ASIL
Insight WTO Appellate Body Rules on Dominican
Republic Cigarette Imports By Eliza
Patterson
May
17, 2005
In early April 2005, the WTO Appellate Body (AB) issued a ruling in an
appeal of a case brought by Honduras against measures taken by the
Dominican Republic in connection with the importation and internal
sale of cigarettes.[1] One of
the measures was a requirement that a tax stamp be affixed to all
cigarettes.
The importance of this case stems from its analysis of
Article XX(d) of the GATT 1994. Article XX , entitled “General
Exceptions,” allows WTO members to take 10 types of
measures (listed in subparagraphs a-j) that would otherwise
conflict with their WTO obligations, provided that specified
conditions are met. Subparagraph (d) covers measures “necessary” to
secure compliance with laws or regulations that are themselves
consistent with the WTO. The Dominican Republic claimed its
tax stamp requirement was covered by Article XX (d) because
it was “necessary” to ensure compliance with
tax and anti-cigarette smuggling laws.
Article XX is of growing importance. As global trade expands
and economies become more open to imports and foreign competition,
governments are looking increasingly to Article XX to justify
trade-restricting measures. Consequently, the AB analysis
of the Dominican Republic’s Article XX defense establishes
an important precedent. It may be a troublesome one.
The AB confirmed the long-established rule that the determination
of whether a government measure qualifies for Article XX
protection is two-tiered. First it must be determined if
the measure is of a type covered by one of the subparagraphs.
If it is, it must then also be determined that it complies
with the introductory paragraph’s non-discrimination
requirement.
The key issue in determining whether the tax stamp requirement
falls under subparagraph (d) was whether it was “necessary” within
the meaning of that provision. The AB explained that this
determination involves a process of weighing factors: the
importance of the law to which the tax stamp relates; the
contribution of the tax stamp to securing compliance with
that law; the adverse trade impact of the tax stamp requirement;
and whether a WTO-consistent measure is reasonably available
to achieve the same end.
Following such an analysis, the AB upheld the earlier Panel
ruling that that the tax stamp requirement was not “necessary” within
the meaning of Article XX (d) because the tax stamp was of
only limited effectiveness in preventing tax evasion. Moreover,
it agreed with the Panel that a WTO-consistent measure was
reasonably available.[2]
This ruling raises concerns because it is based in part
on a subjective judgment by the AB on a matter on which it
arguably has less expertise than the government concerned
has. The question as to whether a hypothetical WTO-consistent
law would have a specified effect on tax avoidance in a particular
country is not one on which members of an AB are likely to
have expertise, since they are not experts in either tax
or the operation of the economy of the Dominican Republic.
The AB could have reached its finding (that the tax stamp
requirement was not covered by Article XX (d)) by making
an objective factual determination that the requirement had
not been effective in preventing tax evasion. That approach
would have obviated the objection that the WTO dispute settlement
system has interfered in areas properly left to the judgment
of sovereign governments.
In addition to deciding the Article XX issue, the AB addressed
the question whether a requirement that importers and domestic
producers of cigarettes post a bond to ensure payment of
taxes violated the National Treatment obligation of GATT
1994, Article III:4. On this issue the AB provided a service
by explaining Article III:4 in clear, unambiguous language
as requiring that a government measure -- in this case the
bond requirement -- must not give domestic products a competitive
advantage in the market over imported like products. It determined
that the bond requirement did not do so.
About the author Eliza Patterson is a Harvard Law School graduate. She
is a Fulbright Scholar to be based in China later this year.
She can be reached at erpatterson@msn.com.
[2]The alternative constructed
by the Panel and agreed to by the AB was for the government
to provide tax stamps to foreign exporters, so that those tax
stamps could be affixed on cigarette packets in the course
of their own production process, prior to importation.
Copyright 2005 by The American Society of International
Law ASIL
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