EUROPEAN COMMUNITIES- CUSTOMS CLASSIFICATION OF CERTAIN COMPUTER EQUIPMENT.

: The European Communities' application of tariffs on local area networks: (LAN) equipment and
multimedia personal computers (PCs) in excess of those provided for in the EC Schedules through
changes in customs classification.

• Product at issue: Computer equipment associated with LAN namely, (i) LAN equipment such as
network or adaptor cards and (ii) multimedia PCs.

SUMMARY OF KEY PANEL/AB FINDINGS • GATT Art. II:1 (schedule of concessions – LAN): The
Appellate Body reversed the Panel's finding of a violation by the European Communities of Art. II:1
with respect to LAN equipment on the basis of the Panel's erroneous legal reasoning and
consideration of only selective evidence. In this regard the Appellate Body rejected the Panel's
finding that a tariff concession in the Schedule can be interpreted in light of an exporting Member's
“legitimate expectations” – a concept relevant to a non-violation complainant under GATT
Art. XXIII:1(b) – in the context of a violation complaint. Rather, the Appellate Body found that a tariff
concession provided for in the Member's Schedule should be interpreted according to the general
rules of treaty interpretation set out in Arts. 31 and 32 of the VCLT2;

Moreover, the Appellate Body said that the Panel should have further examined the following: the
Harmonized System and its Explanatory Notes as context in interpretation of the terms of the
Schedule; the existence and relevance of subsequent practice; the European Communities'
classification practice during the Tokyo Round, in addition to that during the Uruguay Round;
relevant US practice with regard to the classification of the product at issue; and the EC legislation
governing customs classification at the time.

• Clarification of the scope of tariff concessions: The Appellate Body reversed the Panel's finding that
the United States, as an exporting Member, was not required to clarify the scope of the European
Communities' tariff concessions. The Appellate Body emphasized the “give and take” nature of tariff
negotiations and that Members' Schedules “represent a common agreement among all Members”,
particularly in light of the fact that they are an integral part of the GATT, and thus found that
clarification is a “task for all interested parties”.

• GATT Art. II:1 (schedule of concessions – PCs): The Panel found that the United States failed to
provide sufficient evidence to demonstrate that the European Communities had violated GATT
Art. II:1 with respect to PCs.

The Panel was established to consider complaints by the United States against the European
Communities, Ireland and the United Kingdom concerning the tariff treatment of Local Area Network
("LAN") equipment and personal computers with multimedia capability ("PCs with multimedia
capability").2 The United States claimed that the European Communities, Ireland and the United
Kingdom accorded to LAN equipment and/or PCs with multimedia capability treatment less
favourable than that provided for in Schedule LXXX of the European Communities3 ("Schedule
LXXX") and, therefore, acted inconsistently with their obligations under Article II:1 of the General
Agreement on Tariffs and Trade 1994 (the "GATT 1994").
SOLVING ISSUES

The European Communities also submits that the Panel erred in interpreting Schedule LXXX, in
particular, by: (a) reading Schedule LXXX in the light of the "legitimate expectations" of an exporting
Member; and (b) considering that Article II:5 of the GATT 1994 confirms the interpretative value of
"legitimate expectations".

Subordinately, the European Communities submits that the Panel erred in considering that the
"legitimate expectations" of an exporting Member with regard to the interpretation of tariff
concessions should be based on the classification practices for individual importers and individual
consignments, or on the subjective perception of a number of exporting companies of that exporting
Member. 75. Schedule LXXX provides tariff concessions for ADP machines under headings 84.71 and
84.73 and for telecommunications equipment under heading 85.17. The customs duties set forth in
Schedule LXXX on telecommunications equipment are generally higher than those on ADP
machines.50 We note that Schedule LXXX does not contain any explicit reference to "LAN
equipment" and that the European Communities currently treats LAN equipment as
telecommunications equipment.

The United States, however, considers that the EC tariff concessions on ADP machines, and not its
tariff concessions on telecommunications equipment, apply to LAN equipment. The United States
claimed before the Panel, therefore, that the European Communities accords to imports of LAN
equipment treatment less favourable than that provided for in its Schedule, and thus has acted
inconsistently with Article II:1 of the GATT 1994. The United States argued that the treatment
provided for by a concession is the treatment reasonably expected by the trading partners of the
Member which made the concession.51 On the basis of the negotiating history of the Uruguay
Round tariff negotiations and the actual tariff treatment accorded to LAN equipment by customs
authorities in the European Communities during these negotiations, the United States argued that it
reasonably expected the European Communities to treat LAN equipment as ADP machines, not as
telecommunications equipment

PANEL’S RESOLUTION FIRST

The Panel found that: ... for the purposes of Article II:1, it is impossible to determine whether LAN
equipment should be regarded as an ADP machine purely on the basis of the ordinary meaning of
the terms used in Schedule LXXX taken in isolation. However, as noted above, the meaning of the
term "ADP machines" in this context may be determined in light of the legitimate expectations of an
exporting Member.

APPELLATE BODY REPORT

We disagree with the Panel's conclusion that the meaning of a tariff concession in a Member's
Schedule may be determined in the light of the "legitimate expectations" of an exporting Member.
First, we fail to see the relevance of the EEC - Oilseeds panel report with respect to the
interpretation of a Member's Schedule in the context of a violation complaint made under Article
XXIII:1(a) of the GATT 1994. The EEC - Oilseeds panel report dealt with a non-violation complaint
under Article XXIII:1(b) of the GATT 1994, and is not legally relevant to the case before us. Article
XXIII:1 of the GATT 1994 provides for three legally-distinct causes of action on which a Member may
base a complaint; it distinguishes between so-called violation complaints, non-violation complaints
and situation complaints under paragraphs (a), (b) and (c). The concept of "reasonable
expectations", which the Panel refers to as "legitimate expectations", is a concept that was
developed in the context of non-violation complaints.58 As we stated in India - Patents, for the Panel
to use this concept in the context of a violation complaint "melds the legally-distinct bases for
'violation' and 'non-violation' complaints under Article XXIII of the GATT 1994 into one uniform cause
of action"59, and is not in accordance with established GATT practice

Second, we reject the Panel's view that Article II:5 of the GATT 1994 confirms that "legitimate
expectations are a vital element in the interpretation" of Article II:1 of the GATT 1994 and of
Members' Schedules.60 It is clear from the wording of Article II:5 that it does not support the Panel's
view. This paragraph recognizes the possibility that the treatment contemplated in a concession,
provided for in a Member's Schedule, on a particular product, may differ from the treatment
accorded to that product and provides for a compensatory mechanism to rebalance the concessions
between the two Members concerned in such a situation. However, nothing in Article II:5 suggests
that the expectations of only the exporting Member can be the basis for interpreting a concession in
a Member's Schedule for the purposes of determining whether that Member has acted consistently
with its obligations under Article II:1. In discussing Article II:5, the Panel overlooked the second
sentence of that provision, which clarifies that the "contemplated treatment" referred to in that
provision is the treatment contemplated by both Members.

Third, we agree with the Panel that the security and predictability of "the reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to
trade" is an object and purpose of the WTO Agreement, generally, as well as of the GATT 1994.61
However, we disagree with the Panel that the maintenance of the security and predictability of tariff
concessions allows the interpretation of a concession in the light of the "legitimate expectations" of
exporting Members, i.e., their subjective views as to what the agreement reached during tariff
negotiations was. The security and predictability of tariff concessions would be seriously undermined
if the concessions in Members' Schedules were to be interpreted on the basis of the subjective views
of certain exporting Members alone. Article II:1 of the GATT 1994 ensures the maintenance of the
security and predictability of tariff concessions by requiring that Members not accord treatment less
favourable to the commerce of other Members than that provided for in their Schedules

Furthermore, we do not agree with the Panel that interpreting the meaning of a concession in a
Member's Schedule in the light of the "legitimate expectations" of exporting Members is consistent
with the principle of good faith interpretation under Article 31 of the Vienna Convention. Recently,
in India - Patents, the panel stated that good faith interpretation under Article 31 required "the
protection of legitimate expectations".62 We found that the panel had misapplied Article 31 of the
Vienna Convention and stated that: The duty of a treaty interpreter is to examine the words of the
treaty to determine the intentions of the parties. This should be done in accordance with the
principles of treaty interpretation set out in Article 31 of the Vienna Convention.

But these principles of interpretation neither require nor condone the imputation into a treaty of
words that are not there or the importation into a treaty of concepts that were not intended.63 84.
The purpose of treaty interpretation under Article 31 of the Vienna Convention is to ascertain the
common intentions of the parties. These common intentions cannot be ascertained on the basis of
the subjective and unilaterally determined "expectations" of one of the parties to a treaty. Tariff
concessions provided for in a Member's Schedule -- the interpretation of which is at issue here -- are
reciprocal and result from a mutually-advantageous negotiation between importing and exporting
Members. A Schedule is made an integral part of the GATT 1994 by Article II:7 of the GATT 1994.
Therefore, the concessions provided for in that Schedule are part of the terms of the treaty. As such,
the only rules which may be applied in interpreting the meaning of a concession are the general
rules of treaty interpretation set out in the Vienna Convention.

Pursuant to Article 31(1) of the Vienna Convention, the meaning of a term of a treaty is to be
determined in accordance with the ordinary meaning to be given to this term in its context and in
the light of the object and purpose of the treaty.

Article 31(2) of the Vienna Convention stipulates that: The context, for the purpose of the
interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connexion with
the conclusion of the treaty; (b) any instrument which was made by one or more parties in
connexion with the conclusion of the treaty and accepted by the other parties as an instrument
related to the treaty.

Furthermore, Article 31(3) provides that: There shall be taken into account together with the
context: (a) any subsequent agreement between the parties regarding the interpretation of the
treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty
which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of
international law applicable in the relations between the parties. Finally, Article 31(4) of the Vienna
Convention stipulates that:

A special meaning shall be given to a term if it is established that the parties so intended.

The application of these rules in Article 31 of the Vienna Convention will usually allow a treaty
interpreter to establish the meaning of a term.64 However, if after applying Article 31 the meaning
of the term remains ambiguous or obscure, or leads to a result which is manifestly absurd or
unreasonable, Article 32 allows a treaty interpreter to have recourse to:

... supplementary means of interpretation, including the preparatory work of the treaty

In paragraphs 8.20 and 8.21 of the Panel Report, the Panel quoted Articles 31 and 32 of the Vienna
Convention and explicitly recognized that these fundamental rules of treaty interpretation applied
"in determining whether the tariff treatment of LAN equipment ... is in conformity with the tariff
commitments contained in Schedule LXXX".66 As we have already noted above, the Panel, after a
textual analysis 67, came to the conclusion that: ... for the purposes of Article II:1, it is impossible to
determine whether LAN equipment should be regarded as an ADP machine purely on the basis of
the ordinary meaning of the terms used in Schedule LXXX taken in isolation.68 Subsequently, the
Panel abandoned its effort to interpret the terms of Schedule LXXX in accordance with Articles 31
and 32 of the Vienna Convention . In doing this, the Panel erred circumstances of its conclusion.

We are puzzled by the fact that the Panel, in its effort to interpret the terms of Schedule LXXX, did
not consider the Harmonized System and its Explanatory Notes. We note that during the Uruguay
Round negotiations, both the European Communities and the United States were parties to the
Harmonized System. Furthermore, it appears to be undisputed that the Uruguay Round tariff
negotiations were held on the basis of the Harmonized System's nomenclature and that requests
for, and offers of, concessions were normally made in terms of this nomenclature. Neither the
European Communities nor the United States argued before the Panel72 that the Harmonized
System and its Explanatory Notes were relevant in the interpretation of the terms of Schedule LXXX.
We believe, however, that a proper interpretation of Schedule LXXX should have included an
examination of the Harmonized System and its Explanatory Notes.

A proper interpretation also would have included an examination of the existence and relevance of
subsequent practice. We note that the United States referred, before the Panel, to the decisions
taken by the Harmonized System Committee of the WCO in April 1997 on the classification of certain
LAN equipment as ADP machines.73 Singapore, a third party in the panel proceedings, also referred
to these decisions.74 The European Communities observed that it had introduced reservations with
regard to these decisions and that, even if they were to become final as they stood, they would not
affect the outcome of the present dispute for two reasons: first, because these decisions could not
confirm that LAN equipment was classified as ADP machines in 1993 and 1994; and, second, because
this dispute "was about duty treatment and not about product classification".75 We note that the
United States agrees with the European Communities that this dispute is not a dispute on the
correct classification of LAN equipment, but a dispute on whether the tariff treatment accorded to
LAN equipment was less favourable than that provided for in Schedule LXXX.76 However, we
consider that in interpreting the tariff concessions in Schedule LXXX, decisions of the WCO may be
relevant; and, therefore, they should have been examined by the Panel

This may well be correct and, in any case, seems central to the position of the United States.
Therefore, we are surprised that the Panel did not examine whether, during the Tokyo Round tariff
negotiations, the European Communities bound LAN equipment as ADP machines or as
telecommunications equipment

The Panel did not examine the classification practice in the European Communities during the
Uruguay Round negotiations as a supplementary means of interpretation within the meaning of
Article 32 of the Vienna Convention84; and, second, the value of the classification practice as a
supplementary means of interpretation is subject to certain qualifications discussed below.

We note that the Panel examined the classification practice of only the European Communities85,
and found that the classification of LAN equipment by the United States during the Uruguay Round
tariff negotiations was not relevant.86 The purpose of treaty interpretation is to establish the
common intention of the parties to the treaty. To establish this intention, the prior practice of only
one of the parties may be relevant, but it is clearly of more limited value than the practice of all
parties. In the specific case of the interpretation of a tariff concession in a Schedule, the classification
practice of the importing Member, in fact, may be of great importance. However, the Panel was
mistaken in finding that the classification practice of the United States was not relevant.

94. In this context, we also note that while the Panel examined the classification practice during the
Uruguay Round negotiations, it did not consider the EC legislation on customs classification of goods
that was applicable at that time. In particular, it did not consider the "General Rules for the
Interpretation of the Combined Nomenclature" as set out in Council Regulation 2658/87 on the
Common Customs Tariff.87 If the classification practice of the importing Member at the time of the
tariff negotiations is relevant in interpreting tariff concessions in a Member's Schedule, surely that
Member's legislation on customs classification at that time is also relevant.

95. Then there is the question of the consistency of prior practice. Consistent prior classification
practice may often be significant. Inconsistent classification practice, however, cannot be relevant in
interpreting the meaning of a tariff concession. We note that the Panel, on the basis of evidence
relating to only five out of the then 12 Member States88, made the following factual findings with
regard to the classification practice in the European Communities

On the basis of the erroneous legal reasoning developed and the selective evidence considered,
the Panel was not justified in coming to the conclusion that the United States was entitled to
"legitimate expectations" that LAN equipment would be accorded tariff treatment as ADP
machines in the European Communities93 and, therefore, that the European Communities acted
inconsistently with the requirements of Article II:1 of the GATT 1994 by failing to accord imports of
LAN equipment from the United States treatment no less favourable than that provided for in
Schedule LXXX.

The last issue raised by the European Communities in this appeal is whether the Panel erred in
placing the onus of clarifying the scope of a tariff concession during a multilateral tariff
negotiation, held under the auspices of the GATT/WTO, solely on the importing Member

However, the case before us raises a different problem. The question here is whether the
European Communities has committed itself to treat LAN equipment as ADP machines under
headings 84.71 or 84.73, rather than as telecommunications equipment under heading 85.17 of
Schedule LXXX. We do not believe that the "requirement of clarification", as discussed by the
Panel, is relevant to this question.

We do not share this perception of the nature of tariff commitments. Tariff negotiations are a
process of reciprocal demands and concessions, of "give and take". It is only normal that importing
Members define their offers (and their ensuing obligations) in terms which suit their needs. On the
other hand, exporting Members have to ensure that their corresponding rights are described in
such a manner in the Schedules of importing Members that their export interests, as agreed in the
negotiations, are guaranteed.

There was a special arrangement made for this in the Uruguay Round. For this purpose, a process
of verification of tariff schedules took place from 15 February through 25 March 1994, which
allowed Uruguay Round participants to check and control, through consultations with their
negotiating partners, the scope and definition of tariff concessions.

104 Indeed, the fact that Members' Schedules are an integral part of the GATT 1994 indicates that,
while each Schedule represents the tariff commitments made by one Member, they represent a
common agreement among all Members.

110. For the reasons stated above, we conclude that the Panel erred in finding that "the United
States was not required to clarify the scope of the European Communities' tariff concessions on
LAN equipment".105 We consider that any clarification of the scope of tariff concessions that may
be required during the negotiations is a task for all interested parties.
ARGENTINA-MEASURES AFFECTING IMPORTS OF FOOTWEAR, TEXTILES, APPAREL AND OTHER
ITEMS

On 4 October 1996, the United States requested Argentina to hold consultations pursuant to Article
4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes("DSU"),
Article XXII:1 of the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), Article 14 of the
Agreement on Technical Barriers to Trade ("TBT Agreement"), Article 19 of the Agreement on
Implementation of Article VII of the GATT 1994 ("Customs Valuation Agreement"), and Article 7 of
the Agreement on Textiles and Clothing ("ATC"), regarding certain measures maintained by
Argentina affecting imports of footwear, textiles, apparel and other items, namely, measures
imposing specific duties on various footwear, textiles and apparel in excess of the bound rate of 35
per cent ad valorem provided in Argentina's Schedule LXIV; a statistical tax of three per cent ad
valorem on imports of all sources other than MERCOSUR countries; and measures imposing, inter
alia, labelling requirements related to affidavits of product components (WT/DS56/1).

1.2 Pursuant to Article 4.11 DSU, Hungary requested to be joined in these consultations on 21
October 1996 (WT/DS56/2). The European Communities ("EC") made a similar request on 25
October 1996 (WT/DS56/3). In separate communications dated 6 November 1996, Argentina
accepted the request of Hungary and the request of the EC to join the consultations which the
United States had requested (WT/DS56/4). 1.3 During the consultations, a mutually agreed solution
was reached between the United States and Argentina regarding Argentina's labelling requirements.
However, the parties failed to reach a mutually satisfactory solution on the other aspects raised
during the consultations.

On 9 January 1997, the United States requested the Dispute Settlement Body ("DSB") to establish a
panel (WT/DS56/5). The United States claimed that Argentina's measures were "inconsistent with
the obligations of Argentina under Articles II, VII, VIII and X of the GATT 1994; Articles 1 through 8 of
the Agreement on Implementation of Article VII of the GATT 1994; and Article 7 of the Agreement on
Textiles and Clothing"

B. Article II of GATT. Does the imposition of minimum specific duties by Argentina, which has bound
the tariffs at issue at an ad valorem rate, constitute a violation of Article II? Does Argentina's tariff
system have the potential to violate Article II and is this potential sufficient to constitute an
infringement thereof? Has Argentina imposed duties in excess of its bound rate of 35 per cent ad
valorem? How should we treat the issues raised by the parties with regard to proof and evidence
submitted to the Panel?

C. The domestic challenge procedure. Do the constitutional supremacy of international law under
the Argentine Constitution and the existence of a domestic procedure to challenge duties imposed in
excess of Argentina's bound rates constitute a defence to the claimed violation of Article II of GATT?

D. Article VIII of GATT. What are the criteria for application of Article VIII’s limits on charges and fees
imposed in connection with importation? Is the statistical tax of three per cent ad valorem collected
by Argentina on imports in violation of Article VIII of GATT?

RESOLUTION
The United States claims that Argentina violates the provisions of Article II of GATT in two ways: a)
Argentina’s application of minimum specific duties to products in respect of which it bound ad
valorem duties violates Argentina’s obligation to maintain ad valorem tariffs pursuant to Article II;
and b) The specific duties applied by Argentina will inevitably lead and have in fact led to the
imposition of duties in excess of the 35 per cent ad valorem tariff rate bound by Argentina pursuant
to Article II.

Argentina argues that an allegation of a "potential" violation of Article II is not sufficient, and that in
any case its tariffs do not have the potential and indeed have never exceeded the bound rate of 35
per cent ad valorem. It also responds that as long as its applied tariffs do not exceed the equivalent
of 35 per cent ad valorem, it is free to use any type of duties, including specific duties. Argentina also
adds that in its Constitution, international law prevails over domestic law and that it is therefore
unconstitutional in Argentina to violate WTO rules.

In this context, Argentina further argues that it maintains a domestic mechanism whereby Argentine
importers, should they be required to pay duties above Argentina’s bindings, can ask any judge to
declare such duties to be illegal and unconstitutional, which, it notes, has never happened in the
sector of textiles, apparel and footwear.

THE TYPE OF DUTIES USED

6.23 The United States claims that the type of duties applied by a WTO Member - even below any
bound rate - must conform to that specified in the Schedule of such Member. Since Argentina has
bound its tariffs at 35 per cent ad valorem in its Schedule of Concessions (hereafter called
"Schedule"), the United States argues that Argentina may only impose ad valorem duties. Argentina
responds that as long as the duties it imposes are below the equivalent of 35 per cent ad valorem, it
can use any type of duties.

Therefore, we have to decide whether the imposition of minimum specific duties by Argentina,
which has bound the tariffs at issue at an ad valorem rate, constitutes a violation of Article II. 6.24
The wording of Article II does not seem to address explicitly whether WTO Members have an
obligation to use a particular type of duty. However, the wording of Article II must be interpreted in
the light of past GATT practice, as mentioned in Article XVI:1 of the WTO Agreement and paragraph
1(b)(iv) of Annex 1A incorporating the GATT 1994 into the WTO Agreement, and indicated by the
Appellate Body in Japan - Taxes on Alcoholic Beverages. 175 Issues similar to those presented in this
case have arisen on a number of occasions.176 6.25 In this connection, the Working Party Report on
Rectifications and Modifications of Schedules177 stated in 1953: "The Working Party also concerned
itself with the proposal of the Greek Government to introduce a minimum ad valorem rate for
certain specific rates and came to the conclusion that such changes could not be considered
rectifications to be dealt with by the Working Party, [...] [I]t decided therefore to refer the question
to the CONTRACTING PARTIES so that such changes could form the object of consultations and
negotiations with the parties having an interest in these items".

6.26 In 1954, the Working Party Report on Transposition of Schedule XXXVII - Turkey178 stated 3.
“The Working Party has also examined the proposal to change the specific duties in the Turkish
Schedule to ad valorem duties, in cases where such a change is not expressly provided for in the
Schedule, in order that the new tariff as regards bound items will conform with the Government’s
obligations under the General Agreement. A comparison by the secretariat of the proposed ad
valorem rates with rates which would have resulted, if the conversion had been carried out on
certain other bases which were suggested, has indicated that for a considerable proportion of the
items the method employed by the Turkish Government has resulted in lower rates than would have
been the case if one of those other bases had been used. The Working Party considered the
proposals in relation to the provisions of the Agreement and to the practices of the CONTRACTING
PARTIES which deal with the modification of schedules. It was found that there is no provision in the
General Agreement which authorizes a contracting party to alter the structure of bound rates of
duty from a specific to an ad valorem basis. (Emphasis added)

4. The obligations of contracting parties are established by the rates of duty appearing in the
schedules and any change in the rate such as a change from a specific to an ad valorem duty could in
some circumstances adversely affect the value of the concessions to other contracting parties.
Consequently, any conversion of specific into ad valorem rates of duty can be made only under some
procedure for the modification of concessions"

6.27 The Working Party Report on the Fourth Protocol of Rectifications and Modifications179
reached similar conclusions in 1955 :

"1. One question could not be solved by the interested parties and was referred to the Working
Party. Among the rectifications requested by the Austrian Government were those relating to Items
140 to 144 of the Austrian Tariff which were being made under the authority of the Note to these
items included in the Austrian Schedule XXXII which granted the Austrian Government freedom to
change the specific into ad valorem rates. The Austrian Government felt that it would not be
impairing the value of the concessions if it retained beside the ad valorem duty the old specific rate
as a minimum rate. 2. The Working Party took the view that such changes would constitute
modifications of Austria’s obligations and that it could not recommend their acceptance as
rectifications. Such modifications could only be inserted in a protocol of rectifications and
modifications after negotiations authorized by the CONTRACTING PARTIES in accordance with the
proper procedures. The Austrian delegation, therefore, did not further insist on the insertion in the
Fourth Protocol of Rectifications and Modifications of the specific minimum rates in Items 140 to
144". (Emphasis added)

6.28 In 1984, the report of the Panel on Newsprint180 described GATT practice as follows: “50. [...]
[U]nder longstanding GATT practice, even purely formal changes in the tariff schedule of a
contracting party, which may not affect the GATT rights of other countries, such as the conversion of
a specific duty to an ad valorem duty without an increase in the protective effect of the tariff rate in
question, have been considered to require negotiations"

[...]The Panel then considered whether the introduction of a specific tariff for bananas in place of the
ad valorem tariff provided for in its Schedule constituted 'treatment no less favourable' in terms of
Article II. The Panel observed that while the bound ad valorem tariff was related to the value of
bananas, the new specific tariff was based on the weight of bananas. Any change in the value of
bananas per ton therefore led to a change in the ad valorem equivalent of the specific tariff. Since
the value of bananas was unpredictable, the ad valorem equivalent of the specific tariff could also
not be foreseen. The Panel noted in this context that the ad valorem equivalent of the 850 ECUs per
ton specific tariff on bananas presently exceeded by far 20 per cent ad valorem. As to the 100 ECUs
per ton specific tariff, the Panel also noted that the EEC had neither argued nor submitted any
evidence that this tariff could never exceed 20 per cent ad valorem; according to the complainants,
the 100 ECUs per ton specific tariff had already exceeded the equivalent of the bound 20 per cent ad
valorem tariff after 1 July 1993.

The Panel consequently found that the new specific tariffs led to the levying of a duty on imports of
bananas whose ad valorem equivalent was, either actually or potentially, higher than 20 per cent ad
valorem. 135. The Panel considered that the actual levying of a duty in excess of the bound rate
clearly constituted a treatment of bananas less favourable than that provided for in the EEC’s
Schedule of Concessions. The Panel then proceeded to examine whether also the mere possibility
that the specific tariff rate applied by the EEC might be higher than the corresponding bound ad
valorem rate, rendered it inconsistent with Article II. The Panel recalled the importance of security
and predictability in the application of tariffs bindings. It noted that previous panels and working
parties had emphasized that tariff bindings justify reasonable expectations about market access and
conditions of competition.

The CONTRACTING PARTIES had consistently found that a change from a bound specific to an ad
valorem rate was a modification of the concession [...] . The Panel [...] concluded that, in
determining whether treatment accorded by a tariff measure was no less favourable than that
provided for in the Schedule, it had to take into account not only the actual consequences of that
measure for present imports but also its effects on possible future imports.

This followed from the principle recognized by many previous panels that the provisions of the
General Agreement serve not only to protect actual trade flows but also to create predictability for
future trade". (Emphasis added) 6.30 The Bananas II panel report clearly recognizes the past GATT
practice and can be read as concluding that the imposition of specific duties when only ad valorem
duties are bound is sufficient to establish a violation of Article II.

We note that the past GATT practice is clear: a situation whereby a contracting party applies one
type of duties while its Schedule refers to bindings of another type of duties constitutes a violation
of Article II of GATT, without any obligation for the complaining party to submit further evidence
that such variance leads to an effective breach of bindings. The fact that Argentina claims that it is
simply following its past practice of using specific duties would not seem to be relevant, since it
made ad valorem tariff concessions on the products in question and thus created an obligation for
itself to impose such type of duties.

As a guarantee for predictability and to ensure the full respect of the negotiations under Article II,
GATT practice has generally required that once a Member has indicated the type(s) of duties in
specifying its bound rate, it must apply such type(s) of duties. Accordingly, faced with such a
variance in the type duties applied by Argentina from that reflected in its Schedule, we consider
that we do not have to examine the effects of that variance on possible future imports. Indeed,
such a variance undermines the stability and predictability of Members' Schedules. 6.32 We,
therefore, find that Argentina, in using a system of specific minimum tariffs although it has bound
its tariffs at ad valorem rates only, is violating the provisions of Article II of GATT and that the
United States does not have to provide further evidence that the resultant duties exceed the
bound tariff rate. Such a variance between Argentina’s Schedule and its applied tariffs constitutes
a less favourable treatment to the commerce of the other Members than that provided for in
Argentina’s Schedule, contrary to the provisions of Article II of GATT.

We consider that when the Appellate Body refers to the obligation of the complainant party to
provide sufficient evidence to establish a "presumption", it refers to two aspects: the procedural
aspect, i.e., the obligation for the complainant to present the evidence first, but also to the nature of
evidence needed. In the present case, we consider that it was for the United States to raise a
presumption that Argentina did violate the provisions of Article II of GATT. Then, it is for Argentina to
provide sufficient evidence to rebut the said presumption. When, however, Argentina is claiming a
specific affirmative defense, such that its national challenge procedure can be used to correct any
alleged violation of GATT rules, it is for Argentina to raise first a presumption that such system
operates in a way that there is, in effect, no infringement of GATT/WTO rules.

The concept of "presumption" may need some elaboration. A presumption is an inference in favour
of a particular fact and would also refer to a conclusion reached in the absence of direct
evidence.183 6.39 For international disputes it seems normal that tribunals, in evaluating claims, are
given considerable flexibility. Inference (or judicial presumption) is a useful means at the disposal of
international tribunals for evaluating claims. In situations where direct evidence is not available,
relying on inferences drawn from relevant facts of each case facilitates the duty of international
tribunals in determining whether or not the burden of proof has been met. It would therefore
appear to be the prerogative of an international tribunal, in each given case, to determine whether
applicable and unrebutted inferences are sufficient for satisfying the burden of proof. In this respect,
the International Court of Justice, in some cases, found it difficult to assert stringent rules of
evidence.184 6.40 Another incidental rule to the burden of proof is the requirement for
collaboration of the parties in the presentation of the facts and evidence to the panel and especially
the role of the respondent in that process.

It is often said that the idea of peaceful settlement of disputes before international tribunals is
largely based on the premise of co-operation of the litigating parties. In this context the most
important result of the rule of collaboration appears to be that the adversary is obligated to provide
the tribunal with relevant documents which are in its sole possession. This obligation does not arise
until the claimant has done its best to secure evidence and has actually produced some prima facie
evidence in support of its case. It should be stressed, however, that "'discovery' of documents, in its
common-law system sense, is not available in international procedures".185 We shall, therefore,
follow these general rules when addressing, for instance, the request of the United States to
Argentina for production of documents and the fact that Argentina did not do so.

We understand that the specific duties were set based on representative international prices. In
these circumstances, when the specific duties are set so as to be equivalent to a 35 per cent ad
valorem rate, it is certain that every time a good is imported at a transaction value below the
representative international price, the specific duty level will be more than 35 per cent ad valorem of
the transaction value. In the case of specific duties set so as to be equivalent to a tariff rate of less
than 35 per cent, if a good is imported at a transaction value sufficiently below the representative
international price used to set the duty, the bound rate of 35 per cent ad valorem will also be
exceeded. For example, if the representative international price of a product is US$100.00 and the
specific duty is set at US$20.00 to reflect an ad valorem equivalent of 20 per cent, if the product is
imported at a price below US$57.00, the effective ad valorem rate will always exceed 35 per cent.
Thus, in many cases, it seems clear that the specific duties at issue will necessarily result in a duty in
excess of the 35 per cent bound rate when the customs value of a product is below the
representative international price for such product

We note that customs duties are normally to be imposed on the transaction value of imported goods
as defined in the Agreement on the Implementation of Article VII of GATT 1994 (“Customs Valuation
Agreement"). The transaction value is defined as "the price actually paid or payable for the goods
when sold for export to the country of importation". Obviously, if the customs value declared by the
importer does not represent the price actually paid, the Argentine authorities may take action to
counteract a false declaration through, for example, revisions of the customs value declared in
specific cases and even criminal prosecutions.

However, neither the Customs Valuation Agreement nor any other provision of the WTO Agreement
allows the breach of tariff bindings made under Article II of GATT on the grounds of a general
suspicion that declared customs values are sometimes understated. We note, therefore, that
mechanisms to counteract alleged underpricing190 practices are not justifications for Article II
violation.

6.45 In respect of the Argentine argument that the US claim should not be considered because it
addresses only a potential violation - in support of which it refers to the Tobacco panel report - we
note that the Argentine measures, the specific duties, are mandatory measures. Argentina admits
that its customs officials are obligated to collect the specific duties on all imports. GATT/WTO case
law is clear in that a mandatory measure can be brought before a panel, even if such an adopted
measure is not yet in effect, and independently of the absence of trade effect of such measure for
the complaining party: "[T]he 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"

.191 We are also of the view that the Tobacco panel report merely confirms this principle.

Moreover, in Bananas III192 , the Appellate Body confirmed that the principles developed in
Superfund193 were still much applicable to WTO disputes and that any measure which changes the
competitive relationship of Members nullifies any such Members' benefits under the WTO
Agreement.

“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".194
We consider that this principle is also appropriate when dealing with the application of the
obligations contained in Article II of GATT which requires a "treatment no less favourable than that"
provided in a Member’s Schedule. In the present dispute we consider that the competitive
relationship of the parties was changed unilaterally by Argentina because its mandatory measure
clearly has the potential to violate its bindings, thus undermining the security and the predictability
of the WTO system. 6.47 We find, therefore, that the United States has established a presumption
that the very nature of the minimum specific duty system maintained by Argentina violates the
provisions of Article II of GATT and that, as shown above, this presumption has not been rebutted by
Argentina.

We consider, therefore, that Argentina has not rebutted the presumption raised by the United
States to the effect that Argentine customs officials have imposed duties, which in many cases are
well above 35 per cent ad valorem, contrary to Argentine tariff bindings and contrary to GATT Article
II. Argentina’s arguments do not affect the admissibility and reliability of the evidence submitted.

6.65 In the light of the foregoing, we find that the United States has provided sufficient evidence
that Argentina has effectively imposed duties on imports of textiles and apparel above 35 per cent
ad valorem, that indeed the total amount of duties collected annually on these items leads to the
conclusion that duties above 35 per cent ad valorem on the average transaction value have been
imposed on the same items, and that in any case, as we found in paragraph 6.47 above, the very
nature of the minimum specific duty system imposed in Argentina on the items at issue will
inevitably lead, in certain instances, to the imposition of duties above 35 per cent ad valorem. In
addition, the fact that Argentina is using minimum specific duties while they bound their tariffs
according to an ad valorem type of duties, is inconsistent with its Schedule and with the
requirements of Article II of GATT. Therefore, we consider that minimum specific duties imposed by
Argentina on textile and apparel imports constitute a treatment of those imports that is less
favourable than that provided for in Argentina’s Schedule and contrary to Article II of GATT.

The Understanding provides:

"1. In order to ensure transparency of the legal rights and obligations deriving from paragraph 1(b)
of Article II, the nature and level of any 'other duties or charges' levied on bound tariff items, as
referred to in that provision, shall be recorded in the Schedules of concessions annexed to GATT
1994 against the tariff item to which they apply.

It is understood that such recording does not change the legal character of 'other duties or charges’.
[...] 5. The recording of 'other duties or charges' in the Schedules is without prejudice to their
consistency with rights and obligations under GATT 1994 other than those affected by paragraph 4.
All Members retain the right to challenge, at any time, the consistency of any 'other duty or charge'
with such obligations.

6. For the purposes of this Understanding, the provisions of Articles XXII and XXIII of GATT 1994 as
elaborated and applied by the Dispute Settlement Understanding shall apply". This provision is
consistent with GATT and WTO jurisprudence dealing with conflicts between non-tariff provisions
included in the Member’s Schedules and general GATT and WTO rules.

6.82 Therefore, we consider that the fact that Argentina’s statistical tax is included in its Schedule is
not a defence to its inconsistency with the provisions of Article VIII of GATT. 6.83 Consequently, for
all the reasons mentioned above, we find that the Argentine statistical tax of three per cent ad
valorem is inconsistent with the provisions of Article VIII of GATT in that it is not "limited in amount
to the approximate cost of services rendered.
TURKEY- RESTRICTIONS ON IMPORTS OF TEXTILE AND CLOTHING PRODUCTS.

Turkey appeals from certain issues of law and legal interpretations in the Panel Report,
Turkey – Restrictions on Imports of Textile and Clothing Products (the "Panel Report").1 The
Panel was established to consider a complaint by India regarding quantitative restrictions
introduced by Turkey on imports of Indian textile and clothing products.

On 6 March 1995, the Turkey-EC Association Council adopted Decision 1/952 , which sets
out the rules for implementing the final phase of the customs union between Turkey and
the European Communities.

Article 12(2) of this Decision states: In conformity with the requirements of Article XXIV of
the GATT Turkey will apply as from the entry into force of this Decision, substantially the
same commercial policy as the Community in the textile sector including the agreements
or arrangements on trade in textile and clothing. In order to apply what it considered to
be "substantially the same commercial policy" as the European Communities on trade in
textiles and clothing, Turkey introduced, as of 1 January 1996, quantitative restrictions on
imports from India on 19 categories of textile and clothing products.

The Panel considered claims by India that the quantitative restrictions introduced by Turkey
were inconsistent with Articles XI and XIII of the GATT 1994, and Article 2.4 of the
Agreement on Textiles and Clothing (the "ATC").

In the Panel Report, circulated on 31 May 1999, the Panel reached the conclusion that the
quantitative restrictions were inconsistent with the provisions of Articles XI and XIII of the
GATT 1994 and consequently with those of Article 2.4 of the ATC, and rejected Turkey's
defence that the introduction of any such otherwise GATT/WTO incompatible import
restrictions is permitted by Article XXIV of the GATT 1994.

4 4. On 26 July 1999, Turkey notified the Dispute Settlement Body (the "DSB") of its
intention to appeal certain issues of law covered in the Panel Report and legal
interpretations developed by the Panel, pursuant to Article 16.4 of the Understanding on
Rules and Procedures Governing the Settlement of Disputes (the "DSU"), and filed a Notice
of Appeal pursuant to Rule 20 of the Working Procedures for Appellate Review (the
"Working Procedures"). On 5 August 1999, Turkey filed its appellant's submission.5 On 20
August 1999, India filed an appellee's submission

.6 On the same day, Hong Kong, China; Japan; and the Philippines filed third participant's
submissions.

IV. Issue Raised in this Appeal

This appeal relates to certain quantitative restrictions imposed by Turkey on 19 categories

of textile and clothing products imported from India. Turkey adopted these quantitative
restrictions upon the formation of a customs union with the European Communities. The
Panel found these quantitative restrictions to be inconsistent with Articles XI and XIII of the
GATT 1994 and Article 2.4 of the ATC. The issue raised by Turkey in this appeal is whether
these quantitative restrictions are nevertheless justified by Article XXIV of the GATT 1994.

We note that, in its findings, the Panel referred to the chapeau of paragraph 5 of Article
XXIV only in a passing and perfunctory way. The chapeau of paragraph 5 is not central to the
Panel's analysis, which focuses instead primarily on paragraph 5(a) and paragraph 8(a).
However, we believe that the chapeau of paragraph 5 of Article XXIV is the key provision for
resolving the issue before us in this appeal. In relevant part, it reads:

“Accordingly, the provisions of this Agreement shall not prevent, as between the territories
of contracting parties, the formation of a customs union …; Provided that: … (emphasis
added)”

To determine the meaning and significance of the chapeau of paragraph 5, we must look at
the text of the chapeau, and its context, which, for our purposes here, we consider to be
paragraph 4 of Article XXIV.

45. First, in examining the text of the chapeau to establish its ordinary meaning, we note
that the chapeau states that the provisions of the GATT 1994 "shall not prevent" the
formation of a customs union. We read this to mean that the provisions of the GATT 1994
shall not make impossible the formation of a customs union.

12 Thus, the chapeau makes it clear that Article XXIV may, under certain conditions, justify
the adoption of a measure which is inconsistent with certain other GATT provisions, and
may be invoked as a possible "defence" to a finding of inconsistency.13

46. Second, in examining the text of the chapeau, we observe also that it states that the
provisions of the GATT 1994 shall not prevent "the formation of a customs union". This
wording indicates that Article XXIV can justify the adoption of a measure which is
inconsistent with certain other GATT provisions only if the measure is introduced upon the
formation of a customs union, and only to the extent that the formation of the customs
union would be prevented if the introduction of the measure were not allowed.

47. It follows necessarily that the text of the chapeau of paragraph 5 of Article XXIV cannot
be interpreted without reference to the definition of a "customs union". This definition is
found in paragraph 8(a) of Article XXIV, which states, in relevant part.

A customs union shall be understood to mean the substitution of a single customs territory
for two or more customs territories, so that (i) duties and other restrictive regulations of
commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and
XX) are eliminated with respect to substantially all the trade between the constituent
territories of the union or at least with respect to substantially all the trade in products
originating in such territories, and, (ii) … substantially the same duties and other regulations
of commerce are applied by each of the members of the union to the trade of territories not
included in the union. (emphasis added)

48. Sub-paragraph 8(a)(i) of Article XXIV establishes the standard for the internal trade
between constituent members in order to satisfy the definition of a "customs union". It
requires the constituent members of a customs union to eliminate "duties and other
restrictive regulations of commerce" with respect to "substantially all the trade" between
them. Neither the GATT CONTRACTING PARTIES nor the WTO Members have ever reached
an agreement on the interpretation of the term "substantially" in this provision.14 It is clear,
though, that "substantially all the trade" is not the same as all the trade, and also that
"substantially all the trade" is something considerably more than merely some of the trade.

We note also that the terms of sub-paragraph 8(a)(i) provide that members of a customs
union may maintain, where necessary, in their internal trade, certain restrictive regulations
of commerce that are otherwise permitted under Articles XI through XV and under Article
XX of the GATT 1994. Thus, we agree with the Panel that the terms of sub-paragraph 8(a)(i)
offer "some flexibility" to the constituent members of a customs union when liberalizing
their internal trade in accordance with this sub-paragraph.15 Yet we caution that the degree
of "flexibility" that sub-paragraph 8(a)(i) allows is limited by the requirement that "duties
and other restrictive regulations of commerce" be "eliminated with respect to substantially
all" internal trade.

Sub-paragraph 8(a)(ii) establishes the standard for the trade of constituent members with
third countries in order to satisfy the definition of a "customs union". It requires the
constituent members of a customs union to apply "substantially the same" duties and other
regulations of commerce to external trade with third countries. The constituent members of
a customs union are thus required to apply a common external trade regime, relating to
both duties and other regulations of commerce. However, sub-paragraph 8(a)(ii) does not
require each constituent member of a customs union to apply the same duties and other
regulations of commerce as other constituent members with respect to trade with third
countries; instead, it requires that substantially the same duties and other regulations of
commerce shall be applied. We agree with the Panel that: [t]he ordinary meaning of the
term "substantially" in the context of subparagraph 8(a) appears to provide for both
qualitative and quantitative components. The expression "substantially the same duties and
other regulations of commerce are applied by each of the Members of the [customs] union"
would appear to encompass both quantitative and qualitative elements, the quantitative
aspect more emphasized in relation to duties.16 50. We also believe that the Panel was
correct in its statement that the terms of subparagraph 8(a)(ii), and, in particular, the phrase
"substantially the same" offer a certain degree of "flexibility" to the constituent members of
a customs union in "the creation of a common commercial policy."

17 Here too we would caution that this "flexibility" is limited. It must not be forgotten that
the word "substantially" qualifies the words "the same". Therefore, in our view, something
closely approximating "sameness" is required by Article XXIV:8(a)(ii). We do not agree with
the Panel that: … as a general rule, a situation where constituent members have
"comparable" trade regulations having similar effects with respect to the trade with third
countries, would generally meet the qualitative dimension of the requirements of sub-
paragraph 8(a)(ii).18 Sub-paragraph 8(a)(ii) requires the constituent members of a customs
union to adopt "substantially the same" trade regulations.

In our view, "comparable trade regulations having similar effects" do not meet this
standard. A higher degree of "sameness" is required by the terms of sub-paragraph 8(a)(ii).

51. Third, in examining the text of the chapeau of Article XXIV:5, we note that the chapeau
states that the provisions of the GATT 1994 shall not prevent the formation of a customs
union "Provided that". The phrase "provided that" is an essential element of the text of the
chapeau. In this respect, for purposes of a "customs union", the relevant proviso is set out
immediately following the chapeau, in Article XXIV:5(a). It reads in relevant part: with
respect to a customs union …, the duties and other regulations of commerce imposed at the
institution of any such union … in respect of trade with contracting parties not parties to
such union … shall not on the whole be higher or more restrictive than the general incidence
of the duties and regulations of commerce applicable in the constituent territories prior to
the formation of such union …;

Given this proviso, Article XXIV can, in our view, only be invoked as a defence to a finding
that a measure is inconsistent with certain GATT provisions to the extent that the measure
is introduced upon the formation of a customs union which meets the requirement in sub-
paragraph 5(a) of Article XXIV relating to the "duties and other regulations of commerce"
applied by the constituent members of the customs union to trade with third countries

With respect to "duties", Article XXIV:5(a) requires that the duties applied by the constituent
members of the customs union after the formation of the customs union "shall not on the
whole be higher … than the general incidence" of the duties that were applied by each of
the constituent members before the formation of the customs union. Paragraph 2 of the
Understanding on Article XXIV requires that the evaluation under Article XXIV:5(a) of the
general incidence of the duties applied before and after the formation of a customs union
"shall … be based upon an overall assessment of weighted average tariff rates and of
customs duties collected."19 Before the agreement on this Understanding, there were
different views among the GATT Contracting Parties as to whether one should consider,
when applying the test of Article XXIV:5(a), the bound rates of duty or the applied rates of
duty.

This issue has been resolved by paragraph 2 of the Understanding on Article XXIV, which
clearly states that the applied rate of duty must be used. 54. With respect to "other
regulations of commerce", Article XXIV:5(a) requires that those applied by the constituent
members after the formation of the customs union "shall not on the whole be … more
restrictive than the general incidence" of the regulations of commerce that were applied by
each of the constituent members before the formation of the customs union. Paragraph 2 of
the Understanding on Article XXIV explicitly recognizes that the quantification and
aggregation of regulations of commerce other than duties may be difficult, and, therefore,
states that "for the purpose of the overall assessment of the incidence of other regulations
of commerce for which quantification and aggregation are difficult, the examination of
individual measures, regulations, products covered and trade flows affected may be
required."

We agree with the Panel that the terms of Article XXIV:5(a), as elaborated and clarified by
paragraph 2 of the Understanding on Article XXIV, provide:

… that the effects of the resulting trade measures and policies of the new regional
agreement shall not be more trade restrictive, overall, than were the constituent countries'
previous trade policies.

21 and we also agree that this is: an "economic" test for assessing whether a specific
customs union is compatible with Article XXIV.22 56. The text of the chapeau of paragraph 5
must also be interpreted in its context. In our view, paragraph 4 of Article XXIV constitutes
an important element of the context of the chapeau of paragraph 5. The chapeau of
paragraph 5 of Article XXIV begins with the word "accordingly", which can only be read to
refer to paragraph 4 of Article XXIV, which immediately precedes the chapeau.

Paragraph 4 states: The contracting parties recognize the desirability of increasing freedom
of trade by the development, through voluntary agreements, of closer integration between
the economies of the countries parties to such agreements. They also recognize that the
purpose of a customs union or of a free-trade area should be to facilitate trade between the
constituent territories and not to raise barriers to the trade of other contracting parties with
such territories.

57. According to paragraph 4, the purpose of a customs union is "to facilitate trade"
between the constituent members and "not to raise barriers to the trade" with third
countries. This objective demands that a balance be struck by the constituent members of a
customs union. A customs union should facilitate trade within the customs union, but it
should not do so in a way that raises barriers to trade with third countries. We note that the
Understanding on Article XXIV explicitly reaffirms this purpose of a customs union, and
states that in the formation or enlargement of a customs union, the constituent members
should "to the greatest possible extent avoid creating adverse affects on the trade of other
Members"

.23 Paragraph 4 contains purposive, and not operative, language. It does not set forth a
separate obligation itself but, rather, sets forth the overriding and pervasive purpose for
Article XXIV which is manifested in operative language in the specific obligations that are
found elsewhere in Article XXIV. Thus, the purpose set forth in paragraph 4 informs the
other relevant paragraphs of Article XXIV, including the chapeau of paragraph 5. For this
reason, the chapeau of paragraph 5, and the conditions set forth therein for establishing the
availability of a defence under Article XXIV, must be interpreted in the light of the purpose
of customs unions set forth in paragraph 4. The chapeau cannot be interpreted correctly
without constant reference to this purpose .

Accordingly, on the basis of this analysis of the text and the context of the chapeau of
paragraph 5 of Article XXIV, we are of the view that Article XXIV may justify a measure
which is inconsistent with certain other GATT provisions. However, in a case involving the
formation of a customs union, this "defence" is available only when two conditions are
fulfilled. First, the party claiming the benefit of this defence must demonstrate that the
measure at issue is introduced upon the formation of a customs union that fully meets the
requirements of sub-paragraphs 8(a) and 5(a) of Article XXIV. And, second, that party
must demonstrate that the formation of that customs union would be prevented if it were
not allowed to introduce the measure at issue. Again, both these conditions must be met
to have the benefit of the defence under Article XXIV.

we conclude that Turkey was not, in fact, required to apply the quantitative restrictions at
issue in this appeal in order to form a customs union with the European Communities.
Therefore, Turkey has not fulfilled the second of the two necessary conditions that must
be fulfilled to be entitled to the benefit of the defence under Article XXIV. Turkey has not
demonstrated that the formation of a customs union between Turkey and the European
Communities would be prevented if it were not allowed to adopt these quantitative
restrictions. Thus, the defence afforded by Article XXIV under certain conditions is not
available to Turkey in this case, and Article XXIV does not justify the adoption by Turkey of
these quantitative restrictions.

UNITED STATES- RESTRICTIONS ON IMPORTS OF COTTON AND MAN-MADE FIBRE

UNDERWEAR.

This is an appeal by Costa Rica from certain issues of law and legal interpretations set out in
the Panel Report, United States- Restrictions on Imports of Cotton and Man-made Fibre
Underwear1 (the "Panel Report"). That Panel (the "Panel") had been established to consider
a complaint by Costa Rica relating to a transitional safeguard measure imposed by the
United States on imports of cotton and man-made fibre underwear from Costa Rica under
Article 6 of the Agreement on Textiles and Clothing ("ATC").

1. Whether or not backdating of the effectivity of a transitional safeguard measure is

permitted by Article 6.10 of the ATC;

2. Whether or not Article XIII:3(b), General Agreement, is applicable to a transitional

safeguard measure taken under Article 6, ATC; and
3. Whether or not ArticleX:2, General Agreement, is applicable to a transitional safeguard
measure taken under Article 6, ATC.

ADDRESSING ISSUES

IV. The Issue of Backdating the Effectivity of a Transitional Safeguard Measure taken under Article
6.10 of the ATC

The Agreement on Textiles and Clothing, one of the Multilateral Trade Agreements in Annex 1A of
the WTO Agreement, sets out provisions to be applied by WTO Members during a 10-year transition
period leading to the integration of the textiles and clothing sector into the regime of the General
Agreement. The Members have recognized that, during this transition period, it may become
necessary "to apply a specific transitional safeguard mechanism" to textile and clothing products not
yet integrated WT/DS24/AB/R Page 12 into the General Agreement. A transitional safeguard
mechanism is in essence a measure establishing, for a certain period of time, a quantitative restraint
on the importation of specified categories of goods from an identified Member or Members. Many
legal and operating aspects of this mechanism are defined and regulated in varying degrees of detail
by Article 6 of the ATC.

In its Report, the Panel formulated the particular issue we are here addressing in the following
manner: Costa Rica argues that the United States retroactively applied the restriction in violation of
Article 6.10 of the ATC. The restriction was introduced on 23 June 1995 for a period of 12 months
starting on 27 March 1995, which was the date of the request for consultations under Article 6.7 of
the ATC. Although Article 6.10 of the ATC allows the importing country to "apply the restraint, ...
within 30 days following the 60-day period for consultations", it is silent about the initial date from
which the restraint period should be calculated. In contrast, Article 3.5(i) of the Multifibre
Arrangement (MFA) stated that the restraint could be instituted "for the twelve-month period
beginning on the day when the request was received by the participating exporting country or
countries". Thus, the question before the Panel is whether the silence of the ATC in this regard
should be interpreted as prohibition of a practice which was explicitly recognized under the MFA,
and if so, what should be the appropriate date from which the restraint period isto be calculated
under the ATC.18 (Emphases added).

The first thing which must be noted about Article 6.10 of the ATC is that its terms make no express
reference to backdating the effectivity of a safeguard restraint measure to some date prior to the
promulgation or imposition of such measure. To this extent, we agree with the Panel that Article
6.10 ATC is silent on the question of backdating a safeguard restraint measure. We do not, however,
believe that Article 6.10 does notsubstantively addressthat issue. To the contrary, we believe it does
and that the answer to this question is to be found within Article 6.10 itself - its text and context -
considered in the light of the objective and purpose of Article 6 and the ATC. Under the express
terms of Article 6.10, the importing Member which "propose[s] to take safeguard action" may, "after
the expiry of the period of 60 days" from the date of receipt of the request for consultations without
agreement having been reached, "apply the restraint (measure)" "within 30 days following the 60-
day period for consultations ...". As we understand it, "apply" when used as here in respect of a
governmental measure - whether a statute or an administrative regulation - means, in ordinary
acceptation, putting such measure into operation. To apply a measure is to make it effective with
respect to things or events or acts falling within its scope.

Put in a slightly different way, a government functionary who evaluates and characterizes things,
events or acts in terms of the requirements set out in a restraint measure, is "applying" or
"implementing" or "enforcing" that measure. It is essential to note that, under the express terms of
Article 6.10, ATC, the restraint measure may be "applied" only "after the expiry of the period of 60
days" for consultations, without success, and only within the "window" of 30 days immediately
following the 60-day period.

23 Accordingly, we believe that, in the absence of an express authorization in Article 6.10, ATC, to
backdate the effectivity of a safeguard restraint measure, a presumption arises from the very text of
Article 6.10 that such a measure may be applied only prospectively. This presumption appears to us
entirely appropriate in respect of measures which are limitative or deprivational in character ortenor
and impact upon Member countries and their rights or privileges and upon private persons and their
acts.

Article 6.1 directs that transitional safeguard measures be applied "as sparingly as possible" on the
one hand and, on the other, applied "consistently with the provisions of [Article 6] and the effective
implementation of the integration process under [the ATC]". It appears to the Appellate Body that to
inject into Article 6.10 an authorization for backdating the effectivity of a restraint measure will
encourage return to the practice of backdating restraint measures which appears to have been
widespread under the regime of the MFA, a regime which has now ended, as discussed below, with
the advent of the ATC.

Such an introjection would moreover loosen up the carefully negotiated language of Article 6.10,
which reflects an equally carefully drawn balance ofrights and obligations of Members, by allowing
the importing Member an enhanced ability to restrict the entry into its territory of goods in the
exportation of which no unfair trade practice such as dumping or fraud or deception as to origin, is
alleged or proven.

For retroactive application of a restraint measure effectively enablesthe importing Member to

exclude more goods by enforcing the quota measure earlier rather than later. It further appears to
us that to read Article 6.10 as somehow authorizing the backdating, as a matter of course, of the
effectivity or operation of a restraint measure, will tend to diminish the utility and significance of
prior consultations with the identified exporting Member or Members. Article 6.7 of the ATC
provides for those consultations in very substantial detail.

Thus, Article 6.7 requires that the request for consultations be accompanied by specific, relevant and
up-to-date information on the factors which led the importing Member to make a determination of
"serious damage" (listed in Article 6.3) and the factors which led to the unilateral attribution of such
damage to an identified exporting Member or Members (referred to in Article 6.4). One clear
objective of requiring a 60-day period for consultations is to give such Member or Members a real
and fair, not merely pro forma, opportunity to rebut or moderate those factors. The requirement of
consultations is thus grounded on, among other things, due process considerations; that
requirement should be protected from erosion or attenuation by a treaty interpreter. It is, again,
noteworthy that Article 6.7 refers repeatedly to the Member "proposing to take safeguard action",
or who "proposes to invoke the safeguard action" and to the level at which imports of the goods
specified "are proposed to be restrained". The common, day-to-day, implication which arises from
this language is clear to us: the restraint is to be applied in the future, after the consultations, should
these prove fruitless and the proposed measure not withdrawn. The principle of effectiveness in
treaty interpretation24 sustains this implication.

We believe the disappearance in the ATC of the earlier MFA express provision for backdating the
operative effect of a restraint measure, strongly reinforces the presumption that such retroactive
application is no longer permissible.

Whether or not, in a specific given case, a "flood of imports" would actually follow publication of a
call for consultations relating to a proposed restraint measure will, in our view, depend upon any
number of variable factors. Such factors would include, for instance, the particular kind of textile or
clothing item involved, the "high fashion", high-value or alternatively the fungible, low-value nature
of the goods subjected to a quota, the seasonality of demand for such items, the length of
production time, the presence or absence of abnormally high inventories of such goods in the
exporting country, and so forth. Another kind of factor which may bear upon the possibility of a
"flood of imports", is the level of the minimum or floor quota guaranteed to the exporting
Member[s] by Articles 6.7 and 6.8, ATC, and public awareness of such guaranteed quota level within
the importing and exporting countries.

It appears to us that the above is basically all that the Panel sought to convey in its brief statement
on the matter: Finally, we note the US argument that if the safeguard measure could only be applied
starting at some time later than the date of the request for consultations, there would be a flood of
imports in anticipation of the eventual restriction, which might defeat the whole purpose of the
transitional safeguard measure. We find this argument to be persuasive from a practical point of
view. In order to avoid such a consequence, in our view, all that is needed on the part of the
importing country is to publish the content of the request for consultations immediately.28
(Emphases added).

The conclusion we have arrived at, in respect of the issue of permissibility of backdating, is that the
giving of retroactive effect to a safeguard restraint measure is no longer permissible under the
regime of Article 6 of the ATC and is in fact prohibited under Article 6.10 of that Agreement. The
presumption of prospective effect only, has not been overturned; it is a proposition not simply
presumptively correct but one requiring our assent. We believe, accordingly, and so hold, that the
Panel erred in ruling that Article 6.10 of the ATC had nothing to say on the issue of backdating and
that such backdating to 21 April 1995, the date of publication of the call for consultations, was
permissible under Article X:2 of the General Agreement. The importing Member is, however, not
defenceless against a speculative "flood of imports" where it is confronted with the circumstances
contemplated in Article 6.11. Its appropriate recourse is, in other words, to action under Article 6.11

VI. The Issue of Applicability of Article X:2 of the General Agreement, to a Transitional Safeguard
Measure taken under Article 6.10, ATC of the ATC, complying in the process with the requirements
of Article 6.10 and Article 6.11

Article X
Publication and Administration of Trade Regulations

No measure of general application taken by any contracting party effecting an advance in a rate of
duty or other charge on imports under an established and uniform practice, or imposing a new or
more burdensome requirement, restriction or prohibition on imports, or on the transfer of
payments therefor, shall be enforced before such measure has been officially published. (Emphases
added).

Article X:2, General Agreement, may be seen to embody a principle of fundamental importance -
that of promoting full disclosure of governmental acts affecting Members and private persons and
enterprises, whether of domestic or foreign nationality. The relevant policy principle is widely known
asthe principle of transparency and has obviously due process dimensions.

The essential implication is that Members and other persons affected, or likely to be affected, by
governmental measures imposing restraints, requirements and other burdens, should have a
reasonable opportunity to acquire authentic information about such measures and accordingly to
protect and adjust their activities or alternatively to seek modification of such measures. We believe
that the Panel here gave to Article X:2, General Agreement, an interpretation that is appropriately
protective of the basic principle there projected.

At the same time, we are bound to observe that Article X:2 of the General Agreement, does not
speak to, and hence does not resolve, the issue of permissibility of giving retroactive effect to a
safeguard restraint measure. The presumption of prospective effect only does, of course, relate to
the basic principles of transparency and due process, being grounded on, among other things, these
principles. But prior publication is required for all measures falling within the scope of Article X:2,
not just ATC safeguard restraint measures sought to be applied retrospectively.

Prior publication may be an autonomous condition for giving effect at all to a restraint measure.
Where no authority exists to give retroactive effect to a restrictive governmental measure, that
deficiency is not cured by publishing the measure sometime before its actual application. The
necessary authorization is not supplied by Article X:2 of the General Agreement.

Our finding, therefore, that the safeguard restraint measure here involved is properly regarded as "a
measure of general application" under Article X:2 does not conflict with, and does not affect our
conclusion under the first issue above that backdating the effectivity of a restraint measure is
prohibited by Article 6.10 of the ATC.

RELEVANT GATT ARTICLES ON BORDER MEASURES

ARTICLES I- MOST FAVOURED NATION PRINCIPLE

II:1-

(a) Each contracting party shall accord to the commerce of the other contracting parties treatment
no less favourable than that provided for in the appropriate Part of the appropriate Schedule
annexed to this Agreement.
(b) The products described in Part I of the Schedule relating to any contracting party, which are the
products of territories of other contracting parties, shall, on their importation into the territory to
which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that
Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein.
Such products shall also be exempt from all other duties or charges of any kind imposed on or in
connection with the importation in excess of those imposed on the date of this Agreement or those
directly and mandatorily required to be imposed thereafter by legislation in force in the importing
territory on that date.

(c) The products described in Part II of the Schedule relating to any contracting party which are the
products of territories entitled under Article I to receive preferential treatment upon importation
into the to which the Schedule relates shall, on their importation into such territory, and subject to
the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs
duties in excess of those set forth and provided for in Part II of that Schedule. Such products shall
also be exempt from all other duties or charges of any kind imposed on or in connection with
importation in excess of those imposed on the date of this Agreement or those directly or
mandatorily required to be imposed thereafter by legislation in force in the importing territory on
that date. Nothing in this Article shall prevent any contracting party from maintaining its
requirements existing on the date of this Agreement as to the eligibility of goods for entry at
preferential rates of duty.

II:7- The Schedules annexed to this Agreement are hereby made an integral part of Part I of this
Agreement

ARTICLE XI

General Elimination of Quantitative Restrictions

1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective
through quotas, import or export licences 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.

2. The provisions of paragraph 1 of this Article shall not extend to the following:

(a) Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of
foodstuffs or other products essential to the exporting contracting party;

(b) Import and export prohibitions or restrictions necessary to the application of standards or
regulations for the classification, grading or marketing of commodities in international trade;

(c) Import restrictions on any agricultural or fisheries product, imported in any form,* necessary to
the enforcement of governmental measures which operate:

(i) to restrict the quantities of the like domestic product permitted to be marketed or produced, or, if
there is no substantial domestic production of the like product, of a domestic product for which the
imported product can be directly substituted; or
(ii) to remove a temporary surplus of the like domestic product, or, if there is no substantial
domestic production of the like product, of a domestic product for which the imported product can
be directly substituted, by making the surplus available to certain groups of domestic consumers
free of charge or at prices below the current market level; or

(iii) to restrict the quantities permitted to be produced of any animal product the production of
which is directly dependent, wholly or mainly, on the imported commodity, if the domestic
production of that commodity is relatively negligible.

Any contracting party applying restrictions on the importation of any product pursuant to sub-
paragraph (c) of this paragraph shall give public notice of the total quantity or value of the product
permitted to be imported during a specified future period and of any change in such quantity or
value. Moreover, any restrictions applied under (i) above shall not be such as will reduce the total of
imports relative to the total of domestic production, as compared with the proportion which might
reasonably be expected to rule between the two in the absence of restrictions. In determining this
proportion, the contracting party shall pay due regard to the proportion prevailing during a previous
representative period and to any special factors* which may have affected or may be affecting the
trade in the product concerned.

Article XXVIII bis

Tariff Negotiations

1. The contracting parties recognize that customs duties often constitute serious obstacles to trade;
thus negotiations on a reciprocal and mutually advantageous basis, directed to the substantial
reduction of the general level of tariffs and other charges on imports and exports and in particular to
the reduction of such high tariffs as discourage the importation even of minimum quantities, and
conducted with due regard to the objectives of this Agreement and the varying needs of individual
contracting parties, are of great importance to the expansion of international trade. The
CONTRACTING PARTIES may therefore sponsor such negotiations from time to time.

2. (a) Negotiations under this Article may be carried out on a selective product-by-product basis or
by the application of such multilateral procedures as may be accepted by the contracting parties
concerned. Such negotiations may be directed towards the reduction of duties, the binding of duties
at then existing levels or undertakings that individual duties or the average duties on specified
categories of products shall not exceed specified levels. The binding against increase of low duties or
of duty-free treatment shall, in principle, be recognized as a concession equivalent in value to the
reduction of high duties.

(b) The contracting parties recognize that in general the success of multilateral negotiations would
depend on the participation of all contracting parties which conduct a substantial proportion of their
external trade with one another.

3. Negotiations shall be conducted on a basis which affords adequate opportunity to take into
account:

(a) the needs of individual contracting parties and individual industries;

(b) the needs of less-developed countries for a more flexible use of tariff protection to assist their
economic development and the special needs of these countries to maintain tariffs for revenue
purposes; and

(c) all other relevant circumstances, including the fiscal,* developmental, strategic and other needs
of the contracting parties concerned.

Article VII

Valuation for Customs Purposes

1. The contracting parties recognize the validity of the general principles of valuation set forth in the
following paragraphs of this Article, and they undertake to give effect to such principles, in respect of
all products subject to duties or other charges* or restrictions on importation and exportation based
upon or regulated in any manner by value. Moreover, they shall, upon a request by another
contracting party review the operation of any of their laws or regulations relating to value for
customs purposes in the light of these principles. The CONTRACTING PARTIES may request from
contracting parties reports on steps taken by them in pursuance of the provisions of this Article.

2. (a) The value for customs purposes of imported merchandise should be based on the actual value
of the imported merchandise on which duty is assessed, or of like merchandise, and should not be
based on the value of merchandise of national origin or on arbitrary or fictitious values.*

(b) "Actual value" should be the price at which, at a time and place determined by the legislation of
the country of importation, such or like merchandise is sold or offered for sale in the ordinary course
of trade under fully competitive conditions. To the extent to which the price of such or like
merchandise is governed by the quantity in a particular transaction, the price to be considered
should uniformly be related to either (i) comparable quantities, or (ii) quantities not less favourable
to importers than those in which the greater volume of the merchandise is sold in the trade between
the countries of exportation and importation.*

(c) When the actual value is not ascertainable in accordance with sub-paragraph (b) of this
paragraph, the value for customs purposes should be based on the nearest ascertainable equivalent
of such value.*

3. The value for customs purposes of any imported product should not include the amount of any
internal tax, applicable within the country of origin or export, from which the imported product has
been exempted or has been or will be relieved by means of refund.

4. (a) Except as otherwise provided for in this paragraph, where it is necessary for the purposes of
paragraph 2 of this Article for a contracting party to convert into its own currency a price expressed
in the currency of another country, the conversion rate of exchange to be used shall be based, for
each currency involved, on the par value as established pursuant to the Articles of Agreement of the
International Monetary Fund or on the rate of exchange recognized by the Fund, or on the par value
established in accordance with a special exchange agreement entered into pursuant to Article XV of
this Agreement.
(b) Where no such established par value and no such recognized rate of exchange exist, the
conversion rate shall reflect effectively the current value of such currency in commercial
transactions.

(c) The CONTRACTING PARTIES, in agreement with the International Monetary Fund, shall formulate
rules governing the conversion by contracting parties of any foreign currency in respect of which
multiple rates of exchange are maintained consistently with the Articles of Agreement of the
International Monetary Fund. Any contracting party may apply such rules in respect of such foreign
currencies for the purposes of paragraph 2 of this Article as an alternative to the use of par values.
Until such rules are adopted by the CONTRACTING PARTIES, any contracting party may employ, in
respect of any such foreign currency, rules of conversion for the purposes of paragraph 2 of this
Article which are designed to reflect effectively the value of such foreign currency in commercial
transactions.

(d) Nothing in this paragraph shall be construed to require any contracting party to alter the method
of converting currencies for customs purposes which is applicable in its territory on the date of this
Agreement, if such alteration would have the effect of increasing generally the amounts of duty
payable.

5. The bases and methods for determining the value of products subject to duties or other charges
or restrictions based upon or regulated in any manner by value should be stable and should be given
sufficient publicity to enable traders to estimate, with a reasonable degree of certainty, the value for
customs purposes.

Article XVIII*

Governmental Assistance to Economic Development

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 programmes and policies 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 programmes 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 subparagraph (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.

Article X

Publication and Administration of Trade Regulations

1. Laws, regulations, judicial decisions and administrative rulings of general application, made
effective by any contracting party, pertaining to the classification or the valuation of products for
customs purposes, or to rates of duty, taxes or other charges, or to requirements, restrictions or
prohibitions on imports or exports or on the transfer of payments therefor, or affecting their sale,
distribution, transportation, insurance, warehousing inspection, exhibition, processing, mixing or
other use, shall be published promptly in such a manner as to enable governments and traders to
become acquainted with them. Agreements affecting international trade policy which are in force
between the government or a governmental agency of any contracting party and the government or
governmental agency of any other contracting party shall also be published. The provisions of this
paragraph shall not require any contracting party to disclose confidential information which would
impede law enforcement or otherwise be contrary to the public interest or would prejudice the
legitimate commercial interests of particular enterprises, public or private.

2. No measure of general application taken by any contracting party effecting an advance in a rate of
duty or other charge on imports under an established and uniform practice, or imposing a new or
more burdensome requirement, restriction or prohibition on imports, or on the transfer of
payments therefor, shall be enforced before such measure has been officially published.

3. (a) Each contracting party shall administer in a uniform, impartial and reasonable manner all its
laws, regulations, decisions and rulings of the kind described in paragraph 1 of this Article.

(b) Each contracting party shall maintain, or institute as soon as practicable, judicial, arbitral or
administrative tribunals or procedures for the purpose, inter alia, of the prompt review and
correction of administrative action relating to customs matters. Such tribunals or procedures shall be
independent of the agencies entrusted with administrative enforcement and their decisions shall be
implemented by, and shall govern the practice of, such agencies unless an appeal is lodged with a
court or tribunal of superior jurisdiction within the time prescribed for appeals to be lodged by
importers; Provided that the central administration of such agency may take steps to obtain a review
of the matter in another proceeding if there is good cause to believe that the decision is inconsistent
with established principles of law or the actual facts.

(c) The provisions of sub-paragraph (b) of this paragraph shall not require the elimination or
substitution of procedures in force in the territory of a contracting party on the date of this
Agreement which in fact provide for an objective and impartial review of administrative action even
though such procedures are not fully or formally independent of the agencies entrusted with
administrative enforcement. Any contracting party employing such procedures shall, upon request,
furnish the CONTRACTING PARTIES with full information thereon in order that they may determine
whether such procedures conform to the requirements of this sub-paragraph.

Harmonized Systems (HS) Convention

The Harmonized Commodity Description and Coding System, generally referred to as the
Harmonized System or simply the "HS", is a multipurpose international product nomenclature
developed by the World Customs Organization (WCO). The HS is governed by "The International
Convention on the Harmonized Commodity Description and Coding System", which was adopted in
June 1983 and entered into force January 1988.

The objective of the HS Convention is to facilitate trade and information exchange by harmonizing
the description, classification and coding of goods in international trade. The HS is used for Customs
tariffs and the collection of external trade statistics. It is also extensively used by governments,
international organizations and the private sector for many other purposes, such as internal taxes,
trade policies, monitoring of controlled goods, rules of origin, freight tariffs, transport statistics, price
monitoring, quota controls, compilation of national accounts, and economic research and analysis.

The HS is a nomenclature for the coding, description and classification of goods/products in

international trade. It consists of over 5,000 commodity groups, which are structured into 21
Sections (Sections I to XXI), 97 Chapters (1 - 97), four-digit headings and six-digit sub-headings.
Chapters 98 and 99 are for national use only. The HS harmonizes the codification of commodities up
a six-digit scheme. Most Customs administrations, however, use a ten or more digit commodity
coding system, with the first six digits being the HS code. To achieve uniform classification of goods
in the HS, it also contains Section, Chapter and Subheading Notes and General Interpretative Rules.
The official interpretation of the HS is given in the Explanatory Notes (5 volumes in English and
French) published by the WCO. These Explanatory Notes are also available online and on CD-ROM,
as part of a commodity database giving the HS classification of more than 200,000 commodities
actually traded internationally (Source: WCO website).

The HS is binding to Contracting Parties. The Convention and any disputes are administered by the
WCO HS Committee. The HS Committee also prepares amendments updating the HS every 5 – 6
years. The latest HS edition now in force is the 2017 edition , following those of 2002, 2007
and 2012. As of February 2019, the HS has 157 Contracting Parties (156 countries and the EU). As of
February 2019, over 211 countries, territories and economic or Customs unions are applying HS in
practice and 130 countries have already implemented the 2017 edition.

AGREEMENT ON IMPLEMENTATION OF ARTICLE VII OF THE GENERAL AGREEMENT ON TARIFFS AND

TRADE 1994 GENERAL INTRODUCTORY COMMENTARY 1

. The primary basis for customs value under this Agreement is "transaction value" as defined in
Article 1. Article 1 is to be read together with Article 8 which provides, inter alia, for adjustments to
the price actually paid or payable in cases where certain specific elements which are considered to
form a part of the value for customs purposes are incurred by the buyer but are not included in the
price actually paid or payable for the imported goods. Article 8 also provides for the inclusion in the
transaction value of certain considerations which may pass from the buyer to the seller in the form
of specified goods or services rather than in the form of money

. Articles 2 through 7 provide methods of determining the customs value whenever it cannot be
determined under the provisions of Article 1. 2. Where the customs value cannot be determined
under the provisions of Article 1 there should normally be a process of consultation between the
customs administration and importer with a view to arriving at a basis of value under the provisions
of Article 2 or 3. It may occur, for example, that the importer has information about the customs
value of identical or similar imported goods which is not immediately available to the customs
administration in the port of importation. On the other hand, the customs administration may have
information about the customs value of identical or similar imported goods which is not readily
available to the importer. A process of consultation between the two parties will enable information
to be exchanged, subject to the requirements of commercial confidentiality, with a view to
determining a proper basis of value for customs purposes.

3. Articles 5 and 6 provide two bases for determining the customs value where it cannot be
determined on the basis of the transaction value of the imported goods or of identical or similar
imported goods. Under paragraph 1 of Article 5 the customs value is determined on the basis of the
price at which the goods are sold in the condition as imported to an unrelated buyer in the country
of importation. The importer also has the right to have goods which are further processed after
importation valued under the provisions of Article 5 if the importer so requests. Under Article 6 the
customs value is determined on the basis of the computed value. Both these methods present
certain difficulties and because of this the importer is given the right, under the provisions of Article
4, to choose the order of application of the two methods

. 4. Article 7 sets out how to determine the customs value in cases where it cannot be determined
under the provisions of any of the preceding Articles. Members, Having regard to the Multilateral
Trade Negotiations; Desiring to further the objectives of GATT 1994 and to secure additional benefits
for the international trade of developing countries; Recognizing the importance of the provisions of
Article VII of GATT 1994 and desiring to elaborate rules for their application in order to provide
greater uniformity and certainty in their implementation;

Recognizing the need for a fair, uniform and neutral system for the valuation of goods for customs
purposes that precludes the use of arbitrary or fictitious customs values; Recognizing that the basis
for valuation of goods for customs purposes should, to the greatest extent possible, be the
transaction value of the goods being valued;
 Recognizing that customs value should be based on simple and equitable criteria consistent with
commercial practices and that valuation procedures should be of general application without
distinction between sources of supply;

Recognizing that valuation procedures should not be used to combat dumping; Hereby agree as
follows.

THAILAND- CUSTOMS AND FISCAL MEASURES ON CIGARETTES FROM THE PHILLIPINES.

Thailand appeals certain issues of law and legal interpretations developed in the Panel Report,
Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines (the "Panel Report").2

The Panel was established on 17 November 2008 to consider a complaint by the Philippines with
respect to certain customs and fiscal measures imposed by Thailand on cigarettes imported from the
Philippines.

III. Issues Raised in This Appeal

82. The following issues are raised in this appeal:

- whether the Panel erred in rejecting Thailand's defence under Article XX(d) of the GATT 1994 to
the Panel's finding of inconsistency under Article III:4; and

DECISION.

Thailand's Defence Under Article XX(d) of the GATT 1994

162. Thailand also appeals the Panel's finding that:

… Thailand has not discharged its burden of showing that the administrative requirements and the
imposition of penalties for failure to complete VAT filing requirements are necessary to secure
compliance with the Thai VAT laws within the meaning of Article XX(d) of the GATT 1994.257

163. The Panel made this finding in response to Thailand's efforts to invoke Article XX(d) of the
GATT 1994 to defend the additional administrative requirements found to be inconsistent with
Article III:4. Article XX(d) enables Members to justify measures found to be inconsistent with the
provisions of the GATT 1994 if they can establish that such measures are "necessary to secure
compliance with laws or regulations which are not inconsistent with the provisions of this
Agreement", and provided that the application of such measures is also consistent with the
requirements of the chapeau of Article XX. Thus, in order to make out an Article XX(d) defence, a
respondent must, inter alia, identify "laws or regulations which are not inconsistent" with the
GATT 1994, and establish that the measure found to be GATT-inconsistent is "necessary" to secure
compliance with such "laws or regulations".

Thailand argues that the Panel's reference to Section VII.F.6(b)(ii) shows that the Panel identified
as the "laws or regulations" with which the inconsistent measure purportedly secures compliance
the very same measure that the Panel had found to be inconsistent with Article III:4 of the GATT
1994. Thus, the Panel's cross-reference signifies, according to Thailand, that the Panel rejected
Thailand's Article XX(d) defence to the violation of Article III:4 on the grounds that it had already
found that the additional administrative requirements violate Article III:4. Such circular reasoning
constitutes, in Thailand's view, a "fundamental error" by the Panel that "effectively deprived
Thailand of its right to assert its Article XX(d) defence" to the finding of inconsistency with Article
III:4. For this reason, Thailand submits that the Panel's Article III:4 finding "is also legally flawed",
and should also be reversed.

LIKE THE PARTICIPANTS, WE, TOO, CONSIDER THE PANEL'S REFERENCE TO SECTION VII.F.6(B)(II) TO
BE ERRONEOUS. READ LITERALLY, THIS CROSS-REFERENCE MEANS THAT THE PANEL CONSIDERED
THAT THE ADDITIONAL ADMINISTRATIVE REQUIREMENTS COULD NOT BE JUSTIFIED AS
NECESSARY TO SECURE COMPLIANCE WITH THOSE SAME ADDITIONAL ADMINISTRATIVE
REQUIREMENTS BECAUSE THE ADDITIONAL ADMINISTRATIVE REQUIREMENTS HAD ALREADY
BEEN FOUND TO BE INCONSISTENT WITH ARTICLE III:4. THIS WOULD BE A MANIFESTLY INCORRECT
APPROACH TO THE ANALYSIS OF THAILAND'S ARTICLE XX(D) DEFENCE.

Due to the obvious error in the penultimate sentence of paragraph 7.758 of the Panel Report, we are
compelled to reverse the Panel's finding, in that paragraph, that Thailand did not discharge its
burden of demonstrating that the additional administrative requirements are necessary to secure
compliance with the Thai VAT laws within the meaning of Article XX(d) of the GATT 1994.

173. We have difficulties understanding why the Panel's disposition of the Philippines' claim under
Article III:4 should depend on the Panel's disposition of Thailand's defence under Article XX(d). It is
true that, in examining a specific measure, a panel may be called upon to analyze a substantive
obligation and an affirmative defence, and to apply both to that measure. It is also true that such an
exercise will require a panel to find and apply a "line of equilibrium"264 between a substantive
obligation and an exception. Yet this does not render that panel's analyses of the obligation and the
exception a single and integrated one. On the contrary, an analysis of whether a measure infringes
an obligation necessarily precedes, and is distinct from, the "further and separate" assessment of
whether such measure is otherwise justified. Thus, we reject Thailand's request to reverse the
Panel's Article III:4 finding on the grounds that the Panel erred in its analysis of Thailand's Article
XX(d) defence.

Article XX(d) of the GATT 1994 provides:

General Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute
a means of arbitrary or unjustifiable discrimination between countries where the same conditions
prevail, or a disguised restriction on international trade, nothing in this Agreement shall be
construed to prevent the adoption or enforcement by any Member of measures:

(d) necessary to secure compliance with laws or regulations which are not inconsistent with the
provisions of this Agreement, including those relating to customs enforcement, the enforcement of
monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade
marks and copyrights, and the prevention of deceptive practices[.]

A Member will successfully discharge that burden and establish its Article XX(d) defence upon
demonstration of three key elements, namely: (i) that the measure at issue secures compliance
with "laws or regulations" that are themselves consistent with the GATT 1994; (ii) that the
measure at issue is "necessary" to secure such compliance; and (iii) that the measure at issue
meets the requirements set out in the chapeau of Article XX. Furthermore, when Article XX(d) is
invoked to justify an inconsistency with Article III:4, what must be shown to be "necessary" is the
treatment giving rise to the finding of less favourable treatment.270 Thus, when less favourable
treatment is found based on differences in the regulation of imports and of like domestic
products, the analysis of an Article XX(d) defence should focus on whether those regulatory
differences are "necessary" to secure compliance with "laws or regulations" that are not GATT-
inconsistent.

In all of its submissions before the Panel, Thailand devoted just six paragraphs to justifying the
additional administrative requirements, and provided little or no elaboration of the necessary
elements of its asserted defence under Article XX(d). We see at least four critical flaws in Thailand's
presentation of its Article XX(d) defence to the Panel.

179. First, in putting forth its defence, Thailand sought to justify administrative requirements relating
to VAT liability generally, rather than to justify the differential treatment afforded to imported versus
domestic cigarettes under its measure. Second, Thailand failed to identify precisely the "laws or
regulations" with which the measure at issue purportedly secures compliance, and engaged in no
effort to establish that such laws and regulations are consistent with the GATT 1994.

Even assuming that the vague references made by Thailand in its submissions to the Panel271 could
be construed as identifying relevant laws or regulations with which the additional administrative
requirements seek to ensure compliance, Thailand's arguments with respect to, third, "necessity"
and, fourth, the chapeau of Article XX, were patently underdeveloped.272 With respect to the
necessity test, Thailand asserted that the "reporting requirements are necessary ... to the
enforcement of Thailand's VAT system and that the additional administrative requirements are
necessary "in that it is difficult to see how Thailand could administer its VAT system without
requiring VAT payers to maintain and submit input and output reports, the VAT Form Por.Por. 30
and the other requirements".

Thailand provided no further elaboration of these assertions and adduced no evidence in support of
them.275 As for the chapeau of Article XX, Thailand referred to it only once. In its entirety, this
reference consisted of Thailand's argument that, "[g]iven that these measures are applied to all
products, imported or domestic, subject to VAT, they are not applied in a manner that constitutes an
arbitrary or unjustifiable discrimination or a disguised restriction on international trade". This cannot
suffice to establish that the additional administrative requirements fulfil the requirements of the
chapeau of Article XX.

In our view, therefore, the arguments and evidence put forward by Thailand fail, on their face, to
establish the requisite elements of an Article XX(d) defence. Accordingly, we find that Thailand failed
to make out a prima facie defence and, therefore, failed to establish that the additional
administrative requirements are justified under Article XX(d) of the GATT 1994.

UNITED STATES - SECTION 337 OF THE TARIFF ACT OF 1930.

The matter referred to the CONTRACTING PARTIES by the European Economic Community was
described in document L/6198 as follows:

"On 22 April 1987 the European Community requested consultations with the United States under
Article XXIII:1 of the General Agreement concerning the application of Section 337 of the USTariff Act
1930 (document L/6160).

"The request for consultations resulted from an examination of a specific case where for the purpose
of enforcing private intellectual property rights imported goods were subjected to a separate and
distinct procedure solely by virtue of their non-US origin. The EC considered that a denial of national
treatment within the meaning of Article III of the General Agreement resulted from the different
rules applicable under Section 337 and that this denial does not fall within the provisions of Article
XX(d) of the General Agreement. The EC therefore considers the benefits accruing to it under the
General Agreement are being nullified and impaired through the application of the provisions of
Section 337."

Under Section 337 of the United States Tariff Act of 1930 unfair methods of competition and unfair
acts in the importation of articles into the United States, or in their sale, are unlawful if these unfair
acts or methods of competition have the effect or tendency to (i) destroy or to substantially injure an
industry efficiently and economically operated in the United States, (ii) prevent the establishment of
such an industry, or (iii) restrain or monopolise trade and commerce in the United States. The unfair
acts and methods of competition in question include the importation or sale of goods that infringe
valid United States patents. Section 337a specifically applies Section 337 to the importation or sale
of products produced abroad by a process covered by a United States patent. Since it was revised in
the Trade Act of 1974, the majority of investigations under the Section 337 have concerned alleged
infringements of patents

Relation of Article III to Article XX(d)

The Panel noted that Article XX is entitled "General Exceptions" and that the central phrase the
introductory clause reads: "nothing in this Agreement shall be construed to prevent the adoption
or enforcement ... of measures ...". Article XX(d) thus provides for a limited and conditional
exception from obligations under other provisions. The Panel therefore concluded that Article
XX(d) applies only to measures inconsistent with another provision of the General Agreement, and
that, consequently, the application of Section 337 has to be examined first in the light of Article
III:4. If any inconsistencies with Article III:4 were found, the Panel would then examine whether
they could be justified under Article XX(d).

Article III:4

(a) Meaning of "laws, regulations and requirements" in Article III:4

The Panel noted that the text of Article III:4 makes no distinction between substantive and
procedural laws, regulations or requirements and it was not aware of anything in the drafting history
that suggests that such a distinction should be made.

If the procedural provisions of internal law were not covered by Article III:4, contracting parties
could escape the national treatment standard by enforcing substantive law, itself meeting the
national treatment standard, through procedures less favourable to imported products than to like
products of national origin.

The fact that Section 337 is used as a means for the enforcement of United States patent law at the
border does not provide an escape from the applicability of Article III:4; the interpretative note to
Article III states that any law, regulation or requirement affecting the internal sale of products that is
enforced in the case of the imported product at the time or point of importation is nevertheless
subject to the provisions of Article III. Nor could the applicability of Article III:4 be denied on the
ground that most of the procedures in the case before the Panel are applied to persons rather than
products, since the factor determining whether persons might be susceptible to Section 337
proceedings or federal district court procedures is the source of the challenged products, that is
whether they are of United States origin or imported. For these reasons, the Panel found that the
procedures under Section 337 come within the concept of "laws, regulations and requirements"
affecting the internal sale of imported products, as set out in Article III of the General Agreement.

(b) The "no less favourable" treatment standard of Article III:4

5.11 The Panel noted that, as far as the issues before it are concerned, the "no less favourable"
treatment requirement set out in Article III:4, is unqualified. These words are to be found
throughout the General Agreement and later agreements negotiated in the GATT framework as an
expression of the underlying principle of equality of treatment of imported products as compared to
the treatment given either to other foreign products, under the most favoured nation standard, or
to domestic products, under the national treatment standard of Article III. The words "treatment no
less favourable" in paragraph 4. call for effective equality of opportunities for imported products in
respect of the application of laws, regulations and requirements affecting the internal sale, offering
for sale, purchase, transportation, distribution or use of products.

This clearly sets a minimum permissible standard as a basis. On the one hand, contracting parties
may apply to imported products different formal legal requirements if doing so would accord
imported products more favourable treatment. On the other hand, it also has to be recognised that
there may be cases where application of formally identical legal provisions would in practice accord
less favourable treatment to imported products and a contracting party might thus have to apply
different legal provisions to imported products to ensure that the treatment accorded them is in fact
no less favourable.

For these reasons, the mere fact that imported products are subject under Section 337 to legal
provisions that are different from those applying to products of national origin is in itself not
conclusive in establishing inconsistency with Article III:4. In such cases, it has to be assessed whether
or not such differences in the legal provisions applicable do or do not accord to imported products
less favourable treatment. Given that the underlying objective is to guarantee equality of treatment,
it is incumbent on the contracting party applying differential treatment to show that, in spite of such
differences, the no less favourable treatment standard of Article III is met.

The Panel therefore considered that, in order to establish whether the "no less favourable"
treatment standard of Article III:4 is met, it had to assess whether or not Section 337 in itself may
lead to the application to imported products of treatment less favourable than that accorded to
products of United States origin.
The Panel further found that the "no less favourable" treatment requirement of Article III:4 has to be
understood as applicable to each individual case of imported products. The Panel rejected any
notion of balancing more favourable treatment of some imported products against less favourable
treatment of other imported products. If this notion were accepted, it would entitle a contracting
party to derogate from the no less favourable treatment obligation in one case, or indeed in respect
of one contracting party, on the ground that it accords more favourable treatment in some other
case, or to another contracting party. Such an interpretation would lead to great uncertainty about
the conditions of competition between imported and domestic products and thus defeat the
purposes of Article III.

Summary of findings under Article III:4

5.20 The Panel found that Section 337, inconsistently with Article III:4 of the General Agreement,
accords to imported products alleged to infringe United States patents treatment less favourable
than that accorded under federal district court procedures to like products of United States origin as
a result of the following factors:

(i) the availability to complainants of a choice of forum in which to challenge imported products,
whereas no corresponding choice is available to challenge products of United States origin;

(ii) the potential disadvantage to producers or importers of challenged products of foreign origin
resulting from the tight and fixed time-limits in proceedings under Section 337, when no comparable
time-limits apply to producers of challenged products of United States origin;

(iii) the non-availability of opportunities in Section 337 proceedings to raise counterclaims, as is

possible in proceedings in federal district court;

(iv) the possibility that general exclusion orders may result from proceedings brought before the
USITC under Section 337, given that no comparable remedy is available against infringing products of
United States origin;

(v) the automatic enforcement of exclusion orders by the United States Customs Service, when
injunctive relief obtainable in federal court in respect of infringing products of United States origin
requires for its enforcement individual proceedings brought by the successful plaintiff;

(vi) the possibility that producers or importers of challenged products of foreign origin may have to
defend their products both before the USITC and in federal district court, whereas no corresponding
exposure exists with respect to products of United States origin.

5.21 The Panel considered whether all these differences of treatment could be traced back to one
common cause, this being the structure of the USITC which is fundamentally not a court of law but

an administrative agency, and whether this structural difference could be said to entail in itself
treatment incompatible with the requirements of Article III. The Panel however reached no
conclusion in this respect, as this question had not been raised in such general terms by the
Community.

5.26 It was clear to the Panel that a contracting party cannot justify a measure inconsistent with
another GATT provision as "necessary" in terms of Article XX(d) if an alternative measure which it
could reasonably be expected to employ and which is not inconsistent with other GATT provisions is
available to it. By the same token, in cases where a measure consistent with other GATT provisions is
not reasonably available, a contracting party is bound to use, among the measures reasonably
available to it, that which entails the least degree of inconsistency with other GATT provisions. The
Panel wished to make it clear that this does not mean that a contracting party could be asked to
change its substantive patent law or its desired level of enforcement of that law, provided that such
law and such level of enforcement are the same for imported and domestically-produced products.
However, it does mean that, if a contracting party could reasonably secure that level of enforcement
in a manner that is not inconsistent with other GATT provisions, it would be required to do so.

5.27 Bearing in mind the foregoing and that it is up to the contracting party seeking to justify
measures under Article XX(d) to demonstrate that those measures are "necessary" within the
meaning of that provision1, the Panel considered whether the inconsistencies that it had found with
Article III:4 can be justified as "necessary" in terms of Article XX(d). The Panel first examined the
argument of the United States that the Panel should consider not whether the individual elements
of Section 337 are "necessary" but rather whether Section 337 as a system is "necessary" for the
enforcement of United States patent laws (paragraphs 3.57-3.58). The Panel did not accept this
contention since it would permit contracting parties to introduce GATT inconsistencies that are not
necessary simply by making them part of a scheme which contained elements that are necessary. In
the view of the Panel, what has to be justified as "necessary" under Article XX(d) is each of the
inconsistencies with another GATT Article found to exist, i.e. in this case, whether the differences
between Section 337 and federal district court procedures that result in less favourable treatment of
imported products within the meaning of Article III:4, as outlined above (paragraph 5.20), are
necessary.

VI. CONCLUSIONS

6.1 To avoid any misunderstanding as to the scope and implications of the above findings, the Panel
stresses that neither Article III:4 nor Article XX(d) puts obligations on contracting parties specifying
the level of protection that they should accord to patents or the effectiveness of procedures to
enforce such protection. The only task entrusted to the Panel was to see whether the treatment
accorded to imported products under Section 337 is compatible with the rules of the General
Agreement.

6.2 The Panel also wishes to state that, although it found that some elements of Section 337 are
inconsistent with the GATT obligations of the United States, it found no evidence that these
elements had been deliberately introduced so as to discriminate against foreign products.

6.3 On the basis of the findings set out in paragraphs 5.1 - 5.35 above the Panel concluded that
Section 337 of the United States Tariff Act of 1930 is inconsistent with Article III:4, in that it accords

to imported products challenged as infringing United States patents treatment less favourable than
the treatment accorded to products of United States origin similarly challenged, and that these
inconsistencies cannot be justified in all respects under Article XX(d).

UNITED STATES – IMPORT PROHIBITION OF CERTAIN SHRIMP AND SHRIMP PRODUCTS.

The United States issued regulations in 1987 pursuant to the Endangered Species Act of 19739
requiring all United States shrimp trawl vessels to use approved Turtle Excluder Devices ("TEDs") or
tow-time restrictions in specified areas where there was a significant mortality of sea turtles in
shrimp harvesting.10 These regulations, which became fully effective in 1990, were modified so as to
require the use of approved TEDs at all times and in all areas where there is a likelihood that shrimp
trawling will interact with sea turtles, with certain limited exceptions.

Section 609 was enacted on 21 November 1989. Section 609(a) calls upon the United States
Secretary of State, in consultation with the Secretary of Commerce, inter alia, to "initiate
negotiations as soon as possible for the development of bilateral or multilateral agreements with
other nations for the protection and conservation of … sea turtles" and to "initiate negotiations as
soon as possible with all foreign governments which are engaged in, or which have persons or
companies engaged in, commercial fishing operations which, as determined by the Secretary of
Commerce, may affect adversely such species of sea turtles, for the purpose of entering into bilateral
and multilateral treaties with such countries to protect such species of sea turtles; … ." Section
609(b)(1) imposed, not later than 1 May 1991, an import ban on shrimp harvested with commercial
fishing technology which may adversely affect sea turtles. Section 609(b)(2) provides that the import
ban on shrimp will not apply to harvesting nations that are certified. Two kinds of annual
certifications are required for harvesting nations, details of which were further elaborated in
regulatory guidelines in 1991, 1993. and 199611:

First, certification shall be granted to countries with a fishing environment which does not pose a
threat of the incidental taking of sea turtles in the course of shrimp harvesting.12 According to the
1996 Guidelines, the Department of State "shall certify any harvesting nation meeting the following
criteria without the need for action on the part of the government of the harvesting nation:

(a) Any harvesting nation without any of the relevant species of sea turtles occurring in waters
subject to its jurisdiction; (b) Any harvesting nation that harvests shrimp exclusively by means that
do not pose a threat to sea turtles, e.g., any nation that harvests shrimp exclusively by artisanal
means; or (c) Any nation whose commercial shrimp trawling operations take place exclusively in
waters subject to its jurisdiction in which sea turtles do not occur."13

4. Second, certification shall be granted to harvesting nations that provide documentary evidence of
the adoption of a regulatory program governing the incidental taking of sea turtles in the course of
shrimp trawling that is comparable to the United States program and where the average rate of
incidental taking of sea turtles by their vessels is comparable to that of United States vessels.14

According to the 1996 Guidelines, the Department of State assesses the regulatory program of the
harvesting nation and certification shall be made if the program includes: (i) the required use of TEDs
that are "comparable in effectiveness to those used in the United States. Any exceptions to this

requirement must be comparable to those of the United States program … "; and (ii) "a credible
enforcement effort that includes monitoring for compliance and appropriate sanctions."15 The
regulatory program may be in the form of regulations, or may, in certain circumstances, take the
form of a voluntary arrangement between industry and government.16 Other measures that the
harvesting nation undertakes for the protection of sea turtles will also be taken into account in
making the comparability determination.17 The average incidental take rate "will be deemed
comparable if the harvesting nation requires the use of TEDs in a manner comparable to that of the
U.S. program … ."

5. The 1996 Guidelines provide that all shrimp imported into the United States must be accompanied
by a Shrimp Exporter's Declaration form attesting that the shrimp was harvested either in the waters
of a nation currently certified under Section 609 or "under conditions that do not adversely affect
sea turtles", that is: (a) "Shrimp harvested in an aquaculture facility in which the shrimp spend at
least 30 days in ponds prior to being harvested"; (b) "Shrimp harvested by commercial shrimp trawl
vessels using TEDs comparable in effectiveness to those required in the United States"; (c) "Shrimp
harvested exclusively by means that do not involve the retrieval of fishing nets by mechanical
devices or by vessels using gear that, in accordance with the U.S. program … , would not require
TEDs"; and (d) "Species of shrimp, such as the pandalid species, harvested in areas where sea turtles
do not occur."19 On 8 October 1996, the United States Court of International Trade ruled that the
1996 Guidelines were in violation of Section 609 in allowing the import of shrimp from non-certified
countries if accompanied by a Shrimp Exporter's Declaration form attesting that they were caught
with commercial fishing technology that did not adversely affect sea turtles.

On 19 April 1996, the United States issued the 1996 Guidelines, extending Section 609 to shrimp
harvested in all foreign countries effective 1 May 1996.

VI. Appraising Section 609 Under Article XX of the GATT 1994

The Panel did not follow all of the steps of applying the "customary rules of interpretation of public
international law" as required by Article 3.2 of the DSU. As we have emphasized numerous times,
these rules call for an examination of the ordinary meaning of the words of a treaty, read in their
context, and in the light of the object and purpose of the treaty involved. A treaty interpreter must
begin with, and focus upon, the text of the particular provision to be interpreted. It is in the words
constituting that provision, read in their context, that the object and purpose of the states parties to
the treaty must first be sought. Where the meaning imparted by the text itself is equivocal or
inconclusive, or where confirmation of the correctness of the reading of the text itself is desired,
light from the object and purpose of the treaty as a whole may usefully be sought

In the present case, the Panel did not expressly examine the ordinary meaning of the words of
Article XX. The Panel disregarded the fact that the introductory clauses of Article XX speak of the
"manner" in which measures sought to be justified are "applied". In United States - Gasoline, we
pointed out that the chapeau of Article XX "by its express terms addresses, not so much the
questioned measure or its specific contents as such, but rather the manner in which that measure is
applied."(emphasis added) The Panel did not inquire specifically into how the application of Section
609 constitutes "a means of arbitrary or unjustifiable discrimination between countries where the
same conditions prevail, or a disguised restriction on international trade." What the Panel did, in
purporting to examine the consistency of the measure with the chapeau of Article XX, was to focus
repeatedly on the design of the measure itself. For instance, the Panel stressed that it was
addressing "a particular situation where a Member has taken unilateral measures which, by their
nature, could put the multilateral trading system at risk."

The general design of a measure, as distinguished from its application, is, however, to be examined
in the course of determining whether that measure falls within one or another of the paragraphs of
Article XX following the chapeau. The Panel failed to scrutinize the immediate context of the
chapeau: i.e., paragraphs (a) to (j) of Article XX. Moreover, the Panel did not look into the object and
purpose of the chapeau of Article XX. Rather, the Panel looked into the object and purpose of the
whole of the GATT 1994 and the WTO Agreement, which object and purpose it described in an overly
broad manner. Thus, the Panel arrived at the very broad formulation that measures which
"undermine the WTO multilateral trading system"86 must be regarded as "not within the scope of
measures permitted under the chapeau of Article XX."

Maintaining, rather than undermining, the multilateral trading system is necessarily a fundamental
and pervasive premise underlying the WTO Agreement; but it is not a right or an obligation, nor is it
an interpretative rule which can be employed in the appraisal of a given measure under the chapeau
of Article XX. In United States - Gasoline, we stated that it is "important to underscore that the
purpose and object of the introductory clauses of Article XX is generally the prevention of 'abuse of
the exceptions of [Article XX]'."The Panel did not attempt to inquire into how the measure at stake
was being applied in such a manner as to constitute abuse or misuse of a given kind of exception .

The above flaws in the Panel's analysis and findings flow almost naturally from the fact that the
Panel disregarded the sequence of steps essential for carrying out such an analysis. The Panel defined
its approach as first "determin[ing] whether the measure at issue satisfies the conditions in the
chapeau."89 If the Panel found that to be the case, it said that it "shall then examine whether the US
measure is covered by the terms of Article XX(b) or (g)."

In United States - Gasoline, we enunciated the appropriate method for applying Article XX of the
GATT 1994:

In order that the justifying protection of Article XX may be extended to it, the measure at issue must
not only come under one or another of the particular exceptions -- paragraphs (a) to (j) -- listed
under Article XX;

it must also satisfy the requirements imposed by the opening clauses of Article XX. The analysis is, in
other words, two-tiered: first, provisional justification by reason of characterization of the measure
under XX(g); second, further appraisal of the same measure under the introductory clauses of Article
XX.

The sequence of steps indicated above in the analysis of a claim of justification under Article XX
reflects, not inadvertence or random choice, but rather the fundamental structure and logic of
Article XX. The Panel appears to suggest, albeit indirectly, that following the indicated sequence of
steps, or the inverse thereof, does not make any difference. To the Panel, reversing the sequence set
out in United States - Gasoline "seems equally appropriate." We do not agree.

The task of interpreting the chapeau so as to prevent the abuse or misuse of the specific exemptions
provided for in Article XX is rendered very difficult, if indeed it remains possible at all, where the
interpreter (like the Panel in this case) has not first identified and examined the specific exception
threatened with abuse. The standards established in the chapeau are, moreover, necessarily broad
in scope and reach: the prohibition of the application of a measure "in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between countries where the same
conditions prevail" or "a disguised restriction on international trade."(emphasis added) When
applied in a particular case, the actual contours and contents of these standards will vary as the kind
of measure under examination varies. What is appropriately characterizable as "arbitrary
discrimination" or "unjustifiable discrimination", or as a "disguised restriction on international trade"
in respect of one category of measures, need not be so with respect to another group or type of
measures. The standard of "arbitrary discrimination", for example, under the chapeau may be
different for a measure that purports to be necessary to protect public morals than for one relating
to the products of prison labour.

The consequences of the interpretative approach adopted by the Panel are apparent in its findings.
The Panel formulated a broad standard and a test for appraising measures sought to be justified
under the chapeau; it is a standard or a test that finds no basis either in the text of the chapeau or in
that of either of the two specific exceptions claimed by the United States. The Panel, in effect,
constructed an a priori test that purports to define a category of measures which, ratione materiae,
fall outside the justifying protection of Article XX's chapeau.

In the present case, the Panel found that the United States measure at stake fell within that class of
excluded measures because Section 609 conditions access to the domestic shrimp market of the
United States on the adoption by exporting countries of certain conservation policies prescribed by
the United States. It appears to us, however, that conditioning access to a Member's domestic
market on whether exporting Members comply with, or adopt, a policy or policies unilaterally
prescribed by the importing Member may, to some degree, be a common aspect of measures falling
within the scope of one or another of the exceptions (a) to (j) of Article XX. Paragraphs (a) to (j)
comprise measures that are recognized as exceptions to substantive obligations established in the
GATT 1994, because the domestic policies embodied in such measures have been recognized as
important and legitimate in character. It is not necessary to assume that requiring from exporting
countries compliance with, or adoption of, certain policies (although covered in principle by one or
another of the exceptions) prescribed by the importing country, renders a measure a priori
incapable of justification under Article XX. Such an interpretation renders most, if not all, of the
specific exceptions of Article XX inutile, a result abhorrent to the principles of interpretation we are
bound to apply.

We hold that the findings of the Panel quoted in paragraph 112 above, and the interpretative
analysis embodied therein, constitute error in legal interpretation and accordingly reverse them.

B. Article XX(g): Provisional Justification of Section 609

In claiming justification for its measure, the United States primarily invokes Article XX(g). Justification
under Article XX(b) is claimed only in the alternative; that is, the United States suggests that we
should look at Article XX(b) only if we find that Section 609 does not fall within the ambit of Article
XX(g).99 We proceed, therefore, to the first tier of the analysis of Section 609 and to our
consideration of whether it may be characterized as provisionally justified under the terms of Article
XX(g).

126. Paragraph (g) of Article XX covers measures: relating to the conservation of exhaustible natural
resources if such measures are made effective in conjunction with restrictions on domestic
production or consumption
Given the recent acknowledgement by the international community of the importance of concerted
bilateral or multilateral action to protect living natural resources, and recalling the explicit
recognition by WTO Members of the objective of sustainable development in the preamble of the
WTO Agreement, we believe it is too late in the day to suppose that Article XX(g) of the GATT 1994
may be read as referring only to the conservation of exhaustible mineral or other non-living natural
resources. Moreover, two adopted GATT 1947 panel reports previously found fish to be an
"exhaustible natural resource" within the meaning of Article XX(g).115 We hold that, in line with the
principle of effectiveness in treaty interpretation, measures to conserve exhaustible natural
resources, whether living or non-living, may fall within Article XX(g).

The sea turtle species here at stake, i.e., covered by Section 609, are all known to occur in waters
over which the United States exercises jurisdiction.119 Of course, it is not claimed that all
populations of these species migrate to, or traverse, at one time or another, waters subject to
United States jurisdiction. Neither the appellant nor any of the appellees claims any rights of
exclusive ownership over the sea turtles, at least not while they are swimming freely in their natural
habitat -- the oceans. We do not pass upon the question of whether there is an implied jurisdictional
limitation in Article XX(g), and if so, the nature or extent of that limitation. We note only that in the
specific circumstances of the case before us, there is a sufficient nexus between the migratory and
endangered marine populations involved and the United States for purposes of Article XX(g).

For all the foregoing reasons, we find that the sea turtles here involved constitute "exhaustible
natural resources" for purposes of Article XX(g) of the GATT 1994.

Relating to the Conservation of Exhaustible Natural Resources.

Article XX(g) requires that the measure sought to be justified be one which "relat[es] to" the
conservation of exhaustible natural resources. In making this determination, the treaty interpreter
essentially looks into the relationship between the measure at stake and the legitimate policy of
conserving exhaustible natural resources.

In United States - Gasoline, we inquired into the relationship between the baseline establishment
rules of the United States Environmental Protection Agency (the "EPA") and the conservation of
natural resources for the purposes of Article XX(g). There, we answered in the affirmative the
question posed before the panel of whether the baseline establishment rules were

"primarily aimed at" the conservation of clean air. We held that:

… The baseline establishment rules whether individual or statutory, were designed to permit
scrutiny and monitoring of the level of compliance of refiners, importers and blenders with the "non
degradation" requirements. Without baselines of some kind, such scrutiny would not be possible
and the Gasoline Rule's objective of stabilizing and preventing further deterioration of the level of air
pollution prevailing in 1990, would be substantially frustrated. …

We consider that, given that substantial relationship, the baseline establishment rules cannot be
regarded as merely incidentally or inadvertently aimed at the conservation of clean air in the United
States for the purposes of Article XX(g). The substantial relationship we found there between the
EPA baseline establishment rules and the conservation of clean air in the United States was a close
and genuine relationship of ends and means.
In its general design and structure, therefore, Section 609 is not a simple, blanket prohibition of
the importation of shrimp imposed without regard to the consequences (or lack thereof) of the
mode of harvesting employed upon the incidental capture and mortality of sea turtles. Focusing
on the design of the measure here at stake, it appears to us that Section 609, cum implementing
guidelines, is not disproportionately wide in its scope and reach in relation to the policy objective
of protection and conservation of sea turtle species. The means are, in principle, reasonably
related to the ends. The means and ends relationship between Section 609 and the legitimate
policy of conserving an exhaustible, and, in fact, endangered species, is observably a close and real
one, a relationship that is every bit as substantial as that which we found in United States -
Gasoline between the EPA baseline establishment rules and the conservation of clean air in the
United States.

"If Such Measures are Made Effective in conjunction with Restrictions on Domestic Production or
Consumption"

143. In United States – Gasoline, we held that the above-captioned clause of Article XX(g), … is
appropriately read as a requirement that the measures concerned impose restrictions, not just in
respect of imported gasoline but also with respect to domestic gasoline. The clause is a
requirement of even-handedness in the imposition of restrictions, in the name of conservation,
upon the production or consumption of exhaustible natural resources.

In this case, we need to examine whether the restrictions imposed by Section 609 with respect to
imported shrimp are also imposed in respect of shrimp caught by United States shrimp trawl
vessels.

However, two years earlier, in 1987, the United States issued regulations pursuant to the
Endangered Species Act requiring all United States shrimp trawl vessels to use approved TEDs, or to
restrict the duration of tow-times, in specified areas where there was significant incidental mortality
of sea turtles in shrimp trawls.130 These regulations became fully effective in 1990 and were later
modified. They now require United States shrimp trawlers to use approved TEDs "in areas and at
times when there is a likelihood of intercepting sea turtles" , with certain limited exceptions.132
Penalties for violation of the Endangered Species Act, or the regulations issued thereunder, include
civil and criminal sanctions. The United States government currently relies on monetary sanctions
and civil penalties for enforcement.134 The government has the ability to seize shrimp catch from
trawl vessels fishing in United States waters and has done so in cases of egregious violations.

135 We believe that, in principle, Section 609 is an even-handed measure. Accordingly, we hold that
Section 609 is a measure made effective in conjunction with therestrictions on domestic harvesting
of shrimp, as required by Article XX(g).

C. The Introductory Clauses of Article XX: Characterizing Section 609 under the
Chapeau's Standards.

We commence the second tier of our analysis with an examination of the ordinary meaning of the
words of the chapeau. The precise language of the chapeau requires that a measure not be applied
in a manner which would constitute a means of "arbitrary or unjustifiable discrimination between
countries where the same conditions prevail" or a "disguised restriction on international trade."
There are three standards contained in the chapeau: first, arbitrary discrimination between
countries where the same conditions prevail; second, unjustifiable discrimination between countries
where the same conditions prevail; and third, a disguised restriction on international trade. In order
for a measure to be applied in a manner which would constitute "arbitrary or unjustifiable
discrimination between countries where the same conditions prevail", three elements must exist.

First, the application of the measure must result in discrimination. As we stated in United States –
Gasoline, the nature and quality of this discrimination is different from the discrimination in the
treatment of products which was already found to be inconsistent with one of the substantive
obligations of the GATT 1994, such as Articles I, III or XI.138 Second, the discrimination must be
arbitrary or unjustifiable in character.

We will examine this element of arbitrariness or unjustifiability in detail below. Third, this
discrimination must occur between countries where the same conditions prevail. In United States –
Gasoline, we accepted the assumption of the participants in that appeal that such discrimination
could occur not only between different exporting Members, but also between exporting Members
and the importing Member concerned. Thus, the standards embodied in the language of the
chapeau are not only different from the requirements of Article XX(g); they are also different from
the standard used in determining that Section 609 is violative of the substantive rules of Article XI:1
of the GATT 1994.

151. In United States – Gasoline, we stated that "the purpose and object of the introductory clauses
of Article XX is generally the prevention of 'abuse of the exceptions of [Article XX]'."140 We went on
to say that:

“… The chapeau is animated by the principle that while the exceptions of Article XX may be invoked
as a matter of legal right, they should not be so applied as to frustrate or defeat the legal obligations
of the holder of the right under the substantive rules of the General Agreement. If those exceptions
are not to be abused or misused, in other words, the measures falling within the particular
exceptions must be applied reasonably, with due regard both to the legal duties of the party
claiming the exception and the legal rights of the other parties concerned.”

We note once more that this language demonstrates a recognition by WTO negotiators that optimal
use of the world's resources should be made in accordance with the objective of sustainable
development. As this preambular language reflects the intentions of negotiators of the WTO
Agreement, we believe it must add colour, texture and shading to our interpretation of the
agreements annexed to the WTO Agreement, in this case, the GATT 1994. We have already observed
that Article XX(g) of the GATT 1994 is appropriately read with the perspective embodied in the above
preamble.

Turning then to the chapeau of Article XX, we consider that it embodies the recognition on the part
of WTO Members of the need to maintain a balance of rights and obligations between the right of a
Member to invoke one or another of the exceptions of Article XX, specified in paragraphs (a) to (j),
on the one hand, and the substantive rights of the other Members under the GATT 1994, on the
other hand. Exercise by one Member of its right to invoke an exception, such as Article XX(g), if
abused or misused, will, to that extent, erode or render naught the substantive treaty rights in, for
example, Article XI:1, of other Members. Similarly, because the GATT 1994 itself makes available the
exceptions of Article XX, in recognition of the legitimate nature of the policies and interests there
embodied, the right to invoke one of those exceptions is not to be rendered illusory. The same
concept may be expressed from a slightly different angle of vision, thus, a balance must be struck
between the right of a Member to invoke an exception under Article XX and the duty of that same

Member to respect the treaty rights of the other Members. To permit one Member to abuse or
misuse its right to invoke an exception would be effectively to allow that Member to degrade its own
treaty obligations as well as to devalue the treaty rights of other Members. If the abuse or misuse is
sufficiently grave or extensive, the Member, in effect, reduces its treaty obligation to a merely
facultative one and dissolves its juridical character, and, in so doing, negates altogether the treaty
rights of other Members. The chapeau was installed at the head of the list of "General Exceptions" in
Article XX to prevent such far-reaching consequences.

Thus, the negotiating history of Article XX confirms that the paragraphs of Article XX set forth
limited and conditional exceptions from the obligations of the substantive provisions of the GATT.
Any measure, to qualify finally for exception, must also satisfy the requirements of the chapeau.
This is a fundamental part of the balance of rights and obligations struck by the original framers of
the GATT 1947

The chapeau of Article XX is, in fact, but one expression of the principle of good faith. This
principle, at once a general principle of law and a general principle of international law, controls
the exercise of rights by states. One application of this general principle, the application widely
known as the doctrine of abus de droit, prohibits the abusive exercise of a state's rights and
enjoins that whenever the assertion of a right "impinges on the field covered by [a] treaty
obligation, it must be exercised bona fide, that is to say, reasonably."An abusive exercise by a
Member of its own treaty right thus results in a breach of the treaty rights of the other Members
and, as well, a violation of the treaty obligation of the Member so acting.

The task of interpreting and applying the chapeau is, hence, essentially the delicate one of locating
and marking out a line of equilibrium between the right of a Member to invoke an exception
under Article XX and the rights of the other Members under varying substantive provisions (e.g.,
Article XI) of the GATT 1994, so that neither of the competing rights will cancel out the other and
thereby distort and nullify or impair the balance of rights and obligations constructed by the
Members themselves in that Agreement. The location of the line of equilibrium, as expressed in
the chapeau, is not fixed and unchanging; the line moves as the kind and the shape of the
measures at stake vary and as the facts making up specific cases differ

Thus, the effect of the application of Section 609 is to establish a rigid and unbending standard by
which United States officials determine whether or not countries will be certified, thus granting or
refusing other countries the right to export shrimp to the United States.

Other specific policies and measures that an exporting country may have adopted for the
protection and conservation of sea turtles are not taken into account, in practice, by the
administrators making the comparability determination.
Another aspect of the application of Section 609 that bears heavily in any appraisal of justifiable or
unjustifiable discrimination is the failure of the United States to engage the appellees, as well as
other Members exporting shrimp to the United States, in serious, across-the-board negotiations
with the objective of concluding bilateral or multilateral agreements for the protection and
conservation of sea turtles, before enforcing the import prohibition against the shrimp exports of
those other Members.

The Inter-American Convention thus provides convincing demonstration that an alternative course
of action was reasonably open to the United States for securing the legitimate policy goal of its
measure, a course of action other than the unilateral and non-consensual procedures of the
import prohibition under Section 609. It is relevant to observe that an import prohibition is,
ordinarily, the heaviest "weapon" in a Member's armoury of trade measures

Clearly, the United States negotiated seriously with some, but not with other Members (including
the appellees), that export shrimp to the United States. The effect is plainly discriminatory and, in
our view, unjustifiable. The unjustifiable nature of this discrimination emerges clearly when we
consider the cumulative effects of the failure of the United States to pursue negotiations for
establishing consensual means of protection and conservation of the living marine resources here
involved, notwithstanding the explicit statutory direction in Section 609 itself to initiate
negotiations as soon as possible for the development of bilateral and multilateral agreements.175
The principal consequence of this failure may be seen in the resulting unilateralism evident in the
application of Section 609.

As we have emphasized earlier, the policies relating to the necessity for use of particular kinds of
TEDs in various maritime areas, and the operating details of these policies, are all shaped by the
Department of State, without the participation of the exporting Members. The system and
processes of certification are established and administered by the United States agencies alone.

The decision-making involved in the grant, denial or withdrawal of certification to the exporting
Members, is, accordingly, also unilateral. The unilateral character of the application of Section 609
heightens the disruptive and discriminatory influence of the import prohibition and underscores
its unjustifiability

We acknowledge that the greatly differing periods for putting into operation the requirement for
use of TEDs resulted from decisions of the Court of International Trade. Even so, this does not
relieve the United States of the legal consequences of the discriminatory impact of the decisions
of that Court. The United States, like all other Members of the WTO and of the general community
of states, bears responsibility for acts of all its departments of government, including its judiciary

When the foregoing differences in the means of application of Section 609 to various shrimp
exporting countries are considered in their cumulative effect, we find, and so hold, that those
differences in treatment constitute "unjustifiable discrimination" between exporting countries
desiring certification in order to gain access to the United States shrimp market within the meaning
of the chapeau of Article XX.

"Arbitrary Discrimination"
177. We next consider whether Section 609 has been applied in a manner constituting "arbitrary
discrimination between countries where the same conditions prevail". We have already observed
that Section 609, in its application, imposes a single, rigid and unbending requirement that countries
applying for certification under Section 609(b)(2)(A) and (B) adopt a comprehensive regulatory
program that is essentially the same as the United States' program, without inquiring into the
appropriateness of that program for the conditions prevailing in the exporting countries.180

Furthermore, there is little or no flexibility in how officials make the determination for certification
pursuant to these provisions. 181 In our view, this rigidity and inflexibility also constitute "arbitrary
discrimination" within the meaning of the chapeau.

However, with respect to neither type of certification under Section 609(b)(2) is there a transparent,
predictable certification process that is followed by the competent United States government
officials. The certification processes under Section 609 consist principally of administrative ex parte
inquiry or verification by staff of the Office of Marine Conservation in the Department of State with
staff of the United States National Marine Fisheries Service.186 With respect to both types of
certification, there is no formal opportunity for an applicant country to be heard, or to respond to
any arguments that may be made against it, in the course of the certification process before a
decision to grant or to deny certification is made. Moreover, no formal written, reasoned decision
whether of acceptance or rejection, is rendered on applications for either type of certification,
whether under Section 609(b)(2)(A) and (B) or under Section 609(b)(2)(C).187 Countries which are
granted certification are included in a list of approved applications published in the Federal Register;
however, they are not notified specifically. Countries whose applications are denied 188 also do not
receive notice of such denial (other than by omission from the list of approved applications) or of the
reasons for the denial. No procedure for review of, or appeal from, a denial of an application is
provided.

181. The certification processes followed by the United States thus appear to be singularly informal
and casual, and to be conducted in a manner such that these processes could result in the negation
of rights of Members. There appears to be no way that exporting Members can be certain whether
the terms of Section 609, in particular, the 1996 Guidelines, are being applied in a fair and just
manner by the appropriate governmental agencies of the United States. It appears to us that,
effectively, exporting Members applying for certification whose applications are rejected are denied
basic fairness and due process, and are discriminated against, vis-à-vis those Members which are
granted certification.

We find, accordingly, that the United States measure is applied in a manner which amounts to a
means not just of "unjustifiable discrimination", but also of "arbitrary discrimination" between
countries where the same conditions prevail, contrary to the requirements of the chapeau of Article
XX. The measure, therefore, is not entitled to the justifying protection of Article XX of the GATT
1994.

In reaching these conclusions, we wish to underscore what we have not decided in this appeal. We
have not decided that the protection and preservation of the environment is of no significance to
the Members of the WTO. Clearly, it is. We have not decided that the sovereign nations that are
Members of the WTO cannot adopt effective measures to protect endangered species, such as sea
turtles. Clearly, they can and should. And we have not decided that sovereign states should not act
together bilaterally, plurilaterally or multilaterally, either within the WTO or in other international
fora, to protect endangered species or to otherwise protect the environment. Clearly, they should
and do.

186. What we have decided in this appeal is simply this: although the measure of the United States
in dispute in this appeal serves an environmental objective that is recognized as legitimate under
paragraph (g) of Article XX of the GATT 1994, this measure has been applied by the United States in a
manner which constitutes arbitrary and unjustifiable discrimination between Members of the WTO,
contrary to the requirements of the chapeau of Article XX. For all of the specific reasons outlined in
this Report, this measure does not qualify for the exemption that Article XX of the GATT 1994 affords
to measures which serve certain recognized, legitimate environmental purposes but which, at the
same time, are not applied in a manner that constitutes a means of arbitrary or unjustifiable
discrimination between countries where the same conditions prevail or a disguised restriction on
international trade. As we emphasized in United States – Gasoline, WTO Members are free to adopt
their own policies aimed at protecting the environment as long as, in so doing, they fulfill their
obligations and respect the rights of other Members under the WTO Agreement

UNITED STATES - STANDARDS FOR REFORMULATED AND CONVENTIONAL GASOLINE.

The Panel had been established to consider a dispute between the United States, on the one hand,
and Venezuela, later joined by Brazil, on the other. The dispute related to the implementation by the
United States of its domestic legislation known as the Clean Air Act of 1990 (the "CAA") and, more
specifically, to the regulation enacted by the United States' Environmental Protection Agency (the
"EPA") pursuant to that Act, to control toxic and other pollution caused by the combustion of
gasoline manufactured in or imported into the United States. This regulation is formally entitled
"Regulation of Fuels and Fuel Additives - Standards for Reformulated and Conventional Gasoline",
Part 80 of Title 40 of the Code of Federal Regulations,1 and is commonly referred to as the Gasoline
Rule.

More specifically, the United States assigns as error the ruling of the Panel that the baseline
establishment rules do not constitute a "measure" "relating to" the conservation of clean air within
the meaning of Article XX(g) of the General Agreement. Consequently, it is also the view of the
United States that the Panel erred in failing to proceed further in its interpretation and application of
Article XX(g), and in not finding that the baseline establishment rules satisfy the other requirements
of Article XX(g) and the introductory provisions of Article XX.

III. The Issue of Justification Under Article XX(g) of the General Agreement- These earlier panels
had not interpreted "measures" more broadly under Article XX

"Measures"

The question is whether "measures" refers to the entire Gasoline Rule or, alternatively, only to the
particular provisions of the Gasoline Rule which deal with the establishment of baselines for
domestic refiners, blenders and importers- earlier panel did not define the concept broadly in
respect of all act or laws but only specific provisions in the law contrary to the GATT
"Relating to the conservation of exhaustible natural resources"

The Panel Report took the view that clean air was a "natural resource" that could be "depleted."
Accordingly, as already noted earlier, the Panel concluded that a policy to reduce the depletion of
clean air was a policy to conserve an exhaustible natural resource within the meaning of Article
XX(g). Shortly thereafter, however, the Panel Report also concluded that "the less favourable
baseline establishments methods" were not primarily aimed at the conservation of exhaustible
natural resources thus fell outside the justifying scope of Article XX(g) less favourable treatment to
imported gasoline were primarily aimed at the conservation of naturalresources" (emphasis added).
The Panel did not try to clarify whether the phrase "direct connection" was being used as a synonym
for "primarily aimed at" or whether a new and additional element (on top of "primarily aimed at")
was being demanded

Applying the basic principle of interpretation that the words of a treaty, like the General Agreement,
are to be given their ordinary meaning, in their context and in the light of the treaty's object and
purpose, the Appellate Body observes that the Panel Report failed to take adequate account of the
words actually used by Article XX in its several paragraphs. In enumerating the various categories of
governmental acts, laws or regulations which WTO Members may carry out or promulgate in pursuit
of differing legitimate state policies or interests outside the realm of trade liberalization, Article XX
uses different terms in respect of different categories:

"necessary" - in paragraphs (a), (b) and (d); "essential" - in paragraph (j);

"relating to" - in paragraphs (c), (e) and (g); "for the protection of" - in paragraph (f);

"in pursuance of" - in paragraph (h); and "involving" - in paragraph (i).

It does not seem reasonable to suppose that the WTO Members intended to require, in respect of
each and every category, the same kind or degree of connection or relationship between the
measure under appraisal and the state interest or policy sought to be promoted or realized.

At the same time, Article XX(g) and its phrase, "relating to the conservation of exhaustible natural
resources," need to be read in context and in such a manner as to give effect to the purposes and
objects of the General Agreement. The context of Article XX(g) includes the provisions of the rest of
the General Agreement, including in particular Articles I, III and XI; conversely, the context of Articles
I and III and XI includes Article XX. Accordingly, the phrase "relating to the conservation of
exhaustible natural resources" may not be read so expansively as seriously to subvert the purpose
and object of Article III:4. Nor may Article III:4 be given so broad a reach as effectively to emasculate
Article XX(g) and the policies and interests it embodies. The relationship between the affirmative
commitments set out in, e.g., Articles I, III and XI, and the policies and interests embodied in the
"General Exceptions" listed in Article XX, can be given meaning within the framework of the General
Agreement and its object and purpose by a treaty interpreter only on a case-to-case basis, by careful
scrutiny of the factual and legal context in a given dispute, without disregarding the words actually
used by the WTO Members themselves to express their intent and purpose.

The 1987 Herring and Salmon report, and the Panel Report itself, gave some recognition to the
foregoing considerations of principle. As earlier noted, the Panel Report quoted the following
excerpt from the Herring and Salmon report:
“as the preamble of Article XX indicates, the purpose of including Article XX(g) in the General
Agreement was not to widen the scope for measures serving trade policy purposes but merely to
ensure that the commitments under the General Agreement do not hinder the pursuit of policies
aimed at the conservation of exhaustible natural resources”

The baseline establishment rules, taken as a whole (that is, the provisions relating to establishment
of baselines for domestic refiners, along with the provisions relating to baselines for blenders and
importers of gasoline), need to be related to the "non-degradation" requirements set out elsewhere
in the Gasoline Rule. Those provisions can scarcely be understood if scrutinized strictly by
themselves, totally divorced from other sections of the Gasoline Rule which certainly constitute part
of the context these provisions. The baseline establishment rules whether individual or statutory,
were designed permit scrutiny and monitoring of the level of compliance of refiners, importers and
blenders with the "non-degradation" requirements. Without baselines of some kind, such scrutiny
would not be possible and the Gasoline Rule's objective of stabilizing and preventing further
deterioration of the level of air pollution prevailing in 1990, would be substantially frustrated. The
relationship between the baseline rules and the "non-degradation" requirements of the Gasoline
Rule is not negated by the inconsistency, found by the Panel, of the baseline establishment rules
with the terms of Article III:4.

We consider that, given that substantial relationship, the baseline establishment rules cannot be
regarded as merely incidentally or inadvertently aimed at the conservation of clean air in the United
States for the purposes of Article XX(g).

"if such measures are made effective in conjunction with restrictions on domestic production or
consumption

The Appellate Body considers that the basic international law rule of treaty interpretation, discussed
earlier, that the terms of a treaty are to be given their ordinary meaning, in context, so as to
effectuate its object and purpose, is applicable here, too. Viewed in this light, the ordinary or natural
meaning of "made effective" when used in connection with a measure - a governmental act or
regulation - may be seen to refer to such measure being "operative", as "in force", or as having
"come into effect."40 , the phrase "in conjunction with" may be read quite plainly as "together with"
or "jointly with."41 Taken together, the second clause of Article XX(g) appears to us to refer to
governmental measures like the baseline establishment rules being promulgated or brought into
effect together with restrictions on domestic production or consumption of natural resources. Put in
a slightly different manner, we believe that the clause "if such measures are made effective in
conjunction with restrictions on domestic product or consumption" is appropriately read as a
requirement that the measures concerned

The clause is a requirement of even-handedness in the imposition of restrictions, in the name of

conservation, upon the production or consumption of exhaustible natural resources. impose
restrictions, not just in respect of imported gasoline but also with respect to domestic gasoline

The baseline establishment rules affect both domestic gasoline and imported gasoline, providing
for - generally speaking - individual baselines for domestic refiners and blenders and statutory
baselines for importers. Thus, restrictions on the consumption or depletion of clean air by
regulating the domestic production of "dirty" gasoline are established jointly with corresponding
restrictions with respect to imported gasoline. That imported gasoline has been determined to
have been accorded "less favourable treatment" than the domestic gasoline in terms of Article
III:4, is not material for purposes of analysis under Article XX(g). It might also be noted that the
second clause of Article XX(g) speaks disjunctively of "domestic production or consumption."

IV. The Introductory Provisions of Article XX of the General Agreement: Applying the Chapeau of
the General Exceptions

In order that the justifying protection of Article XX may be extended to it, the measure at issue must
not only come under one or another of the particular exceptions - paragraphs (a) to (j) - listed under
Article XX; it must also satisfy the requirements imposed by the opening clauses of Article XX. The
analysis is, in other words, two-tiered: first, provisional justification by reason of characterization of
the measure under XX(g); second, further appraisal of the same measure under the introductory
clauses of Article XX.

The chapeau by its express terms addresses, not so much the questioned measure or its specific
contents as such, but rather the manner in which that measure is applied.43 It is, accordingly,
important to underscore that the purpose and object of the introductory clauses of Article XX is
generally the prevention of "abuse of the exceptions of [what was later to become] Article [XX]."44
This insight drawn from the drafting history of Article XX is a valuable one. The chapeau is animated
by the principle that while the exceptions of Article XX may be invoked as a matter of legal right,
they should not be so applied as to frustrate or defeat the legal obligations of the holder of the right
under the substantive rules of the General Agreement. If those exceptions are not to be abused or
misused, in other words, the measures falling within the particular exceptions must be applied
reasonably, with due regard both to the legal duties of the party claiming the exception and the legal
rights of the other parties concerned.

"Arbitrary discrimination", "unjustifiable discrimination" and "disguised restriction" on international

trade may, accordingly, be read side-by-side; they impart meaning to one another. It is clear to us
that "disguised restriction" includes disguised discrimination in international trade. It is equally clear
that concealed or unannounced restriction or discrimination in international trade does not exhaust
the meaning of "disguised restriction." We consider that "disguised restriction", whatever else it
covers, may properly be read as embracing restrictions amounting to arbitrary or unjustifiable
discrimination in international trade taken under the guise of a measure formally within the terms of
an exception listed in Article XX. Put in a somewhat different manner, the kinds of considerations
pertinent in deciding whether the application of a particular measure amounts to "arbitrary or
unjustifiable discrimination", may also be taken into account in determining the presence of a
"disguised restriction" on international trade. The fundamental theme is to be found in the purpose
and object of avoiding abuse or illegitimate use of the exceptions to substantive rules available in
Article XX.

FINDINGS AND CONCLUSIONS

For the reasons set out in the preceding sections of this report, the Appellate Body has reached

the following conclusions:

(a) the Panel erred in law in its conclusion that the baseline establishment rules contained in Part 80
of Title 40 of the Code of Federal Regulations did not fall within the terms of Article XX(g) of the
General Agreement;

(b) the Panel accordingly also erred in law in failing to decide whether the baseline rules contained in
Part 80 of Title 40 of the Code of Federal Regulation fell within the ambit of the chapeau of Article
XX of the General Agreement;

(c) the baseline establishment rules contained in Part 80 of Title 40 of the Code of Federal
Regulations fail to meet the requirements of the chapeau of Article XX of the General Agreement,
and accordingly are not justified under Article XX of the General Agreement.

The foregoing legal conclusions modify the conclusions of the Panel as set out in paragraph 8.1 of its
Report. The Appellate Body's conclusions leave intact the conclusions of the Panel that were not the
subject of appeal.

CHINA-MEASURES AFFECTING TRADING RIGHTS AND DISTRIBUTION SERVICES FOR CERTAIN

PUBLICATIONS AND AUDIO VISUAL ENTERTAINMENT PRODUCTS.

The Panel was established to consider a complaint by the United States concerning a series of
Chinese measures regulating activities relating to the importation and distribution of: reading
materials (for example, books, newspapers, periodicals, electronic publications); audiovisual home
entertainment ("AVHE") products (for example, videocassettes, video compact discs, digital video
discs ("DVDs")); sound recordings (for example, recorded audio tapes); and films for theatrical
release

Before the Panel, the United States claimed that certain of the challenged Chinese measures
violate trading rights commitments undertaken by China in the Protocol on the Accession of the
People's Republic of China to the World Trade Organization (the "WTO") ("China's Accession
Protocol")4 and the Report of the Working Party on the Accession of China to the WTO ("China's
Accession Working Party Report")5 because, by limiting trading rights to wholly Chinese State-
owned enterprises, the measures restrict the right of enterprises in China, foreign enterprises, and
foreign individuals, to import the relevant products into China.6 The United States alleged
violations of paragraphs 5.1 and 5.2 of China's Accession Protocol, and of paragraph 1.2 of China's
Accession Protocol to the extent that it incorporates commitments referred to in paragraphs 83
and 84 of China's Accession Working Party Report.

the United States claimed that certain of China's measures are inconsistent with Article III:4 of the
General Agreement on Tariffs and Trade 1994 (the "GATT 1994") because they:

(a) restrict the distribution of certain imported reading materials within China by requiring that,
unlike the situation for like domestic products, distribution be conducted only by wholly Chinese
State-owned enterprises, only through subscription, and only to subscribers approved by the
Chinese Government;
(b) limit to wholly Chinese-owned enterprises the distribution of certain imported reading
materials, while the distribution of like domestic products is not so limited;

(c) discriminate against imported sound recordings intended for electronic distribution within
China by subjecting them to more burdensome content review requirements than like domestic
products; or

(d) discriminate against imported films for theatrical release by limiting the distribution of such
imported films to two wholly Chinese State-owned enterprises, while the distribution of like
domestic products is not so limited

VI. CHINA'S DEFENCE UNDER ARTICLE XX(A) OF THE GATT 1994

In this case, China asserted that the introductory clause of paragraph 5.1 of its Accession
Protocol allowed it to justify the provisions of its measures found to be inconsistent with its
trading rights commitments as necessary to protect public morals in China within the
meaning of Article XX(a) of the GATT 1994. The Panel did not decide whether paragraph 5.1
gave China access to this defence. Instead, the Panel proceeded on the assumption that
such a defence was available. Yet, if China cannot rely on Article XX(a) to defend its
measures as ones that protect public morals in China, the findings of inconsistency with
China's trading rights commitments would be the end of the matter, and any analysis of the
measures under Article XX(a) would be unnecessary. Moreover, certain elements of the
Panel's reasoning under Article XX(a), notably its analysis of the appropriate restrictive
effect to be taken into account, depended, at least to some extent, on the availability of
Article XX(a) as a defence to a violation of China's trading rights commitments.Thus, these
parts of the Panel's analysis rest upon an uncertain foundation as a result of the absence of
a ruling on the applicability of Article XX(a) in this case

Whether the introductory clause of paragraph 5.1 allows China to assert a defence under
Article XX(a).

The first two sentences of paragraph 5.1 of China's Accession Protocol provide:

“Without prejudice to China's right to regulate trade in a manner consistent with the WTO
Agreement, China shall progressively liberalize the availability and scope of the right to
trade, so that, within three years after accession, all enterprises in China shall have the
right to trade in all goods throughout the customs territory of China, except for those
goods listed in Annex 2A which continue to be subject to state trading in accordance with
this Protocol. Such right to trade shall be the right to import and export goods.

we read the phrase "right to regulate trade in a manner consistent with the WTO Agreement" as a
reference to: (i) rights that the covered agreements affirmatively recognize as accruing to WTO
Members, namely, the power of Members to take specific types of regulatory measures in respect
of trade in goods when those measures satisfy prescribed WTO disciplines and meet specified
criteria; and (ii) certain rights to take regulatory action that derogates from obligations under the
WTO Agreement—that is, to relevant exceptions.

China's power to regulate trade in goods is disciplined by the obligations set out in Annex 1A of
the WTO Agreement. In our view, the introductory clause of paragraph 5.1 cannot be interpreted
in a way that would allow a complainant to deny China access to a defence merely by asserting a
claim under paragraph 5.1 and by refraining from asserting a claim under other provisions of the
covered agreements relating to trade in goods that apply to the same or closely linked measures,
and which set out obligations that are closely linked to China's trading rights commitments.433
Rather, whether China may, in the absence of a specific claim of inconsistency with the GATT 1994,
justify its measure under Article XX of the GATT 1994 must in each case depend on the relationship
between the measure found to be inconsistent with China's trading rights commitments, on the
one hand, and China's regulation of trade in goods, on the other hand

All of the above suggests to us that the introductory clause of paragraph 5.1 should be interpreted
as follows. Any exercise of China's right to regulate trade will be protected under the introductory
clause of paragraph 5.1 only if it is consistent with the WTO Agreement. This will be the case when
China's measures regulating trade are of a type that the WTO Agreement recognizes that
Members may take when they satisfy prescribed disciplines and meet specified conditions. Yet,
these are not the only types of WTO-consistent measures that may be protected under the
introductory clause of paragraph 5.1. Whether a measure regulating those who may engage in the
import and export of goods falls within the scope of China's right to regulate trade may also
depend on whether the measure has a clearly discernable, objective link to the regulation of trade
in the goods at issue. In considering whether such a link is discernable, it may be relevant whether
the measure regulating who may engage in trade is clearly and intrinsically related to the objective
of regulating the goods that are traded. In addition, such a link may often be discerned from the
fact that the measure in question regulates the right to import and export particular goods. This is
because the regulation of who may import and export specific goods will normally be objectively
related to, and will often form part of, the regulation of trade in those goods. Whether the
necessary objective link exists in a specific case needs to be established through careful scrutiny of
the nature, design, structure, and function of the measure, often in conjunction with an
examination of the regulatory context within which it is situated. When such a link exists, then
China may seek to show that, because its measure complies with the conditions of a GATT 1994
exception, the measure represents an exercise of China's power to regulate trade in a manner
consistent with the WTO Agreement and, as such, may not be impaired by China's trading rights
commitments.

In the light of this relationship between provisions of China's measures that are inconsistent with
China's trading rights commitments, and China's regulation of trade in the relevant products, we
find that China may rely upon the introductory clause of paragraph 5.1 of its Accession Protocol
and seek to justify these provisions as necessary to protect public morals in China, within the
meaning of Article XX(a) of the GATT 1994. Successful justification of these provisions, however,
requires China to have demonstrated that they comply with the requirements of Article XX of the
GATT 1994 and, therefore, constitute the exercise of its right to regulate trade in a manner
consistent with the WTO Agreement. The Panel found that China had not successfully made out
such a defence, and we now turn to review that finding.
The Appellate Body has previously considered the proper approach to take in analyzing the
"necessity" of a measure in several appeals, in particular: Korea – Various Measures on Beef (in the
context of Article XX(d) of the GATT 1994); US – Gambling (in the context of Article XIV(a) of the
GATS452); and in Brazil – Retreaded Tyres (in the context of Article XX(b) of the GATT 1994). In each
of these cases, the Appellate Body explained that an assessment of "necessity" involves "weighing
and balancing" a number of distinct factors relating both to the measure sought to be justified as
"necessary" and to possible alternative measures that may be reasonably available to the
responding Member to achieve its desired objective.

240. In US – Gambling, for example, the Appellate Body addressed, in the context of Article XIV(a) of
the GATS, the proper means of assessing "necessity" through a process of "weighing and balancing"
a number of factors. The Appellate Body explained that the process begins with an assessment of
the relative importance of the interests or values furthered by the challenged measure. A panel
should then turn to the other factors that are to be weighed and balanced, which will in most cases
include: (i) the contribution of the measure to the realization of the ends pursuedby it; and (ii) the
restrictive effect of the measure on international commerce. Additional factors may be relevant in
specific cases. Once a panel has identified the factors to be weighed and balanced, a comparison of
the challenged measure and possible alternatives should be undertaken, and the results considered
in the light of the importance of the objective pursued.

we do not see that, in the circumstances of this case, the Panel's approach amounted to error or
contradicted the approach set out in previous Appellate Body reports.

THE CONTRIBUTION OF CHINA'S MEASURES TO THE PROTECTION OF PUBLIC MORALS IN CHIN

The Appellate Body's finding, in Korea – Various Measures on Beef, that the term "necessary", in the
abstract, refers to a range of degrees of necessity.476 The Appellate Body explained that
determining whether a measure is "necessary" involves a process of weighing and balancing a series
of factors that prominently include the contribution made by the measure to secure compliance with
the law or regulation at issue, the importance of the common interests or values protected by that
law or regulation, and the accompanying impact of the law or regulation on imports or exports. The
greater the contribution a measure makes to the objective pursued, the more likely it is to be
characterized as "necessary".

252. In Brazil – Retreaded Tyres, the Appellate Body clarified how the analysis of the contribution
made by a challenged measure to the achievement of the objective pursued is to be undertaken. The
Appellate Body noted that a party seeking to demonstrate that its measures are "necessary" should
seek to establish such necessity through "evidence or data, pertaining to the past or the present",
establishing that the measures at issue contribute to the achievement of the objectives pursued. In
examining the evidence put forward, a panel must always assess the actual contribution made by
the measure to the objective pursued.

253. However, this is not the only type of demonstration that could establish such a contribution.
The Appellate Body explained that a panel is not bound to find that a measure does not make a
contribution to the objective pursued merely because such contribution is not "immediately
observable" or because, "[i]n the short-term, it may prove difficult to isolate the contribution [made
by] one specific measure from those attributable to the other measures that are part of the same
comprehensive policy". Accordingly, the Appellate Body stated in Brazil – Retreaded Tyres, that:

“... a panel might conclude that [a measure] is necessary on the basis of a demonstration that [it] is
apt to produce a material contribution to the achievement of its objective. This demonstration could
consist of quantitative projections in the future, or qualitative reasoning based on a set of
hypotheses that are tested and supported by sufficient evidence”

We do not agree that the Panel would have come to the conclusion that the State-ownership
requirement makes a contribution to the protection of public morals in China if it had considered
China's argument in a different way. China did not establish a connection between the exclusive
ownership of the State in the equity of an import entity and that entity's contribution to the
protection of public morals in China. We therefore find that the Panel did not err, in paragraphs
7.860 and 7.863 of the Panel Report, in its finding regarding the contribution to the protection of
public morals in China made by the State-ownership requirement in Article 42(2) of the
Publications Regulation and we reject China's claim that the Panel failed to make an objective
assessment of the matter before it, in violation of Article 11 of the DSU.

China did not establish that the exclusion of foreign-invested enterprises from engaging in the
importation of the relevant products contributes to the protection of public morals in China. We
see no indication that the Panel did not reasonably consider China's claim or otherwise failed to
make an objective assessment of the matter.

We have found that the Panel erred in finding that the State plan requirement is apt to make a
material contribution to the protection of public morals in China and can be characterized as
"necessary", in the absence of reasonably available alternatives, to protect public morals in China.
Consequently, the condition upon which the United States' alternative claim under Article 11 of
the DSU rests is not fulfilled and we do not address this claim.

C. Summary and Conclusion on Article XX(a) of the GATT 1994

336. We have found above that: (i) by virtue of the introductory clause of paragraph 5.1 of China's
Accession Protocol, China may, in this case, invoke Article XX(a) of the GATT 1994 to justify the
provisions and requirements found to be inconsistent with its trading rights commitments under its
Accession Protocol and Accession Working Party Report; (ii) the Panel did not err in its finding
regarding the contribution to the protection of public morals in China made by the State-ownership
requirement in Article 42(2) of the Publications Regulation; (iii) the Panel did not err in its finding
regarding the contribution to the protection of public morals made by the provisions excluding
foreign-invested enterprises from engaging in the importation of the relevant products; (iv) the
Panel erred in finding that the State plan requirement in Article 42 of the Publications Regulation is
apt to make a material contribution to the protection of public morals and that, in the absence of a
reasonably available alternative, it can be characterized as "necessary" to protect public morals in
China; (v) the Panel did not err in taking account of the restrictive effect that the measures at issue
have on those wishing to engage in importing as part of its assessment of the restrictive effect of the
provisions of China's measures found to be inconsistent with its trading rights commitments; and (vi)
the Panel did not err in finding that at least one of the alternative measures proposed by the United
States is an alternative "reasonably available" to China.

CHINA-RAW MEASURES RELATED TO THE EXPORTATION OF VARIOUS RAW MATERIALS

China and the United States each appeals certain issues of law and legal interpretations in the Panel
Report, China – Measures Related to the Exportation of Various Raw Materials, Complaint by the
United States (WT/DS394/R) (the "US Panel Report"); China and the European Union each appeals
certain issues of law and legal interpretations developed in the Panel Report, China – Measures
Related to the Exportation of Various Raw Materials, Complaint by the European Union
(WT/DS395/R) (the "EU Panel Report"); and China and Mexico each appeals certain issues of law and
legal interpretations developed in the Panel Report, China – MeasuresRelated to the Exportation of
Various Raw Materials, Complaint by Mexico (WT/DS398/R) (the"Mexico Panel Report") (collectively,
the "Panel Reports").2 The Panel was established to consider complaints by the United States3, the
European Union4, and Mexico5 (the "complainants") regarding the consistency of certain measures
imposed by China on the exportation of certain forms of bauxite, coke, fluorspar, magnesium,
manganese, silicon carbide, silicon metal, yellow phosphorous, and zinc6 (the "raw materials") with
the General Agreement on Tariffs and Trade 1994 (the "GATT 1994"), the Protocol on the Accession
of the People's Republic of China7 ("China's Accession Protocol"), and the Report of the Working
Party on the Accession of China8 ("China's Accession Working Party Report").

Before the Panel, the complainants challenged four types of restraints imposed by China on the
exportation of the raw materials: (i) export duties; (ii) export quotas; (iii) export licensing; and (iv)
minimum export price requirements.9 The complainants also challenged certain aspects of China's
allocation and administration of export quotas, export licences, and minimum export prices, as well
as the alleged non-publication of certain export measures.10 The complainants alleged that these
export restraints were inconsistent with China's commitments under China's Accession Protocol and
China's Accession Working Party Report, and with Articles VIII:1(a), VIII:4, X:1, X:3(a), and XI:1 of the
GATT 1994.

VIII. Article XX(g) of the GATT 1994

345. China alleges that the Panel erred in interpreting the phrase "made effective in conjunction
with" in Article XX(g) to mean that restrictions on domestic production or consumption must "be
applied jointly with the challenged export restrictions", and that "the purpose of those export
restrictions must be to ensure the effectiveness of those domestic restrictions".670

A. The Panel's Findings and Arguments on Appeal

346. The Panel found that China's export quota on refractory-grade bauxite is inconsistent with
Article XI:1 of the GATT 1994. China sought to justify this export quota pursuant to Article XX(g) of
the GATT 1994, arguing that refractory-grade bauxite is an exhaustible natural resource that is
scarce and requires protection.

347. The Panel first addressed the question of whether China's export quota relates to the
conservation of refractory-grade bauxite. Based on its review of the evidence and arguments before
it, the Panel found this not to be the case.672 The Panel nevertheless continued its analysis in order
to determine whether the export quota on refractory-grade bauxite was "made effective in
conjunction with" restrictions on domestic production or consumption, as required under Article
XX(g) of the GATT 1994.

348. The Panel considered that, in order for a measure to be justified under Article XX(g), the
measure must satisfy two conditions: (i) it must relate to the conservation of an exhaustible natural
resource; and (ii) it must be made effective in conjunction with restrictions on domestic production
or consumption. With respect to the first requirement, the Panel stated that the words "relate to …
conservation" have been interpreted by the Appellate Body to require a substantial relationship
between the trade measure and conservation, so that the trade measure would be "primarily aimed
at" the conservation of exhaustible natural resources.673 The Panel further noted that the term
"conservation" is defined as "the act of preserving and maintaining the existing state of something,
in this case 'natural resources' covered by Article XX(g)."674

349. With respect to the requirement that conservation measures in the sense of Article XX(g) be
"made effective in conjunction with" restrictions on domestic production, the Panel referred to a
statement of the GATT panel in Canada – Herring and Salmon, that a measure can only be
considered to be "made effective in conjunction with" restrictions on domestic production, if it is
"primarily aimed at rendering effective these restrictions".675 The Panel also quoted the Appellate
Body's statement in US – Gasoline that the phrase "'if such measures are made effective in
conjunction with restrictions on domestic products or consumption' is appropriately read as a
requirement that the measures concerned impose restrictions, not just in respect of
imported[products], but also with respect to domestic [products]."676 The Panel then found that
"restrictions on domestic production or consumption must not only be applied jointly with the
challenged export restrictions but, in addition, the purpose of those export restrictions must be to
ensure the effectiveness of those domestic restrictions.

Article XX of the GATT 1994 contemplates a two-tiered analysis of a measure that a Member seeks
to justify under that provision.685 A respondent must first demonstrate that the challenged
measure falls within the scope of one of the subparagraphs of Article XX. Where this is the case, a
respondent must further establish that the measure at issue satisfies the requirements of the
chapeau of Article XX.

355. In order to fall within the ambit of subparagraph (g) of Article XX, a measure must "relat[e] to
the conservation of exhaustible natural resources". The term "relat[e] to" is defined as "hav[ing]
some connection with, be[ing] connected to".686 The Appellate Body has found that, for a measure
to relate to conservation in the sense of Article XX(g), there must be "a close and genuine
relationship of ends and means". The word "conservation", in turn, means "the preservation of the
environment, especially of natural resources

Article XX(g) further requires that conservation measures be "made effective in conjunction with
restrictions on domestic production or consumption". The word "effective" as relating to a legal
instrument is defined as "in operation at a given time".689 We consider that the term "made
effective", when used in connection with a legal instrument, describes measures brought into
operation, adopted, or applied.

Accordingly, the trade restriction must operate jointly with the restrictions on domestic
production or consumption. Article XX(g) thus permits trade measures relating to the conservation
of exhaustible natural resources when such trade measures work together with restrictions on
domestic production or consumption, which operate so as to conserve an exhaustible natural
resource. By its terms, Article XX(g) does not contain an additional requirement that the
conservation measure be primarily aimed at making effective the restrictions on domestic
production or consumption.

The Appellate Body addressed Article XX(g) in US – Gasoline.691 The Appellate Body noted
Venezuela's and Brazil's argument that, to be deemed as "made effective in conjunction with
restrictions on domestic production or consumption", a measure must be "primarily aimed at"
both conservation of exhaustible natural resources and making effective certain restrictions on
domestic production or consumption. The Appellate Body, however, found that:

“… "made effective" when used in connection with a measure—a governmental act or regulation
—may be seen to refer to such measure being "operative", as "in force", or as having "come into
effect." Similarly, the phrase "in conjunction with" may be read quite plainly as "together with" or
"jointly with." Taken together, the second clause of Article XX(g) appears to us to refer to
governmental measures like the baseline establishment rules being promulgated or brought into
effect together with restrictions on domestic production or consumption of natural resources. Put
in a slightly different manner, we believe that the clause "if such measures are made effective in
conjunction with restrictions on domestic production or consumption" is appropriately read as a
requirement that the measures concerned impose restrictions, not just in respect of imported
gasoline but also with respect to domestic gasoline. The clause is a requirement of even-
handedness in the imposition of restrictions, in the name of conservation, upon the production or
consumption of exhaustible natural resources.

In assessing whether the baseline establishment rules at issue in US – Gasoline were "made
effective in conjunction with" restrictions on domestic production or consumption, the Appellate
Body relied on the fact that those rules were promulgated or brought into effect "together with"
restrictions on domestic production or consumption of natural resources. However, eventhough
Brazil and Venezuela had presented arguments suggesting that it was necessary that thepurpose
of the baseline establishment rules be to ensure the effectiveness of restrictions on domestic
production, the Appellate Body did not consider this to be necessary. In particular, the Appellate
Body did not consider that, in order to be justified under Article XX(g), measures "relatingto the
conservation of exhaustible natural resources" must be primarily aimed at rendering effective
restrictions on domestic production or consumption. Instead, the Appellate Body read the terms
"in conjunction with", "quite plainly", as "together with" or "jointly with"693, and found no
additional requirement that the conservation measure be primarily aimed at making effective
certain restrictions on domestic production or consumption.

As explained above, we see nothing in the text of Article XX(g) to suggest that, in addition to being
"made effective in conjunction with restrictions on domestic production or consumption", a trade
restriction must be aimed at ensuring the effectiveness of domestic restrictions, as the Panel
found. Instead, we have found above that Article XX(g) permits trade measures relating to the
conservation of exhaustible natural resources if such trade measures work together with
restrictions on domestic production or consumption, which operate so as to conserve an
exhaustible natural resource.

361. Based on the foregoing, we find that the Panel erred in interpreting the phrase "made
effective in conjunction with" in Article XX(g) of the GATT 1994 to require a separate showing that
the purpose of the challenged measure must be to make effective restrictions on domestic
production or consumption. Accordingly, we reverse this interpretation by the Panel in paragraph
7.397 of the Panel Reports.

The Panel did not err, in paragraph 7.159 of the US Panel Report, in finding that there is no basis
in China's Accession Protocol to allow the application of Article XX of the GATT 1994 to China's
obligations in Paragraph 11.3 of China's Accession Protocol; and therefore upholds the Panel's
conclusion, in paragraph 8.2(b) of the US Panel Report, that China may not seek to justify the
application of export duties to certain forms of fluorspar pursuant to Article XX(g) of the GATT
1994 and the Panel's conclusion, in paragraph 8.2(c) of the US Panel Report, that China may not
seek to justify the application of export duties to certain forms of magnesium, manganese and zinc
pursuant to Article XX(b) of the GATT 1994;

UNITED STATES – MEASURES AFFECTING THE CROSS-BORDER SUPPLY OFGAMBLING AND BETTING
SERVICES.

The United States, and Antigua and Barbuda ("Antigua"), each appeals certain issues of law and legal
interpretations developed in the Panel Report, United States – Measures Affecting the Cross- Border
Supply of Gambling and Betting Services (the "Panel Report").1 The Panel was established to
consider a complaint by Antigua concerning certain measures of state and federal authorities that
allegedly make it unlawful for suppliers located outside the United States to supply gambling and
betting services to consumers within the United States.

Before the Panel, Antigua claimed that certain restrictions imposed by the United States through
federal and state laws resulted in a "total prohibition" on the cross-border supply of gambling and
betting services from Antigua.3 Antigua contended that such a "total prohibition" was contrary to
obligations of the United States under the General Agreement on Trade in Services (the "GATS"). In
particular, Antigua asserted that the GATS Schedule of the United States includes specific
commitments on gambling and betting services. Antigua argued that, because the United States
made full market access and national treatment commitments (that is, inscribed "None" in the
relevant columns of its GATS Schedule), the United States, in maintaining the measures at issue, is
acting inconsistently with its obligations under its GATS Schedule4, as well as under Articles VI, XI,
XVI, and XVII of the GATS

VII. Article XIV of the GATS: General Exceptions

In these circumstances, we are of the view that, although the United States could have raised its
defence earlier, the Panel did not err in deciding to assess whether the United States' measures are
justified under Article XIV. From the outset, Antigua was apparently aware that the United States
might argue that its measures satisfy the requirements of Article XIV. Antigua admitted that it raised
no objection to the timing of the United States' defence before the Panel. Antigua also
acknowledged that it did have an opportunity to respond adequately to the United States' defence,
albeit at a late stage of the proceeding. For these reasons, we consider that the Panel did not
"deprive" Antigua of a "full and fair opportunity to respond to the defence".325 We find, therefore,
that the Panel did not fail to satisfy its obligations under Article 11 of the DSU by entering into the
merits of the United States' defence under Article XIV.

It follows that the principles of good faith and due process oblige a responding party to articulate its
defence promptly and clearly. This will enable the complaining party to understand that a specific
defence has been made, "be aware of its dimensions, and have an adequate opportunity to address
and respond to it."317 Whether a defence has been made at a sufficiently early stage of the panel
proceedings to provide adequate notice to the opposing party will depend on the particular
circumstances of a given dispute

Furthermore, as part of their duties, under Article 11 of the DSU, to "make an objective assessment
of the matter" before them, panels must ensure that the due process rights of parties to a dispute
are respected.318 A panel may act inconsistently with this duty if it addresses a defence that a
responding party raised at such a late stage of the panel proceedings that the complaining party had
no meaningful opportunity to respond to it. To this end, panels are endowed with "sufficient
flexibility" in their working procedures, by virtue of Article 12.2 of the DSU, to regulate panel
proceedings and, in particular, to adjust their timetables to allow for additional time to respond or
for additional submissions where necessary.

274. In the present case, the United States made no mention of Article XIV of the GATS until its
second written submission, filed on 9 January 2004.320 Antigua did not refer to Article XIV in its
second written submission, filed on the same day, although Antigua had, in its first written
submission, referred to the possibility that the United States might seek to invoke Article XIV.321
Both parties discussed issues relating to Article XIV in their opening statements at the second
substantive panel meeting on 26 January 2004.

At the hearing in this appeal, Antigua acknowledged that it "had the opportunity to respond"to the
United States' defence, and had "responded sufficiently", during its opening statement at the second
substantive panel meeting.323 When asked whether it had informed the Panel of any prejudice
resulting from the United States' allegedly late invocation of the defence, Antigua answered that it
had not so informed the Panel. Nevertheless, Antigua maintained at the hearing that it was
prejudiced on the grounds that the late invocation by the United States of its defence hampered the
Panel's ability to assess that defence, resulting in the Panel's making the defence for the United
States

the Panel allegedly identified on its own in examining the United States' defence under paragraph (a)
of Article XIV, namely, health concerns, and combating money laundering and fraud. In both its first
and second written submissions to the Panel, the United States, in responding to one of Antigua's
claims under the GATS, identified five "concerns associated with the remote supply of gambling
[services]."333 These "concerns" relate to: (1) organized crime334; (2) money laundering335; (3)
fraud336; (4) risks to youth, including underage gambling337; and (5) public health
C. The Panel's Substantive Analysis Under Article XIV

Article XIV of the GATS sets out the general exceptions from obligations under that Agreement in the
same manner as does Article XX of the GATT 1994. Both of these provisions affirm the right of
Members to pursue objectives identified in the paragraphs of these provisions even if, in doing so,
Members act inconsistently with obligations set out in other provisions of the respective
agreements, provided that all of the conditions set out therein are satisfied. Similar language is used
in both provisions349, notably the term "necessary"350 and the requirements set out in their
respective chapeaux. Accordingly, like the Panel, we find previous decisions under Article XX of the
GATT 1994 relevant for our analysis under Article XIV of the GATS.

Article XIV of the GATS, like Article XX of the GATT 1994, contemplates a "two-tier analysis" of a
measure that a Member seeks to justify under that provision.352 A panel should first determine
whether the challenged measure falls within the scope of one of the paragraphs of Article XIV. This
requires that the challenged measure address the particular interest specified in that paragraph and
that there be a sufficient nexus between the measure and the interest protected. The required
nexus—or "degree of connection"—between the measure and the interest is specified in the
language of the paragraphs themselves, through the use of terms such as "relating to" and
"necessary .Where the challenged measure has been found to fall within one of the paragraphs of
Article XIV, a panel should then consider whether that measure satisfies the requirements of the
chapeau of Article XIV.

Justification of the Measures Under Paragraph (a) of Article XIV

293. Paragraph (a) of Article XIV covers:

“... measures ... necessary to protect public morals or to maintain public order. (footnote omitted)”

294. In the first step of its analysis under this provision, the Panel examined whether the measures
at issue—the Wire Act, the Travel Act, and the IGBA—are "designed" to protect public morals and to
maintain public order.354 As a second step, the Panel determined whether these measures are
"necessary" to protect public morals or to maintain public order, within the meaning of Article
XIV(a).355 The Panel found that:

“... the United States has not been able to provisionally justify, under Article XIV(a) of the GATS, that
the Wire Act, the Travel Act (when read together with the relevant state laws) and the Illegal
Gambling Business Act (when read together with the relevant state laws) are necessary to protect
public morals and/or public order within the meaning of Article XIV(a). We, nonetheless,
acknowledge that such laws are designed so as to protect public morals or maintain public order.”

(a) "Measures … to protect public morals or to maintain public order"

In its analysis under Article XIV(a), the Panel found that "the term 'public morals' denotes
standards of right and wrong conduct maintained by or on behalf of a community or nation."358
The Panel further found that the definition of the term "order", read in conjunction with footnote
5 of the GATS, "suggests that 'public order' refers to the preservation of the fundamental interests
of a society, as reflected in public policy and law. The Panel then referred to Congressional reports
and testimony establishing that "the government of the United States consider[s] [that the Wire
Act, the Travel Act, and the IGBA] were adopted to address concerns such as those pertaining to
money laundering, organized crime, fraud, underage gambling and pathological gambling."360 On
this basis, the Panel found that the three federal statutes are "measures that are designed to
'protect public morals' and/or 'to maintain public order' within the meaning of Article XIV(a)."

Antigua contests this finding on a rather limited ground, namely that the Panel failed to determine
whether the concerns identified by the United States satisfy the standard set out in footnote 5 to
Article XIV(a) of the GATS, which reads:

“[t]he public order exception may be invoked only where a genuine and sufficiently serious threat is
posed to one of the fundamental interests of society.

298. We see no basis to conclude that the Panel failed to assess whether the standard set out in
footnote 5 had been satisfied. As Antigua acknowledges362, the Panel expressly referred to footnote
5 in a way that demonstrated that it understood the requirement therein to be part of the meaning
given to the term "public order".363 Although "no further mention"364 was made in the Panel
Report of footnote 5 or of its text, this alone does not establish that the Panel failed to assess
whether the interests served by the three federal statutes satisfy the footnote's criteria. Having
defined "public order" to include the standard in footnote 5, and then applied that definition to the
facts before it to conclude that the measures "are designed to 'protect public morals' and/or 'to
maintain public order'", the Panel was not required, in addition, to make a separate, explicit
determination that the standard of footnote 5 had been met.

299. We therefore uphold the Panel's finding, in paragraph 6.487 of the Panel Report, that "the
concerns which the Wire Act, the Travel Act and the Illegal Gambling Business Act seek to address
fall within the scope of 'public morals' and/or 'public order' under Article XIV(a)."

(b) The Requirement that a Measure be "Necessary" Under Article XIV(a)

In the second part of its analysis under Article XIV(a), the Panel considered whether the Wire Act,
the Travel Act, and the IGBA are "necessary" within the meaning of that provision. The Panel found
that the United States had not demonstrated the "necessity" of those measures.

This finding rested on the Panel's determinations that: (i) "the interests and values protected by [the
Wire Act, the Travel Act, and the IGBA] serve very important societal interests that can be
characterized as 'vital and important in the highest degree'"367; (ii) the Wire Act, the Travel Act, and
the IGBA "must contribute, at least to some extent", to addressing the United States' concerns
"pertaining to money laundering, organized crime, fraud, underage gambling and pathological
gambling"368; (iii) the measures in question "have a significant restrictive trade impact"369; and (iv)
"[i]n rejecting Antigua's invitation to engage in bilateral or multilateral consultations and/or
negotiations, the United States failed to pursue in good faith a course of action that could have been
used by it to explore the possibility of finding a reasonably available WTO-consistent alternative."

APPELLATE BODY ANALYSIS

(i) Determining "necessity" under Article XIV(a)

We note, at the outset, that the standard of "necessity" provided for in the general exceptions
provision is an objective standard. To be sure, a Member's characterization of a measure's objectives
and of the effectiveness of its regulatory approach—as evidenced, for example, by texts of statutes,
legislative history, and pronouncements of government agencies or officials—will be relevant in
determining whether the measure is, objectively, "necessary". A panel is not bound by these
characterizations, however, and may also find guidance in the structure and operation of the
measure and in contrary evidence proffered by the complaining party. In any event, a panel must, on
the basis of the evidence in the record, independently and objectively assess the "necessity" of the
measure before it.

In Korea – Various Measures on Beef, the Appellate Body stated, in the context of Article XX(d) of the
GATT 1994, that whether a measure is "necessary" should be determined through "a process of
weighing and balancing a series of factors".374 The Appellate Body characterized this process as
one:

“... comprehended in the determination of whether a WTO-consistent alternative measure which

the Member concerned could "reasonably be expected to employ" is available, or whether a less
WTO inconsistent measure is "reasonably available”

The process begins with an assessment of the "relative importance" of the interests or values
furthered by the challenged measure.376 Having ascertained the importance of the particular
interests at stake, a panel should then turn to the other factors that are to be "weighed and
balanced". The Appellate Body has pointed to two factors that, in most cases, will be relevant to a
panel's determination of the "necessity" of a measure, although not necessarily exhaustive of factors
that might be considered. One factor is the contribution of the measure to the realization of the
ends pursued by it; the other factor is the restrictive impact of the measure on international
commerce.

A comparison between the challenged measure and possible alternatives should then be
undertaken, and the results of such comparison should be considered in the light of the importance
of the interests at issue. It is on the basis of this "weighing and balancing" and comparison of
measures, taking into account the interests or values at stake, that a panel determines whether a
measure is "necessary" or, alternatively, whether another, WTO-consistent measure is "reasonably
available.

The requirement, under Article XIV(a), that a measure be "necessary"—that is, that there be no
"reasonably available", WTO-consistent alternative—reflects the shared understanding of Members
that substantive GATS obligations should not be deviated from lightly. An alternative measure may
be found not to be "reasonably available", however, where it is merely theoretical in nature, for
instance, where the responding Member is not capable of taking it, or where the measure imposes
an undue burden on that Member, such as prohibitive costs or substantial technical difficulties.
Moreover, a "reasonably available" alternative measure must be a measure that would preserve for
the responding Member its right to achieve its desired level of protection with respect to the
objective pursued under paragraph (a) of Article XIV.

It is well-established that a responding party invoking an affirmative defence bears the burden of
demonstrating that its measure, found to be WTO-inconsistent, satisfies the requirements of the
invoked defence.380 In the context of Article XIV(a), this means that the responding party must
show that its measure is "necessary" to achieve objectives relating to public morals or public order.

In our view, however, it is not the responding party's burden to show, in the first instance, that there
are no reasonably available alternatives to achieve its objectives. In particular, a responding party
need not identify the universe of less trade-restrictive alternative measures and then show that
none of those measures achieves the desired objective. The WTO agreements do not contemplate
such an impracticable and, indeed, often impossible burden.

310. Rather, it is for a responding party to make a prima facie case that its measure is "necessary" by
putting forward evidence and arguments that enable a panel to assess the challenged measure in
the light of the relevant factors to be "weighed and balanced" in a given case. The responding party
may, in so doing, point out why alternative measures would not achieve the same objectives as the
challenged measure, but it is under no obligation to do so in order to establish, in the first instance,
that its measure is "necessary". If the panel concludes that the respondent has made a prima facie
case that the challenged measure is "necessary"—that is, "significantly closer to the pole of
'indispensable' than to the opposite pole of simply 'making a contribution to'"381—then a panel
should find that challenged measure "necessary" within the terms of Article XIV(a) of the GATS.

311. If, however, the complaining party raises a WTO-consistent alternative measure that, in its
view, the responding party should have taken, the responding party will be required to demonstrate
why its challenged measure nevertheless remains "necessary" in the light of that alternative or, in
other words, why the proposed alternative is not, in fact, "reasonably available. If a responding party
demonstrates that the alternative is not "reasonably available", in the light of the interests or values
being pursued and the party's desired level of protection, it follows that the challenged measure
must be "necessary" within the terms of Article XIV(a) of the GATS.

Did the Panel err in its analysis of the "necessity" of the measures at issue?

In its "necessity" analysis under Article XIV(a), the Panel appeared to understand that, in order for a
measure to be accepted as "necessary" under Article XIV(a), the responding Member must have first
"explored and exhausted" all reasonably available WTO-compatible alternatives before adopting its
WTO-inconsistent measure.390 This understanding led the Panel to conclude that, in this case, the
United States had "an obligation to consult with Antigua before and while imposing its prohibition
on the cross-border supply of gambling and betting services".391 Because the Panel found that the
United States had not engaged in such consultations with Antigua, the Panel also found that the
United States had not established that its measures are "necessary" and, therefore, provisionally
justified under Article XIV(a).

In our view, the Panel's "necessity" analysis was flawed because it did not focus on an alternative
measure that was reasonably available to the United States to achieve the stated objectives
regarding the protection of public morals or the maintenance of public order. Engaging in
consultations with Antigua, with a view to arriving at a negotiated settlement that achieves the same
objectives as the challenged United States' measures, was not an appropriate alternative for the
Panel to consider because consultations are by definition a process, the results of which are
uncertain and therefore not capable of comparison with the measures at issue in this case.
318. We note, in addition, that the Panel based its requirement of consultations, in part, on "the
existence of [a] specific market access commitment [in the United States' GATS Schedule] with
respect to cross-border trade of gambling and betting services".396 We do not see how the
existence of a specific commitment in a Member's Schedule affects the "necessity" of a measure in
terms of the protection of public morals or the maintenance of public order. For this reason as well,
the Panel erred in relying on consultations as an alternative measure reasonably available to the
United States.

In our analysis above, we found that the Panel erred in assessing the necessity of the three United
States statutes against the possibility of consultations with Antigua because such consultations, in
our view, cannot qualify as a reasonably available alternative measure with which a challenged
measure should be compared.403 For this reason, we reverse the Panel's finding, in paragraph
6.535 of the Panel Report, that, because the United States did not enter into consultations with
Antigua:

The record before us reveals no reasonably available alternative measure proposed by Antigua or
examined by the Panel that would establish that the three federal statutes are not "necessary"
within the meaning of Article XIV(a). Because the United States made its prima facie case of
"necessity", and Antigua failed to identify a reasonably available alternative measure, we conclude
that the United States demonstrated that its statutes are "necessary", and therefore justified, under
paragraph (a) of Article XIV.

ARGENTINA-SAFEGAURD MEASURES ON IMPORTS OF FOOTWEAR

Argentina and the European Communities appeal certain issues of law and legal interpretation in the
Panel Report, Argentina – Safeguard Measures on Imports of Footwear (the "Panel Report").1 The
Panel was established to consider a complaint by the European Communities with respect to the
application by Argentina of certain safeguard measures on imports of footwear.

On 14 February 1997, Argentina initiated a safeguard investigation and adopted Resolution 226/97,
which imposed provisional measures in the form of minimum specific duties on imports of certain
footwear.2 On the same day, the Argentine Ministry of Economy and Public Works repealed the
minimum specific duties on imports of footwear ("DIEMs") that had been maintained by Argentina
since 31 December 1993.3 The opening of the safeguard investigation and the implementation of a
provisional safeguard measure were notified to the Committee on Safeguards by Argentina in a
communication dated 21 February 19974 and, by further communication dated 5 March 1997,
Argentina transmitted a copy of the provisional duty resolution to the Committee on Safeguards.

On 25 July 1997, Argentina notified the Committee on Safeguards of the determination of serious
injury made by its competent authorities, the Comisión Nacional de Comercio Exterior ("CNCE").6
Attached to this notification was Act 338, the report of the CNCE on serious injury. Act 338
incorporates by reference the Technical Report, a summary by CNCE staff of the factual data
gathered during the safeguard investigation.7 On 1 September 1997, Argentina notified the
Committee on Safeguards of its intention to impose a definitive safeguard measure. 8 On 12
September 1997, Argentina adopted Resolution 987/97, which imposed, effective 13 September
1997, a definitive safeguard measure in the form of minimum specific duties on certain imports of
footwear. On 26 September 1997, Argentina transmitted a copy of this Resolution to the Committee
on Safeguards 9, and Uruguay, as Pro Tempore President of the Mercado Común del Sur
("MERCOSUR")10 notified the definitive safeguard measure imposed by that Resolution.11 On 28
April 1998, Argentina published Resolution 512/98 modifying Resolution 987/97.12 On 26 November
1998, Argentina published Resolution 1506/98, further modifying Resolution 987/97, and, on 7
December 1998, the Argentine Secretariat of Industry, Commerce and Mines published Resolution
837/98 implementing Resolution 1506/98.13 The relevant factual aspects of this dispute are set out
in further detail at paragraphs 2.1–2.6 and 8.1–8.20 of the Panel Report.

4. The Panel considered claims made by the European Communities that Argentina's safeguard
measures are inconsistent with Articles 2, 4, 5, 6 and 12 of the Agreement on Safeguards, and with
Article XIX:1(a) of the General Agreement on Tariffs and Trade 1994 (the "GATT 1994").

The Panel concluded that "the definitive safeguard measure on footwear based on Argentina's
investigation and determination is inconsistent with Articles 2 and 4 of the Agreement on
Safeguards" and, therefore, "that there is nullification or impairment of the benefits accruing to the
European Communities under the Agreement on Safeguards within the meaning of Article 3.8 of the
DSU."

The Panel found "no basis to address the [European Communities'] claims under Article XIX of GATT
separately and in isolation from those under the Safeguards Agreement."15 The Panel rejected the
claims of the European Communities under Article 12 of the Agreement on Safeguards16 and, in
light of its determination that the definitive safeguard measure is inconsistent with Articles 2 and 4
of the Agreement on Safeguards, the Panel did not consider it necessary to make findings with
respect to the claims of the European Communities under Articles 5 and 6 of that Agreement

V. Article XIX of the GATT 1994 and "Unforeseen Developments"

The European Communities appeals the Panel's conclusion "that safeguard investigations conducted
and safeguard measures imposed after the entry into force of the WTO agreements which meet the
requirements of the new Safeguards Agreement satisfy the requirements of Article XIX of GATT."

The European Communities appeals as well the Panel's consequent refusal to rule on the European
Communities' Article XIX claim, and asks the Appellate Body to reverse the legal interpretations and
findings of the Panel made in support of this conclusion, notably the "fundamental error" made by
the Panel when it referred to the "express omission of the criterion of unforeseen developments" in
the Agreement on Safeguards.62 The European Communities argues that the requirement of
increased imports resulting from "unforeseen developments" is a fundamental characteristic of a
safeguard measure because it lies at the beginning of a "logical continuum" of events justifying the
invocation of a safeguard measure.63 The European Communities requests the Appellate Body to
find, on the basis of uncontested facts in the Panel Report, that Argentina did not comply with the
requirement in Article XIX:1(a) of the GATT 1994 that safeguard measures may only be taken when
the alleged increase in imports is "a result of unforeseen developments".64

77. In concluding that safeguard investigations and safeguard measures imposed after the entry into
force of the Agreement on Safeguards which meet the requirements of that Agreement also thereby
"satisfy" the requirements of Article XIX of the GATT 1994, the Panel made the following
observations about the relationship between Article XIX of the GATT 1994 and the Agreement on
Safeguards:

“Article XIX requires - since the entry into force of the Safeguards Agreement - conformity with the
requirements and conditions of the latter agreement. Although all the provisions of Article XIX of
GATT continue to legally co-exist with the Safeguards Agreement in the framework of the single
undertaking of the Uruguay Round agreements, any implementation of safeguard measures in the
meaning of Article XIX presupposes the application of and thus compliance with the provisions of the
Safeguards Agreement. …

… While the Safeguards Agreement does not supersede or replace Article XIX, which continues to
remain in force as part of the GATT, the original conditions contained in Article XIX have to be read
in the light of the subsequently negotiated and much more specific provisions of the Safeguards
Agreement. Those provisions of the Safeguards Agreement place the original rule of Article XIX
within the entire package of the new WTO legal system and make it operational in practice.

… Given the reasoning developed by the panel and the Appellate Body in the Brazil - Desiccated
Coconut case, it is our view that Article XIX of GATT and the Safeguards Agreement must a fortiori be
read as representing an inseparable package of rights and disciplines which have to be considered in
conjunction. Therefore, we conclude that Article XIX of GATT cannot be understood to represent the
total rights and obligations of WTO Members, but that rather the Safeguards Agreement as applying
the disciplines of Article XIX of GATT, reflects the latest statement of WTO Members concerning their
rights and obligations concerning safeguards. Thus the Safeguards Agreement should be understood
as defining, clarifying, and in some cases modifying the whole package of rights and obligations of
Members with respect to safeguard measures as they currently exist. By the same token, and in the
light of the principle of effective treaty interpretation, the express omission of the criterion of
unforeseen developments in the new agreement (which otherwise transposes, reflects and refines in
great detail the essential conditions for the imposition of safeguard measures provided for in Article
XIX of GATT) must, in our view, have meaning

… it is our conclusion that safeguard investigations conducted and safeguard measures imposed
after the entry into force of the WTO agreements which meet the requirements of the new
Safeguards Agreement satisfy the requirements of Article XIX of GATT.

Therefore, we see no basis to address the EC's claims under Article XIX of GATT separately and in
isolation from those under the Safeguards Agreement.”

APPELLATE BODY ANALYSIS

“we will examine, first, whether the Panel is correct in its conclusion about the relationship
between the Agreement on Safeguards and Article XIX of the GATT 1994, and, second, whether
the clause – "as a result of unforeseen developments and of the effect of the obligations incurred
by a Member under this Agreement, including tariff concessions … " in Article XIX:1(a) of the GATT
1994 continues to have any meaning and legal effect.”

With respect to the relationship between the Agreement on Safeguards and Article XIX of the GATT
1994, we begin with Article II of the WTO Agreement. Paragraph 2 of that Article stipulates:

“The agreements and associated legal instruments included in Annexes 1, 2 and 3 (hereinafter
referred to as "Multilateral Trade Agreements") are integral parts of this Agreement, binding on all
Members.

Paragraph 4 of that Article provides:

The General Agreement on Tariffs and Trade 1994 as specified in Annex 1A (hereinafter referred to
as "GATT 1994") is legally distinct from the General Agreement on Tariffs and Trade, dated 30
October 1947 … (hereinafter referred to as "GATT 1947").

Thus, the GATT 1994 is not the GATT 1947. It is "legally distinct" from the GATT 1947. The GATT 1994
and the Agreement on Safeguards are both Multilateral Agreements on Trade in Goods contained in
Annex 1A of the WTO Agreement, and, as such, are both "integral parts" of the same treaty, the
WTO Agreement, that are "binding on all Members".70 Therefore, the provisions of Article XIX of the
GATT 1994 and the provisions of the Agreement on Safeguards are all provisions of one treaty, the
WTO Agreement. They entered into force as part of that treaty at the same time. They apply equally
and are equally binding on all WTO Members. And, as these provisions relate to the same thing,
namely the application by Members of safeguard measures, the Panel was correct in saying that
"Article XIX of GATT and the Safeguards Agreement must a fortiori be read as representing an
inseparable package of rights and disciplines which have to be considered in conjunction. Yet a
treaty interpreter must read all applicable provisions of a treaty in a way that gives meaning to all of
them, harmoniously. And, an appropriate reading of this "inseparable package of rights and
disciplines" must, accordingly, be one that gives meaning to all the relevant provisions of these two
equally binding agreements.

We see nothing in the language of either Article 1 or Article 11.1(a) of the Agreement on Safeguards
that suggests an intention by the Uruguay Round negotiators to subsume the requirements of Article
XIX of the GATT 1994 within the Agreement on Safeguards and thus to render those requirements
no longer applicable. Article 1 states that the purpose of the Agreement on Safeguards is to establish
"rules for the application of safeguard measures which shall be understood to mean those measures
provided for in Article XIX of GATT 1994." (emphasis added) This suggests that Article XIX continues
in full force and effect, and, in fact, establishes certain prerequisites for the imposition of safeguard
measures. Furthermore, in Article 11.1(a), the ordinary meaning of the language "unless such action
conforms with the provisions of that Article applied in accordance with this Agreement" (emphasis
added) clearly is that any safeguard action must conform with the provisions of Article XIX of the
GATT 1994 as well as with the provisions of the Agreement on Safeguards. Neither of these
provisions states that any safeguard action taken after the entry into force of the WTO Agreement
need only conform with the provisions of the Agreement on Safeguards. Thus, we conclude that any
safeguard measure74 imposed after the entry into force of the WTO Agreement must comply with
the provisions of both the Agreement on Safeguards and Article XIX of the GATT 1994
As a consequence, we must examine the claims of the European Communities under Article XIX of
the GATT 1994, and, specifically, its claim on appeal that the clause – "as a result of unforeseen
developments and of the effect of the obligations incurred by a Member under this Agreement,
including tariff concessions … " – in Article XIX:1(a) of the GATT 1994 is a requirement that must be
satisfied in order for a safeguard measure to be imposed.

GATT 1994

Article XIX

Emergency Action on Imports of Particular Products

1. (a) If, as a result of unforeseen developments and of the effect of the obligations incurred by a
Member under this Agreement, including tariff concessions, any product is being imported into the
territory of that Member in such increased quantities and under such conditions as to cause or
threaten serious injury to domestic producers in that territory of like or directly competitive
products, the Member shall be free, in respect of such product, and to the extent and for such time
as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part
or to withdraw or modify the concession. (emphasis added)

Agreement on Safeguards

Article 2

Conditions

1. A Member may apply a safeguard measure to a product only if that Member has determined,
pursuant to the provisions set out below, that such product is being imported into its territory in
such increased quantities, absolute or relative to domestic production, and under such conditions as
to cause or threaten to cause serious injury to the domestic industry that produces like or directly
competitive products. (footnote omitted).

In comparing the language of Article XIX:1(a) of the GATT 1994 and Article 2.1 of the Agreement on
Safeguards, we observe that although much of the language in the two provisions is very similar,
and, in fact, identical, the initial clause in Article XIX:1(a) – "as a result of unforeseen developments
and of the effect of the obligations incurred by a Member under this Agreement, including tariff
concessions … " – does not appear in Article 2.1 of the Agreement on Safeguards.After making this
same observation, the Panel concluded that the "unforeseen developments" clause was "expressly
omitted" by the Uruguay Round negotiators. And, although the Panel conceded at one point in its
reasoning that Article XIX and the Agreement on Safeguards "legally co-exist"75 as part of the WTO
Agreement, the Panel concluded from this supposedly "express omission" that the "omitted" phrase
has no meaning.

We believe that, with this conclusion, the Panel failed to give meaning and legal effect to all the
relevant terms of the WTO Agreement, contrary to the principle of effectiveness in the
interpretation of treaties.

The Panel states that the "express omission of the criterion of unforeseen developments" in Article
XIX:1(a) from the Agreement on Safeguards "must, in our view, have meaning."77 On the
contrary, in our view, if they had intended to expressly omit this clause, the Uruguay Round
negotiators would and could have said so in the Agreement on Safeguards. They did not.

89. Furthermore, it is clear from Articles 1 and 11.1(a) of the Agreement on Safeguards that the
Uruguay Round negotiators did not intend that the Agreement on Safeguards would entirely
replace Article XIX. Instead, the ordinary meaning of Articles 1 and 11.1(a) of the Agreement on
Safeguards confirms that the intention of the negotiators was that the provisions of Article XIX of
the GATT 1994and of the Agreement on Safeguards would apply cumulatively, except to the extent
of a conflict between specific provisions. We do not see this as an issue involving a conflict
between specific provisions of two Multilateral Agreements on Trade in Goods. Thus, we are
obliged to apply the provisions of Article 2.1 of the Agreement on Safeguards and Article XIX:1(a)
of the GATT 1994 cumulatively, in order to give meaning, by giving legal effect, to all the
applicable provisions relating to safeguard measures.

90. Having concluded that the clause – "as a result of unforeseen developments and of the effectof
the obligations incurred by a Member under this Agreement, including tariff concessions … " – in
Article XIX:1(a) of the GATT 1994 does have meaning, we are obliged by virtue of that conclusion
to consider what that meaning is. Toward this end, we refer again to the language of Article
XIX:1(a),in its entirety:

“If, as a result of unforeseen developments and of the effect of the obligations incurred by a
Member under this Agreement, including tariff concessions, any product is being imported into the
territory of that Member in such increased quantities and under such conditions as to cause or
threaten serious injury to domestic producers in that territory of like or directly competitive
products, the Member shall be free, in respect of such product, and to the extent and for such time
as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in
part or to withdraw or modify the concession.

To determine the meaning of the clause – "as a result of unforeseen developments and of the
effect of the obligations incurred by a Member under this Agreement, including tariff concessions
… " – in sub-paragraph (a) of Article XIX:1, we must examine these words in their ordinary
meaning, in their context and in light of the object and purpose of Article XIX.79 We look first to
the ordinary meaning of these words. As to the meaning of "unforeseen developments", we note
that the dictionary definition of "unforeseen", particularly as it relates to the word
"developments", is synonymous with "unexpected". "Unforeseeable", on the other hand, is
defined in the dictionaries as meaning "unpredictable" or "incapable of being foreseen, foretold or
anticipated".81 Thus, it seems to us that the ordinary meaning of the phrase "as a result of
unforeseen developments" requires that the developments which led to a product being imported
in such increased quantities and under such conditions as to cause or threaten to cause serious
injury to domestic producers must have been "unexpected". With respect to the phrase "of the
effect of the obligations incurred by a Member under this Agreement, including tariff concessions
… ", we believe that this phrase simply means that it must be demonstrated, as a matter of fact,
that the importing Member has incurred obligations under the GATT 1994, including tariff
concessions. Here, we note that the Schedules annexed to the GATT 1994 are made an integral
part of Part I of that Agreement, pursuant to paragraph 7 of Article II of the GATT 1994. Therefore,
any concession or commitment in a Member's Schedule is subject to the obligations contained in
Article II of the GATT 1994.

When we examine this clause – "as a result of unforeseen developments and of the effect of the
obligations incurred by a Member under this Agreement, including tariff concessions … " – in its
immediate context in Article XIX:1(a), we see that it relates directly to the second clause in that
paragraph – "If, … , any product is being imported into the territory of that Member in such
increased quantities and under such conditions as to cause or threaten serious injury to domestic
producers in that territory of like or directly competitive products …". The latter, or second, clause
in Article XIX:1(a) contains the three conditions for the application of safeguard measures. These
conditions, which are reiterated in Article 2.1 of the Agreement on Safeguards82, are that: (1) a
product is being imported "in such quantities and under such conditions"; (2) "as to cause"; (3)
serious injury or the threat of serious injury to domestic producers. The first clause in Article
XIX:1(a) – "as a result of unforeseen developments and of the obligations incurred by a Member
under the Agreement, including tariff concessions … " – is a dependent clause which, in our view, is
linked grammatically to the verb phrase "is being imported" in the second clause of that
paragraph. Although we do not view the first clause in Article XIX:1(a) as establishing independent
conditions for the application of a safeguard measure, additional to the conditions set forth in the
second clause of that paragraph, we do believe that the first clause describes certain
circumstances which must be demonstrated as a matter of fact in order for a safeguard measure to
be applied consistently with the provisions of Article XIX of the GATT 1994. In this sense, we believe
that there is a logical connection between the circumstances described in the first clause – "as a
result of unforeseen developments and of the effect of the obligations incurred by a Member under
this Agreement, including tariff concessions … " – and the conditions set forth in the second clause
of Article XIX:1(a) for the imposition of a safeguard measure.

Our reading is supported by the context of these provisions. As part of the context of paragraph
1(a) of Article XIX, we note that the title of Article XIX is: "Emergency Action on Importsof
Particular Products". The words "emergency action" also appear in Article 11.1(a) of the
Agreement on Safeguards. We note once again, that Article XIX:1(a) requires that a product be
imported "in such increased quantities and under such conditions as to cause or threaten serious
injury to domestic producers". (emphasis added) Clearly, this is not the language of ordinary
events in routine commerce. In our view, the text of Article XIX:1(a) of the GATT 1994, read in its
ordinary meaning and in its context, demonstrates that safeguard measures were intended by the
drafters of the GATT to be matters out of the ordinary, to be matters of urgency, to be, in short,
"emergency actions." And, such "emergency actions" are to be invoked only in situations when, as
a result of obligations incurred under the GATT 1994, a Member finds itself confronted with
developments it had not "foreseen" or "expected" when it incurred that obligation. The remedy
that Article XIX:1(a) allows in this situation is temporarily to "suspend the obligation in whole or in
part or to withdraw or modify the concession". Thus, Article XIX is clearly, and in every way, an
extraordinary remedy.

This reading of these phrases is also confirmed by the object and purpose of Article XIX of the GATT
1994. The object and purpose of Article XIX is, quite simply, to allow a Member to readjust
temporarily the balance in the level of concessions between that Member and other exporting
Members when it is faced with "unexpected" and, thus, "unforeseen" circumstances which lead to
the product "being imported" in "such increased quantities and under such conditions as to cause
or threaten serious injury to domestic producers of like or directly competitive products". In
perceiving and applying this object and purpose to the interpretation of this provision of the WTO
Agreement, it is essential to keep in mind that a safeguard action is a "fair" trade remedy. The
application of a safeguard measure does not depend upon "unfair" trade actions, as is the case
with anti-dumping or countervailing measures. Thus, the import restrictions that are imposed on
products of exporting Members when a safeguard action is taken must be seen, as we have said,
as extraordinary. And, when construing the prerequisites for taking such actions, their
extraordinary nature must be taken into account.

95. Our reading of these prerequisites does precisely this, by making certain that all the relevant
provisions of the Agreement on Safeguards and Article XIX of the GATT 1994 relating to safeguard
measures are given their full meaning and their full legal effect. Our reading, too, is consistent
with the desire expressed by the Uruguay Round negotiators in the Preamble to the Agreement on
Safeguards "to clarify and reinforce the disciplines of GATT 1994, and specifically those of its
Article XIX …, to re-establish multilateral control over safeguards and eliminate measures that
escape such control …". In furthering this statement of the object and purpose of the Agreement
on Safeguards, it must always be remembered that safeguard measures result in the temporary
suspension of concessions or withdrawal of obligations, such as those in Article II and Article XI of
the GATT 1994, which are fundamental to the WTO Agreement. As such, safeguard measures may
be applied only when all the provisions of the Agreement on Safeguards and Article XIX of the
GATT 1994 are clearly demonstrated.

In addition, we note that our reading of the clause – "as a result of unforeseen developments and
of the effect of the obligations incurred by a Member under this Agreement, including tariff
concessions … " – in Article XIX:1(a) is also consistent with the one GATT 1947 case that involved
Article XIX, the so-called "Hatters' Fur" case. Members of the Working Party in that case, in 1951,
stated…

"unforeseen developments" should be interpreted to mean developments occurring after the

negotiation of the relevant tariff concession which it would not be reasonable to expect that the
negotiators of the country making the concession could and should have foreseen at the time
when the concession was negotiated.

97. In the light of all of this, we do not agree with the Panel that any safeguard investigations
conducted or safeguard measures imposed after the entry into force of the WTO Agreement
"which meet the requirements of the new Safeguards Agreement satisfy the requirements of
Article XIX of GATT." (emphasis added) Therefore, we reverse the Panel's conclusion in paragraph
8.69 of the Panel Report that safeguard measures imposed after entry into force of the WTO
Agreement which meet the requirements of the Agreement on Safeguards necessarily "satisfy" the
requirements of Article XIX of the GATT 1994, as well as the Panel's finding that the Uruguay
Round negotiators "expressly omitted" the clause – "as a result of unforeseen developments and
of the effect of the obligations incurred by a Member under this Agreement, including tariff
concessions … " – from

Article 2 of the Agreement on Safeguards.

98. As will be seen, in the final section of this Report, we uphold the conclusions of the Panel that
Argentina's investigation in this case was inconsistent with the requirements of Articles 2 and 4 of
the Agreement on Safeguards. As a consequence, there is no legal basis for the safeguard
measures imposed by Argentina. For this reason, we do not believe that it is necessary to complete
the analysis of the Panel relating to the claim made by the European Communities under Article
XIX of the GATT 1994 by ruling on whether the Argentine authorities have, in their investigation,
demonstrated that the increased imports in this case occurred "as a result of unforeseen
developments and of the effect of the obligations incurred by a Member under this Agreement,
including tariff concessions … ".

KOREA – MEASURES AFFECTING IMPORTS OF FRESH, CHILLED AND FROZEN BEEF

B. Article XX(d) of the GATT 1994

The Panel went on to conclude that the dual retail system, which it found to be inconsistent with
Article III:4, could not be justified pursuant to Article XX(d) of the GATT 1994. The Panel found that
the dual retail system is a disproportionate measure not necessary to secure compliance with the
Korean law against deceptive practices

The Panel began its examination of Korea's dual retail system under Article XX(d) by finding that
the dual retail system was designed to "secure compliance" with the Unfair Competition Act, a law
consistent on its face with WTO provisions. 94 The Panel then focused on whether the dual retail
system is "necessary" to secure compliance with that law. It examined enforcement measures
taken by Korea for related products where fraudulent misrepresentation or passing of one product
for another has occurred, and found that in these areas a dual retail system was not used. Instead,
in respect of such product areas, Korea uses traditional enforcement measures, consistent with
WTO rules, which include record-keeping, investigations, policing and fines. The Panel next
inquired into whether these alternative, WTO-consistent measures were "reasonably available" to
Korea to meet Korea's desired level of enforcement of laws against fraudulent misrepresentation
in the retail beef sector. The Panel concluded that these measures are "reasonably available"
alternative measures, and that Korea therefore cannot justify the dual retail system as
"necessary" under Article XX(d).

154. Korea appeals the Panel's conclusion. Korea argues that the Panel incorrectly interpreted the
term "necessary" in Article XX(d) as requiring consistency among enforcement measures taken in
related product areas. Further, according to Korea, the Panel neglected to take into account the
level of enforcement that Korea sought with respect to preventing the fraudulent sale of imported
beef.

Article XX(d), together with the introductory clause of Article XX, reads as follows:

Article XX

General Exceptions
Subject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between countries where the same
conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall
be construed to prevent the adoption or enforcement by any Member of measures:

(d) necessary to secure compliance with laws or regulations which are not inconsistent with the
provisions of this Agreement, including those relating to customs enforcement, the enforcement
of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents,
trademarks and copyrights, and the prevention of deceptive practices

We note that in examining the Korean dual retail system under Article XX, the Panel followed the
appropriate sequence of steps outlined in United States – Standards for Reformulated and
Conventional Gasoline ("United States – Gasoline"). There we said:

“In order that the justifying protection of Article XX may be extended to it, the measure at issue
must not only come under one or another of the particular exceptions -- paragraphs (a) to (j) --
listed under Article XX; it must also satisfy the requirements imposed by the opening clauses of
Article XX. The analysis is, in other words, two-tiered: first, provisional justification by reason of
characterization of the measure under XX(g); second, further appraisal of the same measure under
the introductory clauses of Article XX.98 (emphasis added) The Panel concentrated its analysis on
paragraph (d), that is, the first-tier analysis.

Having found that the dual retail system did not fulfill the requirements of paragraph (d), the
Panel correctly considered that it did not need to proceed to the second-tier analysis, that is, to
examine the application in this case of the requirements of the introductory clause of Article XX.

For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally under
paragraph (d) of Article XX, two elements must be shown. First, the measure must be one
designed to "secure compliance" with laws or regulations that are not themselves inconsistent
with some provision of the GATT 1994. Second, the measure must be "necessary" to secure such
compliance. A Member who invokes Article XX(d) as a justification has the burden of
demonstrating that these two requirements are met.

The Panel examined these two aspects one after the other. The Panel found, "despite …
troublesome aspects, … that the dual retail system was put in place, at least in part, in order to
secure compliance with the Korean legislation against deceptive practices to the extent that it
serves to prevent acts inconsistent with the Unfair Competition Act." 100 It recognized that the
system was established at a time when acts of misrepresentation of origin were widespread in the
beef sector. It also acknowledged that the dual retail system "does appear to reduce the
opportunities and thus the temptations for butchers to misrepresent [less expensive] foreign beef
for [more expensive] domestic beef ". The parties did not appeal these findings of the Panel

We turn, therefore, to the question of whether the dual retail system is "necessary" to secure
compliance with the Unfair Competition Act. Once again, we look first to the ordinary meaning of
the word "necessary", in its context and in the light of the object and purpose of Article XX, in
accordance with Article 31(1) of the Vienna Convention.
160. The word "necessary" normally denotes something "that cannot be dispensed with or done
without, requisite, essential, needful". We note, however, that a standard law dictionary cautions
that:

“[t]his word must be considered in the connection in which it is used, as it is a word susceptible of
various meanings. It may import absolute physical necessity or inevitability, or it may import that
which is only convenient, useful, appropriate, suitable, proper, or conducive to the end sought. It
is an adjective expressing degrees, and may express mere convenience or that which is
indispensable or an absolute physical necessity"

We believe that, as used in the context of Article XX(d), the reach of the word "necessary" is not
limited to that which is "indispensable" or "of absolute necessity" or "inevitable". Measures which
are indispensable or of absolute necessity or inevitable to secure compliance certainly fulfil the
requirements of Article XX(d). But other measures, too, may fall within the ambit of this
exception. As used in Article XX(d), the term "necessary" refers, in our view, to a range of degrees
of necessity. At one end of this continuum lies "necessary" understood as "indispensable"; at the
other end, is "necessary" taken to mean as "making a contribution to." We consider that a
"necessary" measure is, in this continuum, located significantly closer to the pole of
"indispensable" than to the opposite pole of simply "making a contribution to".

In appraising the "necessity" of a measure in these terms, it is useful to bear in mind the context in
which "necessary" is found in Article XX(d). The measure at stake has to be "necessary to ensure
compliance with laws and regulations … , including those relating to customs enforcement, the
enforcement of [lawful] monopolies … , the protection of patents, trade marks and copyrights, and
the prevention of deceptive practices". (emphasis added) Clearly, Article XX(d) is susceptible of
application in respect of a wide variety of "laws and regulations" to be enforced. It seems to us
that a treaty interpreter assessing a measure claimed to be necessary to secure compliance of a
WTO consistent law or regulation may, in appropriate cases, take into account the relative
importance of the common interests or values that the law or regulation to be enforced is
intended to protect. The more vital or important those common interests or values are, the easier
it would be to accept as "necessary" a measure designed as an enforcement instrument.

There are other aspects of the enforcement measure to be considered in evaluating that measure
as "necessary". One is the extent to which the measure contributes to the realization of the end
pursued, the securing of compliance with the law or regulation at issue. The greater the
contribution, the more easily a measure might be considered to be "necessary". Another aspect is
the extent to which the compliance measure produces restrictive effects on international
commerce, that is, in respect of a measure inconsistent with Article III:4, restrictive effects on
imported goods.

A measure with a relatively slight impact upon imported products might more easily be considered
as "necessary" than a measure with intense or broader restrictive effects.

In sum, determination of whether a measure, which is not "indispensable", may nevertheless be

"necessary" within the contemplation of Article XX(d), involves in every case a process of weighing
and balancing a series of factors which prominently include the contribution made by the
compliance measure to the enforcement of the law or regulation at issue, the importance of the
common interests or values protected by that law or regulation, and the accompanying impact of
the law or regulation on imports or exports.

165. The panel in United States – Section 337 described the applicable standard for evaluating
whether a measure is "necessary" under Article XX(d) in the following terms: It was clear to the
Panel that a contracting party cannot justify a measure inconsistent with another GATT provision
as "necessary" in terms of Article XX(d) if an alternative measure which it could reasonably be
expected to employ and which is not inconsistent with other GATT provisions is available to it. By
the same token, in cases where a measure consistent with other GATT provisions is not reasonably
available, a contracting party is bound to use, among the measures reasonably available to it, that
which entails the least degree of inconsistency with other GATT provisions.106

166. The standard described by the panel in United States – Section 337 encapsulates the general
considerations we have adverted to above. In our view, the weighing and balancing process we
have outlined is comprehended in the determination of whether a WTO-consistent alternative
measure which the Member concerned could "reasonably be expected to employ" is available, or
whether a less WTO-inconsistent measure is "reasonably available".

It is not open to doubt that Members of the WTO have the right to determine for themselves

the level of enforcement of their WTO-consistent laws and regulations. We note that this has also

been recognized by the panel in United States – Section 337, where it said: "The Panel wished to

make it clear that this [the obligation to choose a reasonably available GATT-consistent or less

inconsistent measure] does not mean that a contracting party could be asked to change its
substantive

patent law or its desired level of enforcement of that law …. ". (emphasis added) The panel added,

however, the caveat that "provided that such law and such level of enforcement are the same for

imported and domestically-produced products".126

177. We recognize that, in establishing the dual retail system, Korea could well have intended to

secure a higher level of enforcement of the prohibition, provided by the Unfair Competition Act, of

acts misleading the public about the origin of beef (domestic or imported) sold by retailers, than
the

level of enforcement of the same prohibition of the Unfair Competition Act with respect to beef

served in restaurants, or the sale by retailers of other meat or food products, such as pork or

seafood.

178. We think it unlikely that Korea intended to establish a level of protection that totally
eliminates fraud with respect to the origin of beef (domestic or foreign) sold by retailers. The total
elimination of fraud would probably require a total ban of imports. Consequently, we assume that
in effect Korea intended to reduce considerably the number of cases of fraud occurring with
respect to the origin of beef sold by retailers. The Panel did find that the dual retail system "does
appear to reduce the opportunities and thus the temptations for butchers to misrepresent foreign
beef for domestic beef".127 And we accept Korea's argument that the dual retail system facilitates
control and permits combatting fraudulent practices ex ante. Nevertheless, it must be noted that
the dual retail system is only an instrument to achieve a significant reduction of violations of the
Unfair Competition Act. Therefore, the question remains whether other, conventional and WTO-
consistent instruments can not reasonably be expected to be employed to achieve the same result.

Turning to investigations, the Panel found that Korea, in the past, had been able to distinguish
imported beef from domestic beef, and had, in fact, published figures on the amount of imported
beef fraudulently sold as domestic beef. This meant that Korea was able, in fact, to detect fraud.128
On fines, the Panel found that these could be an effective deterrent, as long as they outweighed the
potential profits from fraud.129 On record-keeping, the Panel felt that if beef traders at all levels
were required to keep records of their transactions, then effective investigations could be carried
out.

Finally, on policing, the Panel noted that Korea had not demonstrated that the costs would be too
high. For all these reasons, the Panel considered "that Korea has not demonstrated to the
satisfaction of the Panel that alternative measures consistent with the WTO Agreement were not
reasonably available". Thus, as already noted, the Panel found that the dual retail system was "a
disproportionate measure not necessary to secure compliance with the Korean law against
deceptive practices"

We share the Panel's conclusion. We are not persuaded that Korea could not achieve itsdesired level
of enforcement of the Unfair Competition Act with respect to the origin of beef sold by retailers by
using conventional WTO-consistent enforcement measures, if Korea would devote moreresources to
its enforcement efforts on the beef sector. It might also be added that Korea's argument about the
lack of resources to police thousands of shops on a round-the-clock basis is, in the end, not
sufficiently persuasive. Violations of laws and regulations like the Korean Unfair Competition Act can
be expected to be routinely investigated and detected through selective, but well-targeted, controls
of potential wrongdoers. The control of records will assist in selecting the shops to which the police
could pay particular attention.

EUROPEAN COMMUNITIES – MEASURES AFFECTING ASBESTOS AND ASBESTOS-CONTAINING

PRODUCTS.

VII. Article XX(b) of the GATT 1994 and Article 11 of the DSU

Under Article XX(b) of the GATT 1994, the Panel examined, first, whether the use of chrysotile-
cement products poses a risk to human health and, second, whether the measure at issue is
"necessary to protect human … life or health". Canada contends that the Panel erred in law in its
findings on both these issues.

We recall that Article XX(b) of the GATT 1994 reads:

“Subject to the requirement that such measures are not applied in a manner which would constitute
a means of arbitrary or unjustifiable discrimination between countries where the same conditions
prevail, or a disguised restriction on international trade, nothing in this Agreement shall be
construed to prevent the adoption or enforcement by any Member of measures:

(b) necessary to protect human, animal or plant life or health; (emphasis added)

A. "To Protect Human Life or Health"

On the issue of whether the use of chrysotile-cement products poses a risk to human health
sufficient to enable the measure to fall within the scope of application of the phrase "to protect
human … life or health" in Article XX(b), the Panel stated that it "considers that the evidence before
it tends to show that handling chrysotile-cement products constitutes a risk to health rather than the
opposite.

we will interfere with the Panel's appreciation of the evidence only when we are "satisfied that the
panel has exceeded the bounds of its discretion, as the trier of facts, in its appreciation of the
evidence." 148 (emphasis added) In this case, nothing suggests that the Panel exceeded the bounds
of its lawful discretion. To the contrary, all four of the scientific experts consulted by the Panel
concurred that chrysotile asbestos fibres, and chrysotile-cement products, constitute a risk to human
health, and the Panel's conclusions on this point are faithful to the views expressed by the four
scientists. In addition, the Panel noted that the carcinogenic nature of chrysotile asbestos fibres has
been acknowledged since 1977 by international bodies, such as the International Agency for
Research on Cancer and the World Health Organization. In these circumstances, we find that the
Panel remained well within the bounds of its discretion in finding that chrysotile-cement products
pose a risk to human life or health.

B. "Necessary"

On the issue of whether the measure at issue is "necessary" to protect public health within the

meaning of Article XX(b), the Panel stated:

“In the light of France's public health objectives as presented by the European Communities, the
Panel concludes that the EC has made a prima facie case for the non-existence of a reasonably
available alternative to the banning of chrysotile and chrysotile-cement products and recourse to
substitute products. Canada has not rebutted the presumption established by the EC. We also
consider that the EC's position is confirmed by the comments of the experts consulted in the course
of this proceeding.

165. Canada argues that the Panel erred in applying the "necessity" test under Article XX(b) of the
GATT 1994 "by stating that there is a high enough risk associated with the manipulation of
chrysotile-cement products that it could in principle justify strict measures such as the Decree."

Looking at this issue now, we believe that, in determining whether a suggested alternative measure
is "reasonably available", several factors must be taken into account, besides the difficulty of
implementation. In Thailand – Restrictions on Importation of and Internal Taxes on Cigarettes, the
panel made the following observations on the applicable standard for evaluating whether a measure
is "necessary" under Article XX(b):

“The import restrictions imposed by Thailand could be considered to be "necessary" in terms of

Article XX(b) only if there were no alternative measure consistent with the General Agreement, or
less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health
policy objectives. 163 (emphasis added)

171. In our Report in Korea –Beef, we addressed the issue of "necessity" under Article XX(d) of the
GATT 1994.164 In that appeal, we found that the panel was correct in following the standard set
forth by the panel in United States – Section 337 of the Tariff Act of 1930: It was clear to the Panel
that a contracting party cannot justify a measure inconsistent with another GATT provision as
"necessary" in terms of Article XX(d) if an alternative measure which it could reasonably be expected
to employ and which is not inconsistent with other GATT provisions is available to it. By the same
token, in cases where a measure consistent with other GATT provisions is not reasonably available, a
contracting party is bound to use, among the measures reasonably available to it, that which entails
the least degree of inconsistency with other GATT provisions.

172. We indicated in Korea – Beef that one aspect of the "weighing and balancing process …
comprehended in the determination of whether a WTO-consistent alternative measure" is
reasonably available is the extent to which the alternative measure "contributes to the realization of
the end pursued".In addition, we observed, in that case, that "[t]he more vital or important [the]
common interests or values" pursued, the easier it would be to accept as "necessary" measures
designed to achieve those ends. In this case, the objective pursued by the measure is the
preservation of human life and health through the elimination, or reduction, of the well-known, and
life-threatening, health risks posed by asbestos fibres. The value pursued is both vital and important
in the highest degree. The remaining question, then, is whether there is an alternative measure that
would achieve the same end and that is less restrictive of trade than a prohibition

Canada asserts that "controlled use" represents a "reasonably available" measure that would serve
the same end. The issue is, thus, whether France could reasonably be expected to employ
"controlled use" practices to achieve its chosen level of health protection – a halt in the spread of
asbestos-related health risks.

174. In our view, France could not reasonably be expected to employ any alternative measure if that
measure would involve a continuation of the very risk that the Decree seeks to "halt". Such an
alternative measure would, in effect, prevent France from achieving its chosen level of health
protection. On the basis of the scientific evidence before it, the Panel found that, in general, the
efficacy of "controlled use" remains to be demonstrated. 168 Moreover, even in cases where
"controlled use" practices are applied "with greater certainty", the scientific evidence suggests that
the level of exposure can, in some circumstances, still be high enough for there to be a "significant
residual risk of developing asbestos-related diseases." 169 The Panel found too that the efficacy of
"controlled use" is particularly doubtful for the building industry and for DIY enthusiasts, which are

the most important users of cement-based products containing chrysotile asbestos. 170 Given these
factual findings by the Panel, we believe that "controlled use" would not allow France to achieve its
chosen level of health protection by halting the spread of asbestos-related health risks. "Controlled
use" would, thus, not be an alternative measure that would achieve the end sought by France.

175. For these reasons, we uphold the Panel's finding, in paragraph 8.222 of the Panel Report, that
the European Communities has demonstrated a prima facie case that there was no "reasonably
available alternative" to the prohibition inherent in the Decree. As a result, we also uphold the
Panel's conclusion, in paragraph 8.223 of the Panel Report, that the Decree is "necessary to protect
human … life or health" within the meaning of Article XX(b) of the GATT 1994.

KOREA – DEFINITIVE SAFEGUARD MEASURE ON IMPORTS OF CERTAIN DAIRY PRODUCTS

Korea and the European Communities appeal from certain issues of law and legal interpretations
developed in the Panel Report, Korea – Definitive Safeguard Measure on Imports of Certain Dairy
Products ("the Panel Report").1 The Panel was established to consider a complaint by the
European Communities relating to a definitive safeguard measure imposed by Korea on imports of
certain dairy products.

2. On 17 May 1996, the Korean Trade Commission initiated an investigation of injury to the
domestic industry by imports of skimmed milk powder preparations. The results of this
investigation were published by the Korean Trade Commission in the Investigation Report on
Industrial Injury by the Office of Administration and Investigation (the "OAI Report"). On 7 March
1997, Korea published in its Government Gazette its decision to apply a definitive safeguard
measure in the form of a quantitative restriction on imports of the dairy products at issue. Korea
notified the initiation and results of its investigation, as well as its decision to apply a safeguard
measure, to the Committee on Safeguards. On 12 August 1997, following consultations in the
Committee on Safeguards, the European Communities requested consultations with Korea under
the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU")
regarding the consistency of Korea's safeguard measure with its WTO obligations. The European
Communities subsequently requested the establishment of a panel to examine the consistency of
Korea's safeguard measure with its obligations under Articles 2, 4, 5 and 12 of the Agreement on
Safeguards and Article XIX of the GATT 1994. The United States participated as a third party in the
proceedings before the Panel.

In its Report circulated to Members of the World Trade Organization ("the WTO") on 21 June 1999,
the Panel concluded that Korea's definitive safeguard measure was imposed inconsistently with its
WTO obligations in that:

(a) Korea's serious injury determination is not consistent with the provisions of Article 4.2(a) of the
Agreement on Safeguards;

(b) Korea's determination of the appropriate safeguard measure is not consistent with the
provisions of Article 5 of the Agreement on Safeguards; and

(c) Korea's notifications to the Committee on Safeguards (G/SG/N/6/KOR/2, G/SG/N/8/KOR/1,

G/SG/N/10/KOR/1, G/SG/N/10/KOR/1. Suppl) were not timely and therefore are not consistent
with the provisions of Article 12.1 of the Agreement on Safeguards.
The Panel rejected:

(a) the European Communities' claim that Korea violated the provisions of Article XIX:1 of GATT by
failing to examine the "unforeseen developments";

(b) the European Communities' claim that Korea violated the provisions of Article 2.1 of the
Agreement on Safeguards by failing to examine, as a separate and additional requirement, the
"conditions" under which increased imports caused serious injury to the relevant domestic
industry; and

(c) the European Communities' claims that the content of Korea's notifications to the Committee
on Safeguards (G/SG/N/6/KOR/2, G/SG/N/8/KOR/1, G/SG/N/10/KOR/1, G/SG/N/10/KOR/1.
Suppl) did not meet the requirements of Article 12.1, 12.2 and 12.3 of the Agreement on
Safeguards.

III. ISSUES RAISED IN THIS APPEAL

(a) Whether the Panel erred in its conclusion that the clause in Article XIX:1(a) of the GATT 1994 –
"if, as a result of unforeseen developments and of the effect of the obligations incurred by a
Member under this Agreement, including tariff concessions …" – does not add conditions for any
safeguard measure to be applied pursuant to Article XIX of the GATT 1994;

CLAIMS UNDER ARTICLE XIX OF THE GATT 1994

The European Communities appeals the Panel's rejection of the claim by the European
Communities that Korea violated the provisions of Article XIX:1 of the GATT 1994 by failing to
examine whether the alleged increase in imports was "as a result of unforeseen developments".27
The European Communities requests that the Appellate Body reverse the legal interpretations and
findings made by the Panel in paragraphs 7.42 to 7.48 of the Panel Report, and, most notably, the
"fundamental error" made by the Panel in finding that:

“… the prior section of the sentence, "If, as a result of unforeseen developments and of the effect
of obligations incurred by a contracting party under this Agreement, including tariff concessions…"
does not add conditions for any measure to be applied pursuant to Article XIX …”

The European Communities also asks that the Appellate Body complete the Panel's reasoning and
find on the basis of uncontested facts on the record that Korea did not comply with the
"requirement" contained in Article XIX:1(a) of the GATT 1994 to apply safeguard measures only
where the alleged increase in imports is "as a result of unforeseen developments.

In its examination of the claim of the European Communities under Article XIX:1 of the GATT 1994,
the Panel stated that:

“We consider that the terms and prescriptions of Article XIX:1 of GATT are still generally
applicable, as we are of the view that there is no conflict between the provisions of Article XIX:1 of
GATT and those of Article 2.1 of the Agreement on Safeguards.31

70. Having decided that Article XIX:1 of the GATT 1994 is still applicable under the WTO
Agreement, the Panel proceeded to examine the meaning of the clause in Article XIX:1(a) – "If, as
a result of unforeseen developments and of the effect of the obligations incurred by a contracting
party under this Agreement, including tariff concessions …". The Panel stated that, in its view, this
clause:

… does not add conditions for any measure to be applied pursuant to Article XIX but rather serves
as an explanation of why an Article XIX measure may be needed, taking into account the fact that
at the time (1947) the CONTRACTING PARTIES had just agreed (for the first time) on multilateral
tariff bindings and on a general prohibition against quotas. (emphasis added)

71. The Panel reasoned further:

“… the proposition "as a result of unforeseen developments and of the effect of the obligations
incurred by a contracting party under this Agreement" does not address the conditions for Article
XIX measures to be applied but rather explains why a provision such as Article XIX may be needed.
For us, the object of this section of the first sentence of paragraph 1 of Article XIX cannot be
anything else but a statement (of what we would now consider to be obvious) that because of the
binding nature of the GATT obligations and concessions, tariffs and other obligations negotiated
on the basis of trade expectations may need to be changed temporarily in light of actual
unforeseen developments. Thus, the phrase "unforeseen circumstances" does not specify anything
additional as to the conditions under which measures pursuant to Article XIX may be applied.”

we do not agree with the Panel that the clause – "as a result of unforeseen developments and of
the effect of the obligations incurred by a Member under this Agreement, including tariff
concessions …" – "does not specify anything additional as to the conditions under which measures
pursuant to Article XIX may be applied."53 We, therefore, reverse the Panel's conclusion that
"Article XIX of GATT does not contain such a requirement."

The Panel did not make any factual findings on whether the alleged increase in imports ofskimmed
milk powder preparations was "a result of unforeseen developments and of the effect of the
obligations incurred by a Member under this Agreement, including tariff concessions …". The facts
were also contested by the parties. While Korea argues that the increase in imports was "a result
of unforeseen developments", the European Communities disagrees with this view of the facts. In
the absence of any factual findings by the Panel or undisputed facts in the Panel record relating to
whether the alleged increase in imports was, indeed, "a result of unforeseen developments and of
the effect of the obligations incurred by a Member under this Agreement, including tariff
concessions …", we are not in a position, within the scope of our mandate set forth in Article 17 of
the DSU, to complete the analysis and make a determination as to whether Korea acted
inconsistently with its obligations under Article XIX:1(a). Accordingly, we are unable to come to a
conclusion on whether or not Korea violated its obligations under Article XIX:1(a) of the GATT
1994.