Brazil Tyres: Policy Space Confirmed under GATT Article XX

1 February 2008

Health and environmental policies, even import bans, enjoy not only the protection of GATT Article XX but also the sympathy of the Appellate Body – unless, that is, they discriminate without a suitable reason. Brazil-Tyres may make it easier to defend the ‘necessity’ of measures, but harder to fit them into regional trade agreements and other preferential arrangements.

Exactly three months after the European Union’s notice of appeal, the Appellate Body on 3 December 2007 issued its report on Brazil – Measures Affecting Imports of Retreaded Tyres. Like the panel (Bridges Year 11 No.4 page 7), the Appellate Body found Brazil’s import ban on retreaded tyres to be in principle justified under Members’ right to protect human, animal or plant life or health, embodied in GATT Article XX (b), but discriminatory in its application, and hence not covered by the provision’s chapeau.

Notwithstanding Brazil’s loss on points, the decision is no less than a slam dunk victory for Members’ environmental and health policies vis-à-vis trade disciplines. The Appellate Body’s message to WTO Members, not for the first time, is (almost) straightforward: if your objectives are legitimate and your measures reasonable, don’t worry too much about technicalities; the system is with you. But do worry about discrimination – we won’t tolerate that, unless it is a logical part of your protective policy.

A special additional message goes to developing country governments with limited resources at their disposal: there is no obligation to come up with costly and difficult in-depth analyses, in particular quantitative economic projections and the like (even though they remain welcome), when establishing ‘necessity’. Qualitative, inductive and logical reasoning based on available science and other information will normally be quite sufficient to provide cover.

Mixed Reactions Likely

Environmental NGOs had strongly criticised the EU for its decision to go after the Brazilian ban in the first place, and even more for its decision to appeal. Perhaps they should send flowers to Brussels now – for the EU provoked a decision that widens and cements the policy space for environmental and health measures. The much-feared ‘trade bias’ of the WTO dispute settlement system, in this decision at least, seems to have been turned on its head. The Appellate Body’s and the panel’s rather explicit sympathy for a preventive environmental policy, namely the avoidance or tyre waste rather than its management and disposal (alternatives the EU had proposed), appears to have easily eclipsed their concern about this policy’s tough trade effect.

Lawyers’ views will be divided. Purists may be frustrated, pragmatists more or less satisfied, litigators delighted. The ‘necessity’ analysis remains a rather flexible catch-all (or catch-nothing) piece of wax in the hands of the Appellate Body. The ‘weighing and balancing’ test in particular is a thinly veiled proportionality test, miraculously operating rather well without an agreed value system (constitution) to rely on – probably because it comes along with utmost judicial restraint, if not deference to national policy choices. Perhaps ‘disproportionality’ test would therefore be a better word for it. The chapeau, never mind its embellishing adjectives (‘arbitrary’, ‘unjustifiable’ and ‘disguised’), operates as a general check against abuse – but a very sharp one when it comes to discriminations: only those that are justified by the same protective rationale as the measure itself will pass.

Trade policy observers will equally have mixed perspectives. While trade can and will be unequivocally trumped by good faith non-trade policy measures, at least those catering to key societal interests such as health and the environment (trade seems a distant second), this must happen without discrimination and must not otherwise be abused as a trade policy measure (tr ade catches up). Since this balance is probably the only workable one for an institution without either central authority or a comprehensive constitution, however, true friends of the WTO system are likely to sympathise with (most of ) this Appellate Body decision.

The Panel and Appellate Body Decisions

The Appellate Body and the panel rejected the EU’s attack on the ‘necessity’ of the import ban. The Appellate Body accepted the panel’s ‘weighing and balancing’ of factors and, like the panel, did not find any of the alternatives proposed by the EU to be both suitable and readily available to Brazil. Both therefore found the ban provisionally justified under Article XX (b).

The two bodies, however, disagreed with respect to the chapeau of Article XX. The panel found that both the Mercosur exception and the court injunctions did indeed lead to discrimination. It found, however, that neither one of them was ‘arbitrary,’ because both constituted implementations of court decisions by administrations and legislators, their action thus being neither ‘capricious’ nor ‘unpredictable’ nor ‘random’ (elements of a dictionary definition of ‘arbitrary’). The result was different for ‘unjustifiable discrimination’.

The panel looked at the quantitative impacts, and found the Mercosur exemption not to generate sufficiently significant actual imports of retreaded tyres to counteract the purpose of the ban. The same, it determined, was not true for the imports of used tyres under the court injunctions, which for this reason (to the extent that they crossed that threshold) acted as an ‘unjustifiable discrimination’. For the same reason the panel found the court injunctions, but not the Mercosur exemption, to operate as ‘disguised restrictions’.

The Appellate Body rejected this quantitative caveat and found both to be ‘arbitrary or unjustifiable’ discriminations, because neither had a basis in the rationale of the ban itself – defining this as the only criterion that mattered.

A lot could – and should – be said about the details of this case , including the new ‘contribution’ standard (too lenient?), the test for ‘alternatives’ a Member would have to accept (not many), and the potential pitfalls of the strict discrimination check under the chapeau (probably no special and differential treatment, and regional policies difficult to justify). Since that would require much more space than we have here, here’s a checklist for post-Brazil- Tyres users of Article XX (b) instead.

Checklist – Where is the Policy Space?

Is my objective one of those listed in the paragraphs of Article XX? This is a more or less objective test (with some margins of appreciation), which can and will be reviewed by panels and the Appellate Body. However, the coverage is very broad, so the actual policy space is vast. The “protect[ion] of human, animal and plant life or health,” for instance, covers comfortably virtually anything related to health, and many things considered ‘environmental’ (the rest falls under paragraph (g)). Absent labelling fraud, Members will be left undisturbed by the WTO system at this stage (but mind the ‘disguised restriction on trade’ test under the chapeau).

What is my desired ‘level of protection’? Here Members are entirely free to set their goals, says the Appellate Body, and so far no-one publicly disagrees. But it gets even more dynamic: Brazil in this case, supported by the panel and the Appellate Body, defined its level of protection as “the reduction of the risk of waste tyre accumulation to the extent possible.” This means that anything short of a complete eradication of those risks (dengue, malaria transmitted by mosquitoes that may have bread in tyres; poisoning from tyre fires) will not satisfy as long as there is anything that can be done against it. A dynamic ‘as much as possible’ goal has two effects. First, it is likely to spill over into the ‘contribution’ analysis. Second, it puts all potential alternatives strongly on the defensive, especially since there is no grand net calculation of costs and benefits, because alternatives may work differently than the original measure. If the target is not defined in a static way (X number of malaria cases avoided), more complex alternatives proposed by claimants stand little chance. This is what happened here. The panel and the Appellate Body rather quickly bought Brazil’s (probably correct) argument that tyre waste avoidance is in fact by definition superior to waste management. While technically a separate analysis, the intuitive conclusion is hard to reject if ‘as much as possible’ is the target, absent quantifications of actual results. The problem from a trade perspective is that this approach may result in a rather powerful anti-trade bias, because saying no (e.g. in the form of an import ban) tends to be much easier than saying “yes, but…”. Be that as it may: the policy space here is vast, as only the sky (the ideal situation, e.g. perfect public health) is the true limit.

Is the measure ‘necessary’ to achieve this level of protection? This is where it gets complicated. The sub-checklist after Brazil-Tyres looks as follows:

  • Does the measure ‘contribute’ to the achievement of the protection and, if so, to what extent? Here two things matter, namely the degree and the actual occurrence of the contribution required. The second aspect is where the Appellate Body, despite denials, arguably softened its scrutiny vis-à-vis its demand in Korea-Beef that the ‘extent’ of the contribution be examined as a component for the ‘weighing and balancing’. Brazil had not provided any quantitative analysis, but the panel had been satisfied with the conclusion that the ban was capable of making that contribution. The Appellate Body, agreeing in principle (and graciously overlooking the gradual divergences with the panel’s conclusions), phrased its test as follows: is the measure apt to advance the goal and is it likely to make a material contribution to the goal? Importantly, ‘aptitude’ and likelihood do not require hard quantitative projections based on sound (expensive, difficult) economic analysis. A more abstract, lawyerly, inductive perspective looking at the assumed logic of cause and effect is acceptable (quantitative analyses remain welcome for support). This ‘qualitative’ analysis significantly lightens the burden on user Members to substantiate their ‘necessity’ claim – leaving significant policy space.

  • How important is the protected value? The basis for this value judgement by WTO bodies is not clear, because there is no comprehensive value system to rely on – common sense, bolstered with evidence of what the WTO and wider international community currently thinks, seems to be the best guide for predicting the Appellate Body’s reaction. Since in reality it performs a negative test (can we tell the Member that this value is not as important as it thinks?), the policy space resulting from de facto deference may be significant.

  • How trade-restrictive is the measure? This is a technical task, fully reviewable by panels and the Appellate Body – after all this is their core area of expertise. No policy space here.

Are Equally Effective but Less Trade-restrictive Alternatives Readily Available?

‘Equally effective’ is a technical test. Importantly, there is no offsetting of costs. ‘Readily available’ implies a value judgement – what can Members be asked to take on by way of costs, risks, difficulties, hassle? In Brazil-Tyres the Appellate Body and the panel took a very restrained view of the multiple alternatives proposed by the EU. Potential risks and ‘high’ costs (‘prohibitive’ is not the measure) easily eliminated proposed alternatives from the game, leaving a significant policy space to Brazil. ‘Less trade restrictive’, again, is a technical test, fully subject to revision. It may be tricky if various trade interests pull in different directions, but so far that has not been a major issue.

Weigh and Balance All That

It is in fact not entirely clear when and where exactly this is supposed to happen – among the three factors, together with the alternatives, or both. Be it as it may: the Appellate Body stresses that this is a flexible, ‘holistic’ exercise, to be performed on a case by case basis. What does this mean for user Members? Some legal insecurity (ticking boxes won’t do), but in the end a significant margin of both appreciation (risks, projections) and discretion (choice of tools). The approach is really a general proportionality test with important value judgements to be performed, a questionable exercise in the absence of a comprehensive constitution. Thanks to the restraint commonly exercised by panels and the Appellate Body, however, it acts more as a ‘disproportionality test’ – and arguably works quite well.

Is the Result ‘Arbitrary or Unjustifiable Discrimination’?

Is there discrimination? What is discrimination will in most cases be relatively clear. Note that ‘likeness’ is not part of the analysis – the scope is wider. No policy space here – the test is technical, subject to full review. Is the discrimination ‘arbitrary or unjustifiable’? ‘Arbitrary and unjustifiable’ are – and this is a key result of Brazil-Tyres – not too important as terms of law; what they mean is one thing: is the discrimination based on the very same rationale that the protection measure itself relies on? All other justifications are irrelevant. This includes regional trade agreement constraints (such as the Mercosur ruling Brazil had invoked in this case) and other considerations, including, it would seem, benevolent ones like special and differential treatment. This is a very strict and very legal test. The discrimination hurdle is thus a very high one, with little room for manoeuvre. This is not entirely new – the US experience in US-Gasoline and US Shrimp was not dissimilar to Brazil’s here.

Does the Application Operate as a ‘Disguised Restriction on Trade’?

Again, this test is technical – except that the purity of the non-trade motivation behind the measure (the ‘disguised’ criterion) may be looked at. Panels and the Appellate Body, however, are not keen on rejecting a Member’s claimed motivation and accuse it of hidden trade interests, absent a smoking gun. Trade protection benefits that happen to arise out of health and/or environment measures are not a problem per se – in Brazil-Tyres they were even part and parcel of the mechanism.

All in all, there is very significant policy space within Article XX. Importantly, the ‘necessity’ test at issue here is supposed to be the strictest of all tests under that provision. Brazil-Tyres, however, was also about obviously rather nasty risks to human health that everyone can sympathise with. This may have helped to shape the legal conclusions. No sympathy (and no flexibility) can be expected for discrimination – an important point to remember for policy makers who are tempted to settle other accounts, help their friends or do other things when the spirit moves them.

Hannes Schloemann is a Director of WTI Advisors Ltd., a trade policy consultancy, and a partner with MSBH Rechtsanwälte, a law firm. He is based in Geneva.

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