Brazil – Measures Affecting Imports of Retreaded Tyres

Brazil – Measures Affecting Imports of Retreaded Tyres

 

World Trade Organization – GATT Article XX(b) – Interpretation of necessity – arbitrary or unjustifable discrimination – disguised restriction

Facts

Brazil had imposed a prohibition on imports of retreaded tyres and on internal marketing of imported retreaded tyres. Brazil conceded that the measure was in violation of GATT Article XI:1 and III:4, but argued that the measure was justified under Article XX(b), the exception for measures ‘necessary to protect human, animal or plant life or health’.35 Brazil argued that the measure was part of a package of measures adopted for health reasons. It argued that used tyres contribute to two risks to human health: they are a breeding ground for mosquitoes which spread various tropical diseases; and if they catch fire, they emit fumes that are dangerous. The Brazilian government indicated that it was seeking to reduce these risks to the maximum possible extent. To do so, the Brazilian government had also imposed a ban on the importation of used tyres and had imposed regulations requiring manufacturers and importers of new tyres to collect and dispose of a minimum number of waste tyres for every new tyre sold.36

Brazil argued that the prohibition on imports of retreaded tyres would cause a reduction in the total number of used tyres in Brazil because it would result in some tyres already in Brazil being retreaded in Brazil to have a second life as a retreaded tyre. Brazil further argued that the reduction in the total number of used tyres in Brazil would help to reduce the two health risks that could arise from the presence of waste tyres.

Two other aspects of the Brazilian law were important. First, that the Brazilian law prohibiting imports of retreaded tyres exempted imports of retreaded tyres from countries that were, with Brazil, part of the Mercosur customs union; and second, that despite the Brazilian law prohibiting the import of used tyres, the Brazilian courts had granted injunctions permitting imports of used tyres.

The panel considered whether the measures were within the exception in GATT Article XX(b), first whether the measures were within paragraph (b) and then whether they conformed to the requirements of the chapeau.

The complainant, the European Communities (‘EC’), argued that the measure was not necessary for protection of human health for three reasons. First, Brazil had not demonstrated that a reduction in waste tyres leads to a reduction in the risks to human life and health.37 Second, Brazil had not demonstrated that the prohibition on the import of retreaded tyres decreases the number of waste tyres in Brazil.38 Third, there were reasonably available alternative methods for reducing the number of waste types in Brazil including (i) measures to encourage the retreading of tyres in Brazil and measures to restrict the import of used tyres into Brazil; and (ii) measures to improve the management of waste tyres including controlled landfilling, and material recycling.39

The EC also argued that Brazil was not applying the measure in a way that conformed to the requirements of the chapeau of Article XX. On that point, the EC’s two main arguments were based on (i) the prohibition in Brazilian law prohibiting imports of retreaded tyres not applying to imports of retreaded tyres from countries in the Mercosur customs union; and (ii) the exceptions being allowed by Brazilian courts to the Brazilian prohibition on imports of used tyres.

The Question of Necessity

Both the panel and the Appellate Body utilized the complex approach originating from the Korea Beef case of making the determination of necessity on the basis of a process of weighing and balancing various factors.40 The Appellate Body described the test as requiring a weighing and balancing of relevant factors in order to make a preliminary finding of necessity (such factors being, in particular, the importance of the interests or values at stake, the trade restrictiveness of the measures, and the extent of the measure’s contribution to the achievement of the measure’s objective). The test then required that a comparison be undertaken of the measure with possible alternative measures ‘which may be less restrictive while providing an equivalent contribution to the achievement of the objective’.41

By way of comment, it may be that the Appellate Body has stated the test too formally. It seems reasonable that a finding of necessity requires a comparison between the measure and alternative measures in the light of the trade restrictiveness of the measure and the contribution of the measure to the realization of the objective. However the text of Article XX(b) provides no basis for the formal division of the test into two stages. Nor does it provide a basis for the panel to inquire into the relative importance of the interests or values furthered.

The panel found that the measure was ‘necessary’ within the meaning of Article XX(b). In its Report, the Appellate Body dismissed the appeals against that finding. Two important aspects of the Appellate Body’s review of the finding of necessity relate to the findings that: (i) the measure contributed to the achievement of the objective; and (ii) a less restrictive alternative measures for achieving the objective was not reasonably available.
Concerning the first of these aspects, the panel had found that the import ban on retreaded tyres was capable of producing or ‘apt to produce a material contribution to the achievement of the objective of reducing exposure to the risks arising from the accumulation of waste tyres’,42 but the panel had not made any finding as to the extent to which the ban on imported retreaded tyres would reduce the total number of waste tyres. The panel had also found that a reduction in the total number of waste tyres in Brazil would contribute to a reduction of the risks to human, animal and plant life and health arising from waste tyres43 but the panel not did make any determination of the extent to which a reduction in the total number of waste tyres in Brazil would contribute to a reduction in the risks to human, animal and plant life and health.

The basis for the panel’s finding that the measure contributed to achievement of the objective was limited to observations that it was possible that used tyres sourced from within Brazil could be retreaded in Brazil and that, therefore, the import ban would cause some substitution away from purchases of imports of foreign retreaded tyres toward the retreading in Brazil of used tyres. The panel saw it as obvious that there would necessarily have to be an overall reduction of waste tyres in Brazil. On appeal, the EC argued that the panel had ‘to determine the extent to which the Import Ban makes a contribution to the achievement of its stated objective’ and had erred by not quantifying the reduction of waste tyres resulting from the import ban.44 The EC argued that it was not enough for the panel to find that the measure could make a contribution to the objective of reducing the health risks; the panel had to find whether the measure was making an actual contribution to the reduction of health risks.45

The Appellate Body responded to the EC’s arguments by making two points:

• That with some complex health or environmental problems, it may be necessary to use a combination of measures, and that it may be difficult to isolate out the contribution of a single measure to the objective from the contribution of other measures; and
• That it may not be possible to know in advance what the contribution of a measure to realizing an objective (and the Appellate Body gives the example of measures adopted in order to attenuate global warming and climate change) will be but that in such cases a panel can rely on evidence or data pertaining to the past or present that establish that the measure makes a material contribution to the protection of public health or environmental measures pursued.46

The Appellate Body considered the Brazilian import ban in the context of the other measures which Brazil had adopted, including the ban on imports of used tyres and the regulations requiring manufacturers and importers of new tyres to dispose of waste tyres. The Appellate Body concluded that with the import ban in place, fewer waste tyres would be generated and that the import ban was likely to make a ‘material contribution to the achievement of its objective of reducing the exposure to risks arising from the accumulation of waste tyres.’47

As for the EC’s second ground of appeal, on the issue of whether the Brazilian measures were ‘necessary’ given possible alternative measures, the Appellate Body confirmed the approach taken in United States – Gambling that for an alternative measure to constitute a reasonably available less restrictive alternative, it is not only necessary that the alternative measure be reasonably available but also that the alternative measures would achieve the same ‘desired level of protection with respect to the objective pursued’.48 Therefore, when a complaining member suggests an alternative measure, the responding member can establish that the measure is necessary by showing either that each suggested alternative measure does not achieve the same objective, or is not reasonably available.

With respect to each of the alternative measures suggested by the EC, the panel had found either that the alternative measure was already in place, that it would not achieve Brazil’s level of protection with respect to the desired objective or that it was not reasonably available.49 On appeal, the EC challenged the panel’s finding that a better enforcement of the import ban on used tyres and better enforcement of the existing disposal schemes were not reasonably available alternatives because they would not on their own achieve the desired objective. The Appellate Body agreed with the panel, saying that these policies operated as part of a comprehensive policy in combination with the import ban on retreaded tyres, and that removing the import ban on retreaded tyres from the comprehensive policy would weaken the overall effect on reducing the volume of waste tyres.50 The Appellate Body also agreed with the panel’s finding that the various waste management measures suggested by the EC could not achieve Brazil’s desired level of protection with respect to the desired objective, that is, ‘reducing the “exposure to the risks to human, animal or plant life or health arising from the accumulation of waste tyres’ to the maximum extent possible” , because the waste management measures themselves posed certain risks to human life and health.51 The Appellate Body also found that the panel did not err in finding that materials recycling was not a reasonably available alternative because of the cost and required technology.52

 

The Chapeau: Arbitrary or Unjustified Discrimination

Turning to the issue of whether the conditions in the chapeau of Article XX were satisfied, the panel had found that two elements of the application of the measure resulted in discrimination. These were, first, the fact that the prohibition on imports of retreaded tyres did not apply to imports from Mercosur countries resulted in discrimination between Mercosur countries and other WTO members;53 and second, the fact that the ban on imports of new tyres was being applied in a way that permitted certain volumes of used tyres to be imported resulted in discrimination in favour of tyres retreaded in Brazil using imported tyre casings to the detriment of imported retreaded tyres.54 These findings as to the existence of discrimination were not appealed.

The panel moved on to consider whether the discrimination was ‘arbitrary or unjustifiable’ and whether the discrimination was ‘discrimination between countries where the same conditions prevail’.

(I) Non Application of Prohibition to Mercosur countries

A tribunal established under the dispute settlement system of the Mercosur customs union had found that Brazil’s import ban on retreaded tyres from other Mercosur countries violated Brazil’s obligations under the Treaties constituting the customs union. Following that decision, Brazil had exempted Mercosur countries from the prohibition on imports of retreaded tyres.55 The EC argued that this exemption constituted both ‘arbitrary discrimination’ and ‘unjustified discrimination’ inconsistent with the chapeau of Article XX.

In assessing the question of arbitrary discrimination, the panel took the view that discrimination would be ‘arbitrary’ if it was ‘capricious or random’ and found that this discrimination in favour of imports from Mercosur countries was not ‘capricious or random’ because it arose from an order of a tribunal under the Mercosur treaty.56

As for the issue of ‘unjustified discrimination’, the panel indicated that the discrimination between imports from Mercosur countries and other imports would be unjustifiable discrimination if it significantly undermined the ability of the prohibition on imports of retreaded tyres to achieve the desired objective (the reduction of accumulation of waste tyres to the greatest extent possible).57 The panel found that imports from Mercosur countries under the exemption were not significant, and accordingly, that the exemption had not significantly undermined the ability of the prohibition to achieve its objective. Therefore, the exemption had not resulted in unjustifiable discrimination.58

On appeal, the Appellate Body reversed all of the panel’s findings on this issue. It rejected the proposition that discrimination cannot be arbitrary if it is not ‘random or capricious’.59 It also rejected the proposition that discrimination cannot be unjustifiable if the quantitative effects of the discrimination do not significantly undermine the achievement of the objective of the measure at issue.60 The Appellate Body held that the focus must be on the rationale for the discrimination and that the effects of the discrimination are relevant only for determining the rationale for the discrimination.

The Appellate Body indicated that the test for determining the existence of arbitrary or unjustifiable discrimination is whether the rationale for the discrimination is rationally connected to the objective falling within a paragraph of Article XX.61 Applying this test to the present case, the Appellate Body found that the rationale for the exception for imports from Mercosur countries, being the desire to comply with the Mercosur tribunal, was not rationally related to the objective of reducing the health risks arising from accumulation of waste tyres and, therefore, the measure was applied in a way that constituted arbitrary or unjustifiable discrimination. This was the case even though the exception was not capricious, and even though it did not significantly undermine the achievement of the objective.

 

(II) Application of Prohibition Such that Certain Volumes of Tyre Imports Were Permitted

It seems obvious that if domestic operators were to import used tyres and to use the casings from those used tyres to make retreaded tyres, then the prohibition on retreaded tyres might not lead to any reduction in the total quantity of waste tyres in Brazil.
Brazil’s prohibition on importation of retreaded tyres was indeed accompanied by a prohibition on imports of used tyres. However, there had been a number of challenges to the ban on imports of used tyres resulting in Brazilian courts granting injunctions allowing the import of used tyres.63 The EC argued that allowing import of used tyres for retreading in Brazil but not allowing imports of retreaded tyres into Brazil amounted to arbitrary and unjustifiable discrimination.

The panel took the same approach it had taken to determining whether the Mercosur exception constituted arbitrary or unjustifiable discrimination. The panel found that the discrimination between imported retreaded tyres and local retreaded tyres made from imported used tyres which arose from the court injunctions was not ‘arbitrary discrimination’ because it was not the result of ‘capricious’ or ‘random’ action.64 However, the panel did find that the discrimination was ‘unjustifiable’, because the effect was to allow imports of used tyres to an extent that significantly undermined the achievement of the objective of the prohibition on imports of retreaded tyres, that is, the reduction in accumulation of waste tyres to the greatest extent possible.65 Having found the existence of unjustifiable discrimination, the panel next considered whether it was unjustifiable discrimination ‘between countries where the same conditions prevail’ and concluded that it was. In reaching that conclusion, the panel noted that the same environmental effects arose from a retreaded tyre made in Brazil as from an imported retreaded tyre and that Brazil had not identified any pertinent difference between the conditions prevailing in Brazil and in other WTO Member countries.66

In reviewing the finding with respect to the imports of used tyres under court injunctions, the Appellate Body indicated again that the test for determining the existence of arbitrary or unjustifiable discrimination is whether the rationale for the discrimination is rationally connected to the objective falling within a paragraph of Article XX.67 It found that the rationale for the discrimination being the desire to comply with court injunctions was not related at all to the objective of the prohibition on imports of retreaded tyres, that is, the reduction to the greatest extent possible of risks arising from the accumulation of waste tyres. The Appellate Body reversed the panel’s findings that the imports under court injunctions had not resulted in arbitrary or unjustifiable discrimination to the extent that they had not resulted in effects which undermined the achievement of the objective and to the extent that the imports were not the result of capricious or random action. Accordingly, the Appellate Body found that as a result of the absence of a rational connection between the rationale for permitting the imports of used tyres under the injunctions and the objective of reducing the health risk, the discrimination was arbitrary and unjustifiable (even to the extent it was not capricious and even to the extent it did not have the effect of undermining the achievement of the measure’s objective).68

 

The Chapeau: Disguised Restriction on International trade?

In assessing the question of whether the measures were applied in a manner which constituted a disguised restriction on international trade, the panel indicated that a measure would be a ‘disguised restriction on international trade’ where it would be an abuse of the exception in Article XX.69 The panel said that this is not just an issue of transparency; a restriction need not be formally concealed in order to constitute a disguised restriction.70 The panel distinguished between a general argument that the measure was adopted to protect the Brazilian industry and narrower arguments that the two factors mentioned above, the admission of imports of retreaded tyres from Brazil and the admission of imports of used tyres, resulted in the measure being applied in a manner that constituted a disguised restriction on international trade.

The EC’s broader argument was that the measure was adopted with the intention of protecting the Brazilian industry rather than for the purpose of protecting public health. The panel indicated that a government’s intention in adopting a measure is relevant to determining whether the measure is a disguised restriction on international trade and that examination of the design of the measure and of statements by the government may both be useful indications of the intention of the legislator.71 After examining those factors, the panel concluded that it was ‘not persuaded that [those factors] conclusively demonstrate that Brazil did not adopt the prohibition on importation of retreaded tyres with the intention of protecting the public health or the environment.’72 This finding was not appealed.
The panel proceeded to examine the more specific arguments and applied the same test as it applied to the determination of whether the application of the measure resulted in unjustified discrimination (namely, whether the application of the measure significantly undermined the measure from achieving its objective). This was essentially an assessment of the extent to which the relevant aspect of the application of the measure resulted in a significant volume of imports. The panel found that the exception for imports of retreaded tyres from Mercosur countries did not result in a significant volume of imports of retreaded tyres from Mercosur countries. The panel found that:

‘the Mercosur exemption, to the extent that it results only in volumes of imports that do not significantly undermine the ability of the general import ban on retreaded tyres to fulfil its intended objective, does not result in the measure being applied in a manner that constitutes a disguised restriction on international trade.’73

The panel found that the fact that injunctions were being granted to permit imports of used tyres was resulting in significant imports which significantly undermined the achievement of the objective of the prohibition on retreaded tyres.74 Therefore, the occurrence of the imports of used tyres did mean that the prohibition on retreaded tyres was being applied in a manner which constituted a disguised restriction on international trade. In contrast, the exemption for imports of retreaded tyres from Mercosur countries had not been shown to constitute a disguised restriction on international trade.

Both of these findings of the panel were reversed by the Appellate Body.75
The reason given by the Appellate Body for reversing those findings is brief. The Appellate Body says that it should reject the conditioning of a finding of a disguised restriction on whether the relevant aspect of the application results in an undermining of the achievement of the objective of the restriction, for the same reason that it rejected the conditioning of a finding of arbitrary or unjustified discrimination on whether the relevant aspect of the application results in an undermining of the achievement of the objective of the restriction.76 This finding is open to question. It may be the case that the existence of a rational relationship between the discrimination and the objective is an appropriate touchstone for determining if discrimination is ‘arbitrary’ or ‘unjustifiable’. It does not necessarily follow, however, that the existence of a rational relationship between the protective effect of a measure and the asserted objective of the measure is an appropriate way to determine whether a measure is applied in a manner that constitutes disguised protection. In this case, the Appellate Body has made some useful steps toward clarifying the interpretation of Article XX, particularly the guidance on arbitrary and unjustified discrimination, but it would seem that the task is not yet finished.

77 For a description of the products covered by Chile’s measures, see Chile – Price Band and Safeguard Measures Relating to Certain Agricultural Products, WTO Doc WT/DS207/AB/R (Report of the Appellate Body) (‘Chile Price Band’) [12] and accompanying fn 20.

78 The sequence of steps in the litigation is set out in Chile – Price Band System and Safeguard Measures Related to Certain Agricultural Products – Recourse to Article 21.5 of the DSU by Argentina, WTO Doc WT/DS207/AB/RW (Report of the Appellate Body) (‘Chile Price Band Recourse to Article 21.5′) [2.7]- [2.11].

79 Chile Price Band, Appellate Body Report, [14]. Note that by the time of the Art 21.5 proceedings this fixed duty was at the rate of six per cent: see Chile Price Band Recourse to Article 21.5, WTO Doc WT/DS207/RW (Report of the Panel) [2.17].

 

37 Brazil Tyres, Panel Report, [7.144].

38 Ibid [7.124].

39 Ibid [7.159]-[7.161].

40 Ibid [7.104] and the accompanying footnote which refers to the Korea Beef Case, WTO Docs WT/DS161,169/R and WT/DS161, 169/AB/R, adopted 10 January 2001, and other previous cases dealing with the test for necessity. See also Brazil Tyres, Appellate Body Report, [178] ff.

41 Brazil Tyres, Appellate Body Report, [178].

42 Ibid [152].

43 Brazil Tyres, Panel Report [7.146]-[7.148] cited in Brazil Tyres, Appellate Body Report, [149].

44 Brazil Tyres, Appellate Body Report, [137].

45 Ibid [11].

46 Ibid [151].

47 Ibid [154]-[155].

48 United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WTO Doc WT/DS285/AB/R [308], adopted on 20 April 2005, quoted in the Brazil Tyres, Appellate Body Report, [156], [170].

49 Brazil Tyres, Panel Report, [7.212].

50 Brazil Tyres, Appellate Body Report, [172].

51 Ibid [174] incorporating quotations from Brazil Tyres, Panel Report, [7.102], [7.108].

52 Ibid [175].

53 Brazil Tyres, Panel Report [7.235].

54 Ibid [7.243].

55 Ibid [7.265].

56 Ibid [7.272]-[7.281].

57 Ibid [7.272]-[7.288].

58 Ibid [7.289].

59 Brazil Tyres, Appellate Body Report, [232].

60 Ibid [229]-[230].

61 Ibid [224]-[230].

62 Ibid [224]-[234].

63 Brazil Tyres, Panel Report, [7.292].

64 Brazil Tyres, Panel Report, [7.294].

65 Ibid [7.295]-[7.306].

66 Ibid [7.309].

67 Brazil Tyres, Appellate Body Report, [246].

68 Ibid [246]-[247].

69 Brazil Tyres, Panel Report, [7.320].

70 Ibid [7.318]-[7.319], [7.326].

71 Ibid [7.330]-[7.332].

72 Ibid [7.341].

73 Ibid [7.354].

74 Ibid [7.347]-[7.349].

75 Brazil Tyres, Appellate Body Report, [239], [251].

76 Ibid [239] in relation to the Mercosur exemption and at [251] in relation to the imports of used tyres under the court injunctions.

Conclusion

Notes

See Also

References and Further Reading

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