WTO Appellate Body: Colombian Textiles Tariff in Violation of Trade Rules

16 June 2016

The WTO’s highest court has said that a Colombian compound tariff on imports of textiles, apparel, and footwear is inconsistent with global trade rules, despite reversing some of an earlier panel’s (DS461) findings.

The Colombian compound tariff has been in place since 2013, with the tariff made up of a combination of 10 percent of the import price as well as a “specific component,” the latter of which varies according to the import price and customs classification.

The dispute began three years ago, when Panama filed its consultations request at the WTO in June 2013. At the time, Panama argued that the compound tariff violated Article II of the General Agreement on Tariffs and Trade (GATT) and Colombia’s goods schedule.

A panel was established in September 2013 to hear the case, and last November ruled largely in favour of Panama’s claims. Two months later, Colombia appealed certain legal aspects of the panel report. (See Bridges Weekly, 3 December 2015)

Tackling money laundering, crime

The case had brought forward the issue of illicit financial flows and how to design measures aimed at reducing them without running afoul of WTO rules, given that Colombia has argued throughout the proceedings that this compound tariff was meant to address the problem of money laundering.

Specifically, Bogotá suggested that the affected imports can be the product of “illicit trade,” brought across its borders at “artificially low prices” as part of a scheme to launder money which, in turn, helps fuel drug trafficking and armed conflict domestically.

Various international agencies, including the Organisation for Economic Co-operation and Development (OECD) and the World Bank, have warned that “illicit financial flows” – including through money laundering – can have devastating implications for developing countries, such as by diverting resources from essential public services toward private consumption.

“While such practices occur in all countries – and are damaging everywhere – the social and economic impact on developing countries is more severe given their smaller resource base and markets,” said the OECD in a 2014 report devoted to the problem.

Such illegal financial flows are also blamed for hurting efforts at eradicating poverty, with the recently-adopted Sustainable Development Goals (SDGs) including a target for “significantly” tackling them.

GATT Article II and illicit trade

When defending its compound tariff to the earlier dispute panel, Colombia claimed that GATT Article II does not apply to “illicit trade,” which its compound tariff purportedly meant to address.

According to GATT Article II, WTO members must grant the trade of fellow members with “treatment no less favourable” than what has been agreed under its goods schedule. This requires, among other provisions, the application of ordinary customs duties not greater than those provided in such schedules.

Last November, the panel found it unnecessary to decide whether GATT Article II applies to “illicit trade,” concluding that the compound tariff is still greater than the ceilings Colombia agreed to under its goods schedule.

The Appellate Body said that “illicit trade” should indeed be covered by that GATT provision. According to their ruling, the earlier panel’s finding that the compound tariff did not solely cover the alleged illicit trade implied that the measure could still apply to “illicit trade,” and therefore a legal interpretation on the relationship between Article II and “illicit trade” should have been made by the panel.

The Appellate Body nonetheless rejected Colombia’s argument, finding that the scope of that GATT provision is not “qualified in respect of the nature or type of imports, or the reason or function of the transaction, in a manner that excludes what Colombia considers to be illicit trade” from the requirements to fulfil the bound tariff commitment.

The WTO judges added that legitimate policy objectives – including those aimed at tackling money laundering – should be considered through the GATT’s “general exceptions.”

Ultimately, the Appellate Body sided with the panel and found that the compound tariff exceeds Colombia’s tariff ceilings. 

Public morals, domestic laws

Colombia had claimed that the compound tariff is needed to protect public morals and to secure compliance with domestic money-laundering laws which do not violate GATT provisions, and therefore can be justified under the relevant Article XX exceptions.

These GATT exceptions outline a set of scenarios under which WTO members may enact measures that would otherwise be illegal under international trade rules, so long as these are used to fulfil certain greater public policy goals. These include public morals and complying with domestic laws and regulations that are not otherwise in violation of the GATT.

Last November, the panel rejected Colombia’s defence, finding that the country did not show that the compound tariff was either “designed” or “necessary” to fight money laundering, or to secure compliance with domestic laws on the subject.

The Appellate Body found, however, that the panel “had recognised that at least some goods priced at or below the thresholds could be imported into Colombia at artificially low prices for money laundering purposes, and would thus be subject to the disincentive created by the higher specific duties that apply to these goods.”

The WTO’s highest court therefore disagreed with the panel’s finding that the compound tariff was not “designed” to meet objectives such as protecting public morals or complying with Colombian law, instead finding that there is indeed a relationship between the measure and these policy goals.

The Appellate Body added that Colombia had proved that the laundering problem is “of real and present concern” which has fuelled, in turn, a broad spectrum of criminal activities, including the armed conflict which has plagued the country. The WTO judges therefore deemed that combating money laundering reflects “societal interests” that can be characterised as “vital and important in the highest degree.”

Nonetheless, the Appellate Body said that Colombia failed to show clearly enough how the compound tariff helped meet the above-mentioned public policy goals, along with how trade-restrictive it is – thus not showing that the measure is “necessary” under the Article XX general exceptions.

Officials respond

Officials from both sides have spoken publicly about the Appellate Body ruling, with Colombian officials claiming that the outcome validates their goal of tackling the money laundering issue, while Panamanian officials have stressed the points of the ruling in their favour.

“While the WTO’s Appellate Body upheld an earlier panel decision… it also allows for establishing that the measure’s design can help meet the objective of fighting money laundering,” said a statement issued by Colombia’s Ministry of Commerce, Industry, and Tourism, referring to the interpretation made by their minister, Maria Claudia Lacouture.

The Colombian government also said that it was analysing the Appellate Body findings with a view to their implementation, “without ending its government policy in preventing and ending crime.”

Augusto Arosemena, Panama’s Minister of Trade and Industry, has called for Colombia to bring its measures into compliance with the ruling’s terms, without delay.

Next steps

Under WTO dispute settlement practices, if immediate compliance cannot be achieved, a reasonable period of time will be established for bringing the WTO-illegal measures in line with global trade rules.

Should the parties later disagree as to whether Colombia has complied with the recommendations and rulings, WTO rules allow for compliance-related reviews, among other processes.

ICTSD reporting; “OMC reconoce que arancel mixto puede luchar contra lavado activos,” AGENCIA EFE, 7 June 2016.

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