SUNS  4287 Thursday 24 September 1998

Geneva, 22 Sep (Chakravarthi Raghavan) -- The Dispute Settlement Body of the World Trade Organization Tuesday agreed to refer to a panel the dispute raised by the European Communities over the US law that exempts from US direct taxes incomes of its corporations derived from exports of products having at least 50% local content.

The US provides this benefit based on local content under the Foreign Service Corporation Act.

The EC has challenged it as an export subsidy scheme, contingent on use of domestic over imported goods, and thus violating the GATT rules and the Agreement on Subsidies and Counter-vailing Measures (ASCM).

The US subsidy practice has a long-standing history. The previous US law was successfully challenged under the old GATT, and after considerable wrangling between the US and EC, the FSC law was enacted and put in place - under which US parent corporations set up subsidiaries for exports, and the dividends and other incomes of these are exempt from US taxes, provided the exported product has atleast 50% US content.

With the WTO, and its automatic processes for dispute resolution and binding rulings, the EC has again brought up the issue. In November 1997 it sought consultations with the US, and three rounds of consultations were held on 17 Dec 1997, and 10 Feb and 3 April of 1998.

The consultations produced no agreement, and the EC has now brought it up for a panel reference, and the DSB referred it to a panel on Tuesday, the second time it came up before the DSB.

The US, in a statement, argued that it considered the issue as one "resolved long ago", and viewed the EC action in bringing it up under the WTO as "legally unwarranted, commercially unjustified and
unlikely to prove helpful to the multilateral trading system or our bilateral relationship with the EC and its member states," and that the US was ready to vigorously defend its position before the
panel.

The US blocked an EC-Japan request for a panel over the Massachusetts state law that forbids state authorities, agencies and entities from procuring goods and services from corporations
doing business with Myanmar (Burma). This is the first time the panel request is before the DSB, and a reference is automatic when brought up on the next occasion.

The complainants say that the law violates the US obligations under the plurilateral agreement on government procurement.

The US said that it regretted that the EC and Japan which had an interest in improving the human rights situation in Burma (the name Myanmar, announced by the military regime is not recognized by the US), that the US in consultation with the Massachusetts authorities was trying to reach a mutually satisfactory solution, but that it would defend the measure if it goes to a panel.

In other actions, the DSB adopted a panel ruling against India on the complaint brought by the EC over India's failure to give effect to the provisions of the TRIPs under Art. 70.8(a) to provide a
"means" to receive applications for pharmaceutical and agro-chemical product patents, preserving the "novelty" and "priority" features of the application and disposed of the application after the 10-year transition period India has to implement product patents in this area, and provide exclusive
marketing rights to the applicants under Art. 70. 9.

India has accepted the ruling and has agreed to implement it. Under an earlier dispute on the same issues, brought up by the US, and ruled against India by the panel and appellate body, India has been given 15 months time from the adoption of the panel ruling this year, to implement it.

While the panel that went into the EC dispute has come to the same conclusion, the ruling strengthens the suspicion of trade observers and experts over a secretariat role in the WTO dispute settlement system.

The suspicion of an active role by the secretariat in panel processes (and several members of past panels have confirmed privately that in their deliberations and conclusions, they are guided by the secretariat expertise) has also come up in the ruling against the Indonesian national car project, where in a curious interpretation, that panel has said that the reference in the TRIMS agreement, Art. 2.1, to Art III of the GATT should be interpreted as referring to the "provisions" of that Article, and not the Article itself.

A general perception within civil society of the South of a secretariat influence will add to the erosion of credibility of the WTO system, notwithstanding the repeated statements of trade officials about the dispute settlement process being one of the bright features of the rule-based system. Civil society in the South, and many wings of government, view the WTO system as biased against the developing countries and functioning in the interests of major corporations of the major powers - the US, EC and Japan.

In justifying its ruling, the panel chaired by Stuart Harbinson of Hong Kong, has cited what it calls the "negotiating history of the TRIPs Agreement" and that a "critical part" of the compromise (deducible from the negotiating history) was the "deal" that developing countries that did not provide product patents got a 10-year transition period, but that they were required to put in place from the inception of the WTO both a mechanism to receive applications and to provide exclusive marketing authority.

The Uruguay Round papers, officially made public by the GATT/WTO after Marrakesh, contains only the various formal proposals by the participants, and the "Dunkel" text itself. No negotiating history was ever drawn up and put before the Contracting Parties and approved by them, as the Vienna Law of Treaties requires in terms of negotiating history of negotiations and its use as a
"supplementary means of interpretation".

In accepting the ruling in the TRIPs case on the EC complaint, India made a lengthy statement, and one of the points raised by it is over the "negotiating history", and its own knowledge of the negotiating history. Since India was one of the important negotiators on this issue, this in effect contradicted the purported negotiating history that the panel has mentioned, and indirectly raised the question of what was the source of "negotiating history" that the panel used.

A similar "negotiating history" argument was used by the earlier panel (in the dispute brought by the US), and the "legitimate expectations" of parties (in interpreting the obligations under 70.9), but the appellate body rejected this last argument of the panel, noting that the "legitimate expectations of parties" was a concept relating to the GATT provisions on exchange of concessions, that could not be imported into TRIPs. Despite this, the appellate body left unchanged the ruling in the US-India panel on Art. 70.9.

The Harbinson panel, in giving its findings based on the language used in 70.8 and 70.9, sets out what it calls the negotiating history, but does not say where it has drawn this negotiating history from, and used it for "confirming" its views on 70.8 and 70.9.

It looks more like a case of the new panel's conclusions and arguments, being used to justify an earlier panel's references to the "expectations" concept which the appellate body rejected.

Another point raised by India was what it called the "systemic" issue, namely that the EC was a third party before the panel that went into the US complaint, and then raised a dispute of its own on
the same issue, after the first panel and the appellate body had ruled. India had wondered whether the WTO members could go on raising the same issues in successive disputes.

The Harbinson panel has merely noted that the DSU places no such limitation.

But it raises the questions about the costs that developing countries are forced to incur in the panel processes by such successive disputes on the same case.