22 January 1996

Working Party on the Accession of China

The following non-paper has been prepared by the Secretariat in response to a request by the Chinese delegation made during the December 1995 informal meeting of the Working Party. lt should be noted that the selection of WTO provisions (in Part I) and panel reports (in Part II) is illustrative and non-exhaustive.

Part I: Illustrative list of provisions of the WTO Agreement relating to industrial policy

1.      Most-favored-nation treatment

A Article I:1 of GATT 1994

With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or

imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article 111, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.

B Article II:1 of GATS

With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.

2.      National treatment

A Article III of GATT 1994

1.      The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations, requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.

2.      The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

3.      With respect to any existing internal tax which is inconsistent with the provisions of paragraph 2, but which is specifically authorized under a trade agreement, in force on April 10, 1947, in which the import duty on the taxed product is bound against increase, the contracting party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to such tax until such time as it can obtain release from the obligations of such trade agreement in order to permit the increase of such duty to the extent necessary to compensate for the elimination of the protective element of the tax.

4.      The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.

5.      No contracting party shall establish or maintain any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources. Moreover, no contracting party shall otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1.

7.      No internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions shall be applied in such a manner as to allocate any such amount or proportion among external sources of supply.

9.      The contracting parties recognize that internal maximum price control measures, even though conforming to the other provisions of this Article, can have effects prejudicial to the interests of contracting parties supplying imported products. Accordingly, contracting parties applying such measures shall take account of the interests of exporting contracting parties with a view to avoiding to the fullest practicable extent such prejudicial effects.

Notes Ad Article III

Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III.

Paragraph 1

The application of paragraph 1 to internal taxes imposed by local governments and authorities with the territory of a contracting party is subject to the provisions of the final paragraph of Article XXIV. The term "reasonable measures" in the last-mentioned paragraph would not require, for example, the repeal of existing national legislation authorizing local governments to impose internal taxes which, although technically inconsistent with the letter of Article III, are not in fact inconsistent with its spirit, if such repeal would result in a serious financial hardship for the local governments or authorities concerned. With regard to taxation by local governments or authorities which is inconsistent with both the letter and spirit of Article III, the term "reasonable measures" would permit a contracting party to eliminate the inconsistent taxation gradually over a transition period, if abrupt action would create serious administrative and financial difficulties.

Paragraph 2

A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.

Paragraph 5

Regulations consistent with the provisions of the first sentence of paragraph 5 shall not be considered to be contrary to the provisions of the second sentence in any case in which all of the products subject to the regulations are produced domestically in substantial quantities. A regulation cannot be justified as being consistent with the provisions of the second sentence on the ground that the proportion or amount allocated to each of the products which are the subject of the regulation constitutes an equitable relationship between imported and domestic products.

B Annex to the Agreement on TRIMs

1.      TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require:

(a)      the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or

(b)      that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports.

C Article XVII of GATS

1.      In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers.

2.      A Member may meet the requirement of paragraph 1 by according to services and service suppliers of any other Member, either formally identical treatment or formally different treatment to that it accords to its own like services and service suppliers.

3.      Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or service suppliers of any other Member.

3.      Quantitative and other restrictions

A Article XI:1 of GATT 1994

No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

B Article II:4 of GATT 1994

If any contracting party establishes, maintains or authorizes, formally or in effect, a monopoly of the importation of any product described in the appropriate Schedule annexed to this Agreement, such monopoly shall not, except as provided for in that Schedule or as otherwise agreed between the parties which initially negotiated the concession, operate so as to afford protection on the average in excess of the amount of protection provided for in that Schedule. The provisions of this paragraph shall not limit the use by contracting parties of any form of assistance to domestic producers permitted by other provisions of this Agreement.

Note ad Article II, Paragraph 4;

Except where otherwise specifically agreed between the contracting parties which initially negotiated the concession. the provisions of this paragraph will be applied in the light of the provisions of Article 31 of the Havana Charter.1

C Article XVII:1 of GATT 1994

(a)      Each contracting party undertakes that if it establishes or maintains a State enterprise, wherever located, or grants to any enterprise, formally or in effect, exclusive or special privileges, such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders.

(b)      The provisions of sub-paragraph (a) of this paragraph shall be understood to require that such enterprises shall, having due regard to the other provisions of this Agreement, make any such purchases or sales solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of the other contracting parties adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales.

(c)      No contracting party shall prevent any enterprise (whether or not an enterprise described in sub-paragraph (a) of this paragraph) under its jurisdiction from acting in accordance with the principles of sub-paragraphs (a) and (b) of this paragraph.

D Annex to the Agreement on TRIMs

2.      TRIMs that are inconsistent with the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article Xl of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which restrict:

(a)      the importation by an enterprise of products used in or related to its local production, generally or to an amount related to the volume or value of local production that it exports;

(b)      the importation by an enterprise of products used in or related to its local production by restricting its access to foreign exchange to an amount related to the foreign exchange inflows attributable to the enterprises: or

(c)      the exportation or sale for export by an enterprise of products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

E Article II.l(b) of the Agreement on Safeguards

Furthermore, a Member shall not seek, take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side.2 These include actions taken by a single Member as well as actions under agreements, arrangements and understandings entered into by two or more Members. Any such measure in effect on the date of entry into force of the WTO Agreement shall be brought into conformity with this Agreement or phased out in accordance with paragraph 2.

4.      Subsidies

A Article III:8(b) of GATT 1994

The provisions of this Article shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article and subsidies effected through governmental purchases of domestic products.

B Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM)

Prohibited Subsidies

3.1      Except as provided in the Agreement on Agriculture the following subsidies, within the meaning of Article I, shall be prohibited:

(a)      subsidies contingent, in law or in fact3, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex 14;

(b)      subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1.

C Annex I to the Agreement on SCM

ILLUSTRATIVE LIST OF EXPORT SUBSIDIES

(a)      The provision by governments of direct subsidies to a firm or an industry contingent upon export performance.

(b)      Currency retention schemes or any similar practices which involve a bonus on exports.

(c)      Internal transport and freight charges on export shipments, provided or mandated by governments, on terms more favourable than for domestic shipments.

(d)      The provision by governments or their agencies either directly or indirectly through govemment-mandated schemes, of imported or domestic products or services for use in the production of exported goods, on terms or conditions more favourable than for provision of like or directly competitive products or services for use in the production of goods for domestic consumption, if (in the case of products) such terms or conditions are more favourable than those commercially available5 on world markets to their exporters.

(e)      The full or partial exemption remission, or deferral specifically related to exports, of direct taxes6 or social welfare charges paid or payable by industrial or commercial enterprises.7

(f) The allowance of special deductions directly related to exports or export performance, over and above those granted in respect to production for domestic consumption, in the calculation of the base on which direct taxes are charged.

(g)      The exemption or remission, in respect of the production and distribution of exported products, of indirect taxes8 in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.

(h)      The exemption, remission or deferral of prior-stage cumulative indirect taxes9 on goods or services used in the production of exported products in excess of the exemption, remission or deferral of like prior-stage cumulative indirect taxes on goods or services used in the production of like products when sold for domestic consumption, provided, however, that prior-stage cumulative indirect taxes may be exempted, remitted or deferred on exported products even when not exempted, remitted or deferred on like products when sold for domestic consumption if the prior-stage cumulative indirect taxes are levied on inputs that are consumed in the production of the exported product (making normal allowance for waste).10 This item shall be interpreted in accordance with the guidelines on consumption of inputs in the production process contained in Annex II.

(i)      The remission or drawback of import charge11 in excess of those levied on imported inputs that are consumed in the production of the exported product (making normal allowance for waste); provided, however, that in particular cases a firm may use a quantity of home market inputs equal to, and having the same quality and characteristics as, the imported inputs as a substitute for them in order to benefit from this provision if the import and the corresponding export operations both occur within a reasonable time period, not to exceed two years. This item shall be interpreted in accordance with the guidelines on consumption of inputs in the production process contained in Annex II and the guidelines in the determination of substitution drawback systems as export subsidies contained in Annex III.

(j)      The provision by governments (or special institutions controlled by governments) of export credit guarantee or insurance programs, of insurance or guarantee programs against increases in the cost of exported products or of exchange risk programs, at premium rates which are inadequate to cover the long-term operating costs and losses of the programs.

(k)      The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.

Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.

(1)      Any other charge on the public account constituting an export subsidy in the sense of Article XVI of GATT 1994.

D Article 5 of the Agreement on SCM

Actionable Subsidies12

No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.;

(a)      injury to the domestic industry of another Memberl3;

(b)      nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article 11 of GATT 199414;

(c)      serious prejudice to the interests of another Member.15

This Article does not apply to subsidies maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture.

E Article 6 of the Agreement on SCM

Serious Prejudice

6.1      Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in the case of:

(a)      the total ad valorem subsidization16 of a product exceeding 5 per cent17

(b)      subsidies to cover operating losses sustained by an industry;

(c)      subsidies to cover operating losses sustained by an enterprise, other than one-time measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems;

(d)      direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment.18

6.2      Notwithstanding the provisions of paragraph 1, serious prejudice shall not be found if the subsidizing Member demonstrates that the subsidy in question has not resulted in any of the effects enumerated in paragraph 3.

6.3      Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply:

(a)      the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member;

(b)      the effect of the subsidy is to displace or impede the exports of a like product of another Member from a third country market;

(c)      the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market;

(d)      the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity19 as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.

6.4      For the purpose of paragraph 3(b), the displacement or impeding of exports shall include any case in which, subject to the provisions of paragraph 7, it has been demonstrated that there has been a change in relative shares of the market to the disadvantage of the non-subsidized like product (over an appropriately representative period sufficient to demonstrate clear trends in the development of the market for the product concerned, which, in normal circumstances, shall be at least one year). "Change in relative shares of the market" shall include any of the following situations: (a) there is an increase in the market share of the subsidized product; (b) the market share of the subsidized product remains constant in circumstances in which, in the absence of the subsidy, it would have declined; (c) the market share of the subsidized product declines, but at a slower rate than would have been the case in the absence of the subsidy.

6.5      For the purpose of paragraph 3(c), price undercutting shall include any case in which such price undercutting has been demonstrated through a comparison of prices of the subsidized product with prices of a non-subsidized like product supplied to the same market. The comparison shall be made at the same level of trade and at comparable times, due account being taken of any other factor affecting price comparability. However, if such a direct comparison is not possible, the existence of price undercutting may be demonstrated on the basis of export unit values.

6.6      Each Member in the market of which serious prejudice is alleged to have arisen shall, subject to the provisions of paragraph 3 of Annex V, make available to the parties to a dispute arising under Article 7, and to the panel established pursuant to paragraph 4 of Article 7, all relevant information that can be obtained as to the changes in market shares of the parties to the dispute as well as concerning prices of the products involved.

6.7      Displacement or impediment resulting in serious prejudice shall not arise under paragraph 3 where any of the following circumstances exist20 during the relevant period:

(a)      prohibition or restriction on exports of the like product from the complaining Member or on imports from the complaining Member into the third country market concerned;

(b)      decision by an importing govemment operating a monopoly of trade or state trading in the product concerned to shift, for non-commercial reasons, imports from the complaining Member to another country or countries;

(c)      natural disasters, strikes, transport disruptions or other substantially affecting production, qualities, quantities or prices of the product available for export from the complaining Member;

(d)      existence of arrangements limiting exports from the complaining Member;

(e)      voluntary decrease in the availability for export of the product concerned from the complaining Member (including, inter alia, a situation where firms in the complaining Member have been autonomously reallocating exports of this product to new markets);

(f)      failure to conform to standards and other regulatory requirements in the importing country.

6.8      In the absence of circumstances referred to in paragraph 7, the existence of serious prejudice should be determined on the basis of the information submitted to or obtained by the panel, including information submitted in accordance with the provisions of Annex V.

6.9      This Article does not apply to subsidies maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture.

5.      Special and differential treatment of developing country Members

A Article XVIII of GATT 1994

1.      The contracting parties recognize that the attainment of the objectives of this Agreement will be facilitated by the progressive development of their economies, particularly of those contracting parties the economies of which can only support low standards of living and are in the early stages of development.

2.      The contracting parties recognize further that it may be necessary for those contracting parties, in order to implement programs and polices of economic development designed to raise the general standard of living of their people, to take protective or other measures affecting imports, and that such measures are justified in so far as they facilitate the attainment of the objectives of this Agreement. They agree, therefore, that those contracting parties should enjoy additional facilities to enable them (a) to maintain sufficient flexibility in their tariff structure to be able to grant the tariff protection required for the establishment of a particular industry and (b) to apply quantitative restrictions for balance of payments purposes in a manner which takes full account of the continued high level of demand for imports likely to be generated by their programs of economic development.

3.      The contracting parties recognize finally that, with those additional facilities which are provided for in Sections A and B of this Article, the provisions of this Agreement would normally be sufficient to enable contracting parties to meet the requirements of their economic development. They agree, however, that there may be circumstances where no measure consistent with those provisions is practicable to permit a contracting party in the process of economic development to grant the governmental assistance required to promote the establishment of particular industries with a view to raising the general standard of living of its people. Special procedures are laid down in Sections C and D of this Article to deal with those cases.

4.      (a) Consequently, a contracting party, the economy of which can only support low standards of living and is in the early stages of development, shall be free to deviate temporarily from the provisions of the other Articles of this Agreement, as provided in Sections A, B and C of this Article.

(b) A contracting party, the economy of which is in the process of development, but which does not come within the scope of sub-paragraph (a) above, may submit applications to the CONTRACTING PARTIES under Section D of this Article.

5.      The contracting parties recognize that the export earnings of contracting parties, the economies of which are of the type described in paragraph 4 (a) and (b) above and which depend on exports of a small number of primary commodities, may be seriously reduced by a decline in the sale of such commodities. Accordingly, when the exports of primary commodities by such a contracting party are seriously affected by measures taken by another contracting party, it may have resort to the consultation provisions of Article XXII of this Agreement.

6.      The CONTRACTING PARTIES shall review annually all measures applied pursuant to the provisions of Sections C and D of this Article.

Section A

7.      (a) If a contracting party coming within the scope of paragraph 4(a) of this Article considers it desirable, in order to promote the establishment of a particular industry with a view to raising the general standard of living of its people, to modify or withdraw a concession included in the appropriate Schedule annexed to this Agreement, it shall notify the CONTRACTING PARTIES to this effect and enter into negotiations with any contracting party with which such concession was initially negotiated, and with any other contracting party determined by the CONTRACTING Parties to have a substantial interest therein. If agreement is reached between such contracting parties concerned, they shall be free to modify or withdraw concessions under the appropriate Schedules to this Agreement in order to give effect to such agreement, including any compensatory adjustments involved.

(b) If agreement is not reached within sixty days after the notification provided for in sub-paragraph (a) above, the contracting party which proposes to modify or withdraw the concession may refer the matter to the Contracting PARTIES which shall promptly examine it. If they find that the contracting party which proposes to modify or withdraw the concession has made every effort to reach an agreement and that the compensatory adjustment offered by it is adequate, that contracting party shall be free to modify or withdraw the concession if, at the same time, it gives effect to the compensatory adjustment. If the CONTRACTING PARTIES do not find that the compensation offered by a contracting party proposing to modify or withdraw the concession is adequate, but find that it has made every reasonable effort to offer adequate compensation, that contracting party shall be free to proceed with such modification or withdrawal. If such action is taken, any other contracting party referred to in sub-paragraph (a) above shall be free to modify or withdraw substantially equivalent concessions initially negotiated with the contracting party which has taken the action.

Section C

13.      If a contracting party coming within the scope of paragraph 4(a) ofthis Article finds that governmental assistance is required to promote the establishment of a particular industry with a view to raising the general standard of living of its people, but that no measure consistent with the other provisions of this Agreement is practicable to achieve that objective, it may have recourse to the provisions and procedures set out in this Section.

14.      The contracting party concerned shall notify the CONTRACTING PARTIES of the special difficulties which it meets in the achievement of the objective outlined in paragraph 13 of this Article and shall indicate the specific measure affecting imports which it proposes to introduce in order to remedy these difficulties. It shall not introduce that measure before the expiration of the time-limit laid down in paragraph 15 or 17, as the case may be, or if the measure affects imports of a product which is the subject of a concession included in the appropriate Schedule annexed to this Agreement, unless it has secured the concurrence of the CONTRACTING PARTIES in accordance with provisions of paragraph 18; Provided that, if the industry receiving assistance has already started production, the contracting party may, after informing the CONTRACTING PARTIES, take such measures as may be necessary to prevent, during that period, imports of the product or products concerned from increasing substantially above a normal level.

15.      If, within thirty days of the notification of the measure, the CONTRACTING PARTIES do not request the contracting party concerned to consult with them, that contracting party shall be free to deviate from the relevant provisions of the other Articles of this Agreement to the extent necessary to apply the proposed measure.

16.      If it is requested by the CONTRACTING PARTIES to do so, the contracting party concerned shall consult with them as to the purpose of the proposed measure, as to alternative measures which may be available under this Agreement, and as to the possible effect of the measure proposed on the commercial and economic interests of other contracting panics If, as a result of such consultation, the CONTRACTING PARTIES agree that there is no measure consistent with the other provisions of this Agreement which is practicable in order to achieve the objective outlined in paragraph 13 of this Article, and concur in the proposed measure, the contracting party concerned shall be released from its obligations under the relevant provisions of the other Articles oft his Agreement to the extent necessary to apply that measure.

17.      If, within ninety days after the date of the notification of the proposed measure under paragraph 14 of this Article, the CONTRACTING PARTIES have not concurred in such measure, the contracting party concerned may introduce the measure proposed after informing the CONTRACTING PARTIES.

18.      If the proposed measure affects a product which is the subject of a concession included in the appropriate Schedule annexed to this Agreement, the contracting party concerned shall enter into consultations with any other contracting party with which the concession was initially negotiated, and with any other contracting party determined by the CONNTRACTING PARTIES to have a substantial interest therein. The CONTRACTING PARTIES shall concur in the measure if they agree that there is no measure consistent with the other provisions of this Agreement which is practicable in order to achieve the objective set forth in paragraph 13 of this Article, and if they are satisfied:

(a)      that agreement has been reached with such other contracting parties as a result of the consultations referred to above, or

(b)      if no such agreement has been reached within sixty days after the notification provided for in paragraph 14 has been received by the CONTRACTING PARTIES that the contracting party having recourse to this Section has made all reasonable efforts to reach an agreement and that the interests of other contracting parties are adequately safeguarded.

The contracting party having recourse to this Section shall thereupon be released from its obligations under the relevant provisions of the other Articles of this Agreement to the extent necessary to permit it to apply the measure.

19.      If a proposed measure of the type described in paragraph 13 of this Article concerns an industry the establishment of which has in the initial period been facilitated by incidental protection afforded by restrictions imposed by the contracting party concerned for balance of payments purposes under the relevant provisions of this Agreement, that contracting party may resort to the provisions and procedures of this Section; Provided that it shall not apply the proposed measure without the concurrence of the CONTRACTING PARTIES.

20.      Nothing in the preceding paragraphs of this Section shall authorize any deviation from the provisions of Articles 1,11 and Xlll of this Agreement. The provisos to paragraph 10 of this Article shall also be applicable to any restriction under this Section.

21.      At any time while a measure is being applied under paragraph 17 of this Article any contracting party substantially affected by it may suspend the application to the trade of the contracting party having recourse to this Section of such substantially equivalent concessions or other obligations under this Agreement the suspension of which the CONTRACTING PARTIES do not disapprove; Provided that sixty days' notice of such suspension is given to the CONTRACTING PARTIES not later than six months after the measure has been introduced or changed substantially to the detriment of the contracting party affected. Any such contracting party shall afford adequate opportunity for consultation in accordance with the provisions of Article XXII of this Agreement.

Section D

22.      A contracting party coming within the scope of subparagraph 4(b) of this Article desiring, in the interest of the development of its economy, to introduce a measure of the type described in paragraph 13 of this Article in respect of the establishment of a particular industry may apply to the CONTRACTING PARTIES for approval of such measure. The CONTRACTING PARTIES shall promptly consult with such contracting party and shall, in making their decision, be guided by the considerations set out in paragraph 16. If the CONTRACTING PARTIES concur in the proposed measure the contracting party concerned shall be released from its obligations under the relevant provisions of the other Articles of this Agreement to the extent necessary to permit it to apply the measure. If the proposed measure affects a product which is the subject of a concession included in the appropriate Schedule annexed to this Agreement, the provisions of paragraph 18 shall apply.

23.      Any measure applied under this Section shall comply with the provisions of paragraph 20 of this Article.

Notes Ad Article XVIII

The CONTRACTING PARTIES and the contracting parties concerned shall preserve the utmost secrecy in respect of matters arising under this Article.

Paragraphs 1 and 4

1.      When they consider whether the economy of a contracting party "can only support low standards of living", the CONTRACTING PARTIES shall take into consideration the normal position of that economy and shall not base their determination on exceptional circumstances such as those which may result from the temporary existence of exceptionally favourable conditions for the staple export product or products of such contracting party.

2.      The phrase "in the early stages of development" is not meant to apply only to contracting parties which have just started their economic development, but also to contracting parties the economies of which are undergoing a process of industrialization to correct an excessive dependence on primary production.

Paragraphs 2, 3, 7, 13 and 22

The reference to the establishment of particular industries shall apply not only to the establishment of a new industry, but also to the establishment of a new branch of production in an existing industry and to the substantial transformation of an existing industry, and to the substantial expansion of an existing industry supplying a relatively small proportion of the domestic demand. It shall also cover the reconstruction of an industry destroyed or substantially damaged as a result of hostilities or natural disasters.

Paragraph 7 (b)

A modification or withdrawal, pursuant to paragraph 7 (b), by a contracting party, other than the applicant contracting party, referred to in paragraph 7 (a), shall be made within six months of the day on which the action is taken by the applicant contracting party, and shall become effective on the thirtieth day following the day on which such modification or withdrawal has been notified to the CONTRACTING PARTIES.

Paragraphs 13 and 14

It is recognized that, before deciding on the introduction of a measure and notifying the CONTRACTING PARTIES in accordance with paragraph 14, a contracting party may need a reasonable period of time to assess the competitive position of the industry concerned.

Paragraphs 15 and 16

It is understood that the CONTRACTING PARTIES shall invite a contracting party proposing to apply a measure under Section C to consult with them pursuant to paragraph 16 if they are requested to do so by a contracting party the trade of which would be appreciably affected by the measure in question.

Paragraphs l 6, 18, 19 and 22

1.      It is understood that the CONTRACTING PARTIES may concur in a proposed measure subject to specific conditions or limitations if the measure as applied does not conform to the terms of the concurrence it will to that extent be deemed a measure in which the CONTRACTING PARTIES have not concurred. In cases in which the CONTRACTING PARTIES have concurred in a measure for a specified period, the contracting party concerned, if it finds that the maintenance of the measure for a further period of time is required to achieve the objective for which the measure was originally taken, may apply to the CONTRACTING PARTIES for an extension of that period in accordance with the provisions and procedures of Sections C or D, as the case may be.

2.      It is expected that the CONTRACTING PARTIES will, as a rule, refrain from concurring in a measure which is likely to cause serious prejudice to exports of a commodity on which the economy of a contracting party is largely dependent.

Paragraphs 18 and 22

The phrase "that the interests of other contracting parties are adequately safeguarded" is meant to provide latitude sufficient to permit consideration in each case of the most appropriate method of safeguarding those interests. The appropriate method may, for instance, take the form of an additional concession to be applied by the contracting party having recourse to Section C or D) during such time as the deviation from the other Articles of the Agreement would remain in force or of the temporary suspension by any other contracting party referred to in paragraph 18 of a concession substantially equivalent to the impairment due to the introduction of the measure in question. Such contracting party would have the right to safeguard its interests through such a temporary suspension of a concession; Provided that this right will not be exercised when, in the case of a measure imposed by a contracting party coming within the scope of paragraph 4 (a), the CONTRACTING PARTIES have determined that the extent of the compensatory concession proposed was adequate.

Paragraph 19

The provisions of paragraph 19 are intended to cover the case where an industry has been in existence beyond the "reasonable period of time" referred to in the note to paragraphs 13 and 14, and should not be so construed as to deprive a contracting party coming within the scope of paragraph 4 (a) of Article XVIII, of its right to resort to the other provisions of Section C, including paragraph 17, with regard to a newly established industry even though it has benefited from incidental protection afforded by balance of payments import restrictions.

Paragraph 21

Any measure taken pursuant to the provisions of paragraph 21 shall be withdrawn forthwith if the action taken in accordance with paragraph 17 is withdrawn or if the CONTRACTING PARTIES concur in the measure proposed after the expiration of the ninety-day time limit specified in paragraph 17.

B Article 4 of the Agreement on TRIMs

A developing country Member shall be free to deviate temporarily from the provisions of Article 22' to the extent and in such a manner as Article XVIII of GATT 1994, the Understanding on the Balance-of-Payments Provisions of GATT 1994, and the Declaration on Trade Measures Taken for Balance-of-Payments Purposes adopted on 28 November 1979 (BISD 26S/205209) permit the Member to deviate from the provisions of Articles III and Xl of GATT 1994.

C Article 27 of the Agreement on SCM

27.1      Members recognize that subsidies may play an important role in economic development programs of developing country Members.

27.2      The prohibition of paragraph l(a) of Article 3 shall not apply to:

(a)      developing country Members referred to in Annex VII.

(b)      other developing country Members for a period of eight years from the date of entry into force of the WTO Agreement, subject to compliance with the provisions in paragraph 4.

27.3      The prohibition of paragraph l(b) of Article 3 shall not apply to developing country Members for a period of five years, and shall not apply to least developed country Members for a period of eight years, from the date of entry into force of the WTO Agreement.

27.4      Any developing country Member referred to in paragraph 2(b) shall phase out its export subsidies within the eight year period, preferably in a progressive manner. However, a developing country Member shall not increase the level of its export subsidies22, and shall eliminate them within a period shorter than that provided for in this paragraph when the use of such export subsidies is inconsistent with its development needs. If a developing country Member deems it necessary to apply such subsidies beyond the 8-year period, it shall not later than one year before the expiry of this period enter into consultation with the Committee which will determine whether an extension of this period is justified, after examining all the relevant economic, financial and development needs of the developing country Member in question. If the Committee determines that the extension is justified, the developing country Member concerned shall hold annual consultations with the Committee to determine the necessity of maintaining the subsidies. If no such determination is made by the Committee, the developing country Member shall phase out the remaining export subsidies within two years from the end of the last authorized period.

27.5      A developing country Member which has reached export competitiveness in any given product shall phase out its export subsidies for such product(s) over a period of two years. However, for a developing country Member which is referred to in Annex VII and which has reached export competitiveness in one or more products, export subsidies on such products shall be gradually phased out over a period of eight years.

27.6      Export competitiveness in a product exists if a developing country Member's exports of that product have reached a share of at least 3.25 per cent in world trade of that product for two consecutive calendar years. Export competitiveness shall exist either (a) on the basis of notification by the developing country Member having reached export competitiveness, or (b) on the basis of a computation undertaken by the Secretariat at the request of any Member. For the purpose of this paragraph, a product is defined as a section heading of the Harmonized System Nomenclature. The Committee shall review the operation of this provision five years from the date of the entry into force of the WTO Agreement.

27.7      The provisions of Article 4 shall not apply to a developing country Member in the case of export subsidies which are in conformity with the provisions of paragraphs 2 through 5. The relevant provisions in such a case shall be those of Article 7.

27.8      There shall be no presumption in terms of paragraph 1 of Article 6 that a subsidy granted by a developing country Member results in serious prejudice, as defined in this Agreement. Such serious prejudice where applicable under the terms of paragraph 9, shall be demonstrated by positive evidence, in accordance with the provisions of paragraphs 3 through 8 of Article 6.

27.9      Regarding actionable subsidies granted or maintained by a developing country Member other than those referred to in paragraph 1 of Article 6, action may not be authorized or taken under Article 7 unless nullification or impairment of tariff concessions or other obligations under GATT 1994 is found to exist as a result of such a subsidy, in such a way as to displace or impede imports of a like product of another Member into the market of the subsidizing developing country Member or unless injury to a domestic industry in the market of an importing Member occurs.

27.10      Any countervailing duty investigation of a product originating in a developing country Member shall be terminated as soon as the authorities concerned determine that:

(a)      the overall level of subsidies granted upon the product in question does not exceed 2 per cent of its value calculated on a per unit basis; or

(b)      the volume of the subsidized imports represents less than 4 per cent of the total imports of the like product in the importing Member, unless imports from developing country Members whose individual shares of total imports represent less than 4 per cent collectively account for more than 9 per cent of the total imports of the like product in the Importing Member.

27.11      For those developing country Members within the scope of paragraph 2(b) which have eliminated export subsidies prior to the expiry of the period of eight years from the date of entry into force of the WTO Agreement, and for those developing country Members referred to in Annex All, the number in paragraph 10(a) shall be 3 per cent rather than 2 per cent. This provision shall apply from the date that the elimination of export subsidies is notified to the Committee, and for so long as export subsidies are not granted by the notifying developing country Member. This provision shall expire eight years from the date of entry into force of the WTO Agreement.

27.127 The provisions of paragraphs 10 and 11 shall govern any determination of de minimis under paragraph 3 of Article 15.

27.13      The provisions of Part III shall not apply to direct forgiveness of debts, subsidies to cover social costs, in whatever form, including relinquishment of government revenue and other transfer of liabilities when such subsidies are granted within and directly linked to a privatization program of a developing country Member, provided that both such program and the subsidies involved are granted for a limited period and notified to the Committee and that the program results in eventual privatization of the enterprise concerned.

27.14      The Committee shall, upon request by an interested Member, undertake a review of a specific export subsidy practice of a developing country Member to examine whether the practice is in conformity with its development needs.

27.15      The Committee shall, upon request by an interested developing country Member, undertake a review of a specific countervailing measure to examine whether it is consistent with the provisions of paragraphs 10 and 11 as applicable to the developing country Member in question.

Part II: Selected panel cases bearing on issues of industrial policy

The following are excerpts from past panel reports which may have some implication for industrial policy. The selection is by no means exhaustive. It is intended as a rough guide to the types of issues that may need to be assessed in relation to the WTO Agreement in planning and implementing industrial policy. The Agricultural Machinery case (A) is a leading case concerning GATT Article 111. The FIR case (B) was the first GATT case in which the issue of trade and investment was discussed. The relevant part of the Semiconductor case (C) deals with the issue of non-binding administrative guidance. The Superfund case (D) is important both as to the issue of trade effects and to that of mandatory legislation. Finally the importance of non violation cases should not be overlooked, with the Oilseeds case (E) providing the most recent and typical example.

A.      ITALIAN DISCRIMINATION AGAINST IMPORTED AGRICULTURAL MACHINERY (Complaint by the United Kingdom)

Report adopted on 23 October 1958 (L/833 - BISD 7S/60)

"5. The United Kingdom delegation noted that Article III:4 of the General Agreement provide that products imported into the territory of any contracting party "shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation . . ." etc. As the credit facilities provided under the Italian Law were not available to the purchasers of imported tractors and other agricultural machinery these products did not enjoy the equality of treatment which should be accorded to them. The fact that these credit facilities were reserved exclusively to the purchasers of Italian tractors and other agricultural machinery represented a discrimination and the operation of the Law involved an inconsistency with the provisions of Article 111 of the General Agreement which provides that laws, regulations and requirements affecting internal sale should not be applied to imported products so as to afford protection to domestic producers. The United Kingdom would not challenge the consistency with the General Agreement of subsidies which the Italian Government might wish to grant to domestic producers of tractors and other agricultural machinery in accordance with the terms of paragraph 8 (b) of Article III. However, in the case of the Italian Law the assistance by the State was not given to producers but to the purchasers of agricultural machinery, a case which is not covered by the provisions of paragraph 8 (b). Even in the case of subsidies, granted to producers the rights of the United Kingdom under Article XXIII of the General Agreement would be safeguarded as was recognized by the CONTRACTING PARTIES in paragraph 13 of the report on other barriers to trade which they approved during the course of the Review Session.23

"6. The Italian delegation considered that the General Agreement was a trade agreement and its scope was limited to measures governing trade; thus the text of paragraph 4 of Article 111 applied only to such laws, regulations and requirements which were concerned with the actual conditions for sale, transportation, etc., of the commodity in question and should not be interpreted in an extensive way. In particular, the Italian delegation stated that the commitment undertaken by the CONTRACTING PARTIES under that paragraph was limited to qualitative and quantitative regulations to which goods were subjected, with respect to their sale or purchase on the domestic market.

"7. It was clear in their view that Law No. 949 which concerned the development of the Italian economy and the improvement in the employment of labor was not related to the questions of sale, purchase or transportation of imported and domestically produced products which were the only matters dealt with in Article III.

"8. Moreover the Italian delegation considered that the text of Article III:4 could not be construed in such a way as to prevent the Italian Government from taking the necessary measures to assist the economic development of the country and to improve the conditions of employment in Italy.

"9. Finally, the Italian delegation, noting that the United Kingdom delegation recognized that the Italian Government would be entitled to grant subsidies exclusively to domestic producers, stressed it would not be logical to exclude this possibility in the case of credit facilities which had a far less pronounced effect on the terms of competition.

"10. In the view of the Italian delegation it would be inappropriate for the CONTRACTING PARTIES to construe the provisions of Article III in a broad way since this would limit the rights of contracting parties in the formulation of their domestic economic policies in a way which was not contemplated when they accepted the terms of the General Agreement.

"11. The Panel agreed that the questions of the consistency of the efforts of. The Italian Law with the provisions of the General Agreement raised a problem of interpretation. It had the impression that the contention of the Italian Government might have been influenced in part by the slight difference of wording which existed between the French and the English texts of paragraph 4 of Article 111. The French text which had been submitted to the Italian Parliament for approval provided that the imported products ne seront pas soumis a un traitement moins favorable whereas the English text read "the imported product shall be accorded treatment no less favorable". It was clear from the English text that any favorable treatment granted to domestic products would have to be granted to like imported products and the fact that the particular law in question did not specifically prescribe conditions of sale or purchase appeared irrelevant in the light of the English text. It was considered, moreover, that the intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given.

"12. In addition, the text of paragraph 4 referred both in English and French to laws and regulations and requirements affecting internal sale, purchase, etc., and not to laws, regulations and requirements governing the conditions of sale or purchase. The selection of the word "affecting" would imply, in the opinion of the Panel, that the drafters of the Article intended to cover in paragraph 4 not only the laws and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market.

"13. The Italian delegation alleged that the provisions of paragraph 8(b) which exempted the granting of subsidies to producers from the operation of this Article showed that the intention of the drafters of the Agreement was to limit the scope of Article 111 to laws and regulations directly related to the conditions of sale, purchase, etc. On the other hand, the panel considered that if the Italian contention were correct and if the scope of Article 111 was limited in this way (which would, of course, not include any measure of subsidization) it would have been unnecessary to include the provisions contained in paragraph 8 (b) since they would be excluded ipso facto from the scope of Article 111 The fact that the drafters of Article III thought it necessary to include this exemption for production subsidies would indicate that the intent of the drafters was to provide equal conditions of competition once goods had [editor 's note: end of paragraph]

"14. Moreover, the Panel agreed with the contention of the United Kingdom delegation that in any case the provisions of paragraph 8(b) would not be applicable to this particular case since the credit facilities provided under the Law were granted to the purchasers of agricultural machinery and could not be considered as subsidies accorded to the producers of agricultural machinery.

"15. The Panel also noted that if the Italian contention were correct, and if the scope of Article 111 were limited in the way the Italian delegation suggested to a specific type of laws and regulations, the value of the bindings under Article 11 of the Agreement and of the general rules of non-discrimination as between imported and domestic products could be easily evaded.

"16. The Panel recognized - and the United Kingdom delegation agreed with this view - that it was not the intention of the General Agreement to limit the right of a contracting party to adopt measures which appeared to it necessary to foster its economic development or to protect a domestic industry, provided that such measures were permitted by the terms of the General Agreement. The GATT offered a number of possibilities to achieve these purposes through tariff measures or otherwise. The Panel did not appreciate why the extension of the credit facilities in question to the purchasers of imported tractors as well as domestically produced tractors would detract from the attainment of the objectives of the Law, which aimed at stimulating the purchase of tractors mainly by small farmers and cooperatives in the interests of economic development. If, on the other hand, the objective of the Law, although not specifically stated in the text thereof, were to protect the Italian agricultural machinery industry, the Panel considered that such protection should be given in ways permissible under the General Agreement rather than by the extension of credit exclusively for purchases of domestically produced agricultural machinery."

B.      CANADA - ADMINISTRATION OF THE FOREIGN INVESTMENT REVIEW ACT (Complaint by the United States)

Report adopted on 7 February 1984 (L/5504 - BISD 30S/140)

"6.1 In the light of the considerations set out in paragraphs 5.4 to 5.12, the Panel concluded that the practice of Canada to allow certain investments subject to the Foreign Investment Review Act conditional upon written undertakings by the investors to purchase goods of Canadian origin, or goods from Canadian sources, is inconsistent with Article III:4 of the General Agreement according to which contracting parties shall accord to imported products treatment no less favorable than that accorded to like products of national origin in respect of all internal requirements affecting their purchase. The Panel further concluded that in relation to Article III:5, there were insufficient grounds to consider the purchase undertakings which refer to specific amounts or proportions under its provisions (paragraph 5.13). Noting that purchase undertakings do not prevent the importation of goods as such, the Panel reached the conclusion that they are not inconsistent with Article Xl: l (paragraph 5.14). Further, having reached a decision on purchase requirements in relation to Article III: 4, the Panel did not consider it necessary to make a specific finding on the interpretation of Article XVII: 1 © in the context of this case, and therefore did not reach a separate conclusion regarding the consistency of purchase requirements with this provision (paragraphs 5.15 and 5.16). On the basis of the evidence before it, the Panel could not conclude that the purchase undertakings that were found to be inconsistent with Article III:4 are necessary within the meaning of Article XX(d) for the effective administration of the Foreign Investment Review Act (paragraphs 5.19 to 5 .2).

"6.2 For the reasons set out in paragraphs 5.17 and 5.18, the Panel found that Canada does not act inconsistently with Article XVII:l© of the General Agreement when allowing certain investments subject to the Foreign Investment Review Act conditional upon undertakings by investors to export a specified amount or proportion o of their production. Finally, the Panel considered that the examination of undertakings to manuacture goods which would be imported otherwise was not covered by its terms of reference (paragraph 5.3)

"6.3 The Panel is aware that inconsistency with Article III:4 was not intended by the Foreign Investment Review Act. which does not require the submission of undertakings, but that this practice developed as the administration of the Act evolved, to the point that "they are now routinely submitted in support of nearly all larger investment proposals" (paragraph 2.4 above). This evolution may partly reflect the need for foreign investors to demonstrate, by this and other means, to the Canadian administration that their proposed investment would be of significant benefit to Canada. The Panel sympathizes with the desire of the Canadian authorities to ensure that Canadian goods and suppliers would be given a fair chance to compete with imported products. However, the Panel holds the view that the purchase requirements under examination do not stop short of this objective but tend to tip the balance in favour of Canadian products, thus coming into conflict with Article III:4.

"6.4 The Panel recognizes that purchase requirements may reflect plans which the investors would have carried out also in the absence of the undertakings; that undertakings with such provisos as "competitive availability" have an adverse impact on imported products only in those cases in which imported and Canadian goods are offered on equivalent terms; and that the undertakings are enforced flexibly. Many of the undertakings, though technically in violation with the General Agreement, therefore possibly do not nullify or impair benefits accruing to the United States under the General Agreement. However, understanding GATT practice, a breach of a rule is presumed to have an adverse impact on other contracting parties (BISD 26S/216), and the Panel also proceeded on this assumption.

"6.5 As to the extent to which purchase requirements reflect plans of the investors, the Panel does not consider it relevant nor does it feel competent to judge how the foreign investors are affected by the purchase requirements, as the national treatment obligations of Article III of the General Agreement do not apply to foreign persons or firms but to imported products and serve to protect the interests of producers and exporters established on the territory of any contracting party. Purchase requirements applied to foreign investors in Canada which are inconsistent with Article III:4 can affect the trade interests of all contracting parties, and impinge upon their rights.

"6.6 The Panel carefully considered the effects of the purchase requirements on trade. The Panel concluded that an evaluation of these effects would entail security and analysis of the implementation of several thousands of often differently worded undertakings as well as speculation on what the purchasing behavior of foreign investors would have been in their absence. The Panel could not undertake such an evaluation and it is therefore not in a position to judge how frequently the purchase requirements cause investors to act differently than they would have acted in the absence of the undertakings and how frequently they therefore adversely affect the trade interests of other contracting parties. The Panel, however, believes that an evaluation of the trade effects was not directly relevant to its findings because a breach of a GATT rule is presumed to have an adverse impact on other contracting parties (see paragraph 6.4 above)."

C.      JAPAN - TRADE IN SEMICONDUCTORS (Complaint by the European Communities)

Report adopted on 4 May 1988 (L/6309 - BISD) 35S/116)

"106. The Panel then examined the contention of the Japanese Government that the measures complained of were not restrictions within the meaning of Article XI:I because they were not legally binding or mandatory. In this respect the Panel noted that Article XI:I, unlike other provisions of the General Agreement, did not refer to laws or regulations but more broadly to measures. This wording indicated clearly that any measure instituted or maintained by a contracting party which restricted the exportation or sale for export of products was covered by this provision, irrespective of the legal status of the measure.

"107. Having reached this finding on the basis of the wording and purposed of the provision, the Panel looked for precedents that might be of further assistance to it on this point. It noted that the CONTRACTING PARTIES had addressed a case relating to the interpretation of Article XI:2(c) in the report of the Panel on "Japan - Restrictions on Imports of Certain Agricultural Products" (L/6253). Under Article XI:2(c), import restrictions might be imposed if they were necessary to the enforcement ofv"governmental measures" restricting domestic supplies. The complaining party argued in the earlier panel proceedings that some of the measures which Japan had described as governmental measures were in fact "only an appeal for private measures to be taken voluntarily by private parties" and could therefore not justify the import restrictions. Japan replied that "to the extent that governmental measures were effective, it was irrelevant whether or not the measures were mandatory and statutory", that the governmental measures "were effectively enforced by detailed directives and instructions to local governments and/or farmers' organizations" and that "such centralized and mutually collaborative structure of policy implementation was the crux of government enforcement in Japan" (L/5253, paragraph 29). The Panel which examined that case had noted that "the practice of 'administrative guidance' played an important role" in the enforcement of the Japanese supply restrictions, that this practice was "a traditional tool of Japanese government policy based on consensus and peer pressure" and that administrative guidance in the special circumstances prevailing in Japan could therefore be regarded as a governmental measure enforcing supply restrictions. The Panel recognized the differences between Article XI:1 and Article XI :2(c) and the fact that the previous case was not the same in all respects as the case before it, but noted that the earlier case supported its finding that it was not necessarily the legal status of the measure which was decisive in determining whether or not it fell under Article XI:1.

"108. The Panel recognized that not all non-mandatory requests could be regarded as measures within the meaning of Article XI:1. Government-industry relations varied from country to country, from industry to industry, and from case to case and were influenced by many factors. There was thus a wide spectrum of government involvement ranging from, for instance, direct government orders to occasional government consultations with advisory committees. The task of the panel was to determine whether the measures taken in this case would be such as to constitute a contravention of Article XI.

" 109. In order to determine this, the Panel considered that it needed to be satisfied on two essential criteria. First, there were reasonable grounds to believe that sufficient incentives or disincentives existed for non-mandatory measures to take effect. Second, the operation of the measures to restrict export of semiconductors at prices below company-specific costs was essentially dependent on Government action or intervention. The Panel considered each of these two criteria in turn. The Panel considered that if these two criteria were met, the measures would be operating in a manner equivalent to mandatory requirements such that the difference between the measures and mandatory requirements was only one of form and not of substance, and that there could be therefore no doubt that they fell within the range of measures covered by Article XI:1.

"110. On the first criterion, the Panel considered the background against which the measures operated. The Panel noted that the Government of Japan had formally concluded in September 1986 an Arrangement with the Government of the United States, one of the main provisions of which was for the Japanese Government to monitor costs and export prices to third country markets in order to prevent dumping. Following bilateral consultations, the Government of Japan assured the United States in April 1987 that it had taken "appropriate action to ensure that Japanese semi-conductor exports are being sold at not less than their costs in third country markets." In the light of this, the Panel considered that at least by April 1987, there would certainly have been no doubt in the minds of relevant Japanese producers and exporters that the Japanese Government had made an undertaking to the United States to ensure that a certain class of sales did not take place. They would also have known that any such action would have led to the Government of Japan being unable to fulfill a commitment which it had given to the United States, and therefore would have adverse consequences for Japan. They would also have been aware that the Government had the fullest information available to identify any producers or exporters selling at prices below costs.

"111. The Panel considered that, in the above circumstances, the Japanese Government's measures did not need to be legally binding to take effect, as there were reasonable grounds to believe that there were sufficient incentives or disincentives for Japanese producers and exporters to conform. The Panel did not consider that these circumstances were, of themselves, sufficient to ensure compliance. Indeed, events showed that despite the existence of the Arrangement, a certain number of Japanese producers and exporters had pursued their original course of production and sales. What was required to ensure compliance were additional Government measures.

"112. The Panel went on to consider the second criterion regarding the manner in which the measures operated in this case. To begin with, the Panel noted the Japanese Government's own description of its measures as provided to the United States in its Proposition Paper of April 1987, notably that "Japan exercised administrative guidance to achieve production cutbacks and adopted more stringent export licensing practices" and that "actions have been taken aimed at reducing supplies and squeezing out grey market transactions" It referred also to the measures taken as "recently-ordered production cut-backs", and that "the measures (i.e. those relating to production and export administration) taken by the Japanese Government have as their exclusive purpose and effect avoiding below cost sales of semiconductors in third country markets".

"113. The Panel further examined the structure and elements of the measures adopted. It noted that Japanese producers were required to submit detailed information on costs on a regular basis. It also noted the importance of the statutory requirement for exporters to supply information on export prices and of the heavy penalties attached for failure to comply with that requirement. The objective of identification in the monitoring measures was clear. For instance, in cases where the exporter was not a producer, the origin of the transaction had to be declared and identified. The Panel noted that this gave the Japanese Government a comprehensive basis for precise identification of the source of any below cost pricing. It also observed that any producer or exporter would have been aware that the Japanese Government would be in a position to have this information. The preparedness of the Japanese Government to request, and to continue requesting, for below cost sales to cease was also evident.

"114. The Panel examined the operation of the supply and demand forecasts. It noted that MITI had instituted regular meetings of the Supply and Demand Forecasts Committee, involving producers, upon which its forecasts were drawn up. The Panel considered that the Government of Japan played a decisive role in the entire operation. Indeed it was stated by Japan that "the Japanese Government in consideration of large inventories of products, made an attempt to restore balance in supply and demand." Thus in the first and second quarters of 1987, the Government of Japan compiled the supply and demand forecasts "to get production levels reflective of actual demand". The Panel recalled the statement quoted in paragraph 112 above concerning the production cut-backs and the avoidance of below cost sales of semi-conductors in third country markets. On the basis of these, the Panel considered that the Government of Japan had intervened to facilitate the reduction of the production levels of semi-conductors through the operation of the supply and demand forecasts The Panel further considered that if Japanese producers and exporters were subject to any measure restricting the exportation or sale for export of semi-conductors, they would have to adjust their production levels accordingly. The panel therefore considered that the operation of the supply and demand forecasts had facilitated the reduction of the production levels, strengthening the effectiveness of the other measures adopted.

"115 . The Panel then considered whether the operation of the measures was essentially dependent on Government action. The complex of measures was, in the Panel's view, so dependent. The period between September 1986 and January 1987 gave an interesting indication of how Japanese firms were disposed to operate where they were subject to less constraint. It was apparent that they had been prepared to produce and sell up to a quantity which included what was later termed "false demand" in the context of the revised supply or demand forecast in February 1987. The Panel considered that the disposition to produce and sell was what the Government of Japan by its complex of measures intended to control, by the strengthening of the monitoring measures, lowering of the minimum export amount requiring an export license to 50,000 yen, requests to producers not to export at prices below company-specific costs, and the revisions of the supply and demand forecasts

"116. The Panel also considered that the series of statements quoted in paragraph 112 above were relevant in this context. In addition to these, the Panel noted that Japan had stated in the proceedings of the Panel that "although monitoring by MITI was limited in scope, it was still meaningful because MITI represented a neutral and objective figure overseeing the entire industry while taking into account costs and prices among competing companies in Japan. Monitoring also helped to stamp out suspicion among companies that others were cheating or resorting to dumping". Japan had further stated that "if the semiconductor manufacturers were to pursue their own profits and ignore MITI's concern, the whole dumping prevention mechanism would collapse", and that "the administration presents (firms) with objective facts and considerations and others that are usually not obtainable by one firm alone". The Panel considered that these statements concerning the way in which the Government exercised its authority were a further confirmation of the fact that the Government's involvement was essential to the prevention of sales below company-specific costs.

"117. All these factors led the Panel to conclude that an administrative structure had been created by the Government of Japan which operated to exert maximum possible pressure on the private sector to cease exporting at prices below company specific costs. This was exercised through such measures as repeated direct requests by MITI, combined with the statutory requirement for exporters to submit information on export prices, the systematic monitoring of company and product-specific costs and export prices and the institution of the supply and demand forecasts mechanism and its utilization in a manner to directly influence the behavior of private companies. These measures operated furthermore to facilitate strong peer pressure to comply with requests by MITI and at the same time to foster a climate of uncertainty as to the circumstances under which their exports could take place. The Panel considered that the complex of measures exhibited the rationale as well as the essential elements of a formal system of export control. The only distinction in this case was the absence of formal legally binding obligations in respect of exportation or sale for export of semiconductors. However, the Panel concluded that this amounted to a difference in form rather than substance because the measures were operated in a manner equivalent to mandatory requirements The Panel concluded that the complex of measures constituted a coherent system restricting the sale for export of monitored semi-conductors at prices below company-specific costs to markets other that the United States, inconsistent with Article XI:1."

D.      UNITED STATES - TAXES ON PETROLEUM AND CERTAIN IMPORTED SUBSTANCES (Complaint by Canada)

Report adopted on 17 June 1987 (L/6175 - BISD 34S/136)

"5.1.6 The Panel examined how the CONTRACTING PARTIES have reacted in previous cases to claims that a measure inconsistent with the General Agreement had no adverse impact and therefore did not nullify or impair benefits accruing under the General Agreement to the contracting party that had brought the complaint. The Panel noted such claims had been made in a number of cases but that there was no case in the history of the GATT in which a contracting party had successfully rebutted the presumption that a measure infringing obligations causes nullification and impairment. In a case involving credit facilities granted to farmers that purchase domestically produced machinery the Panel considered that:

"If the considered view of the Italian Government was that these credit facilities had not influenced the terms of competition on the Italian market, there would not seem to be a serious problem in amending the operation of the Law so as to avoid any discrimination as regards these credit facilities between the domestic and imported tractors and agricultural machinery (BISD 7S/66-67).

In a case involving undertakings to purchase domestic products, given by foreign investors to obtain a governmental authorization to invest, the Panel concluded:

"The Panel carefully considered the effects of the purchase requirements on trade. The Panel concluded that an evaluation of these effects would entail scrutiny and analysis of the implementation of several thousands of often differently worded undertakings as well as speculation on what the purchasing behavior of foreign investors would have been in their absence. The Panel could not undertake such an evaluation and it is therefore not in a position to judge how frequently the purchase requirements cause investors to act differently than they would have acted in the absence of the undertakings and how Frequently they therefore adversely affect the trade interests of other contracting parties. The Panel, however, believes That an evaluation of the trade effects was not directly relevant to its findings because a breach of a GATT rule is presumed to have an adverse impact on other contracting parties" (BISD 30S/ 167).

In the case of an import quota on leather which allegedly had not been fully utilized by the complaining country the Panel stated:

"The Panel wished to stress that the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had on the volume of trade but also for other reasons e.g., it would lead to increased transaction costs and would create uncertainties which could affect investment Plans"(BISD 31 S/113).

The remarks made by the panels in these cases apply, mutatis mutandis, also to the case before the present Panel.

"5.1.7 The Panel concluded from its review of the above and other cases that, while the CONTRACTING PARTIES had not explicitly decided whether the presumption that illegal measures cause nullification or impairment could be rebutted, the presumption had in practice operated as an irrefutable presumption.

"5.1.8 The Panel then examined whether - even assuming that the presumption could be regarded as rebuttable in the present case - a demonstration that the trade effects of the tax differential were insignificant would constitute a proof that the benefits accruing to Canada, the EEC and Mexico under Article III:2, first sentence, had not been nullified or impaired.

"5.1.9 An acceptance of the argument that measures which have only an insignificant effect on the volume of exports do not nullify or impair benefits accruing under Article III:2, first sentence, implies that the basic rationale of this provision - the benefit it generates for the contracting parties - is to protect expectations on export volumes. That, however, is not the case Article III:2, first sentence, obliges contracting parties to establish certain competitive conditions for imported products in relation to domestic products. Unlike some other provisions in the General Agreement, it does not refer to trade effects. The majority of the members of the Working Party on the "Brazilian Internal Taxes" therefore correctly concluded that the provisions of Article III:2, first sentence, "were equally applicable, whether imports from other contracting parties were substantial, small or non-existent"(BISD Vol. II/185) The Working Party also concluded that "a contracting party was bound by the provisions of Article III whether or not the contracting party in question had undertaken tariff commitments in respect of the goods concerned" (BISD Vol. II/182), in other words, the benefits under Article III accrue independent of whether there is a negotiated expectation of market access or not. Moreover, it is conceivable that a tax consistent with the national treatment principle (for instance, a high but non-discriminatory excise tax) has a more severe impact on the exports of other contracting parties than a tax that violates that principle (for instance a very low but discriminatory tax). The case before the panel illustrates this point: the United States could bring the tax on petroleum in conformity with Article III:2, first sentence, by raising the tax on domestic products, by lowering the tax on imported products or by fixing a new common tax rate for both imported and domestic products. Each of these solutions would have different trade results, and it is therefore logically not possible to determine the difference in trade impact between the present tax and one consistent with Article III:2, first sentence, and hence to determine the trade impact resulting from the non-observance of that provision. For these reasons, Article III:2, first sentence, cannot be interpreted to protect expectations on export volumes; it protects expectations on the competitive relationship between imported and domestic products. A change in the competitive relationship contrary to that provision must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement. A demonstration that a measure inconsistent with Article III:2, first sentence, has no or insignificant effects would therefore in the view of the Panel not be a sufficient demonstration that the benefits accruing under chat provision had not been nullified or impaired even if such a rebuttal were in principle permitted."

"5.2.1 The Panel noted that the United States objected to an examination of this tax because it did not go into effect before 1 January 1989, and - having no immediate effect on trade and therefore not causing nullification or impairment - fell outside the framework of Article XXIII. The Panel examined this point and concluded the following.

"5.2.2 The Panel on "Japanese Measures on Imports of Leather "examined the contention of Japan that an import quota had not been filled and considered that "the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had on the volume of trade but also for other reasons e.g. it would lead to increased transaction costs and would create uncertainties which could affect investment plans"(BISD 31S/113).

The reasoning endorsed by the CONTRACTING PARTIES on that occasion applies also in the present case. The general prohibition of quantitative restrictions under Article Xl, which the Panel on Japanese Measures on Imports of Leather examined, and the national treatment obligation of Article III, which Canada and the EEC invoked in the present case, have essentially the same rationale, namely to protect expectations of the contracting parties as to the competitive relationship between heir products and those of the other contracting parties. Both articles are not only to protect current trade but also to create the predictability needed to plan future trade. That objective could not be attained if contracting parties could not challenge existing legislation mandating actions at variance with the General Agreement until the administrative acts implementing it had actually been applied to their trade. Just as the very existence of a regulation providing for a quota, without it restricting particular imports, has been recognized to constitute a violation of Article XI:1, the very existence of mandatory legislation providing for an internal tax, without it being applied to a particular imported product, should be regarded as falling within the scope of Article III:2, first sentence. The Panel noted that the tax on certain imported substance had been enacted, that the legislation was mandatory and that the tax authorities had to apply it after the end of next year and hence within a time frame within which the trade and investment decisions that could be influenced by the tax are taken. The Panel therefore concluded that Canada and the EEC were entitled to an investigation of their claim that this tax did not meet the criteria of Article 111:2, first sentence.

"5.2.7 The Panel ... then examined whether the tax on certain imported substances meets the national treatment requirement of Article III:2 first sentence. This provision permits the imposition of an internal tax on imported products provided the like domestic products are taxed, directly or indirectly, at the same or a higher rate. Such internal taxes may be levied on imported products at the time or point of importation (Note ad Article III). Paragraph 2(a) of Article II therefore clarifies that a tariff concession does not prevent the levying of "a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article 111 in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part."

The drafters of the General Agreement explained the word "equivalent" uses in this provision with the following example:

"If a charge is imposed on perfume because it contains alcohol, the charge to be imposed must take into consideration the value of the alcohol and not the value of the perfume, that is to say the value of the content and not the value of the whole"(EPCT/TAC/PV/26, page 21).

5.2.8      The tax on certain imported substances equals in principle the amount of the tax which would have been imposed under the Superfund Act on the chemicals used as materials in the manufacture or production of the imported substance if these chemicals had been sold in the United States for use in the manufacture or production of the imported substance. In the words which the drafters of the General Agreement used in the above perfume-alcohol example: the tax is imposed on the imported substances because they are produced from chemicals subject to an excise tax in the United States and the tax rate is determined in principle in relation to the amount of these chemicals used and not in relation to the value of the imported substance The Panel therefore concluded that, to the extent that the tax on certain imported substances was equivalent to the tax borne by like domestic substances as a result of the tax on certain chemicals the tax mat the national treatment requirement of Article III:2, first sentence.

5.2.9      According to the Superfund Act. the tax on certain imported substances will however not necessarily be equal to the tax on the chemicals used in their production. If an importer fails to furnish the information necessary to determine the amount of tax to be imposed, a penalty tax of 5 per cent of the appraised value of the imported substance shall he imposed. Since the tax on certain chemicals subjects some of the chemicals only to a tax equivalent to 2 per cent of the 1980 wholesale price of the chemical, the 5 per cent penalty tax could be much higher than the highest possible tax that the importer would have to pay if he provided sufficient information (paragraph 2.3 above) the imposition of a penalty conform with the national treatment requirement of Article III:2, first sentence, because the tax rate would in that case no longer be imposed in relation to the amount of taxable chemicals used in their production but the value of the imported substance. Thus it would not meet the requirement of equivalence which the drafters explained in the perfume-alcohol example mentioned in the preceding paragraph. However, the Superfund Act permits the Secretary of the Treasury to prescribe by regulation, in lieu of the 5 per cent rate, a rate which would equal the amount that would be imposed if the substance were produced using the predominant method of production (Paragraph 2.6 above). These regulations have not yet been issued. Thus, whether they will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, as required by Article III:2, first sentence, remain open questions. From the perspective of the overall objectives of the General Agreement it is regrettable that the Superfund Act explicitly directs the United States tax authorities to impose a tax inconsistent with the national treatment principle but, since the Superfund Act also gives them the possibility to avoid the need to impose that tax by issuing regulations, the existence of the penalty rate provisions as such does not constitute a violating of the United States obligations under the General Agreement. The Panel noted with satisfaction the statement of the United States that, given the tax authorities' regulatory authority under the Act, "in all probability the 5 per cent penalty rate would never be applied "(paragraph 3.2.13 above)."

E.      EUROPEAN ECONOMIC COMMUNITY - PAYMENTS AND SUBSIDES PAID TO THE PRODUCERS OF OILSEEDS AND RELATED ANIMAL-FEED PROTEINS (Complaint by the United States)

Report adopted on 25 January 1990 (L/6657 - BISD 37S/86)

"142. The Panel then turned to the complaint by the United States that the grant of subsidies to Community producers of oilseeds had nullified or impaired benefits accruing to the United States under the Community's tariff concessions for oilseeds. The Panel first examined whether its finding that the payments to the processors are inconsistent with the General Agreement might make an examination of the question of the nullification or impairments of the tariff concessions unnecessary. The Panel noted that this would be the case if compliance by the Community with the finding on Article III:4 would necessarily remove the basis of the United States claim of nullification or impairment. The Panel noted that the subsidies the Community presently grants to producers of oilseeds result from the maintenance of producer prices at levels generally exceeding the price of competing imports through payments to processors conditional upon the purchase or transformation of domestic oilseeds. The finding of the Panel under Article 111:4 does not relate to the benefits accruing to the Community producers under the Community subsidy schemes but only to the benefits accruing to processors. The Panel further noted that the Community could comply with the Panel's finding on Article III and still make available in the Community market oilseeds produced with the benefit of producer prices maintained at levels exceeding the price of competing imports. Compliance with the finding on Article III thus could, but would not necessarily, eliminate the basis of the United States complaint that the benefits accruing to the Community producers of oilseeds impair the Community's tariff concessions for oilseeds. The Panel therefore decided that it had to examine that complaint as well.

"143. The Panel noted that the tariff concessions for oilseeds were originally made in 1962 following negotiations with the United States and other contracting parties in the Dillon Round and under Article XXIV:6 after the Community had established a common external tariff. The United States bases its case on expectations it claims to have had in 1962 when the concessions for oilseeds were first incorporated into the Community Schedule. The Community argues that the United States can base its claim only on expectations it could reasonably have had when the Schedule of Concessions currently in force was negotiated, narnely in 1986 when the production subsidies had already been introduced.

"144. The first issue the Panel examined in this context was therefore whether the benefits accruing to the United States under the tariff concessions on oilseeds presently in force include the protection of expectations that prevailed in 1962 when the tariff concessions on oilseeds were originally incorporated in the Schedule of Concessions of the Community. The Panel, noting that there is no explicit rule nor a precedent to guide it in this matter, considered the issue in the light of the purpose of the provisions of Article XXIII relating to the impairment of benefits accruing under the General Agreement. The Panel noted that these provisions, as conceived by the drafters and applied by the CONTRACTING PARTIES, serve mainly to protect the balance of tariff concessions 24. The idea underlying them is that the improved competitive opportunities that can legitimately be expected from a tariff concession can be frustrated not only by measures proscribed by the General Agreement but also by measures consistent with that Agreement. In order to encourage contracting parties to make tariff concessions they must therefore be given a right of redress when a reciprocal concession is impaired by another contracting party as a result of the application of any measure, whether or not it conflicts with the General Agreement.

" 145. The Panel concluded from the above that the answer to the question of whether the expectations of 1962 continue to be protected depends on whether the concessions on oilseeds resulting from the subsequent renegotiations under Article XXIV:6 were part of a new balance of concessions or whether the reinstitution of the concessions at the same rate after the successive enlargements of the Community meant that the balance of concessions originally negotiated in 1962 was to be continued. The Panel noted that the result of the initial Article XXIV:6 negotiations of the Community in 1962 was the creation of a Schedule of Concessions for its common external tariff that had replaced the tariffs of the six founding member States. In these negotiations, the trading partners of the Community compared the benefits accruing to them under the previous tariff Concessions of the individual member States with the benefits accruing to them under the common external tariff in the whole territory of the Community. The result of the Article XXIV:6 negotiations following the successive enlargements of the Community was not the creation of a new common external tariff but the extension of the existing tariff concessions of the Community to the new member States25. On the occasion of these negotiations pre-existing concessions of the Community were renegotiated as well but such modifications remained exceptional. Except where such modifications were specifically renegotiated, the partners of the Community could confine themselves to comparing the benefits accruing to them under the previous tariff concessions of the new member States with the benefits accruing to them as a result of the application of the Community's tariff concessions by the new member States. They had no reason to proceed to a global reassessment of the value of all the Community's concessions in the whole of the Community's territory.

"146. In these circumstances, the partners of the Community in the successive renegotiations under Article XXIV:6 could legitimately assume, in the absence of any indications to the contrary, that the offer to continue a tariff commitment by the Community was an offer not to change the balance of concessions previously attained. The Panel noted that nothing in the material submitted to it indicated that the Community had made it clear to its negotiating partners that the withdrawal and reinstitution of the tariff concessions for oilseeds as part of the withdrawal of the whole of the Community Schedule meant that the Community was seeking a new balance of concessions with respect co these items There is in particular no evidence that the Community, in the- context of these negotiations, offered to compensate its negotiating partners for any impairment of the tariff concessions through production subsidies or that it accepted compensatory tariff withdrawals by its negotiating partners to take into account any such impairment. The balance of concessions negotiated in 1962 in respect of oilseeds was thus not altered in the successive Article XXIV:6 negotiations. The Panel therefore found that the benefits accruing to the United States under the oilseeds tariff concessions resulting from the Article XXIV:6 negotiations off 1986/87 include the protection of reasonable expectations the United States had when these concessions were initially negotiated in 1962.

"147. The Panel carefully analyzed the price mechanism established in the framework of the Community's market organization for oilseeds and found that the production subsidy schemes of the Community protect Community producers completely from the movement of prices for imports and hence prevent the lowering of import duties from having any impact on the competitive relationship between domestic and imported oilseeds. The Panel examined whether it was reasonable for the United States to expect that the Community would not introduce subsidy schemes systematically counteracting the price effect of the tariff concessions. The essential argument of the United States on this point was that the CONTRACTING PARTIES had already recognized in 1955 the legitimacy of such expectations when they decided that:

"a contracting party which has negotiated a concession under Article II may be assumed, for the purpose of Article XXIII, to have a reasonable expectation, failing evidence to the contrary, that the value of the concession will not be nullified or impaired by the contracting party which granted the concession by the subsequent introduction or increase of a domestic subsidy...".26

The essential argument of the Community in this respect was that it is not legitimate to expect the absence of production subsidies even after the grant of a tariff concession because Articles III:8(b) and XVI:I explicitly recognize the right of contracting parties to grant production subsidies. This right would be effectively eliminated if its exercise were assumed to impair tariff concessions.

"148. The Panel examined in detail the implications of these arguments and found the following: the noun before it does not require the Panel to address the question of whether the assumption created by the 1955 decision of the CONTRACTING PARTIES applies to all production subsidies, including generally available subsidies serving broad policy objectives of the kind mentioned in Article II:1 of the Subsidies Code. At issue in the case before it are product-specific subsides that protect producers completely from the movement of prices for imports and thereby prevent tariff concessions from having any impact on the competitive relationship between domestic and imported oilseeds. The Panel considered that the main value of a tariff concession is that it provides an assurance of better market access through improved price competition. Contracting parties negotiate tariff concessions primarily to obtain that advantage. They must therefore be assumed to base their tariff negotiations on the expectation that the price effect of the tariff concessions will not be systematically offset. If no right of redress were given to them in such a case then would be reluctant to make tariff concessions and the General Agreement would no longer be useful as a legal framework for incorporating the results of trade negotiations. The Panel does not share the view of the Community that the recognition of the legitimacy of such expectations would amount to a re-writing of the rules of the General Agreement. The CONTRACTING PARTIES have decided that a finding of impairment does not authorize them to request the impairing contracting parry to remove a measure not inconsistent with the General Agreement; such a finding merely allows the contracting party frustrated in its expectation to request, in accordance with Article XXIII:2, in authorization to suspend the application of concessions or other obligations under the General Agreement2'. The recognition of the legitimacy of an expectation thus essentially means the recognition of the legitimacy of such a request. The recognition of the legitimacy of an expectation relating to the use of production subsidies therefore in no way prevents a contracting party from using production subsidies consistently with the General Agreement; it merely delineates the scope of the protection of a negotiated balance of concessions. For these reasons the Panel found that the United States may be assumed not to have anticipated the introduction of subsidies which protect Community producers of oilseeds completely from the movement of prices for imports and thereby prevent tariff concessions from having any impact on the competitive relationship between domestic and imported oilseeds, and which have as one consequence that all domestically-produced oilseeds are disposed of in the internal market notwithstanding the availability of imports.

"149. Having made this finding the Panel examined whether the Community had submitted any evidence to rebut that assumption. The Panel noted that the evidence submitted by the Community showed that the United States was aware that there existed in 1962 subsidies for oilseeds in some of the member States of the Community and that a common agricultural policy was being elaborated by the Community. Nothing in the evidence submitted by the Community, however, indicates that the Community had made it known at that time that it planned to introduce subsidy schemes insulating oilseed producers completely from import competition. The evidence thus showed that the United States must reasonably have expected the transformation of national producer support measures into a Community support scheme but that it could not reasonably have anticipated the introduction of subsidy schemes which protect producers completely from the movement of prices for imports and thereby prevent the tariff concessions from having any impact on the competitive relationship between domestic and imported oilseeds.

"150. The Community claims that the subsidy schemes for oilseeds, even if they could not reasonably have been anticipated, did not actually impair the concessions because they did not displace or impede imports, as imports of rapeseed, sunflowers and soybeans had risen from 4.5 million tons in 1966 (EC-6) to 20.4 million tons in 1988 (EC-12) on a meal equivalent basis. The United States' view is that they did impair the tariff concessions because they upset the competitive relationship between domestic and imported oilseeds. These arguments of the parties raise the question of the nature of the benefit accruing under Article II; does that benefit consist of the protection of expectations on competitive conditions or on trade flows? The Panel noted that the CONTRACTING PARTIES have consistently interpreted the basic provisions of the General Agreement on restrictive trade measures as provisions establishing conditions of competition. Thus they decided that an import quota constitutes an import restriction within the meaning of Article XI:1 whether or not it actually impeded imports and that an internal tax on imported products does not meet the national treatment requirement of Article III whether or not the tax is actually applied to imports28. A previous panel pointed out that Articles III and XI are "to protect expectations of the contracting parties as to the competitive relationship between their products and those of other contracting parties. Both articles are not only to protect current trade but also create the predictability needed to plan future trade29." In the past Article XXIII:l(b) cases, the CONTRACTING PARTIES have adopted the same approach: their findings of nullification or impairment were based on a finding that the products for which a tariff concession had been granted were subjected to an adverse change in competitive conditions. In none of these cases did they consider the trade impact of the change in competitive conditions to be determining. In one case they specifically rejected the relevance of statistics on trade flows for a finding on nullification and impairment30. It is of course true that, in the tariff negotiations in the framework of GATT, contracting parties seek tariff concessions in the hope of expanding their exports, but the commitments they exchange in such negotiations are commitments on conditions of competition for trade, not on volumes of trade.

" 151. The approach of the CONTRACTING PARTIES reflects the fact that governments can often not predict with precision what the impact of their interventions on import volumes will be. If a finding of nullification or impairment depended not only on whether an adverse change in competitive conditions took place but also on whether that change resulted in a decline in imports, the exposure of the contracting parties to claims under Article XXlll:l(b) would depend on factors they do not control; the result on nullification and impairment could consequently no longer guide government policies. Moreover the contracting parties facing an adverse change in policies could make a claim of nullification or impairment only after that change has produced effects. Such claims could consequently not be made to prevent adverse effects; they could only be made to obtain redress ex post. If Article II were considered to be protecting expectations on trade flows it would be necessary for the CONTRACTING PARTIES to determine what export volumes a contracting party can reasonably expect after having obtained a tariff concession. The Panel is not aware of any criteria or principles that could be applied to make such a determination. The Panel further noted that changes in trade volumes result not only from government policies but also other factors, and that, in most circumstances, it is not possible to determine whether a decline in imports following a change in policies is attributable to that change or to other factors. The provisions of Article XXIII:I (b) could therefore in practice hardly be applied if a contracting party claiming nullification or impairment had to demonstrate not only that an adverse change in competition has taken place but also that the change has resulted in a decline in imports.

"152. For these reasons the Panel found that benefits accruing to the United States under Article II of the General Agreement in respect of the zero tariff bindings for oilseeds in the Community Schedule of Concessions were impaired as a result of subsidy schemes which operate to protect Community producers of oilseeds completely from the movement of prices of imports and thereby prevent the oilseeds tariff concessions from having any impact on the competitive relationship between domestic and imported oilseeds."

FOOTNOTES

1Article 31 of the Havana Charter provides as follows:

1.      If a Member establishes, maintains or authorizes, formally or in effect, a monopoly of the importation or exportation of any product, the Member shall, upon the request of other Member or Members having a substantial interest in trade with it in the product concerned, negotiate with such other Member or Members in the manner provided for under Article 17 in respect of tariffs, and subject to all the provisions of this Charter with respect to such tariff negotiations, with the object of achieving:

(a)      in the case of an export monopoly, arrangements designed to limit or reduce any protection that might be afforded through the operation of the monopoly to domestic users of the monopolized product, or designed to assure exports of the monopolized product in adequate quantities at reasonable prices;

(b)      in the case of an import monopoly, arrangements designed to limit or reduce any protection that might be afforded through the operation of the monopoly to domestic producers of the monopolized product, or designed to relax any limitation on imports which is comparable with a limitation made subject to negotiation under other provisions of this Chapter.

2.      In order to satisfy the requirements of paragraph l(b), the Member establishing, maintaining or authorizing a monopoly shall negotiate:

(a)      for the establishment of the maximum import duty that may be applied in respect of the product concerned; or

(b)      for any other mutually satisfactory arrangement consistent with the provisions of this Charter, if it is evident to the negotiating parties that to negotiate a maximum import duty under sub-paragraph (a) of this paragraph is impracticable or would be ineffective for the achievement of the objectives of paragraph 1. Any Member entering into negotiations under this sub-paragraph shall afford to other interested Members an opportunity for consultation.

3.      In any case in which a maximum import duty is not negotiated under paragraph 2(a), the Member establishing, maintaining or authorizing the import monopoly shall make public, or notify the Organization of the maximum import duty which it will apply in respect of the product concerned.

4.      The import duty negotiated under paragraph 2, or made public notified to the Organization under paragraph 3, shall represent the maximum margin by which the price charged by the import monopoly for the imported product (exclusive of internal taxes conforming to the provisions of Article 18, transportation, distribution and other expenses incident to the purchase, sale or further processing, and a reasonable margin of profit) may exceed the landed cost; Provided that regard may be had to average landed costs and selling prices over recent periods; and Provided further that, where the product concerned is a primary commodity which is the subject of a domestic price stabilization arrangement, provision may be made for adjustment to take account of wide fluctuations or variations in world prices, subject where a maximum duty has been negotiated to agreement between the countries parties to the negotiations.

5.      With regard to any product to which the provisions of this Article apply, the monopoly shall, wherever this principle can be effectively applied and subject to the other provisions of this Charter, import and offer for sale such quantities of the product as will be sufficient to satisfy the full domestic demand for the imported product, account being taken of any rationing to consumers of the imported and like domestic product which may be in force at that time.

6.      In applying the provisions of this Article, due regard shall be had for the fact tat some monopolies are established and operated mainly for social, cultural, humanitarian or revenue purposes.

7.      This Article shall not limit the use by Members of any form of assistance to domestic producers permitted by other provisions of this Charter.

2Footnote 4 to this paragraph states:

Examples of similar measures include export moderation, export-price or import-price monitoring systems, export or import surveillance, compulsory import cartels and discretionary export or import licensing schemes, any of which afford protection.

3Footnote 4 to this subparagraph states:

This standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export not for that reason alone be considered to be an export subsidy within the meaning of this provision.

4Footnote S to this subparagraph states:

Measures referred to in Annex 1 as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.

5Footnote 57 to this paragraph states:

The term "commercially available" means that the choice between domestic and imported products is unrestricted and depends only on commercial considerations.

6Footnote 58 to this paragraph states:

For the purpose of this Agreement:

The term "direct taxes" shall mean taxes on wages, profits, interests, rents, royalties, and all other forms of income, and taxes on the ownership of real property;

The term "import charges" shall mean tariffs, duties, and other fiscal charges not elsewhere enumerated in this note that are levied on imports;

The term "indirect taxes" shall mean sales, excise, turnover, value added, franchise, stamp, transfer, inventory and equipment taxes, border taxes and all taxes other than direct taxes and import charges;

"Prior-stage" indirect taxes are those levied on goods or services used directly or indirectly in making the product;

"Cumulative" indirect taxes are multi-staged taxes levied where there is no mechanism for subsequent crediting of the tax if the goods or services subject to tax at one stage of production are used in a succeeding stage of production;

"Remission" of taxes includes the refund or rebate of taxes;

"Remission or drawback" includes the full or partial exemption or deferral of import charges.

7Footnote 59 to this paragraph states:

The Members recognize that deferral need not amount to an export subsidy where, for example, appropriate interest charges are collected. The Members reaffirm the principle that prices for goods in transactions between exporting enterprises and foreign buyers under their or under the same control should for tax purposes be the prices which would be charged between independent enterprises acting at arm's length. Any Member may draw the attention of another Member to administrative or other practices which may contravene this principle and which result in a significant saving of direct taxes in export transactions. In such circumstances the Members shall normally attempt to resolve their differences using the facilities or existing bilateral tax treaties or other specific international mechanisms, without prejudice to the rights and obligations of Members under GATT 1994, including the right of consultation created in the preceding sentence.

Paragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of foreign-source income earned by its enterprises or the enterprises of another Member.

8See Note 6 (Originally Footnote 58) supra.

9See Note 6 (Originally Footnote 58) supra.

10Footnote 60 to this paragraph states:

Paragraph (h) does not apply to value-added tax systems and border-tax adjustment in lieu thereof; the problem of the excessive remission of value-added taxes is exclusively covered by paragraph (g).

11See note 6 (Originally Footnote 58) supra.

12Certain subsidies such as assistance for research activities, disadvantaged regions and environmental protection.

13Footnote 11 to this subparagraph states:

The term "injury to the domestic industry" is used here in the sa same sense as it is used in Part V.

14Footnote 12 to this subparagraph states:

The term "nullification or impairment" is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.

15Footnote 13 to this subparagraph states:

The term "serious prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.

16Footnote 14 to this subparagraph states:

The total ad valorem subsidization shall be calculated in accordance with the provisions of Annex IV.

17Footnote 15 to this subparagraph states:

Since it is anticipated that civil aircraft will be subject to specific multilateral rules, the threshold in this subparagraph does not apply to civil aircraft.

18Footnote 16 to this subparagraph states:

Members recognize that where royalty-based financing for a civil aircraft programme is not being fully repaid due to the level of actual sales falling below the level of forecast sales, this does not in itself constitute serious prejudice for the purposes of this subparagraph.

19Footnote 17 to this subparagraph states:

Unless other multilaterally agreed specific rules apply to the trade in the product or commodity in question.

20Footnote 18 to this paragraph states:

The fact that certain circumstances are referred to in this paragraph does not, in itself, confer upon them any legal status in terms of either GATT 1994 or this Agreement. These circumstances must not be isolated, sporadic or otherwise insignificant.

21Article 2.1 of the Agreement on TRIMs provides as follows:

Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1 994.

22Footnote 55 to this paragraph states:

For a developing country Member not granting export subsidies as of the date of entry into force of the WTO Agreement, this paragraph shall apply on the basis of the level of

23The report refers to BISD 3S/224.

24EPCT/A/PV6, page 5; "The Australian Subsidy on Ammonium Sulphate", report adopted on 3 April 1950 (BISD, Vol. 11/ 188, 194-5); "Treatment by Germany of Imports of Sardines", report adopted on 31 October 1952 (BISD IS/53, 58-59); "Operation of the Provisions of Article XVI", report adopted on 21 November 1961 (BISD 10S/201, 209).

25 "Article XXIV:6 Negotiations: Communication from the Commission of the European Communities", document L/3807 dated 11 January 1973; "Negotiations Under the Provisions of Article XXIV:6: Communication from the Commission of the European Communities", document TAR/16 dated 20 May 1961; "Enlargement of the European Economic Community: Accession of Portugal and Spain", document L/5936, Add.2 and Third Geneva (1987) Protocol, Schedule LXXX.

26 "Other Barriers to Trade", Report adopted on 3 March 1955 (BISD 3S/222, 224).

27 "The Australian Subsidy on Ammonium Sulphate", report adopted on 3 April 1950 (BISD Vol.II/188, 195); and "Reports of Committees and Principal Sub-Committees", Geneva, September 1948 (ICITO 1/8, page 155).

28 "Panel on Japanese Measures on Imports of Leather", report adopted on 15/16 May 1984 (BISD 31S/1 13); "Brazilian Internal Taxes", report adopted on 30 June 1949 (BISD Vol.II/184185).

29 "United States - Taxes on Petroleum and Certain Imported Substances", report adopted on 17 June 1987 (BISD 34S/160).

30 "Treatment by Germany of Imports of Sardines", panel report adopted on 31 October 1952 (BISD lS/53, 56).