12 August 1994

45. The United States submitted that the inspection fee was consistent with the provisions of Article VIII and noted that the consistency of the measure with Article III had not been at issue in this dispute. The United States considered that the complainants' assumption that the fees for inspection of imported tobacco were not commensurate with the costs of services rendered was not only a misreading of the statute, but also speculative, since to date there had been no change in the USDA inspection fee structure. The provision did not require a GATT-inconsistent administrative response, and the complainants' speculation was insufficient to meet the burden placed on them to establish an inconsistency with the General Agreement. There was no basis for concluding that fees for inspecting imported tobacco would not be commensurate with the costs of services rendered. 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 costs of the services rendered. Prior to the 1993 Budget Act, the provision in question read: "the importer fees and charges for inspection . . . shall, as nearly as practicable, cover the costs of such services." ⁴⁶ Section 1106(c) of the 1993 Budget Act amended this provision to require also that these fees "be comparable to fees and charges fixed and collected for services provided in connection with tobacco produced in the United States". In the opinion of the United States, there was nothing contradictory between these provisions, and nothing that required fees to exceed the cost of services rendered.

46. The United States further submitted that although Section 1106(c) required USDA to ensure that inspection fees imposed on imports be "comparable" to those imposed on domestic products, it did not require USDA to impose fees on imports that were not commensurate with the cost of services rendered, i.e. it did not require that the same fees be imposed. Most importantly, it did not preclude a fee structure under which the fee for inspection of imports was less than that imposed on domestic products, and commensurate with the cost of services rendered. Applying the same criterion to assess the fee (cost of services rendered), for example, could make the two fees "comparable". The etymology of the word "comparable" was "capable of being compared". This meant only that there must be enough similar characteristics or qualities to make comparison appropriate. Although the statutory provision on inspection fees for tobacco had not been interpreted by a court, U.S. jurisprudence confirmed that in U.S. legal interpretation, the word "comparable" was to be distinguished from the words "equal" and "identical". In sum, because the word "comparable" in the inspection fee provision did not mean "same" or "identical", the statute left USDA free to assess a fee on imports that was less than the fee on domestic products, and was in keeping with the statutory requirement that the fee be commensurate with the cost of services rendered. The United States further explained that the difference in inspection fees resulted from the fact that domestic tobacco was inspected in small lots brought by farmers to auctions. By contrast, imported tobacco arrived in large containers and the practice had been to inspect only a few boxes in the container. Thus, despite the fact that inspection of imports required a greater degree of expertise, the fee for inspection had been kept lower than that for domestic tobacco.

47. Australia considered that the U.S. regulations governing the importation, internal sale and use of tobacco contained in section 1106 of the 1993 Budget Act violated its obligations under the General Agreement. While Australia had negligible export interests in the US market for unmanufactured tobacco (exports of A$44,000 in 1992), the DMA and BDA resulted in clear interference with the importation of tobacco into the United States, and if unchallenged, could encourage the imposition of similar measures on products of direct trade interest to Australia. Australia submitted that the requirement imposed by section 1106(a) of the 1993 Budget Act was an unambiguous violation of Article III:5, first and second sentences. The requirement that cigarette manufacturers had to purchase additional, domestically produced tobacco if the domestic content rule was not met, meant that compliance with the 75 per cent domestic content requirement was unavoidable. Australia considered that the compulsory purchase of domestically produced tobacco, together with the imposition of financial penalties for failure to comply, was sufficient to demonstrate inconsistency with Article III:5, first sentence. That the DMA provisions did not require that any product contained a particular mix of tobacco was, in Australia's opinion, irrelevant. The 75 per cent domestic purchase requirement was also inconsistent with Article III:5, second sentence, as it was applied in a manner contrary to Article III:1. This was because the domestic content requirement reserved a portion of the domestic market for domestically grown tobacco. The 1978 Animal Feed panel ⁴⁷ provided a relevant precedent with the conclusion that "the measures ... with a view to ensuring the sale of a given quantity of [domestic product] protected this product in a manner contrary to the principles of Article III:1 and to the provisions of Article III:5, second sentence".

48. If, for any reason, the Panel were to determine that the DMA provisions were not within the purview of Article III:5, the provisions would still be inconsistent with Article III:4 which, in Australia's opinion, the DMA violated inter alia because the U.S. Government had made the granting of an advantage (avoidance of penalties) dependent on undertakings to use domestically produced tobacco at the expense of imported tobacco. Australia believed that a finding that the creation of a preference or incentive for the purchase or use of domestic products over imported products was inconsistent with Article III:4 would be supported by several GATT precedents. For example, the report of the panel on Canada - Administration of the Foreign Investment Review Act ⁴⁸ noted that purchase requirements which "tend to tip the balance in favour of [domestic] products" were inconsistent with Article III:4.

49. Australia also considered that the BDA, as currently calculated and applied to imported tobacco, resulted in differential tax treatment for imported and domestic tobacco, in violation of the provisions of Article III:2. The use of an average of burley and flue-cured tobacco prices for the assessment of all imports of these two types meant that at least one type of imported tobacco would be subject to taxes in excess of those applied to the like domestic product, inconsistently with Article III:2. The argument that disadvantage to one product (in this case flue-cured tobacco) could be offset by advantage to another (burley tobacco) had been rejected by past GATT panels. Australia referred to the report of the panel on United States - Section 337 of the Tariff Act of 1930 ⁴⁹ which concluded that "the 'no less favourable' treatment requirement of Article III:4 has to be understood as applicable to each individual case of imported products. The Panel rejected any notion of balancing more favourable treatment of other imported products". Australia believed this interpretation applied equally to Article III:2. Any defence of the tax differential between domestic and imported products by citing its small size had also been rebutted by previous dispute settlement panels. ⁵⁰ Australia observed that the United States could bring the BDA into conformity with the General Agreement simply by removing the averaging provision and instead calculate the assessment on imported product on the same basis as the assessment levied on the like domestic product. While the trade effects of this change might be minimal, Australia considered that acceptance of de minimis arguments as defence for measures which were on their face inconsistent with the General Agreement would undermine the effectiveness of the national treatment obligations of Article III and of the General Agreement in general.

50. The European Community ("EC") submitted that the DMA was the main trade distorting measure among those implemented by the United States with respect to tobacco within the framework of the 1993 Budget Act, infringing a number of requirements of Article III of the General Agreement. The EC considered that the DMA was contrary to Article III:5, first sentence since the DMA was an internal regulation applied exclusively to the manufacturing of cigarettes in the United States. Even though it was called Domestic Marketing Assessment, the use of the word "assessment" should not mislead the Panel. The Assessment was not a tax, but a penalty which was imposed if a proportion of domestic tobacco was not respected by the U.S. manufacturers of cigarettes to which the measure applied. The DMA was therefore primarily a quantitative regulation, functioning as an incentive to respect the proportions imposed by the law. In addition, the DMA applied to the use of tobacco ⁵¹ by certain U.S. manufacturers of cigarettes. Finally, it required a specific proportion of 75 per cent of U.S. grown tobacco. ⁵²

51. The EC submitted that the DMA was also contrary to Article III:5, second sentence and to Article III:1. The EC noted that the United States had not contested that the purpose of the DMA was to help U.S. tobacco growers (i.e., domestic tobacco production) within the meaning of Article III:1 by providing them with a protected outlet for their production, in addition to an income support in the form of intervention prices. The EC was of the opinion that a measure intended to ensure the sale of certain quantities of domestic product had long been considered as being contrary to Article III:5, second sentence, and referred in this regard to the report of the Animal Feed panel. ⁵³

52. The EC, moreover, considered that the DMA was contrary to Article III:4 since the minimum content requirement contained in the DMA resulted in less favourable treatment to imported tobacco. By limiting the proportion of foreign tobacco which could be used by the U.S. manufacturers, the DMA obviously was a law or regulation, within the meaning of Article III:4, which affected the use of foreign tobacco in the production of cigarettes in the United States.

53. With respect to the BDA, the EC, referring to the argumentation by the United States that the amount of the tax was very small or that the tax differential between domestic and like imported products was negligible, recalled the findings of the Superfund panel ⁵⁴ which considered that

Either the BDA conformed with Article III:2, and its actual impact on imports was of no relevance for a violation case, or it did not, in which case its limited effect on the price of the end-product was also not relevant, as Article III:2, first sentence, obliged contracting parties to establish certain competitive conditions for imported products in relation to domestic products, not to protect expectations on trade volumes. As a result, neither the de minimis amount of the tax, nor a negligible tax differential should be admitted as a justification for the United States to maintain the discrimination existing as a result of the implementation of the BDA.

54. The EC did not contest the right of the United States to extend the scope of an internal tax to like imported goods as a border tax adjustment. However, in the present case, this extension was not made in conformity with Article III:2 in two respects. The EC considered that the imposition on all imported tobacco of a tax applied only to two varieties of domestically produced tobacco was contrary to Article III:2. The purpose of Article III:2 was to ensure that imported products would be treated in the same way as the like domestic products once they had been cleared through customs. ⁵⁶ This was not the case here, whether one considered that the "like product" was unmanufactured tobacco in general or that only varieties of unmanufactured tobacco were "like products."

55. This difference of treatment (which existed irrespective of the interpretation made of the concept of "like product") resulted in practice in imported tobacco being subject to internal taxes in excess of those applied to like domestic products, within the meaning of Article III:2. If the like product was unmanufactured tobacco, domestic unmanufactured tobacco benefitted from certain exceptions and was consequently on average taxed less than imported tobacco which was always liable to the Assessment. If the like product was each variety of tobacco, the case was even clearer. Among those varieties produced in the United States, only burley and flue-cured were subject to the assessment. The excess represented the full amount of the tax levied on the imported varieties. The violation of Article III:2 in this respect was therefore well established. Second, the calculation of the BDA for imported tobacco resulted in imported flue-cured tobacco being more taxed than domestic flue-cured tobacco. The United States seemed to argue that the de minimis difference of the taxation should justify a finding of no nullification or impairment. Such an argumentation had already been rejected by the Superfund panel. ⁵⁷ In any event, the de minimis argumentation of the United States could not prevail for those varieties which were not taxed when grown in the United States. Moreover, the discrimination should not be justified on the basis that the method used by the United States in calculating the BDA was "reasonable". GATT practice regarding Article III:2 had been to make an objective assessment of the measures under review. If the method used by the United States led to a discrimination (whether de minimis or not), it was sufficient to establish a violation. In other words, Article III:2 left no room for "reasonableness" in the application of internal taxes. For the reasons mentioned above, the EC was of the opinion that the BDA violated Article III:2 of the General Agreement.

56. Without prejudice to the merits of the arguments raised by the complainants regarding the conformity of the importers' contribution to the NNCA with provisions of the General Agreement, the EC stressed that the Panel, when reviewing the conformity of this tax, should take due account of the principles enshrined in the text of the General Agreement and in GATT practice, to be found, inter alia, in Article III:8(b) of the General Agreement and in the report of the Superfund panel. ⁵⁸

57. As concerned the inspection fees, the EC understood that Section 1106(c), as amended, contained two obligations: one that the importers fees and charges for inspection cover, as nearly as practicable, the costs of such services, and one pursuant to which these fees should be comparable to fees and charges fixed and collected for services provided in connection with tobacco produced in the United States. Inspection fees for imported tobacco were currently lower than for domestic tobacco and one could reasonably assume that they were fixed at least at the level of the cost of services. One could consequently deduce that if they were raised to the level of fees on domestic tobacco, they would no longer be commensurate with the actual costs of the services. In other words, one could assume, on the basis of the above, that Section 1106(c) required the U.S. authorities to take actions inconsistent with the General Agreement. Under GATT practice with respect to mandatory legislation, an argument to the effect that the fee had not been increased yet was irrelevant, as was clearly stated by the panel on United States - Measures Affecting Alcoholic and Malt Beverages. ⁵⁹

58. India submitted that the current complaint with respect to the U.S. measures affecting the importation, internal sale and use of tobacco should be considered in the light of overall trends towards market access restrictions which were not in conformity with the provisions of the General Agreement, like the ones under consideration. India was not a large exporter of tobacco to the United States but had an important systemic interest in this issue because actions such as this had major implications for the world trading system.

59. India believed that the 75 per cent domestic content requirement was inconsistent with the provisions of Article III:5 of the General Agreement. The BDA, requiring that an importer of tobacco remit to the CCC a non-refundable marketing assessment failing which, as in the case of the domestic content requirement, there would be a heavy penalty, was inconsistent with Article III:2. India also considered that the NNCA violated the provisions of Article III:2 of the General Agreement. In India's opinion, the substantive provisions of the 1993 Budget Act not only violated the provisions of the General Agreement, but also went against the obligations of the United States and undermined its credibility as a contracting party to the GATT. If major trading nations like the United States knowingly detracted from their obligations under the multilateral trade rules, this was bound to have very adverse repercussions for the multilateral trading system itself.

60. Turkey submitted that the 1993 Budget Act amended the Agricultural Adjustment Act of 1938 by including provisions to protect domestically-produced tobacco, to the detriment of the imported product. The aim of this new measure was to safeguard the interests of small U.S. tobacco farms which were negatively affected by the domestic price support programme and system of production controls. Turkey was of the opinion that it was difficult to accept the introduction of a border measure in order to offset the implications of a malfunctioning domestic support policy, in particular in the aftermath of the conclusion of the Uruguay Round negotiations and signing of the Marrakesh Agreement.

61. As for the product coverage of the measure, tobacco was defined in the proposed regulations to mean that which was commonly considered to be "tobacco" in the trade. As there was no provision in the statute to do otherwise, that would include all foreign tobacco, even those kinds of tobacco which were not produced in the United States and consequently were not subject to marketing quotas and did not receive price support. Turkey was a producer and exporter of Oriental tobacco. Forty-five per cent of its exports went to the United States, amounting to US$188 million in 1993. In the same year, Turkey's imports of flue-cured and burley tobacco from the United States amounted to 20,000 tons, with a value of US$121 million. Turkey feared that this two-way trade between the two countries would be adversely affected by the new regulation. In general, the expected reduction in the level of U.S. imports due to this new measure would destabilize world tobacco prices and disrupt the patterns of world trade. Subsequently, fewer sales and lower prices for exporting countries would lead to increased tobacco storage costs.

Introduction

62. The Panel recalled that the complainants had identified four separate U.S. measures, corresponding to four subsections of Section 1106 of the Omnibus Budget Reconciliation Act of 1993 ("1993 Budget Act"), which they claimed were inconsistent with the General Agreement. These four measures were:

The Panel decided to address the claims relating to each of the four measures in turn.

Domestic Marketing Assessment ("DMA")

63. The Panel noted that the issues in dispute with respect to the DMA arose essentially from the following facts. The DMA legislation, Section 1106(a) of the 1993 Budget Act, required each "domestic manufacturer of cigarettes", as defined in the legislation (see Annex), to certify to the Secretary of the U.S. Department of Agriculture ("USDA"), for each calendar year, the percentage of domestically produced tobacco used by such manufacturer to produce cigarettes during the year. A domestic manufacturer that failed to make such a certification or to use at least 75 per cent domestic tobacco was subject to penalties in the form of a nonrefundable marketing assessment (i.e. the DMA) and was required to purchase additional quantities of domestic burley and flue-cured tobacco.

64. The complainants claimed that the DMA, Section 1106(a) of the 1993 Budget Act, was inconsistent with the provisions of three paragraphs of Article III: paragraphs 2, 4 and 5.

65. The Panel considered that because the complainants claimed that the DMA was a domestic content requirement covered by Article III:5, and because that paragraph was the most specific of the provisions alleged to be violated, it should first examine the DMA in light of Article III:5.

Article III:5

66. The Panel noted that Article III:5 provides as follows:

The Panel then recalled the complainants' claim that the DMA was inconsistent with both the first and second sentences of this provision.

67. As to the applicability of Article III:5, first sentence, to the DMA, the Panel considered that it first had to determine whether the United States had established an "internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions ... ". The Panel noted the following in this respect:

The Panel thus found that the DMA was an "internal quantitative regulation relating to the ... use of products in specified amounts or proportions ... ", within the meaning of the first part of the first sentence of Article III:5.

68. The Panel then turned to a consideration of whether the DMA "requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources", as provided in the second part of the first sentence of Article III:5. The Panel noted the following in this respect:

The Panel thus concluded that the DMA was an internal quantitative regulation relating to the use of tobacco in specified amounts or proportions which required, directly or indirectly, that a minimum specified proportion of tobacco be supplied from domestic sources, inconsistently with Article III:5, first sentence.

69. The Panel next turned to a consideration of whether the DMA was inconsistent with Article III:5, second sentence, as claimed by the complainants. On this point, the Panel noted that the second sentence of Article III:5 is subsidiary to the first sentence thereof, as the second sentence only becomes relevant where a contracting party is "otherwise apply[ing] internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1", i.e. "so as to afford protection to domestic production". The Panel was therefore of the view that, in light of the finding of inconsistency of the DMA with Article III:5, first sentence, it would not be necessary to examine the consistency of the DMA with Article III:5, second sentence. ⁶⁰

Article III:4

70. The Panel then turned to a consideration of the claim that the DMA was inconsistent with Article III:4.

71. The Panel noted that Article III:4 provides in relevant part as follows:

72. The Panel noted that both Article III:5 and Article III:4 deal with internal regulations, but that Article III:5 is the more specific of the two provisions. In view of the Panel's finding of inconsistency of the DMA with Article III:5, and following the reasoning enunciated in paragraph 69, the Panel considered that it would not be necessary to examine the consistency of the DMA with Article III:4. ⁶¹

Article III:2

73. The Panel next turned its consideration to the claim by the complainants that the penalty provisions of the DMA, i.e. the nonrefundable marketing assessment and the requirement to purchase additional quantities of domestic burley and flue-cured tobacco, which were applicable where a domestic manufacturer failed to provide the required certification or to use annually a minimum of 75 per cent domestic tobacco in the manufacture of cigarettes, were inconsistent with the first sentence of Article III:2.

74. The Panel noted that Article III:2 provides as follows:

75. In the Panel's view, the Article III:2 claim raised the question of whether the DMA's penalty provisions were separate fiscal measures or enforcement measures for the domestic content requirement of the DMA. The Panel noted in this regard that previous panels, consistent with the practice of international tribunals, had refrained from engaging in an independent interpretation of domestic laws, and had treated the interpretation of such laws as questions of fact. ⁶² The Panel considered that it should approach its analysis of the complainants' Article III:2 claims in conformity with this practice and, therefore, to treat the interpretation of Section 1106(a) of the 1993 Budget Act as a question of fact. As the basis for such an analysis, the Panel considered that it should seek guidance from the manner in which the United States, as author of the legislation, itself interpreted these provisions.

76. The Panel considered as significant that the subsection of the DMA provision which set forth the additional marketing assessment and purchase requirements was entitled "Penalties". Thus, the ordinary meaning of the title of the provision suggested to the Panel that the additional assessment and purchase requirements were treated under U.S. domestic law as penalties, not as separate fiscal measures.

77. The Panel recalled once again that the DMA provision, in relevant part, read as follows:

78. The Panel further recalled that USDA's Proposed Rules implementing Section 1106(a) of the 1993 Budget Act set out the penalty provisions under Section 723.502(b), entitled "Failure to Comply". The text of these Proposed Rules provided the following:

79. The Panel noted in addition that the text accompanying the Proposed Rules suggested that the additional marketing assessment and purchase requirements were in the nature of penalties. For example, the Panel noted that the following explanation was provided:

The accompanying text further provided:

TO CONTINUE WITH MEASURES AFFECTING THE IMPORTATION, INTERNAL SALE AND USE OF TOBACCO

⁴⁶ 7 U.S.C. 511r(d).

⁴⁷ Report of the panel on EEC Measures on Animal Feed Proteins, paragraph 4.8, adopted on 14 March 1978, BISD 25S/49.

⁴⁸ Paragraph 6.3, adopted on 7 February 1984, BISD 30S/140.

⁴⁹ Paragraph 5.14, adopted on 7 November 1989, BISD 36S/345.

⁵⁰ Report of the Panel on United States - Taxes on Petroleum and Certain imported Substances, paragraphs 5.1.9-10, adopted on 17 June 1987, BISD 34S/136.

⁵¹ See: Section 1106(a) of the Omnibus Budget Reconciliation Act of 1993, which refers to "the percentage of the quantity of tobacco used by the manufacturer to produce cigarettes".

⁵² See: Section 1106(a) of the Omnibus Budget Reconciliation Act of 1993.

⁵³ Report of the panel on EEC Measures on Animal Feed Proteins, paragraph 4.8, adopted on 14 March 1978, BISD 25S/49.

⁵⁴ Report of the Panel on United States - Taxes on Petroleum and Certain Imported Substances, adopted on 17 June 1987, BISD 34S/136.

⁵⁵ Idem, paragraph 5.1.9.

⁵⁶ See: e.g., report of the panel on Italian Discrimination against Imported Agricultural Machinery, paragraph 11, adopted on 23 October 1958, BISD 7S/60.

⁵⁷ Report of the Panel on United States - Taxes on Petroleum and Certain imported Substances, paragraphs, adopted on 17 June 1987, BISD 34S/136.

⁵⁸ Idem, paragraph 5.2.4.

⁵⁹ Paragraph 5.39, adopted on 19 June 1992, BISD 39S/206.

⁶⁰ Cf. Report of the panel on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD 39S/206, 270, where that panel found that it would not be appropriate to consider Canada's Article III:1 allegations to the extent that it found the U.S. measures to be inconsistent with the more specific provisions of Articles III:2 and III:4.

⁶¹ Cf. Report of the panel on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD 39S/206, 270, where that panel found that it would not be appropriate to consider Canada's Article III:1 allegations to the extent that it found the U.S. measures to be inconsistent with the more specific provisions of Articles III:2 and III:4.

⁶² See, e.g., report of the panel on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD 39S/206, 284-287, 296-297.

⁶³ 59 Federal Register 1493, 1497 (11 January 1994).

⁶⁴ 59 Federal Register 1493, 1495 (11 January 1994).

⁶⁵ 59 Federal Register 1493, 1495 (11 January 1994).

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