The WTO dispute settlement framework and operation
Case 3: Japan's variety-by-variety testing requirement
that less trade-restrictive requirements, such as consumer packaging, would also avoid unsafe processing and achieve the desired health protection.
The report of the panel on compliance was adopted without appeal on 20 March 2000. Australia and Canada started consulting, and reported on 18 May 2000 that a mutually agreed solution had been reached.
is insufficient, Members may provisionally adopt SPS measures on the basis of available pertinent information. They must then seek the additional information necessary for a more objective assessment of risk, and review the measure within a reasonable period of time.
The panel found no evidence that Japan had actively sought to obtain additional information to review its measure within a reasonable period. The Appellate Body agreed with the panel.
The panel also considered whether Japan had adopted the least trade-restrictive measure which would provide its desired level of health protection. The United States proposed product-by-product testing. The panel concluded it did not have sufficient evidence to determine if this option would achieve Japan's appropriate level of protection. The experts advising the panel suggested a second option. If there were differences in the way fruit varieties responded to the treatment, these would be related to different levels of sorption of the fumigant by the fruit variety in question. Testing for differences in sorption levels was relatively easy. The panel considered that the determination of sorption levels could be a less trade-restrictive alternative to the varietal testing requirement.
The Appellate Body upheld the panel's finding on the product-by-product testing method proposed by the US. Regarding the determination of sorption levels, the Appellate Body found that the panel had made an error of law by considering an alternative that had not been proposed by the United States, who bore the burden of proof that an alternative measure existed.
According to Annex B, Members must publish all SPS regulations.
Japan had not published the variety testing requirement. Japan argued the testing requirement was not actually an SPS regulation because it was not mandatory, the exporting countries were allowed to demonstrate quarantine efficiency by other means. The panel and Appellate Body found that measures had to be published regardless of whether they were mandatory, and that Japan had therefore acted inconsistently with this obligation.
Implementation
The United States and Japan agreed that it would be reasonable to give Japan until the end of 1999 to implement the rulings.
Throughout 2000, both parties continued to report that they were close to finding a mutually acceptable solution.
Economic considerations in dispute settlement
The WTO agreements, including the SPS Agreement, are legal texts.
The dispute settlement system is a quasi-judicial procedure. Little consideration was given to economic arguments or considerations during the actual examination of the three disputes outlined above, other than in the calculation of allowable retaliation. The text of the SPS Agreement makes reference to economic factors in only three provisions: Article 5.3, Article 5.6 and the definition of a risk assessment in Annex A.
Nonetheless, economic factors are important in a country's implementation of the SPS Agreement. One concern is the potentially high cost of undertaking an appropriate risk assessment (required by Article 5.1 of the SPS Agreement). It should be remembered that the legal requirement is that a measure be based on a risk assessment, not that the importing country undertake this risk assessment itself. In judging whether a risk assessment is indeed "appropriate to the circumstances", it is conceivable that a future dispute panel might give consideration to arguments of the affordability of a particular risk assessment, in particular if a developing country is defending its actions.
The definition of a risk assessment, in the case of risks to animal or plant health, as contained in Annex A is:
"The evaluation of the likelihood of entry, establishment or spread of a pest or disease within the territory of an importing Member according to the sanitary or phytosanitary measures which might be applied, and of the associated potential biological and economic consequences ...".
According to Article 5.3 of the SPS Agreement, in assessing the risk to animal or plant health and in determining the measure it will apply, a Member is to take into account as relevant economic factors
"... the potential damage in terms of loss of production or sales in the event of the entry, establishment or spread of a pest or disease; the costs of control or eradication in the territory of the importing Member; and the relative cost-effectiveness of alternative approaches to limiting risks."
Some of these economic factors were considered in the risk assessments put forward by Australia in the salmon dispute. The panel implicitly accepted the factors considered by Australia and the manner in which they were included in the risk assessment.
However, if in some future dispute the economic factors considered in a risk assessment were challenged, they could be subjected to intensive scrutiny by a panel.
The third provision of the SPS Agreement which contains a particular reference to economic considerations, Article 5.6, requires that a government put in place the least trade restrictive measure which is capable of achieving its appropriate level of health protection, taking into account economic and technical feasibility.
One difficulty panels face in examining compliance with this provision is the vagueness of the way governments describe their 'appropriate level of protection'. It is difficult to determine if a measure achieves the appropriate level. Panels therefore examine other forms of possible action that seem to address the principal risks, and seek expert advice as to the technical and economic feasibility.
In the salmon dispute, the panel considered that any action taken to appropriately reduce risk which had been identified as a possible response in Australia's own risk assessment could be considered to be technically and economically feasible. In the variety testing dispute, experts advising the panel identified an alternative testing procedure that was much simpler and less costly than the procedure prescribed by Japan, hence the panel considered that this alternative was economically feasible. It should be noted that in both of these
disputes, the Appellate Body overturned the panel's ruling, although not because of the question of economic feasiblity.
Implementation - suspension of concessions
In contrast to the examination of compliance with the legal obligations of a WTO agreement, economic considerations are a critical element during the implementation phase. When a country fails to bring its measures into line with its WTO obligations within the prescribed "reasonable period of time", the preferred option is that it provide compensation for the resulting loss of trade opportunities. When there is no agreement on compensation, the complainant in the dispute can request authorisation to suspend trade benefits previously given to the non-complying country. The complainant party identifies the value of trade benefits it wishes to suspend, and provides a list of products (tariff lines) that may be affected. In the few cases to date in which retaliation has been sought, the party affected by the suspension has challenged the proposed level of retaliation, and the matter was referred to the original dispute settlement panel for arbitration on the appropriate level.
The task of the arbitrators is to determine the normal annual level of imports from the complainant that would have existed if the challenged party had fully implemented the panel and Appellate Body findings at the end of a 'reasonable period of time'. In the beef hormones case, the United States requested the right to suspend concessions on imports from the European Comunity valued at US$202 million, and Canada sought authorisation for suspension on CDN$75 million. The arbitrators had to determine what the annual value of EC imports of hormone-treated beef from the United States and from Canada would have been if the European Community had lifted its import restrictions on 13 May 1999.1 The WTO procedures do not provide for retroactive compensation, for lost trade opportunities during years when the measure was in place, in this case since 1988.
1 The decision of the arbitrators is contained in WTO documents WT/DS26/ARB (US case) and WT/DS48/ARB (Canadian case).
The arbitrators considered both the potential trade in high-quality beef and in edible beef offal. EC imports of high-quality beef from the United States and Canada are limited by a tariff-rate quota of 11,500 tons. This quantitative constraint exists irrespective of the hormones ruling. The quota represents a negligible portion of total EC beef production, and tariff rate quotas allocated to other suppliers of high quality beef are usually filled. Given the high production and export capabilities of both the US and Canadian beef industries, the arbitrators assumed that without the hormone ban, the European Community would import at least 11,500 tons of high quality beef from the United States and Canada.
The arbitrators estimated the share of this quota that would normally be filled by each country. The estimate was based on the respective historic shares with adjustments to reflect the general trend of Canada's increasing share of high-quality beef markets.
The parties to the dispute each provided per unit prices and estimates of the expected value of high quality beef. The arbitrators considered the current value of high quality US and Canadian beef (not hormone treated) in the EC market, and what effect changes in cuts and quantities might have on prices if hormone-treated beef were permitted. The arbitrators eventually decided that the US suggested price, very close to the EC suggested price, was reasonable.
From the quantity and unit value calculations, the arbitrators estimated the total value of high quality beef from the United States and Canada which could be expected to enter the European Community annually had the ban on hormone-treated beef been removed in May 1999. However, the arbitrators made further adjustments to this calculation. They deducted the value of US and Canadian high quality beef (not hormone treated) that was actually entering the EC market despite the ban. They also took into account the effects on current US export levels of an EC "hold and test"
procedure for all shipments of US high quality beef that the European Community had imposed on the grounds that some of the US meat contained prohibited hormones.
The calculation of lost trade opportunities for edible beef offal from the United States and Canada was more complicated because there was no quota setting potential maximum import levels. The arbitrators took as a base the average annual US (or Canadian) exports of offal to the European Community in the years before the ban. A number of adjustments were made to account for the decline in EC consumption – recognising that a portion of this decline could be due to the hormone ban itself. The arbitrators calculated the difference between the trend in import volumes for the years immediately following the imposition of the ban (extrapolated from actual import volumes preceding the ban) and the actual import volumes for these years. The annual average difference was then added to actual imports in each of the years 1995-97 and used to calculate the expected EC consumption in the absence of the ban.
The arbitrators then considered the probable per unit value of edible beef offal. The United States and European Community suggested very similar prices, a lower level was suggested by Canada. The arbitrators noted the US price was lower than the current actual price but was considered reasonable because prices could be expected to fall if the ban were lifted, as a result of the impact increased imports would have upon the European price.
In making their calculations, the arbitrators deducted the value of US and Canadian edible beef offal coming from non-treated animals that currently entered the EC market. A complication arose because a portion of EC imports of edible beef offal is destined for pet food, not for human consumption. Offal for pet food is not subject to the hormone ban, but is included in data under the same tariff line as that destined for human consumption. The parties did not agree as to what proportion of potential US and Canadian offal exports would go into pet food. The European Community was unable to substantiate its claim that over 31per cent was destined for pet food so the arbitrators used the US and Canadian estimates (5 and 10 per cent, respectively) to reduce their calculation of the total value of US and Canadian exports of edible beef offal that would be entering the European Community except for the hormones ban.
The arbitrators finally judged that if the European Community had complied with the findings of the WTO dispute settlement panel and Appellate Body by the set deadline, the United States could have expected to export an additional US$116.8 million per year of high quality beef and edible beef offal to the European Community.
The value of the lost trade to Canada was estimated as a maximum of CDN$11.3 million per year. The Dispute Settlement Body thus authorised the United States and Canada to suspend trade benefits on an equivalent value of trade from the European Community.
Conclusion
To date, economic factors have been of little importance in the consideration of disputes over sanitary and phytosanitary measures, despite the economic implications of the SPS Agreement for countries. These include the benefits of imports, the potential losses associated with pest or disease introduction, the costs of undertaking a risk assessment, and of implementing appropriate measures.
Another potential economic concern to governments is the cost of involvement in a formal dispute under the WTO procedures.
Although the WTO does not collect a fee or charge governments using the dispute resolution system, governments face important financial and resource costs when they are bringing a challenge, or defending their requirements. Nonetheless, one should not exaggerate these costs, as in many cases the actual costs are reduced because most of the participants are already in place and thus can be considered as a fixed cost to their governments. The variable costs include additional travel, special studies and overtime for employees, as well as opportunity costs of time and resources.
Given these costs, it might be expected that a complaint would only be brought concerning export products of major economic importance, ie. those which have an important political constituancy in the exporting country. There is no doubt that the potential economic gains in the hormones and variety testing disputes are substantial; they seem to be considerably less in the salmon case.
However, the WTO dispute settlement process does not screen
complaints nor refuse those where potential trade gains would be minimal.
Each dispute considered at the WTO is judged on its own merits.
Economic factors are of most direct relevance only when the legal decisions have not been implemented, and the value of compensation or retaliation for lost trade opportunities must be determined. Although the economic evaluation of lost trade opportunities will be unique to each dispute, the hormones case provides a useful example of the methodologies that might be used, the factors which may be examined and the manner in which adjustments may be made to reflect the relevant economic considerations.
Countries trade for economic benefits. Economics, by nature, is the basis of any trade discussion. The need to protect human, animal and plant health leads governments to impose restraints on trade.
The SPS Agreement and the WTO dispute resolution system provide a legal and institutional framework for regulating these restraints on the economic process. The focus of the SPS Agreement and the WTO process on health and legal, rather than economic considerations, should thus come as no surprise.
References
WTO (1998a) Report of Appellate Body on EC: measures concerning meat and meat products (hormones), Geneva: World Trade Organization.
WTO (1998b) Report of Panel on Australia: measures affecting importation of salmon, Geneva: World Trade Organization.
WTO (1998c) Report of Appellate Body on Australia: measures affecting importation of salmon, Geneva: World Trade Organization.
WTO (1998d) Report of Panel on Japan: measures affecting agricultural practice, Geneva: World Trade Organization.
WTO (1999) Report of Appellate Body on Japan: measures affecting agricultural practice. Geneva: World Trade Organization.