6:55 AM Jan 18, 1996


Geneva 18 Jan (Chakravarthi Raghavan) -- A World Trade Organization Dispute panel which has been looking into complaints from Brazil and Venezuela against the United States in terms of discriminatory actions over sale in the of domestically refined gasoline and imported gasoline has handed down a ruling that the US actions are discriminatory and not saved by the exceptions (Art. XX) under the GATT rules.

The US gasoline regulations were issued by the US Environment Protection Agency (EPA) in December 1993 under the US Clean Air Act, and require gasoline sold in major US cities and metropolitan centres should be "reformulated" to control automobile emissions.

But while the rules enabled US domestic refiners to use their 1990 fuel as a baseline from which to measure their improvements to the reformulated gasoline (RFG) standards, overseas refiners exporting to the US market had to use the average 1990 US gasoline as the baseline.

The panel has apparently held the differing US yardsticks to measure the improvements as discriminatory violation of Art III of the General Agreement, and one not saved by the Art XX exceptions.

Venezuela raised the complaint first early in 1994 (under the old GATT), but withdrew it and refiled under the WTO to take advantage of the automaticity of the WTO dispute settlement rules. Brazil which brought up is own separate dispute a little later, agreed to have it coupled with Venezuela's to be heard and disposed off by a single panel -- though the types of gasoline, and issues, differed from Venezuela's.

This is the first dispute under the WTO Dispute Settlement Understanding and mechanism providing for automatic adoption of rulings.

The panel report appears to have been handed over to the three parties -- Brazil, Venezuela and the United States -- Wednesday evening, and is expected to be circulated to all the WTO members on 29 January.

While the three delegations here, and the secretariat, kept the ruling under wraps, the US Trade Representative Mickey Kantor said in comments in Washington that the ruling had gone against the US, that he was 'disappointed' that the panel had not accepted the US view about the consistency of the gasoline regulations with WTO rules, and that he would examine all options including an appeal to the WTO Standing Appellate Body.

The US options could involve an appeal process on law, acceptance of the ruling and changing the gasoline rules to remove the discrimination between domestically refined and imported gasoline or the US deciding not to implement the ruling but offering compensation to the parties.

Kantor's remarks relayed here by the US Information Service (USIS) of the US Mission, in a press release, said: "Obviously we are disappointed that the panel did not accept our view that the EPA regulation's treatment of imports is consistent with the WTO rules.

"At the same time, I must emphasize that the results of this dispute cannot and will not compromise this Administration's commitment to our environmental laws (emphasis in original). Nothing related to this matter will undermine fulfilling the objectives of the Clean Air Act. We will be carefully reviewing the panel's reasoning and our legal options, and will be consulting with Congress and interested members of the public about our next steps."

But the EPA rules, applying different standards to domestic and imported gasoline, run till end 1997. Beginning 1998, both imports and domestic gasoline have to meet the same requirements.

This would provide the US an easy way out: it could plead inability to change the rules and offer to compensate Venezuela and Brazil in the interregnum (until end 1997) when the rules will apply similarly to everyone.

But the DSU (Art. 3.7) lays down as a dictum that in the absence of a mutually agreed solution to a dispute between parties, "the first objective of the dispute settlement mechanism is usually to secure the withdrawal of the measures concerned if these are found to be inconsistent with the provisions of any of the covered agreements. The provision of compensation should be resorted to only if the immediate withdrawal of the measure is impracticable and as a temporary measure pending the withdrawal of the measure which is inconsistent with a covered agreement..." In Caracas, the Venezuelan Minister and President of the Foreign Trade Institute, Mr. Werner Corrales, said Venezuela was very pleased with the decision.

The Venezuelans have a large distribution network in North-East United States and supply mostly RFG gasoline.

Brazil supplies mostly normal gasoline to established networks and importers.

Neither side would comment on the value of trade involved, since this would figure in any subsequent dispute if the US refuses to change the rules but offers compensation, and the extent of it could be an issue.

But the USIS press release said that overall only five percent of US gasoline requirements are supplied by imports, but that imports account for between 10 to 20 percent of East coast supplies.

Under the WTO's DSU and procedures (Art. 15.2), the parties to the dispute were provided by the panel, early in December, an interim report outlining the descriptive sections and outlining the panel's findings and conclusions and written comments if any were sought from the parties. At this stage, at the request of any party making the comments, the panel is to have a further meeting with the parties on the issues identified before finalising its report.

The panel held a such a meeting on 3 January with all the parties and has now made final its report.

But at the interim stage, its conclusions appear to have become known (to the three governments and all the interested parties -- refiners, importers and distributors), and a subsequent Venezuelan comment from Caracas, responding to a US media report, made clear that the ruling had gone against the US and hoping the US would swiftly implement it. Venezuela was faulted by the panel for disregarding the confidentiality - but its comment was seen in terms of unfamiliarity of WTO members to the new interim stage process.

None of the three delegations involved here were willing to talk about it at this stage, but reports from Washington have quoted the US Trade Representative, Mickey Kantor, as saying that it was being studied and the USTR would be examining all the legal options open to the US.

Unless any of the parties (in this case the US) gives notice of intention to appeal to the Standing Appellate Body for a ruling on the issues of law, the ruling would be automatically adopted by the Dispute Settlement Body within 60 days from 29 January - in the week of 15 April depending on how the days are counted.

If the US notifies its decision to appeal (and it has to do so before 15 April), the Appellate Body is to complete its proceedings within 60 days from the appeal notification date, and any event not exceeding 90 days from that date -- about mid-July.

Within 30 days of that ruling by the Appellate Body, it become automatically binding.

Though the dispute involves trade actions for purported environmental objectives, neither Brazil nor Venezuela had challenged or questioned the environmental objectives of the US Clean Air Act.

Rather they challenged the way in which objective was sought to be achieved by the rules applied in a discriminatory way to domestic and foreign like products.

According to the USIS, the US EPA formulated its gasoline regulations in December 1993 while implementing the 1990 amendments to the Clean Air Act, which requires that gasoline sold in major US population centers be "reformulated" so as to control automobile emissions. It also seeks to ensure that the reformulated gasoline program does not result in a degradation of the quality of the "conventional" (or non-reformulated) gasoline sold outside these more polluted areas of the United States.

(The State of California even before this has its own RFG rules).

Under the EPA regulations, most of the US refiners were to maintain certain gasoline parameters at their individual 1990 historical levels -- using a variety of data laid down EPA.

Importers bringing in gasoline refined abroad had to ensure that their gasoline satisfies an across-the-board requirements based on an estimate of the average 1990 levels in the US market as a whole.

The EPA's argument, presented by the US to the panel was that the provisions governing US refiners (namely their own individual 1990 baseline) could not be applied to imports without raising substantial concerns (within the US) about availability of foreign data, enforcement problems, and environmental consequences.

The panel has clearly rejected this plea, though its reasoning will be known only when it is widely circulated.

The ruling appears to turn on the fact that the EPA rules allows US oil refiners to produce and sell gasoline with certain characteristics, but applies different standards and characteristics for gasoline refined abroad, imported into the United States and sold at pumps.

The US gasoline rules allow US domestic refiners (using domestic or imported petroleum) to use some processes to produce gasoline with certain characteristics, but does not allow the same to foreign refiners exporting the gasoline to the US market, but sets different and higher standards and characteristics.

This means that the same 'chemical product' that can be sold when produced by domestic refiners cannot be sold when supplied by foreign refiners -- a clear violation of Art. III of the GATT which demands like treatment for domestic and imported products.

And while Art XX (b), the General Exception provision allows measures contrary to the GATT obligations on grounds of protection of human, animal or plant life or health, this has to be applied in a manner that is not an "arbitrary or unjustifiable discrimination between countries where the same conditions apply or a disguised restriction on international trade".

There is a long line of panel rulings and precedents to judge whether or not the actions taken under the exception plea are arbitrary, involve unjustifiable discrimination or a disguised restriction on international trade (protectionist actions) under the old GATT (which would apply under the WTO and the GATT 1994).

Being the first ruling under the new much proclaimed "rule-based" trading system, and involving the leading 'power' in the WTO trading system, the way this question is finally resolved would be watched by everyone.

And in an US election year, it would also run into the famous or infamous US conditional acceptance of the WTO: 'three-strikes-and-we-are-out' threat of the US domestic law owing its origin to Senator Bob Dole, a leading Republican candidate for the White House, during 1994 battle in the Congress on the WTO ratification.