In a series of TBT cases a while ago, the Appellate Body was confronted with defining the similar but not identical legal standards in TBT Agreement Article 2.1 and GATT Article III:4. Roughly speaking, its conclusion was that Article 2.1 required an examination of "regulatory purpose" through the "stems exclusively from a legitimate regulatory distinction" element, but this element should not be taken into account under GATT Article III:4.
Practically speaking, it seems to me that if this approach were followed strictly, it would likely mean an Article III:4 standard under which a disparate impact on imported products would be enough to find a violation. But if you read the Appellate Body's statements here differently, let me know in the comments.
I don't think that approach is sustainable as a matter of policy or politics (I also think the approach is clearly wrong under VCLT Article 31, but I'll leave that for another post). Eventually, in my view, we will have a case where a clearly non-protectionist measure is found to violate Article III:4 under this standard (and is not able to be justified under an exception), and people will realize that an approach to Article III:4 that relies on more than just disparate impact is necessary.
For this reason, I'm always on the lookout for good Article III:4 disputes that may prompt a reassessment. As the dispute proceeds, I'm interested in how the arguments under this provision are presented, to see if this is the case where a panel might shift away from the Appellate Body's apparent approach. The EU - Palm Oil dispute brought by Malaysia has a bit of potential in this regard.
Malaysia's written submission is not online as far as I can tell, but here's a good overview of its general concern about the EU policies and measures as articulated in its panel request:
4. In the context of addressing the environmental risks posed by the extensive use of fossil fuels, the EU and its Member States have, since 2009, adopted a policy of promoting the use of biofuels by setting national targets for the use of renewable energy in various sectors, including the transport sector. This policy led to a rapid increase in the EU consumption of biofuels, produced mainly from food and feed crops.
5. While, in general, the measures taken by the EU and certain EU Member States under the renewable energy policy pursue the reduction of greenhouse gas ('GHG') emissions and the achievement of commitments under international climate agreements, Malaysia considers that some of these measures are inconsistent with the EU's and certain EU Member States' WTO obligations.
6. In particular, the EU contends that only palm oil production entails a high risk of indirect land-use change ('ILUC'). On that basis, the share of oil palm crop-based biofuel shall not exceed the level of consumption of such fuel in each EU Member State in 2019 and shall gradually decrease to 0% by 2030. Malaysia submits that, in fact, a number of EU Member States appear to phase out oil palm crop-based biofuels, for purposes of meeting EU renewable energy targets, much earlier than 2030. Unless certified as low ILUC-risk, oil palm crop-based biofuel cannot be counted towards EU renewable energy targets.
7. Generally speaking, the measures adopted by the EU, as well as the related measures so far adopted by certain EU Member States, confer unfair benefits to EU domestic producers of certain biofuel feedstocks, such as rapeseed, sunflower, and soybeans, and to the biofuels produced therefrom, at the expense of, respectively, palm oil and oil palm crop-based biofuel produced in Malaysia. These measures also discriminate against palm oil and oil palm crop-based biofuel from Malaysia in favour of 'like products' from third countries.
8. Malaysia submits that the measures adopted by the EU and certain EU Member States already limit and will increasingly reduce the volume of oil palm crop-based biofuel, and, hence, the amount of palm oil used for its production, that may be counted towards reaching EU renewable energy targets and, consequently, that will be sold in the EU market.
In a nutshell, Malaysia produces lots of palm oil and palm oil-products, and the EU's measures discriminate against these products in favor of other like products (derived from rapeseed, sunflower, and soybeans) and therefore, as articulated later in the panel request, the measures violate various WTO non-discrimination provisions.
The EU first written submission in the case is now available. There is lot going on in this 355 page(!) submission, but I'm going to focus on one narrow point: The arguments about "less favorable treatment" under GATT Article III:4.
First, though, for additional background, the EU lays out a general defense as follows:
4. The EU Biofuels regime is not designed to target palm oil or palm oil based biofuels. It is neither protectionist nor discriminatory and, it does not impose market access conditions. The EU Biofuels regime is designed to contribute to achieving the climate change mitigation objectives of the European Union in terms of the reduction of greenhouse gas emissions, whilst at the same time contributing to wider environmental objectives, and in particular the prevention of biodiversity loss. Contributing to these objectives is necessary to protect the EU public morals, as the fight against climate change and biodiversity destruction constitute deep and longstanding moral concerns
for the EU public and the EU legislator.5. Not all biofuels are equally able to contribute to these objectives. The ever increasing global demand for the food and feed crops used to produce some biofuels has unintended consequences and indirect effects. Qualified scientific opinions indicate that demand for certain agriculture commodities is driving land-use change associated with mass deforestation and the transformation of other types of land with high-carbon stock. The adverse impact on the environment in terms of biodiversity loss is devastating; as forest and peatland gives way to food and feed crop cultivation, many species are eliminated or depleted. At the same time, the level of GHG emissions rises
as conversion of this land to agricultural production may lead to GHG emissions of such magnitude that the net emissions of “biofuels” may even exceed those associated with fossil fuels.6. The EU “measures” challenged by Malaysia are not designed to restrict trade. Rather they are designed to change the drivers of European Union demand for biofuels so that the EU renewable energy policy does not create additional demand for biofuels whose
production risk to lead to land use change, and in particular of land with high carbon stock and biodiversity value. They apply indiscriminately to all biofuel produced from food or feed crop whose production requires the use of land, whether domestic or
imported and with no differentiation on grounds of origin. Nor does the EU Biofuels Regime create unnecessary obstacles to trade. It does not limit the import or placing on the market of any biofuel, including biofuel produced from palm oil, nor does it limit the quantity of palm oil to be imported in the EU.
Now let's get into Article III:4. Two of the key components here are: (1) like products; and (2) less favorable treatment.
On like products, as set out in the EU submission, Malaysia argued that:
all oil crop-based biofuels, and in particular oil palm crop-based biofuel, rapeseed oil-based biofuel and soyabean oil-based biofuel, are “like products” within the meaning of Article 2.1 of the TBT Agreement.
...
biofuels made from food and feed crops are “like” biofuels made from other feedstocks, i.e., that biofuels made from food and feed crops and biofuels made from other feedstocks are in a sufficiently close competitive relationship to be considered “like” within the meaning of Article III:4 of the GATT 1994
(see paras. 611, 626 of the EU submission)
In response, the EU argued that:
630. The European Union considers that oil palm crop-based biofuel, rapeseed oil-based biofuel and soyabeans oil-based biofuel are not like products.
631. This is valid for the likeness test under both Article 2.1 of the TBT Agreement and Articles I and III:4 of the GATT 1994
I'm not going to try to resolve that disagreement, but I wanted to note it because it is important for the less favorable treatment arguments.
The less favorable treatment analysis goes from para. 1158 to para. 1184. Here's a key passage:
1168. The Panel must however, avoid assimilating an asymmetry in terms of production of a specific agricultural crop to evidence of less favourable treatment under the GATT for the sole reason that a Member adopts a requirement which happens to impact an agricultural commodity which is predominantly grown in another part of the world.
1169. Instead, when comparing the treatment of a group of like products, the Panel must compare the treatment of the group of like products from the import side with the treatment of exactly the same group of like products domestically. In all instances, the question before the Panel is whether the treatment is consistent on both sides of that equation.
I'm not sure these two paragraphs are on the same page with each other. The first one seems to say that disparate impact is not enough to find a violation; the second one seems to say that you must compare groups of like products with each other. That's all fine, but I'm not sure I understand the "instead," because I don't think these two ideas conflict.
But the next paragraphs explain the EU's views here:
1170. In the present proceedings, therefore, the Panel must consider whether imported palm oil based biofuel is treated in the same way as domestically produced palm oil based biofuel. The answer to this question is indisputably affirmative.
1171. Similarly, the Panel, when examining the group of like products, must assess whether imported soyabean oil and imported rapeseed oil are treated the same way as domestically produced soyabean and rapeseed oil. The Panel cannot, as Malaysia seems to suggest, deduce from the fact that the impact of the measures is on palm oil, that there is less favourable treatment within the group of like products.
So the EU wants to compare palm oil to palm oil, and soyabean/rapeseed oil to soyabean/rapeseed oil.
Now, if you accept the EU's likeness arguments, that makes sense. Why compare the treatment of products that are not like?
But if you don't accept that view, and you conclude that all of these products are like, then I think you would have to compare the treatment of the group of domestic palm/soyabean/rapeseed/etc oil products to the group of imported palm/soyabean/rapeseed/etc oil products. And if you were to do that, what's not at all clear to me is how the EU sees GATT Article III:4 operating. Under such a comparison, does the EU think that disparate impact would be enough to find a violation? Or would it look, in some form and to some degree, at the purpose of the measures? I assume it's the latter, but I don't have a sense of how it would do so.
I wondered what the U.S. thought of this issue (the U.S. third party submission is here). They did not explicitly weigh in on GATT Article III though. Instead, they focused on various TBT provisions and GATT Article XX. However, in the context of their TBT 2.1 arguments, the U.S. said this:
4. Thus, to establish a breach of Article 2.1, the complainant must prove three elements: (i) that the measure at issue is a technical regulation; (ii) that the imported and domestic products are “like”; and (iii) that the treatment accorded to imported products is less favorable than that accorded to like domestic products or like products from other countries.2 In this way, Article 2.1 mirrors Article III:4 of the GATT 1994.3
Footnote 3 says:
Article III:4 requires a complainant to demonstrate that (1) the measures at issue is either a law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use; (2) the imported and domestic products are “like;” and (3) the law or regulation provides to imported products treatment less favorable than that accorded to like domestic products. See, e.g., Korea – Beef (Panel), para. 617.
You could take that to mean that the U.S. believes the Article III:4 standard is the same as the Article 2.1 standard, but for the sake of clarity, it would have been helpful if they said that explicitly.
Later, the U.S. criticizes the Appellate Body's approach to 2.1:
In more recent reports, the Appellate Body has found that, in the context of the TBT Agreement, any detrimental impact found to exist with respect to imported products will constitute a breach of Article 2.1 unless the “detrimental impact on imports stems exclusively from legitimate regulatory distinctions.” This requirement—that any detrimental impact “stem exclusively from” a legitimate regulatory distinction—has no basis in the text of the TBT Agreement and significantly narrows the scope of regulatory action permitted under the Agreement. As the United States has explained above, past panel reports have correctly found measures to be consistent with Article III:4 of the GATT 1994 if the detrimental impact experienced by imports was explained by factors unrelated to the foreign origin of the product. ...
I'm not totally clear on what the U.S. has in mind here, although I, too, am skeptical about whether the "detrimental impact stems exclusively from a legitimate regulatory distinction" language is ideal as a legal standard here. Later, the U.S. tries to explain a bit more:
19. The question of whether any detrimental impact is based on factors not relating to the origin of the products in question is one that should be answered taking all relevant facts into account. For example, if the regulatory purpose invoked bears a rational relationship to the measure at issue, this would be indicative of non-discrimination. Similarly, if the measure is apt to advance the regulatory purpose identified by the regulating Member, this too would be indicative of non-discrimination. A panel would evaluate this as part of the overall assessment of whether a measure modified the conditions of competition to the detriment of imported or other foreign products. If an evaluation of the measure did not support the proposition that detrimental impact was non-origin-based, or if an examination of the facts reveals the regulatory distinction to be a proxy for origin,25 for example, then the measure would breach the national treatment or MFN obligation.
It kind of feels like the U.S. is thinking about a "design, structure, architecture"-type analysis, but interestingly they don't use those words. What I'd want to hear from the U.S. is how their standard would apply to an actual measure, such as the EU palm oil measures at issue.
It is somewhat surprising to me that it seems like we have less clarity on the Article III:4 less favorable treatment standard than we did, say, 20 years ago. Unfortunately, there's so much going on in the Palm Oil case that perhaps it's not likely to be the one that resolves things. But maybe the panel will ask some probing questions that force the parties to articulate their views on all this.
