The Legitimacy of PPM Based Trade Measures

Introduction

One of the most unsettling questions that the international community has been faced with in the last few decades is whether global environmental concerns belong to the realm of international trade, i.e. if they have a place in the WTO agenda at all. [1] The answer to this is unmistakable to the extent that the importance of the environment has been explicitly entrenched in the WTO through the sustainable development clause in the preamble, the provisions of the TBT [2] agreement, Article XX of the GATT [3] and in several other places. [4] It has also featured significantly in many reports of the WTO Dispute Settlement Bodies (DSB).

Within the trade-environment conflict, one of the most hotly debated issues has been whether the process and production method [5] (PPM) can be used as a legitimate means of distinguishing and thereby discriminating between otherwise “like” products. [6] This issue becomes even more controversial in situations in which the PPM does not affect the physical characteristics of the product in question. [7] One of the best known examples of such a PPM-based restriction is the U.S. trade ban on shrimp from countries that have not been certified as having regulatory regimes in place to prevent the killing of sea turtles. These are called non-product related PPMs. Under WTO law, non-discrimination obligations as such apply only to “like” products. Products that are not “like” maybe treated differently and this does not lead to violation of WTO obligations. Therefore, the determination of likeness assumes great significance and consequently, so does the question of the role of PPMs in determination of likeness.

Sometimes a PPM-based trade restriction is used as a genuine means to address a global environmental threat originating in another country. At other times governments use PPMs as a covert tool of protectionism. This is where the problem lies. Often, in the name of environmental protection, PPM based measures are used to shelter domestic producers and workers from import competition. Therefore instead of having a rigid rule with regard to PPMs, the WTO legality of a PPM should depend both on its environmental rationale and on its implementation. [8]

Though proponents and opponents of PPMs have not reached a compromise in the past several years, the WTO jurisprudence with regard to PPMs has come a long way since the US-Tuna (Mexico) case to the more recent US-Shrimp decision. This paper aims to analyse the WTO consistency of PPM-based trade restrictions addressing the non-trade concern of environmental protection with regard to the obligations of the WTO members under the General Agreement on Trade and Tariffs (GATT) and the Technical Barriers to Trade (TBT) Agreement. This article will focus on the legality and legitimacy of unilateral trade measures in support of environmental process and production methods. More precisely emphasis will be laid on non-product related PPMs.

Chapter I:

The Status of NPR-PPMs under GATT Law

Policy Perspective

The most-favoured nation (MFN) principle under Article I of the GATT requires parties to treat a product of another party no less favourably than the like product of any other party. Similarly, the National Treatment (NT) principle under Article III of the GATT requires treating imported products from a party no less favourably than like domestic products. Thus the non-discrimination obligations contained in Article I and III of the GATT are only applicable to “like products”. On the other hand Article XX of the GATT provides for General Exceptions to the entire Agreement.

The popular prevailing view is that PPMs do not render otherwise like products “unlike” on the basis of differences in the PPMs involved. [9] The question that needs to be answered is: Whether GATT Law would allow discrimination between two otherwise similar products, if they were to be manufactured using different technologies, such as one was harmful to the environment and the other environment-friendly.

Interpretation of “like” products

The GATT/WTO dispute settlement bodies have time and again ruled that the Report of the Working Party on Border Tax Adjustment [10] (BTA) criteria must be used so as to determine likeness between two products. These criteria include the product’s end-uses in a given market; consumers’ tastes and habits; and the product’s properties, nature, and quality. Those who oppose PPM based measures lay emphasis on the criterion of physical characteristics of the product in determination of likeness and argue that distinction between products on grounds of different PPMs has been consistently rejected under GATT jurisprudence.

However, GATT/WTO Jurisprudence has repeatedly affirmed that the BTA criteria are only a list of non-exhaustive and indicative criteria and the like-product analysis must be done on a case-by-case approach. In fact some trade-law scholars consider this case-by-case approach to be the most important contribution that was made by the Working Party Report. [11] The Japan-Alcohol Report [12] stated that no one approach would be appropriate as the concept was a relative one. It is this affirmation by the AB that confirms that there can be no steadfast rule regarding product likeness, not even one which out rightly rejects the concept of PPM based distinction. [13]

In fact advocates of PPM-based measures claim that there is also no justifiable textual basis in the GATT to support the existing interpretation of “like” products or for that matter to support the product-process distinction rule. . [14] Article III does not define “like products” and its wording does not prohibit product distinction based on how goods are produced. Theprimary purpose behind Article III has been stated in the text of Paragraph 1 as being to limit protectionism. Article III:1 provides that internal taxes and regulations affecting the internal sale, transportation, distribution or use of products, “and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.” Thus there is a hidden implication that mixture or processing regulations that do not afford protection to domestic production are not prohibited. Therefore, trade measures which have their origin rooted in a legitimate, non-protectionist objective should not be declared GATT-illegal. [15]

Further in the EC-Asbestos [16] report, the AB has emphasized the need for the adjudicator to examine all relevant factors in a given case and context, and to consider all the evidence pointing either in the direction of likeness or otherwise. [17] A similar view was expressed by the GATT panel in Japan-Alcohol which considered manufacturing processes of products to be relevant to the likeness enquiry. [18] Therefore, the exclusion of origin-neutral process-based distinctions from the purview of Article III seems to be inconsistent with the text of the provision and the basic structure of the GATT. [19]

GATT Jurisprudence

As far as decisions of the DSB are concerned, the GATT/WTO Jurisprudence has evolved over time and come a long way in legitimising PPM-based trade measures. Only some of the significant decisions are discussed below:

In the infamous Tuna/Dolphin decisions, the GATT dispute settlement panels declared unilateral trade actions taken by United States in the form of an import ban on tuna from countries that did not have a regulatory regime to protect dolphins comparable to the U.S. regime as GATT-illegal, despite the absence of any provision clearly prohibiting such action, as well as the presence of clear-cut exceptions in Article XX of the GATT, which allow otherwise GATT-inconsistent measures to be adopted in case they are ‘necessary to protect human, animal or plant life or health’ (Article XX(b)) or if they are ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic consumption and production’ (Article XX(g)). [20] The panel explicitly ruled that Article III “covers only those measures that are applied to the product as such.” Therefore, the U.S. measure regarding dolphins did not fit within the confines of Article III because this PPM “could not possibly affect tuna as a product.” [21]

However, in the the more recent EC-Asbestos decision, Canada complained against the EC ban on asbestos which it claimed was “like” the European substitute fibre. The Appellate Body reversed the ruling of the panel by stating that “the health risks associated with a product may be pertinent in an examination of likeness under Article III:4 of the GATT 1994.” This case assumes significance as the Appellate Body clarified that a determination of product “likeness” goes beyond the physical characteristics of the product, thus opening an avenue for legality of PPMs within the GATT.

The most landmark ruling in the PPM debate has been the US-Shrimp/Turtle decisions. Although the Appellate Body did not come all out to declare that PPMs are legal under the GATT, an implication of the legality of PPMs can be found in the decision. [22] The panel first ruled that the measure at issue was outside the scope of Article XX. This was reversed by the AB which found that the import ban fit paragraph XX (g). The measure was yet rejected as it was found to be against the spirit of the chapeau [23] in so far as its application was concerned. It is argued that “the fact that the Appellate Body reviewed the PPM carefully and gave specific criticisms of how the U.S. government was applying the law demonstrates that PPMs can be justified under Article XX.” [24] Upon adoption of the AB report, the delegate from Pakistan stated that, “Effectively, the Appellate Body’s decision permitted Members to discriminate against products based on non-product related PPMs.” [25]

Thus the GATT does not proscribe environmental PPMs as such. Even assuming that PPM-based import bans are incoherent with GATT Articles I, III, or XI, the US-Shrimp/Turtle rulings have confirmed that they would still qualify for an Article XX exception if they are undertaken for an environmental purpose.

Chapter II:

Legality of NPR-PPM based measures under the TBTA

A GATT/WTO member is also obliged to comply with the Agreement on Technical Barriers to Trade (TBTA) which was implemented following the creation of the WTO at the Uruguay Round in 1992. The TBT Agreement covers two different types of possible technical barriers to trade: technical regulations and standards. Annexure 1.1 defines technical regulation as a “document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method. The definition of standard contained in Annexure 1.2 is similar; the only difference being that a standard is a voluntary rather than a mandatory measure. Only measures that fall within the definition of technical regulation or standard are subject to the TBTA’s disciplines. [26]

The explicit reference to “products or related processes and production methods” in the aforesaid definitions clarifies that incorporated or product-related PPMs are within the scope of the TBTA. However, what remains a contentious issue is whether NPR-PPMs-based measures are subject to the substantive disciplines of the TBTA. Both proponents as well as opponents use the following two approaches to justify their standpoint [27] :

Textual Approach

Negotiating History Approach

Those who argue that technical regulations/standards based on a non-product related PPM are outside the coverage of the TBTA justify it as follows: The first sentence of Annex 1.1 as well as 1.2 indicates that the coverage of the TBTA, in so far as it concerns technical regulations/standards is limited to product characteristics or ‘their related’ process and production methods. The second sentence, albeit, lacking the words ‘their related’ is only an illustrative list of items covered by the first sentence. [28] According to them, this is confirmed by the negotiating history, which indicates that the insertion of the terms ‘related’ and ‘their’ into the first sentence of the definition of technical regulations/standards was done with the intention to unequivocally exclude non-product related PPMs from the coverage of the TBTA in general, rather than from the scope of the first sentence only. [29]

Even if other NPR-PPM regulations are deemed to fall outside the scope of the TBTA, NPR-PPM-based eco-labelling schemes are definitely far more likely to be considered as technical regulations within the TBTA. This is because the second sentence of Annex 1.1 as well as Annex 1.2 of the TBTA indicates that the coverage of the TBTA also extends to labelling requirements as they apply to a product, process or production method. [30] Further, the TBT Committee has in the context of the notification obligation, held that all mandatory labelling requirements are subject to the TBTA regardless of the kind of information provided on the label. [31] In addition, the AB has clarified that to fall within the scope of the TBTA, product requirements must apply to, but need not be intrinsic to the product itself. [32] This may suggest an opening for the acceptance of NPR-PPM-based labelling schemes as technical regulations within the scope of the TBTA. Besides a textual approach, even the drafting history seems to suggest the same. The purpose of inclusion of PPMs under the Uruguay Round was so as to prevent the supposed circumvention of the TBT Agreement. In the light of this purpose, it can be argued that the TBT Agreement should be interpreted to include all forms of PPM-based regulations.

The opposition to technical regulations/standards based on unincorporated PPMs finds its roots in the concern about a forceful trans-boundary application of domestic preferences. Ironically however, Members’ inclusion of PPMs within these definition can be used to allay concerns of protectionist or unilateralist abuse of unincorporated PPMs by subjecting such measures to the strict disciplines of the TBTA. Ensuring that NPR-PPM based regulations or standards are subject to the disciplines of the TBTA would provide a more accountable and rules-based approach as the TBTA is a powerful force in promoting adoption of international standards. [33]

NPR-PPMs-based technical regulations in the context of Like Product Obligations under the TBTA

Once it is established that a certain measure is a technical regulation, it will be subject to Article 2.1 of the TBTA which extends the application of the non-discrimination obligations contained in Articles I and III of the GATT to technical regulations under the TBTA. There-under, to establish a case of discrimination, it is a prerequisite to show that products which are allegedly subjected to different treatments are “like”. The concept of “like” products under GATT has evolved as a part of GATT jurisprudence. However, while defining the scope of “like” under the TBTA, it is important to keep in mind that unlike the GATT, the TBTA does not have an Art. XX equivalent which allows discriminatory measures to be justified on environmental and social policy grounds. Thus, the sixth preambular paragraph of the TBTA combined with the necessity requirement under Art. 2.2 suggests that a narrow interpretation of like products is appropriate in the context of Art. 2.1. [34] Therefore, there should be a distinction made between the concepts of likeness under GATT Articles I/III and TBTA Article 2.1. Thus, products manufactured using production processes having adverse environmental consequences cannot be considered ‘like’ those which adopt eco-friendly PPMs within the TBTA framework. [35]

Conclusion

Though there is no clear answer in the WTO on NPR-PPMs, there are several instances indicative of its acceptance. For instance, GATT Article XX (e) itself recognises the importance of how a good is made by incorporating within the list of General Exceptions to the GATT obligations, products made from prison labour. Further, as per the 2001 Appellate Body decision in Shrimp-Turtle, an environmental PPM per se is not illegal under the WTO. In fact even if a NPR-PPM based trade measure is found to be violative of GATT Articles I, III, or XI, the same will then be reviewed under GATT Articles XX(b) or XX(g) and then subsequently reviewed under the chapeau to the Article. As far as the chapeau is concerned, the AB stated in unequivocal terms that the the line of legality “moves as the kind and the shape of the measures at stake vary and as the facts making up specific cases differ.” [36]

Unfortunately, the continuing debate about the status of PPMs within the WTO framework has undermined support for the WTO. It has given a reason for the developing nations to perceive that the WTO works on power rather than principle. Besides alienation of popular support for the WTO policies, the schism between environmentalists and the trading system has also proved to be bad for environmental policy. The WTO needs to develop effective disciplines so as to ensure that PPM-based measures not only have a valid environmental justification but also ultimately have a justified application. It is essential for both the lobbies need to work in cooperation and coordination. Therefore, the need of the hour is to clearly spell out the status of PPMs within the WTO agenda so as to bridge the increasing gap between the trade and environment lobbyists.