SUMMARY

Decision:

A WTO Panel has issued a mixed ruling in a challenge by China to the EU's modification of its tariff schedule for goods.

Significance of Decision:

This important decision provides new clarity on the obligations of WTO Members when they modify their tariff commitments. The ruling is directly relevant for the U.K. in the context of Brexit.

Article XXVIII of the General Agreement on Tariff and Trade (GATT) 1994 allows WTO Members in certain circumstances to modify their tariff commitments (i.e., maximum import duties) on a product-by-product basis. A country triggering this procedure must comply with a number of conditions, including negotiating compensation (additional market access) for countries that have a "principal supplying interest" in the product, as well as consulting with those that have a "substantial interest" (at least a 10% import share). The designation of which WTO Members fall into these categories is essential, and such countries will have the right to retaliate if they consider the compensation to be inadequate.

In the present case, the EU modified its tariff commitments for certain poultry products, and then established tariff-rate quotas ("TRQs") in their place. It then made country-specific allocations to two suppliers, Thailand and Brazil. The EU did not consider China to have a principal or substantial supplying interest in the products, a finding that China challenged unsuccessfully before the Panel.

However, the Panel agreed with China that an aspect of the EU's country-specific allocations to Thailand and Brazil was WTO-inconsistent. GATT Article XIII provides in part that the allocation within the TRQ should be based on shares provided during a previous representative period, "due account being taken of any special factors which may have affected or may be affecting the trade in the product". The Panel found that China's increased ability to export poultry products following the relaxation of the certain sanitary (SPS) measures was a "special factor". It ruled that the EU breached Article XIII by failing to take this "special factor" into account when it determined which countries had a "substantial interest" in supplying the products.

This Panel's decision has at least two important ramifications for the tariff modification exercise that the U.K. will need to undertake as a result of Brexit.

First, the Panel rejected China's claim that the changes in the EU's schedule had no legal effect because they had not been certified by the WTO. This is an important point for the U.K., as it will be able to trade on its post-Brexit WTO Schedule prior to certification.

Under GATT Article XXVIII and certain agreed GATT procedures, modifications to a tariff schedule are certified when no WTO Members object to the changes. Where there are objections, there can be years of negotiations before certification. The Panel found that "it does not appear to be the case that certification is a legal prerequisite that must be completed before a Member modifying its concessions can proceed to implement the changes agreed upon in Article XXVIII negotiations at the national level".

The Panel's ruling on this point is consistent with WTO practice – after the EU expanded from 15 to 25 member states in 2004, it took more than a decade to complete the negotiations on compensation. Nonetheless, the Panel's decision provides additional legal certainty for the U.K., as the compensation negotiations will not prevent the immediate operationalization of its post-Brexit tariff schedule.

Second, if the U.K. decides to make country-specific allocations for any TRQs that it establishes, it will also have to take into consideration any "special factors" that affect that allocation. One such "special factor" could arise from Brexit itself.

As a first step, the U.K and the EU will need to agree on the division of any EU TRQs for agricultural goods. Once the U.K. has its own TRQs, it may decide to make an allocation among supplying countries. The EU – minus the U.K. – may seek to benefit from any such allocation.

The U.K. may not be able to base its determination exclusively on a "previous representative period", as during such period (e.g., 2016 to 2018) it will have been a member of the EU customs union. Goods crossing from the continent into the U.K. would have been considered simply as part of intra-EU trade. However, the EU could take the position that the U.K.'s membership in the EU was a "special factor" that "may have affected…trade in the product". In other words, the EU may argue that after Brexit, it should indeed be considered as a principal or substantial supplier to the U.K. for some products for the purposes of GATT Article XIII.

REPORT

Background: EU renegotiation of tariff lines

The EU modified its bound Schedule of Concessions on poultry pursuant to negotiations under GATT Article XXVIII with Brazil and Thailand. A first negotiation exercise, which took place in 2006, resulted in the EU replacing its ad valorem duties with tariff rate quotas ("TRQs") on three tariff items for poultry (the "First Modification Package"). A second negotiation exercise, which took place from 2009 to 2011, resulted in the EU replacing its ad valorem bound duties with TRQs for poultry under seven other tariff items (the "Second Modification Package").

In each negotiation exercise, the EU determined that Brazil and Thailand were the only WTO Members with a "principal supplying interest" or "substantial interest", within the meaning of Article XXVIII. The EU made this determination based on actual import data covering the three years preceding the initiation of each of the two negotiation exercises (i.e. 2003-2005 for the First Modification Package, and 2006-2008 for the Second Modification Package). During those reference periods, as the Panel noted, "imports of the poultry products concerned from China into the European Union were negligible".

For the TRQs established under these two negotiations, Brazil and/or Thailand were allocated their own country-specific share, with an "all others" share set aside for other countries.

The EU had applied several SPS measures throughout the period concerned by the two Article XXVIII negotiations (2003 2008). The Panel found that "[f]ollowing a relaxation of the SPS measures by the European Union in July 2008”, imports of poultry products from China "increased significantly" under some of the tariff lines at issue. This increase took place during the negotiations for the Second Modification Package. However, as the Panel found, the EU "did not update the reference period selected for the purpose of determining which Members to negotiate with regarding the modification of its concessions, or for the purpose of calculating the total volume of the TRQs or the respective TRQ shares allocated to different countries”.

Panel upholds EU refusal to recognize China as a principal or substantial supplier

GATT Article XXVIII:1 provides in part that a WTO Member may modify or withdraw a tariff concession following negotiations with any other WTO Members determined to have a "principal supplying interest" in the product, subject to consultation with any other WTO Member determined to have a "substantial interest".

China claimed that the EU violated Article XXVIII:1 "by refusing to recognize China's 'principal supplying interest' and 'substantial interest' in the concessions at issue in the First and Second Modification Packages". In China's view, the EU breached this provision "by not determining which Members held a principal or substantial supplying interest on the basis of an estimate of what Members' shares would have been in the absence of the SPS measures restricting poultry imports from China". It also argued that the EU failed to make a re-determination of which Members held a relevant supplying interest "on the basis of the increase in imports from China over the period 2009-2011". The Panel rejected both of these claims.

An interpretive Note to GATT Article XXVIII provides that the term "substantial interest" is intended to cover only those countries "which have, or in the absence of discriminatory quantitative restrictions affecting their exports could reasonably be expected to have, a significant share in the market of the [WTO Member] seeking to modify or withdraw the concession”. China argued that the SPS measures that restricted Chinese poultry imports over the reference periods used by the EU constituted "discriminatory quantitative restrictions".

The Panel rejected this argument, reasoning that "the sine qua non of characterizing a measure as a ‘discriminatory quantitative restriction' is the existence of differential treatment between countries that are similarly situated, and that in this case China has not attempted to argue that imports from any other similarly situated country… were not subject to the same restrictions” [original emphasis].

As for a "substantial interest”, the Panel noted that "[i]n the context of Article XXVIII:1, a 10% import share benchmark has been applied for the purpose of determining which Members hold a substantial supplying interest".

The Panel rejected China's argument that "an importing Member is under a legal obligation to reappraise which WTO Members hold a principal or substantial supplying interest to reflect changes in import shares that have taken place following the initiation of the negotiations".

Therefore, the Panel concluded that China failed to demonstrate that the EU violated Article XXVIII:1 by not recognizing that "China held a principal or substantial supplying interest in the concessions at issue in the First and Second Modification Packages".

China's claim for "future trade prospects" rejected

Under GATT Article XXVIII:2, the WTO Member seeking to modify a tariff concession must "endeavour to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade than that provided for in this Agreement prior to such negotiations". The WTO Understanding on GATT Article XXVIII provides that where a tariff concession is replaced by a TRQ, the amount of compensation provided "should be the amount by which future trade prospects exceed the level of the quota". China argued that the EU breached these provisions because the TRQ did not reflect China's "future trade prospects".

The Panel rejected this claim, in part because "there is no requirement to make allowance for each and every measure that may have had the effect of restricting the importation of the products concerned under that concession, but only for those measures that constitute ‘discriminatory quantitative restrictions'." The Panel recalled its earlier finding that the SPS measures at issue were not "discriminatory quantitative restrictions". It also found that GATT Article XXVIII:2 and the relevant portion of the Understanding did not apply to the allocation of TRQ shares among supplying countries.

EU allocation of tariff rate quote found to be WTO-inconsistent: EU failed to consider "special factors"

China claimed that by allocating "all or the vast majority of the TRQs to two of the WTO Members" (Brazil and Thailand), the EU breach GATT Article XIII:2(d), which governs the allocation of shares among countries with a "substantial interest" in supplying the product.

The Panel began its analysis on this issue by recalling that under the opening paragraph ("chapeau") of Article XIII:2, WTO Members applying import restrictions to any product "shall aim at a distribution of trade in such product approaching as closely as possible" the shares which the various WTO Members "might be expected to obtain in the absence of such restrictions" and to that end must observe certain provisions. One such provision is Article XIII:2(d), which provides that where a quota allocation among supplying countries is "not reasonably practicable", the country maintaining the restriction shall allot shares to those WTO Members with a "substantial interest in supplying the product" based upon the proportions supplied during a previous representative period, "due account being taken of any special factors which may have affected or may be affecting the trade in the product".

The Panel rejected the notion that the EU's SPS measures constituted "special factors", as "they apply equally to imports from all Members in the same situation". The Panel indicated that it had "some difficulty with the notion that a Member setting a TRQ would need to make allowance for import restrictions arising from foreign producers' non-compliance with applicable SPS measures". For this reason, the Panel dismissed China's claim that the EU "would have been obliged to increase the amount of the 'all others' share to reflect the amount that China would be able to export, if and when the import restrictions affecting poultry imports from China under those tariff lines were removed".

That said, the Panel found that "China's increased ability to export poultry products… following the relaxation of the SPS measures" was a "special factor" within the meaning of Article XIII:2(d). This "special factor" had to be taken into account by the EU when determining which countries had a "substantial interest" in supplying the products concerned. It ruled that the EU "acted inconsistently with Article XIII:2(d) by not recognizing China as a Member holding a ‘substantial interest in supplying the products'… and by failing to seek agreement with China on the allocation of the TRQs" for those tariff lines. For the same reason, the Panel concluded that the European Union acted inconsistently with the chapeau of Article XIII:2 by not allocating a greater "all others" share under certain tariff lines.

However, the Panel dismissed an alternative claim advanced by China that the EU was obligated under the chapeau of Article XIII:2 to allocate an "all others" share of "at least 10% for all of the TRQs" under the First and Second Modification Packages. The Panel saw "nothing in the terms of the chapeau of Article XIII:2 establishing an obligation to allocate a minimum share to an 'all others' category in a TRQ".

China also argued that the allocation of "all or the vast majority of the TRQs" to Brazil and Thailand violated GATT Article XIII because the importation of the like product from other WTO Members was not "similarly prohibited or restricted". Applying an earlier Appellate Body precedent, the Panel found that such a claim could only be established if "the products from one Member are ‘made subject to the tariff quota', but the products of one or more other Members are not made subject to the tariff quota". It similarly dismissed a claim based on the Most-Favoured-Nation principle of GATT Article I.

EU tariff modifications: certification is not a legal prerequisite

China claimed that the EU's application of the higher out-of-quota tariff rates arising from the two modification packages was in violation of the EU's binding tariff commitments under GATT Article II:1. China argued that "because the changes have not yet been incorporated into the EU Schedule through the certification procedure, they have no legal effect to replace the existing bound duties". Therefore, in China's view, "the absence of certification means that the bound rates that existed in the EU Schedule prior to the completion of the Article XXVIII negotiations remain unchanged, and that the European Union's application of the higher out-of-quota tariff rates violates Article II:1".

The Panel noted that the changes agreed by the EU, Thailand and Brazil in the context of the Article XXVIII negotiations had been notified to WTO members, but that "those changes have not yet been incorporated into the EU Schedule by means of certification".

The Panel began its analysis of this issue by noting that "Article II is one of the key provisions of the GATT 1994, and of the entire WTO legal system”. It added that "[o]n the other hand, one of the specific objects and purposes of Article XXVIII is to allow Members to make tariff concessions by providing them with flexibility to withdraw or modify those concessions subsequently, if necessary[.]"

The Panel reviewed the relevant provisions of the GATT, as well as two sets of procedures agreed by the GATT Contracting Parties in 1980. After reviewing these texts, the Panel concluded that "it does not appear to be the case that certification is a legal prerequisite that must be completed before a Member modifying its concessions can proceed to implement the changes agreed upon in Article XXVIII negotiations at the national level". It therefore found that "we are unable to uphold China's claims that the European Union violated Article II by giving effect to the modifications arising from the Article XXVIII negotiations prior to the changes being reflected in the authentic text of its Schedule through certification".

The Report of the WTO Appellate Body in European Union – Measures Affecting Tariff Concessions on Certain Poultry Meat Products (DS461) was released on 28 March 2017.