WTO Panel Report: Russia - Tariff Treatment

by White & Case LLP
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Summary

Decision

A WTO Panel has ruled that the Russian Federation has violated its WTO obligations by imposing duties on certain EU goods in excess of its committed ("bound") rates, in breach of Article II 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:

This is the first time that a WTO Panel has ruled against Russia. Russia acceded to the WTO in August 2012, and since then there have been persistent complaints, particularly by the EU and the United States, that Russia has not been complying with its WTO obligations. This is the first of three WTO panels against Russia established at the request of the EU.

One EU objective in this litigation strategy was to begin with strong cases where the violations were clear. In the present dispute, the Panel had little difficulty concluding that Russia had breached its tariff commitments. Indeed, Russia did not contest the violations for half of the challenged measures.

Under GATT Article II, each WTO Member maintains a "Schedule of Concessions", which specifies the maximum customs duties that may lawfully be imposed on imported products. In its June 2016 ruling in Colombia – Textiles, the WTO Appellate Body recalled that "Article II:1 of the GATT 1994 serves the important function of preventing Members from applying duties that exceed the bound rates agreed to in tariff negotiations and incorporated into their Schedules of Concessions".

In the present case, the Panel found that virtually all of the challenged measures violated GATT Article II:1(b), first sentence, which provides in part that imported products are "exempt from ordinary customs duties in excess of those set forth" in the importing country's Schedule of Concessions. Russia's imposition of duties above its bound rates breached this provision.

As a minor but curious side note, the Panel repeatedly exercised "judicial economy" (i.e., declined to rule) on the EU's claims that the breach of Russia's bound rates, contrary to GATT Article II:1(b), triggered a consequential violation of GATT Article II:1(a), which requires WTO Members not to impose on imported products treatment "less favourable" than that set out in its Schedule. As far back as 1998, in Argentina – Textiles, the Appellate Body ruled that a violation of GATT Article II:1(b) triggers a consequential violation of GATT Article II:1(a): "It is evident to us that the application of customs duties in excess of those provided for in a Member's Schedule, inconsistent with the first sentence of Article II:1(b), constitutes 'less favourable' treatment under the provisions of Article II:1(a)" (original emphasis). In light of this clear decision by the Appellate Body, the Panel's refusal – on five separate occasions – to rule on this settled legal point is puzzling. Such restraint is vulnerable to being reversed on appeal as "false judicial economy".

Russia successfully rebutted an EU claim against an alleged overarching system of "systematic duty variations". The Panel found that there was insufficient evidence to sustain this allegation.

Report:

Background: three categories of EU claims

The EU challenged Russia's tariff treatment for certain agricultural and manufacturing products. The EU argued that all of the challenged measures imposed duties above Russia's bound rates. The Panel divided the EU claims into three broad categories:

  • The first six claims related to the applied ad valorem rates (i.e., the duty as a percentage of the value of the goods), which were ultimately not contested by Russia;
  • The seventh through eleventh claims, which challenged combined duty rates (a mixture of ad valorem and specific duties); and
  • The twelfth and final claim against what the EU called the "systematic duty variations".

GATT tariff disciplines: protecting conditions of competition

Before turning to the impugned measures, the Panel first set out its interpretive approach to GATT Article II. It began by recalling the dictum of the Appellate Body that the disciplines of the GATT and the WTO "are intended to protect not only existing trade but also the security and predictability needed to conduct future trade". The Panel stressed that "Article II:1(b), first sentence, protects conditions of competition, and not trade volumes". For this reason, the Panel concluded that "a finding of inconsistency under Article II:1(b), first sentence, does not require a complaining party to demonstrate adverse trade effects concerning products falling within the relevant tariff lines". It also rejected any notion of a "de minimis exception", reasoning that "an importing Member in our view must not exceed a tariff binding, even if the extent of the excess is only minimal".

Duties in excess of Russia's ad valorem bound rates: violation uncontested by Russia

Russia initially argued that the relevant bound duty rates in its Schedule reflected an error, but later dropped that defence and did not contest that the duties exceeded the bound rate.

The Panel noted that the rates "were not adopted by Russia, but by the Eurasian Economic Union (EAEU), an international organization of which Russia is a member state". The Panel found that the Common Customs Tariff ("CCT") of the Eurasian Economic Union was attributable to Russia, as "it can be presumed that the CCT requirements will lead to the relevant duty rates being applied by Russia". It added that that "Russia has not sought to rebut that presumption".

Russia's bound duty rate for these products was five per cent, while its applied rates ranged from 10 to 15 per cent. The Panel therefore concluded that "Russia is required to apply duties in excess of those set forth in its Schedule, contrary to Article II:1(b), first sentence".

Temporary tariff reduction: the measure "mandates WTO-inconsistent action…in the future"

One of the EU's claims related to a tariff measure that provided for a temporary reduction of the ad valorem duty rate. At the time of the establishment of the Panel, Russia applied a rate of 5 per cent, which was equal to the bound rate. However, the measure also mandated a future increase to 15 per cent.

The Panel rejected Russia's argument that the measure "did not exist" at the time of the establishment of the Panel, reasoning that "the rule requiring the future applied duty rate (15%) was in force on the date of the Panel's establishment, even though that rate had not yet been applied". It found that "a panel can in principle find an existing measure to be inconsistent as such with a provision such as Article II:1(b), first sentence, even if that measure mandates WTO-inconsistent action that will take place only in the future".

The Panel ruled that the measure mandated the future imposition of "an ad valorem duty rate higher than the bound ad valorem duty rate contained in Russia's Schedule" and therefore "Russia was required to apply duties in excess of those set forth in its Schedule, contrary to Article II:1(b), first sentence".

However, the Panel rejected an independent EU claim that this measure violated GATT Article II:1(a) because it "created deleterious effects on competition due to either a lack of foreseeability or insufficient guarantees of compliance with Article II:1". The Panel found that "the temporary duty reduction at issue in this case did not reduce foreseeability for traders in the marketplace regarding the applicable tariff treatment".

Combined duties result in breaches of Russia's bound rate

The second set of claims related to Russian measures that imposed a combined duty rate. The EU argued that Russia was "required to apply a combined duty (pursuant to which the customs authority… calculates and chooses the higher of either an ad valorem duty or a specific duty), whereas its Schedule provides for a straightforward ad valorem bound duty rate". The EU argued that this "necessarily results in the application of duties in excess of bound duty rates for some categories of transactions". Russia argued that the EU claims were "essentially about the structure and design of the applied duties, rather than the duties themselves", and that "Article II:1 does not prohibit it from applying a type or structure of duty other than that provided for in its Schedule".

The Panel rejected Russia's arguments on this issue. It began by acknowledging that "the mere use by a Member of a duty type or structure that differs from the duty type or structure used in that Member's Schedule is not, in itself, inconsistent with Article II:1". However, it found that "the duties required to be applied by Russia were higher than bound levels for imports at or below specified break-even prices (customs values)" and that "there is no evidence that Russia applied a ceiling or cap that would prevent such duties from being applied". The Panel therefore concluded that "Russia was required in some instances to apply duties in excess of those set forth in its Schedule, contrary to Article II:1(b), first sentence".

EU's claims against "Systematic Duty Variation" rejected

The EU argued that "the CCT systematically provides, in relation to a significant number of tariff lines, for a type or structure of duty that varies from the type or structure of duty recorded in Russia's Schedule, in a way that results in the application of duties in excess of those provided for in the Schedule". However, the Panel found that "the evidence fails to establish that the relevant tariff treatment is accorded in a 'systematic' fashion and that it has been accorded in such a way as to constitute a 'general' practice reflected in the CCT". The Panel therefore dismissed this claim.

The Report of the WTO Panel in Russia – Tariff Treatment of Certain Agricultural and Manufacturing Products (DS485) was released on August 12, 2016.

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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