This is a guest post from Iulianna Romanchyshyna, a Horizon 2020 Marie Curie Fellow and PhD candidate at the University of Passau (Germany) within the European Trade and Investment Partnership (EUTIP) project
On 20th June 2019, the EU requested the establishment of an arbitration panel under the EU-Ukraine Association Agreement (‘AA’) with regard to Ukraine’s export ban of unprocessed timber after the preceding consultations held on 7th February 2019 did not come close to a successful end. Given that it would be the first dispute in which EU challenges a trading partner’s measure by opting for an FTA-specific dispute settlement mechanism rather than the WTO, it raises a question whether in future this practice would be resorted to more frequently, especially in the light of impending WTO Appellate Body demise. It is relevant to mention that earlier on, EU initiated consultations with South Korea with respect to its non-compliance with labour provisions under the EU-Korea FTA, however, this case is different: The alleged violations by Korea constitute WTO-extra obligations (not provided in WTO agreements) meaning that there was no question on the choice of the appropriate forum. Moreover, the labour provisions violations under the EU-Korea FTA are explicitly excluded from the scope of a traditional dispute settlement, instead, they shall go through a specific non-binding procedure resulting in recommendations by the panel of experts that a party is only compelled to comply with by way of political pressure. The EU-Ukraine case, on the other hand, concerns a ban on export, both prohibited by Article 35 of the AA and Article XI of the GATT and is subject to a normal procedure of arbitration under the FTA. This blog intends to provide some preliminary comments on the substance of the dispute, taking account of WTO jurisprudence that might be used for the interpretative purposes.
Measure at issue
In 2015 Ukraine introduced a law temporarily (for a period of 10 years) banning export of unprocessed timber, which initially applied with exception for wood from pine trees, but later, as of 1 January 2017, spread to all timber species (Art. 2 of the Law of Ukraine No 325-VIII of 9 April 2015 ‘On Amendments to the Law of Ukraine On Elements of the State Regulation of Business Operators’ Activities Related to the Sale and Export of Timber concerning the Temporary Export Ban for Unprocessed Timber’ (Law 325-VIII)). The prime purpose of the law is rather convoluted. Interestingly, its explanatory note directly states that ‘the purpose of the measure is to restore the wood processing and furniture industry’. At the same time, the explanatory note to the Law 2531-VIII amending Law 325-VIII which sets certain restrictions on domestic consumption of unprocessed timber and was adopted in 2016 as a result of international outrage re the protectionist character of initial version of Law 325-VIII, clarifies that the purpose of Law 325-VIII is to protect the natural resources, which would probably be invoked by Ukraine as a justification of the measure further down the line.
Article 35 violation and applicability of exceptions
It is crucial to note that the provision at issue (Article 35 of the AA), as well as a possible justification that Ukraine might invoke (Article 36 of the AA) both incorporate relevant GATT obligations under Article XI and Article XX respectively, which makes a case for a possible reference to GATT interpretative instruments, including the relevant jurisprudence. It is critical that Article 320 of the AA explicitly provides that in case obligations thereunder are identical to the WTO obligations, ‘the arbitration panel shall adopt an interpretation which is consistent with any relevant interpretation established in ruling of the WTO Dispute Settlement Body’. The following analysis is based on the premise that the GATT jurisprudence and practice would be recognized as a relevant reference.
Article 35
Article 35 provides exceptions from its scope for reasons enumerated in Art. XI:2 GATT. Ukraine might, in particular, refer to its para. (a):
“Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party”.
Despite that justification might seem to be fitting Ukraine’s narrative, it hardly could be a lifeline for the measure at issue, as it necessitates the evaluation of two key elements that might be challenging to prove in this particular case: i) product must be ‘essential’ for the party; ii) the measure must be applied ‘to prevent or relieve a critical shortage’ of the product. Whereas it is conceivable that timber might be found ‘essential’ (although Ukraine would have to provide evidence on why it is ‘absolutely indispensable or necessary’ (para. 326 of China-Raw Materials Appellate Body Report (ABR)), the ‘critical shortage’ would be more difficult to establish. The Appellate Body, based on the ordinary dictionary meaning of the terms, clarified that a ‘critical shortage’ refers to ‘deficiencies in quantity that are crucial, that amount to a situation of decisive importance, or that reach a vitally important or decisive stage, or a turning point’ (para. 324 of the China-Raw Materials ABR). Importantly, the panel clarified (and the Appellate Body agreed to this opinion) that a mere fact that the product at issue is an exhaustible natural resource would not be sufficient. Its exhaustibility by itself would not amount to a risk of a critical shortage within the meaning of Art. XI:2(a) (see para. 337 of the China-Raw Materials ABR). In this vein, the Appellate Body makes a distinction between articles XI:2(a) and XX (g) of the GATT (justifies measures for the protection of exhaustible natural resources) and states that they are different in reach, have different functions and contain different obligations. It does not mean that Article XI:2(a) cannot be applied to a ‘critical shortage’ of a product which is also an exhaustible natural resource but in this case, there must be a factual basis for characterization of such shortage as ‘critical’. The Appellate Body provides an example when it is triggered by a natural disaster (para. 337). Moreover, understanding of a ‘critical shortage’ as a situation of a crisis is confirmed by the negotiating history and the Members’ practice: Art. XI:2(a) was agreed to cover a critical shortage of merino sheep in Australia as a result of a drought (EPCT/A/PV/40(1)), or acute shortage of product due to price increases in foreign markets (L/332/Rev.1+Adds, para. 73). It is not quite clear how Ukraine is going to substantiate that it was facing conditions of such a critical level.
Article 36
Another option for Ukraine could be to invoke Art. 36 of the AA as an exception, which incorporates Article XX GATT. Here, subparagraph (g) of Art. XX might be of relevance justifying measure ‘relating to the conservation of natural resources’ if ‘made effective in conjunction with restrictions on domestic production and consumption’. Although forests could be identified as an exhaustible natural resource, there are several key points that might be problematic. First, it is required for the restrictions to be applied not just in respect of foreign, but also domestic products (p.20 of the US-Gasoline ABR). Notably, Law 325-VIII (as a result of an amendment by Law 2531-VIII) provides restrictions on the domestic consumption of unprocessed timber, however, it only amounts to a quota of 25 m3/year (Article 4). There could be some doubts as to whether it constitutes essentially similarly onerous burden in comparison with a total export ban.
Secondly, even if the measure satisfies the requirement of subparagraph (g) of Article XX, it still has to pass the ‘chapeau test’ (introductory clause to Art. XX) requiring that the measure must not constitute an ‘arbitrary or unjustifiable discrimination’ or a ‘disguised restriction on trade’. Given that a less burden is provided for the domestic consumption, it might be contended that the measure is applied in a discriminatory fashion and does not ‘bear rational connection to the [legitimate] objective (para. 227 of the Brazil-Retreaded Tyres). Moreover, as the Appellate Body indicates in Brazil-Retreaded Tyres, the analysis might involve evaluation of ‘the cause and the rationale of the discrimination’ (para. 225). Thus, the fact that the proclaimed objective of Law 325-VIII from the very beginning was the restoration of the wood processing and furniture industry in Ukraine might not play in its favour.
The present dispute could become an important development in FTAs adjudication in Europe. Moreover, it could well be an interesting addition to the discussion on environmental protection vs. protectionism. Watch this space.
