Jean Monnet Center at NYU School of Law

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I. Evolution of Non-Violation Cases

A. Drafting History of Non-Violation Provision (GATT Article XXIII: 1(b))

After the Second World War, world economic order was re-established under the banner of the Bretton Woo ds system, initiated by the United States.[9] One crucial pillar of the Bretton Woods system was the GATT 1947, the goal of which was to promote free trade through tariff reduction. Naturally, much of the "form and substance" of the GATT 1947 originated from U.S. bilateral trade agreements in the decades immediately preceding World War II, particularly from the U.S. trade agreements negotiated in the decade after 1935. Such agreements emphasized bilateral tariff reductions as well as a bargained-for exchange, namely "reciprocity." [10]

Once tariff reduction through negotiations was achieved, the next step was to preserve the results and prevent any backsliding. Therefore, the architects of the GATT 1947 established a legal mechanism in which schedules of tariff concessions were binding and their value or effect could be guaranteed with the help of various general obligations, such as those mandated by national treatment principles.[11] In addition, procedures for dispute settlement were established, taking into account these legal obligations.[12] It should be noted that legal obligations were originally just one option among various kinds of diplomatic instruments intended to maintain the tariff concessions. [13] In other words, what the GATT framers really wanted to achieve through legalism was the preservation of the value of tariff concessions and smooth dispute settlement, rather than the establishment of a unified and integrated set of norms and its resulting structure.

Nonetheless, the legalism embedded in the GATT 1947 was imperfect due to the agreement's institutional defects. In fact, this was largely by design, as the GATT 1947 was not intended to provide the requisite institutional framework for governing world trade. Such a role was to have been played by the stillborn International Trade Organization (ITO), which failed to survive a U.S. Congressional veto. The ITO's draft charter included more elaborate dispute settlement mechanisms and allowed for appeal to the World Court (International Court of Justice).[14] Only a small portion of this framework, however, was actually reflected in the GATT 1947.[15]

It is not surprising that concerns remained in the minds of the GATT 1947 drafters that Member states might take actions to circumvent binding tariff reductions, whose integrity could not be fully protected by the agreement's general obligations. The fear was that this would dilute "reciprocity" between GATT Members. Under the above approach in which legal obligations were regarded as just one option among various diplomatic instruments, drafters of the GATT 1947 devised an expansive and ambiguous, yet convenient provision. This "non-violation" provision [16] entitled a contracting party - even in the absence of a breach of obligations by another contracting party - to argue that their benefits had been nullified or impaired under the GATT 1947. The aggrieved country would thus be authorized to receive compensation. The GATT 1947 architects' most important concern seemed to be whether a specific measure in question affected (nullified or impaired) any benefits accruing from tariff concessions, regardless of the distinctions between "breach of obligation" (violation cases) and "other" cases (non-violation cases).

B. Development of Non-Violation Cases in the GATT History

During the half-century history of the GATT, the dispute settlement procedure has tensely oscillated between two positions or tendencies--one that encourages minimal use of non-violation cases ("restraintism") and another that advocates more extensive use of non-violation cases ("activism").[17] The parties in dispute have inconsistently but naturally swung between the two positions, depending on which position served their purposes more at a particular time.

1. Restraintism

Most GATT panel decisions seem to favor restraintism[18] and most GATT panels have consistently tried to narrow the scope of non-violation cases to prevent possible misuse. In doing so, the panels have tried to impose a certain level of discipline on this vague provision by requiring that the measure in dispute meet certain criteria before a non-violation case exists. Measures that do not violate any GATT obligation but allegedly nullify or impair the benefits of other contracting parties may be challenged by the contracting parties if certain requirements are met. [19]

First, the measure in question cannot reasonably have been anticipated by the complaining party at the time the concession was negotiated. For instance, in Oilseeds (1988), [20] the panel ruled that the United States was assumed to have based their tariff negotiations with the European Community (EC) on the expectation that the price effect of the tariff concessions would not be systematically offset.[21] The panel further ruled that EC production subsidies neutralizing the price effect of the tariff concessions nullified or impaired the value of duty-free tariff bindings for oilseeds, and that the value of tariff bindings was reasonably to be expected by the United States from the reciprocal exchange of tariff concessions.[22] What is important here are the "tariff concessions" which form the basis for that expectation. Such a reasonability requirement connected with the tariff concessions serves to prevent possible misuse that could result from an inquiry into subjective expectations. [23]

Second, the measure in question must have damaged the competitive position of the imported product concerned.[24] In Sardines (1952), the panel concluded that the Norwegian government had reason to assume during negotiations that preparations of the type of clupeoid in which they were interested would be no less favorably treated than other preparations of the same family and that this situation would not be modified by unilateral action of the German government. [25] In that case, the panel noted that granting more favorable treatment to similar imported products upset the competitive position of the imported product concerned.[26] The case demonstrates that a party need not use actual trade flows, such as changes of trade volume before and after the measure, in proving a claim that a certain measure worsened a competitive position. Rather, it is sufficient to prove that the measure, in terms of the price mechanism of a market economy, resulted in distortion of a competitive relationship between two products in question.[27] Thus, a complaining party must only prove an abstract adverse change in competition, not an actual decline in imports.[28]

Since the concept of non-violation nullification or impairment is inherently ambiguous, it is important as a practical matter to determine who bears the burden of proof and to what extent. [29] The GATT codified its practices relatively early, requiring a complaining party who brought a non-violation case to submit a "detailed justification" supporting its case.[30] This practice is also reflected in the current WTO system. [31] "Justification" must also be tangible and concrete, going beyond a mere description of the measure at issue. [32] In this context, it seems clear that substantiation of a causal relationship between the invoked measures and nullified or impaired benefits is required.[33]

Non-violation cases that meet these three elements may be labeled "supplementary-mode" cases [34] since they seem to fill in the "legal gap" with a view towards re-balancing the original value of the tariff concession. For example, the products in question in non-violation cases seem to have a relatively close relationship; they are "identical" or "directly competitive" products. [35] That phenomenon implies that to some extent supplementary-mode non-violation cases, which have been established through the panel practices, play a pragmatic role of filling in the gap left by the general obligations in the GATT, including the Article III (national treatment) obligations.[36]

2. Activism

In spite of the efforts by most GATT panels to establish discipline in coping with non-violation cases, there do exist non-violation cases that do not meet the above-mentioned criteria. Indeed, some such cases lack the most important criterion of all, a connection between tariff concessions and an expectation therefrom.[37] For example, in Nullification and Impairment of Benefits (1983) [38], the EC, without establishing any connection to tariff concessions, simply argued that persistent trade imbalances between the EC and Japan constituted both nullification and impairment of benefits. These imbalances, which resulted from a network of government and private impediments to imports, were seen as an impediment to the attainment of GATT objectives.

A lax approach was also undertaken by the panel in Citrus (1982), resulting in a decision apparently at odds with the restraintism approach discussed above. In Citrus, the panel ruled that the non-violation nullification or impairment concept also protects the broader balance of benefits that governments had a right to expect as a result of reciprocal undertakings to observe the obligations in the GATT itself. [39] This open-ended type of non-violation case may be labeled an "independent-mode" case in that this type of case does not call for the existence of specific tariff concession or its connection with a reasonable expectation as the basis for invoking a complaint.[40]

Surprisingly, some proponents of non-violation cases have advocated the use of this "independent- mode" case to be applied in newly emerging areas, such as competition policies [41], which the GATT text could not fully cover. To them, the non-violation provisions are regarded as a source of hope. [42]

3. Uruguay Round Negotiations

The ambiguity of the non-violation provision has led to attempts in the Uruguay Round to specify the possible scope of its application. Initially, negotiators considered clarifying the requirements for invoking a non-violation complaint in the Dispute Settlement Understanding (DSU), including an explanation of reasonable expectation.[43] In the "Understanding on the Interpretation and Application of Article XXII and XXIII of the General Agreement on Tariffs and Trade (Draft Understanding)," which was part of the "Draft Final Act Embodying the Results of Uruguay Round of Multilateral Trade Negotiations (Brussels Draft Final Act)" there was a provision stating that:

The general dispute settlement procedures shall apply, subject to the following qualifications, in the case of complaints that a [reasonable] [legitimate] expectation by a complaining party in respect of a benefit accruing to it through the operation of a market access concessions [or other commitment] [,other obligation,] [or derogation [under Article XXV] therefrom], has been frustrated by the introduction or intensification of a measure, not in conflict with the General Agreement, [upsetting the conditions of competition ] [having an adverse effect on trade], and thereby nullifying or impairing a GATT benefit.[44]

The EC also proposed that in the non-violation complaints no opportunity to appeal be given unless the parties otherwise agree that binding arbitration or conciliation be available, and that panel rulings be adopted by consensus.[45] However, the United States strongly opposed a different procedure for non-violation complaints than for violation complaints. Therefore, the non-violation clause remains unchanged.[46]

Finally, the non-violation clause, which was originally in the GATT 1947, has now been directly applied to new sectors, such as trade in services and intellectual property through the GATS[47] and the Agreement on Trade-Related Aspects of Intel lectual Property Rights (TRIPs).[48] In the process, little consideration of sectoral characteristics, thus leaving potential for future problems.[49]

[9] For the historical background of post-war global economic circumstances and the birth of the GATT, see generally GILBERT R. WINHAM, THE EVOLUTION OF INTERNATIONAL TRADE AGREEMENTS (1992); A. G. KENWOOD & A. L. LOUGHEED, THE GROWTH OF THE INTERNATIONAL ECONOMY 1820 - 1970 (3d ed. 1992); ROBERT E. HUDEC, THE GATT LEGAL SYSTEM AND WORLD TRADE DIPLOMACY (2d ed. 1990); KENNETH W. DAM, THE GATT: LAW AND INTERNATIONAL ECONOMIC ORGANIZATION (1970).

[10] Robert E. Hudec, The GATT Legal System: A Diplomat's Jurisprudence, 4 J. WORLD TRADE L. 615, 616 - 36 (1970); Ernst-Ulrich Petersmann, The Dispute Settlement System of the World Trade Organization and the Evolution of the GATT Dispute Settlement System since 1948, 31 COMMON MKT. L. REV. 1157, 1171 (1994); ERNST H. PREEG, TRADERS AND DIPLOMATS: AN ANALYSIS OF THE KENNEDY ROUND OF NEGOTIATIONS UNDER THE GENERAL AGREEMENT ON TARIFFS AND TRADE 23 - 24 (1970); Edwin Vermulst & Bart Driessen, An Overview of the WTO Dispute Settlement System and its Relationship with the Uruguay Round Agreements, 29 J. WORLD TRADE 131, 136 (1995).

[11] GATT 1994, supra note 5, art. III.

[12] Id. art. XXIII.

[13] Hudec, supra note 10, at 624.

[14] See, e.g., CLAIR WILCOX, A CHARTER FOR WORLD TRADE 159, 305-308 (1949); JOHN H. JACKSON, THE WORLD TRADING SYSTEM: LAW AND POLICY OF INTERNATIONAL RELATIONS, 113-114 (2d ed. 1997); U.N. Charter, art. 92-96.

[15] Id.

[16] GATT 1994, supra note 5, art. XXIII ¶ 1(b). This paper deals only with XXIII:1(b) non-violation complaints. Regarding XXIII:1(c) complaints, often cited as "situation" complaints, there have been very few traces in the former GATT panel history. See Ernst-Ulrich Petersmann, Violation-Complaints and Non-Violation Complaints in Public International Trade Law, 34 GERMAN Y.B. INT'L L. 175, 192 (1991). There have been no GATT panel decisions recognizing non-violation claims based on Article XXIII:1(c). JACKSON ET AL., supra note 5, at 364.

[17] This tension seems to elucidate the reason why GATT failed to develop an "extensive jurisprudence" of non-violation nullification or impairment. HUDEC, supra note 9, at 166.

[18] Most international trade law scholars also seem to share this position. See, e.g., JACKSON ET AL., supra note 5, at 363 - 64; ROBERT E. HUDEC, ENFORCING INTERNATIONAL TRADE LAW: THE EVOLUTION OF THE MODERN GATT LEGAL SYSTEM at 7 (1993); Petersmann, supra note 10, at 1188.

[19] Id. at 1201. See e.g., EEC--Production Aids Granted on Canned Peaches, Canned Pears, Canned Fruit Cocktail and Dried Grapes, L/5778, C/W/476 [hereinafter Canned Fruits].

[20] Payments and Subsidies Paid to Processors and Producers of Oilseeds Related Animal-Feed Proteins, January 25 1990, GATT B.I.S.D. (37th Supp.) at 86 (1991) [hereinafter Oilseeds].

[21] Id.

[22] Id.

[23] For instance, in Fuji-Kodak (1998), Japan (Fuji) defended its position emphasizing this element. It maintained that "By the 1960's, Japanese film manufacturers and importers, including Kodak, had adopted single-brand distribution and acquired or contracted with existing wholesalers to build single-brand distribution networks. This process was largely completed by 1967 and the universal norm by 1979, and did not change through 1994, when the tariff concessions were negotiated, respectively. Given this very public process and the fact that single-brand distribution is the norm in virtually every film market worldwide, the United States simply could not have anticipated anything other than single-brand distribution in Japan." Fujifilm, Comments by Fuji Photo Film concerning Government of Japan WTO Submission in the Film Case (visited August 18, 1997) <> [hereinafter Fujifilm, Comments]. According to the final report of the Fuji-Kodak panel, this argument by the Japanese government seemed to be accepted by the panel. The panel ruled that since the Japanese measures technically existed before the United States negotiated tariff reductions on film and photographic papers, the United States should not have anticipated more market access as a result of the tariff concessions. See Fuji-Kodak Panel Report, supra note 7, ¶¶ 10.103, 10.111, 10.126.

[24] See, e.g., Canned Fruits, supra note 19.

[25] Treatment by Germany of Imports of Sardines, Oct. 31 1952, GATT B.I.S.D. (1st Supp.) at 53 (1953) [hereinafter Sardines].

[26] Id.

[27] In Fuji-Kodak, Japan tried to highlight this aspect in its defense against the United States complaint. It argued that "The key question posed by this case is whether the conditions of competition in the Japanese film and paper markets were upset after 1967, 1979, or 1994. The United States failed to demonstrate that they were. Japan has shown that they were not. Even assuming that the United States claims that actions by the Government of Japan were actually "measures" under WTO rules, the market situation is better now than at any time in the past." Fujifilm, Comments, supra note 23.

[28] See Oilseeds, supra note 20. This so-called "competition" analysis can also be found in violation cases. See, e.g., United States--Taxes on Petroleum and Certain Imported Substances, June 17 1987, GATT B.I.S.D. (34th Supp.) at 136 (1988).

[29] See, e.g., European Community--Refunds on Exports of Sugar, 25 October 25, 1979, GATT B.I.S.D. (26th Supp.) at 290 (1980) [hereinafter Sugar]; U.S.--Restrictions on the Importation of Sugar and Sugar-Containing Products Applied Under the 1955 Waiver and Under the Headnote to the Schedule of Tariff Concessions, November 7. 1990, GATT B.I.S.D. (37th Supp.) at 228 (1991) [hereinafter Waiver].

[30] See Agreed Description of the Customary Practice of the GATT in the Field of Dispute Settlement, ¶ 5, which is an Annex to the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance, GATT B.I.S.D. (26th Supp.) at 210 (1979).

[31] Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of the WTO Agreement, supra note 2, art. 26 [hereinafter DSU].

[32] See Japan--Trade in Semi-Conductors, May 4 1988, GATT B.I.S.D. (35th Supp.) at 116 (1989) [hereinafter Semi-Conductors]; Waiver, supra note 29; The Fuji-Kodak panel also ruled that the United States bore the burden of proving a "detailed justification" for its non-violation claim. See Fuji-Kodak Panel Report, supra note 7, ¶ 10.32.

[33] See, e.g., Semi-Conductors, supra note 32, at 161, ¶ 131.

[34] For an overview of this mode of non-violation cases in the GATT history (1948 - 1990), see Annex: Overview of Non-Violation (GATT Art. XXIII:1(b)) Cases: 1948 - 1990 [hereinafter Annex].

[35] See, e.g., Australian Subsidy on Ammonium Sulphate, April 3, 1950, GATT B.I.S.D. (2d Supp.) at 188 (1952) [hereinafter Australian Subsidy]; Sardines, supra note 25; Armin Von Bogdandy, The Non-Violation Procedure of Article XXIII: 2, GATT -- Its Operations Rationale, 26 J. WORLD TRADE 95, 102 (1992).

[36] Practically speaking, it would be fair to say that the notion of "identical or directly competitive products" found in Australian Subsidy and Sardines largely overlaps that of "like products" or "directly competitive or substitutable products" found in Article III of GATT. However, this conceptual similarity never leads to substitutability between Article III violation and non-violation cases. Although the supplementary-mode non-violation complaints complement the role which the Article III violation clause should have played but did not, the utility of those non-violation complaints must not be exaggerated because the inherently fluid nature of non-violation complaints could not be compatible with the rule of law which the GATT/WTO has been pursuing and will pursue, see GATT 1994, supra note 5, art. III, ¶ 2, 8 (b).

[37] According to Professor Hudec, the contracting parties "seized the occasion to establish their authority in this borderline area, and to give some substance to the shadowy legal concepts outlined by the GATT/ITO draftsmen." HUDEC, supra note 9, at 159.

[38] Japan--Nullification and Impairment of Benefits and Impediment to the Attainment of GATT Objectives, L/5479, C/M/167 [hereinafter Nullification and Impairment of Benefits].

[39] EEC--Tariff Treatment of Citrus Products from Certain Mediterranean Countries, February 7, 1985, L/5776, C/M/186 [hereinafter Citrus].

[40] For an overview of this mode of non-violation cases in the GATT history (1948 - 1990), see supra note 34.

[41] "[A]s formal tariff and regulatory restrictions on imports gradually disappear, market access disputes are likely to focus increasingly on allegations of private anti-competitiveness practices and insufficient foreign enforcement." William H. Barringer & James P. Durling, Point-Counterpoint: Trade Dispute in the Japanese Photographic Film Market, Out of Focus: The Use of Section 301 to Address Anticompetitive Practices in Foreign Markets, 1 UCLA J. INT'L L. & FOREIGN AFF. 99, 137 (1996).

[42] Bogdandy, supra note 35, at 98 - 99. For the proponents of the use of this type of non-violation complaints, see generally David A. Daul, A Picture Worth Far More than a Thousand Words: A Unique Cause of Action at the World Trade Organization to Enforce American Trade Rights against Japan, 17 HAMLINE J. PUB. L. & POL'Y 121 (1995); Robert Howse & Michael J. Trebilcock, The Fair Trade Debate: Trade, Labor, and the Environment, 16 INT'L REV. L. & ECON. 61 (1996); Brian Hindley, Competition Law and the WTO: Alternative Structures for Agreement, in 2 FAIR TRADE AND HARMONIZATION: PREREQUISITES FOR FREE TRADE? 333 (Jagdish Bhagwati & Robert E. Hudec eds., 1996); Tracy M. Abels, The World Trade Organization's First Test: The United States-Japan Auto Dispute, 44 UCLA L. REV. 467 (1996).

[43] 2 THE GATT, URUGUAY ROUND: A NEGOTIATING HISTORY (1986 - 1992) 2785 - 86 (Terence P. Stewart ed. 1993).

[44] Id. at 2783 - 86; GATT Secretariat, Understanding on the Interpretation and Application of Article XXII and XXIII of the General Agreement on Tariffs and Trade, Draft Final Act Embodying the Results of Uruguay Round of Multilateral Trade Negotiations, MTN.TNC/W/ 35 (Dec. 3, 1990) [hereinafter Brussels Draft Final Act].

[45] 1 THE GATT, URUGUAY ROUND: A NEGOTIATING HISTORY (1986 - 1992) 62 (Terence P. Stewart ed. 1993).

[46] Id. The position of the United States seems to derive from a long tradition in international trade negotiations which emphasizes tariff concessions and reciprocity. This tradition dates back to the United States international trade agreement with foreign countries in the 1920s and 1930s. See supra Part I.A. Moreover, it should be noted that Section 301 of the Trade Act of 1974 also provides a variety of causes of action in the name of "unreasonable" acts, policy, or practice which include the toleration by a foreign government of systematic anti-competitive activities by enterprises or among enterprises in the foreign country. See Section 301, supra note 4.

[47] GATS, supra note 6, art. XXIII, ¶ 3.

[48] However, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) explicitly prohibits the non-violation provision in the GATT 1994 from being applied to the dispute settlements under the TRIPs for a period of five years from the date of entry into force of the WTO Agreement. See Agreement on Trade-related Aspects of Intellectual Property Rights, Annex 1C of the WTO Agreement, supra note 2, art. 64, ¶ 2 [hereinafter TRIPs]. Likewise, the North American Free Trade Agreement (NAFTA), although it employs the notion of non-violation nullification or impairment, it does put some limitation on invoking this kind of complaint. See Cherie O'Neal Taylor, Dispute Resolution as a Catalyst for Economic Integration and an Agent for Deepening Integration: NAFTA and MERCOSUR?, 17 NW. J. INT'L L. & BUS. 850, 899 n.161 (1997); North American Free Trade Agreement, Dec. 17, 1992, U.S.-Can.-Mex., 32 I.L.M. 289 (containing chs. 1 - 9), 32 I.L.M. 605 (containing chs. 10 - 22), Annex 2004 (1), (2), at 699 [hereinafter NAFTA].

[49] See infra Part II.B.1.

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