SUNS4500 Wednesday 1 September 1999

Trade: Rulings against India, Brazil raise WTO bias issues

Geneva, 31 Aug (Chakravarthi Raghavan) -- The Appellate body of the World Trade Organization has issued a report (on August 23), rejecting legal issues raised upholding a dispute settlement panel ruling against India over its quantitative restrictions maintained on grounds of balance-of-payments.

The outcome will have some serious political repercussions in India -- against the WTO as a system, and those in government (in 1992-1993), officials and politicians responsible for the negotiations and accords.

Separately, the WTO's Dispute Settlement Body held (on 23 August) a rare (for the old GATT and the new WTO) August meeting, without a quorum, and adopted the panel and appellate body rulings against Brazil and Canada in their mutual disputes over subsidies to aircraft exports.

The rulings show how the WTO Agreement on Subsidies and the WTO Dispute Settlement Processes can enable industrialized countries to get around rules and continue support to industry, while developing countries can't even "create a level playing field" for their enterprises who have to borrow (for export financing) in international markets which load on a heavy premium against them.

In the BOP case, India after some protracted talks in the BOP committee, had agreed to 'phase-out' its BOP restrictions over a 5-7 year period, with restrictions kept on a few 'very sensitive' items till the end. This was ultimately accepted by other industrialized nations, but the US did not, blocked any decision at the BOP Committee, and challenged the Indian restrictions through a dispute and seeking immediate withdrawal.

The appellate body ruling is required to be adopted by the DSB within 30 days and, if there is no agreement, a ruling by arbitrators within 90 days (by 22 December) the period for India to implement the ruling.

The panel in ruling against India, made a 'suggestion' that the arbitrator who ultimately sets the "reasonable period" for implementation give more than the 15 month suggested as a guideline in the DSU rules.

This suggestion was not appealed or challenged by the US, and the appellate body has made no pronouncement on it. But it is no more than a 'suggestion' that the arbitrator - who, in the absence of
the agreement between the US and India, would be named by the secretariat -may follow or disregard.

Whether India gets 15 months or more or less to implement it -- the ruling and its implications will come on 23 December as a 'xmas gift' to the US-Europe-Japan based TNCs exporting to the Indian market, and the rich upper middle-class Indian consumers.

But it will be a "scrooge's" gift to the impoverished agricultural workers and small farmers of India and small
enterprises and informal sectors.

Either way, the ruling which throws up both the inherent asymmetry of the WTO system, as well as the failure of Indian negotiators in the Uruguay Round as a whole -- in this case in not having put the identical wording and language in the BOP understanding, as in the Art XXIV (regional and free trade agreements) understanding, both of which were negotiated by India and EC, but whose negotiating history is conveniently absent from the WTO records and rejected by the panel and appellate body.

The ruling is going to make it difficult for any Indian government to compromise and accommodate the US or EC on other issues at the WTO, much as the political elites would like to do.

As the panel before, the appellate body ruling, has made the BOP provisions of the WTO/GATt for developing countries, a nullity -- by upholding the view that both the BOP Committee and the WTO
General Council (where any member can withhold consensus and block a decision) on the one side, and the Dispute Settlement panels and Dispute Settlement Body adopting the panel recommendations (where a negative consensus is needed to block adoption) have jurisdiction to look into the justifiability of the BOP claims.

The BOP article (Art.XVIII:B) which was negotiated with some difficulty in the 1950s, but had provisions included to accommodate the views of developing countries who by then were already viewing the old GATT with some hostility. One of these (Art.XVIII:B.11) says as a proviso over-riding everything else in that para that "no contracting party shall be required to withdraw or modify restrictions on the ground that a change in
its development policy would render unnecessary the restrictions which it is applying under this Section."

The IMF in its statement and views to the panel, that India could manage its external situation to meet its BOP situation "through macro-economic policy instruments, but these would need to be complemented by structural measures such as scaling back reservations on certain products for small-scale units and pushing ahead with agricultural reforms."

The effect of the panel ruling and that of the appellate body is that "macro-economic instruments" are different from "development policy", and the IMF advice for "scaling back" reservations on products for small-scale units (instituted in India to safeguard employment in the small-scale sectors) and "reforming
agriculture" -- which in IMF terminology means doing away with the protection for small farms and making agriculture commercial - is not a change in development policy but "structural measures".

[A separate article in today's SUNS, by an NGO activist working in India on behalf of a British NGO charity, shows already the effect of 'liberalization' on the domestic economy]

While the US and Europe have long had an eye on India and its use of BOP, nothing can prevent in future any WTO member to block in the BOP committee, the BOP plea of any developing country (including an LDC), take it to the panel and get a ruling in its favour.

The ruling, and its implications in respect of the BOP provisions for developing countries in the GATT and the BOP provisions under GATS, is thus likely to have many negative implications for the WTO (and its globalization drive) in the developing world.

As for the aircraft export subsidy cases, an interesting issue in the panel ruling against Brazil (where too issues of respective jurisdictions of panels and WTO bodies administering the agreement were involved) the panel conceded that there are provisions of the Subsidies agreement relating to the special and differential treatment to developing countries to enable them to subsidise exports to meet their "development needs", but took the view that this was a political and economic question that the panel dealing "with law" could not deal with, but the subsidies committee could.

And one of the questions involved in the Brazil-Canada aircraft export subsidy issue, is the inherent bias of the international (private) money and finance markets, and the differing rates at which enterprises in developing and developed countries borrow - a difference of 2-3 percentage points even as between two
equally-sound enterprises.

The interest rates and conditions under which private enterprises in developing and developed countries are set by their credit- worthiness (judged by the capital markets and rating agencies). But enterprises of developing countries in raising funds from the private banks or capital markets carry in addition what is called
a "country risk premia", which the market rating agencies add on based on the country-debt profile.

This means that while the periodically set OECD guidelines for export credits are to be the benchmark, "firms" in OECD countries will always be at an advantage over developing country firms (and within the OECD, US firms at an advantage over others, other things being equal).

The panel ruling in the Brazil case rejected the Brazilian government argument that it was only trying to compensate its exporters against this "country-risk premium" and create a "level playing field" in the international market.

The panel agreed that Art.27.4 of the Subsidies agreement has a mandatory provision relating to the developing countries, but that an examination as to whether export subsidies are inconsistent with a developing country Member's development needs, "is an enquiry of a peculiarly economic and political
nature, and notably ill-suited to review by a panel whose function is fundamentally legal".

In a footnote, the panel has added that a body like the Subsidies Committee is better equipped than panels to perform this type of examination than a panel.

In the BOP case, the panel and the appellate body have turned down India's arguments that with both the BOP Committee and the General Council on the one side, and the panels on the other having some jurisdiction, the panels should not judge the "justifiability", and make inutile the BOP provisions and the remit of the BOP committee.

The panel said, and the appellate body now says, that "the review by panels of the justification of the balance-of-payments restrictions would not render redundant the competence of the BOP Committee and the General Council. The panel correctly pointed out that the BOP Committee and panels have different functions, and that the BOP Committee procedures and the dispute settlement procedures differ in nature, scope, timing and type of outcome."

The appellate body does not elaborate on any of these.

Two panels, two appellate bodies and two different views?

No, trade observers say: there is a common thread, that of the WTO secretariat and its legal division which (and several panellists have privately acknowledged this) guide panels (including through private notes to the panels, behind the backs of parties) and the appellate body secretariat which guides that body.

While trade negotiators from developing countries are struggling with such contradictions, and while their efforts to change or get a consistent interpretation through the General Council is blocked by the majors withholding consensus, civil society (public interest NGOs and academics and the small and medium
domestic business sectors) in the South are beginning to accept the argument that the WTO system is inherently biased against them, and cannot be cured by minor rule changes, and needs to be opposed and rejected lock-stock-and barrel?

There are also some systemic oddities thrown up.

The US and Canada, in the aircraft subsidy case, as in the other DSU cases, have insisted on the inflexible observance of the time-limitations set in the rules - for adoption of the reports, and the various time-periods set for implementation and/or retaliation.

But in other agreements where time-limits have been set, or the Marrakesh ministerial decisions (which rank equally with the rules of any agreements), the time limitations have been ignored.

This can be found in the working of the Textiles Agreement and the Textile Monitoring Body, or the requirement about completing work on harmonizing Rules of Origin, or other time limitations that were set for various negotiations -- including the financial and telecom services negotiations, or the Information Technology product negotiations, where the demandeurs were the US and EC and the deadlines were repeatedly extended until their demands were met.

In other cases, the US, EC etc are always insistent on no meetings in August that would clash with their vacation schedules.

But in the case of the appellate body rulings on the aircraft subsidy case, the August holiday season was not allowed to interfere and a meeting was set to adopt it.

Though the DSB rules provide that the quorum for a meeting "shall be a simple majority", one of the participants said, the number present was nowhere near the 68 now required, and probably about
half that number (counting the 12 European Union members, who sit with the EC, and do not speak, but count for quorum purposes.)

One developing country participant said that if the EU (which speaks with a single voice, that of the EC) were taken as one, there were less than 15 delegations present.

The participant admitted that it was a failure not to have raised the quorum issue, and even a suspended and resumed meeting (before mid-September) would still not have been able to get a quorum.

The WTO itself does not seem to maintain or ever issue officially a list of delegations present at each meeting.

By a 'conspiracy of silence and connivance' among members, the lack of the mandatory "simple majority" quorum requirement is not raised.

The only exception in the 5-1/2 year old 'rule-based' WTO system, was when the DSB met to adopt a panel ruling against Japan (at a meeting held in a conference centre in Geneva outside of the WTO building), when Japan itself pointed to the lack of a quorum, and the meeting was 'suspended' for the DSB to get a quorum and adopt the ruling.

There are also other systemic issues, including the fact that some personalities seem to be included in some panel or other, while others on the WTO roster of panellists are never called. Generally, for each panel, the secretariat suggests some names that parties are expected to accept, except for "compelling reasons", and if there is no agreement, the Director-General names the panellists.

A more serious one is that the DSU provides for mandatory "consultations" (which are totally confidential) between the parties to a dispute, and the idea is that the complainant must specifically set out the complaint of alleged violation so that the other party can know what is the case and either negotiate and reach an understanding, or defend itself against them in the dispute settlement process.

And in seeking and getting panels established, the specific measures objected to and a brief legal summary of the case must be set out. The two read together would convey the ordinary impression that any question on which there had been no consultation, cannot be taken to a panel.

But the DSB does not exercise any judgement, but automatically refers disputes to panels. And, gradually, the panels and appellate body have interpreted this in such a way that even issues that are acknowledged to have not figured in the consultation or could not have figured (given the dates when the consultations were held and measures complained before the panel were taken - as in the complaint against Brazil) have been allowed to be adjudicated by the panels.

Again, in the case against Brazil, while the panel and the appellate body have conceded that the 'burden of proof' to show Brazil's export subsidies violated the accord rested with Canada, there was nothing wrong in judging whether Canada had discharged this burden, but referring to the Brazilian defence against it - an approach that would not stand a moment's scrutiny in any legal system based on rule of law, but passe at WTO.