Published: The Financial Express, June 11, 2004,

By Pradeep S Mehta

A few years ago, the US put a ban on biris manufactured by Ganesh Biris of Mangalore because US customs inspectors found girl children rolling them in their houses. This was an action under the Generalised System of Preferences (GSP) scheme of the US, under which Indian exporters get concessional terms.

Whether importing countries can take such WTO-illegal actions or not was challenged in the India-EC GSP case (Winning The Battle, But Losing The War, May, 1, 2004). However, one significant element of this case, which has perhaps gone unnoticed, is related to non-trade concerns. Non-trade concerns like labour, environment, human rights etc, have often occupied considerable space in trade negotiations. A concerted effort is on by developed countries to bring these issues into the WTO. Developing countries, as a principle, have opposed the linkage between trade and non-trade concerns arguing that the WTO is a trade body and thus not the right forum to discuss non-trade imperatives.

It is in this context that schemes like GSP assume great importance. GSP allows developed countries to grant tariff preferences to developing countries, provided these preferences are beneficial to developing countries and are extended on a generalised, non-reciprocal and non-discriminatory basis.

These conditional preferences can be broken into positive and negative conditionalities. In the EC’s GSP, positive conditionality refers to the possibility of developing countries to apply for additional tariff preferences on all products if they comply with specified labour and environmental measures. In fact, this positive conditionality has been given a special name called “special incentive arrangement”. As the name suggests, under this arrangement, countries are granted additional tariff preferences as an incentive or reward for complying with certain labour and environmental conditions. Negative conditionality refers to the right to withdraw GSP preferences from beneficiary countries for reasons like involvement in slavery, money laundering etc. After having explained the basic landscape of the EC’s GSP, it will be relevant to view this system through the prism of the Appellate Body (AB) ruling. AB, in its ruling issued on April 7, 2004, stated that developed countries are entitled to apply differential treatment to GSP beneficiaries based on their development, trade and financial needs. It also said that this need should be based on an objective and transparent criteria. According to the AB, EC’s drug arrangement, which was challenged in this case, was not based on an objective and transparent criteria and thus was inconsistent with the “enabling clause”. However, the AB took a contrary position on the conditionality for the protection of labour rights and environment, though this issue was not before it. AB stated that these arrangements are prem-ised on detailed substantive and procedural criteria. Hence, there is an objective and transparent basis for them to exist.

Objective and transparent criteria implies that GSP donor countries can base their tariff preferences on those standards or norms, which are, say, part of international agreements. Thus, a GSP donor country can make granting of additional tariff preferences contingent on a country complying with core labour standards or other ILO conventions, or multilateral environment treaties.

AB’s ruling in the GSP case is significant for three reasons. First, it gives a judicial approval to the existing positive conditionality of EC’s GSP. Second, it has amplified the scope of adding more conditions to the existing list of positive conditionalities. For instance, it will not be astounding if tomorrow the EC adds human rights to its list of “special incentive arrangement”. The EC can say that it will extend additional preferences to all those countries who comply with the “International Covenant on Civil and Political Rights” or who comply with the “International Covenant on Economic Social and Cultural Rights”. According to the AB ruling, the EC is well within its right to have such a positive conditionality. Third, and most importantly, it has imparted momentum to the possibility of bringing in non-trade issues into the WTO. But, this is not the first time that the AB has done this. In the Shrimp-Turtle case, the frontiers of the interface between trade and environment were put to test.

The AB had held that as a general principle, unilateral trade measures to protect the global environment are not unjustifiable under the GATT. This is subject to the condition that these measures do not lead to arbitrary or unjustifiable discrimination between countries where same conditions prevail. Hence, a country can restrict or deny market access to another country on the ground that it has not complied with the domestic environmental policies of the importing country, provided other conditions of the GATT are satisfied. Three years later, in 2001, when AB ruled on Malaysia’s challenge to US implementation of its original ruling it substantiated its position further. It stated that the position it took in Shrimp-Turtle, was not just an observation but had a legal significance. The intention was that this ruling should act as a guide for future panels on this issue.

What is interesting to see is that the GSP ruling has moved this issue forward. This ruling is a signal of a greater assertion by the DSB regarding the openness with which it is ready to view non-trade issues. This ruling, along with the other two Shrimp-Turtle cases also exhibit a more significant and visible departure from the jurisprudence that evolved in the Tuna-Dolphin disputes (which had taken place before the WTO came into being). In the Tuna-Dolphin case, the approach was that any dispute between environment and trade should be resolved in favour of the latter. One can argue that the DSB reports or rulings are binding only on the parties to the dispute and do not have a precedent value. But, the fact of the matter is that they do have an impact on existing multilateralism. They influence negotiations and enable countries to take position on different issues. It will not be imprudent to say that the jurisprudence that evolved in the Shrimp-Turtle case had a role in officially bringing environment onto the trade negotiating agenda. The significance of the GSP ruling should be understood in this context.