most favoured treatment under WTO

1. Principle of Non- Discrimination
Most-favored Nation Treatment
under GATT & GATS
Subject – International Trade Law
Semester VIII

2. Trade without discrimination - Most-favoured-nation (MFN):
- Under the WTO agreements, countries cannot normally discriminate between
their trading partners or Grant someone a special favour (such as a lower
customs duty rate for one of their products) and you have to do the same for all
other WTO members.
- It is covered in Article 1 of the General Agreement on Tariffs and Trade (GATT),
which governs trade in goods.
- Article 2 of General Agreement on Trade in Services (GATS) (Article 2) and
- Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS)

3. - requires Members to accord the most favourable tariff and regulatory
treatment given to the product of any one Member at the time of import or
export of “like products” to all other Members.
- Ex - if WTO Member A agrees in negotiations with country B, to reduce the tariff
on product X to five percent, this same “tariff rate” must also apply to all other
WTO Members as well.
- if a member gives favourable treatment to one country regarding a particular
issue, it must treat all Members equally with respect to the same issue.
- In general, MFN means that every time a country lowers a trade barrier or
opens up a market, it has to do so for the same goods or services for all its
trading partners — whether rich or poor, weak or strong, developed, developing
or LDC
- MFN principle in particular must be observed as a fundamental principle for
sustaining the multilateral trading system.

4. - most-favoured-nation treatment (MFN), also called normal trade relations,
guarantee of trading opportunity equal to that accorded to the most-favoured nation
- it is essentially a method of establishing equality of trading opportunity among states
by facilitating trade
- As a principle of public international law, it establishes the sovereign equality of
states with respect to trading policy.
- As an instrument of economic policy, it provides a treaty basis for competitive
international transactions
- Such treatment has always applied primarily to the duties charged on imports, but
specific provisions have extended the most-favoured-nation principle to other areas of
international economic contact
- MFN seeks to replace the frictions and distortions of power-based policies with the
guarantees of a rules-based framework where trading rights does not depend on the
individual participants’ economic or political clout.
- Rather, the best access conditions that have been conceded to one country must
automatically be extended to all other participants in the system.
- This allows everybody to benefit, without additional negotiating effort, from
concessions that may have been agreed between large trading partners with much
negotiating leverage.

5. Exceptions to MFN –
- countries can set up a free trade agreement that apply only to goods traded
within the group — discriminating against goods from outside.
- Or they can give developing/LDC countries special access to their markets
based on the then prevailing economic status
- Or a country can raise barriers against products that are considered to be
traded unfairly from specific countries.

6. Areas other than reduction of barriers where MFN is used -
a. the establishment of enterprises of one country’s nationals in the territory of
the other
b. navigation in territorial waters
c. Trade rights like Market access
d. Intangible property rights such as patents, industrial designs, trademarks,
copyrights and literary property
e. Trade related necessary purchases like warehousing, infrastructure for
entrepot trade
f. Foreign-exchange allocations; and
g. Taxation.

7. There are two forms of Most Favoured Nation treatment:
1. Conditional – This form grants gratuitously to the contracting party only
those concessions originally made gratuitously to a third party and grants
concessions originally obtained as part of a bargain only under equivalent
conditions or in return for equivalent gains. Ex – Negotiations made during
bilateral and plurilateral agreements. Not uniformly applicable
2. Unconditional – Any tariff concession granted to a third party is granted to
the contracting party, a principle that was included in the 1948 General
Agreement on Tariffs and Trade (GATT) and in 1995 in the agreement
establishing the World Trade Organization (WTO). Ex – Applicable uniformly
under Multilateral agreements.

8. GATT - Article I: Most-Favoured-Nation Treatment
- With respect to customs duties and charges of any kind imposed on or in
connection with importation or exportation or imposed on the international
transfer of payments for imports or exports, and with respect to the method of
levying such duties and charges, and with respect to all rules and formalities in
connection with importation and exportation, any advantage, favour, privilege
or immunity granted by any contracting party to any product originating in or
destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for the territories
of all other contracting parties.

9. Types of measures covered under Article I:
- With respect to customs duties and charges of any kind (for example, transport
or warehouse charges) which are requisite for free and fair trade; and such type
of customs duty or charge must be imposed on or in applied in connection with
the importation and exportation of products
- The charge imposed on the transfer of payments for imports or exports.
- Other rules and formalities in connection with importation and exportation
- Measures with respect to all laws, regulations and requirements affecting their
internal sale, offering for sale, purchase, transportation, distribution or use
must also be uniform for like products from goods destined to or coming from
another Member’s territory.

10. Like Products
- The concept was coined and explained while trying numerous cases of
international importance, which explains that “like products” should be treated
equally, irrespective of their origin.
- Which means that products which are not “like products” does not come
under the restrictive principle of MFN and may be treated differently.
- With the development in GATT/WTO the different cases have set up four
criteria, which are to be fulfilled to determining whether the imported and
domestic products are “like products“, those are:
• The product’s end uses.
• Consumers’ tastes and habits.
• The product’s nature, properties and quality (physical characteristics).
• The customs classification of the products.

11. General Agreement on Trade in Services - GATS –
Article II: Most-Favoured-Nation Treatment
- is applicable to any measure that affects trade in services in any sector falling
under the Agreement, whether specific commitments have been made or not.
- Exemptions could have been sought at the time of the acceptance of the
Agreement (for acceding countries: date of accession).
1. With respect to any measure covered by this Agreement, each Member shall
accord immediately and unconditionally to services and service suppliers of any
other Member treatment no less favourable than that it accords to like services
and service suppliers of any other country.
2. A Member may maintain a measure inconsistent with paragraph 1 provided
that such a measure is listed in, and meets the conditions of, the Annex on
Article II Exemptions.

12. Exemptions in Annex on Article II –
- This Annex specifies the conditions under which a Member, at the entry into
force of this Agreement, is exempted from its obligations under paragraph 1 of
Article II
- Exemptions shall be maximum for 10 years. In any event, they shall be subject
to negotiation in subsequent trade liberalizing rounds.
- The Council for Trade in Services shall review all exemptions granted for a
period of more than 5 years.
- The Council for Trade in Services in a review shall:
(a) examine whether the conditions which created the need for the exemption
still prevail; and
(b) determine the date of any further review.
- A Member shall notify the Council for Trade in Services at the termination of the
exemption period

13. TRIPS & MFN - Article 4 - Most-Favoured-Nation Treatment
- provides that, with regard to the protection of intellectual property, any advantage, favour,
privilege or immunity granted by a member to the nationals of any other country shall be
accorded immediately and unconditionally to the nationals of all other members.
- Exempted from this obligation are any advantage, favour, privilege or immunity accorded by a
Member:
(a) deriving from international agreements on judicial assistance or law enforcement of a
general nature and not particularly confined to the protection of intellectual property;
(b) granted in accordance with the provisions of the Berne Convention (Protection of Literary
and Artistic Works, for protection of original works) or the Rome Convention (Protection of
Performers, Producers of Phonograms and Broadcasting Organizations) authorizing that the
treatment accorded be a function not of national treatment but of the treatment accorded in
another country;
(c) in respect of the rights of performers, producers of phonograms and broadcasting
organizations not provided under this Agreement
(d) deriving from international agreements related to the protection of intellectual property
which entered into force prior to the entry into force of the WTO Agreement, provided that
such agreements are notified to the Council for TRIPS and do not constitute an arbitrary or
unjustifiable discrimination against nationals of other Members.

14. Legal nature of MFN treatment clause
1. It is a general treaty-based obligation that must be contained in a specific
treaty –
- The legal basis for an MFN treatment clause is always a specific treaty (the
“basic treaty”) that contains the MFN treatment clause.
- The clause may take the form of a specific provision or a combination of various
provisions of the treaty.
- It is a conventional obligation which applies to States as a matter of general
legal obligation independent of specific treaty commitments.
- A distinction must be made, however, between the nondiscriminatory content
of MFN treatment and the general requirement of non-discrimination contained
in international law like – Like products get MFN etc.
- The fact that States have the sovereign right to discriminate and regulate the
entry and operation of aliens within their territory does not mean that such
discretion is unlimited and not subject to international law.

15. 2. It is a relative standard -
- The MFN treatment provision is a relative standard, which means that it implies a
comparative test.
- Any assessment of an alleged breach calls not only for the finding of an objective
difference in treatment between two foreign nations, but also for a competitive
disadvantage directly stemming from this difference in the treatment. This finding
must be assessed through a comparison.
- Thus a comparison and an objective test of less favourable treatment are required in
order to assess the violation of an MFN treatment clause
3. It is governed by the Ejusdem Generis principle (of the same kind and nature)
- The Doctrine of Ejusdem Generis provides that when a list of specific words are being
followed by the general words, the general words are interpreted in a way so as to
restrict them to include the items or things which will be of same type as those of
the specific words
- it may only apply to issues belonging to the same subject matter or the same
category of subjects to which the clause relates.
- This principle circumscribes the application of the MFN treatment clause to those
subject matters regulated by the basic treaty.

16. 4. It requires a legitimate basis of comparison-
- MFN treatment provision must be applied to similar objective situations.
- Different treatment is justified amongst nations who are not legitimate
comparators, e.g. do not operate in the same economic sector or do not have the
same corporate structure.
- The MFN treatment clause requires that the host State does not discriminate on the
basis of nationality.
- For instance, MFN treatment does not impede host countries from according
different treatment to different sectors of the economic activity, or to differentiate
between enterprises of different size, or businesses with or without local partners.
5. It relates to discrimination on grounds of nationality –
- In order to establish a violation of MFN treatment, the difference in the treatment
must be based on or caused by the nationality
- After a reasonable comparison has been made amongst appropriate comparators,
there are factors that may justify differential treatment on the part of the State among
foreign nations, such as legitimate measures that do not distinguish, between
nationals and foreigners.

17. 6. It requires a finding of less favourable treatment-
- Treatment is primarily materialized through “measures”, that is, State laws,
regulation and conduct.
- all measures that may affect the course of business – e.g. laws and regulations on
business law, corporate and other forms for doing business, taxation, labor,
environment, bankruptcy, access to financing, financial regulation, land ownership,
use or lease, regulatory or other barriers to entry, competition, horizontal and sectoral
regulations
- The foreign nation covered by an MFN treatment clause is entitled to receive any
more favourable treatment that a third foreign nation is receiving in any of these
areas of the laws and regulations of the host State
7. It operates without prejudice to the freedom of contract –
- if a host country grants special privileges or incentives to an individual
person/company through a contract, there would be no obligation under the MFN
treatment clause to treat other foreign persons/companies equally.
- The reason is that a host country cannot be obliged to enter into an individual
contract.
- In this case, “freedom of contract prevails over the MFN clause”

18. 8. It works differently from the MFN clause in the trade finance context-
- While in aspects of finance applicable to this principle provisions are driven by both
liberalization and protection
- in trade MFN is the pillar provision, the cornerstone of the international trading
system.
- While MFN treatment in the trade context is linked to the free circulation of goods and
services and their access to markets, MFN treatment in finance and related applies to
“investors” and/or their “investments” constituted in accordance with the host State’s
laws.
- Regulation of goods and services is more specific, targeted and measurable, while
investors and investments are subject to a much greater regulatory universe behind
the border.
- MFN in trade applies to “like products or like services” whereas MFN in finance
treaties applies to investors/investments in “like circumstances”.
- MFN in trade was mainly designed to target barriers “at the border” while MFN in
finance has traditionally applied to measures “behind the border” approach.
- In general, the barriers to entry and after entry of goods and investments tend to be of
a different nature.

19. 9. It has to be interpreted in the light of general principles of treaty
interpretation-
- Treaty provisions have to be interpreted whether required by the instrument
itself or by (customary) international law on treaty interpretation.
- MFN treatment refers to material treatment in the economic sphere and
concerns the rules that establish the competitive conditions and opportunities
to foreign nations and their products.
- By prohibiting differentiated treatment as regards the competitive framework,
the MFN treatment clause establishes a level field amongst the relevant players
and avoids market distortions, favouring a sound competitive environment,
thus contributing to the economic objective
- MFN treatment means subjecting all to the same rules and operational and
transactions costs they face in their regular activities, as well as offering them
the same market access and operational conditions and opportunities

20. Modes of discrimination
Discrimination may either be de jure or de facto
De jure discrimination: (De jure is the Latin expression for “by law” or “by right”
and is used to describe a practice that exists by right or according to law. In
contemporary use, the phrase almost always means “as a matter of law.”)
- discrimination that is spelt out by law.
- Hence, when foreign goods and services are not given the same treatment as
domestic goods or services or that which is given to other Members; despite
of being similar or like, it is a case of de jure discrimination.
- For example, there may be laws or regulations that have the impact of
discriminating between goods and services that are like.

21. De facto discrimination: (De facto action is an action taken without strict legal
authority to do so, but recognized as legally valid nonetheless. The action is
considered something that acquires validity based on the fact of its existence and
tradition)
- is discrimination that is not as explicit as de jure discrimination and is implicit in
the type of measures used.
For example - there may be a variable tax rate on beverages with high alcohol
content than those with low alcohol content.
- There being no real discrimination apparent in such a measure, it will be
regarded as de facto discrimination if, based on the market scenario,
- Mere existence of different rule, does not lead us to the conclusion that like
goods and services have been discriminated unless the conditions of
competition have been adversely impacted.

22. Cases to be covered wrt MFN
1. Spain Coffee Case
2. EC-Bananas Case (1997)
3. Canada Aircraft Case (2002)
4. Canada Autos Case (2006)

23. Spain Coffee Case
- Brazil informed that a new Spanish law had introduced certain modifications in the tariff treatment applied to
imports of unroasted coffee, according to which imports into Spain of unroasted non-decaffeinated "unwashed
Arabica" and Robusta coffees were now subject to a tariff treatment less favourable than that accorded to
"mild" coffee.
- Spain adopted a new classification, dividing coffee imports into five headings.
- Three of those headings had a 7 percent tariff applied, and the other two were duty-free. The classifications
were based on geographical factors, cultivation methods, processing, and the genetics of the coffee beans.
- Prior to this new law there had been no differentiation in the tariff treatment applied by Spain to imports of
unroasted coffee.
- As a main supplier of coffee to Spain, Brazil was concerned with the discriminatory character of the new tariff
rates.
- Brazil (plaintiff) challenged these classifications under the General Agreement on Tariffs and Trade (GATT)
because the two types of coffee beans it exported to Spain, Arabica and Robusta, were subject to the 7
percent tariff.
- Brazil argued that its coffee should be treated as favorably as the other types of unroasted, non-decaffeinated
coffee under the most-favored-nation clause.
- The evidence before the GATT Panel indicated that no other party to the GATT divided up the types of
unroasted coffee for tariff purposes as Spain had done.
- Additionally, coffee was typically sold to consumers as blends of coffee from different categories and was
considered as a single product intended for drinking.
- The GATT Panel considered Brazil’s challenge to the Spanish tariff classifications of coffee beans.

24. - The Goods Council agreed to establish a panel
- The Panel held meetings 10 meetings between September 1980 and February
1981
- the Panel heard statements by representatives of Brazil and Spain, Background
documents and relevant information submitted by both parties, their replies to
the questions put by the Panel as well as other information available to the
Panel served as a basis for the examination of the matter subject to dispute
- the panel took the view that unroasted, non-decaffeinated coffee was the
same product regardless of where it was grown, how it was cultivated, or how
the beans were processed.
- Essentially the panel relied on external characteristics and end use, noting that
coffee “was universally regarded as a well-defined and single product
intended for drinking”

25. - Brazil - The representative of Brazil argued that by introducing a 7 % tariff rate
on imports of unroasted, non-decaffeinated coffee of the "unwashed Arabica"
and Robusta groups, while affording duty-free treatment to coffee of other
groups, the new Spanish tariff régime was discriminatory against Brazil, which
exports mainly "unwashed Arabica", but also Robusta coffee, and therefore was
in violation of MFN
- The representative of Brazil argued that coffee was one single product and
that, therefore, for the purpose of Article I:1 of the GATT, must be considered
a "like product“
- He stated that the classification presently used by Spain for tariff purposes had
been introduced by the International Coffee Organization in 1965/66
- He argued that, from the point of view of the consumer, virtually all coffee,
either roasted or soluble, was sold today in the form of blends, combining in
varying proportions coffee belonging to different groups
- He further stated that with respect to its end use, coffee was a well determined
and one single product, generally intended for drinking as a beverage.

26. - Spain - The Spanish authorities continued to claim that they were complying
with MFN
- These authorities furnished photocopies of importing licences in Spain, issued
after 1 March 1980, which evidenced that the new tariff classification was
applied according to the nature of products, and completely independently of
the country of origin.
- In particular, these licences evidenced that Brazilian "washed" coffee was
imported into Spain free of duty.
- The Spanish representative pointed out that qualitative differences did exist
between various types of coffee considering both technico-agronomic,
economic and commercial criteria.
- As distinctive markets existed for the various types of unroasted coffee, the
Spanish representative was of the view that such various types of coffee could
not be regarded as "like products“

27. Findings and conclusions
- the Panel pointed out that MFN equally applied to bound and unbound tariff items
- The Panel found that there was no obligation under the GATT to follow any particular
system for classifying goods, and that a contracting party had the right to introduce
in its customs tariff new positions or sub-positions as appropriate.
- The Panel considered, however, that, whatever the classification adopted, Article I:1
required that the same tariff treatment be applied to "like products”
- the Panel concluded that unroasted, non-decaffeinated coffee beans listed in the
Spanish Customs Tariffs should be considered as "like products" within the meaning
of Article I:1.
- The Panel further noted that Brazil exported to Spain mainly "unwashed Arabica" and
also Robusta coffee which were both presently charged with higher duties than that
applied to "mild" coffee.
- Since these were considered to be "like products", the Panel concluded that the
tariff régime as presently applied by Spain was discriminatory vis-à-vis unroasted
coffee originating in Brazil

28. The US-EU Banana Dispute
- Agriculture has traditionally been a primary source of economic tension between the United
States and the European Union
- The dispute involves the EU's regulatory regime for imported bananas, enacted in 1993.
(1) Prior to 1992 each of the 12 EU member states had its own banana import regime.
Germany operated on a free market system and had no import restrictions. The other 11
members imposed a 20% tariff, and 6 members (France, Italy, Portugal, Spain, Greece, and
the UK) also applied quotas on bananas produced in Central and South America
These restrictions were designed to protect the EU market for bananas produced in former EU
territories and in the ACP countries (developing countries in Africa, the Caribbean and the
Pacific) that entered duty free under the LomA Convention
(2) As part of its 1992 integration program the EU established, effective July 1, 1993, an EU-
wide banana trade regime
(3) Under this complex system banana imports were subject to one of two two-tier tariff rate
quota systems based on their country of origin.
- ACP bananas received duty-free entry up to a ceiling of 85,77,000 metric tons, allocated to
each of the banana-producing countries on the basis of their historic exports to the EU.
- Non-ACP bananas were subject to a duty of ECU (European currency unit) 100 per metric ton
on imports up to 2 million metric tons, and ECU 850 on imports above that amount.

29. - Although the US immediately protested the new banana regime,
- the first legal challenge was brought not by the US, but by five Latin-American
banana-producing countries (Colombia, Costa Rica, Guatemala, Nicaragua, and
Venezuela).
- They initiated GATT dispute settlement proceedings in June 1993.
- The GATT panel ruled in January 1994 that the EU regime was GATT-illegal.
- However, as was common under the GATT system that allowed parties to a dispute to
block rulings against them, the panel report was not adopted.
- Rather, the EU negotiated a so-called "Framework Agreement" with all of the
complaints except Guatemala that increased and guaranteed the value of their
export quotas, in return for their agreement to withdraw the GATT complaint and
refrain from further GATT challenges until December 31, 2002.
- This agreement raised the non-ACP quota to 2.1 million tons in 1994 and to 2.2
million tons in 1995
- lowered the in-quota tariff on Latin American bananas by 25% to ECU 75 per metric
ton; and allocated specific export quotas to each of the 4 Latin American signatories.
- In September 1994 Chiquita Brands International and the Hawaii Banana Industry
Association filed a petition challenging both the EU regime and the Framework
Agreement on the grounds that they were discriminatory and reduced US
companies' share of the EU market by more than 50%.

30. - On January 9, 1995, the USTR (Office of the U.S. Trade Representative) issued a
preliminary determination that the EU banana regime did adversely affect US
economic interests with an impact of several hundreds of millions of dollars.
- Both the EU and Caribbean producers immediately criticized the USTR statement.
- The regime was defended by the EU as a valuable foreign aid policy tool, and by the
Caribbean nations as the mainstay to their economies, the elimination of which would
lead to political and economic instability.
- Unable to reach a negotiated settlement with the EU, the USTR in September 1995
altered its strategy.
- USA terminated the case against the EU, and, joined by Guatemala, Honduras, and
Mexico, initiated a dispute settlement proceeding in the WTO. Ecuador joined the
case in February 1996
- The petitioners alleged that the EU regime violated the GATT 1994 Articles I, II, II, X,
XI, and XIII as well as the Agreement on Import Licensing Procedures, the Agreement
on Agriculture, the General Agreement on Trade in Services (GATS), and the
Agreement on Trade-Related Investment Measures.
- Consultations were held, but because the EU member states refused to grant the EU
Commission a mandate to negotiate substantive changes in the regime, no resolution
was reached.

31. - On April 24, 1996, the US, Ecuador, Guatemala, Honduras and Mexico jointly
requested that a WTO dispute-settlement panel be convened. It was established on
May 8, 1996.
- The EU case as presented to the panel relied heavily on its assertion that the banana
regime was a legitimate part of the Lomà Convention (This was an agreement by the
European Community to provide aid and extend trade and tariff preferences to
African, Caribbean and Pacific (ACP) states made in February 1975) for which the EU
had a WTO waiver.
- The US side's response was that the banana regime was not covered by the LomÃ
Convention.
- The WTO panel report, issued on May 22, 1997, found that the EU banana import
regime was discriminatory and as such was inconsistent with the GATT 1994, the
WTO agreement on Import Licensing and the GATS.
- One month later the EU notified its intention to appeal certain issues of law in the
panel report.
- The Appellate Body not only upheld the panel findings, but found additional
violations of GATT.
- In mid January 1998 the European Commission announced a modified banana
regime that it claimed was WTO-compatible.

32. - The main elements of the new regime were:
1. Maintenance of the current Latin American banana tariff-rate quota
2. Establishment of a new, autonomous Latin American tariff-rate quota of
353,000 tons at duty rate of ECU 75/ton to account for EU enlargement
(Austria, Finland, Sweden joined the EU in 1995)
3. Allocation of a percentage of the tariff rate quota to exporting countries with a
"substantial interest' in the market for bananas.
4. Maintenance of a maximum quantity allowance of 857,700 metric tons at a
zero duty for traditional ACP imports
5. Elimination of the previous licensing system, replacing it with a system
distributing licenses to actual importers on the basis of the volume of imports
handled during the 1994-96 period

33. DID THIS STOP? NOOOOOOOOOOOOO….
- The US objected that the new system continued to use two separate criteria to
allocate shares of its banana market to Latin American and ACP nations and as such
violated the WTO.
- The US argued that in order to be WTO-compatible the EU must adopt a single tariff-
rate quota covering all suppliers and must base the allocation of shares of the quota
among supplying countries on the same set of criteria
- Despite US objections the EEC (European Economic Community) Agriculture Council
approved the new regime and the new system was adopted in October 1998
- In an effort to resolve the disagreement over the WTO-consistency of the modified
banana regime, the US and Ecuador repeatedly sought to reconvene the original
WTO dispute-settlement panel that had ruled against the EU in 1994.
- The EU refused and instead requested in mid -December the establishment of a new
panel under Article 21.5 of the Dispute Settlement Understanding (DSU) to determine
the WTO-consistency of its new regime.
- Unable to secure a decision by the original panel on the new regime, the US
announced in November 1998 a preliminary list of EU products that would face
prohibitive tariff duties of 100 % ad valorem ( proportionate to the estimated value of
the goods or transaction concerned.) if the EU failed to implement a WTO-consistent
banana regime by January 1, 1999.

34. - In mid January 1999, the EU having failed to implement what the US regarded as a
WTO-consistent banana regime,
- the US requested authorization to impose retaliation in the amount of $520 million -
the estimated annual economic loss of US exports and profits for US suppliers as a
result of the EU failure to comply with the panel rulings
- The EU contested the US interpretation of the WTO dispute settlement rules, arguing
that its modified banana regime should be presumed WTO-consistent
- Ultimately the impasse was broken by a proposal by the then WTO Director General
Ruggiero that the arbitration process established under the WTO's Article 22 be used
to determine the amount of appropriate retaliation.
- The US agreed to refrain from collecting retaliatory duties pending a decision by the
arbitrators. Pursuant to the arbitration procedures, the arbitrators were to determine
by March 2, 1999, the extent of the economic harm caused to the US under the
revised banana import regime.
- In contrast, the US request for authority to retaliate in the amount of $520 million was
based on the impact of the initial banana regime.
- Claiming insufficient information had been received from the parties, the arbitrators
announced they were unable to issue a determination within the allotted timeframe.

35. - In November 1999, the European Commission adopted a proposal to modify,
once again, its banana regime so as to bring it into compliance with the WTO.
The proposal called for a transitional tariff rate quota (TRQ) system which would
be replaced, at the latest, by January 1, 2006, by a tariff-only regime. Under
both tariff regimes ACP suppliers would be given a preference
- The US rejected this proposal as equally WTO-inconsistent as were the two
former banana regimes. Frustrated by what it considered was the EU's failure to
comply with the series of WTO rulings against its banana regime, the US, in early
2000, began to consider a novel and controversial approach to retaliation.
- Under the so-called "carousel approach" the US would periodically alter the
products against which it imposed retaliatory duties.
- Rotation of the products on the retaliation list, it was argued, would increase the
number of EU producers hit by the retaliation and thereby increase pressure on
the EU to bring its system into compliance

36. CONCLUSION
- In the end, the major impact of the dispute between the US and the EU over the
latter's banana regime likely will be, not on that regime, but rather on the rules and
laws for resolving international trade disputes.
- The case has raised serious questions about the process by which the US decides
which trade disputes to pursue in the WTO: specifically, whether the system provides
too much discretion to the Administration and thereby favors the politically
connected.
- The effectiveness of the current procedures for determining retaliation were also
being questioned.
- Calls for more effective, that is, more onerous, measures such as the carrousel
approach are countered by fears of mirror legislation in other countries.
- In the WTO, the unresolved question of sequencing is generally considered the most
important systemic problem of the Dispute Settlement Understanding and one
which must be addressed without delay.
- The Dispute Settlement Understanding is considered by many to be a cornerstone of
the WTO.
- The enforceability of WTO obligations is what distinguishes it from many other
international agreements and what makes it a magnet for new issues such as those
relating to labor and the environment.

37. Canada Aircraft case (2002)
Complainant – Brazil
Respondent – Canada
Agreement in question - Art. 1 and 3 Subsidies and Countervailing Measures
(SCM)
Timeline of panels
• Consultations requested: 22 January 2001
• Panel requested: 1 March 2001
• Panel established: 12 March 2001
• Panel composed: 11 May 2001
• Panel report circulated: 28 January 2002
(adopted on 19 February 2002 )
• Art 22.6 DSU Arbitration decision circulated : 17 February 2003
(authorization to retaliate granted on 18 March 2003)

38. - On 22 January 2001, Brazil requested consultations with Canada concerning
subsidies which were allegedly being granted to Canada’s regional aircraft industry.
- Brazil’s claims were as follows:
• Export credits are being provided to Canada’s regional aircraft industry by the Export
Development Corporation (EDC) and the Canada Account.
• Loan guarantees are being provided by EDC, Industry Canada, and the Province of
Quebec, to support exports of Canada’s regional aircraft industry.
• Brazil takes the view that all of the above-mentioned measures are subsidies since
they are financial contributions that confer a benefit.
• According to Brazil, they are also contingent, in law or in fact, upon export, and
constitute, therefore, a violation of Article 3 of the SCM Agreement.
- Art 1 of SCM agreement – Grant subsidies to domestic industries only when they are
weak or to boost them
- Art 3, SCM agreement - (b) subsidies contingent, whether solely or as one of several
other conditions, upon the use of domestic over imported goods shall not be granted

39. - Further to Brazil’s request, the DSB established a panel at its meeting of 12
March 2001.
- Australia, the EC, India and the US reserved their third party rights.
- On 7 May 2001, Brazil requested the Director-General to determine the
composition of the Panel.
- On 11 May 2001, the Panel was composed.
- On 9 August 2001, the Panel informed the DSB that it would not be possible to
complete its work within the 3 months deadline from its composition. The
panel informed that it expected to complete its work by October 2001.
- On 28 January 2002, the Panel circulated its report to the Members.
- The Panel:
• rejected Brazil’s claims on export credit and loan guarantees
• The Panel also recommended that Canada withdraw the subsidies identified
within 90 days.
- At its meeting on 19 February 2002, the DSB adopted the panel report.

40. Implementation of adopted reports
- At the DSB meeting on 8 March 2002 - Canada stated that it was considering its
options on how best to implement the recommendations and rulings of the
DSB.
- Proceedings under Article 22 of the DSU (remedies)
- On 23 May 2002, on the grounds that Canada had failed to implement the
recommendations of the DSB within the 90-day time-period granted by the
DSB, Brazil requested authorization to suspend concessions.
- Brazil proposed that the suspension of concessions takes the form of some or all
of the following countermeasures:
• suspension of its obligations determine the effect of subsidization
• suspension of application of obligations under the Agreement on Import
licencing procedures relating to licensing requirement on imports from Canada;
and
• suspension of tariff concessions and related obligations under GATT 1994
concerning those products

41. - At the DSB meeting on 3 June 2002, Brazil and Canada informed the DSB that they
had reached an agreement in this matter.
- Under the terms of the agreement, the parties agreed that it would in no way
prejudice the right of Brazil to request authorization to take appropriate
countermeasures nor affect the relevant time periods under the DSU.
- At the DSB meeting on 24 June 2002, Brazil stated that it was requesting
authorization to suspend concessions for an amount of US$3.36 billion towards
Canada as the latter had failed to withdraw its prohibited export subsidies within
the time-frame specified by the Panel.
- Canada disputed Brazil’s right to request authorization from the DSB to suspend
concessions. Canada also objected to the countermeasures proposed by Brazil.
- On 17 February 2003, the arbitrator circulated its award.
- The arbitrator determined that the suspension of concessions by Brazil covering trade
in a total amount of US$247,797,000 would constitute appropriate countermeasures
- On 6 March 2003, Brazil requested authorization to suspend concessions or other
obligations
- At its meeting on 18 March 2003, the DSB authorized the suspension of concessions.

42. Canada Autos Case
Complainant – Japan
Respondent – Canada
Complaint by Japan-
- On 3 July 1998, Japan requested consultations with Canada in respect of measures
being taken by Canada in the automotive industry.
- Japan contended that under Canadian legislation implementing an automotive
products agreement (Auto Pact) only a limited number of motor vehicle
manufacturers are eligible to import vehicles into Canada duty free and to distribute
the motor vehicles in Canada at the wholesale and retail distribution levels.
- Japan further contended that this duty-free treatment is contingent on two
requirements:
1. a Canadian value-added (CVA) content requirement that applies to both goods and
services
2. a manufacturing and sales requirement.
- Japan alleges that these measures are inconsistent with WTO agreements like GATT,
GATS, TRIMS as they favour US- Canada deals.

43. - On 17 August 1998, the EC requested consultations with Canada in respect of
the same measures raised by Japan and cites the same provisions alleged to be
in violation which was cited by Japan
- On 12 November 1998, Japan requested the establishment of a panel
- At its meeting on 25 November 1998, the DSB deferred the establishment of a
panel.
- Further to requests to establish a panel by Japan and the EC, at its meeting on 1
February 1999, the DSB established a single panel to examine the complaints
- India, Korea, and the US reserved their third-party rights.
- On 15 March 1999, the EC and Japan requested the Director-General to
determine the composition of the Panel.
- On 25 March 1999, the Panel was composed. The report of the panel was
circulated to Members on 11 February 2000.

44. - The panel found that:
• the conditions under which Canada granted its import duty exemption were
inconsistent with Article I of GATT 1994
• the application of the CVA (Canadian value-added) requirements to be
inconsistent with Article III:4 of GATT 1994.
• the import duty exemption constitutes a prohibited export subsidy in
violation of Article 3 of the SCM Agreement.
• the manner in which Canada conditioned access to the import duty
exemption is inconsistent with Article II of GATS

45. - On 2 March 2000, Canada notified its intention to appeal certain issues of law
and legal interpretations developed by the panel.
- The Appellate Body report was circulated to Members on 31 May 2000.
- The Appellate Body:
• reversed the panel’s conclusion that Article 3.1(b) of the Subsidies Agreement
did not extend to contingency “in fact”.
• considered that the panel had failed to examine whether the measure at
issue affected trade in services as required under Article I:1 of the GATS.
• reversed the panel’s conclusion that the import duty exemption was
inconsistent with the requirements of Article II:1 of the GATS as well as the
panel’s findings leading to that conclusion.
• The DSB adopted the Appellate Body report and the Panel report, as modified
by the Appellate Body report, on 19 June 2000.

46. - Canada informed the DSB on 19 July 2000 that it would comply with the
recommendations of the DSB.
- One of the recommendations made by the DSB was that Canada withdraw
within 90 days the subsidy found to be inconsistent with Article 3.1(a) of the
Subsidies Agreement.
- On 4 August 2000, Japan and the European Communities that the reasonable
period of time be determined by arbitration.
- The arbitrator determined that the “reasonable period of time” was 8 months
from the date of adoption of the Appellate Body and Panel Reports, as
modified by the Appellate Body Report.
- The “reasonable period of time” was thus to expire on 19 February 2001.
- At the DSB meeting of 12 March 2001, Canada stated that, as of 18 February
2001, it had complied with the DSB’s recommendations.