WTO Appellate Body Grants Guatemala Victory in Peru Agriculture Duties Case

23 July 2015

The WTO’s Appellate Body confirmed on Monday that Peru’s additional duties on certain agricultural imports from Guatemala violate global trade rules, in a case that brought to the fore the question of how free trade deals interact with WTO obligations.

The final ruling (DS457) confirmed the majority of an earlier panel’s findings, namely that Peru’s duties were inconsistent with various provisions under the WTO’s Agreement on Agriculture and the General Agreement on Tariffs and Trade (GATT) 1994. 

WTO, FTA timing

In 2001, Peru established a price range system (PRS) that may result in the imposition of additional duties or rebates on certain types of imported rice, sugar, maize, and milk. When additional duties are applied, the combined PRS duties and import tariffs must not exceed the ceiling Lima has committed to at the global trade body.

Peru and Guatemala then signed a free trade agreement (FTA) in December 2011, which included the provision that Lima could keep its PRS in place, along with its amendments. 

However, in April 2013 Guatemala filed a request for consultations on the subject, marking the first step in WTO dispute settlement proceedings, claiming that the PRS violated trade rules. The panel that was later established to hear the case granted a victory to Guatemala in November 2014. (See Bridges Weekly, 4 December 2014)

Meanwhile, Guatemala began its domestic procedures for ratifying the FTA with Peru in December 2013, later notifying Lima that Guatemala City had fulfilled the legal requirements in February 2014 for bringing the deal into force.

Peru, for its part, has not ratified the FTA. Though Lima maintained that the trade agreement should enter into force, it stated during the WTO panel hearings that the “it is not proceeding with the exchange of notifications at this time since the case brought by Guatemala has created uncertainty with regard to the existence of the balance negotiated.”

Following the panel report, both parties submitted appeals earlier this year contesting some of the findings. (See Bridges Weekly, 2 April 2015 and 16 April 2015)

Good faith issue

Peru had earlier claimed at the panel stage that Guatemala had not initiated the dispute in good faith, as required by the provisions of the WTO’s Dispute Settlement Understanding (DSU), because Guatemala had allegedly accepted keeping the PRS under the FTA.

Having lost this claim, Peru had appealed the panel’s conclusion that there was “no evidence that Guatemala brought these proceedings in a manner contrary to good faith.”

The Appellate Body emphasised that relinquishing the right to initiate WTO dispute settlement proceedings “must be made clearly,” and giving up this right through a “solution mutually acceptable to the parties” – as defined by the DSU – also requires that this solution be consistent with the covered WTO agreements.

Given that the Appellate Body also found the PRS to violate WTO rules, and the ambiguity in the relevant provisions of the FTA regarding its relationship with such rules, the judges said that it is unclear whether the free trade agreement intended to allow Peru to maintain a WTO-inconsistent PRS.

Therefore, the Appellate Body said, it does not appear that the FTA constitutes a mutually acceptable solution that aligns with global trade rules.

The Appellate Body also cites Peru’s recognition of Guatemala’s procedural right to bring a WTO claim against the PRS, and the liberty provided by the FTA for parties to select which forum to use in bringing disputes. Therefore, the judges said that there was no clear stipulation of Guatemala’s giving up the right to use the WTO dispute settlement system.

Indicating that these findings were made irrespective of whether the FTA had been ratified, the Appellate Body therefore upheld the panel’s finding on the good faith issue.

Peru’s appeal

The PRS mechanism determines duties based on a range constituted by a floor price and a ceiling price, reflecting international prices over the last 60 months. The system also uses a reference price published biweekly, reflecting each product’s average international market price.

An additional duty on the transaction value of imports is applied when the reference price of the affected product falls below the floor price. However, if the reference price exceeds the ceiling price, the applicable tariff is reduced.

Peru claimed that the panel erred in finding that the additional duties resulting from the PRS are “variable import levies,” or at least “similar border measures,” which are prohibited by Article 4.2 of the Agreement on Agriculture.

This provision says that WTO 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, unless these are consistent with other rules applying to agricultural goods trade.

The Appellate Body sided with the panel, deeming that the PRS contains a variability mechanism that is formed of rules and formulas, and causes the levies to change automatically and continuously, beyond the normal variability of ordinary customs duties. 

Peru also lost on its challenge of the panel's assessment that the PRS lacked transparency and predictability and distorted the transmission of international prices to the domestic market, within the context of whether the measure is a “variable import levy.”

The Appellate Body also agreed with the panel’s finding that the additional duties resulting from PRS are not “ordinary customs duties” and therefore qualify as an “other duty or charge” that were not featured in Peru’s original goods schedule, putting Lima in violation of GATT Article II:1 (b).

Relationship between WTO, FTA provisions

Peru had argued that by relying on the FTA provisions and on Articles 20 and 45 of the International Law Commission (ILC) articles on Responsibility of States for Internationally Wrongful Acts, the panel should have interpreted the terms “shall not maintain” in Article 4.2 of the Agreement of Agriculture as meaning “may maintain” [the PRS] in the relationship between Peru and Guatemala, as well as allowing for the PRS under Article II:1(b) of the GATT.

According to Peru, Guatemala’s approval and ratification of the FTA amounts to “consent” precluding the wrongfulness of Lima’s decision to keep the PRS, and Guatemala’s ratification of the FTA amounts to a waiver as outlined under Article 45(a) of the ILC Articles.

The Appellate Body said that the FTA and ILC Articles do not provide guidance on the nature of the PRS’ additional duties – either in terms of ordinary customs duties or those not allowed by the WTO’s agriculture agreement or GATT rules.

Therefore, the Appellate Body said that these articles are not “relevant” rules of “international law” within the meaning of Vienna Convention on the Law of Treaties, given that these do not concern the same subject matter as outlined under the relevant WTO agreements. The FTA does not qualify as “subsequent agreement” under the Vienna Convention, since it is not an agreement regarding how to interpret those WTO rules.

The Appellate Body also found that Peru’s argument is less about interpreting WTO rules, but indeed about whether Peru and Guatemala had modified WTO provisions between themselves via an FTA. These modifications would then need to be reviewed against WTO rules on forming regional trade deals, which Lima did not bring up in the dispute.

Guatemala’s appeal

Among other claims, Guatemala had asked the Appellate Body to reverse the panel’s finding that Peru’s Price Range System constitutes neither a “minimum import price” nor a “similar border measure” under Article 4.2 of the Agriculture Agreement.

The Appellate Body rejected Guatemala’s claim that the panel erred in its interpretation of “minimum import price,” but did find that the panel was incorrect in its analysis on the subject.

The WTO judges also rejected Guatemala’s claim that the panel erred by conflating the legal standards for “minimum import price” and “similar border measures,” while finding that the panel was incorrect in its analysis of whether the PRS is a border measure similar to a “minimum import price” by not sufficiently analysing the scheme’s design, structure, and operation. 

Next steps

Under WTO dispute settlement practices, if immediate compliance cannot be achieved, the parties can seek a mutual agreement on the reasonable period of time for compliance. Should no mutual agreement be reached, the parties can then resort to arbitration.

ICTSD reporting.

This article is published under
23 July 2015
The European Commission presented last week its much-anticipated legislative proposal for revising the 28-nation bloc’s carbon market for the post-2020 period in order to help meet its 2030 climate...
23 July 2015
After months of tough preparatory negotiations, UN member states meeting in Addis Ababa, Ethiopia last week agreed to a revised global framework for development finance, aligning flows with a range...