WTO – PANEL AND THE EC REGIME

Anne-Claire chambron, Banana Link

1 .WTO core principles

The World Trade organistaion is the legal and institutional basis of the global multilateral trading system. The WTO covers a range of trade agreements, each consisting of different articles, or principles. Ist core principles is the so-called ”Most Favoured Nation” (MFN) principle (Article 1). According to Artcle 1, any advantage granted by one signatory country to another must be automatically extended to all other signatories to the agreement. For example, if the European Union decides to grant a 20% custom duty on the import of bananas, theoretically this level 20% should be extended to all producing countries whether latin American or African.

There are execeptions and possible waivers to MFN rule, however:

• For custom’s union and free trade zone, like the European Union or NAFTA (if the US fix a duty on a product imported from Cananda, for instance, they can still levy a 15% duty on similar porducts imported from other WTO member countries).
• For preferential trade relations that pre-dated the implementation of the original GATT Agreement in 1947, such as the british Commonwealth; this excludes however the Lomé Convention since it was first signed in 1975.

Waivers can also be secured, if two third of the WTO members vote in favour of it. This was the case of the waiver granted to the US for their preferential agreement with the Caribbean countries (CARICOM). This is also the case of the Lomé Convention for which the European Union (EU) finally asked for a waiver in 1995.

There exists only one permanent waiver (derogation) to the MFN principle secured by the developing countries in 1979 (know as part IV of the GATT). It enables a special and differential treatment for developing countries and makes permanent the principle of non- reciprocity. When a developed country gives an advantage (a Lower custom duty for example) to a develoing country, it does not require the developing country to reciprocate. It is in this framework that the Generalised System of Preferences (GSP) was negotaited as an attempt to reconcile the right to development, with international economic integration.

Another important article of WTO is Article III over ”National Treatment”. Article III requires every memeber country to treat imported products from any other member country no less favourably than ”like” products produced on ist territory. For agricultural products however, there exists a ”special treatment”, which enables a country to restrict the imports through the implementation of quotas and tarrifs in four situations:

• In case of a serious deficit in the balance of payment (for a limited period of time).
• Against a state using such restrictions itself.
• To avoid surpluses.
• As an emergency measure when there is a sudden growth in imports that threatens the livelihood fo national porducers.

This ”agricultural exemption” enable the EU to restrict the market access of dollar bananas in Europe on the grounds that real demand, evaluated at 3.2 to 3.8 million tonnes depending on experst, is largely inferior to the offer of bananas on the world market. But, such measures can of course only be applied, if the country that reduces imports by 10% for instance, put in place at the same time a program which aims at reducing national production by 10%. The reduction must apply to all suppliers without exclusion, including traditional suppliers like ACP countries.

There are many other fundamental artcle that cannot be detailed here. It is however important to understand that in case of a dispute at the WTO, the panels‘ recommendations will be baesd on an aggregate of interpretations to give to WTO general articles, and references to previous panel rulings when they exist. These rulings from what is called the ”jurisprudence” of GATT/WTO. In case of a conflict over an interpretation to give to one WTO article, these ”judicial precedents” will prevail over general principles. There is no such thing as one single legal interpretation. Usually the layer set the tune. The better they are – the more convincing they are – and the more likely they are to set a precedent in WTO.

2. Practical illustrations

Nearly all these exemptions/waivers have been used by the European Union to implement the European Banana Import Regime 404/93. This however, is not the subject today, but to understand how the WTO works , it is interesting to note that the banana panel did not condemn the regime as a whole, but only what it considers ”unjustified” interpretations of those articles. For instance, the waiver for the Lomé Convention and the preferential national treatment for European producers were not called into question. Both allow the European Union to impose quotas and licences to protect the preferential market access of traditional ACP bananas, and to levy different tariffson ACP and dollar bananas.

What the panel condemned was:

• The way in which quotas are allocated (it discriminated between producing countries of the same region).
• The discrimination between categories of operators (which are divided into primary and secondary imports and ripening).
• The licences category ”B” considered as ”disguised cross subsidies” since their sales enable European and ACP operators to make up for their difference in costs of production and transport.

According to Article XIII of GATT, trade restrictions when necessary must be applied in the least possible trade distorting manner (i.e. approching as colsely the shares which the various member states might be expected to obtain in the absence of such restrictions), taking into account the interest that producing countries have in exporting the product. If the import from a specific country represents a significant part of the European market for instance (say 5-10%), then this country will be considered as having a ”substantial interest in exporting that product” and this must be taken into account when allocating quota shares

The proposals for reforming the regime adopted by the European Commission follow the recommendations of teh WTO panel.

• A quota of 2.2 million tonnes alloctaed among countries with substantial interest was agreed upon during the Uruguay Round and integrated in the Marrakech greement.
• A supplementary quota of 353,000 tonnes to match the increase in domestic demand (caused by entry of three new EU members) is conformed to the engagements taken in Marrakech (to adapt supply to demand).
• The maintaining of a quota for the ACP countries is allowed. This quota is not allocated for two main reasons: it enables the Commission not to allocate the 353,000 tonne quota to dollar countries without substantial interest, and non-traditional ACP bananas, and in case of hurricans, it enables ACP countries to transfer their supply quantities.
• The difference of tarrifs for ACP and dollar bananas is covered by the waiver for the Lomé Convention. Even the differnce of 200 ECU between non-traditional ACP and dollar bananas (superior to the 75 ECU bound EU tariff) can be justified by using the panel findings which said in its findings that it reekons that ” in their views, a tariff preference of 75 ECU alone would not allow the EC to provide market access opportunities and advantages required by the Lomé Convention”.

The US said that they will refuse these proposlas because it still discriminate between two groups of countries. Basically the only measure which could be contested in WTO terms seem to be the slightly higher difference in tariff (100 rather than 75 ECU) and the quantity of 857,700 tonnes for the ACP, which – if based on pre – 1991 level – could be lowered by 100,000 tonnes. So what is the US aiming at?

Since the beginnig of the dispute, the US government has argued that a ”clean tariffication” model would be more efficient and less expensive to grant preferential treatment to ACP and European production. In their views, it would allow European consumers to pay less for their bananas whilst continuing to grant market access to ACP producers. Import restrictions imposed on dollar bananas raises the price on the European market significantly, creating what Borell calls an ” above normal proft margin for the companies” or quota rent. This quota rent is supported by European consumers wo pay a higher price for their bananas than, say, US consumers.

The solution brought by Borell (which is also the solution advocated by the US) is quite simple. The EU opens the market, and/or fixes the import of dollar bananas at 3.4 million tonnes (ab. 600,000 tonnes more than presently), and imposes a tariff of 74 ECU on the import of dollar bananas. If you multiply 3.4 million tonnes through 74 you obtain 250 million ECU of which you can dispose to subsidy ACP imports! The whole scheme sounds logical and much more simple than the existing system. Very entieing...

In fact it is very tricky for at least two reasons:

• This approach presumes that the international banana market is fully competitive, and that when the supply of dollar bananas increases, then prices fall. This may not be the case since the market is concentrated in the hands of a few powerful companies. In Germany alone, the Universoty of reading (Dr. Davis Hallam and Professor the Lord Peston) has shown that Chiquita has the power to act as a price setter, and to impose ahigher price to importers who wish to buy the ”Chiquita quality”, since they are the main supplier of the German market.
• It assumes that once all the dollar bananas sold onto the European market, there is still a demand for the smallest, more expensive ACP bananas. This won’t be the case, since the banana demand is not elastic – elasticity in the jargon of econmists means that when revenues are increasing, consumers lend to buy proportionally more of a product. ACP and european producers will go out of production.

The American proposal basically means that trade – and market access – is replaced by aid. This is a dangerous alternative, which conveniently forgets the ”multiplier effect” of the banana industry on other sectors of the economy in these countries, and would clearly have devastating financial and psychological for the population and the economy of producing countries.

3. The WTO and sustainable production

The discussions over the new European regime have not raised the issue of haow to boost sustainability in banana production and trade. Though the regime seeks to preserve the market access of ACP bananas – sometimes produced in better terms than their Latin American counterparts – it does not foresee any specific mechanism to adress this issue. Presently, fair trade operators for instance still fall under the category of ”new comers2 and as such have to buy licences from established operators. This adds an extra cost which makes it difficult for fair trade bananas to compete on the world market.

EUROBAN and ist partners have found over the last two years that the issue of sustainable porduction could be addressed in different ways:

• by improving the market access of more sustainable operators, and implementing a specific quota for fair trade bananas taken out of the existing tariff quota;
• or by adopting a system of distributing licences which gives an equal opportunity to all operators to access the licences;
• by incorporating minimal social and environmental clausing in banana trade agreements.

I will now try to examine briefly the compatibility of these proposals in the framework agreement of the current WTO rules.

3.1 Distribution of licences

EUROBAN thinks that it is possible to design a system of licence auctioning which would give to all operators including fair trade operators the chance to access the market on an equal footing.

The EC has still to come up with a proposal on what they think would be the best way of distributing licences. There are no specific GATT/WTO articles to govern the allocation of licences. It is the responsibility of the importing country to do it in the least distorting manner as possible.

For licence auctioning, two main systems presently coexist on the communities market: auctioning and allocation according to historical performances. Until now, neither of them has been challenged. As there is no legal precedent, the first dispute over this issue will probably set the pattern. And if a country like the EU for instance decides to impose a system of auctioning, the more convincing ist lawyers will be and the more chance the EU will have to win the panel. However, one criteria usually prevails for the choice of a system: its practicability on the market (it must be feasible for the importers).

3.2 Trade incentives (fair trade specific quota, and others)

In 1996, EUROBAN submitted a proposal to the European Commission related to the allocation of a specific quota for fair trade bananas. This proposal was turned down on the grounds that it is WTO imcopatible. Since then however, to answer the pressure of European consumers‘ associations, the EC is trying to find a way to facilitate access to the European market for bananas produced under socially and environmentally sustainable conditions, without contravening its obligations under the WTO.

One of the most fundamental problems in sustainable trade management is that the WTO is premised on rules which reflect a very narrowly defined market framework. Although Article XX (b) and (g) appear to offer significant scope for the protection of the environment and the health of living things by permitting measures necessary to protect human, animal or plant plant life or health, and relating to the conservation of exhaustible natural resources, their impact significance has in fact been severely limited by various restrictive interpretations.

Under the current rules of WTO, a country cannot discriminate between two producers on the basis of their production methods. It cannot discriminate between two products because the first one was produced in a way that respects the environment and protect the basic workers‘ rights, whereas the other is produced without any of these considerations. The only way a government can discriminate, for instance – as laid down in article XX – is if it can demonstrate scientifically that a product endagngers the health of its population.

Therefore, any attempt to discriminate or to favour more sustainable bananas – with clausing or with a specific fair trade quota – is bound to be challenged immediately unless:

• The quota is opened to all operators without distinction, and reference criteria are internationally agreed upon by all countries/operators involved in the banana trade.
• It is applied within the framework of a preferential trade agreement which benefits from a waiver to MFN clause, whose beneficiaries are not likely to challenge (like GSP).

Currently, as sensitive products, we have seen that bananas are not likely to become part of the GSP. However, if the current proposal to grant further trade incentives to developing countries that respect basic human rights is adopted by the 15, then it could set a precedent for the EC on which to base a similar proposal for the ACP countries. In the Green paper currently being debated, positive conditionality is presented as one of the alternative. But, three obstacles must be overcome beforehand:

• European member states must reach a consensus on the criteria to be applied.
• Those criteria are bound to be very basic (human rights rather than social rights), and mixed up with some more ”dubious” conditions attached by the EU (like ”better” conditions for European direct investment, etc.).
• Good incentive will have to be worked out (for most primary commodities, tariffs have been shrinking in the recent years, rendering ineffective incentives based on reduction in tariffs only)

In case of a trade dispute over market access of more sustainable products, any WTO panel will base its analysis on a market approach only, drafting its conclusions from existing criteria/norms which are ”agreed by the entire international community”. We have seen in Geneva that no decent social or environmental criteria can be considered as such for the time being; not even the ILO core convention that the US has never ratified. Furthermore, only one standard setting body is currently considered competend by the WTO: the Codex Alimentaris. This means that the terms of reference which will be taken into consideration by the dispute panel will be the Codex sanitary and phyto sanitary norms of bananas – which are purely ”cosmetic” norms over size and colour.

3.3 Labelling

The only WTO compatible market tools to boost sustainable consumption seem therefore to be labelling schemes, whether based on corporate codes of conduct or private initiatives such as fair trade or organic labelling schemes. After all, as a WTO official explained in Geneva, labelling initiatives means that you let consumers make the choice, and that is precisely what the theory of trade liberalisation is all about.
The main problem of labelling initiatives however, is that they tend to multiply, and are therefore bound to provoke a clash at the WTO one day or another. The multiplication of labels is not a long term solution. It is mind-boggling for consumers, and to many labels will kill their meaning.

Let us try to imagine, what would happen in that case. Since there are no articles of the WTO specifically regulating labels, the conclusions of a possible panel will be based on legal interpretations of precedent cases. Recently, the USDA had a proposal which – if passed – would allow genetically modified food commodities to be labelled as organic in the United States. Now, if that happens, and if the multinationals finally succeed in producing a banana resistant to Panama Disease and Black Sigatoka but genetically modified, then companies will have the right to put the US organic label onto it. As long as the trade is small, nothing will happen. But, such bananas are likely to be planted in big quantities. In this framework, if the EU – whose legislation on organic products is very strict – decides to forbid this labelling on its territory (or change its appelation), the US companies will require another WTO dispute.

Again, the terms of reference considered by the panel will be ”interantionally agreed” standards, set up by the international community. For the time being, the only organism dealing with harmonisation of labelling criteria is the Interantional Standards Organisation (ISO). It is also the only body considerd as competent by the WTO. Very few NGOs are represented on it, and though it is composed mainly of government based scientific centers, companies are more influential than consumer groups. So unless something is done to change that rapidliy, there is little chance that the criteria set up will be significant enough to give a chance to decent labelling schemes to survive the WTO rules.