|United States - Sections 301-310 of the Trade Act of 1974 - Report of the Panel|
22 December 1999
UNITED STATES - SECTIONS 301-310 OF THE TRADE ACT OF 1974
Report of the Panel
The report of the Panel on United States - Sections 301-310 of the Trade Act of 1974 is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 22 December 1999 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of law covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning matters under consideration by the Panel or Appellate Body.
Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal. Information on the current status of the Panel Report is available from the WTO Secretariat.
TABLE OF CONTENTS
I. PROCEDURAL BACKGROUND 1
II. FACTUAL ASPECTS 2
A. BASIC STRUCTURE OF MEASURES AT ISSUE 2
1. Section 301(a) 2
2. Section 301(b) 4
B. SCOPE OF AUTHORITY TO TAKE ACTION 4
C. PROCEDURES 4
III. CLAIMS OF PARTIES 6
IV. ARGUMENTS OF THE PARTIES 8
A. OVERVIEW 8
B. WTO PROVISIONS AT ISSUE - DSU ARTICLE 23.2(A) AND (C) 22
C. EVIDENTIARY AND OTHER MATTERS 26
1. Burden of Proof and Fact-finding concerning Domestic Law 26
2. Relevance of the US Statements before the Panel and Statement of Administrative Action 32
D. ANALYSIS OF WTO-CONSISTENCY OF MEASURES AT ISSUE 43
1. Reach of WTO obligations with respect to law authorizing WTO-inconsistent action, not specific applications 43
(a) General Arguments 43
(i) Relevance of GATT/WTO Precedents 43
(ii) Relevance of Protocol of Provisional Application 54
(iii) Marrakech Agreement 63
(b) Arguments specific to distinction between mandatory law and discretionary law 80
(c) Arguments specific to "Security and Predictability" 85
(d) Arguments specific to WTO Agreement Article XVI:4 92
2. Section 304 116
(a) Overview 116
(b) Discretion not to make a determination of violation 120
(i) Interpretation of Section 304 120
(ii) Practice 132
(c) Discretion with respect to the timing of determination and other issues relating to time frames 154
(d) "Security and Predictability" 169
(e) Article XVI:4 of WTO Agreement 172
3. Section 306 180
(a) Overview 180
(b) What constitutes "determination" - Relationship between DSU Articles 21.5 and 22 181
(c) Discretion not to consider that non-implementation has occurred/Discretion with respect to timing of consideration 204
(d) Practice 206
4. Sections 306 and 305 208
(a) Overview 208
(b) USTR's discretion not to take action 214
(c) Discretion with respect to timing of action 216
(d) President's discretion 222
5. GATT claim 224
V. THIRD PARTY ARGUMENTS 226
A. BRAZIL 226
1. Introduction 226
2. Legal Arguments 227
(a) Article XVI:4 of the WTO Agreement 227
(b) Distinction between mandatory law and discretionary law 233
(c) Other arguments 235
3. Conclusion 235
B. CANADA 236
1. Introduction 236
2. Measures at Issue 237
3. Legal Arguments 239
4. Conclusion 243
C. CUBA 244
1. Introduction 244
2. Legal Arguments 244
D. DOMINICA AND ST. LUCIA 246
1. Introduction 246
2. Legal Arguments 246
E. DOMINICAN REPUBLIC 253
1. Introduction 253
2. Legal Arguments 253
F. HONG KONG, CHINA 256
1. Overview 256
2. Legal Arguments 257
(a) Nature of the Dispute Settlement Mechanism under the GATT 1947 and the WTO 257
(b) Application 259
(c) Distinction between mandatory legislation and discretionary legislation 262
3. Conclusion 264
G. INDIA 265
1. Introduction 265
2. Measures at issue 265
3. Legal Arguments 266
(a) Drafting History of WTO Agreement 266
(b) Article XVI:4 of the WTO Agreement 267
(c) Article 23 of the DSU 268
(d) Articles I, II, III, VIII and XI of GATT 1994 268
4. Conclusion 268
H. JAMAICA 269
1. Introduction 269
2. Legal Arguments 269
I. JAPAN 273
1. Introduction 273
2. Legal Arguments 274
J. KOREA 278
1. Introduction 278
2. Overview 282
(a) The Importance of the DSU 282
(b) Measures at issue 284
3. Legal Arguments 285
4. Conclusion 291
K. THAILAND 292
1. Introduction 292
2. Legal Arguments 293
VI. INTERIM REVIEW 298
VII. FINDINGS 300
A. CLAIMS OF THE PARTIES 300
B. PRELIMINARIES 302
1. Relevant Provisions of the WTO and of Sections 301-310 of the US trade Act 302
2. The Panel's Mandate 302
3. Fact Finding: Rules on Burden of Proof and Interpretation of Domestic Legislation 303
(a) Burden of Proof - General 303
(b) Examination of Domestic Legislation 303
4. Rules of Treaty Interpretation 304
5. General Description of the Operation of Sections 301-310 306
6. The Measure in Question and the Panel's General Methodology 306
C. THE EC CLAIM THAT SECTION 304 IS INCONSISTENT WITH ARTICLE 23.2(A) OF THE DSU 307
1. Claims and Arguments of the Parties 307
2. Preliminary Panel Findings in respect of the Statutory Language of Section 304 308
3. The Statutory Language of Section 304 and Member Obligations under Article 23 of the DSU 310
(a) The dual nature of obligations under Article 23 of the DSU 311
(b) Legislation which violates Article 23 of the DSU 314
4. Article 23.2(a) of the DSU interpreted in accordance with the Vienna Convention Rules on Treaty Interpretation 318
(a) "A treaty shall be interpreted & in accordance with the ordinary meaning to be given to the terms of the treaty & " 318
(b) "A treaty shall be interpreted in good faith & " 319
(c) "& the ordinary meaning & in the light of [the treaty's] object and purpose" 320
(d) "& in their context& " 326
5. Preliminary Conclusion after the Panel's Examination of the Statutory Language of Section 304 327
6. The Non-Statutory Elements of Section 304 327
(a) Introduction and Summary of the Panel's Analysis 327
(b) The Internal Dimension: US Statement of Administrative Action 330
(c) US Statements before this Panel 332
(d) USTR Practice under Section 304 335
7. Summary of the Panel's Analysis and Finding in respect of the EC claim under Section 304 336
D. THE EC CLAIM THAT SECTION 306 IS INCONSISTENT WITH ARTICLE 23.2(A) OF THE DSU 337
1. Claims and Arguments of the Parties 337
2. Preliminary Panel Findings in respect of the Statutory Language of Section 306 339
3. US obligations under Article 23.2(a) of the DSU as applied to Section 306 341
(a) Assuming the US view is correct 342
(b) Assuming the EC view is correct 343
4. The Panel's Finding in respect of the EC claim under Section 306 345
E. THE EC CLAIM THAT SECTIONS 305 AND 306 ARE INCONSISTENT WITH ARTICLE 23.2(C) OF THE DSU 346
1. Introduction 346
2. The EC claim in respect of Determinations on Action under Section 306 (b) 346
3. The EC claim in respect of Implementation of Action under Section 305 348
F. THE EC CLAIMS UNDER GATT 1994 349
VIII. CONCLUSIONS 350
ANNEX I 352
A. SECTIONS 301-310 OF THE TRADE ACT OF 1974 352
B. RELEVANT WTO PROVISIONS 365
ANNEX II 368
GENERAL DESCRIPTION OF THE OPERATION OF SECTIONS 301-310 368
A. INVESTIGATION BY THE USTR UNDER SECTIONS 302-303 368
B. "DETERMINATION" ON DENIAL OF US RIGHTS UNDER SECTION 304 368
C. "CONSIDERATION" ON IMPLEMENTATION UNDER SECTION 306 369
D. "DETERMINATION" ON ACTION TO TAKE UNDER SECTION 306 AND IMPLEMENTATION OF ACTION UNDER SECTION 305 370
1.1This proceeding has been initiated by a complaining party, the European Communities.
1.2On 25 November 1998, the European Communities requested consultations with the United States under Article XXII:1 of the General Agreement on Tariffs and Trade 1994 ("GATT 1994") and Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Dispute ("DSU") with regard to Title III, chapter 1 (Sections 301-310) of the United States Trade Act of 1974, as amended (19 U.S.C., paragraphs 2411-2420)(WT/DS152/1). The United States agreed to the request. Dominica Republic, Panama, Guatemala, Mexico, Jamaica, Honduras, Japan, and Ecuador requested, in communications dated 7 December 1998 (WT/DS152/2), 4 December 1998 (WT/DS152/3), 9 December 1998 (WT/DS152/4, WT/DS152/5 and WT/DS152/6), 7 December 1998 (WT/DS152/7), and 10 December 1998 (WT/DS152/8 and WT/DS152/10) respectively, to be joined in those consultations, pursuant to Article 4.11 of the DSU. Consultations between the European Communities and the United States were held on 17 December 1998, but the parties were unable to settle the dispute.
1.3On 26 January 1999, the European Communities requested the establishment of a panel pursuant to Article 6 of the DSU (WT/DS152/11).
1.4In its panel request, the European Communities claims that:
"By imposing specific, strict time limits within which unilateral determinations must be made and trade sanctions must be taken, Sections 306 and 305 of the Trade Act of 1974 do not allow the United States to comply with the rules of the DSU in situations where a prior multilateral ruling under the DSU on the conformity of implementing measures has not yet been adopted by the DSB. Where measures have been taken to implement DSB recommendations, the DSU rules require either agreement between the parties to the dispute or a multilateral finding on non-conformity under Article 21.5 DSU before any determination of non-conformity can be made, let alone any measures of retaliation can be announced or implemented. The DSU procedure resulting in a multilateral finding, even if initiated immediately at the end of the reasonable period of time for implementation, cannot be finalised, nor can the subsequent DSU procedure for seeking compensation or suspension of concessions be complied with, within the time limits of Sections 306 and 305.
The European Communities considers that Title III, chapter 1 (Sections 301 - 310) of the Trade Act of 1974, as amended, and in particular Sections 306 and 305 of that Act, are inconsistent with, in particular, but not necessarily exclusively, the following WTO provisions:
(a)Articles 3, 21, 22 and 23 of the DSU;
(b)Articles XVI:4 of the Marrakesh Agreement Establishing the World Trade Organization; and
(c)Articles I, II, III, VIII and XI of GATT 1994.
Through these violations of WTO rules, this legislation nullifies or impairs benefits accruing, directly or indirectly, to the European Communities under GATT 1994. This legislation also impedes important objectives of the GATT 1994 and of the WTO.
1.5The Dispute Settlement Body ("DSB") agreed to this request for a panel at its meeting of 2 March 1999, establishing a panel pursuant to Article 6 of the DSU. In accordance with Article 7.1 of the DSU, the terms of reference of the Panel were:
"To examine, in the light of the relevant provisions of the covered agreements cited by the European Communities in document WT/DS152/11, the matter referred to the DSB by the European Communities in that document and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".
1.6Brazil, Cameroon, Canada, Columbia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador, Hong Kong (China), India, Israel, Jamaica, Japan, Korea, St. Lucia, and Thailand, reserved their rights to participate in the Panel proceedings as third parties. Cameroon later withdrew its reservations as a third party.
1.7On 24 March 1999, the European Communities requested the Director-General, pursuant to Article 8.7 of the DSU, to determine the composition of the Panel. On 31 March 1999, the Director-General announced the composition of the Panel as follows:
Chairman: Mr. David Hawes
Member: Mr. Terje Johannessen
Mr. Joseph Weiler
1.8The Panel had substantive meetings with the parties on 29 and 30 June 1999, and 28 July 1999.
A.BASIC STRUCTURE OF MEASURES AT ISSUE1
2.1Section 301(a) applies to any case in which "the United States Trade Representative determines under section 304(a)(1) that (A) the rights of the United States under any trade agreement are being denied" or "(B) an act, policy or practice of a foreign country - (i) violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the United States under, any trade agreement, or (ii) is unjustifiable and burdens or restricts United States commerce".2
2.2According to Section 304(a)(1),
"On the basis of the investigation initiated under section 302 and the consultations (and the proceedings, if applicable) under section 303, the [United States] Trade Representative shall & determine whether & the rights to which the United States is entitled under any trade agreement are being denied, or any act, policy, or practice described in sub-section (a)(1)(B) or (b)(1) of section 301 exists".3
2.3Section 301(a) also provides that if the USTR determines that one of these situations has occurred, "the Trade Representative shall take action authorized in [Section 301](c), subject to the specific direction, if any, of the President regarding any such action & to enforce such rights or to obtain the elimination of such act, policy, or practice".4
2.4According to Section 301(a)(2)(A), action is not required under Section 301(a) if the DSB adopts a report finding that United States rights under a WTO Agreement have not been denied or that the act, policy or practice at issue "(I) is not a violation of, or inconsistent with, the rights of the United States, or (II) does not deny, nullify, or impair benefits to the United States under any trade agreement".5
2.5Section 301(a)(2)(B)(i) also provides that the USTR is not required to take action if "the Trade Representative finds that the foreign country is taking satisfactory measures to grant the rights of the United States under a trade agreement". The commitment of a WTO Member to implement DSB recommendations favourable to the United States within the period foreseen in Article 21 of the DSB has, for example, been determined by the USTR to be a "satisfactory measure" justifying a termination of the investigation without taking any action under Section 301.6
2.6According to Section 301(a)(2)(B)(ii) and (iii), the USTR is not required to take action if the foreign country agrees to "eliminate or phase out the act, policy or practice"7 at issue or if it agrees to "an imminent solution to the burden or restriction on United States commerce", 8 or "provide to the United States compensatory trade benefits that are satisfactory to the Trade Representative", when "it is impossible for the foreign country to achieve the results described in clause (i) or (ii)".9
2.7Further, according to Section 301(a)(2)(B)(iv) and (v), the USTR is not required to take action when she finds that:
"(iv) in extraordinary cases, where the taking of action ... would have an adverse impact on the United States economy substantially out of proportion to the benefits of such action, taking into account the impact of not taking such action on the credibility of the provisions of this chapter";10 or
"(v) the taking of action under this subsection would cause serious harm to the national security of the United States".11
2.8Section 301(a)(3) provides:
"(3) Any action taken under paragraph (1) to eliminate an act, policy, or practice shall be devised so as to affect goods or services of the foreign country in an amount that is equivalent in value to the burden or restriction being imposed by that country on United States commerce".12
2.9Section 301(b) applies to an act, policy or practice which, while not denying rights or benefits of the United States under a trade agreement, is nevertheless "unreasonable or discriminatory and burdens or restricts United States commerce".13
2.10Section 301(d)(3)(B) provides examples of unreasonable acts, among them the denial of opportunities for the establishment of an enterprise, failure to protect intellectual property rights, export targeting, toleration of anti-competitive practices by private firms and denial of worker rights.14 "Discriminatory" acts, policies and practices are defined in Section 301(d)(5) as including those that deny "national or most-favoured-nation treatment to United States goods, services, or investment".15 If the USTR determines that an act, policy or practice is actionable under Section 301(b) and determines that "action by the United States is appropriate" the USTR shall take retaliatory action "subject to the specific direction, if any, of the President regarding such action".16
B.SCOPE OF AUTHORITY TO TAKE ACTION
2.11Section 301(c) authorizes the USTR to "suspend, withdraw, or prevent the application of, benefits of trade agreement concessions", or "impose duties or other import restrictions on the goods of, and & fees or restrictions on the services of, such foreign country for such time as the Trade Representative determines appropriate".17 If the act, policy or practice of the foreign country fails to meet the eligibility criteria for duty-free treatment under the United States' Generalised System of Preferences, the Caribbean Basin Economic Recovery Act or the Andean Trade Preference Act, the USTR is also authorized to withdraw, limit or suspend such treatment. In addition, the USTR may enter into binding agreements with the country in question.
2.12Sections 301-310 of the Trade Act of 1974 provide a means by which U.S. citizens may petition the United States government to investigate and act against potential violations of international trade agreements.18 These provisions also authorize the USTR to initiate such investigations at her own initiative.19 The USTR is a cabinet level official serving at the pleasure of the President, and her office is located within the Executive Office of the President.20 The USTR operates under the direction of the President and advises and assists the President in various Presidential functions.21
2.13According to Section 302, investigations may be initiated either upon citizen petition or at the initiative of the USTR. After a petition is filed, the USTR decides within 45 days whether or not to initiate an investigation.22 If the investigation is initiated, the USTR must, according to Section 303, request consultations with the country concerned, normally on the date of initiation but in any case not later than 90 days thereafter.23
2.14Section 303(a)(2) provides that, if the investigation involves a trade agreement and a mutually acceptable resolution is not reached "before the earlier of A) the close of the consultation period, if any, specified in the trade agreement, or B) the 150th day after the day on which consultation commenced", the USTR must request proceedings under the formal dispute settlement procedures of the trade agreement.24
2.15Section 304(a) provides that on or before the earlier of "(i) the date that is 30 days after the date on which the dispute settlement procedure is concluded, or (ii) the date that is 18 months after the date on which the investigation is initiated",25 "[o]n the basis of the investigation initiated under section 302 and the consultations (and the proceedings, if applicable) under section 303, the Trade Representative shall & determine whether" US rights are being denied.26 If the determination is affirmative, USTR shall at the same time determine what action it will take under section 301.27
2.16If the DSB adopts rulings favourable to the United States on a measure investigated under Section 301, and the WTO Member concerned agrees to implement that ruling within the reasonable period foreseen in Article 21 of the DSU, the USTR can determine that the rights of the United States are being denied but that "satisfactory measures" are being taken that justify the termination of the Section 301 investigation.
2.17Section 306(a) requires the USTR to "monitor" the implementation of measures undertaken by, or agreements entered into with, a foreign government to provide a satisfactory resolution of a matter subject to dispute settlement to enforce the rights of the United States under a trade agreement.28
2.18Section 306(b) provides:
"(1) IN GENERAL.-If, on the basis of the monitoring carried out under subsection (a), the Trade Representative considers that a foreign country is not satisfactorily implementing a measure or agreement referred to in subsection (a), the Trade Representative shall determine what further action the Trade Representative shall take under section 301(a). For purposes of section 301, any such determination shall be treated as a determination made under section 304(a)(1).
(2) WTO DISPUTE SETTLEMENT RECOMMENDATIONS.-If the measure or agreement referred to in subsection (a) concerns the implementation of a recommendation made pursuant to dispute settlement proceedings under the World Trade Organization, and the Trade Representative considers that the foreign country has failed to implement it, the Trade Representative shall make the determination in paragraph (1) no later than 30 days after the expiration of the reasonable period of time provided for such implementation under paragraph 21 of the Understanding on Rules and Procedures Governing the Settlement of Disputes & ".29
2.19Section 305(a)(1) provides that, "Except as provided in paragraph (2), the Trade Representative shall implement the action the Trade Representative determines under section 304(a)(1)(B), subject to the specific direction, if any, of the President regarding such action" "by no later than & 30 days after the date on which such determination is made".30
2.20According to Section 305(a)(2)(A), however, "the [USTR] may delay, by not more than 180 days, the implementation" of any action under Section 301 in response to a request by the petitioner or the industry that would benefit from the Section 301 action or if the USTR determines "that substantial progress is being made, or that a delay is necessary or desirable to obtain United States rights or satisfactory solution with respect to the acts, policies, or practices that are the subject of the action".31
III.CLAIMS OF PARTIES
3.1In the light of the considerations set out above and of the general principles laid down in Article 3.7 of the DSU, the European Communities requests the Panel
to find that:
(a)inconsistently with Article 23.2(a) of the DSU:
-Section 304(a)(2)(A) of Trade Act of 1974 requires the USTR to determine whether another Member denies US rights or benefits under a WTO agreement irrespective of whether the DSB adopted a panel or Appellate Body finding on the matter; and
-Section 306(b) requires the USTR to determine whether a recommendation of the DSB has been implemented irrespective of whether proceedings on this issue under Article 21.5 of the DSU have been completed;
(b)inconsistently with Article 23.2(c) of the DSU:
-Section 306(b) requires the USTR to determine what further action to take under Section 301 in the case of a failure to implement DSB recommendations; and
-Section 305(a) requires the USTR to implement that action,
and this in both instances, irrespective of whether the procedures set forth in Articles 21.5 and 22 of the DSU have been completed; and
(c)Section 306(b) is inconsistent with Articles I, II, III, VIII and XI of the GATT 1994 because, in the case of disputes involving trade in goods, it requires the USTR to impose duties, fees or restrictions that violate one or more of these provisions; and
to rule on these grounds, that the United States, by failing to bring the Trade Act of 1974 into conformity with the requirements of Article 23 of the DSU and of Articles I, II, III, VIII and XI of the GATT 1994, acted inconsistently with its obligations under those provisions and under Article XVI.4 of the WTO Agreement and thereby nullifies or impairs benefits accruing to the European Communities under the DSU, the GATT 1994 and the WTO Agreement; and
to recommend that the DSB request the United States to bring its Trade Act of 1974 into conformity with its obligations under the DSU, the GATT 1994 and the WTO Agreement.
3.2The United States requests that the Panel reject the EC's claims in their entirety, and find that:
(a)Section 304(a)(2)(A) is not inconsistent with Article 23 of the DSU because the EC has failed to demonstrate that it requires the Trade Representative to determine that U.S. agreement rights have been denied in the absence of DSB rulings;
(b)Section 306(b) is not inconsistent with Article 23 of the DSU because the EC has failed to demonstrate that it requires the Trade Representative to determine that U.S. agreement rights have been denied;
(c)Sections 306(b) and 305(a)(1) are not inconsistent with Article 23 of the DSU because the EC has failed to demonstrate that these provisions require the Trade Representative to suspend concessions without DSB authorization;
(d)Section 306(b) is not inconsistent with Articles I, II, III, VIII and XI of the GATT 1994 because the EC has failed to demonstrate that this provision requires the suspension of concessions in a manner inconsistent with DSB authorization; and
(e)Sections 301-310 are not inconsistent with Article XVI:4 because they do not mandate action in violation of any provision of the DSU or GATT 1994, nor do they preclude action consistent with those obligations.
IV.ARGUMENTS OF THE PARTIES
4.1The European Communities argues that Article 23 of the DSU prohibits unilateralism in the framework of the WTO dispute settlement procedures. Members must await the adoption of a panel or Appellate Body report by the DSB, or the rendering of an arbitration decision under Article 22 of the DSU, before determining whether rights or benefits accruing to them under a WTO agreement are being denied and whether rulings or recommendations by the DSB or an arbitrator have been implemented.
4.2The European Communities indicates that Article 23 also requires Members to follow the procedures of the DSU on the suspension of concessions and to await an authorization by the DSB before responding to a failure to comply with such rulings or recommendations.32
4.3The European Communities states that while Sections 301-310 require the United States administration to resort to the DSU in respect of WTO matters, they explicitly mandate the United States administration to proceed unilaterally on the basis of determinations reached independently of the DSB, and without its authorization, once specified time periods have lapsed. A law that requires resort to the DSU procedures but expressly stipulates unilateral determinations and actions before the end of these procedures makes a mockery of the WTO dispute settlement system.
4.4The European Communities therefore believes that Sections 301-310 must be amended to make clear that the United States administration is required to act in accordance with the United States' obligations under the WTO agreements in all circumstances and at all times.
4.5The European Communities indicates that the obligation set out in Article 23 of the DSU is one of the key elements in the negotiated balance of rights and obligations of the Uruguay Round.
4.6The European Communities states that the European Communities itself as well as many other countries, consistently took the position in the Uruguay Round that a strengthened dispute settlement system must include an explicit ban on any government taking unilateral action to redress what that government judges to be the trade wrongs of others.
4.7The European Communities argues that the creation of automatic dispute settlement procedures leave no excuse for any government to take the law into its own hands. Article 23 of the DSU and Article XVI:4 of the WTO Agreement are the principal reflections of the outcome of the negotiation in the Uruguay Round on these issues.
4.8The European Communities indicates that its Regulation on the enforcement of WTO rights adopted after the Uruguay Round meets both the letter and the spirit of Article 23 of the DSU. This Regulation, generally referred to as the "Trade Barriers Regulation", enables Member States and Community enterprises to request the European Commission to examine obstacles to trade and to initiate international dispute settlement procedures on such obstacles.33 However, all actions under the Regulation are "subject to compliance with existing international obligations and procedures".34 Specifically, the Regulation provides that "where the Community's international obligations require the prior discharge of an international procedure for consultation or for the settlement of disputes" any response to the obstacle "shall only be decided after that procedure has been terminated".35 The European Communities has faithfully implemented its obligations under Article 23 of the DSU and Article XVI:4 of the WTO Agreement and expects all the other Members of the WTO, including the United States, to do the same.
4.9According to the European Communities, although the present complaint was ultimately prompted by the experience of the Communities with the measures the United States took under Sections 301-310 in the dispute on the European banana regime, this complaint does not concern those measures. The European Communities indicates that these measures are presently the subject matter of a different dispute (WT/DS165/1).
4.10The European Communities further argues that this experience did however reveal the seriousness of the inconsistencies between the requirements under which the USTR is mandated to act under the domestic law of the United States and the requirements for the completion of dispute settlement procedures under WTO law. It also confirmed that the United States has implemented ob torto collo the results of the Uruguay Round into its legislation, keeping open for itself the possibility of resorting to unilateral measures, in clear contradiction with its obligations under the DSU.
4.11The European Communities notes that in the statement of administrative action submitted by the President to the Congress on 27 September 1994 and approved by the Congress together with the Uruguay Round Agreements Act of 199436, the United States announced that
"[t]he administration intends to use section 301 to pursue vigorously foreign unfair barriers that violate U.S. rights or deny benefits to the United States under the Uruguay Round agreements".37
"& There is no basis for concern that the Uruguay Round agreements in general, or the DSU in particular, will make future Administrations more reluctant to apply Section 301 sanctions that may be inconsistent with U.S. trade obligations because such sanctions could engender DSU-authorized counter-retaliation. Although in specific cases the United States has expressed its intention to address an unfair foreign practice by taking action under Section 301 that has not been authorized by the GATT, the United States has done so infrequently. In certain cases the United States has taken such action because the foreign government has blocked adoption of a GATT panel report against it.
Just as the Unites States may now choose to take Section 301 actions that are not GATT-authorized, governments that are the subject of such actions may choose to respond in kind. That situation will not change under the Uruguay Round agreements".38
4.12According to the European Communities, this way of implementing the results of the Uruguay Round multilateral trade negotiations is simply incompatible with the international obligations of the United States resulting from the basic deal that was struck in Marrakech in 1994.
4.13The European Communities argues that it is in exchange for a US commitment not to resort to unilateral determination of the consistency of foreign trade measures with WTO trade rules and to section 301-type trade restrictions without multilateral authorization that the European Communities and other Uruguay Round participants agreed to accept a dispute settlement system that would allow binding adjudication of all trade disputes coming under the purview of the WTO and a credible enforcement procedure.
4.14In the view of the European Communities, this deal responded to US criticism of the perceived imperfections of the GATT dispute settlement system which had been discussed at a special session of the GATT Council on unilateralism in 1989,39 i.e. the possibility to block the adoption of adverse panel reports. That possibility has now been removed. Thus, it is only fair for the European Communities to require the United States to carry out the agreed counterpart of the deal by refraining from mandating recourse to unilateral section 301-type trade restrictions. This is the deal for which the European Communities bargained in the Uruguay Round.
4.15The European Communities argues that it therefore resorted to the present dispute settlement procedures in order to ensure that the United States brings Sections 301-310, as such, into conformity with Article 23 of the DSU, as required by Article XVI:4 of the WTO Agreement. It follows from these considerations that the present complaint is not intended in any way to either foreclose or prejudge the resort of the European Communities to the DSU with respect to the discriminatory specific measures that the United States has applied or might apply in the future to European exports under Sections 301-310 of the Trade Act of 1974.
4.16Also, the European Communities explains the legislative history of Sections 301-310 as follows: Under the Trade Expansion Act of 1962, the United States Congress granted the President the power to take actions against imports under certain conditions.40 This statute was replaced and expanded by Title III of the Trade Act of 1974, which granted similar powers to the President in its Section 301. The Act also established procedures enabling U.S. citizens to petition the government for action against measures by foreign governments. This part of the Trade Act of 1974 was amended several times, most recently by the Uruguay Round Agreements Act of 1994.41 Title III of the Trade Act of 1974, as amended, entitled "Relief from unfair trade practices", comprises Sections 301-310 which set out in detail how the administration is to enforce the United States rights under trade agreements and respond to certain foreign trade practices.
4.17The European Communities adds that most of the amendments enacted between 1974 and 1994 were designed to reduce the President's discretion under Section 301. The prevailing view in Congress was that the President had not made sufficient use of the powers under Section 301 because he had given priority to foreign policy concerns over trade interests. In the hearings preceding the 1988 amendments, Senator George J. Mitchell stated:
"The history of Section 301 is a history of administration after administration of both parties refusing to implement the law. Instead, this president and his predecessors have used the wide discretion provided in the law to deny or to delay taking action sometimes for close to a decade& The administration will claim that [the proposed Section 301] reforms limit their discretion. But it is this very discretion which had led to the disastrous record of enforcement under Section 301".42
The Chairman of the Senate Finance Committee, Senator Lloyd Bentsen, took a similar position:
"We need a trade policy that our trade partners can predict, and I maintain that requires limits on the President's discretion not to act. He needs plenty of discretion on what action to take, but limits have to be placed on his discretion to take no action".43
4.18The European Communities further states that prior to the 1988 amendments of Section 301, it was the President who was authorized to determine whether the foreign government practices were actionable and whether the United States should respond to them with trade measures. In 1985, the Congress discussed whether the President's power should be transferred to the United States Trade Representative ("USTR"). Those in favour argued that it "will ensure that when decisions are made under Section 301 authority, these decisions will be made primarily for reasons of trade policy" and that it would "enhance USTR's position as the lead trade agency and ... make it less likely that trade retaliation would be waived because of foreign policy, defence, or other considerations".44 The administration strongly opposed such a transfer of authority, arguing that the President required discretion to defend the United States interests effectively, and that the USTR in any case served at the President's pleasure and could therefore not be expected to act contrary to the President's views. Moreover, the President was in a better position to weigh the national and industry-specific interests at stake in a Section 301 investigation. Ambassador Yeutter, the former USTR, wrote to the Chairman of the Committee on Ways and Means that
"Section 301 is the H-bomb of trade policy; and in my judgement, H-bombs ought to be dropped by the President of the United States and not by anyone else".45
4.19The United States responds that in its request for the establishment of this Panel, the European Communities defined its legal challenge to Sections 301-310 of the Trade Act of 1974 as follows:
"By imposing specific, strict time limits within which unilateral determinations must be made that other WTO Members have failed to comply with their WTO obligations and trade sanctions must be taken against such WTO Members, this legislation does not allow the United States to comply with the rules of the DSU and the obligations of GATT 1994 in situations where the Dispute Settlement Body has, by the end of those time limits, not made a prior determination& ".46
4.20The United States argues that the European Communities thus from the outset has acknowledged its burden in this case: since it is challenging a law as such, and no specific action taken pursuant to the law, it must demonstrate that Sections 301-310 themselves do not allow the US government to act in accordance with its WTO obligations. As panel reports cited by the European Communities make clear, a law is not in itself inconsistent with a WTO Member's obligations unless that law mandates action which violates those obligations, even if the law does not preclude such action. The question before this Panel is therefore straightforward: do Sections 304(a)(2)(A), 306(b) and 305(a) of the Trade Act of 1974 mandate actions that are inconsistent with US obligations under the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU") and the General Agreement on Tariffs and Trade 1994 ("GATT 1994")?
4.21According to the United States, the European Communities falls woefully short of demonstrating that they do. The European Communities ignores key provisions of the statute and engages in tortured readings of others in an unsuccessful attempt to find even the narrowest of WTO violations - that if WTO dispute proceedings were to require the maximum time authorized under the DSU, Sections 304(a)(2)(A), 306(b) and 305(a) would require US government determinations and actions shortly before formal - and inevitable - adoption of panel, Appellate Body and arbitral findings which have already been issued. However, not even this claim is true. Sections 301 - 310 of the Trade Act of 1974 on their face ensure that the US government may make its determinations and take actions in a manner which is fully consistent with DSU Article 23 and GATT 1994 Articles I, II, III, VIII and XI. The statute does not require the USTR to make a unilateral determination that US agreement rights have been denied, nor does it impose time limits which preclude prior action by the Dispute Settlement Body either to support US determinations or to authorize actions responding to another Member's failure to comply with DSB recommendations.
4.22The United States maintains that the USTR need not and may not, under Section 304(a)(1), determine that US agreement rights have been denied if there are not adopted panel or Appellate Body findings to that effect. The requirement to make a determination within 18 months is not frustrated by the need to comply with the additional statutory requirement that a determination that agreement rights have been denied must be based on the results of dispute settlement proceedings. The USTR is required under Section 304(a)(1) to base a determination of whether agreement rights have been denied on the results of WTO dispute settlement proceedings. Thus, in the event that a dispute settlement panel were to fail to complete its proceedings within the time frames provided for in the DSU and Section 304(a)(2)(A), the USTR would not be able to make a determination that US agreement rights have been denied. On this basis, she could determine that dispute settlement proceedings had not yet finished, and that a determination concerning US agreement rights would be made following completion of these proceedings. She could also, for example, terminate the Section 304 investigation on the basis of the fact that information necessary to make her Section 304(a)(1) determination is not available, then reinitiate another case. The USTR has terminated and reinitiated Section 302 investigations before, including in the Bananas dispute,47 and has terminated investigations without making a determination on numerous occasions.48
4.23The United States adds with respect to Section 306(b) that the European Communities is simply wrong in asserting that there are "explicit requirements to make a determination within a specified time frame whether & failure to implement DSB recommendations has occurred". When the USTR considers non-implementation to have occurred, this is not a determination. Moreover, there are no "specified time frames" for such a "consideration". Inasmuch as a consideration is no more than a belief, the USTR may, at any time - before, during or after the reasonable period of time - consider that another Member has not implemented DSB rulings and recommendations, just as a Member may consider, may believe, that another Member has violated its WTO obligations before, during and after the deadline for submitting a request to establish a panel at a given DSB meeting. Section 306 provides only that if, during the 30 days following the reasonable period, the USTR considers that non-implementation has occurred, she shall determine whether to avail herself of Article 22 procedures. Indeed, as Article 22 is currently drafted, she must avail herself of these procedures within this time frame if the United States is to preserve its WTO rights. However, nothing prevents her from not considering during that 30-day period that non-implementation has occurred.
4.24The United States argues that nothing in Sections 301-310 requires the US government to act in violation of its WTO obligations. To the contrary, Section 303(a) of the Act requires the USTR to undertake WTO dispute settlement proceedings when a WTO agreement is involved,49 and Section 304(a)(1)(A) provides that the USTR will rely on the results of those proceedings when determining whether US agreement rights have been denied.50 Likewise, Section 301(a)(2)(A) explicitly indicates that the USTR need not take action when the DSB has adopted a report finding no denial of US WTO rights.51 The European Communities acknowledges that these provisions, the core provisions establishing the relationship between Sections 301-310 and the WTO dispute settlement process, are "in conformity with the principles set out in Article 23".
4.25The United States argues that as the complaining party to this proceeding, the European Communities bears the burden of presenting evidence and arguments sufficient to establish a presumption that Sections 301-310 of the Trade Act of 1974 are inconsistent with the DSU and GATT 1994.52 In this case, the evidence is the language of Sections 301-310 and how this language is interpreted and applied under United States law.53 Under well-established GATT and WTO jurisprudence and practice which the European Communities appears to accept, a law may be found inconsistent with a Member's WTO obligations only if it precludes a Member from acting consistently with those obligations. The European Communities must therefore demonstrate that Sections 301-310 do not permit the United States government to take action consistent with US WTO obligations - that this legislation in fact mandates WTO-inconsistent action. The European Communities has failed to meet this burden. Its analysis of the language of Sections 301-310 ignores pertinent statutory language and relies on constructions not permitted under US law. Sections 301-310 of the Trade Act of 1974 are fully consistent with US WTO rights and obligations.
4.26The European Communities argues that it has basically submitted to the panel's examination a single, fundamental claim, which is supported by a number of arguments: by adopting, maintaining on its statute book and applying Sections 301-310 (as they are presently worded) after the entry into force of the Uruguay Round Agreements (i.e. after 1 January 1995) the United States has breached the historical deal that was struck in Marrakech between the United States on the one hand, and the other Uruguay Round participants, among them its major trading partners like the European Communities and the developing countries, on the other hand.
4.27The European Communities indicates that that deal, which it has proposed to call the "Marrakech Deal", has found its expression in the legal texts of the WTO Agreements, inter alia in Articles 3, 21, 22 and, most importantly, 23 of the DSU and Article XVI:4 of the Marrakech Agreement. It is the trade-off between the practical certainty of adoption by the DSB of panel and Appellate Body reports and the authorizations for Members to suspend concessions (an explicit US request54) and the complete and definitive abandoning by the United States of its long-standing policy of unilateral action. The second leg of the deal, which is the core of the present panel procedure, has been enshrined in the following WTO provisions:
(a)Strengthening of the multilateral system (Article 23 of the DSU and the related provisions under Articles 21 and 22)
(b)Security and predictability of the multilateral trading system (Article 3 of the DSU)
(c)Ensuring the conformity of domestic law (Article XVI:4 of the Marrakech Agreement)
4.28The European Communities states that Article 23 of the DSU prohibits unilateralism in the framework of the WTO dispute settlement procedures. Members must await the adoption of a panel or Appellate Body report by the DSB before determining that rights or benefits accruing to them under a WTO agreement are being denied and that rulings or recommendations by the DSB have not been implemented.
4.29In the view of the European Communities, Article 23 also requires WTO Members to follow the procedures of the DSU, including the procedure under Article 21.5, before determining a failure to comply with such rulings or recommendations and to await an authorization by the DSB before resorting to the suspension of concessions or other obligations, where applicable on the basis of the level of such suspension determined by an arbitration decision under Article 22 of the DSU.
4.30The European Communities further argues that Article 3 of the DSU describes the dispute settlement system of the DSU as "a central element in providing security and predictability to the multilateral trading system". As the Appellate Body has indicated in the EC - Computer Equipment report,55 the objective of the "security and predictability of the multilateral trading system" is also an object and purpose of the WTO Agreements themselves. It is the reflection of the general principle of public international law "pacta sunt servanda" (Article 26 of the Vienna Convention of the Law of Treaties), which requires that international agreements be performed in good faith. According to the Appellate Body report in India - Patent Protection for Pharmaceutical and Agricultural Chemical Products56, this means in practice not merely the possibility for the Members' executive authorities to act consistently with WTO law, but requires WTO Members to provide "a sound legal basis" in domestic law for the measures required to implement their WTO obligations. The Appellate Body ruling was adopted at the request of the United States and should therefore be easily accepted by the United States as applicable also in the present case.
4.31The European Communities further states that Article XVI:4 of the Marrakech Agreement is a fundamental, additional principle of the WTO legal system governing the relationship between domestic laws, regulations and administrative procedures (i.e. the entire domestic law of each WTO Member) and WTO law that applies over and above the obligation under general public international law enshrined in Articles 26 and 27 of the Vienna Convention on the Law of Treaties. In fact, Article 27 of the Vienna Convention on the Law of Treaties spells out a negative obligation to refrain from invoking the domestic law in order to justify any departure from the international obligation undertaken by a State.
4.32According to the European Communities, Article XVI:4 of the Marrakech Agreement establishes a positive obligation to ensure the conformity of such domestic law with their WTO obligations. Therefore, in cases where pre-existing domestic law was inconsistent with the new WTO obligations, including those under Article 23 of the DSU, Members were required to amend their domestic laws, regulations or administrative procedures.
4.33For the European Communities, this also constitutes a fundamental difference from the pre-existing rules under the Protocol of Provisional Application (PPA) of GATT 1947 and the protocols of accession that permitted the maintenance of mandatory legislation inconsistent with the GATT 1947. Article XVI:4 not only confirms the abrogation of the PPA in the Introduction to the General Agreement on Tariffs and Trade 1994, but requires WTO Members to be pro-active in ensuring, on their own initiative, the conformity of all of their internal law with WTO law. This task had to be accomplished by the United States no later than 1 January 1995.
4.34The European Communities argues that the violation by the United States of its obligations enshrined in the above WTO provisions inevitably entails also a violation of Articles I, II, III, VIII and XI of the GATT 1994.
4.35The European Communities maintains that Sections 301-310 breach the above-mentioned provisions and fundamentally undermine the Marrakech deal. The EC's main legal grounds supporting this basic claim, which will be examined in turn in more detail below, are threefold:
(a)Sections 301-310, on their face, mandate unilateral action by the US authorities in breach of Article 23 of the DSU (and consequently of Articles I, II, III, VIII and XI of the GATT 1994). This is true both under the former GATT 1947 standards concerning mandatory versus discretionary legislation and the present standards under the GATT 1994 and the Marrakech Agreement, which the European Communities considers the relevant sources of law applicable after the entry into force of the WTO Agreements. The European Communities recalls that the issue of the standards applicable to determine whether legislation is genuinely discretionary was examined at length, as shown below.
(b)In addition, Sections 301-310, even if they could be interpreted to permit the USTR to avoid WTO-inconsistent determinations and actions, could not be regarded as a sound legal basis for the implementation of the US obligations under the WTO. The lack of this "sound legal basis" produces a situation of threat and legal uncertainty against other WTO Members and their economic operators that fundamentally undermines the "security and predictability" of the multilateral trading system.
(c)Furthermore, Sections 301-310 are not in conformity with the United States' WTO obligations since they are an expression of a deliberate policy creating a pattern of executive action which is biased against WTO-conformity. Even if Sections 301-310 could be interpreted to provide the USTR with a legal basis for the implementation of the United States' obligations under the WTO, they could not be considered to be in conformity with WTO law within the meaning of Article XVI:4 of the Marrakech Agreement.
4.36In the view of the European Communities, the arguments presented by the United States are entirely unconvincing. In particular, it defies common sense when the United States asserts
(a)that the verb "shall" in Sections 301-310 should be read to mean "may";
(b)that definite deadlines like those in Section 306 could be considered an "invitation" to the executive authorities, without showing a legal basis for such a reading of the text;
(c)that the legislation always authorizes USTR to determine that rights of the United States have not been denied and no failure to implement DSB recommendations has occurred, while the text of Section 304(a)(1) requires the USTR to base her determinations on the results of the investigation initiated under Section 302;
(d)that a chapter heading called "Mandatory action" containing a mandatory list of retaliatory measures or, in the alternative, the possibility of entering into a bilateral agreement whose main conditions are set by the law, shows that the executive has broad discretion what action to take;
(e)that the power of the President to give specific directions to the USTR in individual cases covers also the right to bar the USTR from implementing actions required by the text of Sections 301-310 and which are qualified as "mandatory" by the US Congress; and
(f)that the existence of a limited exception left in the hands of the President, which has never been used so far, conveys to the law the character of discretionary legislation.
4.37The European Communities further argues that this is of course by no means a theoretical debate only. Sections 301-310 were drafted by the United States in the present convoluted way in order to correspond to a very precise, albeit illegitimate, goal.
4.38According to the European Communities, eminent scholars have expressed their view on this particular aspect. For instance, Professor Robert E. Hudec wrote:
"Section 301 is an intricate maze of mandatory commands in one place and extremely wide loopholes in the other. One needs a wiring diagram to trace whether mandatory commands given in one part will actually reach their final target without passing through at least one discretionary exit point. Even with the aid of such a diagram, one cannot predict actual outcomes".57
4.39The European Communities also indicates that Professor John H. Jackson testified before the Senate Foreign Relations Committee as follows:
"Although there are plausible ways to interpret the statutory provisions of regular Section 301 so as to give the President discretion to act consistently with the Uruguay Round dispute settlement rules, in a few cases, particularly in Section 301(a) (mandatory provision) the interpretations to do this are a bit strained. It would clearly therefore be better if the statute were amended to give the President and the Trade Representative in all cases under the statute the discretion to act in a way consistently with U.S. international obligations".58
4.40According to the European Communities, these comments were prompted also by the consideration that the uncertainty about the possible use by the United States of unilateral measures "inconsistent with the Uruguay Round dispute settlement rules" defeats the purpose pursued by the Uruguay Round participants when they agreed to adopt the DSU: namely to provide security and predictability to the multilateral trading system (Article 3.2 of the DSU). This objective was subsequently confirmed by the Appellate Body in EC - Computer Equipment case (WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R) where it affirmed that security and predictability are "an object and purpose of the WTO Agreement, generally, as well as of the GATT 1994".
4.41In the view of the European Communities, despite these comments and well-advised suggestions of eminent lawyers well versed in international trade law, the statute was adopted without amendment.
4.42The European Communities notes that this comes as no surprise when considering the legislative history of the 1988 Trade Act which is at the origin in particular of the present draft of Section 301 (Mandatory action). During the hearings before the Senate Committee on Finance, 100th Congress, 1st session, Robert Strauss, former Special Trade Representative is quoted in an exchange with Senator Bob Packwood, Chairman of that Committee, as follows:
Sen. Packwood: "Do you think any trade [bill] that we have should require mandatory retaliation?"
Mr. Strauss: "Well, I am a little hesitant to require mandatory retaliation & I hate to make [Section 301] mandatory. I think somewhere in between& [M]ore mandatory is a bum choice of words".
Sen. Packwood: "But not compulsory".59
The advice to "make retaliation mandatory but not compulsory" was frequently referred to throughout the debate in the Senate on mandatory retaliation.
4.43The European Communities thus concludes that everything indicates that the apparent confusion in Sections 301-310 is nothing else than a deliberate policy. In fact, the European Communities is convinced that the United States, by maintaining a legislation on the statute book which on its face and by its intent mandates unilateral determinations and actions in breach of US obligations under the DSU and the GATT, implements a deliberate policy pursuing a double objective, which could be called the "Damocles sword effect".
4.44The European Communities further states that on the one hand, the very existence of Sections 301-310, with their mixture of clear-cut mandatory provisions inconsistent with the DSU patched together with convoluted exceptions, creates a climate of legal uncertainty that entails by itself immediate and very concrete trade effects.
4.45The European Communities maintains that in particular, the constant threat of imposition of unilateral measures has an influence on the behaviour and the decisions of the economic operators. In practice, the fact of the filing of a petition or the simple publication of a notice in the Federal Register announcing the initiation of an investigation, within the concrete context of the provisions contained in Sections 301-310 and the publicly known interpretation given by the US administration and the Congress, creates "chilling" trade effects that may range from the slowing down of importation of products to the more radical stoppage of any bilateral trade with the United States in those products. The recent events in the banana dispute, where retaliatory measures stopping the trade of some specific non-banana related products were adopted while the procedure for authorization to suspend concessions within the WTO had not yet been concluded, demonstrate what could happen to practically any trade operator once the unilaterally set deadlines in Sections 301-310 have expired in a given dispute.
4.46For the European Communities, on the other hand, the present text and intent of Sections 301-310 are used by the United States as a "bargaining" tool in order to extract trade concessions from their trading partners, which they are not bound to make under WTO law, by threatening the violation of commitments the United States has assumed under WTO law. Whatever one may think about the legitimacy of this type of action outside the WTO, this is no longer acceptable in the WTO system, which was established on the basis of multilateralism, equality and law.
4.47The European Communities argues that the Damocles sword effect is thus very real. The European Communities would refer the Panel not only to its own experience, but also to the cases described in the third party submissions filed by practically all of the most important trading partners of the United States.
4.48The European Communities contends that Canada, Korea, Hong Kong China, India, Japan and Brazil, all insist on the Damocles sword effects - which they experienced themselves even after the conclusion of the Uruguay Round - and they all concur with the European Communities in indicating to the panel the unacceptable effects of this legislation with regard to the security and predictability of international trade.
4.49In response, the United States claims that the European Communities, confronted with the need to find a legal basis to justify what is in essence a political case, has been forced to rely on false assumptions, speculation and miscalculations. Such an approach would be fatal to any complaining party seeking to meet its burden of proof, and this case is no exception.
4.50In the view of the United States, the European Communities claims that Sections 301-310 of the Trade Act of 1974 on their face mandate a violation of US WTO obligations. The European Communities challenges no particular application of this legislation. Rather, it argues that the legislation by its terms "does not allow the United States to comply with the rules of the DSU and the obligations of GATT 1994" because of time frames in the statute.
4.51The United States maintains that the terms of Sections 301-310 are readily available and may easily be compared to the requirements of DSU Article 23. Sections 301-310 do not prevent the United States from following to the letter the requirements of the DSU. This legislation provides ample discretion to the United States Trade Representative to pursue and comply with multilateral dispute settlement procedures in every instance. The United States notes that the European Communities cites with approval the conclusion of Professor Hudec that Section 301 includes "extremely wide loopholes", which further reinforces the fact that Section 301 provides for very broad discretion. The European Communities may not assume that the USTR will exercise this discretion in a WTO-inconsistent manner, nor may the European Communities assume away discretionary elements of the statute in order to make its case. The European Communities has taken on the task of demonstrating that Sections 301-310 mandate a WTO violation, and it has failed.
4.52The United States explains that as the European Communities made clear, this case does not call for the Panel to examine whether the actions of either party in connection with the Bananas case were consistent with their WTO obligations. Nevertheless, the reason this case has been filed is because the European Communities found itself in the position of having failed to comply with DSB rulings and recommendations in that matter. The EC's reaction to that situation was: to bring this case. EC officials publicly and loudly attempted to cast the issue in Bananas as one of US unilateralism, and declared a case against Section 301 the appropriate response. In other words, the European Communities decided to bring a political case to distract attention from itself.
4.53The United States argues that notwithstanding its political origins, this case must not be about politics, but about law. The issue before the Panel is not whether Sections 301-310 of the Trade Act of 1974 are popular or desirable; rather, it is whether the European Communities has demonstrated that this legislation "does not allow" the United States to comply with DSU rules, as the European Communities asserts in its panel request.
4.54In the view of the United States, the European Communities has brought a political case that is in search of a legal argument. It is apparent that this search continues. Having unsuccessfully argued that Sections 301-310 mandate violations of DSU Article 23 based on a comparison of statutory and DSU time frames, the European Communities now argues that DSU time frames are irrelevant. Indeed, the European Communities appears to argue that the textual obligations set forth in the DSU and WTO Agreement are irrelevant. In their stead, the European Communities posits a "new legal environment", in which certain discretionary legislation may be treated as mandatory, and may be found to violate an unspecified and non-existent obligation to avoid "uncertainty". The EC's approach to this case is driven by its desire for a specific result at the expense of sound legal reasoning. This approach reinforces the fact that its goal is political, and its legal approaches without merit.
4.55The United States argues that the EC's main objective in, and approach to, this proceeding is illustrated by two statements in the EC's answers to the Panel's questions:
"It is true that Article 23.2(a) of the DSU was drafted with Sections 301-310 of the Trade Act of 1974 in mind. But this means, of course, that the Uruguay Round participants had also in mind the threat to the security and predictability of the international trade relations created by the text of the Trade Act as it was drafted in the 1988 version. They had therefore in mind the need to insert in the covered agreements language that would constitute the second leg of what the EC has proposed in its oral statement of 29 June to call the 'Marrakesh deal'.
A law that requires a determination in all cases whether a violation of WTO law has occurred therefore comprises the requirement to determine in certain cases that a violation of WTO law has occurred. Such a law therefore mandates determinations that are inconsistent with Article 23".
4.56According to the United States, the first quotation illustrates the EC's view of the purpose of DSU Article 23: as a tool to attack Sections 301-310. However, the EC's intention to use DSU Article 23 against Sections 301-310 has been hamstrung by the fact that this legislation does not mandate any violation of DSU Article 23 or any other WTO obligation. The European Communities itself quotes the conclusions of Professors Jackson and Hudec that, "there are plausible ways to interpret the statutory provisions of regular Section 301 as to give the President discretion to act consistently with the Uruguay Round dispute settlement rules", and that Section 301 includes "extremely wide loopholes". Under the well-established principle that discretionary legislation is not WTO-inconsistent if it permits WTO-consistent action, Sections 301-310 cannot be found inconsistent with DSU Article 23. This is because Sections 301-310 provide adequate discretion for the United States to comply with DSU rules and procedures in each and every case.
4.57The United States is of the view that the EC's response to this situation has been to develop novel and untenable definitions of the term "mandatory", as illustrated by the second quotation, and to create out of whole cloth new WTO obligations centering on "security and predictability" where the text of the WTO Agreement, including the DSU, cannot be stretched to achieve the EC's political objectives. Apparently unwilling to go so far as Hong Kong and dispense with the distinction between mandatory and discretionary legislation altogether, the European Communities now argues that the Panel should disregard the clear and consistent delineation between discretionary and mandatory measures set forth in each and every GATT and WTO panel report that has dealt with the issue, and instead redefine "mandatory" to include a law which might "in certain cases" be exercised in violation of DSU Article 23. The European Communities further asks the Panel to find that avoiding "uncertainty" and ensuring "security and predictability" are not only objectives of the WTO and DSU, but are obligations, or else require the Panel to adopt interpretations of DSU Article 23 and WTO Agreement Article XVI:4 that are at odds with the actual text of those provisions.
4.58The United States states the Panel must reject these requests. The European Communities has failed to meet its burden in this dispute on either the law or the facts. The continued applicability of the rule distinguishing mandatory and discretionary legislation is clear, as is the ordinary meaning of the text of DSU Article 23 and WTO Article XVI:4. It is also clear that Sections 301-310 provide more than adequate discretion to the USTR to comply with DSU Article 23 and other WTO obligations in every case. Section 304 permits the USTR to base her determinations on adopted panel and Appellate Body findings in every case. And Section 306 permits, in every case, the USTR to request and receive DSB authorization to suspend concessions in accordance with DSU Article 22. As Japan correctly notes, "laws are not inconsistent with WTO rules when & discretion [to comply with WTO obligations] is given to administrators under the laws". Sections 301-310 are thus consistent with DSU Article 23, WTO Agreement Article XVI:4, and GATT 1994 Articles I, II, III, VIII and XI.
4.59The United States argues that with respect to WTO Agreement Article XVI:4, it is important to recognise that a measure must first violate some other WTO commitment in order to violate Article XVI:4. The ordinary meaning of the text of this provision makes this clear: "Each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements". If those laws, regulations and administrative procedures conform with the obligations in the annexed agreements, including the DSU, there is no violation of Article XVI:4. The European Communities may not assume that Sections 301-310 violate the DSU for the purpose of finding a violation of Article XVI:4.
4.60The United States asserts that in the end, the legal analysis of whether Sections 301-310 are consistent with US WTO obligations must focus on the text of the provisions setting forth those obligations. It must focus on the language of the Agreement. Not on objectives, and not on alleged deals so recently invented that their names have to be "proposed". The rights and obligations of the Members of the World Trade Organization are found in the text of the agreements they negotiated. The text reflects, better than any paraphrasing by any Member, the objectives and purposes of all Members when they negotiated those agreements. The Panel's analysis must begin, and end with text.
4.61The United States argues that the question in this dispute, and the only question, is whether Sections 301-310 command the United States to violate specific WTO obligations found in the text of DSU Article 23, WTO Agreement Article XVI:4 and GATT 1994 Articles I, II, III, VIII and XI. The answer to this question is no, and the only way the European Communities can achieve its desired political result is to assume bad faith on the part of another WTO Member. This it may not do.
4.62The United States further states that if ever there were a case which emphasised the importance of the rule of law, this is that case. The law is the protector of both the weak and the strong, equally. It protects the small and the large, equally. It protects the popular and the unpopular, equally. While there are cases where the small and weak are grateful for the restraints it places on the powerful, there are others in which the law provides a shelter to the unpopular, whatever its size, when it has done no wrong. The United States knows that Sections 301-310 are not popular. But the WTO and the DSU are not a club to be used in a popularity contest against any one Member. If they are credibly to protect the weak, they must also protect the strong against attacks not on what they have done, but on who they are. And a statute does no wrong unless it commands authorities to violate their WTO obligations.
4.63According to the United States, here at the WTO, the law, the substantive provisions of the WTO Agreement and its annexes, enforced through the provisions of the dispute settlement system, provides security and predictability to all WTO Members. That security and predictability rests firmly on a mode of legal analysis which focuses first and foremost on the text of the Agreement, because that is what the Members have agreed to. It is the text which they signed; it is the text which they submitted to their legislatures for approval by the representatives of their people. The Members brought to the negotiation of the text a number of objectives and purposes, some of which are explicitly listed in the text, and some of which are not. In either case, however, those objectives and purposes are reflected in the agreement text itself. There can be no security and predictability in the multilateral trading system if the explicit rules Members have agreed to may be ignored in favour of a mode of analysis driven by a desire to achieve a specific result. The law must apply equally to all, and in all cases.
4.64The United States notes that by its terms of reference, this dispute is not about something the United States has done. Because of this, it is not proper to speculate about what the United States might do, any more than it would be proper for the United States to bring a case based on speculation that another Member will not act in accordance with its obligations. The only way that a panel may rule on something that a Member might do in the future is if that Member's law commands it to do it. It may not be assumed that they will not fulfill their solemn international obligations if they are in a position to do so. Only when a Member has crossed the line, by enacting a law which does not permit compliance with its international obligations, has it created a situation in which other Members have a legitimate and non-speculative basis for assuming that another Member will not abide by its international obligations. Only then will those Members find the security and predictability of their trade threatened in a manner distinguishable from the ever-present uncertainty as to whether other Members will fulfill their obligations.
4.65The United States contends that as has been clear from the outset of this case, Sections 301-310 allow the USTR to comply fully with US obligations under the WTO Agreement and its annexes. This law does not command the USTR to violate the WTO obligations of the United States. This law by its mere existence violates none of these obligations. The EC's transparent efforts to turn this proceeding into a forum for making political attacks on US trade policy only highlight the absolute void at the center of its legal case. It has none. This Panel must find that the European Communities has failed to meet its burden of establishing that Sections 301-310 of the Trade Act of 1974 are inconsistent with DSU Article 23, WTO Agreement Article XVI:4 and GATT 1994 Articles I, II, III, VIII and XI, and that Sections 301-310 are therefore not inconsistent with these obligations.
B.WTO PROVISIONS AT ISSUE - DSU ARTICLE 23.2(A) AND (C)
4.66The European Communities points out that the parts of Article 23 of the DSU relevant in this proceeding are:
"1. When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding
2. In such cases, Members shall:
(a) not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding, and shall make any such determination consistent with the findings contained in the panel or Appellate Body report adopted by the DSB or an arbitration award rendered under this Understanding;
(c) follow the procedures set forth in Article 22 to determine the level of suspension of concessions or other obligations and obtain DSB authorization in accordance with those procedures before suspending concessions or other obligations under the covered agreements in response to the failure of the Member concerned to implement the recommendations and rulings within that reasonable period of time".
4.67The European Communities claims that these provisions clearly oblige the United States to refrain from unilaterally determining whether another Member has denied rights or benefits under a WTO agreement to the United States and whether DSB rulings and recommendations have been implemented. They also leave no doubt that obligations under the GATT and the GATS may be suspended in response to a failure to comply with DSB rulings and recommendations only upon the grant of an authorization by the DSB.
4.68The United States notes that Article 23.2(a) provides that Members shall:
"not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding, and shall make any such determination consistent with the findings contained in the panel or Appellate Body report adopted by the DSB or an arbitration award rendered under this Understanding".
4.69The United States argues that thus, for there to be a violation of Article 23.2(a): (1) there must be a determination that a WTO agreement violation has occurred; and (2) that determination is not consistent with panel or Appellate Body report findings adopted by the DSB or an arbitration award rendered under the DSU. Because the European Communities has not, as part of this case, alleged that a specific US determination violates Article 23.2(a), the European Communities must show that, under Sections 301-310, the USTR is required to make a violation determination, and to do so in a manner inconsistent with panel or Appellate Body findings adopted by the DSB.
4.70The United States states that Article 23.2(c) requires Members to "follow the procedures set forth in Article 22 to determine the level of suspension of concessions or other obligations and obtain DSB authorization in accordance with those procedures before suspending concessions or other obligations" when a Member has failed to implement DSB rulings and recommendations. Again, no actual case involving the suspension of concessions is before this Panel. It is thus not possible to determine whether the United States in such a concrete case actually complied with the requirements of Article 22. The only question, then, is whether Section 306(b) commands the USTR not to follow Article 22 procedures or to suspend concessions without DSB authorization. The United States indicates that it manifestly does not. Nothing in Section 306(b) or in Section 305(a) prevents the USTR from complying to the letter with Article 22 procedures, including DSB authorization.
4.71The European Communities adds that international customary law recognises that a party to a treaty breached by another party may reciprocally suspend proportional obligations under the treaty.60 However, it is also recognised that this right may only be exercised in accordance with any provision in the treaty applicable in the event of a breach.61
4.72The European Communities maintains that Articles XXII and XXIII of the GATT 1947 were such provisions. Clair Wilcox, a drafter of the Havana Charter for an International Trade Organisation (ITO), from which these provisions derived, explained their rationale as follows:
"We have introduced a new principle in international economic relations. We have asked the nations of the world to confer upon an international organisation the right to limit their power to retaliate. We have sought to tame retaliation, to discipline it, to keep it within bounds. By subjecting it to the restraints of international control, we have endeavoured to check its spread and growth, to convert it from a weapon of economic warfare to an instrument of international order".62
4.73The European Communities states that this idea was forcefully expressed in Article 92 of the Havana Charter:
"Reliance on the Procedures of the Charter
1. The Members undertake that they will not have recourse, in relation to other Members and to the Organisation, to any procedure other than the procedures envisaged in this Charter for complaints and the settlement of differences arising out of its operation.
2. The Members also undertake, without prejudice to any other international agreement, that they will not have recourse to unilateral economic measures of any kind contrary to the provisions of this Charter".
4.74According to the European Communities, international customary law also recognises that a fundamental change of circumstances not foreseen by the parties to a treaty may, under certain conditions, be invoked as a ground for terminating or withdrawing from the treaty.63 However, the right of a party to such action may in principle be exercised only with respect to the treaty as a whole.64 International customary law does not entitle a party to a treaty to perform its obligations selectively on the ground that the balance of interest under the treaty has shifted to its disadvantage.
4.75The European Communities argues that in respect of the GATT 1947, the United States did not consider itself prevented from taking unilateral restrictive trade actions.65 In its view, unilateral measures were justified because the dispute settlement procedures of Article XXIII were based on consensus and the approval of the suspension of obligations in response to another contracting party's failure to observe obligations could therefore be blocked by the defendant party.
4.76In the view of the European Communities, the United States also did not consider itself bound by the unconditional most-favoured-nation principle of the GATT 1947 because it enabled contracting parties to obtain the benefit of negotiated market access commitments or new rules even if they had not contributed to the liberalisation efforts or accepted the new rules.
4.77According to the European Communities, the United States believed that these features of the GATT 1947 justified resorting to unilateral trade measures inconsistent with the GATT whenever the GATT mechanisms did not produce results meeting its expectations. In 1989, during a special session of the GATT Council of Representatives on unilateral measures, the United States explained:
"Wherever it could, the United States would challenge unfair practices under the dispute settlement provisions of the General Agreement or the Tokyo Round Codes, but where other contracting parties prevented or impeded that process or blocked efforts to ensure that their practices were covered by multilateral disciplines, the United States would act to protect its interests. If such action was considered unilateral, it should be nevertheless recognised as perfectly justifiable, responsive action necessitated by the failure of bilateral or multilateral efforts to address a problem. The way to minimise or avoid unilateralism was to create a credible multilateral system - by strengthening the existing system".66
4.78The European Communities further argues that the Uruguay Round ended with a considerably strengthened multilateral system:
(a)the possibility of blocking the dispute settlement procedures was eliminated;
(b)the Uruguay Round results were adopted as a "single undertaking" replacing the GATT 1947. This ensured that, notwithstanding the most-favoured-nation provisions of the GATT 1947, only those countries that accepted the additional obligations were accorded the corresponding rights;
(c)as a result, all WTO Members are now bound by agreements similar to the Tokyo Round Codes and the main areas the United States had found missing in the GATT 1947 - protection of intellectual property rights and trade in services - were made subject to enforceable rules.
4.79The European Communities contends that as a counterpart, the United States accepted the obligations in Article 23 of the DSU, the introductory clause of which reads:
"When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding".
4.80The European Communities considers this provision to be one of the cornerstones of the multilateral trading system. Security and predictability in international trade relations is inconceivable unless each and every WTO Member scrupulously submits all trade disputes to the DSU procedures.
4.81According to the European Communities, if Members take the law into their own hands and unilaterally impose their own views on their rights under the WTO by threatening or taking measures violating their obligations, they risk provoking spirals of retaliatory actions that would jeopardise the results of half a century of trade negotiations.
C.EVIDENTIARY AND OTHER MATTERS
1.Burden of Proof and Fact-finding concerning Domestic Law
4.82The European Communities argues that according to the Appellate Body's decision in United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India,
"The foundation of dispute settlement under Article XXIII of the GATT 1994 is the assurance to Members of the benefits accruing directly or indirectly to them under the GATT 1994. This was true as well of dispute settlement under the GATT 1947. If any Member should consider that its benefits are nullified or impaired as the result of circumstances set out in Article XXIII, then dispute settlement is available. With respect to complaints of violation of obligations pursuant to Article XXIII:1(a) of the GATT 1994, Article 3.8 of the DSU codifies previous GATT 1947 practice:
'In cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment. This means that there is normally a presumption that a breach of the rules has an adverse impact on other Members parties to that covered agreement, and in such cases, it shall be up to the Member against whom the complaint has been brought to rebut the charge'.
Article 3.8 of the DSU provides that in cases where there is an infringement of the obligations assumed under a covered agreement - that is, in cases where a violation is established - there is a presumption of nullification or impairment. Article 3.8 then goes on to explain that "the Member against whom the complaint has been brought" must rebut this presumption. However, the issue in this case is not what happens after a violation is established; the issue in this case is which party must first show that there is, or is not, a violation. &
In addressing this issue, we find it difficult, indeed, to see how any system of judicial settlement could work if it incorporated the proposition that the mere assertion of a claim might amount to proof. It is, thus, hardly surprising that various international tribunals, including the International Court of Justice, have generally and consistently accepted and applied the rule that the party who asserts a fact, whether the claimant or the respondent, is responsible for providing proof thereof. Also, it is a generally-accepted canon of evidence in civil law, common law and, in fact, most jurisdictions, that the burden of proof rests upon the party, whether complaining or defending, who asserts the affirmative of a particular claim or defence. If that party adduces evidence sufficient to raise a presumption that what is claimed is true, the burden then shifts to the other party, who will fail unless it adduces sufficient evidence to rebut the presumption".67
4.83The European Communities considers that in the India - Patents (US) case, the Appellate Body refined its above-mentioned milestone decision by addressing the specific issue of the authority of Panels and the Appellate Body when interpreting India's municipal law (i.e. a domestic law of a Member) as follows:
"In public international law, an international tribunal may treat municipal law in several ways. Municipal law may serve as evidence of facts and may provide evidence of state practice. However, municipal law may also constitute evidence of compliance or non-compliance with international obligations. For example, in Certain German Interests in Polish Upper Silesia, the Permanent Court of International Justice observed:
It might be asked whether a difficulty does not arise from the fact that the Court would have to deal with the Polish law of July 14th, 1920. This, however, does not appear to be the case. From the standpoint of International Law and of the Court which is its organ, municipal laws are merely facts which express the will and constitute the activities of States, in the same manner as do legal decisions and administrative measures. The Court is certainly not called upon to interpret the Polish law as such; but there is nothing to prevent the Court's giving judgment on the question whether or not, in applying that law, Poland is acting in conformity with its obligations towards Germany under the Geneva Convention. (original emphasis)
In this case, the Panel was simply performing its task in determining whether India's 'administrative instructions' for receiving mailbox applications were in conformity with India's obligations under Article 70.8(a) of the TRIPS Agreement. It is clear that an examination of the relevant aspects of Indian municipal law and, in particular, the relevant provisions of the Patents Act as they relate to the 'administrative instructions,' is essential to determining whether India has complied with its obligations under Article 70.8(a). There was simply no way for the Panel to make this determination without engaging in an examination of Indian law. But, as in the case cited above before the Permanent Court of International Justice, in this case, the Panel was not interpreting Indian law 'as such'; rather, the Panel was examining Indian law solely for the purpose of determining whether India had met its obligations under the TRIPS Agreement. To say that the Panel should have done otherwise would be to say that only India can assess whether Indian law is consistent with India's obligations under the WTO Agreement. This, clearly, cannot be so".
4.84In the view of the European Communities, more specifically on the issue of which of the parties bore the burden of determining the interpretation of India's domestic law in order to assess its conformity with the TRIPs Agreement, the Appellate Body then added the following:
"The Panel states:
'As the Appellate Body report on Shirts and Blouses points out, 'a party claiming a violation of a provision of the WTO Agreement by another Member must assert and prove its claim'. In this case, it is the United States that claims a violation by India of Article 70.8 of the TRIPS Agreement. Therefore, it is up to the United States to put forward evidence and legal arguments sufficient to demonstrate that action by India is inconsistent with the obligations assumed by India under Article 70.8. In our view, the United States has successfully put forward such evidence and arguments. Then, ... the onus shifts to India to bring forward evidence and arguments to disprove the claim. We are not convinced that India has been able to do so (footnotes omitted)'.
This statement of the Panel is a legally correct characterization of the approach to burden of proof that we set out in United States - Shirts and Blouses. However, it is not sufficient for a Panel to enunciate the correct approach to burden of proof; a Panel must also apply the burden of proof correctly. A careful reading of paragraphs 7.35 and 7.37 of the Panel Report reveals that the Panel has done so in this case. These paragraphs show that the United States put forward evidence and arguments that India's 'administrative instructions' pertaining to mailbox applications were legally insufficient to prevail over the application of certain mandatory provisions of the Patents Act. India put forward rebuttal evidence and arguments. India misinterprets what the Panel said about "reasonable doubts". The Panel did not require the United States merely to raise "reasonable doubts" before the burden shifted to India. Rather, after properly requiring the United States to establish a prima facie case and after hearing India's rebuttal evidence and arguments, the Panel concluded that it had 'reasonable doubts' that the 'administrative instructions' would prevail over the mandatory provisions of the Patents Act if a challenge were brought in an Indian court".
4.85The European Communities finally points out that in the context of the Argentina - Textiles and Apparel (US) panel procedure, the United States submitted its views on how the burden of proof should be shared between the parties to the dispute when considering the interpretation of a Member's domestic law:
"The United States contended that, by any standard, the evidence submitted by the United States was sufficient to establish a presumption of a violation of Article II. In fact, the Panel needed look no further than the face of the Argentine resolutions and decrees imposing the specific duties that were the subject of this dispute. & Previous GATT jurisprudence had made clear that this potential, in and of itself, was a sufficient basis for the Panel to find that Argentina had violated Article II.
The United States also argued that a Panel could condemn Argentina's mandatory minimum specific import duties even if they were not yet being applied".68
4.86The European Communities further argues that the panel in the Argentina - Textiles and Apparel (US) case assessed the legal situation as follows:
"We consider that when the Appellate Body refers to the obligation of the complainant party to provide sufficient evidence to establish a "presumption", it refers to two aspects: the procedural aspect, i.e. the obligation for the complainant to present the evidence first, but also to the nature of evidence needed. In the present case, we consider that it was for the United States to raise a presumption that Argentina did violate the provisions of Article II of GATT. Then, it is for Argentina to provide sufficient evidence to rebut the said presumption. When, however, Argentina is claiming a specific affirmative defense, such that its national challenge procedure can be used to correct any alleged violation of GATT rules, it is for Argentina to raise first a presumption that such system operates in a way that there is, in effect, no infringement of GATT/WTO rules".69
4.87In the view of the European Communities, it appears from the above mentioned quotations from earlier Panel and Appellate Body reports that, in the specific case at hand, the European Communities is subject to the burden of proving the existence of the attacked US domestic legislation (i.e. Sections 301-310). Moreover, the European Communities bears the burden to establish the existence of a prima facie violation of the provisions of the covered agreements invoked in its request for establishment of this Panel.
4.88The European Communities contends that the Appellate Body therefore concluded that, while panels cannot interpret domestic law as such, they can examine it to determine whether the WTO Member has met its obligations. Otherwise, so the Appellate Body ruled, only the defendant itself would be able to assess whether its law is consistent with its obligations. This could clearly not be so. The Appellate Body noted that GATT/WTO panels had conducted a detailed examination of domestic law to determine its conformity with GATT/WTO obligations. The Appellate Body cited,70 as an example, the GATT panel on United States - Section 337 of the Tariff Act of 193071 which conducted a detailed examination of the relevant United States' legislation and practice to determine whether Section 337 was consistent with Article III.4 of the GATT 1947.
4.89The European Communities states that it may therefore be concluded that the United States could not validly claim that only it can interpret its own laws and that the Panel would consequently have to rely on the United States' interpretation of Sections 301-310 to determine whether they are in conformity with WTO law.
4.90The European Communities maintains that with all these elements in mind, it appears that the interpretation of the burden of proof suggested by the United States itself in the Argentina - Textiles and Apparel (US) case constitutes an appropriate way forward in the context of this particular dispute.
4.91The European Communities argues that it is thus required
(a)to submit the text of the relevant provisions of Sections 301-310 and
(b)to indicate how, on their face, their wording is in contradiction with the US WTO obligations.
4.92According to the European Communities, in particular, it has shown and will further show that the text of Sections 301-310 mandates determinations and actions in violation of Articles 3, 21, 22 and 23 of the DSU and, consequently, of Articles I, II, VIII and XI of the GATT 1994; it has shown and will further show that Sections 301-310 do not provide a sound legal basis for the executive actions necessary to implement US WTO obligations, thus violating the good faith implementation principle under the Vienna Convention on the Law of Treaties and Article 3.2 of the DSU; finally, it has shown and will further show that the text, structure, design and architecture of Sections 301-310 create a pattern of executive practice that undermines the substantial objectives of the WTO thus also violating Article XVI:4 of the Marrakech Agreement. This already meets the burden of proof of the European Communities and therefore shifts the burden upon the United States as the respondent.
4.93The European Communities then maintains that in any case, ad abundantiam, it submitted and will submit as further evidence additional contextual documentation and information concerning the official interpretation by the US executive authorities and the Congress. Finally, the European Communities also provided, and will continue to provide, additional proof by submitting contextual evidence concerning the practice followed by the United States in the practical implementation of Sections 301-310.
4.94In the EC's view, at the end of this procedure, given the particular context of this case and having considered the specific obligations of positive action enshrined in Article XVI:4 of the Marrakech Agreement, a legal uncertainty that might persist with respect to the interpretation of Sections 301-310 should play to the detriment of the respondent, in its capacity of WTO Member on which legally lies the obligation to ensure the compatibility of its internal legislation with WTO obligations as from 1 January 1995.
4.95The United States responds that as the complaining party, it is the European Communities, not the United States, that bears the burden of proof in this case.72 As a result, the European Communities is obligated to establish a prima facie case with respect to each of the elements necessary to demonstrate the violations alleged. Establishing a prima facie case requires presenting both sufficient legal arguments and, where factual issues are in dispute, adequate supporting evidence. The Appellate Body has made this clear, stating that a panel should begin "its analysis of each legal provision by examining whether the [complaining party] has presented evidence and legal arguments sufficient to demonstrate that the & measures were inconsistent with the obligations assumed by the [responding party] under each article of the [applicable] agreement addressed by the Panel".73
4.96The United States further argues that to establish a prima facie case, the European Communities must provide evidence and arguments sufficient to establish a presumption that Sections 301-310 violate a provision of a WTO agreement.74 In this regard, the Appellate Body has stated, "we find it difficult, indeed, to see how any system of judicial settlement could work if it incorporated the proposition that the mere assertion of a claim might amount to proof . . . [T]he party who asserts a fact & is responsible for providing proof thereof".75
4.97The United States asserts that absent such a showing, the United States, as the responding party, need not rebut the allegations. The Appellate Body has explained that "[o]nly after such a prima facie determination has been made by the Panel may the onus be shifted to the [responding party] to bring forward evidence and arguments to disprove the complaining party's claim".76 The United States notes that, despite this fact, it has nevertheless rebutted each EC claim.
4.98According to the United States, the EC's statements in this case with respect to whether Sections 301-310 mandate determinations and actions violating DSU Article 23 have consisted of mere assertions, a fact exemplified by the statement of the European Communities that it had met its burden simply by providing a copy of the text of Sections 301-310. The United States reiterates that the EC's case rests on numerous unsupported, erroneous assumptions. To meet its burden, the European Communities must in fact prove why, under US law, each and every one of the EC assumptions identified by the United States is correct, and why, under US law, the interpretations of Sections 301-310 put forward by the United States are incorrect.
4.99The United States points out that in meeting its burden in this dispute, the European Communities may not rely on "mere assertions".77 The European Communities claims that it may meet its burden merely by submitting the text of Sections 301-310, because the statute on its face mandates a violation. It cites Argentina - Textiles and Apparel (US) for this proposition. However, in Argentina - Textiles and Apparel (US), the issue was whether Argentina's law provided for a tariff in excess of bound rates, and the United States demonstrated that the law did, in fact, provide for such a tariff. Moreover, contrary to the impression the European Communities attempts to leave, the United States made its case not only through an analysis of the law, but also through submission of data and charts relating to average prices and specific transactions. As a result, the burden shifted to Argentina.78
2.Relevance of the US Statements before the Panel and Statement of Administrative Action
4.100The European Communities indicates the International Court of Justice has, in a limited number of cases, considered unilateral declarations made by high State representatives as internationally binding on that State. Moreover, some GATT 1947 panels have attached legal value to declarations made by a party to a panel procedure concerning the future exercise of the discretionary power conferred to it domestically by a legislative act.
4.101In the view of the European Communities, in the East Greenland case,79 the declaration at issue was made by the Minister of Foreign Affairs of Norway in a bilateral meeting with a representative of Denmark. The declaration had to do with a dispute over the territorial sovereignty with regard to certain parts of Eastern Greenland.
4.102According to the European Communities, it is clear that this situation is not comparable with the present situation, because while the Permanent Court of International Justice considered that such a declaration was binding on Norway, this declaration had a recipient and was made in a context similar to that of the conclusion of an international agreement.
4.103The European Communities considers this case irrelevant for present purposes, because in the East Greenland case the issue of the application and correct interpretation of a piece of domestic legislation was not at stake. This could never have been achieved by a declaration made in private during a bilateral contact between governments. The situation described in the judgement does not in fact resemble a unilateral declaration of the executive branch of the Norwegian government, but was made in bilateral contacts aimed at settling a dispute over territorial sovereignty.
4.104The European Communities argues that in the Nuclear Tests case,80 the International Court of Justice dealt with unilateral public declarations of high representatives of France, including the President of the French Republic concerning the termination of atmospheric nuclear tests. In this context, the ICJ states the following:
"When it is the intention of the State making the declaration that it should become bound according to its terms, that intention confers on the declaration the character of a legal undertaking, the State being thenceforth legally required to follow a course of conduct consistent with the declaration. An undertaking of this kind, if given publicly, and with an intent to be bound, even though not made within the context of international negotiations, is binding".
It appears from the judgement that the ICJ considered the intent of being bound, the public character of the declaration and the rank of the representatives of France decisive for its finding that the declaration created international obligations for France.
4.105The European Communities asserts that in the circumstances of the present case, the situation is quite different, because the European Communities is confronted with the issue of the application and correct interpretation of a piece of domestic US law, i.e. Sections 301-310 of the US Trade Act of 1974.
4.106According to the European Communities, even if it were demonstrated (quod non) that the executive branch of the US government has broad discretion on how to apply Sections 301-310 in individual cases, it must be recalled that, as a matter of fact, the United States has already made an official and public declaration by its President concerning the way in which it intends to apply Sections 301-310 in cases of disputes under the procedures instituted by the WTO in form of the Statement of Administrative Action.
4.107The European Communities states that the Statement of Administrative Action was approved by the US Congress together with the Uruguay Round Agreements and is thus domestically binding on the executive branch of the US government. As the United States has explained itself, the Statement of Administrative Action is "an authoritative expression by the Administration concerning its views regarding the interpretation and application of the Uruguay Round agreements, both for purposes of U.S. international obligations and domestic law".81
4.108The European Communities points out that as the Panel is aware, the Statement of Administrative Action contains the following portion:
"There is no basis for concern that the Uruguay Round agreements in general, or the DSU in particular, will make future Administrations more reluctant to apply section 301 sanctions that may be inconsistent with U.S. trade obligations because such sanctions could engender DSU-authorized counter-retaliation. Although in specific cases the United States has expressed its intention to address an unfair foreign practice by taking action under section 301 that has not been authorized by the GATT, the United States has done so infrequently. In certain cases, the United States has taken such action because a foreign government has blocked adoption of a GATT panel report against it.
Just as the United States may now choose to take section 301 actions that are not GATT authorized, governments that are the subject of such actions may choose to respond in kind. That situation will not change under the Uruguay Round agreements. The risk of counter-retaliation under the GATT has not prevented the United States from taking action in connection with such matters as semiconductors, pharmaceuticals, beer, and hormone-treated beef".82
4.109The European Communities further contends that it is obvious that this portion of the Statement of Administrative Action provides for an authoritative interpretation of the Uruguay Round Agreements Act that undermines the security and predictability of international trade relations. Moreover it announces in very clear terms a policy: the United States will not feel impeded by its international obligations to have recourse to retaliatory action.
4.110The European Communities maintains that in the presence of these explicit indications on the political intentions and the legal texts as they stand, the explanation given by the United States83 is by no means reassuring.
4.111In this context, the European Communities recalls that, after the entry into force of the Uruguay Round agreements, the United States has as a matter of fact resorted to retaliatory action without having recourse to WTO dispute settlement procedures or without awaiting the result of the relevant WTO dispute settlement procedure in at least two well-documented cases (Japan - Autos and EC - Bananas III).84 The assertions made by the United States therefore give rise to the additional concern that the US administration apparently considers itself to be judge and jury also with regard to the applicability of the WTO dispute settlement procedures ratione materiae.85
4.112The European Communities goes on to state that it appears thus obvious that the statements made so far by the US representatives in the present procedure are of a completely different nature from the declaration considered binding by the ICJ in the Nuclear Tests case.
4.113The European Communities further argues that this legal assessment would not change even if those statements were incorporated into the Panel report. In fact, the statements made in the present case by the US representatives were not made with the intent to create an international obligation by a person empowered to undertake a substantial legal commitment on behalf of the United States.86 It is thus obvious that none of the conditions on which the judgement of the ICJ in that case was based is fulfilled in the present case.
4.114According to the European Communities, in any event, the problem of the present case is not the absence of a clearly defined international commitment, because that already exists in the form of Article 23 of the DSU which clearly was accepted by the United States as part of the Uruguay Round agreements. Rather, it is the subsequent implementation of that international obligation into the US legislation by the United States legislature, compounded by the Statement of Administrative Action, that runs counter to the United States obligation to respect its international commitments.
4.115The European Communities further notes that at the same time, US executive determinations and actions add to the uncertainty as to the willingness of the United States to respect its international obligations in future.
4.116The European Communities claims that given the importance of the United States in the multilateral trade relations and within the institutional framework of the WTO, this situation is the source of uncertainty and unpredictability, which is unacceptably detrimental to the multilateral trading system.
4.117The European Communities further states that, looking at the panel findings in the Superfund case,87 it must be recalled that in that case the panel accepted the statement of the United States only because it considered that the United States had discretion to act in accordance with its statement. In addition, that decision was adopted in a legal situation where the strict interpretation of mandatory legislation under the PPA had a decisive influence on the examination of domestic legislation.
4.118According to the European Communities, the only possible way for a panel to "marry" the limitation of the "existing legislation" clause of the PPA with the need to control the implementation of the broadly-defined discretionary legislation was, in cases such as the "Superfund", to obtain promises or commitments concerning the exercise of the discretionary power in the future.
4.119In the EC's opinion, there is no reason for a WTO panel to follow the legal path of the US - Superfund panel under the new WTO rules. In fact, in the present case, given the new legal environment after the entry into force of the WTO Agreements and in particular of Article XVI:4 of the Marrakech Agreement, and given also the public policy statement contained in the Statement of Administrative Action made by the highest representative of the executive branch of the US government and approved by its legislative branch, a simple statement to the Panel in a meeting behind closed doors without revoking the Statement of Administrative Action in this regard would clearly be insufficient to lift the uncertainty created by the Statement of Administrative Action.
4.120In the view of the United States, Section 304(a)(1) requires that determinations under that section be made "on the basis of the investigation initiated under Section 302 and the consultations (and the proceedings, if applicable, under section 303)". The "proceedings" under Section 303 are dispute settlement proceedings.88 Moreover, such proceedings would be "applicable" in any case involving a trade agreement, since Section 303 requires that dispute settlement procedures under a trade agreement be invoked in any case involving a trade agreement, if no mutually acceptable resolution has been achieved.89
4.121The United States indicates that its Administration has, in the Statement of Administrative Action approved by Congress, provided its "authoritative expression & concerning its views regarding the interpretation and application of the Uruguay Round agreements, & for purposes of domestic law".90 The Statement of Administrative Action must, by law, be treated as the authoritative expression concerning the interpretation of the statute in any judicial proceeding.91 The Statement of Administrative Action at page 365-366 provides that the USTR will:
佛invoke DSU dispute settlement procedures, as required under current law;
佛base any section 301 determination that there has been a violation or denial of U.S. rights under the relevant agreement on the panel or Appellate Body findings adopted by the DSB;
佛following adoption of a favorable panel or Appellate Body report, allow the defending party a reasonable period of time to implement the report's recommendations; and
佛if the matter cannot be resolved during that period, seek authority from the DSB to retaliate.92
4.122The United States explains that it is an established principle of US statutory construction that the administering agency's interpretation of a statute is entitled to deference if the statute is "silent or ambiguous with respect to [a] specific issue". Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43. In such circumstances, the court must uphold the agency's interpretation as long as it is based upon a "permissible construction" of the statute. Ibid. The agency's interpretation need not be the "only possible construction", Sullivan v. Everhart, 494 U.S. 83, 89 (1990), nor must it be the construction the court would have selected in the first instance. Chevron, 467 U.S. at 844. A court errs by substituting "its own construction of a statutory provision for a reasonable interpretation made by [the agency]". Ibid. The court's duty is not to weigh the wisdom of the agency's legitimate policy choices. Suramerica de Aleaciones Laminadas, C.A. v. United States, 966 F.2d 660, 665 (Fed. Cir.. 1992). Thus, under US law, the USTR's interpretations of its authority to undertake multiple determinations, determinations other than violation/non-violation determinations, or termination of investigations would receive such deference in a US court - to the extent such determinations would be subject to judicial review at all.93 Likewise, the USTR's interpretation of Section 304(a)(1) as requiring her to rely on DSB-adopted findings in determining that US WTO agreement rights have been denied would be accorded such deference.
4.123The United States indicates that it is not merely offering assertions of its legal authority. Rather, these interpretations are reflected in longstanding practice, in investigations predating this case and predating the WTO. Under US law, these interpretations would be entitled to deference, and, in examining whether the statute commands WTO-inconsistent action, the Panel is required to examine the meaning of the statute as it would be interpreted under US law.94
4.124The United States further argues that another legal basis for US interpretations of statutory provisions is the US principle of statutory construction known as legislative ratification. As the US Supreme Court has stated, this principle provides that Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change. Lindahl v. Office of Personnel Management, 470 U.S. 768, 783, citing Albemarle paper Co. v. Moody, 422 U.S. 405, 414 n.8 (1975).
4.125The United States also states that the multiple determinations in Oilseeds predated the WTO, and the fact that Congress did not amend the statute to prevent such determinations when other amendments were made in 1994 supports the view that the Administration's interpretation is permitted. Similarly, the USTR's practice of applying Sections 301-310 to make determinations other than simple "yes/no" determinations on whether agreement rights have been denied, and to terminate Section 302 investigations before making a determination, predates 1994. Exhibit 13 describes examples of this long-standing practice since 1988, though it predates 1988 as well. And, although Congress amended section 301 in 1994, it did not amend it to undermine the USTR's interpretation or application of Sections 301-310, even though it was fully aware of how it was being applied.
4.126The European Communities disagrees with the US introduction of an entirely new defence at this late stage. The European Communities stresses the fact that the new US arguments are very similar to those submitted by India in the India - Patents (US) case. They were rejected by the panel and the Appellate Body at the request of the US as a complainant in that case.95
4.127The European Communities further states that the quotation of the AB report in India - Patents (US), paragraph 65 [in fact 66], is incorrect. The Appellate Body did not state that "the Panel is required to examine the meaning of the statute as it would be interpreted under US law". Rather, the correct quotation, which has an entirely different meaning, is the following:
"& as in the case cited above before the Permanent Court of International Justice, in this case, the Panel was not interpreting Indian law "as such"; rather, the Panel was examining Indian law solely for the purpose of determining whether India had met its obligations under the TRIPS Agreement".
4.128The United States rebuts the EC argument that the US response raises a new defense, and that allegedly similar arguments were rejected in India - Patents (US). Both of the EC's contentions are incorrect. First, the United States has not raised a new defense. The US discussion of judicial deference under U.S. law was directly responsive to the Panel's request for the textual or other legal basis which permits the USTR to make multiple determinations - a factual issue in this dispute. While the textual basis for the USTR's interpretation is sufficiently clear, the doctrine of judicial deference would serve as an additional basis under US law were a US court to consider the statutory language ambiguous.
4.129The United States also contends that the EC's references to India - Patents (US) fail to support its position. The Appellate Body, in paragraphs 65-66 of its report in India - Patents (US), emphasizes that it was necessary in that case to examine Indian law to determine its compliance with India's international obligations. Domestic law consists not only of statutory provisions, but of domestic legal rules concerning the interpretation of those provisions or, in the case of India - Patents (US), domestic rules concerning conflicts between laws. In India - Patents (US), the Appellate Body examined "the relevant provisions of the Patents Act as they relate to the 'administrative instructions'" at issue in that case96; in other words, the Appellate Body examined whether there was any support under Indian law for India's assertion that unpublished, unwritten administrative instructions would prevail over a conflicting statute explicitly mandating a WTO violation. India in that case failed to provide sufficient evidence that, under Indian law, the instructions would prevail.
4.130In the US view, the doctrine of judicial deference to an agency's interpretation of its statute is part of U.S. law, though it would only become relevant in this dispute were the panel to conclude that there was some ambiguity as to whether a particular provision of Sections 301-310 commanded specific actions violating a WTO obligation. In fact, as the U.S. has explained throughout this proceeding, the statute contains no such ambiguity. On its face, the U.S. statute does not command violation determinations in the absence of DSB-adopted findings, and in fact requires that any such determinations be based on the results of WTO proceedings.97
4.131According to the United States, however, should the Panel find the statute ambiguous, the US Executive Branch interpretation of the statute is of great importance under US law. First, many Executive Branch determinations are not subject to judicial review. As already noted, if this were the case with respect to Section 301 determinations, the USTR interpretation would be definitive under US law. Second, even if a US court were to review such determinations, and even if that court were to conclude that the statutory language is ambiguous, it would be required under US law to interpret that language in light of the Chevron standard of judicial deference.
4.132The United States recalls again that the burden in this dispute lies with the European Communities. As already discussed, the European Communities failed to establish that US law commands the USTR to take actions which violate Article 23, failed to establish that US rules of statutory interpretation permit the European Communities and this Panel to interpret "whether" to mean "that", and failed to establish that it is permissible to disregard entire sections of the statute providing the USTR with discretion to delay or not take action. Likewise, in its latest submission, the European Communities failed to establish that the Chevron deference standard may, under US law, be disregarded.
4.133The United States points out that the last paragraph on page 366 of the Statement of Administrative Action does not relate to a situation in which the United States is seeking redress for the denial of US WTO rights, and thus is not covered by DSU Article 23, nor is it otherwise within the terms of reference of this dispute. As described in the preceding paragraphs on page 366, there will often be cases not involving WTO rights, or involving a mixture of actions only some of which are covered by WTO rules. Moreover, this paragraph describes the fact that, even before establishment of the WTO and its strengthened dispute settlement procedures, the United States infrequently expressed its intention to take retaliatory action, and such action was often a response to a trading partner's decision to obstruct dispute settlement proceedings. The statement that the Administration will not be "more reluctant" to impose sanctions given the DSU should be read in that context.
4.134In response to the Panel's question as to the US statement that "[t]he last paragraph on page 366 of the Statement of Administrative Action does not relate to a situation in which the United States is seeking redress for the denial of U.S. WTO rights", the United States maintains that it is clear from their context that neither the last paragraph on page 366 nor the first full paragraph on page 367 relate to situations in which the United States is seeking redress for denial of US WTO rights. The Statement of Administrative Action at pages 365-67 addresses three situations in which Section 301 may be invoked: (1) cases involving a WTO Member and its denial of US WTO rights; (2) cases involving a WTO Member and non-WTO rights; and, (3) cases involving non-WTO Members or WTO Members to which the United States does not apply the Uruguay Round Agreements pursuant to Article XIII of the WTO Agreement.
4.135The United States also explains that the last paragraph on page 365 deals with the first type of case, that is, situations involving the denial of US rights under the WTO Agreement. The following paragraph, the first full paragraph on page 366, introduces the discussion of the second type of case, those involving WTO Members but not US WTO rights. Each of the first four paragraphs on page 366 explicitly clarifies the types of situations in which a case may involve a WTO Member, but not a US WTO right. The next two paragraphs (those addressed in the question, the last on 366 and the first on 367) follow directly on that discussion and are part of the section of the Statement of Administrative Action discussion relating to situations not involving a US WTO right. Finally, the last paragraph of this section of the Statement of Administrative Action, the second full paragraph on page 367, addresses the third type of case, that is, cases not involving WTO Members or cases involving WTO Members as to which the United States does not apply the Uruguay Round Agreements. The organization of the discussion in the Statement of Administrative Action thus follows precisely the three types of cases for which Section 301 may be applicable.
4.136In the view of the United States, the statement in the first paragraph on page 367 may be reconciled with the earlier bullet points on pages 365-366 of the Statement of Administrative Action, and are logical, only if understood as referring to two different types of cases, those involving US WTO rights and those which do not. The paragraph on page 367 should not be read so as to produce an illogical result.
4.137With respect to the substance of these paragraphs, the United States reiterates again that the last paragraph on page 366 emphasises the infrequency with which the United States took action under the GATT 1947 which had not been authorized, as well as the fact that such situations often involved efforts by a losing party (generally the European Communities) to obstruct multilateral dispute settlement proceedings.
4.138According to the United States, with respect to the first paragraph on page 367, the statement only provides that the prospect of counter-retaliation by a trading partner would not enter into the consideration of whether to take action against that partner in a case not involving the denial of US WTO rights by that partner. The listed cases are provided only as illustrations of this point. None of this says anything about the factors which would be taken into consideration in deciding whether and how to take action when a US WTO Agreement right is not involved, factors such as the US desire to comply with its international obligations. Again, the paragraphs indicate that even under the GATT 1947, the instances in which action was taken were infrequent.
4.139The United States states that because these paragraphs do not relate to situations involving US rights under the WTO Agreement, on that basis alone they are irrelevant to an examination of whether Sections 301-310 are inconsistent with DSU Article 23. Article 23 deals only with situations in which Members "seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements".98 However, even were the statements in the paragraphs on pages 366-367 somehow relevant to Article 23, they would not be relevant to the analysis of whether the European Communities has demonstrated that the law itself, Sections 301-310, command the USTR to violate specific US WTO obligations. The mere existence of the statements is no substitute for the analysis the European Communities has consistently failed to provide on precisely how specific requirements in Sections 301-310 mandate actions inconsistent with specific textual obligations in the WTO provisions set forth in the terms of reference.
4.140The United States finally notes that the statements speak to no more than the possibility of WTO-inconsistent action, a possibility which other WTO Members have repeatedly made a reality through not only their initial decisions to create and implement WTO-inconsistent measures, but in their decisions to disregard DSB rulings and recommendations with respect to these measures. Neither the United States nor any other WTO Member is entitled to bring a successful WTO challenge against another Member because of the mere possibility that it may, in the future, breach its WTO obligations. There must be a measure which does in fact, currently breach a specific WTO obligation, or at the least legislation which commands such a breach in the future.
4.141The European Communities criticises the United States for introducing a new argument by asserting that the Statement of Administrative Action, at pages 365-367 "addresses three situations & ". The European Communities recalls its argument: irrespective of the allegations made by the US concerning its views on the interpretation of the Statement of Administrative Action (and this latest attempt has no more support in the text of the Statement of Administrative Action than the previous ones), the examples provided at page 367 of the Statement of Administrative Action are clearly within the scope of the WTO Agreements and thus defeat also the latest US argument in this respect.
4.142The United States reiterates that the only logical reading of the statements at pages 366-67 is that they apply only to cases not involving a US WTO right, that this conclusion also follows from the organization of the Statement of Administrative Action, and that the statements refer to no more than hypothetical possibilities, as it already argued.
4.143The United States contends that the European Communities has brought an essentially political case. The European Communities and several third parties have attempted to leave the impression that the United States is an implacable foe of the Dispute Settlement Understanding and of multilateral determinations of WTO Agreement rights. They hope through these accusations to raise doubts among the panel about how the Trade Representative could be expected to exercise her discretion under Sections 301-310. However, beyond the lack of relevance of these accusations to the legal question of whether Sections 301-310 mandate a WTO violation, they are quite simply untrue. The United States was an early and strong supporter of the creation of the Dispute Settlement Understanding and of the fundamental improvements in dispute settlement procedures which have established the credibility of the new system: the negative consensus rule, strict deadlines and virtually automatic panel establishment, adoption of reports, and authorization to suspend concessions upon non-implementation.
4.144The United States points out that it has brought 49 disputes to the WTO under its multilateral procedures and has defended itself in 28 others. In five cases, a US measure was found inconsistent with US obligations. The United States not only committed to bring its measure into compliance with DSB rulings and recommendations in each of these cases, it did in fact bring its measure into compliance in three cases, and the reasonable period of time has yet to expire in the remaining two. The US commitment to multilateral dispute settlement procedures is thus evident in the US role in developing those procedures, in the active US use of those procedures, and in US compliance with multilateral decisions when those decisions have been adverse.
4.145In the view of the United States, when stripped of political arguments, it is clear that the European Communities is attempting in this case to challenge a statute based on statutory provisions which do not exist. The European Communities cannot meet its burden in this case by assuming such provisions into existence. The United States therefore respectfully requests that this Panel reject the EC's speculative arguments in their entirety.99
4.146The European Communities, in response to the Panel's question whether Sections 301-310 would be rendered consistent with US obligations under the WTO, assuming that the panel were to find that Sections 301-310 leave sufficient discretion to the USTR to allow it to meet its WTO obligations, claims that this question is of a highly hypothetical nature, and - as the Panel is aware - the European Communities disagrees with the hypothesis that is underlying the question.
4.147According to the European Communities, its complaint concerns Sections 301-310 as such. The European Communities recalls in this context that both parties agree that the question of how the USTR enforces Sections 301-310 is irrelevant in this proceeding.
4.148In the view of the European Communities, in order to address the EC's complaint, the Panel needs to answer the question of whether Sections 301-310, by their terms or expressed intent, mandate WTO-inconsistent determinations or actions, whether they provide the USTR with a sound legal basis for the implementation of the United States' WTO obligations and whether they make certain ("ensure") the conformity with WTO obligations within the meaning of Article XVI:4 of the WTO Agreement.
4.149The European Communities contends that any (hypothetical) reassuring statement by the United States' executive authorities could not change the terms and expressed intent of Sections 301-310 nor could it create a sound legal basis for WTO-consistent actions in US law nor could it bring Sections 301-310, as such, into conformity with WTO law. Such a statement could only relate to the intentions of the current administration on the enforcement of Sections 301-310.100
4.150In the present case, the European Communities considers that the statute compels the executive branch of the US government to act in contradiction with the US WTO obligations or, in any case, creates a legal situation which is biased against compatibility with those obligations. As the European Communities has explained, this legal situation, created by Sections 301-310 as such, is highly detrimental to the multilateral trading system.
4.151It is the EC's understanding of the US internal legal order that no statement of the executive authorities of the United States, however it would be formulated and by whomever it would be made, could do away with the constraints under which the executive branch of the US government finds itself under the US Constitution which imposes on the executive authorities to act in accordance with statutory requirements enacted by the US Congress. In addition, under US law these statutory requirements take precedence over any international obligation contracted by the United States under the Uruguay Round agreements pursuant to Section 102(a) of the Uruguay Round Agreements Act of 1994.
4.152The European Communities recalls once more that the US representative, during the first substantive meeting with the Panel, could not exclude the possibility of a legal challenge before the US domestic courts concerning the implementation of Sections 301-310.
4.153The European Communities reiterates that the situation of the present case is not comparable to the situation that was addressed by the ICJ in the Nuclear Tests Case where the French President and certain highly ranked French representatives made public statements on behalf of the French Republic that were not in contradiction with any piece of domestic legislation.
4.154In rebuttal, the United States points out that the European Communities attempts to make much of the fact that, in US courts, US law would prevail in the event of a conflict with the Uruguay Round Agreements. For example, the European Communities cites Professor D.W. Leebron for this proposition. However, the European Communities fails to quote Professor Leebron's conclusion on page 232 of the very same work cited in footnote 27 that, "Nothing, however, in those provisions [that is, the provisions of Section 301] requires the President or the USTR to act in violation of the Uruguay Round Agreements". In other words, because there is no conflict between Sections 301-310 and the WTO Agreement, it does not matter which would prevail in the event of a conflict. In fact, were there actually a conflict, that is, if a US law mandated a violation of the WTO Agreement, there would be a WTO violation regardless of whether a US court would apply US law. The EC's discussion of US law on when actual conflicts are present is thus completely irrelevant to the Panel's analysis.
D.ANALYSIS OF WTO-CONSISTENCY OF MEASURES AT ISSUE
1.Reach of WTO obligations with respect to law authorizing WTO-inconsistent action, not specific applications
(i)Relevance of GATT/WTO Precedents
4.155The European Communities first contends that previous GATT panels recognised that a law requiring the executive authorities to impose a measure inconsistent with a provision of the GATT can be challenged under the dispute settlement procedure whether or not it had been applied to the trade of the complaining party. The 1987 panel on United States - Taxes on Petroleum and Certain Imported Substances reasoned as follows:
"& The general prohibition of quantitative restrictions under Article XI ... and the national treatment obligation of Article III ... have essentially the same rationale, namely to protect expectations of the contracting parties as to the competitive relationship between their products and those of the other contracting parties. Both articles are not only to protect current trade but also to create the predictability needed to plan future trade. That objective could not be attained if contracting parties could not challenge existing legislation mandating actions at variance with the General Agreement until the administrative acts implementing it had actually been applied to their trade. Just as the very existence of a regulation providing for a quota, without it restricting particular imports, has been recognised to constitute a violation of Article XI.1, the very existence of mandatory legislation providing for an internal tax, without it being applied to a particular imported product, should be regarded as falling within the scope of Article III.2, first sentence. The Panel noted that the tax on certain imported substances had been enacted, that the legislation was mandatory and that the tax authorities had to apply it after the end of next year and hence within a time frame within which the trade and investment decisions that could be influenced by the tax are taken. The Panel therefore concluded that Canada and the EEC were entitled to an investigation of their claim that this tax did not meet the criteria of Article III.2, first sentence".101
4.156The European Communities further argues that it follows that a WTO obligation proscribing a particular behaviour is violated by the adoption of a domestic law mandating such behaviour. Such a law also violates Article XVI:4 of the WTO Agreement. The European Communities is therefore entitled to findings and rulings by the Panel on the question of whether the United States has brought the provisions of the Trade Act of 1974, as such, into conformity with its WTO obligations under Article 23 of the DSU.
4.157According to the European Communities, the 1992 panel on United States - Measures Affecting Alcoholic and Malt Beverages examined legislation which, by its terms, mandatorily required the authorities to impose GATT-inconsistent measures, but which was not actually applied. The United States argued that such legislation did not constitute a measure in respect of which Article XXIII of the GATT could be invoked. The panel ruled as follows:
"The Panel then proceeded to consider the United States argument that the provisions in the state of Illinois permitting manufacturers to sell directly to retailers were not given effect. In this regard, the Panel recalled the decisions of the CONTRACTING PARTIES on the relevance of the non-application of laws in dispute. Recent panels addressing the issue of mandatory versus discretionary legislation in the context of both Articles III.2 and III.4 concluded that legislation mandatorily requiring the executive authority to take action inconsistent with the General Agreement would be inconsistent with Article III, whether or not the legislation were being applied, whereas legislation merely giving the executive authority the possibility to act inconsistently with Article III would not, by itself, constitute a violation of that Article. The Panel agreed with the above reasoning and concluded that because the Illinois legislation in issue allows a holder of a manufacturer's license to sell beer to retailers, without allowing imported beer to be sold directly to retailers, the legislation mandates governmental action inconsistent with Article III.4".102
4.158The European Communities notes that with respect to a law in the state of Mississippi, the panel similarly found:
"The Panel then proceeded to consider the United States argument that the Mississippi law was not being applied. In this regard, the Panel recalled its previous discussion of this issue. ... The Panel noted that the option law in Mississippi provides discretion only for the reinstatement of prohibition, but not for the discriminatory treatment of imported wines. The Panel concluded, therefore, that because the Mississippi legislation in issue, which permits native wines to be sold in areas of the state which otherwise prohibit the sale of alcoholic beverages, including imported wine, mandates governmental action inconsistent with Article III.4, it is inconsistent with that provision whether or not the political subdivisions are currently making use of their power to reinstate prohibition".103
4.159The European Communities then argues that the panel explained the rationale behind these rulings when presenting its findings on the maximum price laws in Massachusetts and Rhode Island:
"In respect of the United States contention that the Massachusetts measure was not being enforced and that the Rhode Island measure was only nominally enforced, the Panel recalled its discussion of mandatory versus discretionary laws in the previous section. The Panel noted that the price affirmation measures in both Massachusetts and Rhode Island are mandatory legislation. Even if Massachusetts may not currently be using its police powers to enforce this mandatory legislation, the measure continues to be mandatory legislation which may influence the decisions of economic operators. Hence, a non-enforcement of a mandatory law in respect of imported products does not ensure that imported beer and wine are not treated less favourably than like domestic products to which the law does not apply. Similarly, the contention that Rhode Island only 'nominally' enforces its mandatory legislation a fortiori does not immunise this measure from Article III.4. The mandatory laws in these two states by their terms treat imported beer and wine less favourably than the like domestic products. Accordingly, the Panel found that the mandatory price affirmation laws in Massachusetts and Rhode Island are inconsistent with Article III.4, irrespective of the extent to which they are being enforced".104
4.160The European Communities explains that in the proceedings of the WTO panel on India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, the United States claimed that the "mailbox system" for patent applications which India had established by administrative action did not meet the requirements of Article 70.8 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), because mandatory provisions of the India Patents Act required the rejection of the mailbox applications within a specified delay.
4.161In the view of the European Communities, India cited provisions of its Constitution on the distribution of authority between the legislative and the executive branch and court rulings on the non-binding nature of statutes requiring administrative actions by a specified date, to argue that a mail box system could be established by administrative action notwithstanding the mandatory provisions of the Patents Act.
4.162The European Communities points out that the United States responds to the European Communities claiming that the GATT 1947 jurisprudence on mandatory legislation made clear that India was obliged to eliminate the legal uncertainty created by the fact that its administrative practices were inconsistent with mandatory provisions of the Patents Act. India was consequently required to amend its Patents Act. Referring to the GATT 105 and on United States - Measures Affecting Alcoholic and Malt Beverages (Beer II), the United States argued:
"The mailbox system & had a rationale common to many other WTO obligations, "namely to protect expectations of the contracting parties as the competitive relationship between their products and those of other contracting parties". The Superfund report had established clearly the importance of "creat[ing] the predictability needed to plan future trade". (& ) Despite India's claim that it had decided for the moment not to enforce the mandatory provisions of (& ) its Patent Act & that "measure continues to be mandatory legislation which may influence the decisions of economic operators". The economic operators in the present case - potential patent applicants - had no confidence that a valid mailbox system had been established & To paraphrase the Beer II panel, a non-enforcement of a mandatory law that violated a WTO obligation did not ensure that the obligation was not being broken".106
4.163The European Communities notes that the United States thus argued that the domestic law of a Member must not only be such as to enable it to act consistently with its WTO obligations; the domestic law must also not create legal uncertainty by prescribing WTO-inconsistent measures.
4.164For the European Communities, the panel accepted the United States' argumentation. It examined the provisions of India's Patent Act and then ruled:
"In the light of these provisions, the current administrative practice creates a certain degree of legal insecurity in that it requires India officials to ignore certain mandatory provisions of the Patents Act. We recall that the Malt Beverages panel dealt with a similar issue. There the respondent offered as a defence that certain GATT-inconsistent legislation was not currently enforced. The panel rejected this defence by stating as follows:
'Even if Massachusetts may not currently be using its policy powers to enforce this mandatory legislation, the measure continues to be mandatory legislation which may influence the decisions of economic operators. Hence, a non-enforcement of a mandatory law in respect of imported products does not ensure that imported beer and wine are not treated less favourably than like domestic products to which the law does not apply'.
We find great force in this line of reasoning. There is no denying that economic operators - in this case the patent applicants - are influenced by the legal insecurity created by the continued existence of mandatory legislation that requires the rejection of product patent applications in respect of pharmaceutical and agricultural chemical products".107
4.165The European Communities argues that these findings imply that a law that, by its terms, mandates behaviour inconsistent with a provision of a WTO agreement, violates that provision, irrespective of whether and how the law is or could possibly be applied.
4.166According to the European Communities, this principle is a reflection of the fact that a law with such terms creates uncertainty adversely affecting the competitive opportunities for the goods or services of other Members.
4.167The European Communities points out that one of the basic objectives of the WTO agreements, however, is to ensure that goods or services of domestic and foreign origin are accorded equal competitive opportunities. In the framework of a treaty designed to ensure stable and predictable conditions of competition, a party does not act in good faith if it accepts an obligation stipulating one behaviour, but adopts a law explicitly stipulating another. The fact that it might exceptionally apply that law in a way that is not inconsistent with its WTO obligations does not affect the above conclusion, particularly where there is no legal entitlement to obtain such an exceptional "act of grace". This manner of implementing WTO obligations is simply incompatible with the fundamental requirement of security and predictability in international trade relations, which is at the basis of the WTO.108
4.168In the view of the European Communities, the consistent line followed by GATT panels is therefore essentially an application of the general principle of international law that a treaty must be interpreted and performed in good faith.109
4.169The European Communities goes on to state that Article XVI:4 of the WTO Agreement turns this principle into a specific legal obligation that can be separately invoked. This provision and the related panel findings quoted above have important implications for the scope of the Panel's examination.
4.170The European Communities maintains that it is sufficient for the Panel to examine whether Sections 301-310 mandate determinations and actions by the USTR that are inconsistent with the United States' obligations under Article 23 of the DSU.
4.171The European Communities further argues that there is no need to examine whether the USTR has actually implemented Sections 301-310 as mandated, whether Sections 301-310 are mandatory in the sense that their application could be enforced by domestic courts, or whether the President would be entitled to instruct the USTR to refrain from taking the actions prescribed by Sections 301-310.
4.172The European Communities concludes that it follows from the above that, if the Panel were to find that certain provisions of Sections 301-310, on their face, mandate determinations or actions that are inconsistent with Article 23 of the DSU, it would have to rule that these provisions must be amended.
4.173The United States responds that GATT and WTO panels have uniformly found that legislation may be challenged as such only if it mandates action inconsistent with WTO or GATT obligations. Most recently, the panel in Canada - Measures Affecting the Export of Civilian Aircraft stated:
"We recall the distinction that GATT/WTO panels have consistently drawn between discretionary legislation and mandatory legislation. For example, in United States - Tobacco, the panel "recalled that panels had consistently ruled that legislation which mandated action inconsistent with the General Agreement could be challenged as such, whereas legislation which merely gave the discretion to the executive authority ... to act inconsistently with the General Agreement could not be challenged as such; only the actual application of such legislation inconsistent with the General Agreement could be subject to challenge". (citation omitted)110
4.174The United States notes that the European Communities was the beneficiary of the settled distinction between mandatory and discretionary legislation in EEC - Regulation on Imports of Parts and Components.111 In that case, the panel found that "the mere existence" of the anticircumvention provision of the EC's antidumping legislation was not inconsistent with the EC's GATT obligations, even though the European Communities had taken GATT-inconsistent measures under that provision.112 The panel based its finding on its conclusion that the anticircumvention provision "does not mandate the imposition of duties or other measures by the EEC Commission and Council; it merely authorizes the Commission and the Council to take certain actions".113
4.175The United States further contends that in this dispute, the European Communities is challenging no specific measures taken under Sections 301-310.114 It is challenging the mere existence of Sections 301-310. Thus, for that challenge to succeed, the European Communities must demonstrate not only that Sections 301-310 authorize WTO-inconsistent action, but that they mandate such action. As the European Communities acknowledges, it must show that this legislation "does not allow" the US government to follow DSU procedures.115
4.176The United States further indicates that in applying the discretionary-mandatory distinction, panels have found that legislation explicitly directing action inconsistent with GATT principles does not mandate inconsistent action so long as it provides the possibility for authorities to avoid such action. For example, in United States - Taxes on Petroleum and Certain Imported Substances,116 the Superfund Act required importers to supply sufficient information regarding the chemical inputs of taxable substances to enable the tax authorities to determine the amount of tax to be imposed; otherwise, a penalty tax would be imposed in the amount of five percent ad valorem or a different rate to be prescribed in regulations by the Secretary of the Treasury by a different methodology. The regulations in question had not yet been issued. Nevertheless, the panel concluded:
"[W]hether [the regulations] will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, as required by Article III:2, first sentence, remain open questions. From the perspective of the overall objectives of the General Agreement it is regrettable that the Superfund Act explicitly directs the United States tax authorities to impose a tax inconsistent with the national treatment principle but, since the Superfund Act also gives them the possibility to avoid the need to impose that tax by issuing regulations, the existence of the penalty rate provisions as such does not constitute a violation of the United States obligations under the General Agreement".117
4.177The United States adds that similarly, in Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes,118 the panel examined Thailand's Tobacco Act, which established a higher ceiling tax rate for imported cigarettes than for domestic cigarettes. While the Act explicitly gave Thai officials the authority to implement discriminatory tax rates, this did not render the statute mandatory. The panel concluded that "the possibility that the Tobacco Act might be applied contrary to Article III:2 was, by itself, not sufficient to make it inconsistent with the General Agreement".119
4.178The United States finally points out that in United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco,120 the panel found that a law did not mandate GATT-inconsistent action where the language of that law was susceptible of a range of meanings, including ones permitting GATT-consistent action. The panel examined the question of whether a statute requiring that "comparable" inspection fees be assessed for imported and domestic tobacco mandated that these fees had to be identical for each, without respect to differences in inspection costs. If so, the statute would be inconsistent with GATT 1947 Article VIII:1(a), which prohibits the imposition of fees in excess of services rendered.121 The United States argued that the term "comparable" need not be interpreted to mean "identical", and that the law did not preclude a fee structure commensurate with the cost of services rendered.122 The panel agreed with the United States:
"[T]he Panel noted that there was no clear interpretation on the meaning of the term "comparable" as used in the 1993 legislative amendment. It appeared to the Panel that the term "comparable", including the ordinary meaning thereof, was susceptible of a range of meanings. The Panel considered that this range of meanings could encompass the interpretation advanced by the United States in this proceeding, an interpretation which could potentially enable USDA to comply with the obligation of Article VIII:1(a) not to impose fees in excess of the cost of services rendered, while at the same time meeting the comparability requirement of [the US law]".123
4.179In the view of the United States, the Panel therefore found that the complaining party had "not demonstrated that [the US law] could not be applied in a manner ensuring that fees charged for inspecting tobacco were not in excess of the cost of services rendered".124
4.180In conclusion, the United States states that there is thus a strict burden on a complaining party seeking to establish that a Member's legislation mandates a WTO agreement violation: the complaining party must demonstrate that the legislation, as interpreted in accordance with the domestic law of the Member, precludes any possibility of action consistent with the Member's WTO obligations. Moreover, where legislation is susceptible of multiple interpretations, the complaining party must demonstrate that none of these interpretations permits WTO-consistent action. As described in the following section, the European Communities has failed to meet that burden in this case.
4.181The United States adds that the distinction between mandatory and discretionary action in GATT/WTO jurisprudence was a basic element of the practice of the GATT 1947 Contracting Parties in interpreting the GATT 1947, and remains a basic element of the practice of WTO Members in interpreting the WTO Agreement. The alternative to this distinction would be to require Members to write into their domestic laws specific limitations on the exercise of discretion in order to avoid even the possibility of WTO-inconsistent action. Each Member would be required to make the WTO Agreement pre-eminent in its legal order - a step which the European Communities expressly rejected for itself in 1994.125 No such obligation now exists in the WTO agreements, and the European Communities has conceded as much in the current review of the Dispute Settlement Understanding. There, the European Communities has submitted a proposal which "would remove the current distinction between discretionary and mandatory measures"126 and make it possible to establish the WTO-incompatibility of discretionary measures.127
4.182The United States argues that when addressing specific provisions of Sections 301-310, the European Communities generally appears to accept that it must demonstrate that the US statute actually mandates (and not merely permits) WTO-inconsistent behaviour. Indeed, the EC's fundamental claim in its request for a panel is that the Section 301 legislation "does not allow" the United States to comply with its WTO obligations.128
4.183In the view of the United States, in its introductory remarks, however, and in statements scattered throughout its submission, the European Communities suggests that it believes that WTO Members are under an affirmative obligation to include in their domestic law explicit limits on discretionary authority. For example, the European Communities states,
"The European Communities & believes that Sections 301-310 must be amended to make clear that the United States administration is required to act in accordance with the United States' obligations under the WTO agreements in all circumstances and at all times". (emphasis added)
4.184The United States contends that likewise, the European Communities laments remaining discretion within Sections 301-310 and decries the alleged fact that the United States is "keeping open for itself the possibility" of resorting to unilateral measures.129
4.185The United States argues that these formulations of WTO obligations are diametrically opposed to the principle set forth in each and every panel report which has addressed the issue - that legislation must require, and not merely leave open the possibility, of GATT or WTO-inconsistent action.130 Likewise, they are also inconsistent with the approach taken in other GATT contexts, for example, working parties examining the legislation of a contracting party or acceding country to determine whether that legislation mandates GATT-inconsistent results, and not whether it could deliver such results.131
4.186In the US view, surely the European Communities understands this. Wholly apart from the fact that the European Communities in its submissions generally acknowledges this principle in its analysis, the European Communities has, in the context of the on-going DSU Review, submitted a proposal which "would remove the current distinction between discretionary and mandatory measures"132 and make it possible to establish the WTO-incompatibility of discretionary measures.133 The European Communities now appears to be asking this Panel to legislate that very change.
4.187In the US view, the implications of the EC DSU proposal and of its request to this panel to establish a rule that all municipal legislation must "make clear" that authorities must act consistently with their WTO obligations "in all circumstances and at all times" are profound. The proposed rule would touch on the sovereignty of Members in a manner they have not, to date, agreed to. One has to ask whether the European Communities has thoroughly considered the implications of its argument. Would, for example, the European Communities be required to amend the legislative and Treaty of Amsterdam authority under which it has been implementing its banana regime in order to include the specific requirement that this regime must comply with the EC's WTO obligations?
4.188The United States argues that in fact, under the EC's proposal, the European Communities would have to amend virtually every piece of European Communities and Member State legislation to require that it be administered in WTO-consistent fashion, since the EC's WTO commitments are at present not directly enforceable under EC law.134 The EC Council of Ministers stated this clearly at the time it ratified the WTO agreements: "[B]y its nature, the Agreement establishing the World Trade Organization, including the Annexes thereto, is not susceptible to being directly invoked in Community or Member State courts".135 Thus, the European Communities does not differ from the United States in this regard, contrary to the impression the European Communities attempts to leave.
4.189The United States further notes that it appears that the European Communities would have to amend its "Trade Barriers Regulation" to remove discretionary elements, which, in the EC's words, "keep open for itself the possibility" of WTO-inconsistent action. The "General Provisions" in Article 15 of the Regulation provide in part:
"[This Regulation] shall be without prejudice to other measures which may be taken pursuant to Article 113 of the Treaty, as well as to Community procedures for dealing with matters concerning obstacles to trade raised by Member States in the committee established by Article 113 of the Treaty".136
4.190The United States maintains that under Article 133 of the Treaty of Amsterdam (formerly, Article 113 of the Treaty of Rome), the European Communities appears to have complete discretion to take any action, for any reason, at any time, in the commercial policy field without regard to WTO rules or DSB authorization. In fact, despite the implication left by the European Communities that its Trade Barriers Regulation is the sole mechanism by which it brings disputes at the WTO, the European Communities has brought only six of 45 WTO disputes through that regulation.137 The remainder have been brought through the unpublished, non-transparent procedures of the Article 133 Committee (if, indeed, any such procedures exist).138 The United States is not aware of any EC legislation or treaty provision which would make "retaliatory action of the [European Communities under its Article 133 procedures] dependent on the authorization of the DSB", nor is the United States aware of any such provision which creates any "legal entitlement to obtain such an exceptional 'act of grace'". Presumably, under the EC's requested rule, it would be required to amend the Treaty of Amsterdam to provide the clarity and further assurances it seeks from the United States.
4.191In the view of the United States, while the European Communities appears to have lost its appreciation for the importance of distinguishing between discretionary and mandatory measures in the context of this dispute, it understood this distinction well in 1957. The 1957 Report on "The European Economic Community" states,
"Following an exchange of views on the provisions of the Rome Treaty in the field of quantitative restrictions, the Sub-Group noted that these provisions were not mandatory and imposed on the Members of the Community no obligation to take action which would be inconsistent with the General Agreement. On the other hand because of the very general scope and competence conferred on the institutions of the Community, it could be within their powers to take measures which could be inconsistent with the GATT whatever the interpretation given to the provisions of Article XXIV. The Six pointed out that many contracting parties had permissive domestic legislation of a general character which, if implemented in full, would enable them to impose restrictions in a manner contrary to Article XI. These countries were not, however, required to consult with the CONTRACTING PARTIES about their possible intentions as regards the implementation of such legislation. The six could not accept that any contracting party by virtue of its adherence to the Rome Treaty should be subjected to additional requirements or obligations as to the consultations about the use of quantitative restrictions".139
4.192The United States argues that however much the European Communities may now wish to amend WTO treaty terms to authorize panels to find discretionary legislation inconsistent with WTO rules, no such term now exists. The European Communities refers to Article XVI:4 of the WTO Agreement, which requires each Member to "ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements".140 However, inasmuch as Sections 301-310 neither mandate action in violation of any provision of the DSU or GATT 1994 nor preclude action consistent with those obligations, Sections 301-310 are in conformity with those obligations and with Article XVI:4 as well. Likewise, because Sections 301-310 do not preclude the USTR from having recourse to, and abiding by, the rules and procedures of the DSU, Sections 301-310 are not inconsistent with DSU Article 23.1.
4.193The United States emphasises the applicable legal standard, which the European Communities appears to recognise. That is the proposition that, where a law itself is challenged under WTO rules, that law must mandate action which is inconsistent with a Member's obligations. A law which provides discretion which may be exercised in a manner either consistent or inconsistent with the Member's obligations does not in itself violate those obligations. The EC panel request recognises this standard when it asserts that the Section 301 legislation "does not allow" the USTR to adhere to DSU procedures as a result of time frames in the statute. In addition, the EC proposal in the DSU review to "remove the current distinction between discretionary and mandatory measures" also reinforces the fact that the European Communities appreciates that WTO Members have never, to date, consented to limitations on their right to adopt discretionary legislation.
4.194The United States argues that in the US - Tobacco case, the panel not only affirmed this rule, it clarified that where statutory language is ambiguous and is susceptible of multiple readings, the complaining party must demonstrate that none of those readings permits action consistent with the defending party's obligations. This approach follows logically from the applicable burden of proof in dispute settlement proceedings, since a complaining party is responsible for proving that the statute does not permit the defending party to comply with its international obligations. One may not assume that a party will not act in good faith to comply with its obligations. Only in cases where the party adopts legislation which does not allow its authorities to comply with its WTO obligations may that legislation be found inconsistent with those obligations.
4.195In the view of the United States, no panel under the GATT or the WTO has diverged from this rule. Contrary to the claims of some that only GATT panels have applied this rule, the WTO panels in the Canada - Aircraft and Turkey - Clothing and Textile cases have also applied it. Moreover, as just noted, the European Communities has, in the context of the DSU review, recognised the rule's continued applicability. There is nothing in the WTO Agreement or its annexes which alters this practice.
(ii)Relevance of Protocol of Provisional Application
4.196In response, the European Communities argues that the distinction between mandatory and discretionary legislation in GATT 1947 practice was a reflection of the fact that the contracting parties to GATT 1947, under the existing legislation clause in the Protocol of Provisional Application (PPA) and the protocols of accession, were bound by their obligations under the GATT 1947 only to the extent that their domestic legislation permitted the executive authorities to perform those obligations.
4.197The European Communities points out that according to paragraph 1(b) of the PPA,
"The Governments of & undertake & to apply provisionally on and after January 1, 1948 & Part II of that Agreement to the fullest extent not inconsistent with existing legislation" (emphasis added)
4.198In the view of the European Communities, this clause allowed the government of the United States and other governments to accept the GATT 1947 without submitting it for ratification by their legislature. Under the GATT 1947 there was thus an assumption and the clear expectation that pre-existing legislation stipulating measures contrary to the provisions of the GATT 1947 could continue.
4.199The European Communities contends that the notion of mandatory legislation under the GATT 1947 was adopted in this particular context of a conflict between an existing legislation and a new GATT-Part II obligation: the existing legislation clause required each contracting party to resolve such a conflict in favour of the former and to the detriment of the latter.
4.200In the EC's view, already in its deliberations in 1947, i.e. before the provisional application of the GATT 1947, the Tariff Agreement Committee stated the following:
"the intent is that it should be what the executive authority can do - in other words, the administration would be required to give effect to the general provisions to the extent that it could do so without either (1) changing the existing legislation or (2) violating existing legislation. If a particular administrative regulation is necessary to carry out the law& that regulation would, of course, have to stand; but to the extent that the administration had the authority within the framework of existing laws to carry out these provisions, it would be required to do so".141 (emphasis added)
4.201The European Communities points out that after the GATT 1947 was provisionally applied by means of the PPA, a 1949 GATT Working party, examining, in the course of its work, measures that could be permitted to be exempted under the "existing legislation" clause of the PPA, confirmed this view:
"The working party agreed that a measure is so permitted, provided that the legislation on which it is based is by its terms or expressed intent of a mandatory character - that is, it imposes on the executive authority requirements which cannot be modified by executive action"142 (emphasis added).
4.202The European Communities notes that the contracting parties therefore had no right to expect that the legal uncertainty arising from the existence of such legislation would be eliminated. All they could expect was that the executive authorities would use the discretion available to them under the legislation in a GATT-consistent manner.
4.203The European Communities argues that this explains the need of a restrictive interpretation of mandatory legislation with the aim to allow a rapid entry into force of the GATT 1947. The intention was in fact to limit the scope of the "existing legislation" clause of the PPA thus allowing an effective application of GATT 1947. A more open reading of the PPA clause would have de facto reduced considerably the achievement of the objectives of the GATT.
4.204The European Communities further maintains that the GATT panels had no option but to apply the same standard to all domestic legislation, whether it was adopted before or after the entry into force of the GATT. The working parties and Panels under GATT 1947143 therefore faced a dilemma: adopting a narrow definition of "mandatory" legislation furthered the objectives of the GATT with respect to existing legislation144 but had exactly the opposite effect when applied to new legislation. The findings of the 1987 United States - Taxes on Petroleum and Certain Imported Substances show that this Panel was aware of this dilemma145:
"& These regulations have not yet been adopted. Thus, whether they will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, & remain open questions. From the perspective of the overall objectives of the General Agreement it is regrettable that the Superfund Act explicitly directs the United States tax authorities to impose tax inconsistent with the national treatment with respect to that case & The Panel noted with satisfaction the statement of the United States that, given the tax authorities' regulatory authority under the Act, 'in all probability the 5 per cent penalty rate would never be applied'" (emphasis added)".
4.205In the EC's view, along the same lines, the 1990 EEC - Parts and Components panel report stated that
"& the mere existence of the anti-circumvention provision in the EEC's anti-dumping Regulation is not inconsistent with the EEC's obligations under the General Agreement. Although it would, from the perspective of the overall objectives of the General Agreement, be desirable if the EEC were to withdraw the anti-circumvention provision, the EEC would meet its obligations under the General Agreement if it were to cease to apply the provision in respect to contracting parties".146
4.206The European Communities adds that more explicitly referring to the PPA, the 1989 Norway - Restrictions of Imports of Apples and Pears panel report reaffirmed the 1947 understanding that a legislation should be considered to
"be mandatory in character by its terms or expressed intent".
4.207The European Communities further argues that the 1990 panel report's findings on Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes were expressly based on the two earlier precedents, i.e. the 1989 Norway - Apples and Pears panel report and the 1949 Working party on 'Notifications of existing measures and procedural questions'. The European Communities draws the attention of the Panel to the fact that, consistently with the Norway - Apples and Pears panel report and the 1949 - Working party report, the Thai - Cigarettes panel report dealt with the issue of mandatory versus discretionary legislation exclusively in the context of the interpretation of a clause in Thailand's Protocol of accession identical to paragraph 1(b) of the PPA.
4.208The European Communities maintains that the 1992 United States - Measures Affecting Alcoholic and Malt Beverages, the panel again had to assess as a matter of priority the scope of application of the PPA with respect to state legislation in the United States. In that context, it came to the conclusion that
"the record does not support the conclusion that the inconsistent state liquor legislation at issue in this proceeding is 'mandatory existing legislation' in terms of the PPA".
4.209The European Communities recalls the 1992 United States - Denial of Most-Favoured-Nation Treatment as to Non-Rubber Footwear from Brazil panel report. The context was again provided by the PPA:
"2.6 This legislation, in effect at the time the United States acceded to the GATT in 1947, was inconsistent with Article VI:6(a), which proscribes the levy of countervailing duties without a determination of injury. However, Section 303 was covered by the "existing legislation" clause of paragraph 1(b) of the Protocol of Provisional Application of the General Agreement (the "PPA"). Paragraph 1(b) of the PPA states that GATT contracting parties shall apply Part II of the General Agreement (which includes Article VI) "to the fullest extent not inconsistent with existing legislation". Section 303 remains in effect today and applies to dutiable imports from all countries that are not signatories to the Subsidies Agreement.
2.7 It was under Section 303 that the countervailing duty order on non-rubber footwear from Brazil was imposed in 1974, without the benefit of an injury test.
2.8 In 1974, the United States enacted Section 331 of the Trade Act of 1974,147 amending its countervailing duty law to apply also to imports of duty-free products. The United States acknowledged that this provision was not in existence in 1947 and, therefore, was not sheltered by the PPA. Accordingly, the United States law provided that, with respect to imports of duty-free products from a GATT contracting party, the United States would provide an injury test before the imposition of countervailing duties". (emphasis added)
4.210The European Communities contends that the only legislation that was therefore under the scrutiny of the Panel was Section 331 of the Trade Act of 1974. This provision, which is part of the Trade Act of 1974 that includes also Sections 301-310 that are the subject-matter of the present dispute settlement procedure, was drafted, in relevant part, as follows:
"(a)(2) In the case of any imported article or merchandise which is free of duty, duties may be imposed under this section only if there is an affirmative determination by the Commission under subsection (b)(1) ...
(b) Injury Determination With Respect to Duty-Free Merchandise; Suspension of Liquidation.-(1) Whenever the Secretary makes a final determination under subsection (a) that a bounty or grant is being paid or bestowed with respect to any article or merchandise which is free of duty and a determination by the Commission is required under subsection (a)(2), he shall-
(A) so advise the Commission, and the Commission shall determine within three months thereafter, and after such investigation as it deems necessary, whether an industry in the United States is being or is likely to be injured, or is prevented from being established, by reason of the importation of such article or merchandise into the United States; and the Commission shall notify the Secretary of its determination; ...
(c) Application of Affirmative Determination.--An affirmative determination by the Secretary under subsection (a) with respect to any imported article or merchandise shall apply with respect to articles entered ... on or after the date of the publication in the Federal Register of such determination. In the case of any imported article or merchandise which is free of duty, so long as a finding of injury is required by the international obligations of the United States, the preceding sentence shall apply only if the Commission makes an affirmative determination of injury under subsection (b)(1)".
4.211The European Communities underlines the very similar wording used by Section 331 and Sections 301-310 of the same Trade Act. With respect to the above mentioned provisions in Section 331, the 1992 "Non-Rubber Footwear" Panel found that
"6.13 Having found that Section 331 of the 1974 Act and Section 104(b) of the 1979 Act are applicable to like products, the Panel examined whether this legislation as such is consistent with Article I:1. The Panel noted that the CONTRACTING PARTIES had decided in previous cases that legislation mandatorily requiring the executive authority to impose a measure inconsistent with the General Agreement was inconsistent with that Agreement as such, whether or not an occasion for the actual application of the legislation had arisen. The Panel recalled that the backdating provisions of the two Acts are mandatory legislation, that is they impose on the executive authority requirements which cannot be modified by executive action, and it therefore found that these provisions as such, not merely their application in concrete cases, have to be consistent with Article I:1". (footnote omitted)
4.212The European Communities notes that, under the United States' countervailing duty law, the administration has discretion whether or not to apply a countervailing duty on subsidised products. The requirement that the Administration not apply the injury criterion if it decides to apply a countervailing duty was nevertheless regarded to be "mandatory".
4.213In the view of the European Communities, in the case of the 1994 United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco panel report,148 its findings were based, on the one hand, on the "Superfund" and the Thai - Cigarettes panel reports (thus confirming the past GATT 1947 practice). On the other hand, the panel explicitly indicated that the discriminatory measures in Section 1106(c) of the 1993 US Budget Act had not been followed by the promulgation of the implementing rules required by the Act.
4.214The European Communities contends that further "useful guidance"149 for this Panel could also be found in the unadopted panel report on EEC - Member States' Import Regimes for Bananas150, paragraphs 342 to 349.
4.215The United States responds by recalling that the European Communities argues that GATT 1947 panels implicitly relied on a "restrictive interpretation of mandatory legislation" because such an interpretation was necessary in light of the Protocol of Provisional Application. According to the European Communities, because the Protocol exempted from GATT 1947 coverage existing legislation, "effective application of GATT 1947" required that this exemption have a limited scope. The European Communities states, "[t]he contracting parties therefore had no right to expect that the legal uncertainty arising from the existence of such [mandatory] legislation would be eliminated". According to the European Communities, GATT panels in fact either implicitly or explicitly relied on the existence of the Protocol in those cases finding discretionary legislation non-actionable.
4.216The United States then contends that the EC's logic is flawed and hard to follow, and it is not clear what "legal uncertainty" arose from "the existence of" pre-existing mandatory legislation. The European Communities apparently is attempting to claim that "uncertainties" existed and had to be tolerated under the GATT 1947 in order to support its argument that they may no longer be tolerated under the WTO Agreement. The United States will address the EC's arguments regarding "uncertainty" in more detail shortly. For now it is sufficient to note that the distinction between the consistency of discretionary and mandatory legislation arose for reasons having nothing to do with the Protocol of Provisional Application or any "uncertainties" the Protocol created.
4.217The United States notes that the European Communities claimed that the panel reports which developed this doctrine either cited the Protocol or cases citing the Protocol, but it fails to establish this in its analysis of these panel reports. To the contrary, these cases never once reference the Protocol or cases citing the Protocol when dealing with the issue of whether the mere existence of discretionary legislation is actionable. The analysis of these cases confirms this. It also confirms that there has been no change in the application of this doctrine in WTO jurisprudence, nor any reference in that jurisprudence to the fact that the Protocol was eliminated. The EC's assertions concerning the relationship between the development of this doctrine and the Protocol are completely without foundation.
4.218The United States notes that the European Communities purports to demonstrate how the doctrine of the non-actionability of discretionary legislation arose in connection with the Protocol of Provisional Application. The European Communities stated that the panels which developed this doctrine either cited the Protocol or cases citing the protocol. The following analysis of these cases reveals that this is not true, and that the EC's discussion of these cases is highly distorted, inaccurate and misleading.
4.219The United States argues that the first panel to find that the mere existence of discretionary legislation is not actionable was the 1987 US - Superfund panel.151 In its analysis of this case, the European Communities makes the bald assertion that this panel "was aware of" the dilemma allegedly created by the Protocol. It offers absolutely no support for this assertion. The EC offers no evidence that the Superfund case so much as references the Protocol, because there is no such reference. The Superfund panel referred neither to prior panel reports, nor to the Protocol, in making its finding regarding discretionary legislation.152
4.220The United States argues that after referencing US - Superfund, the European Communities next introduces, with the phrase "[a]long the same lines", a quotation from the 1990 panel report on EEC - Parts and Components applying the mandatory/discretionary distinction, as if the leap it made with respect to the Superfund panel may be transferred to yet another case. However, the EEC - Parts and Components case makes no reference to the Protocol, or to cases citing the Protocol. Instead, it refers to the Superfund panel report which, as we have seen, makes no reference to the Protocol or to cases citing the Protocol.153
4.221In the view of the United States, the European Communities next juxtaposes a reference to the 1989 panel on Norway -- Restrictions on Imports of Apples and Pears, a case which does, indeed, refer to the Protocol and the question of whether certain mandatory legislation was, by virtue of the Protocol, exempt from GATT coverage. This case did not, however, involve the question of whether the mere existence of discretionary legislation is actionable.154
4.222According to the United States, the European Communities identifies a case which discusses both the Protocol and the question of whether the mere existence of discretionary legislation is actionable: Thai - Cigarettes. However, the European Communities incorrectly states that the Thai - Cigarettes panel report "dealt with the issue of mandatory versus discretionary legislation exclusively in the context of the interpretation of a clause in Thailand's Protocol of accession identical to paragraph 1(b) of the PPA".
4.223The United States contends that in fact, the issue of mandatory versus discretionary legislation arises three times in Thai - Cigarettes. The first is in the context of addressing whether Thailand's Protocol exempted a provision of the Tobacco Act (Section 27) from the application of Article XI:1 of the GATT 1947. 155 The Panel's discussion of this point references Norway Apples, but makes no reference to US - Superfund or to EEC - Parts and Components.156 The next reference to a discretionary/mandatory distinction comes in the context of determining whether the mere existence of excise tax provisions allowing for the possibility of a violation of GATT 1947 Article III:2 could be said to violate that provision.157 The panel found it did not, relying on the US - Superfund and EEC - Parts and Components panel reports.158 Despite the fact that the Panel had one paragraph earlier applied the discretionary/mandatory distinction in the context of the PPA, the panel did not refer to this finding or to the Protocol.159 Likewise, when the panel for a third time addressed a mandatory/discretionary distinction, this time to determine whether the existence of a provision "enabling the executive authorities to levy [a] discriminatory [business and municipal tax]" violated Article III, the panel concluded that it did not.160 In making this finding, the panel referenced its finding with respect to excise taxes (which referenced the US - Superfund and EEC - Parts and Components reports), but made no reference to its earlier findings with respect to the Protocol.161 The panel thus drew no connection between the non-actionability of discretionary legislation and the exemption of pre-existing mandatory legislation under the Protocol, despite the opportunity presented by the fact that the dispute dealt with both issues.
4.224The United States notes that the EC citation to US - Malt Beverages is equally without support. The European Communities notes that this panel report addressed the question of whether legislation was exempt from the GATT 1947 because it was covered by the Protocol (the panel found it was not), but neglects to point out that the Protocol is not so much as mentioned in the separate discussion in that report of whether the non-enforcement of mandatory legislation rendered legislation non-actionable.162 That discussion again references Thai - Cigarettes, EEC Parts and Components and US - Superfund, but not the Protocol or cases citing the Protocol.163 The Protocol issue cited by the European Communities is clearly unrelated to the issues presented here.
4.225The United States notes that the European Communities next discusses the 1992 panel report on United States - Non-Rubber Footwear. The European Communities asserts that "the context was again provided by the PPA", an assertion which is at best misleading. While issues relating to the PPA were responsible for the fact that the United States was applying multiple countervailing duty regimes to countries in different circumstances, the exemption of various of these regimes under the PPA was not at issue.164 Rather, the issue related to the comparative treatment different countries received under each of these regimes, which the panel found to violate GATT 1947 Article I:1.165 The panel found that the specific provisions of these regimes granting more or less favorable treatment were mandatory because they could not be modified through executive discretion, and were therefore actionable as such.166 In a footnote to this finding omitted by the European Communities, the panel cited US - Superfund and EEC - Parts and Components.167 There is no reference to the Protocol or to cases citing the Protocol.
4.226The United States points out that the European Communities also draws false comparisons between Sections 301-310 and the laws at issue in Non-Rubber Footwear. First, the EC focuses on only one of the laws under examination in that case, an amendment to a 1930s law included in the Trade Act of 1974. That amendment, like the other laws at issue dating to the 1930s and 1979, related to countervailing duties and had nothing to do with Sections 301-310. Second, the EC quotes with emphasis references in the 1974 amendment to "determinations" and the word "shall", and states, "the EC cannot help but underline the very similar wording used by Section 331 and Sections 301-310 of the same Trade Act".
4.227The United States argues that the European Communities ignores the fact that the "determinations" on which it focuses had absolutely nothing to do with the finding in the case. The issue in Non-Rubber Footwear was the timing and procedures under each of the laws for lifting existing countervailing duty orders. Existing countervailing duty orders on products of countries newly granted GSP benefits were automatically given an injury review. If that review was negative, the order was revoked, "backdated" to the date these countries were granted GSP benefits. On the other hand, countervailing duty orders on dutiable products from countries acceding to the Subsidies Code were given an injury review only upon application within three years of accession, and the revocations were "backdated" only to the date of the application. The differential treatment was the basis for the panel's Article I:1 finding; that finding had nothing to do with the language highlighted in the EC description.
4.228In the US's view, the European Communities further attempts to draw false parallels between the 1974 countervailing duty law amendment and Sections 301-310 by stating that, under the countervailing duty law,
"the administration has discretion whether or not to apply a countervailing duty on subsidized products. The requirement that the Administration not apply the injury criterion if it decides to apply a countervailing duty was nevertheless regarded to be mandatory".
4.229According to the United States, the only problem with the EC's analysis is that it bears no relationship to that of the panel. "The requirement that the Administration not apply the injury criterion" was (1) not at issue in the case, if for no other reason than (2) no such requirement is in the law. Again, the issue in the case was the timing and procedures for injury reviews and for revocation of existing countervailing duty orders. Because the case dealt with existing orders, the Administration had already in each of these cases determined that a countervailable subsidy existed, years before the issue of revocation, and the application of different revocation regimes, ever arose. Thus, even were it accurate to describe such determinations as discretionary (the procedures and methodologies for making the determination are detailed in statutory and regulatory provisions, and allow for limited discretion), these determinations were never at issue in the case, and were completely irrelevant to the "backdating provisions" which the panel considered mandatory and therefore actionable as such.
4.230The United States points out that the European Communities fails to include any discussion of how this practice allegedly changed under the WTO because the Protocol was no longer in effect. The non-actionability of discretionary legislation (or the actionability of mandatory legislation) was again at issue in Canada - Civil Aircraft, Turkey - Textiles and Argentina - Textiles and Apparel (US), but the European Communities addresses only the last of these. In its discussion of that case the European Communities provides no demonstration that the panel applied a new definition of "mandatory", or that the panel referred to the Protocol of Provisional Application. Instead, the panel found that Argentina's specific duties were mandatory measures, relying on the consistent line of GATT and WTO cases establishing the mandatory/discretionary distinction.168 The panel stated, "GATT/WTO case law is clear in that a mandatory measure can be brought before a Panel, even if such an adopted measure is not yet in effect".169 In a footnote omitted from the EC's discussion, the panel cited US - Superfund. The panel also noted that the U.S. Tobacco report confirmed this interpretation.170
4.231According to the United States, had the EC bothered to address the Canada - Aircraft and Turkey - Textile cases, it would have found that neither of these cases did anything other than apply the GATT distinction on discretionary/mandatory legislation. For example, in Canada - Aircraft, the panel stated:
"We recall the distinction that GATT/WTO panels have consistently drawn between discretionary legislation and mandatory legislation. For example, in United States Tobacco, the panel 'recalled that panels had consistently ruled that legislation which mandated action inconsistent with the General Agreement could be challenged as such, whereas legislation which merely gave the discretion to the executive authority ... to act inconsistently with the General Agreement could not be challenged as such; only the actual application of such legislation inconsistent with the General Agreement could be subject to challenge'".171 (citation omitted)
4.232The United States considers that neither Canada - Aircraft nor Turkey - Textiles redefined the meaning of "mandatory" or refer to the Protocol of Provisional Application to do so.172 The EC's claim that the definition of mandatory has changed because of the elimination of the Protocol of Provisional Application is thus pure fantasy. Neither the GATT cases establishing the actionability of mandatory legislation nor the WTO cases which have continued to apply this rule relied on the existence, expiration, or anything else regarding, the Protocol of Provisional Application.173
4.233The European Communities also argues that Article XVI:4 of the Marrakech Agreement provides for a more far-reaching and novel obligation upon WTO Members when compared to Articles 26 and 27 of the Vienna Convention on the Law of Treaties or to the legal situation existing under the GATT 1947,
"each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations [under the WTO agreements]".
4.234The European Communities points out that in particular, the provision requires a positive action by the WTO Member ensuring the conformity of its domestic law, which includes not only legislation but also regulations and administrative procedures.
4.235The European Communities further indicates that through Article 3.2 of the DSU, the Uruguay Round participants when they agreed to adopt the DSU explicitly pursued the objective of providing security and predictability to the multilateral trading system. This objective has been subsequently confirmed by the Appellate Body in EC - Computer Equipment case174 as
"'an object and purpose of the WTO Agreement, generally, as well as of the GATT 1994'".
4.236The European Communities finally contends that the existing legislation clauses in the PPA and the protocols of accession have been explicitly excluded from the definition of the General Agreement on Tariffs and Trade 1994.
4.237In the view of the European Communities, four sets of important consequences derive from the above-mentioned new legal environment:
(a)Unlike under the GATT 1947, a conflict between a pre-existing incompatible legislation and any obligation under the covered agreements must be resolved in favour of the latter and to the detriment of the former. As the Appellate Body has decided in the India - Patents (US) case175, this new rule is applicable with no exceptions as from 1 January 1995;
(b)The obligations under Article XVI:4 encompass not only legislation but also regulations and administrative procedures and thus include the type of law that is normally adopted and amended by actions of executive authorities. The distinction between law that binds the executive authorities and law that can be modified by them is thus no longer relevant.
(c)As was recalled in the EC's oral statement of 29 June 1999, the terms "ensure" and "conformity" in Article XVI:4, taken together in their context, indicate that that provision obliges all WTO Members not merely to grant their executive authorities formally the right to act consistently with WTO law but to structure their law in a manner that "makes certain" that the objectives of the covered agreements will be achieved.176
(d)Article 3.2 of the DSU and the principle of "good faith" implementation of international obligations under Article 26 of the Vienna Convention on the Law of Treaties no longer allow the existence of legal situations, under domestic legislation, regulations, administrative procedures or under any combination of them, which could seriously impair the security and predictability of the international trading system. A domestic law, regulation or administrative procedure whose structure and architecture is specifically designed to create uncertainty for the trade with other Members could therefore never be deemed to ensure conformity with WTO law.
4.238The European Communities further argues that in this new legal environment it is then no longer justified to apply as such the standards developed under the GATT 1947 to domestic legislation. According to Articles XVI:4 of the WTO and 3.2 of the DSU together with the principle of "good faith" implementation under Article 26 of the Vienna Convention on the Law of Treaties Members' domestic law cannot be considered to be WTO-consistent merely because it does not formally preclude WTO-consistent actions. WTO Members must now go further and ensure that their domestic law is not designed to frustrate the implementation of their WTO obligations.
4.239The European Communities argues that the Panel practice after the entry into force of the WTO is either inconclusive (and therefore does not stand in the way of the above-described interpretation) or supports the EC's views.
4.240The European Communities points out that the 1998 Report of the Panel Japan - Measures Affecting Agricultural Products dealt in particular with the interpretation of paragraph 1 of Annex A to the SPS Agreement. That provision reads as follows:
"phytosanitary measures include all relevant laws, decrees, regulations, requirements and procedures".
4.241In the view of the European Communities, this provision has a function similar to that of Article XVI:4 of the Marrakech Agreement. It defines the domestic law related to phytosanitary measures, not merely actions taken under such law, as a phytosanitary measure. This means that each Member must ensure that that its domestic law related to phytosanitary measures is in conformity with its obligations under the SPS Agreement. Japan essentially argued that its domestic law is in conformity with the SPS Agreement because it does not mandate actions inconsistent with the SPS Agreement. The Panel rejected this argument on the following grounds:
"8.111 Even though the varietal testing requirement is not mandatory - in that exporting countries can demonstrate quarantine efficiency by other means - in our view, it does constitute a "phytosanitary regulation" subject to the publication requirement in Annex B. The footnote to paragraph 1 of Annex B refers in general terms to "phytosanitary measures such as laws, decrees or ordinances".177 Nowhere does the wording of this paragraph require such measures to be mandatory or legally enforceable. Moreover, Paragraph 1 of Annex A to the SPS Agreement makes clear that "phytosanitary measures include all relevant laws, decrees, regulations, requirements and procedures". It does not, in turn, require that such measures be mandatory or legally enforceable. The interpretation that measures need not be mandatory to be subject to WTO disciplines is confirmed by the context of the relevant SPS provisions, a context which includes provisions of other WTO agreements and the way these provisions define "measure", "requirement" or "restriction"178, as interpreted in GATT and WTO jurisprudence.179 This context indicates that a non-mandatory government measure is also subject to WTO provisions in the event compliance with this measure is necessary to obtain an advantage from the government or, in other words, if sufficient incentives or disincentives exist for that measure to be abided by". (emphasis added)
4.242The European Communities considers that the above reasoning can be transposed to Article XVI:4 of the WTO Agreement because the rationale of that provision is similar to that of paragraph 1 of Annex A to the SPS Agreement: what is relevant are the trade effects of the law at issue and the incentives or disincentives it creates, not merely whether it is mandatory.
4.243The European Communities further notes that in its 1997 report on Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items,180 a panel found what follows:
"6.45 In respect of the Argentine argument that the US claim should not be considered because it addresses only a potential violation - in support of which it refers to the Tobacco Panel report - we note that the Argentine measures, the specific duties, are mandatory measures. Argentina admits that its customs officials are obligated to collect the specific duties on all imports. GATT/WTO case law is clear in that a mandatory measure can be brought before a Panel, even if such an adopted measure is not yet in effect, and independently of the absence of trade effect of such measure for the complaining party:
'[T]he very existence of mandatory legislation providing for an internal tax, without it being applied to a particular imported product, should be regarded as falling within the scope of Article III:2, first sentence'.
We are also of the view that the Tobacco Panel report merely confirms this principle.
6.46 Moreover, in Bananas III, the Appellate Body confirmed that the principles developed in Superfund were still applicable to WTO disputes and that any measure, which changes the competitive relationship of Members, nullifies any such Members' benefits under the WTO Agreement.
'Article III:2, first sentence, cannot be interpreted to protect expectations on export volumes; it protects expectations on the competitive relationship between imported and domestic products. A change in the competitive relationship contrary to that provision must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement'.
We consider that this principle is also appropriate when dealing with the application of the obligations contained in Article II of GATT which requires a 'treatment no less favourable than that" provided in a Member's Schedule. In the present dispute we consider that the competitive relationship of the parties was changed unilaterally by Argentina because its mandatory measure clearly has the potential to violate its bindings, thus undermining the security and the predictability of the WTO system'". (emphasis added).
4.244In the view of the European Communities, the panel's decision fully supports the EC's approach as well.
4.245The United States contends that the European Communities claims that panel practice after entry into force of the WTO "is either inconclusive (and therefore does not stand in the way of the [the EC's "new legal environment" theory]) or supports the EC's views". In support of this statement, the European Communities cites Japan - Measures Affecting Agricultural Products181 and Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items. However, the Argentina - Textiles and Apparel (US) panel does no more than reaffirm that mandatory legislation is actionable, without redefining the term "mandatory" as the European Communities seeks to do here.
4.246The United States points out that as for Japan - Agricultural Products, the European Communities refers to a panel discussion involving the publication requirement in paragraph 1 of Annex B of the Agreement on Sanitary and Phytosanitary Measures. This discussion did not involve the question of whether discretionary measures are actionable, nor did the issue arise at any point in Japan - Agricultural Products. Japan did not, as the European Communities would have it, "essentially argue that its domestic law is in conformity with the SPS Agreement because it does not mandate actions inconsistent with the SPS Agreement".182 Rather, Japan argued that its varietal testing requirement did not come within the specific terms of the definition of "sanitary and phytosanitary regulations" provided in Annex B of the SPS Agreement.183 The panel rejected Japan's argument, finding that the definition in the Annex was not limited as proposed by Japan.
4.247The United States notes that according to the European Communities, the Japan - Agricultural Products panel's reasoning "can be transposed to" WTO Agreement Article XVI:4 "because the rationale of that provision is similar to that of paragraph 1 of Annex A to the SPS Agreement". This conclusion is absurd. The rationale of paragraph 1 of Annex B - publication of SPS measures - cannot be equated with that of WTO Agreement Article XVI:4 - to ensure that domestic laws permit compliance with international obligations. Moreover, a panel's examination of an explicit definition of "measures" cannot be equated to the question of whether the mere existence of non-mandatory legislation can result in a finding of WTO inconsistency.
4.248The United States further argues that the European Communities also claims that the Japan - Agricultural Products panel's reliance on a line of GATT cases which pre-date the WTO184 somehow supports the EC's claim that the advent of the WTO changed the definition of "mandatory". Beyond the issue of timing, the European Communities is confusing two separate lines of GATT cases which stand for very different propositions: (1) the Superfund line of cases, which stand for the mere existence of legislation which grants governmental authorities the discretion to comply or not comply with their GATT/WTO obligations is not grounds for a finding of inconsistency; and (2) the Italian Machinery/FIRA line of cases, which stand for the proposition that a measure which nominally does not mandate compliance by private actors may nevertheless be considered a government "requirement" or "restriction" subject to the requirements of GATT 1947 Article III or XI if it creates sufficient incentives or disincentives for those private actors to comply.185
4.249The United States claims that the EC's confusion recalls that of the panel in India - Patents (US), which "merge[d], and thereby confuse[d], two different concepts from previous GATT practice".186 In similar fashion, the European Communities posits a theory of "not genuinely discretionary" measures it has pieced together from assumptions, inferences and misreadings of unrelated panel findings, the Protocol of Provisional Application and miscellaneous DSU and WTO objectives. Like the theories at issue in India - Patents (US) and US - Shrimp, the EC's theory has no textual basis and must be rejected. The analysis of whether Sections 301-310 are consistent with DSU Article 23 and WTO Agreement Article XVI:4 must be based on the text of those provisions.
4.250In response to the Panel's question as to what standards should be used in order to determine whether a Member has ensured the conformity of its laws, regulations and administrative procedures with its WTO obligations, the European Communities contends that as demonstrated above, it is no longer correct to rely on the distinction between mandatory and discretionary legislation along the legal path followed by the GATT 1947 practice. However, this does not mean that all domestic law that does not preclude WTO-inconsistent measures and thus provides for the possibility of actions deviating from WTO law (a "potential deviation") is WTO-inconsistent. It is now necessary to distinguish between
(a)domestic law that is merely meant to transfer decision-making authority from one constitutional body (most often the Parliament) to another constitutional body (most often the executive authorities) within specified parameters, and
(b)domestic law that does not preclude the executive authorities from acting consistently with WTO law but that is - by its design, structure and architecture - manifestly intended to encourage violations of WTO law or is otherwise biased against WTO-consistent action.
4.251In the view of the European Communities, the first type of domestic law is genuinely discretionary. It is simply a consequence of the legislator's decision to delegate decision-making power to the administration. WTO Members are free to decide how to distribute decision-making authority on trade policy matters between the legislature and executive authorities. Article XVI:4 positively requires WTO Members to ensure that their domestic law is in conformity with their obligations under the covered agreements and therefore does not frustrate the objectives of the WTO. However, nothing in Article XVI:4 requires Members to transfer all decision making to the legislator. For these reasons, it would be inappropriate to interpret Article XVI:4 of the WTO Agreement so extensively as to require WTO Members to include explicit language in their domestic law precluding WTO-inconsistent actions.
4.252The European Communities goes on to state that the second type of legislation is not genuinely discretionary. It is not intended to transfer decision-making authority within specified parameters from one branch of the government to another but to frustrate the implementation of specific WTO obligations. It creates, for no legitimate reason, legal uncertainty and unpredictability for the trade with other Members. A Member that maintains such law has not ensured the conformity of its law with its WTO obligations even if the law does not preclude the theoretical possibility of WTO-consistent actions.
4.253The European Communities recalls its argument that in order to determine whether legislation that does not preclude WTO-consistent actions is genuinely discretionary, Panels should concentrate their examination as a matter of priority on the text of the domestic law or regulation.
4.254In the view of the European Communities, this analysis on the text should focus firstly on verifying whether that domestic legislation leaves a large degree of liberty of action to the administration to develop a policy within certain predetermined parameters187 or whether it induces the executive to act systematically in conflict with the Member's WTO obligations and that it is at the very least sufficiently constraining and well-defined. In the latter situation, the measure should not be considered genuinely discretionary.
4.255In the view of the European Communities, in addition, Panels should consider the design, structure and architecture of the domestic legislation under examination. Any domestic legislation or regulation whose structure, design or architecture is biased against compatibility with the Member's WTO obligations, or that is designed to create uncertainty and unpredictability in the trade relations among WTO Members, or that is structured so as to render difficult, unlikely or practically impossible for the executive to pursue a WTO compatible implementation could not be considered genuinely discretionary.
4.256The European Communities points out in this respect that, as the very recent Panel Report on Chile - Taxes on Alcoholic Beverages188 rightly indicates at paragraph 7.119
"Statements by a government against WTO interests (e.g. indicating a protective purpose or design) are most probative. Correspondingly, it is less likely that self-serving comments by a government attempting to justify its measure would be particularly probative".
4.257The European Communities further explains that finally, an additional guiding principle to be used in order to determine whether a domestic law or regulation corresponds to a genuinely discretionary measure is the definition by Dailler and Pellet of the public international law principle of "good faith" implementation: "[L]'ex閏ution de bonne foi, exige positivement fid閘it?et loyaut?aux engagements pris" and should therefore exclude "toute tentative de 'fraude ?la loi', toute ruse".189
4.258In response to the Panel's question as to whether the standards applicable under WTO law in general and Article XVI:4 of the WTO Agreement in particular are met by legislation that mandates discriminatory tax but at the same time allows for "some limited exceptions in special circumstances subject to discretionary powers", the European Communities argues that this specific issue raised by the Panel can be resolved by applying the criteria suggested by the European Communities above.
4.259The European Communities points out that according to the Oxford English Reference Dictionary, a rule is "a principle to which an action conforms or is required to conform". An exception is "an instance that does not follow the rule". In practice, the existence of exceptions is considered to be the confirmation of the existence of the rule.
4.260The European Communities argues that in the example submitted by the Panel to the parties, the fact that the administration is granted, in some limited circumstances, with the power to act by exception to the rule should therefore be interpreted in the following way:
(a)The administration is required to follow as a matter of principle the (WTO-inconsistent) rule;
(b)The use of the exception is limited to specific and limited cases;
(c)The existence of the exception confirms the existence of the (WTO-inconsistent) rule in the first place.
(d)Consequently, the exceptions could not be implemented in such a way as to systematically replace the rule without amending the law itself and, in any case, without defeating its overall (WTO-inconsistent) purpose that the legislative body intended to achieve.
4.261In the EC's view, therefore, a Member's legislation providing for a (number of) rule(s) that are inconsistent with one or more of the obligations under a WTO Agreement should be deemed to violate as such that Member's WTO obligations irrespective of whether the legislation was actually implemented and also independently from the existence of some "limited exceptions in special circumstances subject to discretionary powers".
4.262The European Communities then contends that the design, structure and architecture of such legislation (i.e. its objectively expressed "intent") would be dominated by the (WTO-inconsistent) rule. It would be a legislation purposefully biased against WTO compatibility and thus could not be mended by the existence of some "limited exceptions" to the (WTO-inconsistent) rule. Moreover, the mere existence of such a legislation imposing (WTO-inconsistent) rules would inevitably create a pattern of uncertainty, insecurity and unpredictability in the trade relations among the Members and could by no means constitute a "good faith" implementation of the Member's WTO obligations under Article 26 of the Vienna Convention on the Law of Treaties or (even less so) under the more demanding standard set out in Article XVI:4 of the Marrakech Agreement.
4.263The European Communities further argues that this is, if at all possible, even more relevant in instances where only a remote possibility to obtain an "act of grace" in a specific case, a kind of waiver, to be granted by the highest political authorities of the WTO Member concerned190 and where such an "act of grace" is subject to a number of objective criteria that may, in practice, require the targeted WTO Member to give in to WTO-inconsistent pressure.
4.264The United States points out that the European Communities suggested that WTO Agreement Article XVI:4, read together with DSU Article 3.2 and the elimination of the Protocol of Provisional Application, have created a "new legal environment". According to the European Communities, "In this new legal environment it is then no longer justified to apply as such the standards developed under the GATT 1947 to domestic legislation". Rather, "WTO Members must now go further and ensure that their domestic law is not designed to frustrate the implementation of their WTO obligations". Panels must therefore apply new standards in distinguishing among discretionary legislation to determine which are "not genuinely discretionary". According to the European Communities, a law is not genuinely discretionary if it "does not preclude the executive authorities from acting consistently with WTO law but that is - by design, structure and architecture - manifestly intended to encourage violations of WTO law or is otherwise biased against WTO-consistent action". Such a law "creates, for no legitimate reason, legal uncertainty and unpredictability for the trade with other Members".
4.265According to the United States, the European Communities claims to derive this test from "Article 3.2 of the DSU and the principle of 'good faith' implementation of international obligations under Article 26 of the Vienna Convention on the Law of Treaties", which "no longer allows" legal situations "which could seriously impair the security and predictability of the international trading system". Leaving aside the fact that the language of Article 3.2 dates to the 1989 Montreal Rules, and thus predates the EC's "new legal environment", the European Communities is seeking to create from a WTO provision relating to the objectives of the Dispute Settlement Understanding, and its own notions of "good faith" and "uncertainty", an entirely new obligation not found in any provision of the WTO Agreement or its annexes.
4.266The United States puts forth that the Appellate Body has confronted such a situation before. The European Communities even alludes to one such situation in its oral statement, when it refers to the US endorsement in India - Patents (US) of panel findings that the "protection of legitimate expectations of WTO Members regarding conditions of competition is as central to trade relating to intellectual property as it is to trade in goods that do not relate to intellectual property". What the European Communities fails to mention is that the Appellate Body squarely reversed the panel on this point.
4.267The United States points out that the India - Patents (US) panel found that "the legitimate expectations of WTO Members" must be taken into account, and that the "protection of legitimate expectations of Members regarding the conditions of competition is a well established GATT principle" derived in part from GATT 1994 Article XXIII, the basic dispute settlement provisions of the GATT and WTO, and GATT 1947 panel reports relating to GATT 1947 Article III.191 Further, based on Article 31 of the Vienna Convention, which provides for "good faith" interpretation of treaty terms in accordance with their ordinary meaning in their context and in light of their object and purpose, the Panel stated,
"In our view, good faith interpretation requires the protection of legitimate expectations derived from the protection of intellectual property rights provided for in the Agreement".192
4.268The United States further notes that the Appellate Body rejected this approach, noting that the panel had "merge[d], and thereby confuse[d], two different concepts from previous GATT practice,193 and had misapplied VCLT Article 31:
"The Panel misunderstands the concept of legitimate expectations in the context of the customary rules of interpretation of public international law. The legitimate expectations of the parties to a treaty are reflected in the language of the treaty itself. The duty of a treaty interpreter is to examine the words of the treaty to determine the intentions of the parties. This should be done in accordance with the principles of treaty interpretation set out in Article 31 of the Vienna Convention. But these principles neither require nor condone the imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended".194
4.269The United States indicates that the Appellate Body went on to refer to DSU Article 3.2, which provides, "Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements", and DSU Article 19.2, which provides, "In accordance with paragraph 2 of Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements".195 The Appellate Body stated, "These provisions speak for themselves. Unquestionably, both panels and the Appellate Body are bound by them".196
4.270According to the United States, the European Communities in this case is attempting to engage in even more dramatic fashion in the "imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended",197 the approach which the Appellate Body rejected in India - Patents (US). Nowhere is the EC's "not genuinely discretionary" test found in WTO Agreement Article XVI:4, DSU Article 3.2, or any other provision of a covered agreement. Indeed, the European Communities does not claim that it does. Its test is based on extrapolation from the concept of "security and predictability" in Article 3.2 - an objective, not an obligation - and from a vague explanation of the "good faith" obligation in the VCLT - not a covered agreement.
4.271The United States notes that Article 3.2 opens with the statement, "The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system".198 This enunciation of the purpose of the DSU contains within it the understanding that it is the DSU itself which achieves this purpose. In other words, the substantive obligations in the text of the WTO Agreement and its annexes, enforced through the DSU, provide security and predictability. "The legitimate expectations of the parties to a treaty are reflected in the language of the treaty itself".199 As the Appellate Body underlined in India - Patents (US), interpretations which go beyond the text to make up obligations out of thin air and aspirations can threaten the legitimacy of the dispute settlement system. Article 3.2 draws a line between dispute settlement and legislation, and directs that panels abstain from the latter.
4.272The United States further contends that similarly, in United States - Import Prohibition of Certain Shrimp and Shrimp Products, the Appellate Body stated, "A treaty interpreter must begin with, and focus upon, the text of the particular provision to be interpreted. It is in the words constituting that provision, read in their context, that the object and purpose of the states parties to the treaty must first be sought".200 In US - Shrimp, the Appellate Body rejected a panel's interpretation of the chapeau of Article XX that focused not on the ordinary meaning of the words of the chapeau and its immediate object and purpose, but instead on the general object and purpose of the GATT and WTO Agreement. Just as the European Communities now seeks to derive new obligations from the general notion of security and predictability, the US - Shrimp panel concluded that the chapeau included a general obligation "not to undermine the WTO multilateral trading system". According to the panel,
"we must determine not only whether the measure on its own undermines the WTO multilateral trading system, but also whether such type of measure, if it were to be adopted by other Members, would threaten the security and predictability of the multilateral trading system".201
4.273The United States emphasises that the Appellate Body rejected this approach. The Appellate Body explained that, rather than examining the consistency of the measure in question with the chapeau of Article XX, the panel focused repeatedly on "the design of the measure itself".202 The Appellate Body referred to this as:
"a standard or a test that finds no basis either in the text of the chapeau or in that of either of the two specific exceptions claimed by the United States. The panel, in effect, constructed an a priori test that purports to define a category of measures which, ratione materiae, fall outside the justifying protection of Article XX".203
4.274In the view of the United States, the Appellate Body therefore reversed the panel's analysis and the findings based on that analysis.204 It described the panel's analysis as "abhorrent to the principles of interpretation we are bound to apply".205
4.275The United States argues that the European Communities is proposing a mode of analysis strikingly similar to one already rejected by the Appellate Body in US - Shrimp. Based on the same generalized notion of "security and predictability", the European Communities is proposing a test not found in DSU Article 23 or WTO Agreement Article XVI:4, a test focusing on "the design of the measure itself": whether a discretionary domestic law's "design, structure and architecture" is "manifestly intended to encourage violations of WTO law or is otherwise biased against WTO-consistent action". The Panel must reject this test. The analysis of whether Sections 301-310 are consistent with DSU Article 23 and WTO Agreement Article XVI:4 "must begin with, and focus upon, the text of"206 these provisions.
4.276In this respect, further, the United States responds to the Panel's request for comments on the following statement in the third-party submission by Hong Kong, China:
"The question is consequently raised as to how international obligations can be implemented in good faith if the possibility of deviation exists in a domestic legislation? Are there expectations that the international obligations will be observed and not impaired when the possibility of deviation is expressis verbis provided for in a domestic legislation? Is the predictability, necessary to plan future trade as the Superfund panel acknowledged, not affected when trading partners know ex ante that their partners have enacted legislation which allows them to disregard their international obligations?"
4.277The United States answers that the question Hong Kong raises in the first sentence quoted above is a non sequitur. Parties to an international agreement have, by becoming parties, committed to implement their agreement obligations in good faith. It is this very fact that leads to the conclusion that one cannot assume that authorities will exercise discretion under domestic legislation so as to violate international obligations.
4.278In the view of the United States, if authorities exercise their discretion such that they actually deviate from their international obligations, they may then be found to have violated those obligations. Until that point, however, it may not be assumed that they will exercise their discretion in this manner. It may not be assumed that parties will act in bad faith. Certainly the European Communities should accept this: in the Article 21.5 proceedings in the Bananas dispute and again in its recent proposal to amend Article 21, the European Communities has taken the position that there is a presumption of compliance in all WTO proceedings, even in Article 21.5 proceedings to determine whether a Member has brought into compliance a measure already found to be WTO-inconsistent.207
4.279The United States adds that with respect to the relevance of whether legislation provides expressis verbis for the "possibility of deviation" from international obligations, the United States notes that any legislation which does not explicitly limit the exercise of discretion provides for such a possibility, and the United States doubts that Hong Kong authorities lack such discretion.208 This does not change the fact that WTO Members with discretionary legislation, whatever the form, have made a binding legal commitment to comply with their WTO obligations - in other words, to exercise their discretion in a WTO-consistent manner. As discussed further in response to the following question, there is no greater assurance that a Member will act in accordance with its WTO obligations if it exercises broad, undefined discretionary authority than if it must exercise discretion not to undertake WTO-inconsistent action explicitly provided for in legislation.
4.280In the view of the United States, Hong Kong's reference to the Superfund209 panel's discussion of "predictability" ignores the facts and findings of that case, which contradict Hong Kong's position. There, the legislation in question specifically did, expressis verbis, provide for action which, if delegated discretion were not exercised in a particular manner, would have been inconsistent with US obligations under the GATT 1947. The 1986 Superfund Act required importers to supply sufficient information regarding the chemical inputs of taxable substances to enable the tax authorities to determine the amount of tax to be imposed; otherwise, a penalty tax would be imposed in the amount of five percent ad valorem or a different rate to be prescribed in regulations by the Secretary of the Treasury by a different methodology.210 The five per cent penalty tax, which was to go into effect on January 1, 1989 if regulations to the contrary were not issued, would have been inconsistent with GATT 1947 Article III:2.211 At the time of the panel proceedings in 1987, the regulations in question had not yet been issued. Nevertheless, the panel concluded:
"[W]hether [the regulations] will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, as required by Article III:2, first sentence, remain open questions. From the perspective of the overall objectives of the General Agreement it is regrettable that the Superfund Act explicitly directs the United States tax authorities to impose a tax inconsistent with the national treatment principle but, since the Superfund Act also gives them the possibility to avoid the need to impose that tax by issuing regulations, the existence of the penalty rate provisions as such does not constitute a violation of the United States obligations under the General Agreement".212
4.281According to the United States, it is worth emphasising the US - Superfund panel's reliance on the fact that there were "open questions" regarding the Superfund regulations which would have to be answered before a panel could determine the GATT-inconsistency of the penalty tax provision. On the one hand, this illustrates the fact that the panel would not assume that the United States would ultimately exercise its discretion in bad faith. However, it also illustrates the fact that, even where a statute is discretionary, the actual exercise of that discretion remains open to challenge. In Superfund, the regulations in that case - once issued - would have been subject to challenge if they violated GATT rules. Likewise, it remains open to WTO Members, including the European Communities, to challenge the US exercise of discretion under Sections 301-310 in particular cases if they believe it to be inconsistent with US WTO obligations.213 Thus, for this Panel to confirm the consistent findings of every GATT and WTO panel to date regarding the mandatory/discretionary distinction would in no way deny the European Communities or other Members the ability to challenge US actions taken under Sections 301-310.214
4.282The United States further contends that the Superfund panel's discussion of "predictability" came in the context of explaining why mandatory legislation may be challenged even if it will not go into effect until a fixed time in the future.215 As described above, the Superfund Act was enacted in 1986 but the penalty tax provision would not become effective until 1989. According to the panel, the fact that legislation is not yet in effect would not excuse any GATT-inconsistent acts which the legislation mandates.216 However, the panel went on to conclude that the penalty tax provisions of the legislation were not mandatory because they also included discretion to implement regulations consistent with US GATT obligations.217 As the panel indicated, the legislation gave US authorities "the possibility" to avoid GATT-inconsistent action.218 Thus, as the United States has emphasized, it is the possibility of compliance, and not the possibility of deviation, which is the proper question for panels examining whether the mere existence of legislation as such is consistent with a Member's obligations. This has uniformly been the analysis which GATT and WTO panels have applied to date.
4.283The United States claims that Hong Kong's attempt to subject to WTO findings of inconsistency discretionary legislation which "allows WTO-inconsistent action to be taken" also ignores the fact that domestic legislation may be applicable not only to WTO Members in connection with rights under covered agreements, but also to countries which are not WTO Members, and to WTO Members with respect to matters not subject to a covered agreement. The WTO Agreement and its annexes by definition are not applicable to such cases. Thus, even if discretionary legislation were to "leave open the possibility" of determinations which would violate DSU Article 23 if applied to a WTO Member regarding rights under a covered agreement, DSU Article 23 may not be read so as to circumscribe the exercise of a Member's rights with respect to non-WTO Members and non-WTO matters.
4.284The United States indicates that to put another way, international agreements are made between contracting parties. The actions of those parties towards one another may or may not violate the obligations they have undertaken vis-?vis one another. However, the actions taken towards non-parties are not relevant to this analysis. It is one thing to conclude that a contracting party may challenge legislation mandating action towards all if that action violates an obligation with respect to contracting parties. However, if legislation permitting such action could also be challenged, contracting parties would effectively be precluded from exercising sovereign powers with regard to non-parties, except by establishing parallel sets of laws applicable to parties and non-parties, or by explicitly providing for limits in their domestic laws as to how discretion may be exercised towards parties. There is absolutely no indication in the WTO Agreement or its annexes that Members agreed to this degree of interference with the exercise of national sovereignty.
4.285In response to a question posed by the Panel, the United States further agues that no distinction can or should be made between different types of discretionary legislation for purposes of determining whether the mere existence of that legislation violates a Member's WTO obligations. In either case, authorities may exercise their discretion in a manner consistent or inconsistent with their international obligations. One may not assume that authorities will fail to implement their international obligations in good faith.
4.286The United States contends that leaving aside the fact that it may not be assumed that a Member will fail to act in good faith to comply with its obligations, it would be impossible to distinguish "good" and "bad" discretionary legislation. The Panel's question implies that it may be possible to distinguish based on whether the legislation provides for general, non-specific discretion to achieve certain goals, rather than discretion not to undertake a specified course of action which would violate a country's international obligations. However, if this were the test, it could lead to the odd result that legislation providing for broad discretion could not be reviewed as such even if authorities repeatedly exercise their discretion in a WTO-inconsistent manner, while legislation providing for discretion not to take WTO-inconsistent action could be found inconsistent even if authorities always exercise that discretion so as to be consistent with their WTO obligations.
4.287The United States further points out that on the other hand, if the means of distinguishing discretionary legislation were based on whether there were a pattern of exercising that discretion in a WTO-inconsistent manner, as the European Communities suggests, this would present other problems. For example, the first requirement of any such test would be that a particular incident could not be included in the pattern unless there were panel or Appellate Body findings of a violation with respect to that incident. Complaining parties could not merely assert that violations had taken place in the past, and panels could not merely accept these assertions. However, if no such findings exist, the panel could itself make these findings only if the subject matter of each incident were within the panel's terms of reference, and involved a violation of a covered agreement.219 Moreover, incidents occurring prior to entry into force of the covered agreements - before 1995 - could not be considered as part of the "pattern".
4.288The United States adds that such a "pattern of conduct" test would imply a presumption that a Member will not comply with its WTO obligations. If experience under the WTO Agreement has established any pattern, it is that the European Communities has persistently failed to comply with its obligations with respect to its banana import regime, and any presumption of non-compliance could be expected to apply in this case. Yet, as noted above, in the Article 21.5 proceedings in the Bananas dispute and again in its recent proposal to amend DSU Articles 21, 22 and 23, the European Communities has taken the position that there is a presumption of compliance in all WTO proceedings, even in Article 21.5 proceedings. Article 21.5 proceedings will only take place if there is a disagreement on the existence or consistency of measures taken to implement DSB rulings or recommendations, in other words if, after the DSB has at least once already adopted findings that a Member has violated its WTO obligations, there remain doubts as to whether the Member has fulfilled its commitment pursuant to Article 21.3 to bring its measure into compliance. Nevertheless, even under these circumstances (and in the Bananas dispute, the DSB rulings had been preceded by adverse rulings by two GATT panels), the European Communities insists that there remains a presumption that a Member is complying with its obligations. It is difficult to square this position with one suggesting that, after a pattern of violations has been demonstrated, one may assume that a Member will violate its obligation to implement in good faith.
4.289The United States goes on to state that in addition, in order to find a pattern of conduct, it would be necessary to define a "pattern". How many actions inconsistent with WTO rules would establish such a pattern? Moreover, if such a pattern were established and a violation found, how could a Member bring itself into compliance? For example, if the EC's pattern of violating its international obligations in connection with its banana import regime were sufficient to establish that the Treaty of Amsterdam authority for this regime is WTO-inconsistent, would the European Communities have to amend its Treaty authority to preclude any further WTO violations?
4.290In the view of the United States, all of this illustrates the complexity of this issue. It is a proper subject of debate in the DSU Review, since any change from current practice would require an amendment under Article X of the WTO Agreement or interpretation under Article IX of the WTO Agreement. In that connection, the United States again notes that the European Communities has in those discussions conceded that there currently is a distinction between mandatory and discretionary legislation in GATT/WTO jurisprudence and practice, by offering a proposal to "remove the current distinction between discretionary and mandatory measures",220 thereby making it possible to establish the WTO-incompatibility of discretionary measures.221
4.291In rebuttal, the European Communities argues that according to consistent GATT 1947 practice, a law that mandates a measure inconsistent with an obligation under the GATT is deemed to be inconsistent with that obligation even if it has not yet been applied. The GATT 1947 panels were of the view that the objective of predictability could not be achieved if a GATT 1947 contracting party adopted domestic legislation stipulating actions at variance with its obligations.
4.292The European Communities asserts that even in applying the standard developed by the GATT 1947 panels, the obligations of the United States set out in Article 23 of the DSU and Articles I, II, III, VIII and XI of the GATT 1994 are violated by Sections 301-310 because they mandate the executive authorities of the United States to act inconsistently with these DSU and GATT provisions.
4.293In the view of the European Communities, the United States recognises that Sections 301-310 must meet the standard developed under GATT 1947 practice. Its principal argument is that Sections 301-310 do not require the USTR to determine that a WTO Member is denying the United States' rights under a WTO agreement or is failing to implement DSB recommendations. In its view, Sections 301-310 therefore do not "preclude" WTO-consistent action and are consequently not mandatory within the meaning of the GATT 1947 practice.
4.294According to the European Communities, the United States further claims that the USTR is not required to determine that United States' rights under a WTO agreement are being denied and that a failure to implement DSB recommendations occurred and that, consequently, Sections 301-310 do not mandate determinations inconsistent with Article 23 of the DSU. However, these determinations must be based on the investigation initiated by the USTR under Section 302 or the monitoring conducted by the USTR under Section 306(a).
(b)Arguments specific to distinction between mandatory law and discretionary law
4.295The European Communities is of the view that the US arguments are based on a misinterpretation of the legal standard developed by GATT 1947 panels.
4.296In the view of the European Communities, under the GATT 1947, the United States maintained provisions of its countervailing duty law, pre-dating the provisional application of the GATT 1947, that required its executive authorities to impose countervailing duties without an injury criterion, which was inconsistent with Article VI of the GATT. The United States consistently claimed that these provisions constitute mandatory legislation, even though the executive authorities of the United States could theoretically have acted consistently with Article VI by not making the affirmative determinations required for the imposition of countervailing duties. The GATT Panel on United States - Denial of Most-Favoured-Nation Treatment as to Non-Rubber Footwear from Brazil endorsed the US claim and considered on this basis that part of the relevant US legislation, i.e. Section 303 of the Tariff Act of 1930, was covered by the "existing legislation" clause of the GATT Protocol of Provisional Application.222
4.297The European Communities points out that the United States countervailing duty law that was at issue in that case is comparable to Sections 301-310 to the extent that it also required the executive to make a negative or affirmative determination on the basis of specified factual criteria and mandated a GATT-inconsistent action if the determination was affirmative.
4.298The European Communities further notes that the fact that the countervailing duty legislation did not preclude GATT-consistent action because there was the possibility for the USTR to determine that there was no basis to impose countervailing duties did not, in the view of United States and the GATT 1947 panel, turn this legislation into discretionary legislation.
4.299The European Communities is thus of the view that this conclusion was compelled by the fact that there was no basis under the US countervailing duty law to exercise the discretion available under it for the purpose of avoiding inconsistencies with the provisions of Article VI of the GATT 1947 on injury findings. In addition, such an exercise of the discretion would have frustrated the objectives pursued by the US law.
4.300The European Communities argues that as for the US countervailing duty law, the mere fact that Sections 301-310 provide for the possibility to determine that rights of the United States have not been denied and no failure to implement DSB recommendations has occurred and that these provisions therefore do not "preclude" WTO-consistency does not turn them into discretionary legislation: the discretion in making determinations was not given to the USTR to ensure the WTO-consistency but only to the limited effect to take into account the results of her investigations under Section 302 or the monitoring of implementation under Section 306(b), which constitute the compelling basis of her decisions.
4.301In rebuttal, the United States points out that the European Communities appears to be unwilling to go so far as Hong Kong in discarding the distinction between mandatory and discretionary legislation. Further, the European Communities opposes the notion that discretionary legislation must include explicit language limiting that discretion so as to "preclud[e] WTO inconsistent actions".223 The European Communities thus rejects Hong Kong's argument that legislation which allows for "a potential deviation" from WTO obligations is WTO-inconsistent.224 Indeed, the European Communities would have significant difficulty complying with such an obligation to avoid "potential deviations". Having recognised the danger to the WTO system of embarking upon such an interpretation, the European Communities nonetheless seeks a case-specific, results-driven approach to the definition of "mandatory" to ensure that Sections 301-310 be found mandatory. The EC's approach denies the meaning of GATT/WTO jurisprudence based on the spurious claim that these cases relied on the now inapplicable Protocol of Provisional Application, and argues that the term "mandatory" - and the language of Sections 301-310 - must be interpreted by reference to a new-found obligation to avoid uncertainty and to ensure "security and predictability".
4.302The United States argues that the European Communities clearly and correctly sets forth the distinction between discretionary and mandatory legislation in its panel request: legislation is mandatory, and actionable, if it "does not allow" a Member's authorities to comply with its WTO obligations.225 Having offered this clear formulation and using it as the basis for its analysis, the European Communities now appears to realize that Sections 301-310 do, indeed, allow the United States to comply with DSU rules and procedures in every case. The European Communities therefore attempts to walk away from its earlier formulation, arguing that the United States overstates the conclusion of GATT and WTO panel reports when it points out that laws are not inconsistent with WTO obligations when those laws do not preclude compliance, or may reasonably be interpreted to permit compliance .
4.303In the view of the United States, to say that a law "does not allow" WTO-consistent action is no different than saying that the law "precludes" such action. A law allows authorities to comply with their WTO obligations if, under domestic law, there is an interpretation of that law which permits WTO-consistent action. The US formulation follows directly from that set forth by the European Communities. Moreover, it is solidly grounded in GATT/WTO jurisprudence and applicable international practice in construing national and international law.
4.304The United States argues that several statements from the panel reports it cited demonstrate the clear line drawn between mandatory and discretionary legislation. In US - Tobacco, the panel found against the complaining party because it had "not demonstrated that [the US law at issue] could not be applied in a [GATT-consistent] manner".226 In other words, the complaining party had not demonstrated that the law precluded authorities from complying with their GATT obligations. Moreover, the Tobacco panel's finding turned on the fact that the term "comparable" in the US legislation was "susceptible of a range of meanings", including one which permitted GATT-consistent action.227 The US - Tobacco panel report thus rests squarely on a finding that the burden is on the complaining party to demonstrate that domestic law does not allow an interpretation permitting a party to comply with its international obligations.
4.305The United States further contends that likewise, in US - Superfund, the panel found, "since the Superfund Act also gives [US authorities] the possibility to avoid the need to impose [a GATT-inconsistent penalty] tax by issuing regulations [not yet issued or drafted], the existence of the penalty rate provisions as such does not constitute a violation of the United States obligations under the General Agreement".228 It is difficult to conceive of any reading of this finding other than that drawn by the United States, namely, that a law which provides for the possibility of GATT-consistent action provides authorities with adequate discretion to comply with their GATT/WTO obligations. Again - unlike Sections 301-310 - the Superfund Act explicitly provided for a GATT-inconsistent tax; yet the panel found it sufficient that the statute also provided for the possibility that authorities might take action in the future that would be GATT-consistent. The panel did not assume that they would not.
4.306The United States also points out that similarly, in Thai - Cigarettes, the panel was unfazed by a provision in the statute explicitly authorizing a tax which would, if implemented, have constituted a violation of Thailand's GATT obligations. The panel concluded that "the possibility that the Tobacco Act might be applied contrary to Article III:2 was, by itself, not sufficient to make it inconsistent with the General Agreement".229 Again, the possibility of deviation from a party's international obligations does not render mean that law is WTO inconsistent. To the contrary, the very fact that there is a possibility of compliance is dispositive of whether the law is discretionary, and its mere existence is not a WTO violation. If the law permits a party to comply with its international obligations, it must be assumed that it will.
4.307The United States is of the view that all of these GATT findings are consistent with the ordinary meaning of "mandatory", which is "obligatory in consequence of a command, compulsory".230 If a law does not make it compulsory for authorities to act so as to violate their international obligations, that law may not be said to command such action. This can be illustrated through a simple example. A law which provides, "the Trade Representative shall take a walk in the park on Tuesdays, unless she chooses not to" does not oblige the USTR to walk in the park on Tuesdays. She has complete discretion not to take a walk in the park on Tuesdays; the law in no way obliges or commands her to do so. This remains true despite the use of the word "shall" in that law.
4.308The United States maintains that the clear distinction in GATT/WTO jurisprudence between discretionary and mandatory legislation is also consistent with general international practice in interpreting domestic legislation in light of international law, and of US practice in particular. Under the principles set forth in India - Patents (US), the relevant facts of this case are to be found in US municipal law, which includes not only the language of Sections 301-310, but also how those provisions would be interpreted under US law.231 It is both general international practice and that of the United States that statutory language is to be interpreted so as to avoid conflicts with international obligations. There is thus a presumption against a conflict between international and national law. In general,
"[A]lthough national courts must apply national laws even if they conflict with international law, there is a presumption against the existence of such a conflict. As international law is based upon the common consent of the different states, it is improbable that a state would intentionally enact a rule conflicting with international law. A rule of national law which ostensibly seems to conflict with international law must, therefore, if possible always be so interpreted as to avoid such conflict".232
4.309The United States further notes that in US law, it is an elementary principle of statutory construction that "an act of Congress ought never to be construed to violate the law of nations if any other possible construction remains". Murray v. Schooner Charming Betsy, 6 U.S. (2 Cranch) 64, 118 (1804). While international obligations cannot override inconsistent requirements of domestic law, "ambiguous statutory provisions . . . [should] be construed, where possible, to be consistent with international obligations of the United States". Footwear Distributors and Retailers of America v. United States, 852 F. Supp. 1078, 1088 (CIT), appeal dismissed, 43 F.3d 1486 (Table) (Fed. Cir. 1994), citing DeBartolo Corp. v. Florida Gulf Coast Building and Trades Council, 485 U.S. 568 (1988).
4.310In the view of the United States, GATT jurisprudence distinguishing between mandatory and discretionary legislation does no more than apply the general practice of nations, including the United States, that there is a presumption against conflicts between national and international law. If a law provides discretion not to violate international obligations, there is a presumption that domestic authorities will interpret that law so as to avoid a conflict with those obligations. Likewise, this presumption may be seen as underlying the US - Tobacco panel's finding that a domestic law susceptible of multiple interpretations would not violate a party's international obligations so long as one possible interpretation permits action consistent with those obligations.233
4.311The United States explains that the mandatory/discretionary distinction in GATT/WTO jurisprudence is clear and unequivocal: a law which allows WTO-consistent action is not WTO-inconsistent. The EC's attempt to qualify this principle to satisfy its political objectives would have the Panel presume bad faith on the part of the United States in its observance of its international obligations. Such a presumption would clearly be contrary to this jurisprudence and to the international practice underlying it.
4.312In support of its argument, the United States refers to the text of DSU Article 23.2(a). That Article deals with "determinations to the effect that a violation has occurred". It prohibits Members from making these determinations without following DSU rules and procedures, and these determinations must be consistent with findings in panel and Appellate Body reports adopted by the DSB.
4.313In the view of the United States, there is no "determination to the effect that a violation has occurred" before the Panel in this case. The European Communities does not challenge a determination which has actually been made. It is therefore not possible to analyze whether such a determination meets the requirements of Article 23.2(a). One cannot say whether, in making such a determination, the United States followed DSU rules and procedures, nor whether the United States made a determination consistent with DSB-adopted findings. Neither the findings nor the determination exist.
4.314The United States asks how the Panel can perform its analysis under these circumstances. In the absence of a concrete determination, how is it possible to know whether a Member has breached its obligations under Article 23.2(a)? It is not permissible to speculate about how the Member will make its determination in the future. It is not permissible to look at determinations made in the past which are not within the terms of reference. It is not permissible to assume that certain Members are not to be trusted. It is not permissible to assume that they will act in bad faith. Under these circumstance, must the conclusion be that without a concrete determination, there can be no violation of Article 23.2(a)?
4.315The United States points out that over 10 years ago, in 1987, a GATT panel wrestled with this type of question. It looked at a statute which would not go into effect for another three years and asked, may a panel determine whether this law is inconsistent with a party's GATT obligations when it is possible that the party may change the law before
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