WTO Panel Rules Against Peruvian Agriculture Duties

4 December 2014

A WTO dispute panel has granted a victory to Guatemala in its complaint against Peru’s duties on certain agricultural imports, in a case that has also highlighted the question of whether and how bilateral trade deals can interact with obligations taken on at the global trade body (DS457).

At the heart of the case were the additional duties imposed by Peru on imports of certain agricultural products – such as milk, maize, rice and sugar – through its Price Range System, or PRS.

The panel structured its analysis by reviewing first Peru’s own claim that Guatemala did not act in good faith by taking on this dispute in the first place, and secondly Guatemala’s various substantive claims.

FTA, WTO balance questions

Under a Free Trade Agreement (FTA) signed between Peru and Guatemala in December 2011, Guatemala had agreed that Peru could maintain its PRS. Lima had therefore argued that, by initiating a WTO case against the scheme, Guatemala was violating its obligation of acting in good faith in dispute proceedings.

A provision of the WTO’s Dispute Settlement Understanding (DSU) requires WTO members to exercise judgement over whether filing a dispute would be fruitful, before lodging the complaint itself.

In the report, the panel said that nothing in the DSU provision, WTO case law, or the present case’s circumstances supported the suggestion that Guatemala did not duly exercise its judgement.

On the good faith question, the panel also recalled that the Appellate Body, the WTO’s highest court, has previously found that “irrespective of the type of proceeding, if a WTO member has not clearly stated that it would not take legal action with respect to a certain measure, it cannot be regarded as failing to act in good faith if it challenges that measure.”

For the panel, Peru had not put forward any argument or evidence on whether Guatemala, before engaging in this dispute, had expressly waived the right to bring a WTO case with respect to the PRS or recognised the consistency of that measure with the global trade body’s rules.

The panel also rejected Peru’s argument that according to Article 18 of Vienna Convention on the Law of Treaties, Guatemala is obliged not to defeat the object and purpose of the FTA and that by initiating a dispute on PRS, Guatemala rendered the provisions of the treaty meaningless. The panel considered that, among other findings, making a determination on an unenforced FTA’s object and purpose would go beyond the panel’s terms of reference.

Regarding the relationship between the FTA and WTO agreements, Peru also argued that, by means of the bilateral deal, the parties had modified their reciprocal WTO rights and obligations. Accordingly, Lima said, the bilateral agreement allowing the use of the PRS should prevail.

The panel found that, because the FTA has not entered into force, its provisions were not binding on the parties at the time of the panel report. As a result, it was unnecessary for the panel to express any opinion on whether the parties may, by means of a free trade pact, modify between themselves their rights and obligations under the WTO covered agreements.

Agriculture, GATT rules

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 is applied if the reference price of the affected product is below the floor price. However, if the reference price exceeds the ceiling price, the applicable tariff is reduced. These reductions are rare in practice, given Peru's zero percent applied tariff for most of these products.

In its complaint, Guatemala had said that the duties resulting from the PRS constitute variable import levies and minimum import prices, or similar measures, and as a result violate Article 4.2 of the Agreement on Agriculture.

This provision prohibits the use of agriculture-specific non-tariff measures, unless these are consistent with other WTO rules applying to goods trade.

The panel found that the PRS-related duties are border measures similar to a variable import levy, while lacking in transparency and predictability and having the potential to affect import prices. Thus by maintaining such measures, the panel said, Lima was violating the WTO’s agriculture rules.

Guatemala also claimed that the duties resulting from the PRS qualify as an “other duty or charge” that were not featured in Peru’s original Schedule of Concessions at the WTO, therefore putting Lima in violation of GATT Article II:1 (b).

This provision essentially prohibits new import duties either not in place when the GATT entered into force or that were not expected due to the domestic legislation at place at that time. The panel ultimately agreed with Guatemala’s claim.

Next steps

Both sides have 60 days from when the report was circulated to appeal the panel's findings. Under WTO rules, the Appellate Body can review aspects of law, such as legal interpretation, but generally will not interfere with the factual findings of the original panel.

ICTSD reporting.

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