Report of the Appellate Body

(Continued)

C. Arguments of the Third Participants

1. Australia

80. Australia considers that Chile's appeal raises important systemic issues concerning several of the covered agreements, in particular, the Agreement on Agriculture, and maintains that Article 4.2 of that Agreement prohibits WTO Members from introducing a price band system. In Australia's view, the term "variable import levy" in footnote 1 appears to refer to any system that allows for variation, but not to ad hoc changes that a government may make to the level of an applied tariff. The term "variable", therefore, seems to refer to variability that is inherent in a system, and not to "any variability". The existence of a binding in a Member's tariff schedule is not relevant for purposes of determining whether a measure is a prohibited "variable import levy" under Article 4.2. Rather, the question of whether a Member applies duties in excess of its tariff binding is an issue that should be examined under Article II of the GATT 1994 and not under Article 4.2 of the Agreement on Agriculture . With respect to the meaning of "similar border measures" in Article 4.2, Australia agrees with the United States that, to be "similar", it is sufficient for a border measure to be "similar" to any one of the measures listed in footnote 1-without having to be similar to all of those measures. Australia further agrees with the United States that, to be "similar" to a "variable import levy", a border measure does not need to share all the "fundamental characteristics" of such a levy.⁸⁵

2. Brazil

(a) Article 11 of the DSU

81. Brazil submits that the Panel's finding that Chile's price band system constitutes a violation of the second sentence of Article II:1(b) of the GATT 1994, is just a logical and necessary consequence of the Panel's finding that the price band system violates Article 4.2 of the Agreement on Agriculture . According to Brazil, GATT/WTO practice clearly sets out that panels are not compelled to accept the interpretations or legal reasoning developed by the parties to a dispute, even if all the parties to a dispute have similar or identical views.

(b) Order of Analysis

82. Brazil considers that the Panel was correct in choosing to examine Article 4.2 of the Agreement on Agriculture before examining Article II:1(b) of the GATT.

83. Brazil notes that the price band system applies exclusively to agricultural products and thus is subject to the Agreement on Agriculture . Article 21.1 of the Agreement on Agriculture sets out that "the provisions of GATT 1994 � shall apply subject to the provisions of [the Agreement on Agriculture ]".⁸⁶ (underlining in original) Therefore, Article 4.2 of the Agreement on Agriculture takes precedence over any conflicting GATT 1994 provision, which applies to goods in general. Thus, in the present case, according to Brazil, the Agreement on Agriculture is lex specialis, regardless of how detailed Article II:1(b) of GATT 1994 may be with respect to other goods not covered by the Agreement on Agriculture.

(c) Article 4.2 of the Agreement on Agriculture

84. Brazil agrees with the Panel's conclusion that substantial elements of Article 4.2 of the Agreement on Agriculture would be rendered void of meaning if that provision were to be read as only prohibiting those specific measures which other Members actually and specifically required to be converted and which in practice were converted at the end of the Uruguay Round.⁸⁷ Brazil submits, in this respect, that Chile does not seem to attach the necessary importance to the verb "maintain" in Article 4.2, which, according to Brazil, was clearly drafted to encompass the possibility that, at the end of the Uruguay Round, a Member had in place measures "of the kind which have been required to be converted", but decided not to convert those measures.

85. Brazil submits that Chile put undue emphasis on the fact that other WTO Members have not challenged its price band system before, although it notes that Chile concedes that the mere fact that a measure has not been challenged does not mean ipso facto that the measure is consistent with the WTO Agreement.

3. Colombia

(a) Article 11 of the DSU

86. Colombia submits that the Panel acted inconsistently with Article 11 of the DSU by making a finding under the second sentence of Article II:1(b) of the GATT 1994 and, in doing so, deprived the parties and third parties to the dispute of a fair right of response.

(b) Article 4.2 of the Agreement on Agriculture

87. Colombia questions the role given by the Panel to the Punta del Este Declaration and the preamble to the Agreement on Agriculture when interpreting the meaning of the term "ordinary customs duties". According to Colombia, the Panel's interpretation of that term presupposes a level of commitments and a scope of obligations that are not reflected in the substantive provisions of the Agreement on Agriculture .

88. Colombia argues that the Panel erred in concluding that Chile's price band system is inconsistent with Article 4.2 of the Agreement on Agriculture . This error was a result of the erroneous interpretation that the Panel gave to the term "variable import levies". In Colombia's view, variable import levies were prohibited in Article 4.2 in order to prohibit a system which led to uncertainty resulting from the absence of any limitation on tariff variability. Article 4.2 cannot be interpreted in isolation from other Multilateral Trade Agreements, which provide for the elimination of certain measures through commitments that are not derived from Article 4.2.

89. Colombia concludes that Article 4.2 must be assessed in the light of Articles I and II of the GATT and in the light of the fact that the European Communities and a major group of countries made commitments under Article II of the GATT. According to Colombia, seen in its proper context, Article 4.2 does not impose on WTO Members an obligation to limit their agricultural tariff policies to the point of ruling out any variation in tariffs over time. Rather, the only obligation is not to impose tariffs in excess of a tariff binding.

4. Ecuador

(a) Article 11 of the DSU

90. Ecuador argues that the Panel exceeded its terms of reference when it ruled on the inconsistency of price band systems with the second sentence of Article II:1(b) of the GATT 1994, and in so doing, acted inconsistently with Article 11 of the DSU.⁸⁸

(b) Order of Analysis

91. Ecuador submits that the Panel erred in choosing to examine Article 4.2 of the Agreement on Agriculture before examining Article II:1(b) of the GATT 1994. The Panel should first have determined whether the price band duties constitute "ordinary customs duties", and only then determined their conformity with Article II:1(b) and Article 4.2.

(c) Article 4.2 of the Agreement on Agriculture

92. Ecuador argues that the Panel erred in concluding that all price band systems are prohibited by Article 4.2 of the Agreement on Agriculture . According to Ecuador, price band systems are "similar" to variable import levies or minimum prices only to the extent that their design, structure or mode of operation are similar to those variable import levies and minimum import prices. All price band systems are not intrinsically unstable, unpredictable and intransparent. The degree to which these features are present in a price band system will depend on the way it is designed and operated.

93. In this respect, Ecuador argues that if, for instance, the reference price is not the lowest price on world markets but rather a price that is more representative of world market prices, there is no reason to consider that the domestic market would be insulated from world price trends. Ecuador adds that if a price band system operates on the basis of ad valorem tariffs applicable to the transaction value of the imported goods, the applicable duty will fall in proportion to the price of the goods.

94. Ecuador further submits that the Panel failed to take into account, in the interpretation of Article 4.2, Article XXXVIII:2(a) of the GATT 1994, which requires Members to devise measures designed to stabilize and improve conditions of world markets for primary (usually agricultural) products, including measures designed to attain stable, equitable and remunerative prices for their exports.

(d) Article II:1(b) of the GATT 1994

95. Ecuador maintains that the first sentence of Article II:1(b) merely lays down the obligation not to exceed tariff bindings. Article II does not prohibit the imposition of any type of duty or the use of a formula for calculating such a duty, nor does it preclude modifying the type of duty applied, provided that the tariff binding is not exceeded.

96. Ecuador argues that the Panel's interpretation, however, appears to place two additional obligations on WTO Members: (i) not to record customs duties other than those that are ad valorem , specific, or a combination thereof; and (ii) not to apply any kind of formula in setting such duties. Ecuador stresses that neither of these obligations is based on the ordinary meaning of Article II:1(b), read in its context, and in the light of its object and purpose.

97. Ecuador adds that in Argentina - Textiles and Apparel , the Appellate Body affirmed the freedom of Members to determine the types and characteristics of the duties that they apply, by specifying that the sole obligation imposed by Article II:1(b), and its first sentence in particular, was not to exceed bound ceilings.⁸⁹

98. Ecuador notes that all tariffs are linked to a variety of exogenous factors (e.g. tax revenue requirements, seasonal influence, development needs, and other political reasons) and concludes that there is no requirement, under the first sentence of Article II:1(b), to ban duties that are based on exogenous factors.

99. Ecuador concludes that the Panel went beyond its terms of reference when, having found that certain elements of one price band system were inconsistent with Article 4.2 of the Agreement on Agriculture , it extended its reasoning to include any type of duty resulting from any price band system insofar as the calculation of such duty is based on exogenous factors. Ecuador submits that, by doing so, the Panel substituted itself for the will of the Members and legislated in their place by making a distinction where the rules do not, thus creating additional obligations for WTO Members and diminishing their rights under the WTO.

5. European Communities

(a) Article 11 of the DSU

100. The European Communities alleges that the Panel exceeded its terms of reference. According to the European Communities, the first and second sentences of Article II:1(b) contain distinct legal obligations. Therefore, where a Member makes reference to one of these obligations and not the other, the terms of reference of the panel will not include the latter.

101. The European Communities advances no specific arguments under Article 11 of the DSU. It claims that, as a third party, it is not in a position to comment on whether Chile's rights of defence were prejudiced by the lack of clarity in the terms of reference, but notes that the second sentence of Article II:1(b) "was not the subject of any detailed discussion in the proceedings before the Panel in which the European Communities was involved".⁹⁰ A panel is entitled to make a finding only if the complaining Member has actually made a claim with respect to a specific obligation. However, the European Communities contends that the question whether Argentina actually made a claim is an issue of fact that is tied to the determination of whether Chile's rights of defence were prejudiced, a subject on which it is not in a position to comment because, as a third party, it was not present during the entire Panel proceedings.

(b) Article 4.2 of the Agreement on Agriculture

102. The European Communities asserts that the Panel erred in its interpretation of Article 4.2 of the Agreement on Agriculture . The European Communities submits that the Uruguay Round tariffication process involved the transformation of non-tariff barriers into tariff equivalents and the binding of those tariffs. For products which were already subject to a bound customs duty, certain reductions were required. Unbound customs duties, on the other hand, were required to be bound, and then made subject to reduction commitments. According to the European Communities, Article 4.2 is designed to prevent a Member from using measures which were required to be tariffied. The European Communities concludes that "ordinary customs duties" could not be subject to tariffication and are thus not prohibited by Article 4.2. As a consequence, if Chile's price band system is found to be an ordinary customs duty, it need only be assessed for conformity with Article II:1(b) of the GATT. Should the Appellate Body consider that the Chile's price band system is not an ordinary customs duty, and that it must therefore be examined under Article 4.2, the European Communities submits that the Panel's interpretation of Article 4.2 is erroneous.

103. With respect to Article 4.2, the European Communities notes that the Panel's definition of "variable import levies" fails to capture the essential characteristics of such levies. The first essential characteristic of a variable import levy is that they are not bound and can vary without any limit. The second is that, as a result of not being bound, variable import levies have the effect of completely insulating the domestic market from any possible price competition from imports.

104. The European Communities argues that this latter essential characteristic is common to all the other measures listed in footnote 1 to Article 4.2, that is, all those measures operate to prevent price competition on all or a part of all imports. This characteristic is not shared by tariffs, however, where price competition with domestic products is (at least theoretically) possible. As Article 4.2 prohibits border measures "similar" to those listed, it must prohibit measures which prevent price competition on part of or all imports. The European Communities submits that where a tariff binding exists, price competition is at least theoretically possible for all imports. It concludes that, if a measure allows the possibility of price competition (at least theoretically), then that measure cannot be a "similar border measure" within the meaning of Article 4.2 (because it does not share the "essential characteristics" of the measures listed in footnote 1). The European Communities adds that, in its view, a measure that shares a fundamental characteristic with one, or some, of the measures listed in footnote 1, but not all of them, is not prohibited by Article 4.2.⁹¹

(c) Article II:1(b) of the GATT 1994

105. The European Communities submits that the Panel erred in its interpretation of "ordinary customs duties" in the first sentence of Article II:1(b) of the GATT 1994. First, the Panel failed to examine the relevance of the word "customs", which serves to distinguish the "ordinary customs duties" referred to in the first sentence of Article II.1(b) from "other duties and charges" in the second sentence of that provision. The principal objective behind "ordinary customs duties" is the collection of revenue and the protection of domestic production. By contrast, "other duties and charges" are typically maintained in separate legislation that does not form part of the tariff legislation. Such duties often have additional objectives beyond simple protection and revenue collection. The European Communities mentions stamp taxes, deposit schemes, revenue duties and primage duties as examples of such "other duties and charges".

106. The European Communities argues that the Panel erred in suggesting that Members "invariably" express customs duties in specific or ad valorem terms, or in a combination thereof, and thus no exogenous factors play a role in the application of customs duties. According to the European Communities, such a broad reading of the term "exogenous" is problematic because certain duties are expressed in foreign currencies (for example, commodities are typically traded in US dollars) and thus the duty applied will depend on exchange rate fluctuations. In addition, seasonal duties are levied by some Members on certain products (often fruit and vegetables).

107. The European Communities maintains that the Panel failed to consider the ordinary meaning of the term "ordinary customs duties" in its context and in the light of the object and purpose of the GATT 1994. An examination of the context of Article II:1(b) would lead to the conclusion that being ad valorem or specific (or, conversely, not based on exogenous factors) is not the distinguishing feature of an "ordinary customs duty". The European Communities notes that the special safeguard duties which a Member may impose under Article 5 of the Agreement on Agriculture typically take the form of ad valorem or specific duties, although they are clearly not considered to be "ordinary customs duties" in the sense of Article II:1(b). According to the European Communities, the Panel never explains how it can distinguish between an ad valorem "ordinary customs duty" and an ad valorem "other duty or charge".

108. The conclusion that an "ordinary customs duty" cannot be distinguished from "other duties or charges" simply on the basis that it is ad valorem or specific (that is, not based on exogenous factors), is supported by the purpose of Article II:1(b). According to the European Communities, the whole thrust of Article II:1(b) is to protect the level of concessions negotiated in the successive tariff reduction negotiations which took place under the GATT, rather than to require a Member to apply a particular type of customs duty.

109. The European Communities further argues that, had the Panel examined the negotiating history of Article II:1(b) of the GATT 1947, it would not have found confirmation for its view that the drafters intended to limit "ordinary customs duties" to those not based on exogenous factors. Rather than confirming the Panel's interpretation of "ordinary customs duties", the negotiating history directly contradicts the Panel's conclusion, because it involved no discussion of the type of duties concerned.

110. The European Communities maintains that the negotiators in the Uruguay Round had recognized the difficulty of defining "ordinary customs duties" in the context of discussing a proposal by New Zealand, which was later to lead to the Understanding on Article II:1(b). Given the lack of explicit instruction as to the type of duty required by the phrase "ordinary customs duty", it was not for the Panel to assume a definition prohibiting customs duties based on exogenous factors. In so doing, it lightly assumed that WTO Members had taken on a more onerous obligation than that apparent from the text, contrary to the in dubio mitius principle referred to by the Appellate Body in EC - Hormones.⁹²

111. The European Communities seeks support for its reasoning in the findings of the Appellate Body in Argentina - Textiles and Apparel . According to the European Communities, the Appellate Body concluded in that case that Article II:1(b) does not provide for requirements as to the type of duty that a Member may apply; the essential obligation of Article II:1(b) is that customs duties should not be applied in excess of bound rates.⁹³

6. United States

(a) Article 11 of the DSU

112. The United States offers no opinion in its submission as to whether Argentina presented arguments or evidence with respect to claims arising under the second sentence of Article II:1(b). However, the United States suggests that the issue is one of burden of proof rather than one of an objective assessment of the matter under Article 11 of the DSU.

(b) Order of Analysis

113. The United States submits that the Panel followed the proper order of analysis in choosing to first examine Argentina's claim under Article 4.2 of the Agreement on Agriculture before examining its claim under Article II:1(b) of the GATT 1994. The Panel correctly reasoned that Chile's price band system applies exclusively to agricultural products and that Article 4.2 of the Agreement on Agriculture deals "more specifically and in detail" with measures affecting market access of agricultural products. In any event, according to the United States, the Panel's decision to proceed first with an assessment of Argentina's claim under Article 4.2 would not be a reversible error. Even if the Panel had commenced its work by interpreting Article II:1(b), the United States believes the Panel would have reached the same conclusions.

(c) Article 4.2 of the Agreement on Agriculture

114. The United States considers that the Panel properly found that Chile's price band system is prohibited by Article 4.2 of the Agreement on Agriculture .

115. The United States submits that Chile's interpretation of Article 4.2 is not grounded in the text of Article 4.2 or important context. Instead, Chile presents a selective reading of the context provided by the schedule of the European Communities and "a lengthy exposition of the 'original intent' of the Uruguay Round negotiators it finds in the history surrounding the price band system and the tariffication of the European Communities' variable import levies."⁹⁴ This alleged "evidence" regarding the European Communities' variable import levies can form at most one part of a proper analysis of Article 4.2 under the customary rules of interpretation of public international law.⁹⁵ The United States notes, however, that an examination of the European Communities' schedule reveals that all of the products on which variable import levies existed are now subject to tariff bindings, yet these bindings contain only specific rates or ad valorem plus specific rates of duty in the ordinary customs duty column. The United States further notes Chile's argument that the European Communities' conversion of its variable import levies made clear that they would vary, but adds that Chile neglects to mention that the "duty-paid import price" commitments to which it refers are not expressed in the ordinary customs duty column; rather, they are recorded as two headnotes to Section I (on Agricultural Products) of the European Communities' Schedule. Furthermore, the United States asserts that "Chile implies incorrectly that these duties must vary according to a formula � but these headnotes merely provide for a cap on the duty that the EC will apply on certain goods."⁹⁶

116. The United States also endorses the Panel's finding that, contrary to the suggestion of the European Communities and Chile, a variable levy cannot be distinguished from an ordinary customs duty simply because the latter is subject to a tariff binding. There is nothing in the texts of Article 4.2 or Article II:1(b) that suggests a variable import levy can exist only if it is not subject to a binding. If the Uruguay Round commitment concerning variable import levies was solely to prevent unbound levies, there would have been no need to include the variable import levy mechanism within Article 4.2.⁹⁷ Rather, it would have been sufficient to require that all agricultural tariffs be bound⁹⁸ because, as a result, variable import levies would have automatically ceased to exist. The United States also submits that a review of GATT documents reveals that there were numerous statements indicating that variable import levies could be subject to bindings without any suggestion that they would cease to be variable levies.⁹⁹

117. For the United States, it is difficult to understand how merely capping the amount that can be collected via a variable import levy is tantamount to converting it into an ordinary customs duty, especially if the same measure applies both before and after. Thus, the United States concludes that "Chile's interpretation of the terms 'variable import levies' and 'ordinary customs duties' does not make sense of either the text or context of Article 4.2."¹⁰⁰

118. With respect to the meaning of "similar border measures " in Article 4.2, the United States notes that, in its view, to be "similar" to a border measure listed in footnote 1, it is sufficient for a border measure to be "similar " to any one of the measures listed in that footnote 1-without having to be similar to all of those measures. A fundamental characteristic of variable import levies is not that they would not be subject to a binding. Even if it were, the United States maintains that to be "similar" to a "variable import levy", a border measure does not need to share all the "fundamental characteristics" of such a levy.¹⁰¹

(d) Article II:1(b) of the GATT 1994

119. The United States endorses the Panel's finding that Chile's price band system is an "other duty or charge" within the meaning of the second sentence of Article II:1(b) of the GATT 1994.

7. Venezuela

(a) Article 11 of the DSU

120. Venezuela argues that the Panel acted inconsistently with Article 11 of the DSU and exceeded its terms of reference by making a finding under the second sentence of Article II:1(b) of the GATT 1994.

(b) Order of Analysis

121. Venezuela submits that the Panel erred in choosing to examine Article 4.2 of the Agreement on Agriculture before examining Article II:1(b) of the GATT 1994. According to Venezuela, the Panel should first have determined whether Chile's price band system constitutes an "ordinary customs duty", and only then determined whether it constituted a "measure of the kind which had been required to be converted" under Article 4.2 of the Agreement on Agriculture .

(c) Article 4.2 of the Agreement on Agriculture

122. Venezuela contends that the Panel erred in its interpretation of Article 4.2. Moreover, Venezuela contends that the Panel erred in extending its findings to cover all the products that are subject to the price band system, even though one product in particular had been excluded by the complainant.

(d) Article II:1(b) of the GATT 1994

123. Venezuela submits that in Argentina - Textiles and Apparel , the Appellate Body affirmed that WTO Members are free to decide the types and characteristics of the duties that they bind, and that the only obligation imposed by Article II:1(b) of the GATT 1994 is not to exceed bound rates.¹⁰²

124. Venezuela concludes that the Panel went beyond its terms of reference when, having found that certain elements of one price band system were inconsistent with Article 4.2 of the Agreement on Agriculture, it extended its reasoning to include any type of duty resulting from any price band system insofar as the calculation of such duty is based on exogenous factors. Venezuela submits that by doing so, the Panel substituted itself for the will of the Members and legislated in their place by making a distinction where the rules do not, thus creating additional obligations for WTO Members and diminishing their rights under the WTO.

85 Australia's response to questioning at the oral hearing.

86 Brazil's statement at the oral hearing.

87 Brazil refers to paragraph. 7.18 of the Panel Report.

88 Ecuador's third participant's submission, paras. 110 and 116.

89 Appellate Body Report, supra, footnote 55, para. 46.

90 European Communities' third participant's submission, para. 13.

91 European Communities' responses to questioning at the oral hearing.

92 Appellate Body Report, supra, footnote 69, footnote 154 to para. 165.

93 Appellate Body Report, Argentina - Textiles and Apparel , supra, footnote 55, para. 46.

94 United States' third participant's submission, para. 3.

95 Ibid., para. 11.

96 Ibid.

97 United States' third participant's submission, para. 13.

98 Ibid.

99 United States' statement at the oral hearing.

100 United States' third participant's submission, para. 14.

101 United States' response to questioning at the oral hearing.

102 Appellate Body Report, supra, footnote 55, para. 46.

To continue with IV. Issues Raised in this Appeal

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