In a landmark ruling on 28 October, a WTO panel upheld an Indian complaint against provisions under the EU's Generalised System of Preferences (GSP) scheme that grant developing countries combating illicit drug production additional trade preferences. In a ruling that was issued on a confidential basis to India and the EC, the panel stood by India's primary claim that the special tariff preferences were inconsistent with the Most-Favoured Nation (MFN) obligation of the General Agreement on Tariffs and Trade (GATT Article 1.1). The MFN obligation requires every WTO Member to extend any advantage, favour, privilege or immunity granted to imports from any single Member to be automatically extended to all other Members.

The panel also agreed with the second Indian claim that the tariff- preferences violated Articles 2(a), 3 (a) and 3(c) of the 28 November 1979 GATT Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, popularly known as the Enabling Clause. Paragraph 2(a) of the Enabling Clause calls for the establishment of "nonreciprocal and non-discriminatory preferences" under GSP schemes, while paragraphs 3(a) and 3(c) require that preferences be designed to "facilitate and promote the trade of developing countries" and "respond positively to the development, financial and trade needs of developing countries".

The panel rejected an EC claim that Article XX (b), which allows Members to implement trade-restrictive measures to protect 'human, animal, or plant life or health,' provided a sufficient exception to derogate from WTO rules.

India had initially requested the establishment of a panel on 19 December 2002 (see BRIDGES Weekly, 15 January 2003). India reportedly raised the dispute following unsuccessful consultations with the EC after Pakistan was granted tariff-preferences for its textile exports under the drug-control scheme.

EU GSP incentives arrangements in line with sustainable development

India had argued that the GSP was an exception to the MFN obligation only to the extent that it allowed discrimination in favour of some developing countries. According to a trade source, India felt that the Enabling Clause was primarily to enable developed countries -- while granting preferences to developing countries -- to avoid challenges based on the MFN clause. In that sense the scope of the exception that the Enabling Clause was designed to serve was 'narrowly-defined'. It was thus not a complete exception to the MFN, so Article 1.1 was still relevant.

In its initial submission, India had also challenged tariff preferences granted to developing countries upholding certain environmental and labour standards. According to the EC, the GSP scheme fully conformed with the conditions in the Enabling Clause. It further argued that the scheme's special incentives to combat drug production and trafficking and promote environment and labour standards were fully in line with internationally-recognised objectives aimed at the promotion of sustainable development. India had informed the EC in March 2003 of its decision to withdraw the challenge on tariff preferences granted under the GSP's environmental and labour clauses and confine itself to the 'drug-window' of the GSP.

India calls for discrimination in favour of and not between developing countries

In its submissions to the panel, India argued that the incentives for combating drug-production and trafficking did not comply with three conditions that a developed country had to meet when applying the GSP. Firstly, the Enabling Clause justified only those preferences that did not discriminate between developing countries. With regard to the preferences granted under the 'drug-window,' these were discriminatory as they had not been extended to all but only to twelve developing country Members and had not been extended unconditionally. Secondly, the Enabling Clause covered only those preferences that were beneficial to all developing countries and that, thirdly, were designed to respond positively to their needs. According to India, the preferences were designed to respond only to the needs of the EU.

In its submissions to the panel, the EC responded by contending that India had misconceived the relationship between the Enabling Clause and Article 1.1 of the GATT. The Enabling Clause did not require the granting of preferences to all developing countries on an unconditional basis and in any event the drug preferences were 'unconditional'. Differing treatment of developing countries that had different economic needs was not discriminatory, according to the EC. Moreover, by supporting sustainable economic alternatives, tariff preferences provided an appropriate response to the drug problem and, hence, to the special development needs of the countries affected by that problem.

The EC points to measure 'necessary' for protection of human life or health

The EC in its submission also argued for an exception from WTO rules on the grounds that it was 'necessary' for protecting human life and health within the EU. Such an exception was contained in Article XX (b) of the GATT. The EC sought to show that the drug-arrangements were necessary for the protection of human life and health and pointed to the link between development and effective drug-control. The EC stated that the GSP preferences complemented other measures such as technical and financial assistance in order to promote alternate economic activities. Among other things, the EC contended that the approach was in line with the recommendations issued by UN, and in particular a 1998 Action Plan, which expressly encouraged UN members to provide greater market access to imports from the countries concerned in order to support alternative economic activities. In its second submission, the EC stated that it was not aware of any alternatives that would be equally effective and less trade restrictive in order to provide effective market access to the products from the beneficiaries.

Waiver could have saved the EU

According to many trade sources, the EU conditionality clauses in its GSP scheme could have been saved had it sought a waiver from the WTO. The EU reportedly had planned to seek a waiver for its tariff- preferences under the drug-control scheme but did not proceed due to the possibility of objections (a copy of the waiver request, G/C/W/328, is available at http://docsonline.wto.org/). India had in its first submission contended that the drug arrangements were not justified in the absence of a waiver. The Cotonou Agreement on the preferential market-access partnership between the EU and 70 African, Caribbean and Pacific countries was legitimised within WTO rules on the basis of such a waiver.

Sources indicate that the panel ruling will, if adopted, have an impact on similar GSP schemes in place based on control of drug-production and trafficking, notably those maintained by the US in favour of many Latin American countries such as the drugs eradication programs under the Andean Trade Preference Act. Bolivia, Colombia, Ecuador, and Peru reportedly received preferential US tariff treatment under this GSP program in 2001 to the tune of approximately USD 1.7 billion of exports. Trade sources also said that the ruling could have a 'chilling effect' on GSP schemes based on protection of the environment and labour rights. While India has dropped earlier claims on such grounds against the EC, it reportedly indicated that it would reserve its right to initiate new dispute settlement proceedings against the labour and environment provisions if it believed the EC was applying the tariff preferences in a way that harmed its trade or if the EC decided to renew the provisions on expiry of current GSP rules towards the end of 2004. Adding to the controversy of the case, one of the three panellists however gave a dissenting opinion.

According to trade sources, the panel report is due to be released to the public in early December. The EC will then decide on whether to appeal the panel ruling within 60 days of its release.

ICTSD reporting; "WTO Panel Final Ruling Upholds India Case Against EU GSP Program," WTO REPORTER, 31 October, 2003; "India Wins Dispute On GSP against EU," THE HINDU ONLINE, 10 September 2003.

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