GNLU Moot Court on International Trade Law

Dear All,

The Gujarat National Law University is organizing a moot court competition which deals with the hitherto unexplored area of business process outsourcing under international trade in services.

The moot problem addressing the need to understand international trade concerns in services in the broader canvass of privacy protection and international relations encompasses the above.

It revolves around a contemporary issue of leak of sensitive data from business process outsourcing units. The fundamental debate borders on one question. How much protection should a country exporting such information to the recipient state exercise without the same becoming a technical barrier to trade in services?

The International Court of Justice is the forum for this fictional dispute involving a developing and developed nation.

For the Compromis click here

Why international trade lawyers love recession?

Recession brings mixed fortunes for lawyers.

While some lawyers specially ones working on areas like capital markets are having a hard time, it is boom time for international trade lawyers.

An economic low is always good news for an international trade lawyer. Industries which would normally be happy competing with foreign exports when the economy is on an upward curve, seek protection to ensure they are able to survive with profitable margins in their home market. With the emergence of anti dumping as an instrument of protectionism, this often translates into a higher number of applications by the domestic industry for initiation of anti dumping duty investigations. Of course the international trade lawyers are the necessary link in this chain, which translates into more income for the lawyers.

No matter how bad any economic situation is, it seems some lawyer in some part of the world is inevitably laughing all the way to the bank.

US wins alcohol dispute against India on appeal: Legal Perspective

The United States won its appeal in the case concerning Additional and Extra Additional Duties on alcoholic beverages. Economic Times describes it as more of a moral victory as a lot of the duties so challenged had already been subjected to review and reduction. The dispute itself revolved round the question whether the additional duties and extra additional duties imposed by India, on alcoholic beverages was consistent with the General Agreement of Tariff and Trade. In particular the provisions on schedule of concessions in Article II were claimed to be violated by India’s tax regime on imports.

The stakes are enormous. As cited in the Economic Times, it has been reported by the Distilled Spirits Council of the United States that the spirits market in India as on 2006 was worth 16.2 billion $ with imports comprising about one percent of it. With the nature of the dispute understood, understanding the legal reasoning of the decision may be in order.

The legal provisions which underwent legal scrutiny in the dispute are as below.

GATT, 1994
Article II (Schedule of Concession)
(1)
(a) Each contracting party shall accord to the commerce of the other contracting parties treatment no less favourable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.
(b) The products described in Part I of the Schedule relating to any contracting party, which are the products of territories of other contracting parties, shall, on their importation into the territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein. Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with the importation in excess of those imposed on the date of this Agreement or those directly and mandatorily required to be imposed thereafter by legislation in force in the importing territory on that date.

(2) Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product:
(a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part;
(b) any anti-dumping or countervailing duty applied consistently with the provisions of Article VI;
(c) fees or other charges commensurate with the cost of services rendered.

Article III (National Treatment on Internal Taxation and Regulation)
(2)
The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph

Indian Law
The Constitution of India makes the imposition of excise duty within the purview of the individual states rather than the centre. This would essentially mean that different states will impose a differential rate of duty. So, to give an example an alcohol manufactured in Maharashtra may be 30% and in Punjab 25%. Additional duties are imposed by India on imports to offset local excise duties and extra additional duties imposed to offset local sales tax. This in principle is not inconsistent with WTO GATT. What is prohibited however is charging an importer a duty in excess of those applied, directly or indirectly, to like domestic products. As long as the duties charged are in excess and it was alleged that it was, the measures would be WTO inconsistent. The proviso to Section 3(1) of the Indian Customs Tariff Act, explanation clause enables the Central Government to specify the rate of Additional Duty applicable to imports of alcoholic beverages "having regard" to excise duties leviable on like alcoholic products manufactured or produced in different Indian state. A common rate would have to be arrived to be applicable to all imports. By special notification Customs Notification 32/2003 of 1 March 2003, relevant to the dispute such common additional duty rate was notified.
The Appellate Body acknowledged that a provision legitimate under Article II (2) would not be subject to the schedule of concession requirement under Article II (1) (b). This means that if India has specified a bound rate of 150% on spirits it could impose taxes above and beyond it, as long as they were taxes imposed to offset local excise or sales tax. It proceeded to interpret Article II (1) (b) and Article II (2) together.

Three points of dispute were crucial to the findings of the Appellate Body and in determining the WTO consistency of India's indirect tax regime.

1. Whether Article II: 1(b) cited above covers only duties or charges that "inherently discriminate against imports", while Article II: 2 covers only charges that do not "inherently discriminate against imports"?

The Panel tried to distinguish between duties subject to the schedule of concessions as provided in Article II (1) (b) and between charges which are equivalent to internal tax charged to importers to bring them at par with local producers subject to such taxes as provided in Article II(2). The basis of such discrimination was that the former would inherently discriminate against imports as they had no domestic equivalent while the former was not inherently discriminating but applicable in specified situations. By this interpretation the provision on schedule of concessions in Article II (1) (b) was sought to be restricted to duties which inherently discriminated. The Appellate Body disagreed with the Panel that taxes under Article II (1) (b) always had to be inherently discriminatory relying on contextual support from the provisions of Article II (2) (b) and (c). It argued that the logic of the Panel was defeated as even anti dumping duty or anti subsidy duty did not have a domestic equivalent. The legal implication is that taxes on imports would always be subject to the schedule of concessions subject to the established legitimacy of the system under Article II (2).

2. Whether the term "equivalent" in Article II: 2(a) relates to the "function" of a border charge and an internal tax, and does not relate to "effect" or "amount"?

The Panel was of the opinion that equivalent did not mean a numerical equivalent but the determination was whether they had the same function. This would not impose a requirement that taxes imposed on importers were equal to that of local manufacturers. The panel also tried to read out the significance of the provision which required consistency with Article III(2) which prohibited excess charges on imports stating that the provisions on equivalence and consistency with Article III(2) were separate and distinct provisions. The Appellate Body reversing the Panel report stated that equivalence required consideration of qualitative as well as quantitative information including effect and amount.

3. Whether in order to satisfy the conditions of Article II(2)(a), it is not necessary to determine whether a charge equivalent to an internal tax is "imposed consistently with the provisions of paragraph 2 of Article III"?

Reversing the Panel position the Appellate Body states that the provisions of Paragraph 2 of Article III are necessary to be met to be in consistence with Article II(2)(a).
The Appellate Body in relevant part held that additional and extra additional duties would be inconsistent with Article II( 2) (1) to the extent it resulted in imposition of charges on alcoholic beverages above the local excise or sales tax. This would render the additional duty inconsistent to the extent it results in the imposition of duties on alcoholic beverages in excess of those set forth in India's Schedule of Concession. It may be noted that India had not contested the United States' assertion that the Additional Duty and the Extra-Additional Duty, when applied in conjunction with the Basic Customs Duty, may subject certain imports to an aggregate amount of duties that is in excess of the rates specified in India's Schedule of Concessions. Instead it relied on the legality of the measure regardless of the above on grounds of justification under GATT.

For full report of the Appellate Body; Click here
For more background details on the DISPUTE DS360 India — Additional and Extra-Additional Duties on Imports from the United States Click here

Carbon Tax measures by the European Community: World Trade Issues.

The Economic Times reports

Indian goods being exported to the European Union may face higher barriers if the 27-member grouping goes ahead with a proposal to place a carbon tax on goods imported from advanced developing countries. While the EU justifies the proposed tax as a measure to create a level-playing field between polluting developing countries and countries that have agreed to cut emissions under the Kyoto protocol, India feels that the move may be yet another step to render exports from certain countries non-competitive.

The role of climate change policy in international trade can hardly be understated. It is also perhaps one of those areas where the thin line between legitimate and protectionist measures lose their distinction.

The news is obviously bad news for countries like India , China and even Brazil in which industries are primarily run by environment unfriendly fuels. The point of the whole debate is whether a remedy exists at the World Trade Organization for such a measure.

NATIONAL TREATMENT

The legal provision in question is the national treatment clause of GATT, 1994. The provision essentially requires that goods imported into the country be treated in the same way as good originating in the home country. Now the requirement is that like products be treated in the same way. So the next question is whether two product identical in all aspects except the process through which it is manufactured could be considered not like, which would legitimize the measure as far as provisions of national treatment are concerned. This remains a grey area of WTO law. While there does exist a precedent for such distinction if reliance is to be put on a pre WTO , GATT panel decision in US- Superfund case , the likeness test in WTO law is still without a definite answer. The Japan Alcohol jurisprudence also put forth a likeness test which does not seem to encompass a likeness test based on process.

ARTICLE XX EXCEPTIONS

The Economic Times also draws attention to Article 20 of the GATT, citing Shrimp Turtle jurisprudence as a basis for a contention that a measure of the nature that could be initiated by the EC, could find justification under the General Exceptions under GATT.

Article XX (g)
It makes sense to remember that the WTO Appellate Body found the US consistent with Article XX (g) of the GATT, which is an exception with regard to conservation of exhaustible natural resources. Interpretation of climate as an exhaustible natural resource seems a permissible interpretation. And the measure indeed could find justification under this exception. However the question is as far as the UNFCCC or the Kyoto protocol itself recognize differential responsibilities for developing countries and developed and underdeveloped countries could the WTO General Exception authorize such measure. It is important to note that both the Community as also India for instance is a party to UNFCCC and Kyoto and interpretation of a treat like GATT should be in adherence to principles of public international law. The requirement imposed by international law is that treaties be interpreted in their context which would include the climate change treaty and the subsequent protocol. It may make sense to remember that the Shrimp Turtle jurisprudence imposed on the US a requirement to negotiate or at least try to, to be clear of the arbitrary discrimination clause in the chapeau of Article XX. As long as a negotiated agreement on climate remains, its importance has to be given due bearance.

Article XX(b)
Article XX(b) is an exception when a measure is necessary to protect human, animal or plant life or health. Necessary would entail a search for less WTO inconsistent alternatives comparable in effectiveness though the measure need not be the least inconsistent measure. The measure may find itself under a lot of scrutiny when nations have come together and arrived at a multilaterally agreed mode of combating climate change (to which the EC is a party) through an international protocol. This the EC acknowledges is an effective mode of combating climate change by becoming a party to Kyoto. While the post Kyoto scenario is interesting its unlikely it would lead to a substantial change in the present responsibilities.

The developments may finally set the stage for a much anticipated dispute on climate change and its role in international trade.

Did Stare Decisis in WTO Dispute Settlement get introduced in United States– Final Anti-Dumping Measures?

WTO Dispute Settlement process does not recognize the role of "precedence" in the dispute settlement process. The question is, has this position changed post the Appellate Body Report in United States – Final anti-dumping Measures on Stainless Steel from Mexico on April 30, 2008?

The case itself concerned "zeroing" which is becoming without doubt the most controversial area of anti dumping law. My present post however does not concern zeroing. What it focuses on is whether the Appellate Body in reversing the Panel decision which itself had disregarded prior WTO Appellate Body Reports has in a way incorporated stare decisis into the dispute settlement process. While the Appellate Body itself might disagree that its purpose was to introduce precedence into the system by noting that "Appellate Body reports are not binding, except with respect to resolving the particular dispute between the parties" a close reading of the report reveals something else.

Legal Basis of the challenge remained Article 11 of the DSU reproduced below.

Article 11
The function of panels is to assist the DSB in discharging its responsibilities under this Understanding and the covered agreements. Accordingly, a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements. Panels should consult regularly with the parties to the dispute and give them adequate opportunity to develop a mutually satisfactory solution.

Basis of Mexico's claim was that in disregarding established WTO Appellate Body jurisprudence the WTO Dispute Settlement Panel had violated Article 11 of the DSU.

Excerpts from the Appellate Body report are reproduced below.

Para 156
We observe that the second sentence of Article 11 begins with the term "Accordingly". This term creates a link between the first and the second sentence of Article 11; it ties the second sentence to the general description contained in the first sentence. The second sentence enunciates two specific "functions" of panels, namely, the duty "to make an objective assessment of the matter before it" and "to make such other findings as will assist the DSB in making the recommendations or in giving the rulings" under the covered agreements.

It goes on to add that

The function of panels in the first sentence of Article 11 is informed by the general provisions contained in Article 3 of the DSU, which sets out the basic principles of the WTO dispute settlement system

In particular attention is drawn to Article 3.2 which in relevant part states

The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law

Most pertinent is the observation of the Appellate Body that

"security and predictability" in the dispute settlement system, as contemplated in Article 3.2 of the DSU, implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case

The above paragraph lays down in more or less explicit term in the absence of any cogent reason which would in practical terms mean distinction on the basis of facts, a dispute settlement would not only have to consider but also follow a prior Appellate Body Report laid down in a different case.

While the Appellate Body is correct in reiterating the Japan - Alcoholic Beverages II jurisprudence which opined that adopted Panel decisions create legitimate expectations among WTO Members, and, therefore, should be taken into account where they are relevant to any dispute, it may have gone overboard in requiring that an adjudicatory body will resolve the same legal question in the same way in a subsequent case.

What is more interesting that at the end of it all the Appellate Body refrained from making a finding with regard to Article 11 stating
Since we have corrected the Panel's erroneous legal interpretation and have reversed all of the Panel's findings and conclusions that have been appealed, we do not, in this case, make an additional finding that the Panel also failed to discharge its duties under Article 11 of the DSU.

The question is if a finding with regard to Article 11 was not necessary for determination of the dispute why would the Appellate Body get into an analysis of Article 11 in this regard and not exercise judicial economy.

In the interesting world of dispute settlement the precedential value of the Appellate Body Report laying down that precedence is required remains to be seen.

The Shrimp EBR saga continues : Parties appeal Panel decision.

The Shrimp – Anti dumping saga continues. Readers would have read on wtoindia, a previous post which highlighted the victory of India at the WTO Dispute Settlement Panel.

With both the parties, the United States and India going on appeal it remains to be seen what would be the settled position of WTO law on the subject, once the Appellate Body gives its report.
The Economic Times reports
The US position centres around its belief that the Panel decision holding the quantum of EBR to be unreasonable was incorrect. India on the other hand is on appeal arguing that the Panel decision should be made tighter to prevent additional duties to be imposed in the future.

An important point needs to be mentioned here.
The Panel has at no point of time decided that the EBR scheme per se is violative of WTO law, concentrating instead on the unreasonability of the scheme. In exercise of judicial economy the Appellate Body may still decline to examine the consistency of the EBR scheme in the event it upholds the panel position on “unreasonability” of the scheme. It remains to be seen whether like zeroing the very concept of enhanced bond requirement will be declared contrary to WTO law.

There has been a strong reaction from the domestic lobby in the United States to the Panel decision (Read the Southern Shrimp Alliance request letter to the USTR urging the US Government to go on appeal) which no doubt has been pivotal in influencing the US decision to approach the Appellate Body.

Read also the Notification of an Appeal by India at the WTO.

International Trade in Biofuels: Defining the Indian negotiating strategy.

Basically an essay I wrote as a requirement for the application for the Model WTO. It tries to give a perspective to the Indian position on trade in biofuels. Do add in your views.

INDIA’S NEGOTIATING STRATEGY IN INTERNATIONAL TRADE IN BIOFUELS.

Essential basis of a successful negotiation without doubt remains the determination of grounds of common interest between negotiators who try to look for signs of commonality in a myriad range of varied interest. Primary mode of successfully forwarding India’s interest at the WTO Negotiations would be the identification of certain core interests which needs to be defended at all costs. Beyond the core interest would lay areas in which there is enough room for negotiations. As international trade in biofuels becomes a definite possibility, the role of the WTO should be in accordance with its mandate to ensure conditions of free and fair trade. An Indian negotiator’s role as argued would be to properly identify the scope of India’s comparative advantage in biofuels.

Ethanol and biodiesel while by no means the only represent the primary subject of discord in international trade of biofuels. While India enjoys the position of the fourth largest manufacturer of ethanol, the statistics do not necessarily reveal that the annual quantum remains far below the first three, i.e. United States, Brazil and China. India’s national interest in trade in ethanol compared to the above three is limited. If India is to secure a stake in the biofuels trade its primary area of concentration should be biodiesels. India has an acknowledged comparative advantage in biodiesels for reason discussed below with a potential to become a major player in this market. So a negotiator defending India’s interest in the WTO negotiations should aggressively forward India’s interest in biodiesels. Such strategy should be used in conjunction with using her limited interest in ethanol as a scope for possible alliance with other developing countries such as Brazil and China. These countries stand much more to benefit from removal of protective measures in developed countries than India. This would essentially mean that India could barter her support for their cause in ethanol in exchange for their support in India’s position on biodiesels. Of course India may do well to secure some basic interest in ethanol to at the very least ensure that foreign producers do not completely replace the infant domestic ethanol industry.

India has certain distinct advantages in manufacture of biodiesel. Unlike, biodiesel manufactured in other principle jurisdictions which use edible oil and seeds, India has concentrated on non edible oil seeds as a source of biodiesel. Jatropha represents the most popular of such kind of non edible seed. The distinct advantage of jatropha is that it could be grown in areas where availability of water is low. This would mean that vast areas of waste land could be successfully diverted to the cultivation of jatropha. Advantage for India, as well as the world community is at two levels. First, biodiesel manufactured from jatropha ensures that valuable food crop is not diverted to the manufacture of fuels. Second, since the crop may be grown on wasteland, there is no need to use fertile land for such purpose. In addition with specific regard to India, farmers based in lands not suited for mainstream cultivation have a source of income from jatropha.

A negotiation strategy towards the developed countries would be directed towards bridging the differences of interest between the European Community and the United States. Such a strategy with particular reference to the European Community may be explained with a simple model. Presently the Community extends a high amount of subsidies to its biofuels manufacturers as also the input providers of this industry. The financial cost of this subsidy is borne by the European Community taxpayer. As discussed India has a comparative advantage in biodiesel. If industries based in the Community were to invest their funds in the Indian biodiesel programme, a profit generated from it would obviously be repatriated back to the Community. It would make sense for the European Community to ensure that through taxation mode or otherwise that some of the repatriated amount is used to support the agricultural farms and industry contributing towards biofuels in some way. This would ensure that support is extended to these sections not out of the Community’s own pocket but from a steady source of income. It may be noted that the European Community itself has been in favour of developing a coherent biofuels package for developing countries with a potential for biofuels as suggested in a Communication from the European Community Commission (Brussels 8.2.06, COM(2006) 34 final). While the position of biofuels in the Clean Development Mechanism of the Kyoto Protocol is still at its preliminary stage, the future may witness the Kyoto Protocol bound Community benefitting from its investment in India. The strategy discussed above would in most parts hold true for the United States as well except that unlike the Community, USA is not bound by the Kyoto Protocol.

India may well do to address a legitimate concern, i.e. spiraling prices of food crops in the event that food crops are actually used for biofuels manufacture. An artificially protected biofuels industry would be that much more willing to pay a higher amount for input usually food crop than an industry which competes with imports in the local market. Now food crop with end use in biofuels industry would fetch a better price for the input provider meaning he would allocate his produce more towards the biofuels industry. This would adversely affect the food supply, which may lead to increase in domestic prices. Subsidies if given to offset the same would also have to undergo a very strict WTO scrutiny. For this reason such nations may do well to reduce the tariffs to enable the biofuels industries to respect market standards.

A clear competing interest is represented by the present manufacturers of fossil fuel who may see a surge in international trade of biofuels as directly affecting their exports in fossil fuel. It may be well said that negotiation in this aspect may be tougher than the one witnessed in the North South divide. Saudi Arabia as one of the largest producers of fossil fuel may not find it in its national interest to promote international trade in biofuels. The key point here is to emphasize that it is an acknowledged reality that fossil fuel is an exhaustible resource and is not going to last forever. Countries which are generating a significant amount of revenue from fossil fuel today may do well to secure their future by diverting an amount of their funds towards biofuels. A proposal for cooperation in research to gauge the possibility for Saudi Arabia to emerge as a cultivator of jatropha which requires minimum water and fertility to grow may also be put on the agenda subject to scientific evidence to the contrary.
Like India, countries such as Bangladesh would also benefit from increased flow of foreign investment with regard to biofuels projects and the lowering of tariffs in the same. Geographical neighbors the two countries could be natural allies at the WTO.

The classification of biofuels as agricultural/industrial or environmental goods is an exercise already undertaken by the Committee on Trade & Environment, and therefore the Committee on Trade & Agriculture should refrain from addressing the same. It may however move towards a separate agreement on biofuels like the Information Technology Agreement to negotiate a reduction regardless of classification of the biofuels. India should push towards including separate rules on investment in the agreement. This is not without precedence with rules regarding investment on services being covered by GATS instead of TRIMS. Unreasonable distinction in the process of manufacture as a basis for differential treatment should be discouraged for as has been witnessed they often become a mode of protection. Tax credits and subsidies should also be subject to a phased reduction to restore the parity. Such reduction commitments may be enshrined in the schedule itself of individual countries.

Harmonization of interest between the developed, developing and the LDCs may ensure a successful outcome for the negotiations.