Chile Price Band System and Safeguard Measures Relating to Certain Agricultural Products

 

World Trade Organization – scope of coverage of Agreement on Agriculture Article 4.2 – meaning of variable levy and minimum import price – the task of DSU Article 21.5 panels

Australia was a third party in a complaint by Argentina against Chile’s price band system (‘PBS’) for determining customs duties on imports of certain agricultural products including wheat and wheat flour, a number of vegetable oils and sugar products.77 The panel report as modified by the report of the Appellate Body in the original complaint was adopted by the Dispute Settlement Body on 23 October 2002. Before the end of 2003, Chile made amendments to its PBS to attempt to bring the measure into conformity with the Dispute Settlement Body ruling. However, Argentina was not satisfied with the new version of the price band system and, on 29 December 2005, Argentina requested that the question of whether Chile’s application of the new PBS to wheat and wheat flour complied with the Dispute Settlement Body ruling be referred back to the original panel under DSU Article 21.5.78 The outcome of the Article 21.5 proceedings is that the panel held, in findings upheld by the Appellate Body, that the revised version of Chile’s PBS was, like the version adjudicated upon in the original proceedings, in violation of Article 4.2 of the Agreement on Agriculture.

Chile’s PBS consisted of the legislative rules which determined the customs duty to be applied. Under Article 12 of law 18.525 of 1986, the duty was made up of two components:

(1) A fixed ad valorem duty which in 2002 was 7 per cent;79
(2) A price band specific duty which would depend on the comparison between a reference import price which was determined weekly and the upper and lower thresholds of a price band which was determined annually so that:

a. If the reference price were within the price band, then the price band specific duty would be zero;

b. If the reference price were less than the lower threshold of the price band, then the price band specific duty would be equal to the difference between the lower threshold of the price band and the reference price ; and

c. If the reference price were above the higher threshold of the price band, then there would be a price band rebate equal to the amount by which the reference price exceeded the reference price but in no case higher than the fixed ad valorem duty under (1) above. 80
The reference price was closely related to the current world price and the upper and lower thresholds of the price band were determined by reference to a moving average world price over a 5 year period so the specific duty would prevent fluctuations away from the 5 year average price from being transmitted into prices inside Chile. In general, for any given shipment, the price band duty was equal to the difference between the lower threshold price of the annually determined price band and the reference price applicable to the week in which the particular goods had been shipped.81

Argentina’s Schedule of Concessions contained a binding on all of the products at issue in the original dispute at an ad valorem rate of 31.5 per cent.82 Part of Argentina’s concern arose from the fact that in some years, the total duty levied by Chile had exceeded the bound rate. Therefore, Argentina argued that Chile’s law violated GATT Article II:1(b). Argentina also argued that the PBS was in violation of Article 4.2 of the Agreement on Agriculture which provides:

4.2 Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties [see footnote below], except as otherwise provided for in Article 5 and Annex 5.
The footnote provides:
These measures include quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state-trading enterprises, voluntary export restraints, and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country -specific derogations from the provisions of GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture specific provisions of GATT 1994 or of other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.

At the second panel hearing in the original complaint, that is, after the request for establishment of the panel, composition of the panel, submission of written submissions and the first hearing, Chile advised that it had amended the law so that the total duty could not exceed the bound rate.83 On that basis, Chile’s law appeared to no longer be in violation of the first sentence of GATT Article II:1(b). Nevertheless, the original panel still found a breach of Article II:1(b) but upon the basis of the second sentence. The panel found that the PBS was a fee or charge other than an ordinary customs duty beyond the limit set by the second sentence of Article II:1(b). The original panel also found that the price band system was in violation of Article 4.2 of the Agreement on Agriculture upon the basis that the PBS was a measure of a kind that was required to be tariffed within the meaning of Article 4.2. The Appellate Body confirmed the finding of a violation of Article 4.2. However, it found that the panel’s finding regarding Article II:1(b), second sentence was outside the terms of reference and found it unnecessary to rule on consistency with Article II:1(b).84 Therefore, it was the finding of inconsistency with Article 4.2 with which Chile had to comply.

In order to explain the decision in the Recourse to Article 21.5 decisions, it is necessary to observe the elements of inconsistency with Article 4.2 that were found by the original rulings. The violation of Article 4.2 arose from a finding by the panel, as modified by the Appellate Body, that the price band measure was both similar to a ‘variable import levy’ and similar to a ‘minimum import price’ measure (‘MIP’) and, therefore, within the class of measures prohibited by Article 4.2. There had been a difference of approach between the panel and the Appellate Body with the original panel assessing whether the price band system had the fundamental characteristics of a variable levy or MIP and the Appellate Body saying that the focus should be on an empirical assessment of any elements of likeness or resemblance sufficient to find that they are ‘similar’ rather than upon the existence of fundamental characteristics.85 The elements of similarity relied on in the original Appellate Body decision were:

• That the variability in the PBS was inherent in the measure itself and that the measures ensured automatic and continuous variability in the duty;86
• That the PBS impeded the transmission of world market prices to domestic prices (even thought the lower threshold was based on a world price rather than a domestic target price);87
• That apart from the general nature of the scheme impeding the transmission of world market prices to domestic prices, specific aspects of the calculation of the price band duty further contributed to impeding the transmission of world prices.88
• That a number of elements of non-transparency and unpredictability in the operation of the PBS had a tendency to further limit the volume of imports by making it difficult for an exporter to predict the level of customs duty that would apply.89

The panel found that even with the ceiling set to keep the duty below the bound rate, the PBS was still similar to a variable levy and similar to a MIP and, therefore, within the class of measures prohibited by Article 4.2. The Appellate Body dismissed an appeal that the panel had failed to take proper account of the fact that Chile’s duty was limited by the cap, saying that it found ‘nothing in Article 4.2 to suggest that a measure prohibited by that provision would be rendered consistent with it if applied with a cap.’90

This finding is critical to the outcome of the entire proceedings. The first panel failed to observe that all of the measures described in Article 4.2 enabled a Member to limit the volume of imports to any level they desired. The Appellate Body report not only failed to observe this fundamental characteristic but actually stated that the task at hand was not a matter of identifying fundamental characteristics. In effect, the panel and Appellate Body concluded that a measure which did not enable a Member to limit the volume of imports as desired was similar to other measures described in Article 4.2, all of which do give a Member a capacity to limit the volume of imports as desired. In adopting an interpretation of Article 4.2 which overlooks the fundamental difference between Chile’s price band measure and the measures described in Article 4.2 and focuses on other elements of similarity, the initial rulings made it virtually impossible for Chile to bring its measure into conformity with Article 4.2 without simply removing it and reverting to either always charging the full bound duty or alternatively using a completely non-transparent approach to announcing an applied rate from time to time within the bound rate. It seems that the approach adopted in the original proceedings made it an almost foregone conclusion that there was not going to be anything that Chile could do to alter the PBS to bring it into conformity with the rulings.

To attempt to comply with the Dispute Settlement Body ruling, Chile amended the PBS in a number of significant ways.

First, whereas the old scheme resulted in the setting of a new duty for goods shipped in each week, under the new PBS, the duty was determined six times per year for two month periods

Chile argued that, in light of this amendment, the price band duty was no longer automatic because the change to the duty occurred through a new administrative decree and was no longer continuous because it occurred only six times a year. The panel rejected this saying that the variability was still inherent in the measure itself and that it was still continuously variable. 91 Chile appealed that the panel could not have found that the variability had met the elements of automaticity and continuity which the original Appellate Body had regarded as part of the definition of a ‘variable levy’. The Appellate Body rejected an appeal on this issue saying that the panel had needed only to find that the variability was inherent in the measures. It did not need to find that the variability was automatic and continuous but only needed to consider automaticity and continuity as part of the consideration of whether the variability was inherent in the measures itself. While the new PBS did change the duty less frequently than the old one, the panel had taken this into account and had not made any error of law.92

Second, the new PBS was still calculated by reference to a gap between the lower threshold and the Reference Price but, whereas under the old PBS, the lower threshold was a five year moving average of world prices, under the new PBS, the lower threshold was a fixed price for each year with the price for each successive year being reduced slightly.

Chile argued that, by introducing this modification of the PBS, it had abolished the characteristics that were found in the original Proceedings to render the PBS like a variable levy or like a MIP. The scheme no longer involved a calculation which excluded the top and bottom 25 percentiles of the five year prices (a methodology which the original panel and Appellate Body had found to make the calculation of the duty unpredictable and non-transparent). The panel found that Chile had not demonstrated that the exclusion of this element had made the PBS any more predictable or transparent.93 The Appellate Body said that the panel had not made any error in finding that the new measure lacked transparency and predictability even though the Appellate Body acknowledged that the amended method of setting the reference price was more transparent and more predictable.94 Further, the panel found that the fixing of the thresholds to preset prices meant that the measure still had the characteristic of impeding the transmission of world prices into the Chilean domestic market and the Appellate Body agreed.95

Third, as with the old PBS, the Reference Price was based on current prices in relevant markets but in the new PBS, the legislation specifically identified which markets would be used to determine the Reference price.

Chile argued that, in making this amendment, it had eliminated that element of non-transparency and unpredictability which derived from the uncertainty as to which markets would be used to determine the Reference price. This did not assuage the panel’s concerns. It found that regardless of the improvement in transparency, the mere existence of the Reference Price caused a lack of transparency and predictability.96 The Appellate Body confirmed that even though the new method of determining the Reference Price was more transparent, the measure still lacked transparency and predictability and this impeded the transmission of international prices.97

Fourth, whereas under the old PBS the comparison between the threshold price and the Reference Price was a comparison between a Reference Price ascertained by reference to Free on Board (‘fob’) prices and a lower threshold price ascertained by reference to a 5 year moving average of international fob prices that were adjusted to Cost Insurance Freight (‘cif’) prices by adding an amount for import costs, under the new PBS, the comparison was between two fob prices with the reference price being directly based on fob prices and the lower threshold price being a fixed amount calculated by deducting import costs from cif prices.

Therefore, Chile argued that the scheme no longer involved a comparison between an fob price (for the reference price) and an cif price (for the threshold) which could inflate the size of the price band duty. The panel found that the new system had the same element of lack of transparency and predictability and impeded the transmission of international prices in the same way as the old system. The panel’s argument was that the old system incorporated the non-transparent element of adding import costs in order to arrive at a cif equivalent threshold price whereas the new system involved a non-transparent system of deducting import costs in order to arrive at an fob equivalent threshold price.98

In assessing whether the new PBS was similar to a Minimum Import Price, the panel found that it was possible but improbable that with the PBS scheme the import price could fall below the lower threshold of the price band.99 Therefore, the panel found that the New PBS was still similar to a MIP and therefore prohibited by Article 4.2, and the Appellate Body agreed.100

The Appellate Body decision also sheds some light on the way that a panel should approach its task in cases involving recourse to Article 21.5 and, in particular, as to the burden of proof which the panel should apply. The panel assessed whether the amendments to the PBS made the measure consistent with Article 4.2. On appeal, Chile argued that the panel had failed to place the burden of proof on Argentina to establish that the measure was inconsistent with Article 4.2. The Appellate Body confirmed that in this Article 21. 5 proceeding, the burden of proof was on Argentina to show that the revised PBS was inconsistent with Article 4.2 but the Appellate Body found that the panel had not committed an error. The panel had simply done its analysis ‘in the light of the interpretations of the requirements of Article 4.2 in the original proceedings.’ The Appellate Body was satisfied that the panel had properly considered whether the measure was consistent with Article 4.2.101

In the Article 21.5 proceedings determining whether the new PBS was in conformity with Article 4.2, the panel did not consider the argument made in the original proceedings that the measure was not a measure covered by Article 4.2 because it was expressly limited so that it could not exceed the bound duty. It appears that Chile did not remake the argument that the operation of the PBS within a bound tariff was not like a variable levy or like a minimum import regulation because of the existence of the ceiling. This issue is not dealt with by the Appellate Body either. It is difficult to discern from the face of the reports why the issue was not raised again in the Article 21. 5 proceedings. The parties and the panel may have taken the view that the issue was res judicata, it having been decided in the original proceedings. The closest that the reports come to stating this is a statement by the Appellate Body that ‘we are mindful that adopted panel and Appellate Body reports must be accepted by the parties to a dispute.’102 Nevertheless, the Appellate Body was careful to point out that the panels task in the Article 21.5 review was to make a new determination of whether the new measure was consistent with Article 4.2 rather than merely to determine whether Chile had removed the elements of inconsistency identified in the original decision.103 The Appellate Body also took some care to elaborate that the original Appellate Body decision had been based upon a comprehensive consideration of all of the characteristics of the PBs and was not a simple assessment of whether certain characteristics were present.104 Taken to its logical conclusion, that view obliged the panel in the Article 21.5 review to consider all of the characteristics of the revised PBS measure including the fact that it was limited by the ceiling imposed by the tariff binding and obliged the Appellate Body to find that the panel had made an error of law in neglecting to do so.

The result of this litigation is curious. Chile could comply with the Dispute Settlement Body ruling by:

• abolishing the PBS scheme and charging the full 31.5 per cent all of the time; or
• charging the full rate of 31.5 per cent sometimes and then, from time to time, announcing a completely non-transparent change of the applied rate to a level below the bound rate.

Alternatively, Chile could decide not to conform to the panel and Appellate Body recommendation. In that event, Argentina could apply for authorisation to suspend obligations up to the level of the nullification or impairment of the tariff binding. This would involve a comparison between the level of trade that would flow in a counterfactual situation of applying the full 31.5 per cent duty all the time and the level of trade that would flow in the factual situation of the PBS being retained. It appears that the level of trade in the factual would exceed the level in the counterfactual so the permissible level of retaliation would be zero.

The decision also leaves WTO Members in a situation in which they are unable to know the extent to which they can change their tariff rate from time to time within a bound ceiling. If they implement any kind of reasonably predictable method for changing a bound duty inside the binding so as to flatten out fluctuations, then on the basis of the reasoning in this dispute, they would be implementing a measure which is inherently variable and likely to be regarded as similar to a variable levy, despite the fact that they are not exceeding their tariff binding. To the extent that Members would prefer to provide domestic suppliers and exporters some degree of predictability as to when they will charge the full bound duty and when they will not, this decision makes it rational for them to seek an amendment to the Agreement on Agriculture to clarify that it is legal for them to increase duties in response to falling world prices. This decision may have contributed to the demands in the Doha Round negotiation for a flexible special Safeguard Mechanism for developing countries.105

Chile could well have misgivings about this decision. The circumstances prior to the Uruguay Round were that the GATT could not achieve liberalization of agricultural trade through reciprocal tariff reductions because of the proliferation of quantitative restrictions under a variety of official and unofficial exceptions to the prohibition on quantitative restrictions in Article XI:1. Dealing with these ‘exceptions’ had been difficult. Although there had been one case, the EC- MIPS case, finding that a minimum import price scheme breached Article XI:1, there had never been such a ruling on a variable levy.106 Voluntary export restraints were widely regarded as a ‘grey area measures’ in relation to which there were various arguments as to whether they were prohibited or fell within the cracks between the rules.107 A series of disputes under Article XI:2 had eliminated some of the restrictions purportedly justified under this exception but there remained some contention over whether Article XI:2 could be wholly or partly removed from the GATT and there was no agreement on which part should remain if part of it were to be repealed.108 The common consequence of all of these exceptions was that they allowed contracting parties to control the quantity of imports. The tariffication process removed all of the quantitative restrictions allegedly justified under all of these official and unofficial exceptions. Negotiators must have understood that Article XI:1 could be safely relied upon to ensure that some of the tariffed measures could not be reintroduced but that it could not be safely relied upon to ensure that all of the kinds of measures tariffed could not be reintroduced. Therefore, they added Article 4.2 to cover whatever gap was left by Article XI:1. By doing so, they could ensure that Members would not be able to apply measures 282

which enabled the Member to control the volume of imports. The Members would still be able to apply their negotiated tariff up to the level of the binding and the Members would tolerate that the application of the bound tariff would have the effect of directly raising the price and indirectly limiting the volume of imports up to a point but Members would not be able to use any measure that enabled them to absolutely control the level of imports.

In extending Article 4.2 to cover the operation of a variable levy within the limits of a bound tariff, the panels and Appellate Body reports in this series of litigation would appear to have cast the net of Article 4.2 beyond its object and purpose. In doing so, they have arrived at Dispute Settlement Body recommendations which are troubling because Chile can comply by adopting a more protectionist measure and also because the level of permissible retaliation against non-compliance would be zero. And they are arguably detrimental to the negotiation of further liberalization because they remove from Members the capacity to adjust duties within a binding so as to flatten out price fluctuations, thereby providing an incentive for them to propose a step back from liberalization in the Doha Round in the form of a separate special safeguard mechanism to expressly give the right to adjust duties in response to price fluctuations.

80 Chile Price Band, Appellate Body Report, [29].

81 Ibid [27].

82 Ibid [14] and Chile Price Band, Panel Report, [7.5].

83 Chile Price Band, Panel Report, [7.3]-[7.5].

84 Chile Price Band, Appellate Body Report, [288].

85 Ibid [226].

86 Ibid [233], quoted in Chile Price Band Recourse to Article 21.5, Panel Report, [7.27].

87 Chile Price Band, Appellate Body Report, [246].

88 Ibid [250] and Chile Price Band Recourse to Article 21.5, Panel Report, [7.40(c)-(d)].

89 See the relevant parts of the Chile Price Band, Appellate Body Report, [234] cited in Chile Price Band Recourse to Article 21.5, Panel Report ([234] cited at [7.27]; [246] cited in [7.37]; [249] cited in [7.40(a)-(b)]).

90 Chile Price Band, Appellate Body Report, [254].

91 Chile Price Band Recourse to Article 21.5, Panel Report, [7.57]-[7.61].

92 Chile Price Band Recourse to Article 21.5, Appellate Body Report, [207]-[212].

93 Chile Price Band Recourse to Article 21.5, Panel Report, [7.79].

94 Chile Price Band Recourse to Article 21.5, Appellate Body Report, [221].

95 Chile Price Band Recourse to Article 21.5, Panel Report, [7.79] and Chile Price Band Recourse to Article 21.5, Appellate Body Report, [223].

96 Chile Price Band Recourse to Article 21.5, Panel Report, [7.72].

97 Chile Price Band Recourse to Article 21.5, Appellate Body Report, [221].

98 Chile Price Band Recourse to Article 21.5, Panel Report, [7.74]-[7.77].

99 Ibid [7.87]-[7.92].

100 Chile Price Band Recourse to Article 21.5, Appellate Body Report, [202].

101 Ibid [142].

105 Relevant here is the proposal in G33 Proposal on Special Safeguard Mechanism for Developing Countries, WTO Doc JOB(06)/64 (2006), also at <https://www.agtradepolicy.org/output/ resource/G33_revised_proposal_SSM_23Mar06.pdf> at 9 September 2007. See the analysis of this proposal in B G Williams, ‘The Falconer Draft Text for Doha Round WTO Negotiations on Agriculture – A “Ha’porth of Tar” to save the Vessel from Sinking or just a Dab of Paint on an Irreparably Broken Hull’ (2007) 30 University of New South Wales Law Journal 368.

106 European Economic Community – Programme of Minimum Import Prices, Licenses and Surety Deposits for Certain Processed fruits and Vegetables, GATT BISD, 25th Supp, 68, (Report of the Panel), adopted on 18 October 1978, (L/4687).

107 See, eg, E Petersmann, ‘Grey Area Trade Policy and the Rule of law ‘ (1988) 22 Journal of World Trade 23.

108 The last of the series of cases was the EEC – Restrictions on Imports of Dessert Apples, GATT BISD 36th Supp, 135, (Complaint by Chile, Report of the Panel), adopted 22 June 1989, (L/6491).

 

Author: international

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Rule of law, country.