Disputes on Non-tariff Barriers to Trade: From Asbestos to the EU Fuel Quality Directive
© Springer International Publishing Switzerland 2015Christoph Herrmann, Bruno Simma and Rudolf Streinz (eds.)Trade Policy between Law, Diplomacy and ScholarshipEuropean Yearbook of International Economic Law10.1007/978-3-319-15690-3_13
Transatlantic Disputes on Non-tariff Barriers to Trade: From Asbestos to the EU Fuel Quality Directive
Freshfields Bruckhaus Deringer LLP, 10785 Berlin, Germany
Hans-Joachim Prieß (Corresponding author)
Americans and Europeans “make different risk assessments.”1
With that statement at the 1999 Stanford European Forum, Horst G. Krenzler touched the very heart of a long row of disputes between the US, the EU, and Canada in the WTO legal framework, which concerned so-called non-tariff barriers to trade. These transatlantic disputes have affected many different areas of core domestic policy and regulation, such as public health or the environment, as past WTO cases, e.g. EC – Asbestos,2 EC – Hormones 3 and US – Continued Suspension 4 indicate.
Today, we are about to see the development towards another dispute between Canada and the EU arising from the Directive 2009/30/EC5 (Fuel Quality Directive) and its implementing measures. Like in other disputes on non-tariff barriers to trade, the WTO Members concerned disagree on the risks which goods that are about to be put on the market pose to a certain public policy objective. This differing evaluation leads to a different level of precaution, which, in turn, translates into different requirements and standards these goods have to fulfil before being put on the market. In trade relations between WTO Members, different standards may have the effect of market access requirements. They disfavour the industries of those WTO Members where lower standards apply and this has (at least) the effect of restricting trade.
Unlike many other WTO Members, the countries on both sides of the Atlantic are quite ready to challenge their differing risk assessments before the WTO adjudicating bodies, if these have a negative impact on their export figures. As a result, transatlantic disputes have markedly shaped the understanding of the WTO rules regulating non-tariff barriers to trade. Given the ever increasing significance of the global fuel market, it would not surprise, if we were to see a dispute on the legality of the Fuel Quality Directive under WTO law in near future. Before turning to the most important transatlantic non-tariff barrier disputes and the WTO consistency of the Fuel Quality Directive in further detail, we will shortly describe the concept of non-tariff barriers and the relevant rules delimiting the WTO Member’s freedom to impose them.
Non-tariff Barriers to Trade
Unsurprisingly, non-tariff barriers to trade (NTB) can best be explained in relation to tariffs. Tariffs are customs duties and taxes imposed upon importation (clearance for free circulation) or as an internal measure in order to generate state revenues and, at the same time, obtain a competitive advantage for the domestic industry.6 Together with a system of preferences based on rules of origin, they can also be used to give an advantage to products imported from one country over those of another. The costs of these policies are typically borne by the consumer who must pay more for foreign products. Despite the—at times—complicated tariff nomenclature and rules of origin, overall tariffs are transparent and straightforward.
By contrast, NTBs consist of virtually any measure having a trade restrictive effect other than a tariff. Due to their enormous variety and the manifold historical and domestic policy reasons underlying them, it is impossible to establish a precise positive definition,7 or even to state the exact number of NTBs.8 They comprise inter alia bans, permissions or licences, technical or administrative standards and labelling requirements.9 Various attempts have been made to classify at least certain groups of NTBs according to their type, function or particular effect.10 Most importantly, it should be noted that NTBs may be primarily directed at restricting trade and, in this respect therefore, may follow policies similar to tariffs, such as quantitative restrictions, import prohibitions, import licences or monetary support of domestic companies. Likewise, it is possible for NTBs to have a non-trade objective which (only) incidentally causes trade restrictions. These may take the form of national differences regarding scale units, divergent requirements of labelling or administrative standards. Technical standards11 and sanitary and phytosanitary measures12 are also typically considered to fall within this category.13 The non-trade objective pursued may well be—and often is—a legitimate public policy. Compliance with such public policy produces transaction costs, which are typically borne by the suppliers.
The huge variety and the number of different purposes make it difficult to detect and, also, to assess NTBs. They are regulated in several international trade agreements within the WTO legal framework, most notably the General Agreement on Tariffs and Trade (GATT), the Agreement on Technical Barriers to Trade (TBT Agreement) and the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement). However, as a result of the dual nature of NTBs, which serve legitimate public policies on the one hand, and restrict trade on the other, the applicable rules circumscribing and delimiting the WTO Members’ freedom to impose NTBs are necessarily sketchy. Together with the importance which WTO Members attach to defend their public policy choices, this setting provides much scope for dispute. In addition, the relative economic significance of NTBs vis-à-vis tariffs has strongly increased.14 NTBs may soon, if not already, be considered to have replaced tariffs as the standard form of protectionism.15 So too the number of NTB-related disputes will rise.
Against this background, scrutinising a particular NTB under the applicable WTO provisions is an exercise which is becoming ever more frequent and also difficult. Hitherto, the most controversial and extensive disputes within the context of NTBs had resulted from disagreements between the EU, the US, and Canada. Disputes between these WTO Members, such as, inter alia, EC – Asbestos, EC – Biotech, 16 US – Continued Suspension and the EC – Hormones case have shaped the current understanding of the WTO rules on NTBs. EC – Asbestos in particular has strongly influenced the interpretation of the TBT Agreement,17 while EC – Hormones did so in relation to the SPS Agreement.18 On that basis, they are considered to be among the most high-profile19 cases in WTO dispute settlement.20 Before looking at some of these disputes in more detail, we will outline the relevant WTO provisions regulating NTBs.
WTO Provisions Regulating Non-tariff Barriers to Trade
WTO provisions applicable to NTBs generally accept the Members’ legitimate interests to regulate their internal (trade-related) matters according to their own discretion.21 At the same time, however, regulations implementing these legitimate interests must follow certain rules, in particular the principle of non-discrimination. These rules are primarily contained in the GATT, the TBT Agreement and the SPS Agreement.
The core legal principles laid down in the GATT are still considered to be the crucial legal benchmark for NTBs.22 They comprise the prohibition of quantitative restrictions pursuant to Article XI GATT and the principle of non-discrimination contained in Article I:1 GATT (the most-favoured nation obligation) and Article III:4 GATT (national treatment obligation). Contrary to the absolute prohibition of quantitative restrictions, the principle of non-discrimination establishes only a relative standard of protection. It prohibits discriminatory treatment of third countries’ imported products vis-à-vis foreign and domestic “like” products. Accordingly, the principle applies only in relation to “like” products. In practice, it is often crucial to the legality of a trade restrictive measure whether there exists a like product to which the most-favoured nation or the national treatment obligations can apply. In terms of a precise definition of likeness, the WTO texts provide no guidance. However, the WTO adjudicating bodies, i.e. the panels and the Appellate Body have established four criteria for assessing the likeness of products: (1) the properties, nature and quality of the products; (2) the end use of the products; (3) consumers’ tastes and habits in respect of the products; and (4) the tariff classification of the products.23
Even where a NTB discriminates between like products or imposes quantitative restrictions, this does not mean that the NTB is incompatible with the GATT. Article XX GATT entitles WTO Members to pursue certain policies which have a trade-restrictive effect, provided that they are “not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination”.24 In the context of NTBs, WTO Members most often rely on Article XX(b) and (g) GATT, according to which measures may be upheld that are necessary to protect human, animal or plant life or health or that relate to the conservation of exhaustible natural resources, respectively.25 The existing case law shows that the standard which NTBs must meet in order to fall within the scope of these justifications is rather high and only rarely met.
The TBT Agreement supplements the GATT provisions with regard to technical regulations, standards and conformity assessment procedures.26 A technical regulation is defined as a document stipulating product characteristics or their related processes and production methods (PPMs), compliance with which is mandatory.27 In terms of its principal structure, the TBT Agreement is similar to the GATT. Article 2.1 of the TBT Agreement contains the most-favoured nation and the national treatment obligations, while the subsequent provisions entitle WTO Members to enact technical regulations implementing their public policies, provided that such technical regulations are not prepared, adopted, or applied in a manner that creates unnecessary obstacles to international trade. Furthermore, the restraint of trade caused by a technical regulation shall not exceed the extent reasonably necessary to achieve the legitimate objective pursued, such as the protection of human health or safety, animal or plant life or health, or the environment.28 In addition, WTO Members are required to carry out an assessment of the risks that are likely to result if the legitimate objectives were not achieved.29 In that respect, the TBT Agreement builds on Article XX GATT and provides to some extent more precise rules than the latter.30 However, the exact relationship between the TBT Agreement and the GATT is not clear.31 In Korea – Dairy, the Appellate Body held that the WTO Agreement is a “Single Undertaking” and therefore “all WTO obligations are generally cumulative and Members must comply with all of them simultaneously”.32 In EC – Asbestos, it held that “the TBT Agreement imposes obligations on Members that seem to be different from, and additional to, the obligations imposed on Members under the GATT”.33 EC – Sardines confirms this approach. In this case, the Appellate Body made it clear that while “two agreements [can] apply simultaneously […] a panel should normally consider the more specific agreement before the more general agreement”.34
The SPS Agreement contains specific regulations regarding sanitary and phytosanitary measures (SPS measures), which are measures to protect life or health of animal, plant or human from pertinent SPS risks.35 Unlike the GATT or TBT Agreement, the SPS Agreement does not impose a non-discrimination obligation based on like products. Instead, it requires the WTO Members to abstain from discrimination where “identical or similar conditions” exist.36 Yet, the SPS Agreement permits discrimination even in this case, provided that the SPS measure is necessary to protect human, animal or plant life or health and is based on scientific principles and evidence.37 Particularly the latter requirement has the effect that the SPS Agreement is narrower than the TBT Agreement38 since subjective, non-scientific factors, e.g. cultural/moral preferences or consumer tastes, do not suffice as a justification for trade restrictive measures.39 Once the requirements of the SPS Agreement are met, the SPS measure shall be presumed to be in accordance with the GATT, especially the provisions of Article XX(b) GATT.40
The relationship between the SPS and the TBT Agreement is specified in Article 1.5 of the latter. In accordance with this provision, the TBT Agreement shall not apply to SPS measures. Accordingly, where an SPS measure has been identified, it is exclusively subject to the SPS Agreement, if even it has been implemented in the form of a technical regulation.41
NTB cases may be resolved by reference to either the SPS/TBT Committees or the dispute settlement body (DSB).42 While the former play a more important role in dispute prevention, the DSB is involved when the disputants require that their case be decided by a neutral panel or the Appellate Body. The procedural rules are set forth in the WTO Dispute Settlement Understanding (DSU). The decisions of the panels and the Appellate Body carry a strong precedential value, which is why they remain highly relevant today. Particularly, with regard to NTBs, panel and Appellate Body decisions provide a more precise understanding of the legal requirements to be satisfied under the covered agreements. As a result, WTO Members frequently refer to these decisions in order to support their own position. In the following, we will look at the often cited EC – Asbestos and the EC – Hormones cases and how they have shaped the legal requirements to be fulfilled by NTBs.
EC – Asbestos
The EC – Asbestos 43 case between the European Communities (EC) and Canada44 arose from a French decree prohibiting the production, marketing, importation and exportation of asbestos and all goods containing asbestos for public health reasons.45 In 1998, Canada (the world’s second largest asbestos manufacturer at that time)46 requested consultations with the EC maintaining that the French decree was in violation of Articles 2 and 5 SPS Agreement, Article 2 TBT Agreement and Articles III, XI and XIII GATT.47 The Panel concluded that the French decree was inconsistent with the national treatment obligation laid down in Article III:4 GATT.48 The Panel then examined whether the EC could rightly invoke Article XX(b) GATT as a justification for its asbestos ban. In this respect, Canada and the EC essentially disagreed on whether a certain asbestos product posed a human health risk.49 According to the Panel this was a matter of sufficient scientific evidence. In the particular case, the Panel found that the EC had established a prima facie case of a human health risk and that Canada had not presented sufficient evidence to rebut this finding.50 Because there was no alternative measure available to the EC which could fulfil the human health protection objective, the Panel considered the asbestos ban to be justified under Article XX(b) GATT.51 With regard to the TBT Agreement, the Panel held that it did not apply to the asbestos ban but to the exceptions of that ban, because only the latter constituted a technical regulation.52 However, since Canada did not challenge these exceptions, the Panel did not examine them.
On appeal, the Appellate Body held that the ban by the French decree was a “technical regulation”, as defined in Annex 1.1 of the TBT Agreement, and thus covered by the TBT Agreement.53 It did not, however, make any more substantive findings because of the insufficiency of the facts.54 With regard to the GATT, the Appellate Body reversed the Panel’s finding that the products were “like” and the measures therefore inconsistent with Article III:4 GATT.55 According to the Appellate Body, Canada failed to show that a competitive relationship56 between the products and the like products existed.57 Finally, the Appellate Body confirmed the Panel’s view that in any case the ban was justified under Article XX (b) GATT, because it “protect[ed] human life or health” and “no reasonably alternative measure” existed.58 Especially, a “controlled use” would not be a conceivable alternative.59
EC – Hormones
EC – Hormones—a dispute between the EC, the US and Canada—concerned an EC prohibition of the sale and import of beef to which certain kinds of natural or synthetic hormones had been administered for growth purposes. As a result, US farmers suffered extensive export shortfalls. The US successfully challenged the measures as being inconsistent with, inter alia, the SPS Agreement.
With regard to the requirements for a justification of an SPS measure, the Appellate Body emphasised that the right of a WTO Member to define its appropriate level of protection is not absolute and must be backed by a substantive scientific justification when exceeding international standards of protection.60 Accordingly, the WTO Members do not enjoy unfettered discretion when deciding on their level of SPS protection.61 Instead, a “rational relationship” between the measure and the empirical risk assessment conducted by the WTO Member concerned must exist.62 Against this background, the EC could not defend its hormones ban before the Panel and the Appellate Body. It was not based on any risk assessment as prescribed by Article 5.1 SPS Agreement, nor did it conform to international standards as laid down in Article 3.1 SPS Agreement. After the decision of the Appellate Body, the EC refused to implement the decision.63 New disputes arose on the state of implementation of the decision and retaliatory measures imposed to enforce implementation.64
Results for a Justification of NTBs
EC – Asbestos and EC – Hormones are but the very top of a long list of transatlantic disputes on NTBs. Overall this case law on NTBs gives rise to two major observations. First, it is very difficult to meet the standard required for a justification of NTBs under the GATT, the SPS or the TBT Agreement. The only instance where an NTB fully complied with WTO law was EC – Asbestos, where it was obvious that there existed no alternative measure to the introduction of an import ban on asbestos. The Appellate Body held, that “France could not reasonably be expected to employ any alternative measure if that measure would involve a continuation of the very risk that the Decree seeks to ‘halt’. Such an alternative measure would, in effect, prevent France from achieving its chosen level of health protection.”65
Second, the case law illustrates that a risk assessment and reliable scientific evidence of an actual positive effect of the NTB is absolutely key to its justification under WTO law. All parties concerned, the EU, the US, and Canada have already learned that poor evidence, an overly narrow assessment of the risks, and lack of even-handedness of the NTB in view of the general standard of protection within the regulating Member puts the WTO consistency of an NTB at risk. Thus, it is important to prepare the introduction of a new NTB very carefully in order to avoid the unnecessary and unpleasant exercise of redrafting an NTB according to the rulings of a WTO panel.