Jan 24, 1990

PANEL RULING ON SOYABEAN CASE BEFORE GATT COUNCIL.

GENEVA, JANUARY 23 (BY CHAKRAVARTHI RAGHAVAN) The ruling of a GATT panel against the European Community on the payments to its oilseed and animal feed processors for their purchase of local oilseeds is coming up before the GATT Council on Thursday, but is not expected to be adopted immediately.

Apart from the EC itself, other CPs might want to study the report carefully, since it would appear to raise some wider issues as well.

The panel has ruled that the Community regulations for payments to seed processors conditional on purchase of oilseeds originating in the Community are inconsistent with Article III: 4 of the General Agreement.

The Article requires that imported products shall be given treatment no less favourable than that accorded to like domestic products in respect of all regulations affecting their internal purchase.

The panel ruled the EC regulations (intended to provide a production subsidy to EC oilseeds producers) also impaired the benefits flowing to the U.S. as a result of the EC's 1962 bound zero tariff concession an imported oil seeds, a concession that has been repeatedly renegotiated and bound at zero tariff by the EEC with successive enlargements of the Community.

The EC's 1962 concession (in the context of the Dillon Round) and in anticipation of the single EC external trade regime, and the subsequent schemes to support domestic production, replaced the individual import regimes to protect local oilseeds production in force in France, West Germany, Netherlands and Italy.

The ruling, if adopted by the Council, would require the EC to change its incentives to seed processors to buy domestic oilseeds and change its domestic production subsidies to oil seed producers that nullify its bound zero tariff concession on imported oilseeds since the subsidies impair the competitive relationships between domestic and imported oilseeds.

Since both violations stem from the same EC regulation, the panel has said that the Contracting Parties take no action (to authorise the U.S. to withdraw equivalent concessions to restore the balance of its rights) until the Community has had a reasonable opportunity to adjust its regulations to conform to Article III: 4.

The dispute over the EC oilseeds and related animal-feed proteins regime was raised by the U.S. in February 1988, and was referred to a panel in June 1989 after some resistance from the EC which had wanted the issue to be considered within the dispute settlement mechanisms of the subsidies code.

The U.S. complaint over the EC regime related mainly to rapeseed, sunflowerseed and soyabeans and the meals derived from those oilseeds - which are extensively traded because of their high-quality oils and protein content.

Up to 1980, the EC's major consumption of these products was met by imports, but since then while the imports have continued to rise in volume, a substantial part of the consumption is met out of local production. In 1988-89, for example, of the 24.5 million metric tons of consumption, 17.4 million was from imports and 8.15 million from domestic production. In 1989-90, the figures were respectively 25.8 million, 19.4 million and 7.8 million. In 1979-60, they were respectively 17.6 million, 17.2 million and 0.68 million.

While the dispute was between the U.S. and EC, Argentina, Australia, Brazil and Canada, all with interest in oilseed production and export, were among those who intervened before the panel. Some like Brazil also made the point that the EC's schemes, coupled with the U.S. export entitlement schemes had exacerbated their difficulties as competitive exporters on the world market.

Under the Community regime, target prices are fixed for each of the products, and support provided to producers through guaranteed purchases at an intervention price which is slightly lower than the target price. The processors are paid the difference between the target price and the prices on the world markets that the EC calculates from time to time.

The panel noted that the oilseeds market inside the Community had functioned on the basis of payments to processors and this has rendered intervention purchases largely superfluous.

Under the Community scheme, the subsidy payments to processors for purchase of local production can be greater than the difference between the price the processors actually pay to producers and the price they have to pay for imported oilseeds.

The EC regulations were thus capable of giving rise to discrimination against imported products, though they might not necessarily do so in respect of each individual purchase.

Such a risk, the panel ruled, must be considered a violation of the Article III: 4.

But change of regulations to support the producers through provisions that would not subsidise processors for purchasing local products, the panel said, might not necessarily eliminate the U.S. objections under Article XXIII: 1 (b) of impairment of its balance of GATT rights and obligations flowing from the zero bound tariff.

Under this provision, a complaint could be raised by a CP over the application by another CP of any measure "whether or not it conflicts" with the provisions of the General Agreement if this directly or indirectly nullifies or impairs benefits that would accrue to the CP complaining.

The EC had contended that in negotiating and renegotiating these concessions, its partners could be assumed to be aware of the domestic support schemes and proposals and its likely effects.

The panel ruled that the EC's trading partners in successive renegotiations of the tariffs could legitimately assume, in the absence of contrary indications, that the offer to continue the external zero tariff was one not to change the balance of concessions previously attained and the EC had produced no material to show that it had indicated to its partners that it was seeking to establish a new balance of concessions.

While GATT did recognise the right to grant production subsidies, it could not be understood to mean that the right could be exercised to impair a tariff concession that had been granted.

"The recognition of the legitimacy of an expectation relating to the use of production subsidies in no way prevents a CP from using production subsidies consistently with the General Agreement; it merely delineates the scope of protection of a negotiated balance of concessions".

For these reasons, the panel said, the U.S. could be assumed not to have anticipated the introduction of subsidies which protect the Community producers from movement of prices for imports completely, and thereby prevent tariff concessions from having any impact on the competitive relationship between domestic and imported oilseeds.

The U.S. could have expected the transformation of national producer support schemes into a Community support scheme but could not reasonably have expected introduction of subsidy schemes which protected producers completely from movement of prices for imports and thus preventing tariff concessions from having any impact on competitive relationship between domestic and imported oilseeds.

The panel rejected the view that since EC imports had been increasing in volume there was no impairment of benefits. It said what the GATT protected was not a share in volume of the trade but the conditions of competition for trade.

In seeking tariff concessions, GATT CPs hope to expand their exports, "but the commitments they exchange in such negotiations are commitments on conditions of competition for trade, not on volume of trade", the panel pointed out.

For these reasons, the panel said, the EC's schedule of concessions U.S. benefits had been impaired by the subsidy schemes.

On the EC argument that one of the reasons to expand domestic production was the concerns over security of supplies following the 1973 U.S. embargo on exports of soybeans in 1973, the panel said that while the U.S. ban could have rightly roused concerns in the EC about security of supplies, this was no justification for measures affecting the competitive position of imports originating not only in the U.S. but also other CPs benefiting from the EC's tariff binding.

The EC could bring the matter before the Contracting Parties at the appropriate time and seek remedies.

On the EC's contention that the dispute and issues should be adjudicated upon in terms of the subsidies code and its provisions, which in the EC view would enable it to take the measures concerned since article 8:4 of the code (in the EC view) redefined the benefits accruing under a tariff concession, the panel noted that it did not have the mandate to look at the issue from the viewpoint of the provisions of the code.

However, the provisions of the code would have to be interpreted in conformity with the decisions of Contracting Parties rather than "revising the decisions in the light of a particular interpretation of a code accepted by a portion of the contracting parties."

This view of the panel would perhaps be welcomed by the large number of CPs who are increasingly finding themselves discriminated against through application of code provisions to the detriment of their rights reiterated by the Contracting Parties in adopting the codes and placing them within the GATT framework.

In cases arising out of purported impairment of rights, arising out of measures legitimate under GATT, the CP concerned could provide other compensation or the party complaining could seek permission to withdraw some other concession to restore the balance of rights and obligations.

The panel has said that since the modification of the Community regulations would eliminate both the violation of Article III: 4 (national treatment) and the impairment of U.S. rights, the Contracting Parties should take no further action in relation to the impairment of the tariff concessions until the EC has had a reasonable opportunity to adjust its regulations.

This could well result, if the Council adopts the ruling the EC putting off implementation until the Uruguay Round and its agricultural negotiations are completed.