Background:
In 2001, Peru introduced the Price Range System (“PRS”) through which it imposed additional duties on agricultural products. It signed multiple Free Trade Agreements (“FTAs”) with its trading partners. These FTAs contained a clause allowing Peru to maintain its PRS. One such FTA was also signed between Peru and Guatemala. This FTA was ratified by Guatemala but not Peru, and was consequently not yet in force. The FTA further provided that in case of any contradiction between the FTA and the WTO provisions, the FTA provisions would prevail.
Guatemala brought a case against the PRS before the WTO Dispute Settlement Body (“DSB”). Peru based its defence on the provisions of the FTA that allowed it to maintain PRS and provided for the supremacy of FTA provisions over WTO rules.
Issues:
There were three main issues before the DSB. First, the preliminary question- whether Guatemala had violated its good faith obligations under Articles 3.7 and 3.10 of the Dispute Settlement Understanding (“DSU”)? Second, whether PRS was inconsistent with Peru’s WTO obligations? Third, whether Peru and Guatemala had modified their WTO obligations as between themselves through the FTA they had signed?
For the purpose of this blog post, the first and third issues are crucial.
Panel Report:
With regards to Guatemala’s good faith obligations in initiating a WTO dispute, Peru argued before the panel that the provisions on the DSU must be interpreted in light of Article 18 of the Vienna Convention on Law of Treaties (“VCLT”) that prohibits signatories from acting contrary to the object and purpose of a treaty that is not yet in force. The Panel rejected this argument and stated violation of Article 18 does not constitute lack of good faith under Articles 3.7 and 3.10 of the DSU [1] . Since Peru’s preliminary objection failed, the Panel proceeded to the substantive claims.
The Panel held that the PRS was inconsistent with Agreement on Agriculture as well as Article II:1 (b) of GATT.
On the third issue, Peru contended before the Panel that the two countries had modified their obligations under the WTO covered agreements through the FTA. The question arose whether members could rightfully do so. The Panel side-stepped this issue, instead holding that as the FTA was not yet in force, there was no legally binding obligation under the FTA. It went on to state- “it is not necessary for this Panel to express an opinion on whether the parties may, through the FTA, modify between themselves their rights and obligations under the covered agreements…” [2]
Appellate Body Report:
The two countries then appealed before the Appellate Body (“AB”). Before the AB, Peru argued that good faith was a substantive obligation upon Guatemala. The AB held that while countries have “considerable deference” [3] in deciding whether initiating a WTO dispute would be a fruitful exercise, this discretion is not unlimited, and in certain cases greater scrutiny by a Panel or AB would be necessary.
Peru further argued that by agreeing that Peru may maintain the PRS, Guatemala had waived off its right to initiate proceedings before the WTO. The AB has on past occasion recognised parties’ right to agree to a mutually acceptable solution “to forego the right to initiate compliance proceedings” [4]. However, a WTO member must make a clear statement that it would not take legal action against a specific measure [5]. Else, it would not be in breach of its good faith obligations.
In the present case, there was debate between the parties whether the FTA allowed Peru to maintain PRS even if it was WTO inconsistent. Further, the FTA was negotiated before the initiation of the WTO dispute. Hence it could not be said that Guatemala had waived off its right to bring a dispute before the WTO. The AB further held that its decision was irrespective of the status of FTA [6].
On the relationship between the FTA and obligations under the WTO, Peru had argued before the Panel that the parties had modified their WTO obligations through the FTA. Before the AB, Peru changed its argument and contended that the WTO provisions should be interpreted in light of the FTA and other relevant rules on international law.
Peru relied upon Article 31(3)(a) of the VCLT which provides that any subsequent agreement between the parties must be taken into account while interpreting a treaty. Peru argued that the FTA was such a subsequent agreement. The AB, however, rejected this argument, holding that Article 31(3)(a) refers to a subsequent agreement between all the parties to a treaty, and not just two of them. It “express[ed] reservations” whether a bilateral agreement could constitute a subsequent agreement establishing common intention of all WTO members [7]. The AB was reluctant to allow this as it would lead to fragmentation of WTO law depending upon the various FTAs signed by member countries.
In addition Peru also placed emphasis on Article 20 of the ILC’s Articles on Responsibility of States for Internationally Wrongful Acts (consent by a state can preclude the wrongfulness of an act against it) and Article 45 (an injured state may waive off its claim.) It contended that these were relevant rules of international law that must be taken into account while interpreting the WTO Covered Agreements, as per Article 31(3)(c) of the VCLT. The AB held that the question in dispute is not whether PRS can be maintained [8], rather the question is whether PRS constitutes “ordinary customs duties” that are consistent with the WTO covered agreements, or whether they are variable import duties, inconsistent with Peru’s WTO obligations. Therefore, the AB found that the ILC articles were not relevant rules of international law under Article 31(3)(c) [9]. This distinction however seems to be an artificial one. The question whether PRS constitutes variable import duties or not, leads directly to the question whether PRS can be maintained or not. It is thus difficult to see how the ILC Articles are not relevant in the dispute.
Peru also advanced arguments under Article 41 of the VCLT, which allows for amendments to a treaty. The AB rejected this contention, and held that Article XXIV of the GATT, which provides a mechanism for FTAs to amend the GATT, renders Article 41 inapplicable [10]. According to the AB, the legality of a FTA that is contrary to WTO rules must be examined under Article XXIV. Peru however did not advance arguments under this provision, as both countries agreed that a FTA which is not yet in force does not come within the ambit of Article XXIV.
Regardless, the AB looked at Paragraph 4 of Article XXIV, which reads, “the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories…” [11]. Relying on this, the AB held that Article XXIV is not a broad defence for FTA provisions that contradict Members’ rights and obligations under the WTO [12].
Conclusion:
The AB’s reasoning was a welcome break from the Panel in that it did not extensively rely on the fact that the FTA was not in force. Indeed, it stated- “We reach the above findings irrespective of the status of the FTA as not being ratified by both parties” [13].
The AB report demonstrates its reluctance to take into account rules of international law outside the WTO covered agreements. The decision that Article XXIV of GATT renders Article 41 of VCLT unnecessary seems to be in furtherance of this same line of reasoning. It is interesting to note, however, that in US-Clove Cigarettes, the AB found that an explicit WTO provision on interpretation does not displace VCLT Article 31.3 (a) [14].
In Peru-Agricultural Products, however, the AB seems to have ruled against allowing FTAs to modify WTO obligations between parties. Prima facie, this needlessly impinges on member states’ sovereignty and freedom to contract into and out of obligations. On the other hand, if members were allowed to easily modify their obligations through bilateral/plurilateral FTAs, it would lead to fragmentation of laws, with different rules applicable between different countries. This would allow stronger countries an undue advantage in negotiating favourable agreements with weaker countries.
The AB’s treatment of ILC’s Articles was another step along the same path. The AB implicitly refused to consider the Articles as a substantive defence to the WTO rules, instead restricting their role to merely an interpretive tool. There is disagreement among academics whether defences under international law can be accepted by a WTO DSB. It is interesting to note that if the dispute was before another international forum, one that took into account the ILC Articles, Peru would have probably won. By not considering the ILC Articles as substantive defences, the AB implicitly placed WTO laws at a higher threshold than other branches of international law.
The AB’s reluctance to incorporate other rules of international law, whether in the FTA or the VCLT and ILC Articles, into the WTO Jurisprudence renders WTO a “self-contained regime” [15] one that is separate from, (and at least for disputes before the DSB, also supreme over) other branches of international law.
This post has been authored by Pramiti Parwani and Tamalika Bera, 3rd and 1st year students at the West Bengal National University of Juridical Sciences, respectively.
[1] Panel Report, Peru – Additional Duty on Imports of Certain Agricultural Products– Complaint by Guatemala, ¶7.92, WT/DS457/R (November 27, 2014).
[2] Ibid at ¶7.528.
[3] Appellate Body Report, Peru – Additional Duty on Imports of Certain Agricultural Products– Complaint by Guatemala, ¶5.19, WT/DS457/AB/R (July 27, 2015).
[4] Appellate Body Reports, EC — Bananas III (Article 21.5 — Ecuador II) I EC — Bananas III (Article 21.5 — US), ¶212.
[5] Ibid at ¶228.
[6] Supra note 3, at ¶5.28.
[7] Supra note 3, at ¶5.106.
[8] Supra note 3, at ¶5.103.
[9] Ibid.
[10] Supra note 3, at ¶5.112.
[11] General Agreement on Tariffs and Trade,1994 at Article XXIV(4).
[12] Supra note 3, at ¶5.116.
[13] Supra note 3, at ¶5.28.
[14] Appellate Body Report, United States- Measures Affecting the Production and Sale of Clove Cigarettes, Complaint by Indonesia, WT/DS406/AB/R (April 4, 2012).
[15] Shaffer, Gregory and Winters, L. Alan, FTA Law in WTO Dispute Settlement: Peru-Additional Duty and the Fragmentation of Trade Law (August 31, 2016). UC Irvine School of Law Research Paper No. 2016-43. Available at SSRN: https://ssrn.com/abstract=2832910
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