IV.696 The Complaining parties disagreed with the EC's assertion that they had not provided prima facie evidence of a GATS violation. The Complaining parties referred, inter alia, to (i) Exhibit E of their Joint rebuttal submission, which listed the companies of Complainants established in the EC that supplied wholesale trade services for bananas, and (ii) the information set out above, which indicated with specificity the types of wholesale trade services that Complainants' service suppliers engaged in, and (iii) documents they had submitted which demonstrated that Complaining parties’ banana wholesalers distributed bananas they did not produce themselves. With regard to an indication of which activities were performed by which companies in the EC, the EC had not explained why this type of detail was necessary to establish a prima facie case under the GATS. The Complaining parties noted that this type of information was very likely to implicate confidential business information. GATS Article III bis provided that a Member was not required to submit such information. Moreover, the EC did not seriously question the fact that, before Regulation 404/93 went into effect, Latin American and United States firms distributed nearly all Latin American bananas into the EC, and EC and ACP firms distributed the vast majority of EC and ACP bananas into the EC. The Complaining parties observed that the EC alleged that three major Latin American or United States wholesaling firms "controlled" 28 per cent of EC/ACP banana production in 1994 citing the A.D. Little report (paragraph 4.610 refers). The EC purported to base this allegation on a report commissioned by an European banana producer association, but had not provided the study or the underlying data contained in it to the Panel. More importantly, the 28 per cent figure pertained to the period after the regime went into effect and was thus irrelevant to whether the regime had modified competitive conditions. The Complaining parties noted further that the A.D. Little report itself indicated that the share of EC and ACP banana production controlled by the three main North American banana distribution companies prior to the EC banana regime was only 6 per cent. If one assumed, arguendo, that the 6 per cent figure was accurate, it supported Complaining parties’ contention that Latin American bananas and EC/ACP bananas were distributed by separate groups of firms prior to Regulation 404/93.

IV.697 The Complaining parties further questioned whether the EC's arguments regarding sufficiency of evidence could be taken seriously when the EC had not submitted any of its own information to contest Complaining parties’ data, even though as administrator of the banana regime it was the keeper of all data on license allocations given to companies established in the EC, and despite Complaining parties’ requests during consultations for such information. The Complaining parties also questioned how the EC could plausibly say that all of its actions were motivated by the desire to curtail the "Latin American banana oligopoly", and then claim that it did not know whether these firms are engaged in the EC banana market at all. Although maintaining that they had provided adequate information, the Complaining parties offered to provide additional information if the Panel felt it required further clarification to assist its deliberations.

IV.698 The EC argued that its import licensing system was not a measure related to the supply of services. It was a measure aimed at regulating the entry of goods into the EC market and the allocation of the right of importation of these goods among different operators. Even the criteria of allocation were based on the quantities of bananas marketed and not on services supplied. In order to obtain licences under the Category B licence system, one had to have marketed bananas on one's own account (Article 19 of Regulation 404/93) or as "owner" (Article 3.1 of Regulation 1442/93). It did not suffice to have rendered services in respect to bananas. For this reason alone, the EC argued, the attempt to apply the GATS to the system of Category B licences failed.

IV.699 The Complaining parties recalled their argument in paragraph 4.623 above that the regime categorized firms by the amount of wholesale trade services each supplied, in that each of the activity functions were defined in terms of buying and selling bananas into the EC market.

IV.700 The EC continued that the Complaining parties tried to incorporate the licensing system into the GATS with the assertion that it modified competitive opportunities. The EC considered, however, that such assertion alone did not determine whether a measure was covered by the GATS instead of the GATT. First it had to be demonstrated that the measure in question was one that concerned not goods but services. In the view of the EC, one could not argue that import licensing rules which clearly concerned the importation of products became measures affecting trade in services because licences were distributed to companies. It was obvious that import licensing rules were covered by the GATT and, since the Tokyo Round, by the Import Licensing Agreement which were both agreements on trade in goods. There was no reason to assume that after the Uruguay Round rules on import licensing had suddenly become measures affecting trade in services. The EC considered that the kind of licences covered by the GATS was of a fundamentally different nature than import licensing rules. Article VI:4 of GATS referred to "licensing requirements" which should not constitute "unnecessary barriers to trade in services" and which were "not in themselves a restriction on the supply of a service". In the same way, Article XVI of GATS indicated that the kind of restrictions which could be maintained, inter alia, through licences were all in the nature of restrictions on the provision of services as services. The import licences at issue were not of this nature.

IV.701 The EC considered that if the import licences concerned were to be considered licences within the ambit of the GATS, they should fall under Article VI:4 and 5. The licensing requirements mentioned in that Article were of a fundamentally different nature, however, because they related to "the competence and the ability to supply the service"; they aimed to ensure "the quality of the service" (Article VI:4 of GATS). Import licensing requirements were not of this nature; they were measures relating to goods. In the EC's view, Article VI of GATS, and the way in which it approached licences, demonstrated that the GATS was not intended to cover import licences at all. If the Panel were nevertheless to take another view, that is to say that import licences were measures affecting trade in services, then the EC considered that the import licensing rules for bananas were covered by Article VI of GATS. In that case the EC would be in the non-violation situation of Article VI:5. In that case, the Complaining parties should, first, show that licensing requirements had been used so as to nullify or impair specific commitments of the EC in one of the ways indicated in paragraph 4 of Article VI and, second, that this could not have reasonably been expected of the EC when it made its commitments in the distribution services sector. The EC noted that when the EC commitments in this sector entered into force, the EC banana regulations and its licensing system had been in force for 1½ years and that hence no reasonable expectations on the part of the Complaining parties could exist.

IV.702 The Complaining parties contested the EC's claim that the phrase "measures affecting trade in services" must be interpreted narrowly to exclude import licences, and to include only those licences that pertain to Article XVI and those described in Article VI of GATS. According to the Complaining parties, the test for whether a measure was covered by the non-discrimination provisions of GATS Article XVII, and Article II, was whether the measure affected trade in services. In contrast, to the extent that GATS Article VI applied to governmental licences, it was meant primarily to address certain non-discriminatory, but potentially trade-restrictive, procedures pertaining to the issuance of permits and licences to engage in professional services. These obligations were in addition to, and separate from, the non-discrimination rules applicable to all measures affecting trade in services in scheduled sectors. Thus, Article VI could not be read to restrict the meaning of the phrase "measures affecting trade in services." With respect to Article XVI, the Complaining parties referred to their arguments above concerning that article in the context of the meaning of "measures affecting trade in services" of GATS Articles I:1 and XXVIII(c) (see paragraph 4.631).

IV.703 The EC reiterated that the objective of the operator category system was to ensure that the advantages that ACP countries had enjoyed on the market of the EC were safeguarded. The banana producing countries, pursuant to Protocol 5 of the Lomé Convention, were in need of some mechanism that would permit their bananas to have a fair chance to be sold on the EC market in view of their higher production cost. This was only possible by giving importers of ACP bananas a right to import a part of the tariff quota for bananas. The import licences were transferable and did not necessarily allocate market share. The only way for the EC to fulfil its legal duties to the ACP countries was by working through importers and in this way have the desired guarantees for ACP producers. What was given to these importers were rights to import bananas and these were clearly measures relating to goods and not to trade in services. In so far as these rights affected wholesale services, such effects were a consequence of the availability of goods and had to be accepted, in so far as that limited availability was a consequence of measures in conformity with the goods agreements of the WTO. Such situations were covered, in the opinion of the EC, by footnote 9 to Article XVI(2)(c) of GATS, which, according to this footnote, did not cover measures of Members which limited inputs for the supply of services. The (re)distribution of competitive opportunities in the sector of wholesale services was therefore not at issue.

IV.704 The EC recalled that two questions were relevant for the question of possible discrimination under Article XVII, namely what the relevant market and what the relevant period were. According to the EC, the relevant market was certainly not the market for wholesaling Latin-American bananas: it was either wholesaling fruit and vegetables or wholesaling bananas. The relevant period started on 1 January 1995 with the entry into force of the GATS. The situations to be compared were those before and after that date.

IV.705 The Complaining parties responded that two key factual issues were relevant to the question of whether the EC's import licensing rules violated the GATS national treatment and MFN requirements: (i) what conditions of competition had prevailed in the cross-border and domestic EC market for banana wholesaling services prior to the EC banana regime; and (ii) whether the EC rules had modified those conditions in favour of domestic and ACP banana wholesalers. The EC attempted to deflect attention away from these fundamental inquiries by pointing to various ways in which the Latin American and United States firms could endeavour to recoup some of the business they lost due to the regime. The EC asserted, according to the Complaining parties, that North and South American banana importers could buy the right to import back from the EC firms to which their former share of the market had been awarded, or invest in plantations in EC or ACP areas and thereby start to generate their own Category B rights after several years. In fact, if the Latin American and United States firms had to buy their businesses back it was only because they were the victims of a continuing discriminatory market reallocation in favour of EC and ACP firms. In stark contrast, EC and ACP firms were permitted to continue their traditional contractual relations with EC and ACP producers, and were given substantial additional business in the Latin American banana sector. The Complaining parties did not agree that traditional suppliers of Latin American bananas did not lose business as a result of the banana régime. The EC itself had predicted such an effect in EC Court of Justice proceedings. However, like the GATT, the GATS was ultimately not concerned with actual market effects, since this could be the result of many factors other than a given measure. Instead, drawing from GATT practice, the GATS focused on whether the regulatory framework established by a measure changed the competitive environment in a manner that served to protect domestic service providers. The GATS thereby avoided an analytically dubious inquiry into investment flows or market performance. Applying the test that the GATS negotiators intended to be applied under Articles II and XVII, both of which were based on GATT Article III, it was clear that the EC's banana framework had radically altered pre-existing conditions of competition in the banana wholesale services market in favour of EC and ACP firms. The manner in which the regime altered the situation that existed just prior to it showed that the regime was discriminatory. There was no "grandfathering" provision in the GATS that would permit Members to maintain discriminatory regimes upon entry into force of the GATS in January 1995. The fact that the regime continued to this day brought it within the disciplines of the GATS.

IV.706 The EC argued that any system of quotas created quota rents. Given that the agricultural sector was being liberalized largely by having recourse to a system of consolidated tariff quotas, there was no doubt that quota rents would play a certain role in the WTO system for some time to come. The GATT contained no rules on the sharing out of quota rents. Obviously, the GATS had even less reason to include such rules, as tariff quotas on goods did not fall under its ambit. Therefore it was pushing the GATS too far to argue that it was intended to regulate government behaviour with respect to the allocation of quota rents. Any government which instituted tariff quotas created a windfall of quota rents. Nobody had a right to a quota rent that was newly created. There might be rules of domestic law which governed this problem but there were no applicable rules in the law of the WTO. It was inevitable that in allocating quota rent through a licensing system, governments would also allocate a limited amount of financial power as between operators, but this was the unavoidable result of having a tariff quota. In the present case, by far the largest share of the quota rent (66.5 per cent) was handed to established traders in bananas from Central and Latin America, including the two large, integrated United States owned banana trading companies. If a smaller amount of this quota rent was given to traders in bananas from ACP and EC countries, it was partly for reasons related to the EC's obligations under the Lomé Convention's Banana Protocol, to ensure that the quantities for which access was given would also be marketed; partly for reasons related to the integration of the internal market, to ensure that marketing of ACP bananas and Latin American bananas would not continue in two closed circuits; and partly for reasons of competition policy, to ensure that not all of the windfall quota rent would end up with the companies which already had a very strong oligopolistic position on the EC market. All these reasons would, in the opinion of the EC, seem to be entirely consonant with WTO rules or, as in the case of competition, fall entirely outside the scope of the WTO.

IV.707 The EC submitted further that the issue of quota rent transfer was one related to the general protection of investment or treatment of companies and not to the sector of wholesale services or wholesale service suppliers. Therefore, quota rents which were linked to the transferable import rights distributed through the licensing system were not covered by the GATS. The EC claimed that the Complaining parties were seeking a general protection of competitive opportunities to investors and not one which was limited to competitive opportunities to provide services. Competitive opportunities in the field of wholesale trade services arose because of commitments (subject to Article VI regulation) and the rules of the GATS and neither the commitments nor the rules contained anything with respect quota rents. In the view of the EC, it was entirely legitimate to consider a fair (re)distribution of quota rent to counteract the concentration of such "windfall" in a few (already powerful) hands. Otherwise, the "windfall" would be given to the party which happened to be in the strongest position on the market at the moment. According to the EC, it was not possible to apply MFN or national treatment principles to quota rent and it was not necessarily fair to use the criterion of the existing trade patterns.

IV.708 The Complaining parties replied that the EC's licence allocation redistributed opportunities to engage in wholesale trade. The 30 per cent set aside as well as the allocations to ripeners and customs clearers gave EC and ACP firms the means to enter the business of cross-border wholesaling of Latin American bananas. The EC effected this transfer of competitive opportunities at the direct expense of the Latin American and United States firms whose business it had previously been. The Complaining Parties submitted that there was no difference between a measure designed (in the EC's words) to ‘strengthen the competitive position’ of domestic service suppliers (see paragraph 4.677), and one designed to ‘modify the conditions of competition in favor of’ domestic service suppliers, as provided in GATS Article XVII. Because the tariff quota restricted the availability of bananas in the EC market it created quota rents and those rents were awarded, also on a discriminatory basis, along with banana import rights. The fact that some quota rents were (or were not) transferred along with import rights did not change the fact that the transfer of business opportunities from Latin American and United States banana wholesalers to EC and ACP wholesalers modified the terms of competition in favour of the latter in violation of Articles II and XVII of GATS. The Complaining parties disagreed with the EC's assertion that the Complaining parties were attempting to protect their Latin American "investment" interests and not services interests within the scope of the GATS. The Latin American and United States banana wholesalers provided wholesale trade services on a cross-border basis from Latin American Members to the EC, and within the EC, in a manner directly covered by GATS Article I:2(a) and (c), which concerned services provided on a cross-border and commercial presence basis.

IV.709 The Complaining parties contested the EC's claim that its banana régime was implemented in pursuit of legitimate, country-neutral goals, and was not an effort to discriminate on the basis of service suppliers. The EC claim that it was motivated by the need to ensure an integrated market was irrelevant as a GATS matter (and unsupported by the facts). GATS Article V governed market integration. Article V did not relieve the EC from its national treatment obligations, or its MFN obligations vis-à-vis ACP service suppliers. The EC's competition policy claim supported Complaining parties’ contention that the régime was in fact intended to alter competitive conditions.

(b) Article II

IV.710 Ecuador submitted that prior to the imposition of the EC banana regime, the overwhelming percentage of all third-country bananas imported into the EC were imported, distributed and marketed by third-country service suppliers, though the ripening of these bananas was largely performed by EC operators. However, the EC banana regime fundamentally altered this pattern of trade. The operator category allocations set out in Regulation 404/93 violated, according to Ecuador, the MFN principle by allocating a substantial portion of the market in third-country bananas to operators from ACP countries which had never before been involved in the transportation, marketing, and sale of such bananas. The operator categories set out in Regulation 404/93 generally corresponded to the two classes of service providers described in paragraph 4.685 above. Category A operators included mainly service providers from third countries, while Category B operators were largely composed of ACP and EC service providers. Although Category A operators imported virtually all of the third-country bananas marketed in the EC prior to the imposition of the banana regime, Regulation 404/93 deprived these operators of 30 per cent of their market. This 30 per cent share was reallocated to Category B service providers which had never before imported such bananas. Not only did this arbitrary reallocation unjustifiably provide a windfall for traditional ACP service providers, but Regulation 404/93 provided nothing in return to compensate the third-country service providers for their loss. Regulation 404/93 thus left the sheltered market for ACP operators intact while cutting the market for third-country service suppliers almost in half. In the opinion of Ecuador, a more direct violation of the MFN principles set out in Article II of GATS would be difficult to imagine.

IV.711 Mexico argued that, at the level of service suppliers, the violation of Article II of GATS resulted from the same reasons as those mentioned to demonstrate other violations, at the level of goods, of several Articles of GATT. In this case, the violation of Article II of GATS was the result of the advantages granted to ACP enterprises that historically marketed traditional ACP bananas and therefore were registered as Category B operators with all the consequent benefits that this implied, i.e. exemption from the requirement of export certificates when importing bananas from BFA countries and the import licences granted to them in addition to the tariff quota in the event of natural disasters (hurricane licences).

IV.712 The United States argued that the 30 per cent set aside for Category B operators had altered the conditions of competition in favour of ACP marketing firms in comparison with other non-EC banana distribution firms. Certain ACP banana marketing firms (e.g. Jamaica Producers and Winban/Wibdeco) had been clear and deliberate beneficiaries of the operator category regime. Because these firms had, along with EC firms, traditionally marketed ACP-produced bananas for sale in the EC, they were handed part of the 30 per cent allocation reserved for Category B operators. United States, Ecuadorian and other non-EC/ACP firms that had historically marketed the vast majority of Latin American bananas but had marketed few ACP (or EC) bananas sold in the EC were stripped of a portion of their market share, and that portion was awarded, in part, to marketers of selected other countries. According to the United States, the EC had conceded, and other neutral authorities had recognized, that the operator category allocations were instituted to provide, and had the predictable consequence of providing, commercial advantage to those non-EC marketing firms that historically handled EC/ACP bananas as compared to those who historically handled Latin American bananas. The allocation of licences to Category B operators thus provided less favourable treatment to United States and other third-country banana distribution firms than was provided to like ACP firms and was therefore contrary to the EC's MFN obligations under GATS Article II.

IV.713 The United States noted that the EC had made no entries on its list of MFN exemptions that covered any of the measures at issue with respect to the Complaining parties' GATS claims. Although the EC had obtained a limited waiver from Article I of GATT for implementation of certain preferences required under the Lomé Convention with respect to goods, this waiver did not apply to any of the EC's obligations under the GATS.

IV.714 The EC responded that Article II of GATS obliged the EC to grant no less favourable treatment of services of third countries (first mode) and of service suppliers of third countries (third mode). In the present case, as far as the first mode was concerned, direct trans-frontier services with respect to bananas could not be treated differently as services whether they were services of the Complaining parties or services of any of the ACP States. Since the only direct trans-frontier service involved was ocean shipping where there were so far no MFN obligations or commitments, this was a purely theoretical question. Where it concerned the third mode, Article II of GATS obliged the EC not to treat service suppliers of the Complaining parties any different than service suppliers from any of the ACP States. The EC recalled that the EC licence distribution system was a measure affecting trade in goods and not a measure affecting trade in services (paragraph 4.703 above refers). Even under the assumption that the licence distribution system was a measure affecting trade in services, the Complaining parties had to make a prima facie case that there were companies owned or controlled by them operating in the third mode on the EC market and that such companies did not or could not de iure fall under the category of operators who marketed traditional ACP bananas or under any of the categories of ripeners or secondary importers. This the Complaining parties had not done. But even if this were to be the case, the EC was of the view that the Complaining parties had not been able to counter the argument that the licences in question were tradeable and therefore could be bought if necessary. As the EC had argued above, such buying and selling of tradeable import licences was a question of shifting around the quota rent, which was not a matter covered by the GATS (see paragraph 4.707 above).

IV.715 The EC considered that the argument resorted to by the United States in relation to an alleged lack of MFN treatment under the GATS was an argument that the EC had altered the conditions of competition as between marketing firms (probably wholesale trade services firms) of ACP bananas and "other non-EC banana distribution firms". According to the EC, the real complaint of the United States was about the origin of the bananas, not about the origin of the services; in other words, the dispute was about goods and not about services. As was demonstrated in the section on "Standard of Discrimination: Article II" above, the alteration of competitive conditions was not, in the view of the EC, part of the "no less favourable treatment standard" under Article II:1 of GATS. Hence, there was no basis for the United States complaint on this point, quite apart from the other reasons already mentioned above, for rejecting the idea that the quota allocation system had a direct link with the supply of services as such. Moreover, the contested measures did not cover the wholesale trade services sector (see also paragraph 4.610 above).

Activity function licence allocation - Articles II and XVII

IV.716 The Complaining parties recalled their claim, as set out in paragraph 4.607, that a key component through which the EC transferred wholesale distribution business opportunities to its domestic service suppliers were the three "activity functions".

IV.717 The Complaining parties claimed that the specific shares chosen by the EC for the three activity functions gave the false impression of precision or rationality. In fact, the EC had never explained how it arrived at these particular numbers. Moreover, whereas the EC's directives mentioned such considerations as level of commercial risk and scale of business activity, it had never explained how these considerations justified awarding nearly half the import rights on the basis of customs clearance and ripening. The EC thus manipulated the two features of the banana regime described - the operator categories and activity functions - to strip opportunities for Latin American banana distribution business away from the firms that had traditionally supplied nearly all Latin American bananas into the EC market and awarded these opportunities to their competitors, which were EC or ACP-owned companies. By drastically altering competitive conditions in this manner, these aspects of the regime violated the principles of MFN treatment and national treatment of Articles II and XVII of GATS.

IV.718 The Complaining parties submitted that in order to assess whether the EC had impermissibly modified competitive conditions, Article XVII of GATS required an examination of, first, the competitive environment that existed at the time Regulations 404/93 and 1442/93 (which established activity function allocations) went into effect, and second, whether the EC had altered that environment in favour of its own firms. At the time Regulations 404/93 and 1442/93 took effect the situation was as follows:

(i) Latin American and United States firms were virtually alone in providing cross-border wholesaling services for Latin American bananas sold into the EC market. These firms purchased the bananas from Latin American suppliers, took physical delivery, assumed commercial risk, arranged for, or performed, ocean transportation and found wholesale buyers for Latin American bananas sold into the EC. The EC designated these firms as primary importers under activity function (a) and awarded them only 57 per cent of those Latin American banana import rights not already transferred to EC or ACP banana firms.

(ii) The vast majority of banana ripeners were EC-owned firms, frequently small, and located close to retail points of sale. According to information submitted by the Complaining parties, at the time the EC regime took effect, over 80 per cent of the EC's banana imports were ripened by EC-owned firms. Ripening played no role in actual importation. The EC designated ripening firms as performing activity function (c) and awarded them 28 per cent of the import rights for Latin American bananas.

(iii) Customs clearance for Latin American bananas was performed by different types of entities, such as: (a) agents (generally EC nationals or firms) on behalf of United States and Latin American importers, in some cases technically taking title to the bananas for purposes of customs clearance procedures; (b) larger ripeners, or entities related to ripeners; and (c) the importers themselves. Customs clearance was largely a paperwork exercise that was independent of the actual physical and commercial process of importation. Nevertheless, firms that had performed customs clearance for Latin American bananas received 15 per cent of remaining EC licences for those bananas.

IV.719 The United States claimed that firms whose activities were classified within the three activity functions were "like service suppliers". Each activity was part of the overall wholesale distribution chain for Latin American bananas sold in the EC. The right granted to firms under the three activity functions was the same, i.e. the right to import Latin American bananas. The EC's grant of such rights placed firms engaging in the named activities in direct competition with the others for the provision of wholesale distribution services. For example, the 28 per cent import share gave ripeners the means to engage in the import side of the wholesale distribution business in competition with the firms from which their market share was extracted.

IV.720 According to the United States, the EC had explained that in establishing the activity function allocations the Commission had been guided by "the principle whereby the licences had to be granted to natural or legal persons who had undertaken the commercial risk of marketing bananas and by the necessity of avoiding disturbing normal trading relations between persons occupying different points in the marketing chain". ⁶⁹⁰ The EC had also explained that the weighting percentages (57/15/28 per cent) for the three activity functions were designed "to take account of the scale of business concerned and of the commercial risks incurred". ⁶⁹¹ The United States was of the view that none of these rationales provided a sustainable basis for the EC's allocation of banana importation in a manner favouring its domestic service providers. The EC had never stated why it selected the criterion of commercial risk nor, so far as the United States knew, had the EC ever made clear how it defined commercial risk in this context or what methodology it used to assess such risk. The EC had likewise never disclosed its basis for deciding that all importers, customs clearers, and ripeners assumed a marketing risk and precisely how it allocated the percentage of risk between those three groups. ⁶⁹² Similarly, the EC had not explained how the scale of business concerned was an appropriate criterion for allocating import licences and how this criterion justified allocating over 40 per cent of the import rights to activity functions (b) and (c). Activity function (c) required only a modest commercial investment and activity function (b) required none. The overwhelming majority of commercial investments required arose in connection with the so-called primary importer activities. The United States further observed that, while the EC had also claimed that its allocation of import rights for Latin American bananas was meant to avoid disturbing normal trading relations, in fact the EC's overall and specific allocation schemes were calculated to radically rearrange the trading relationships that pertained prior to the imposition of the tariff quota.

IV.721 The Complaining parties argued that there were few if any independent firms whose primary business was clearing Latin American bananas through customs. Thus, this activity did not meet the EC's own test for allocating according to activity function, i.e. that the rules "ensure that the various types of operators whose specialized business activity is directly dependent on access to the quota enjoy such access without any consequent disruption to normal trade between the various actors in the marketing chain." ⁶⁹³ It was not clear whose "specialized business activity" the EC was referring to in the case of customs clearance. Rather, in the view of Complaining parties, the secondary importer category was an entirely artificial construction created by the EC to shift more licence entitlement away from the primary importers. Although ripeners could be identified as discrete commercial entities, their market risk and scale of activity were minor compared to primary importers. In theory, banana ripeners that obtained title to their fruit assumed the risk of price drops that might occur in the five-to-seven day period in which they held bananas. However, this risk was more theoretical than real, since it was common practice for ripeners to recoup from the primary importers any losses resulting from sudden price drops that occur over those several days. Indeed, because of their minimal commercial risk, ripeners generally did not experience the kind of losses suffered by primary importers during the period of low prices in 1992-93. By contrast, the long-term contracts and other arrangements that United States and Latin American banana wholesalers concluded with Latin American growers made them vulnerable to fluctuations in market conditions. Moreover, the scale of commercial activity involved in the marketing of bananas from tropical growing areas to Europe was vastly greater than that of banana ripening. The EC described how ripeners ripened bananas and "often carry out additional controls of quality and re-packing before selling either to wholesalers or to distributors, such as supermarkets." By contrast, for a given shipment of bananas the primary importers generally performed each of the activities listed in the CPC definition of wholesale trade services not just once, but multiple times and in multiple locations, as they distributed the bananas from the tropics to and through the EC. The fact that the EC had not explained the actual percentage allocations between the three activity functions (or the discrimination inherent in stripping import rights only from US and Latin American firms) confirmed that the allocations were politically motivated, made in direct response to a polling of the Member States, each of which generally put forward allocations designed to favor local interests.

IV.722 The EC responded that the activity function allocation was another way of dealing with the problem of quota rent created by the tariff quota and the licences. The aim of the activity function was not to concentrate the economic value related to import licences in a few hands or in one part of the supply chain. Otherwise, the privileged recipients would receive a "windfall dose of power" and influence over their trading partners in the supply chain. For instance, the dependence of independent ripeners on the large, integrated banana trading companies, which was already great, would have grown considerably. It would have meant a further blow to their negotiating ability vis-à-vis these companies, which dominated the banana trade to a very great extent in large parts of the European market. It was on this point that considerations of competition policy most clearly entered into the EC banana regime. Such considerations fell, in the opinion of the EC, entirely outside the ambit of the WTO as was clear from the preparatory discussions for the Singapore Ministerial Conference. The notion of competitive opportunities that had played a role for quite a long time already in the GATT system had nothing to do with the notions of domestic or EC competition policy, such as they entered into consideration here, when deciding about the desirability of allocating the windfall of economic bargaining power which automatically went along with the allocation of import licences.

IV.723 The EC recalled that, in its view, the allocation of import quotas was a goods-related measure and thus not covered by the GATS. In relation to the licence allocation to the ripening sector, it was the view of the EC that the measures at issue did not touch the supply of wholesale trade services since the wholesale trade services sector, which was the sector concerned, was the sector following the ripening stage in the supply chain. In so far as the case under Article II was based on the assertion that the EC measures on activity function allocation had modified the conditions of competition, the EC recalled that Article II did not include this notion. For these reasons, the activity function allocations were not covered by the GATS or, otherwise, were in any case in conformity with Articles II and XVII of GATS.

IV.724 The EC submitted further that the activity function system which required only one import licence as between the different operators made it entirely possible to continue with the existing relationships between so-called primary and secondary importers and ripeners. If the existing business relationships were maintained, the requisite bananas could be imported by a licence somewhere in the chain (whether by a ripener or a primary importer). The only difference would be that the windfall quota rent would not all go to the importers and that the independent ripeners would have some bargaining power vis-à-vis importers intending to rely on the ripener's import licence. In the opinion of the EC, no shift in competitive opportunities between importers and ripeners occurred. Otherwise, the position of primary importers would have become even stronger than it already was, because of the windfall of quota rent. The same was true mutatis mutandis for the secondary importers. The EC considered it entirely legitimate to address these likely competitive consequences of its own regulation in the regulation itself. There was no need to await individual abuses of the increased bargaining power of primary importers in order to act.

IV.725 The Complaining parties replied that the EC's justification was simply a post hoc explanation for protectionism. The Complaining parties argued: (i) the EC could have addressed such concerns through its competition laws, which were the normal route for addressing competition issues and which had previously been used by the EC without hesitation in the banana trade; (ii) the EC did not mention competition concerns or oligopolies in any of the relevant directives, the 1995 report on the operation of the banana regime, or during the second banana GATT panel proceedings; (iii) the Latin American banana distribution sector was in fact more competitive than the distribution sector for other fruit for which the EC had not constructed comparable discriminatory regimes; (iv) the EC did not impose the same import restrictions on distributors of ACP bananas even though the markets in which the ACP bananas were primarily sold, France and the United Kingdom in particular, were notoriously non-competitive; (v) the activity function allocations did not promote competition in any event; and (vi) the EC transferred import opportunities away from all US and Latin American wholesalers, regardless of their competitive position in the EC banana wholesale market.

IV.726 The EC was of the view that it had shown that its concerns regarding competition were explicitly mentioned in the preambular paragraphs of the relevant acts. The EC legislator considered that it would leave ripeners and specialist customs clearers in a difficult position if cooperation with them was not necessary in order to import the tariff quota bananas into the EC. They were given some bargaining power to remedy this situation and since the ripening sector had always been penetrated by foreign suppliers of ripening services or of ripeners for the account of integrated firms (around 20 per cent, according to the EC), it was very difficult to see what de facto discrimination might have occurred. Competition concerns were not raised in the second banana panel because the activity function system was not at issue in that case.

IV.727 The Complaining parties submitted that the EC's claim that the activity function allocations were necessary to protect downstream entities was based on economically unsound reasoning. There was no economic difference, in so far as ripeners were concerned, between the primary importers in fact importing the bananas and primary importers being allocated the legal right to do so. By contrast, allocating a significant share of licences to ripeners did alter existing economic conditions by affording the ripeners the means to enter the cross-border banana wholesaling business. If access to banana imports was critical for downstream firms under the tariff quota, why did the EC choose not to provide allocations to customs clearers and ripeners with respect to their imports of ACP bananas? The fact that the EC did not allocate licences to import ACP bananas suggested that those firms were not disadvantaged by the tariff quota in the first place.

Hurricane licences - Articles II and XVII

IV.728 Ecuador recalled that, since the inception of the banana regime, the EC Commission had made available a total of 281,605 tonnes of supplemental "hurricane" licensing entitlements exclusively to Category B operators and producers. Volumes imported using hurricane licences were used in calculating a firm's future entitlement to licences as a Category B operator. No comparable licence replacement benefit had been conferred on Category A operators. Hurricane licences which were generally either sold or used to import Latin American bananas essentially increased the entitlement of Category B operators above the 30 per cent given to them under Regulation 404/93. The additional volume represented by hurricane licences gave Category B operators a distinct commercial advantage in comparison to Category A operators. Ecuador considered that the measure had skewed the conditions of competition in favour of EC and ACP services and service suppliers in comparison to like services and service suppliers of the United States, Mexico and Ecuador. As such, the measure was inconsistent with the EC's national treatment obligations under Article XVII of GATS and the EC's MFN obligations under Article II of GATS.

IV.729 The United States noted that the EC Commission had granted hurricane licences to Category B distributors and producers entitling them to import bananas from any source. These bananas entered over the established third-country tariff quota. Operators used these licences primarily to import additional Latin American bananas, in light of the otherwise restrictive tariff quota applicable to these bananas. Bananas imported using hurricane licences were counted in calculating a firm’s future entitlement to Category B licences under the EC's rolling three-year reference period. No comparable benefit had been conferred on Category A operators. The United States was of the opinion that, by according less favourable treatment to non-EC service suppliers as compared to like EC service suppliers, hurricane licences were inconsistent with the EC's national treatment obligations under Article XVII of GATS. By according less favourable treatment to non-EC/ACP banana distribution firms vis-à-vis like ACP distribution firms, these licences were likewise inconsistent with the EC's MFN obligations under Article II of GATS.

IV.730 The Complaining parties submitted that the EC's grant of hurricane licences only to firms that historically traded in EC and ACP bananas (Category B operators) represented a further discriminatory allocation to EC and ACP companies of the right to import Latin American bananas. While firms that traditionally traded in ACP bananas were eligible for hurricane licences, United States and Latin American banana wholesalers were not. The EC's hurricane licence allocation scheme thus represented, according to the Complaining parties, a further discriminatory alteration of the terms of competition in the wholesale bananas services market. The EC had acknowledged that any B operator, not only banana farmers, could receive hurricane licences: "... nothing is more natural than attributing these licences to the specific operators who can duly show a lost trade because of the hurricane that is among those who trade in ACP traditional bananas. These operators must equally show they 'include or directly represent ⁶⁹⁴ a specific banana producer affected by the tropical storm concerned'."

IV.731 The EC replied that hurricane licences were licences to import additional quantities of bananas (from anywhere) for those who were part of the preferential system in favour of the Lomé countries and who had suffered demonstrable damage from hurricanes which made it impossible for them to fill their normal, guaranteed quantities under the Lomé preference. Such compensatory licences had been granted by the French and British authorities before the creation of the EC banana regime and hence had to be maintained pursuant to the guarantees given in the Banana Protocol to the Lomé Convention and the pertinent declaration contained in Annex LXXIV of the Lomé Convention. Since they served to import goods, namely bananas, hurricane licences did not relate to the supply of services or the trade in services. It was equally unclear how hurricane licences related to trade in wholesale services. Hence, they were not covered by the GATS and in any case could not be contrary to Articles II and XVII thereof.

IV.732 As described above, the Complaining parties argued that the EC's Lomé waiver was limited to goods and was inapplicable to GATS obligations.

Export certificates - Articles II and XVII

IV.733 Ecuador argued that the special export certificate procedures violated Articles II and XVII of GATS. The principles of Article II and XVII were directly violated by the requirement set out in the BFA and Regulation 478/95 that Category A and C operators, but not Category B operators, apply for a special export certificates to import bananas from the BFA signatory countries. Obtaining special export certificates imposed a significant administrative burden on Category A and C operators and forced these operators to incur large additional transaction costs which Category B operators were not required to bear. These costs arose in part from the fact that Category A and C operators from non-BFA signatory countries frequently had to purchase the special export certificates from those producers and service suppliers in the signatory countries which were awarded special export certificates from their national governments. This process essentially forced the Category A and C operators, but not the Category B operators, to subsidize the BFA entities which sold the export certificates. The EC had recognized that the special export certificates "help [BFA] supplying countries to share in the economic benefits of the tariff quota." ⁶⁹⁵ Additional administrative costs were incurred by the Category A and C operators to ensure that the operators could match the import and export certificates in order to import BFA bananas into the EC.

IV.734 Ecuador noted that firms that were principally Category B service suppliers were composed virtually entirely of EC and ACP firms, while Category A service suppliers consisted of third-country firms. Thus, the additional costs imposed on Category A and C service suppliers were, de facto, imposed in a discriminatory manner on the basis of the nationality of the service or service suppliers. The special export certificate requirement consequently imposed costs on third-country service suppliers but did not impose similar costs on EC and ACP firms. The special export certificate system thus directly violated, according to Ecuador, the MFN and national treatment requirements of the GATS.

IV.735 Mexico argued that the EC regime violated Article II of GATS because it provided the benefit of the quota rent from export certificates only to the suppliers of services of BFA countries and not to all service suppliers of the other Members, because enterprises marketing non-ACP bananas faced an administrative licensing system which was extremely complex and costly and which was not applied to enterprises marketing ACP bananas.

IV.736 The United States noted that EC Regulation 478/95 implemented provisions of the BFA by requiring that Category A and C licence-holders to present export certificates as a condition for importing bananas from three of the four BFA countries (Colombia, Costa Rica and Nicaragua). ⁶⁹⁶ Category B licence-holders (i.e. predominantly EC and ACP firms) were exempted from this requirement. The requirement to obtain and present an export certificate for bananas sourced in certain countries added expense and administrative burden for firms that imported Latin American bananas to the EC. Category A applicants had to obtain certificates from the authorities of the exporting country and had to match these certificates with an import licence entitlement obtained from the EC before they could import bananas from these countries. Both steps entailed substantial administrative and financial costs. For example, Category A operators frequently had to purchase export certificates from producers or marketing firms in the producing countries. Category B operators, in applying for licences to import Latin American bananas from the same source countries, were free of such burdens.

IV.737 According to the United States, the EC had recognized the commercial effect of the export certificate requirement. The EC Commission had explained that Regulation 478/95's delegation of authority to issue export certificates to the relevant exporting countries was made in order to "help [BFA] supplying countries to share in the economic benefits of the tariff quota." ⁶⁹⁷ The economic benefits to which the EC Commission referred were a share of the quota rent associated with the marketing of Latin American bananas. Entities in the BFA countries realized these quota rents by, for example, selling the export certificates to Category A operators. By excluding Category B licence-holders from the export certificate requirement, the EC ensured that BFA countries’ share of quota rent would come only from Category A (and C) operators. Thus, the EC had not only given Category B firms 30 per cent of the Latin American tariff quota, but had also made it much easier and more financially profitable for Category B firms to market this share as compared to Category A firms. The EC's selective application of an export certificate requirement accorded, in the opinion of the United States, less favourable treatment to non-EC banana distribution firms as compared to like EC firms, and was therefore inconsistent with the EC's national treatment obligations under Article XVII of GATS. This feature of the EC banana regime also accorded less favourable treatment to United States and other non-EC/ACP banana distribution firms vis-à-vis like ACP firms and was therefore inconsistent with the EC's MFN obligations under Article II of GATS as well.

IV.738 The Complaining parties submitted that the EC's requirement that certain types of operators had to obtain export certificates, in addition to import licences, in order to import bananas from three of the BFA countries, amounted to further less favourable treatment for Latin American and United States banana wholesale service suppliers beyond that created by the 30 per cent set aside. The EC required export certificates from firms that traditionally traded in Latin American bananas (Category A) but not from firms that traditionally traded in EC or ACP bananas (Category B). A Category A licence-holder's need to obtain export certificates from authorities in the BFA countries and to match the certificates with EC-issued import certificates entailed substantial administrative and financial costs. A Category B licence-holder could import the same bananas from the same BFA countries without having to incur these costs. Thus, the EC's export certificate requirement accorded a competitive advantage to EC/ACP firms (Category B) in relation to Latin American and United States firms (Category A). The EC did not explain why it required export certificates only from Category A operators, that is, predominantly United States and Latin American firms, but not Category B operators. In the view of the Complaining parties, the export certificate requirement, like the 30 per cent set-aside for EC and ACP wholesalers, directly altered the terms of market competition in favour of those same companies by imposing import costs solely on Latin American and United States firms. The export certificate requirement thus equally violated Articles II and XVII of GATS.

IV.739 The EC replied that the Complaining parties' approach to the so-called discrimination relating to export certificate requirements rested on a number of assumptions which were unwarranted or were insufficiently established. First, the Complainants assumed that the measures concerning export certificates were measures relating to the supply of services or to trade in services. In the opinion of the EC, there could be no doubt that regulations concerning the export certificates related to trade in goods. An export certificate was a document showing that a certain good had been exported from a certain country. It was not certifying that a particular service had been exported from that country. Hence, rules in respect of export certificates did not come under the GATS. Second, the EC reiterated that neither the GATT nor the GATS contained any rules with respect to the allocation of quota rents. The export certificate requirement was the best example that the Complaining parties, or at least their service suppliers, were interested primarily in quota rents. They protested against a burden which had been imposed on other countries than their own, which, at least with respect to the speed with which one could dispose of one's bananas, was an advantage to some of the Complaining parties. It appeared to the EC that it was the quota rent that was the problem, not the possibility to provide services. Third, the Complainants seemed to assume that Category A licence-holders were all non-EC and non-ACP owned and that Category B licence-holders were all either EC or ACP owned or controlled. In the view of the EC, Category A and B licences were spread over both categories of ownership. The requirements with respect to export certificates were, in the opinion of the EC, not contrary to Articles II and XVII of GATS.

V . ARGUMENTS PRESENTED BY THIRD PARTIES

ACP THIRD PARTIES

Introduction

V.1 Belize, Cameroon, Côte d'Ivoire, Dominica, the Dominican Republic, Ghana, Grenada, Jamaica, Saint Lucia, Saint Vincent and the Grenadines, Senegal, and Suriname (the "ACP third parties") submitted that not all of the 70 ACP States which were signatories to the Lomé IV Convention (the "Lomé Convention") were involved in the production of bananas and their export to the EC. However, the issues at stake in this dispute went beyond bananas. They concerned the interests of all ACP States, whether banana producing or not, which were Members of the WTO and benefited from the Lomé Convention and the Lomé waiver. Moreover, for those Caribbean and African ACP States which were involved in the production and marketing of bananas, it was an essential aspect of their livelihoods. The banana industry provided high levels of employment and fundamental transport and communication infrastructure in these countries. In addition, for all banana producing ACP States, but especially those which were islands, the weekly shipping service which the banana industry provided was a lifeline without which many of their other industries would collapse.

V.2 The national regimes which operated before the introduction of the EC banana regime afforded significantly greater protection to the ACP banana growers than the current regime. Latin American bananas were admitted to supplement ACP supplies in volumes that would not deprive ACP bananas of a remunerative return from the market. Under its banana regime, the EC had, for the first time, imposed quantitative limits on duty-free imports from the ACP States which were not necessitated by the Lomé Convention. The highest volume of exports from traditional ACP countries amounted to 919,606 tonnes (FAO) or, providing for corrections in the cases of Cameroon and Côte d'Ivoire, 940,000 tonnes. This compared to traditional duty-free imports fixed at a maximum of 857,700 tonnes in Regulation 404/93. These figures did not suggest a "design to shift" banana supplies from Latin American bananas to ACP and EC sources.

V.3 The ACP third parties argued that the establishment of a common market organization for bananas in the EC was complicated by several factors. First, the costs of production in the EC and the ACP States were greatly in excess of the costs of production of Latin American bananas. In Ecuador, costs of production were approximately US$2.95 per box compared to approximately US$12.38 per box in Martinique. ACP costs of production reached up to US$10-11 per box. Secondly, ACP and EC producers faced other inherent disadvantages which necessitated a system, such as the Category B licence arrangement, in order to ensure continued production, distribution and marketing in the EC. These disadvantages included the following:

V.4 Thirdly, the ACP third parties claimed that the banana market was highly concentrated and oligopolistic. Prior to the introduction of Regulation 404/93, two relatively distinct markets for bananas existed in the EC: EC and ACP bananas were sold primarily in the markets of Italy, Portugal, Greece, the United Kingdom, Spain and France; Latin American bananas accounted for approximately 2 million tonnes and predominated in the Northern European countries of Germany, the Netherlands, Belgium, Luxembourg and Ireland.

TO CONTINUE WITH EC - REGIME FOR IMPORTATION OF BANANAS - COMPLAINT BY GUATEMALA AND HONDURAS

⁶⁹⁰ Regulation 404/93, recital 15.

⁶⁹¹ Regulation 1442/93, recital 3.

⁶⁹² The United States remarked that in the banana distribution business, like the distribution business for other fruit, it was commonly known that commercial risk "flowed backward". Firms further down the distribution chain (such as ripeners, customs clearers) incurred vastly fewer commercial risks than those firms that undertook to procure and ship bananas from overseas locations to the EC.

⁶⁹³ Regulation 1442/93, recital 2.

⁶⁹⁴ Regulation 2791/94, Article 2.1.

⁶⁹⁵ "Report on the EC Banana Regime", European Commission, July 1994, p.12.

⁶⁹⁶ Regulation 478/95, Article 3.2.

⁶⁹⁷ "Report on the EC Banana Regime", European Commission, July 1994, p.12.