WTO Appellate Body Report: Indonesia – Import Licensing Regimes

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SUMMARY:

Decision:

The WTO Appellate Body has ruled that certain import licensing measures maintained by Indonesia constitute impermissible import restrictions under Article XI:1 of the General Agreement on Tariffs and Trade (GATT) 1994.

This is one of a series of reports on WTO Panel or Appellate Body decisions.

Significance of Decision:

The Appellate Body has accepted a new interpretive approach to the key exceptions provision of GATT Article XX.

Traditionally, panels have determined (i) whether a measure was "provisionally justified" under one the specific exceptions of GATT Article XX (e.g., health); and, if so, (ii) would then consider whether the measure was being applied in a non-discriminatory way under the "chapeau", or opening paragraph, of that provision. For some of the measures in the current case, the panel examined the chapeau first, and then rejected the Article XX defence without considering the applicability of the specific paragraphs.

The Appellate Body rejected Indonesia's argument that this constituted an error of law. It found that depending on the case, "a panel that deviates from the sequence of analysis under Article XX might not necessarily, for that reason alone, commit a reversible legal error provided the panel has made findings on those elements under the applicable paragraphs that are relevant for its analysis of the requirements of chapeau". Such a ruling introduces an element of uncertainty into the interpretation of GATT Article XX.

In US – Gasoline, the Appellate Body's first decision, the tribunal stated that the chapeau was "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". It will often be difficult for panels to determine if a measure can be upheld under the chapeau before ruling first on whether one of the specified exceptions even applies. Moreover, making "findings on those elements under the applicable paragraphs that are relevant for its analysis of the requirements of chapeau" is not the same as a panel rendering a determination on whether one of the enumerated exceptions validly applies. These are distinct issues that require separate findings. In some cases, such an approach could frustrate the ability of WTO Members to prove that the exception applies "as a matter of legal right".

Thus, what had previously been a clear analytical approach to analyzing an exception under GATT Article XX is now less certain. However, most future panels are likely to continue to follow the traditional, sequenced approach. As the Appellate Body acknowledged in the current appeal, "following the normal sequence of analysis under Article XX provides panels with the necessary tools to assess the requirements of the chapeau".

REPORT:

Background: Panel ruling against Indonesia's import licensing measures

The United States and New Zealand challenged 18 import licensing measures imposed by Indonesia for horticultural, animal, and animal products. It found that all of these measures constituted import restrictions under Article XI:1 of the GATT 1994. The Panel rejected Indonesia's defences under GATT Article XX. The Panel declined to rule on the claims under Article 4.2 of the Agreement on Agriculture on the grounds that GATT Article XI:1 dealt more specifically with quantitative restrictions on agricultural products.

GATT Article XI:1 and Article 4.2 of the Agreement on Agriculture "apply cumulatively"

The complainants in this dispute argued that Indonesia's measures violated both GATT Article XI:1 and Article 4.2 of the Agreement on Agriculture.

GATT Article XI:1 provides in part that "No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through… import… licences or other measures", may be imposed on imported goods. Article 4.2 of the Agreement on Agriculture sets out the obligation that "Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties...." Footnote 1 to provision provides a list of impermissible measures, including "quantitative import restrictions", although it specifically excludes any "measures maintained under… other general, non-agriculture-specific provisions of GATT 1994[.]"

The Panel found that GATT Article XI:1 "deals specifically with quantitative restrictions", while Article 4.2 had a "broader scope" because it refers to measures other than quantitative restrictions. The Panel thus commenced its assessment with GATT Article XI:1 and, having found that all of the challenged measures breached that provision, declined to rule on the claims under Article 4.2.

On appeal, Indonesia argued that the Panel erred by assessing the claims under GATT Article XI:1 rather than Article 4.2 of the Agreement on Agriculture. Among other things, Indonesia invoked Article 21.1 of the Agreement on Agriculture to argue that Article 4.2 of that Agreement was lex specialis (a more specific legal provision) and that Article 4.2 should have been applied to the exclusion of GATT Article XI:1. The Appellate Body rejected this argument.

Article 21.1 of the Agreement on Agriculture provides in part that "[t]he provisions of GATT 1994… shall apply subject to the provisions of this Agreement". The Appellate Body recalled its earlier ruling in EC – Export Subsidies on Sugar that "Members explicitly recognized that there may be conflicts between the Agreement on Agriculture and the GATT 1994, and explicitly provided, through Article 21, that the Agreement on Agriculture would prevail to the extent of such conflicts".

However, the Appellate Body found that there was no conflict between GATT Article XI:1 and Article 4.2. It said that "[a]lthough Article 4.2 of the Agreement on Agriculture generally applies to: "a broader range of measures" and "a narrower scope of products" than GATT Article XI:1, "both provisions prohibit Members from maintaining quantitative import restrictions on agricultural products". It added that a "measure constituting a quantitative import restriction on agricultural products would therefore be inconsistent with both Article XI:1 and Article 4.2".

The Appellate Body ruled that "Article 4.2 of the Agreement on Agriculture does not apply "to the exclusion of" Article XI:1 of the GATT 1994 in relation to the claims challenging the 18 measures at issue as quantitative restrictions" (original emphasis). Both provisions contained "the same substantive obligations in relation to these claims and, thus, in these circumstances, they apply cumulatively".

No shifting of the burden of proof

Indonesia argued that the Panel erred in determining that Indonesia bore the burden of proof under the footnote to Article 4.2 of the Agreement on Agriculture. Indonesia argued that as GATT Article XX is one of the "general, non-agriculture-specific provisions of GATT 1994", it was "not possible for a complainant to present a prima facie case of violation under Article 4.2 without offering any evidence or argumentation that the challenged measure is not justified under Article XX of the GATT 1994".

The Appellate Body rejected Indonesia's argument. It reasoned that "given that footnote 1 to Article 4.2 incorporates Article XX by reference without modifying the nature of this provision as an affirmative defence, it would follow that the burden of proof under Article XX remains with the respondent in the context of Article 4.2". It added that "[w]hile the complainant challenging a measure under Article 4.2 is required to demonstrate that the measure falls within the categories of measures prohibited under Article 4.2, it is the respondent who benefits from a showing that the measure additionally satisfies the requirements of Article XX and therefore is not prohibited under Article 4.2" (original emphasis).

The Appellate Body therefore affirmed the Panel's finding that the burden of proof under Article XX, referred to in footnote 1 to Article 4.2 of the Agreement on Agriculture, "rests on Indonesia".

Treaty conflict: "adherence to the one provision will lead to a violation of the other provision"

While GATT Article XI:1 prohibits quantitative restrictions on imported goods, there are certain exceptions set out in Article XI:2. GATT Article XI:2(c) exempts import restrictions on agricultural and fisheries products that operate to remove a temporary surplus of certain domestic products. Indonesia took the position that some its measures were "necessary to remove a temporary surplus of certain horticultural products, animals and animal products in Indonesia's domestic market". It argued that the Panel erred by finding that GATT Article XI:2(c) had been rendered "inoperative" by Article 4.2 of the Agreement on Agriculture.

The Appellate Body rejected this argument. It recalled that the measures prohibited under Article 4.2 did not include those maintained under general, non-agriculture-specific provisions of GATT 1994. It noted that Article XI:2(c) "does not qualify as a "general, non-agriculture-specific provision[]" because it is "agriculture-specific" in the sense that its application is limited to "agricultural or fisheries product" in express terms" (original emphasis). According to the Appellate Body, "[w]hile it is the function of Article XI:2(c) to carve out certain quantitative restrictions from the prohibition contained in Article XI:1, this does not change the fact that they are quantitative restrictions" within the meaning of Article 4.2 of the Agreement on Agriculture (original emphasis).

The Appellate Body disagreed with Indonesia that agricultural measures maintained under GATT Article XI:2(c) were not "quantitative import restrictions" within the meaning of footnote 1 to Article 4.2 of the Agreement on Agriculture. It ruled that "[a]s a consequence, Members cannot maintain quantitative import restrictions on agricultural products that satisfy the requirements of Article XI:2(c) of the GATT 1994 without violating Article 4.2 of the Agreement on Agriculture".

The Appellate Body then referred to Article 21.1 of the Agreement on Agriculture, quoted above, found that "[t]here is a conflict between Article XI:2(c) and Article 4.2 because quantitative import restrictions on agricultural products that fall within the permission under the former provision cannot be maintained without violating the latter provision" (original emphasis). It referred to one of its earlier decisions that defined a "conflict" as "a situation where adherence to the one provision will lead to a violation of the other provision". It concluded that "in accordance with Article 21.1 of the Agreement on Agriculture, Article XI:2(c) cannot be applied to justify or exempt measures that fall within the prohibition of quantitative import restriction under Article 4.2".

GATT Article XX: failure to follow “normal sequence of analysis” is not necessarily error

Indonesia also argued that the Panel erred in dismissing its defences under the exceptions provided for under GATT Article XX. Specifically, Indonesia challenged the fact that the Panel assessed whether certain measures met the requirements of the chapeau of Article XX, "without first examining whether these measures were provisionally justified under the applicable paragraphs of Article XX".

The Appellate Body began its analysis of this argument by recalling "Members can resort to Article XX as an exception to justify measures that would otherwise be inconsistent with GATT obligations". It noted that "Article XX is made up of two main parts": "(i) ten paragraphs, which enumerate 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"; and (ii) the chapeau, which imposes additional disciplines on measures that have been found to be provisionally justified under one of the paragraphs of Article XX".

The Appellate Body stated that the "the normal sequence of analysis under Article XX of the GATT 1994 involves, first, an assessment of whether the measure at issue is provisionally justified under one of the paragraphs of Article XX and, second, an assessment of whether that measure also meets the requirements of the chapeau of Article XX". This reflects "the fundamental structure and logic of Article XX". At the same time, it found "a panel that deviates from the sequence of analysis under Article XX might not necessarily, for that reason alone, commit a reversible legal error provided the panel has made findings on those elements under the applicable paragraphs that are relevant for its analysis of the requirements of the chapeau". The Appellate Body acknowledged that "following the normal sequence of analysis under Article XX provides panels with the necessary tools to assess the requirements of the chapeau".

The Appellate Body therefore declined to rule on Indonesia's claims under Article XX.

The Report of the WTO Appellate Body in Indonesia – Importation of Horticultural Products, Animals and Animal Products (DS477, DS478) was released on 9 November 2017.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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