Report of the Appellate Body

(Continued)

C. The Interpretation of the Term "Ordinary Customs Duties" as used in Article 4.2 of the Agreement on Agriculture

264. The Panel observed, first, that a measure of the kind which has been required to be converted into ordinary customs duties pursuant to Article 4.2 of the Agreement on Agriculture "is necessarily not, at the same time, an ordinary customs duty."²³⁸ Accordingly, the Panel found that "a measure which is 'similar to' any of the measures listed in footnote 1 will also be 'other than ordinary customs duties'."²³⁹ The Panel concluded, therefore, that a finding that Chile's price band system is "other than an ordinary customs duty" could "be expected to reinforce" its finding that Chile's price band system is similar to a variable import levy and a minimum import price.²⁴⁰ For this reason, the Panel went on to examine whether Chile's price band system is "other than an ordinary customs duty" within the meaning of Article 4.2 of the Agreement on Agriculture . The Panel found that Article II:1(b) of GATT 1994 provides relevant context for the interpretation of the term "ordinary customs duties" in Article 4.2 of the Agreement on Agriculture.²⁴¹

265. The Panel observed that neither Article 4.2 of the Agreement on Agriculture nor Article II:1(b) of the GATT 1994 defines explicitly what should be understood by "ordinary customs duties".²⁴² From an examination of the ordinary meaning of the term in the three official languages of the WTO²⁴³, the Panel concluded that the term should be considered from two perspectives�-one "empirical" and one "normative". The Panel explained:

It appears from these dictionary meanings that the English text, on the one hand, and the French and Spanish texts, on the other, differ in terms of the perspective from which they define "ordinary": the use of "ordinary" in the English text appears to define a particular kind of "customs duties" in reference to the frequency with which such customs duties can be found, whereas the French and Spanish texts suggest that the narrow sense of the term "customs duties" is being referred to. Thus, the English version describes a particular kind of customs duty from an empirical perspective, whereas the French and Spanish versions describe it from a normative perspective. We will therefore proceed to examine what should be considered "ordinary" both on an empirical and a normative basis."²⁴⁴ (original emphasis, footnotes omitted)

266. With respect to these two perspectives, the Panel then provided its findings:

As an empirical matter, we observe that Members, in regular practice, invariably express commitments in the ordinary customs duty column of their Schedules as ad valorem or specific duties, or combinations thereof. All "ordinary" customs duties may therefore be said to take the form of ad valorem or specific duties (or combinations thereof). As a normative matter, we observe that those scheduled duties always relate to either the value of the imported goods, in the case of ad valorem duties, or the volume of imported goods, in the case of specific duties.²⁴⁵ (emphasis in the original, footnotes omitted)

267. The Panel conceded, however, that its own proposition is not valid in the reverse:

We do not believe, however, that, conversely, the fact that a duty ultimately is labelled as an ad valorem or specific duty necessarily qualifies that duty as an ordinary customs duty. As a matter of fact, quite some "other duties or charges", registered as such in the "other duties and charges" column of Members' Schedules, appear to be expressed in specific or ad valorem terms. Put another way, a duty or charge can be expressed either in ad valorem or specific terms, but nevertheless not constitute an "ordinary" customs duty.²⁴⁶

268. Reasoning that the consideration of "exogenous" factors was also significant, the Panel concluded:

Such ordinary customs duties, however, do not appear to involve the consideration of any other, exogenous, factors, such as, for instance, fluctuating world market prices. We therefore consider that, for the purpose of Article II:1(b), first sentence, of GATT 1994 and Article 4.2 of the Agreement on Agriculture, an "ordinary" customs duty, that is, a customs duty senso strictu, is to be understood as referring to a customs duty which is not applied on the basis of factors of an exogenous nature.²⁴⁷ (emphasis added)

269. In examining whether the duties resulting from Chile's price band system are "ordinary customs duties" in the light of the interpretation that it had developed for that purpose (that is, whether they are based on exogenous factors), the Panel found that such duties are "neither in the nature of ad valorem duties, nor specific duties, nor a combination thereof, in the sense that they are not just assessed on the transaction value of individual shipments, nor just on the volume of the goods"²⁴⁸, but rather are assessed on the basis of "exogenous price factors i.e. the [difference between the] lower threshold of the PBS and the Reference Price."²⁴⁹ For this reason, the Panel found that the duties resulting from Chile's price band system are not "ordinary customs duties".

270. On appeal, Chile challenges the Panel's interpretation that the term "ordinary customs duties" has a normative connotation. Chile also contests the Panel's interpretation that "ordinary customs duties" must not be applied on the basis of exogenous factors such as, inter alia, fluctuating world market prices, and argues that a decision to apply a duty at less than the bound rate will always be based on exogenous factors. We share Chile's misgivings about the Panel's definition of "ordinary customs duties".

271. We do not agree with the Panel's reasoning that, necessarily, "[a]s a normative matter, � those scheduled duties always relate to either the value of the imported goods, in the case of ad valorem duties, or the volume of the imported goods, in the case of specific duties."²⁵⁰ (emphasis in original, underlining added) Indeed, the Panel came to this conclusion by interpreting the French and Spanish versions of the term "ordinary customs duty" to mean something different from the ordinary meaning of the English version of that term. It is difficult to see how, in doing so, the Panel took into account the rule of interpretation codified in Article 33(4) of the Vienna Convention whereby "when a comparison of the authentic texts discloses a difference of meaning �, the meaning which best reconciles the texts � shall be adopted." (emphasis added).

272. We also find it difficult to understand how the Panel could find "normative" support for its reasoning by examining the Schedules of WTO Members. We have observed in a previous case that "[t]he ordinary meaning of the term 'concessions' suggests that a Member may yield rights and grant benefits, but it cannot diminish its obligations".²⁵¹ A Member's Schedule imposes obligations on the Member who has made the concessions. The Schedule of one Member, and even the scheduling practice of a number of Members, is not relevant in interpreting the meaning of a treaty provision, unless that practice amounts to "subsequent practice in the application of the treaty" within the meaning of Article 31(3)(b) of the Vienna Convention.²⁵² In this case the Panel Report contains no support for the conclusion that the scheduling activity of WTO Members amounts to "subsequent practice".

273. Surely Members will ordinarily take into account the interests of domestic consumers and domestic producers in setting their applied tariff rates at a certain level. In doing so, they will doubtless take into account factors such as world market prices and domestic price developments. These are exogenous factors, as the Panel used that term. According to the Panel, duties that are calculated on the basis of such exogenous factors are not ordinary customs duties. This would imply that such duties be prohibited under Article II:1(b) of the GATT unless recorded in the "other duties or charges" column of a Member's Schedule. We see no legal basis for such a conclusion.²⁵³

274. Moreover, not each and every duty that is calculated on the basis of the value and/or volume of imports is necessarily an "ordinary customs duty". For example, in the case at hand, the ad valorem duty is calculated on the value of the imports. The calculation of the specific duty resulting from Chile's price band system is, on the other hand, based, not only on the difference between the lower threshold of the price band and the applicable reference price, but also on the volume per unit of the imports.

275. We further note, in examining Article 4.2 of the Agreement on Agriculture , that the second sentence of Article II:1(b) of the GATT 1994, does not specify what form "other duties or charges" must take to qualify as such within the meaning of that sentence. The Panel's own approach of reviewing Members' Schedules reveals that many, if not most, "other duties or charges" are expressed in ad valorem and/or specific terms, which does not, of course, make them "ordinary customs duties" under the first sentence of Article II:1(b).

276. As context for this phrase in Article 4.2 of the Agreement on Agriculture , we observe that Article II:2 of the GATT 1994 sets out examples of measures that do not qualify as either "ordinary customs duties" or "other duties or charges". These measures include charges equivalent to internal taxes, anti-dumping and countervailing duties, and fees or other charges commensurate with the cost of services rendered. They too may be based on the value and/or volume of imports, and yet Article II:2 distinguishes them from "ordinary customs duties" by providing that "[n]othing in [Article II] shall prevent any Member from imposing" them "at any time on the importation of any product".

277. Contextual support for interpreting the term "ordinary customs duties" also appears in Annex 5 to the Agreement on Agriculture . Annex 5, read together with the Attachment to Annex 5 ("Guidelines for the Calculation of Tariff Equivalents for the Specific Purpose Specified in Paragraphs 6 and 10 of this Annex"), contemplates the calculation of "tariff equivalents" in a way that would result in ordinary customs duties "expressed as ad valorem or specific rates". We do not find an obligation in either of those provisions that would require Members to refrain from basing their duties on what the Panel calls "exogenous factors". Rather, all that is required is that "ordinary customs duties" be expressed in the form of "ad valorem or specific rates".

278. In the light of the foregoing, we disagree with the Panel's definition of "ordinary customs duties" and, therefore, we reverse the Panel's finding, in paragraph 7.52 of the Panel Report, that the term "ordinary customs duty", as used in Article 4.2 of the Agreement on Agriculture , is to be understood as "referring to a customs duty which is not applied to factors of an exogenous nature".²⁵⁴

279. This does not change our conclusion that Chile's price band system is a measure "similar" to "variable import levies" or "minimum import prices" within the meaning of Article 4.2 and footnote 1 of the Agreement on Agriculture . In other words, the fact that the duties that result from the application of Chile's price band system take the same form as "ordinary customs duties" does not imply that the underlying measure is consistent with Article 4.2 of the Agreement on Agriculture .

280. We find, therefore, that Chile's price band system is inconsistent with Article 4.2 of the Agreement on Agriculture .

IX. Article II:1(b) of the GATT 1994

281. In addressing Argentina's claim under Article II:1(b) of the GATT 1994, the Panel recalled that it had found Chile's price band system to be a border measure "other than an ordinary customs duty", which is prohibited under Article 4.2 of the Agreement on Agriculture . Having also found that "ordinary customs duties" must have the same meaning in Article 4.2 of the Agreement on Agriculture and Article II:1(b) of the GATT 1994, the Panel then concluded that duties resulting from Chile's price band system do not constitute "ordinary customs duties" and that, therefore, "their consistency with Article II:1(b) cannot be assessed under the first sentence of that provision."²⁵⁵

282. The Panel further observed that Chile did not record its price band system in the column of its Schedule for "other duties and charges" and stated, in this respect, that:

If other duties or charges were not recorded but are nevertheless levied, they are inconsistent with the second sentence of Article II:1(b), in light of the Understanding on the Interpretation of Article II:1(b). We note that Chile did not record its price band system in the "other duties and charges" column of its Schedule.²⁵⁶ (emphasis added)

283. Based on this reasoning, the Panel then concluded that:

� the Chilean PBS duties are inconsistent with Article II:1(b) of the GATT 1994.²⁵⁷

284. On appeal, Chile argues that the Panel erred in finding that the duties resulting from Chile's price band system are "other duties or charges" prohibited by the second sentence of Article II:1(b).

285. We have reversed the Panel's finding that the duties resulting from Chile's price band system constitute a violation of the second sentence of Article II:1(b) on the grounds that the Panel acted inconsistently with Article 11 of the DSU. We also note that the Panel made no finding on the first sentence of Article II:1(b), because, in the Panel's view, the consistency of the duties resulting from Chile's price band system could not be assessed under that provision.

286. Argentina asks us to rule that Chile's price band system is inconsistent with the first sentence of Article II:1(b). Argentina's request is, however, conditioned on our reversal of the Panel's finding that Chile's price band system is inconsistent with Article 4.2 of the Agreement on Agriculture . As this condition has not been fulfilled, and as Chile has not requested a finding with respect to the first sentence of Article II:1(b), we do not see it as necessary for us to rule on whether Chile's price band system is inconsistent with the first sentence of Article II:1(b) of the GATT 1994.

287. In this respect, we also recall our earlier conclusion on the issue of the order of analysis between Article 4.2 of the Agreement on Agriculture and Article II:1(b) of the GATT 1994. We said that, if we were to find that Chile's price band system is inconsistent with Article 4.2 of the Agreement of Agriculture, we would not need to make a separate finding on whether Chile's price band system also results in a violation of Article II:1(b) of the GATT 1994 to resolve this dispute.²⁵⁸ Thus, we make no ruling on Article II:1(b) of the GATT 1994.

X. Findings and Conclusions

288. For the reasons set out in this Report, the Appellate Body:

(a) finds that the Panel acted inconsistently with Article 11 of the DSU by making its finding, in paragraph 7.108 of the Panel Report, that the duties resulting from Chile's price band system are inconsistent with Article II:1(b) of the GATT 1994, on the basis of the second sentence of that provision, which was not before the Panel, and, therefore, reverses this finding;

(b) decides that the Panel did not err in choosing to examine Argentina's claim under Article 4.2 of the Agreement on Agriculture before examining Argentina's claim under Article II:1(b) of the GATT 1994;

(c) with respect to Article 4.2 of the Agreement on Agriculture :

(i) upholds the Panel's finding, in paragraphs 7.47 and 7.65 of the Panel Report, that Chile's price band system is a border measure that is similar to variable import levies and minimum import prices;

(ii) reverses the Panel's finding, in paragraphs 7.52 and 7.60 of the Panel Report, that an "ordinary customs duty" is to be understood as "referring to a customs duty which is not applied on the basis of factors of an exogenous nature";

(iii) upholds the Panel's finding, in paragraphs 7.102 and 8.1(a) of the Panel Report, that Chile's price band system is inconsistent with Article 4.2 of the Agreement on Agriculture ;

(d) decides, in the light of these findings, that it is not necessary to rule on whether Chile's price band system is consistent with the first sentence of Article II:1(b) of the GATT 1994.

289. The Appellate Body recommends that the DSB request Chile to bring its price band system, as found, in this Report and in the Panel Report as modified by this Report, to be inconsistent with the Agreement on Agriculture , into conformity with its obligations under that Agreement.

Signed in the original at Geneva this 9th day of September 2002 by:

_________________________
Georges Michel Abi-Saab
Presiding Member

______________________  James Bacchus Member

___________________________ John Lockhart Member

238 Panel Report, para. 7.24. The Panel notes that this is, of course, subject to the proviso that such measure is not maintained under balance-of-payments provisions or other general, non-agriculture-specific provisions of the GATT 1994 or the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.

239 Panel Report, para. 7.24.

240 Ibid.

241 Ibid., para. 7.49.

242 The Panel noted that these provisions do "give some indication as to what is not an 'ordinary' customs duty. On the one hand, Article II:1(b) of the GATT 1994 distinguishes 'ordinary' customs duties in its first sentence from 'all other duties or charges of any kind imposed on, or in connection with, the importation' in its second sentence. The latter category of 'other duties or charges of any kind' appears to be a residual category, encompassing duties or charges imposed on or in connection with importation that cannot be considered 'ordinary' customs duties. On the other hand, Article 4.2 prohibits Members from maintaining, resorting to, or reverting to any measures of the kind which have been required to be converted into ordinary customs duties. As indicated earlier, all the measures listed in footnote 1 to Article 4.2 are, by definition, not 'ordinary' customs duties". Panel Report, para. 7.50.

243 The Panel reasoned: "We note that 'ordinary customs duties' appear in the co-authentic French and Spanish versions as 'droits de douane proprement dits' and 'derechos de aduana propiamente dichos'. The dictionary meaning of 'ordinary" is 'occurring in regular custom or practice', 'of common or everyday occurrence, frequent, abundant', 'of the usual kind, not singular or exceptional, commonplace, mundane'. 'Propiamente dicho' has been translated as 'true (something)' or '(something)' in the strict sense'". 'Proprement dit' has been explained as 'au sens exact et restreint, au sens propre' and 'stricto sensu'". Panel Report, para. 7.51.

244 Panel Report, para. 7.51.

245 Ibid., para. 7.52.

246 Panel Report, footnote 624 to para. 7.52.

247 Panel Report, para. 7.52.

248 Ibid., para. 7.62.

249 Ibid.

250 Ibid., para. 7.52.

251 Appellate Body Report, EC - Bananas III, supra, footnote 58, para. 154. Panel Report in United States Restrictions on Imports of Sugar, adopted 22 June 1989, BISD 36S/331, para. 5.2.

252 Appellate Body Report, European Communities - Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, DSR 1998:V, 1851, paras. 84, 90 and 93. See also our paras. 213-214 of this Report.

253 We stated in Argentina - Textiles and Apparel, supra, footnote 55, para. 46, that "a tariff binding in a Member's Schedule provides an upper limit on the amount of duty that may be imposed, and a Member is permitted to apply a rate of duty that is less than that provided for in its Schedule." Thus, the fact that the "cap" (recorded in the ordinary customs duty" column of a schedule) is a specific or an ad valorem duty does not mean that a Member will not apply a tariff at a lower rate, or that the rate it applies will not be based on what the Panel calls "exogenous" factors. Indeed, as we noted above, it is difficult to conceive that a Member would ever make changes to its applied tariff rate except based on exogenous factors such as the interests of domestic consumers or producers.

254 In doing so, we wish to underline that we are not saying that Chile's price band duties are "ordinary customs duties" within the meaning of Article 4.2 of the Agreement on Agriculture . We are merely saying that Chile's price band duties take the form of "ordinary customs duties", rather than seeking to qualify them as "ordinary customs duties" or as "any other duties or charges".

255 Panel Report, para. 7.104.

256 Ibid., para. 7.107.

257 Ibid., para. 7.108.

258 See para. 190 of this Report.

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