Settlement procedures served to preserve the rights and obligations of contracting parties under the General Agreement and to clarify the existing provisions of the General Agreement. They did not, however, define new obligations, nor did they create permanent legitimate expectations. While this Panel should examine all relevant provisions of the General Agreement, including the 1980 panel report, this Panel was not required to follow the details and legal reasonings of that particular case. Furthermore, it appeared that the 1980 panel did not make its findings on the basis of all the relevant information. For example, the 1980 panel introduced an aberration into GATT practice by defining the concept of a "temporary surplus above a recurring surplus". The United States believed that this and other misconceptions indicated that the 1980 panel report should not be blindly accepted as precedent and that the issue should be re-examined in light of the evolution of GATT practices and the additional knowledge available today.

3.8 The United States noted that the Community now attempted to place doubt on the validity of the Japanese panel report ⁹ because it was adopted with reservations; but, at the time, the Community hailed the report as "carefully reasoned". ¹⁰ That panel took care to develop broad criteria which would be applicable to any dispute under Article XI. The United States urged this Panel to heed the findings of the Japanese agricultural panel and reject the Community position that only panels involving apples were relevant to apple disputes.

3.9 In response to these arguments, the EEC clarified its position as follows. It had not advanced abstract theory about one panel report taking precedence over another report. It argued, rather, that the previous panel report which was by far the most relevant in this case was the 1980 report. This concerned essentially the same subject matter and the same legal issues and had been approved by all contracting parties without any reservation. In the EEC's view this adopted report therefore clearly had a res judicata effect to the extent that the issues decided were the same and the fundamental, factual and legal circumstances had not changed.

3.10 The EEC further stated that the United States attempted to discard the clearly relevant 1980 report in favour of the 1987 report on Japanese agricultural restrictions. It recalled the serious reservations by many contracting parties regarding certain conclusions of the latter report, and that this report concerned different products and different kinds of restrictions imposed by another contracting party in totally different circumstances. It was made explicitly clear that the panel's findings were limited to the specific measures under examination and that it was on this condition and on this condition only that the Community agreed to its adoption. The 1980 panel obviously considered that the Community fully met whatever burden of proof it had in respect of all the conditions of Article XI:2 except for the proportionality requirement. Again, insofar as the situation remained the same, the conditions were still there and the Community, then and now, met the burden-of-proof requirements. The United States also referred to the 1978 panel report on an EEC scheme of minimum import prices. ¹¹ Again, this report concerned different products and different issues. The United States did not demonstrate in what way the conclusions of this report could put into question those of the 1980 panel on import restrictions on apples, which was the primarily relevant precedent. Moreover, even if there were contradictions, the later report concerning a similar situation to the one under consideration should take precedence in view of the fact that the findings of the 1978 panel report on a different matter were clearly known to the 1980 panel.

3.11 On the question of "legitimate expectation", the EEC added that if the confirmation of GATT rights by CONTRACTING PARTIES as the supreme body interpreting the General Agreement had any meaning, and if legal certainty had any meaning in GATT, then the Community must have a legitimate expectation to the effect that it could not be found to have nullified or impaired a GATT right of another contracting party to the extent that it had respected the adopted conclusions of the 1980 panel.

3.12 Concerning the specific requirements of Article XI:2(c), both parties agreed that for this Panel's purposes apples were an agricultural product in terms of that provision. Their arguments as to whether or not the restrictions constituted a prohibition are covered in paragraphs 3.39-3.41 below.

3.13 The United States recalled that Article XI:2(c)(i) required that there be in existence a domestic production or marketing control system which covered the like product or (in the absence of any substantial domestic production of the like product) a domestic product for which the like product could be directly substituted. It maintained that the EEC's import restrictions and its withdrawal system did not apply to like products in terms of this requirement. An apple was not always an apple. The import quotas impaired the marketability of high-quality fresh United States apples, while the domestic restrictions reduced the quantities of low-quality, undesirable apples. All imported American apples were for human consumption as dessert apples. Of the EEC domestic apples withdrawn, 30 per cent were unfit for consumption and 46 per cent went for animal feed. These withdrawn apples, for which the EEC paid a maximum of 16.27 ECU/100 kg. in April 1987, and an average of 11.91 ECU for the season, were surely not like products to imports which entered the EEC at a reference price of 53.76 ECU in that month.

3.14 Furthermore, the United States noted that although the General Agreement did not elsewhere define either term, Article XI:2(c) clearly differentiated between a "like product" and a "direct substitute". The plain meaning of Article XI:2(c) implied that the domestic programme must primarily cover the like product, if there was "substantial domestic production" of that like product. Only if there was no such production could the domestic programme primarily operate on a direct substitute.

3.15 As both the United States and the European Community produced substantial quantities of high-quality, fresh apples, the European Community must have a domestic control system which covered the like product to high-quality, fresh apples. The United States submitted that low-quality apples which entered the Community withdrawal system were not like products to high-quality, fresh imported United States apples; instead low-quality apples entering withdrawal were at best a direct substitute to high-quality, fresh United States apples. Thus, because the Community withdrawal system primarily affected the direct substitute for high-quality, fresh apples, not the like product, it could not justify import restrictions under Article XI:2(c)(i).

3.16 The EEC maintained that the apples imported from the United States were like products to Community apples, differences in variety or price notwithstanding. It noted that the 1980 Panel had concluded (paragraph 4.4 of its Report) that "[(Chilean apples)], although of different varieties, were "a like product" to Community apples for the purpose of Article XI:2(c)". The conclusions of this report were all the more relevant as there was no new factual basis for contradicting them. In addition the EEC argued that even if the American apples had not been stored since October, they would nonetheless remain like products to Community apples. The fact that Community apples remained in storage longer than imported apples (which were all stored at some stage, if only during transport) did not modify the fundamental perishability of these products. Moreover, the apples exported by the United States to the Community as of 15 February each year were clearly products that had been stored since harvesting, that is, from June to October of the previous year (the production period ended on 15 February, as it did in the Community). American apples were therefore unquestionably like products to Community apples.

3.17 The argument that imported products were not like products in that withdrawal prices were lower than the prices of imported products was unsustainable: the withdrawal price was not a market price, but compensation paid to the producer for the very reason that the product was not marketed. Furthermore, the Community authorities fixed the withdrawal price at a sufficiently low level, in relation to market prices in particular, so as not to stimulate Community production.

3.18 The United States argued that EEC apples were not effectively covered by Community governmental measures. Article XI:2(c) required that there be "governmental measures which operate ... to restrict the quantities ... [or] to remove a temporary surplus "of the like domestic product"". The EEC supply management programme for apples failed to meet this test. The EEC restrictions did not effectively restrain output (or remove a surplus) ¹² because they were voluntary and included no effective enforcement of withdrawals. EEC Council Regulation 1035/72 provided for the withdrawal of apples through producers' organizations (Article 18) but defined the term "producers' organization" as "any organization of fruit and vegetable producers: (a) which is formed on the producers' own initiative ..." (Article 13(1)). Producers could only become eligible to avail themselves of withdrawal through membership in these organizations; however, the EEC did not require its apple producers to create, join or market their production through them. In some member states a significant proportion of apple producers did not belong to producer organizations. A previous panel had examined a similar withdrawal scheme for Community tomatoes, also established under Regulation 1035/72, and found that such a scheme did not meet the requirements of Article XI:2(c) as "there was no effective Community or governmental enforcement of the withdrawals of fresh tomatoes by the producers' organizations". ¹³

3.19 The United States did not dispute that any apple withdrawn was unavailable for consumption. But the mere fact that apples were removed from the market did not make the Community's measures effective in Article XI:2(c)(i) terms. The legal test under Article XI:2(c)(i) was whether such withdrawals effectively restricted output. The EEC measures failed this legal test. Although the drafters did not exactly define the nature of an "effective" domestic programme, they did state that "the essential point was that the measures of domestic restriction must effectively keep output below the level which it would have attained in the absence of restrictions" (Havana Reports, p. 89, para. 17, emphasis added). The European Community programme, though, did not affect output at all; instead, it withdrew apples already harvested, only affecting the amount of apples available for consumption. The United States emphasized that the withdrawal price was substantially lower than the market price, and only affected low-quality apples which often could not be sold in the fresh market. The withdrawal system acted like a safety net to subsidize the production of inefficient apple producers; it provided a market of last resort for apples that would otherwise go to processors for a pittance. The level of withdrawals related mainly to the supply of low-quality apples for processing and to the price paid by processors. When the latter was low, withdrawals were high, and vice versa. Thus the EEC's internal measures were effective only as price support for processing apples - not as supply management for table apples. The only supply management was the import quota.

TO CONTINUE WITH RESTRICTIONS ON IMPORTS OF APPLES - COMPLAINT BY THE UNITED STATES

¹ Report of the Panel on "EEC Restrictions on Imports of Apples from Chile", BISD 27S, pp. 98-117, paragraph 2.2.