Published: The Financial Express, May 01, 2004,

By Pradeep S Mehta

A recent decision of the WTO appellate body in the matter of India’s dispute against the European Union (EU) has two sides, like in a coin. While India is crowing about its victory on the EU’s measure to provide additional concessions to Pakistan for its war against drugs, EU feels that its preferential treatment to Pakistani textiles has not been invalidated per se. India won a battle, but lost the war.

What are the facts? To begin with, the EU, under its scheme of generalised system of preferences (GSP), granted an extra textiles quota in 2002 to Pakistan for managing its drug control system efficiently. Some said this was a reward for its support to the West, post-9/11.

Export of textiles from the poor to rich operate under a quota system, which will hopefully expire this year-end. But the importing countries can use it flexibly for other reasons. India found the additional concessions granted to Pakistan to be discriminatory and complained that her own exports had been affected. EU offered this concession to Pakistan under the WTO’s ‘enabling clause’, which allows grants of extra concessions to developing countries. This provision authorises the GATT contracting parties or WTO members to operate the GSP notwithstanding the Most Favoured Nation (MFN) obligation in the GATT.

India argued that the enabling clause does not permit differentiation among the countries, which can be given GSP privileges. Her position was vindicated by the panel. The panel in its report had said that under the enabling clause and in particular the non-discrimination principle, identical tariff preferences have to be provided to all developing countries with the exception of the least developed countries and the so-called “a priori limitations”.

Following this, the EU filed an appeal before the appellate body (AB) on December 1, 2003. The AB upturned the panel decision, and held that the panel’s interpretation of the principle of ‘non-discrimination’ defined under the enabling clause was incorrect. Both India and the EC, based on their own interpretation of the AB report, are claiming victory.

India’s commerce ministry is claiming that the AB has upheld the finding of the Dispute Sett-lement Panel that the tariff preferences to 12 countries given by the EC under the drug arrangements window of the GSP scheme is inconsistent with the enabling clause. The EC is arguing that the AB has reversed the finding of the panel and rejected India’s claim that the WTO rules, like the enabling clause, do not allow them to be able to discriminate between developing countries.

This case reminds one of the shrimp-turtle case. That case was decided in favour of developing countries, but a closer scrutiny showed that on substantive issues it favoured the US. In the case, the AB did not rule against the mandatory use of turtle-excluder devices. It only stated that the application of these measures by the US was arbitrary and transfer of technology was discriminatory. It created the same kind of ambiguity as is being created now.

Who has won and who has lost? EC, in its appeal to the AB, had challenged the panel’s interpretation regarding the “non discrimination” provision. The panel had held that this term requires that identical tariff preferences under the (GSP) scheme be provided to all developing countries without differentiation.

The AB has reversed this finding. In the words of the AB, “non-discriminatory” in the enabling clause does not prohibit the granting of different tariffs to products originating in different sub-categories of GSP beneficiaries, but that identical tariff treatment must be available to all GSP beneficiaries with the ‘development, financial [or] trade need’ to which the differential treatment is intended to respond”. This reversal by the AB of the panel’s ruling is being interpreted by EC to substantiate its differential tariff preferences under the drug arrangements window of its GSP scheme.

The EC is arguing that by reversing the panel’s finding, the AB has said that its tariff preferences are not inconsistent with its WTO obligations. It is important to note that the AB has not supported EC’s drug arrangements. It found that the EC failed to demonstrate that its drug arrangements are based on transparent and objective criteria and prove that its drug arrangements met the requirement of the enabling clause.

EC’s drug arrangements do not allow all developing countries, which are similarly situated, to qualify for the preferences under the arrangement. Thus, there is discrimination amongst countries that are at a similar footing in terms of development, financial and trade needs. In short, the AB has upheld the ruling of the panel that EC’s drug arrangements or extending tariff preferences are inconsistent with the enabling clause.

It is interesting to note that the EC, in its press release, has admitted that they failed to demonstrate to the AB that its drug arrangements were based on objective and transparent criteria. Trade Commissioner Pascal Lamy also said that tariff preferences to developing countries could be continued provided it was based on an objective and transparent criteria. Closer scrutiny of the AB report shows that the EC could use “non-discrimination” in the enabling clause to provide different tariff preferences, provided these were extended in a non-discriminatory and transparent manner. Like shrimp-turtle, this case has been decided in favour of India on technical grounds, but on substantive law, it favours the EU.

The ruling has a crucial political outcome. In the context of the Special & Differential Treatment debate in the Doha Round, rich countries are arguing that there should be differential approach to developing countries, i.e., India, Brazil et al will need to be treated less favourably than, say, Bangla-desh and Benin. It has been argued that this would only divide the world.

One key issue left undecided by the AB was that whether the EU’s drug arrangements were inconsistent with the MFN clause in Article I.1 of GATT. A ruling on this issue would have gone a long way in giving precision to the other such findings.