WTO GASOLINE RULING NO BAR TO ENVIRONMENTAL PROTECTION

1:27 PM Jan 31, 1996

WTO GASOLINE RULING NO BAR TO ENVIRONMENTAL PROTECTION
Geneva 31 Jan (Chakravarthi Raghavan) -- The ruling of the World Trade Organization panel against the United States over its Gasoline Rule to limit and/or reduce noxious and harmful emissions from auto-vehicles using gasoline makes clear that the WTO/GATT rules have not restricted right of any member to take actions to protect environment, but only preclude unjustifiable discriminatory actions as between domestic and imported products.

The three member panel consisted of Messrs. Joseph Wong, Crawford Falconer and Kim Luotonen and heard the complaints of Venezuela and Brazil against the United States over the latter's 1993 gasoline rules, setting different standards for imported and domestically produced gasoline. The panel ruled that the US had failed to justify the differences in treatment meted to domestic and foreign products as a permitted exception under Art XX of the GATT 1994.

The panel ruling, on a more general level, suggests that the developing countries are well advised to continue to oppose the WTO providing any blanket waivers or agree to rules for a general, ex-ante "exception" covering all multilateral environmental agreements, but rather deal with them on a case-by-case basis where those seeking to depart from their obligations should prove their case.

The panel ruling was communicated to the parties on 17 January, and its substance became known on 18 January, through comments of the USTR Mickey Kantor and the Venezuelan minister in Caracas. Several of the US environment organizations, as well as Pat Buchanan a contender for the Republican Presidential nomination, jumped on it as a violation of US sovereignty and WTO bias against environment protection.

[A brief report on the ruling appeared in SUNS 3680 and Washington reactions in SUNS 3681.]

The report itself was circulated to the WTO members on 29 January, on a confidential basis, but is not publicly available, until it is adopted (automatically) by the Dispute Settlement Body. This last in turn depends on whether or not the US chooses to go in appeal on the GATT law.

But the US last week has made public in Washington the report and the panel's findings.

But a detailed reading of the report shows that the complaint of the US environmental groups, based merely on the summary information that the ruling went against the US rules, is based on misconception or misunderstanding.

Neither Venezuela nor Brazil disputed the right of the United States to set standards for gasoline to deal with environmental problems caused by emissions from gasoline used in automobiles and other vehicles. Rather they questioned the right of the USA to set differing standards between domestic and imported products and thus give domestic refiners and suppliers a competitive edge over imported products.

The panel too did not go into the desirability or necessity of the environmental objectives of the US Clean Air Act or the Gasoline Rule set under it by the Environment Protection Agency (EPA) but said that WTO members were free to set their own environmental objectives, but were bound to implement them through measures consistent with the provisions of the GATT 1994, notably those on the relative treatment of domestic and imported products.

The US did not dispute before the panel that there were differing and discriminatory standards for gasoline from US domestic refiners and supplying to the domestic market (from their own refineries and/or blended with imported stocks) and those for importers who import and sell blended gasoline.

Rather it contended that the differences related to the differences in the source of refiners and on average there was a near equivalence. It also contended that in any event the violation of its obligation to treat domestic and imported products alike was saved by the Art XX exceptions of the General Agreement -- on grounds of need to protect human, animal or plant life, necessary to secure compliance with domestic laws not inconsistent with GATT provisions or to conserve an exhaustible natural resource.

In finding against the US on this plea of exception, the panel noted that as the party invoking an exception, the US bore the burden of proof in demonstrating that the inconsistent measures taken by it were within the scope of the exceptions and fulfilled the requirements postulated in the exception article.

The US it noted failed to prove its case under any of the exceptions.

The facts of the dispute, set out by the panel in its findings, showed the dispute arising out of the US Clean Air Act which aims to control and reduce air pollution in the US. The Act and its regulations (Gasoline rule) set standards for gasoline quality intended to reduce air pollution, including ozone, caused by motor vehicle emissions.

From 1 January, this rule allows only gasoline of a specified cleanliness, "reformulated gasoline", to be sold in areas of high air pollution (some nine major metropolitan areas of the country), and in other areas only gasoline no dirtier than that sold in base year 1990.

The rule applies to refiners, blenders and importers of gasoline. It requires that certain chemical characteristics of the gasoline in which they deal respect on an annual average base, defined levels. Some of these levels are fixed by the Gasoline rule; others are expressed as "non-degradation requirements" -- under which each domestic refiner is must maintain, on an annual average basis, the relevant characteristics at levels no worse than its "individual baseline" which is the annual average achieved by the refiner in 1990.

To establish the baseline, individual refiners must show evidence of quality of gasoline produced or shipped in 1990; if the evidence for this Method 1 is not complete, it must use data on quality of blendstock produced in 1990 (method 2) and, failing that, use data on quality of post-1990 gasoline blendstock or gasoline (method 3).

Importers were also required to use an individual baseline using method I data (all disputants agreed this was unlikely for any importer). If they could not, importers were not allowed to use either of the other two methods, but use a statutory baseline which the US claims was derived from the average characteristics of all gasoline consumed in the US in 1990 (which included the much higher quality reformulated gasoline set in California).

Before the EPA proclaimed these rules, as a result of public hearings and views from importers, it set a modification for importers in May 1994, but Congress vetoed it by denying budget for administering it.

In the arguments about violation of the national treatment requirement under Art III, (which requires equal treatment for like products, with GATT defining 'products' but not 'like'), the panel fell back on the Vienna Law of Treaties (interpretation in good faith by using the ordinary meaning of words) and the past practice of CPs of doing so on a case-by-case basis.

The panel noted that the US did not argue that the domestic and imported products were not per se 'like', but that for judging treatment of the two, the situation of parties dealing in gasoline must be taken into account.

The Panel noted in this regard that chemically-identical imported and domestic gasoline by definition had the same characteristics, end-uses and tariff classification, and thus perfectly substitutable. Thus chemically-identical, imported and domestic gasoline were like products.

The panel then went on to find that under the baseline establishment methods, imported gasoline was effectively prevented from as favourable sales conditions as that afforded to domestic gasoline by an individual baseline tied to the producer of a product. Thus the imported gasoline got less favourable treatment.

The Panel rejected the US argument that requirements of Art III:4 were met because imported gasoline was treated similarly to gasoline from similarly situated domestic parties. Such an interpretation, it said, would be contrary to the ordinary meaning of Art III:4, and would mean that imported and domestic goods could no longer be assured (of equal treatment) on the objective basis of their likeness as products, but rather on the basis of a "highly subjective and variable treatment" according to extraneous factors.

This, the panel said, would create great instability and uncertainty in the conditions of competition as between domestic and imported gods in a manner fundamentally inconsistent with the object and purposes of Art III of GATT.

On the US argument that the statutory baseline criteria it applied to imports was "on the whole" no less favourable than that accorded to domestic gasoline under individual baselines, the Panel said this amounted to the argument that 'equivalence' amounted to arguing that less favourable treatment in one instance could be offset by a correspondingly more favourable treatment in another case. The Panel said that under Art III:4, less favourable treatment of a particular imported products in some instances could not be balanced by more favourable treatment of other imported products in other instances.

Dealing with the US arguments about its actions being covered by Art. XX exceptions, the panel said that to justify departure from GATT obligations on the ground of its being necessary to protect human, animal or plant life or health, three requirements had to be satisfied:

* the policy in respect of measures for which the exception was invoked fell within the range of policies designed for protecting human, animal or plant life or health,

* the inconsistent measures for which the exception was being invoked were necessary to fulfil the policy objective, and

* the measures were applied in conformity with the requirements of the introductory clause of Art XX.

The panel agreed that a policy to reduce air pollution fell within the range of excepted measures for protection of human, animal and plant life or health. The panel also held that it was not the necessity of the policy goal that it had to examine, but whether it was necessary that imported gasoline should be effectively prevented from having the same favourable sales conditions afforded by an individual baseline tied to the producer of a product. The panel had only to address the question whether these inconsistent measures were necessary to achieve the policy goals.

Examining the various US arguments about the difficulties in using the same or equivalent methodologies to foreign refineries and products, the panel found that the U had not shown that the various methods that were available could not used to achieve the purpose it had.

The panel concluded that the US had not met its burden of showing that the concerns raised by it were an adequate justification for maintaining inconsistency of its actions visavis Art III:4

The Panel did not also accept that the US had demonstrated that there was no other measure, consistent or less inconsistent with Art III:4 that were reasonably available to it to enforce compliance with foreigner refiner baselines or importer baselines based on them. The imposition of penalties on importers was a sufficiently available mechanism for enforcement of standards, the panel found.

As for the US argument that its differing treatment was needed to secure compliance with its laws and regulations not inconsistent with GATT -- Art XX (d) exception -- the panel found that the maintenance of discrimination between imported and domestic gasoline did not secure compliance with the US baseline system. These methods were not an enforcement mechanism, but simply rules to determine individual baselines. It was thus not covered by Art XX (d).

As for Art XX (g), namely justification for conserving exhaustible natural resources, the panel noted that this provision was originally intended to cover exports of exhaustible goods such as petroleum or coal, and its expansion to cover "conditions" could not be justified.

The panel agreed that clean air was a 'resource' with a value and could be depleted. That this depleted resource was defined with respect to its qualities was not decisive for the panel, and its renewability was not an objection. A policy to conserve clean air was hence a policy to conserve a natural resource.

It agreed with earlier panel rulings that the purpose of Art XX (g) was not to widen the scope of measures serving trade policy purposes but merely to ensure that commitments under GATT did not hinder pursuit of policies to conserve exhaustible natural resources.

But the panel found that the discriminatory treatment to chemically identical products had no direct connection with the US objective of improving air quality. Affording treatment to imported gasoline consistent with the Art III:4 obligations, the panel found, would not in any way hinder the US objectives and the US remained free to regulate in order to obtain the air quality it desired.

The panel said in its concluding remarks, that it was not its task to examine generally the desirability or necessity of the environmental objectives of the Clean Air Act or the Gasoline Rule. Its examination was confined only to the points raised by the complainants.

Under the General Agreement, WTO members were free to set their own environmental objectives, but were bound to implement these through measures consistent with its provisions, notably on relative treatment of domestic and imported products.

In the light of these, the Panel concluded that the baseline establishment methods in the US gasoline rule were inconsistent with Art III:4 of the General Agreement and could not be justified by any of the Art XX exceptions.

It recommended that the DSB request the US to bring its rules into conformity with the GATT obligations.