Update: The Mercosur Exemption Reversed – Conflict between WTO and Mercosur Rulings and Its Implications for Environmental Values
January 23, 2009
Since the Panel issued its decision in June 2007, there have been two major developments in this case. First, on appeal of the Panel’s decision by the European Communities, the Appellate Body issued its decision in December 2007. The Appellate Body upheld the Panel’s finding that Brazil’s import ban on retreaded tyres was “necessary” to protect public health and the environment within the meaning of Article XX(b), but reversed the Panel’s findings concerning the Mercosur exemption under the chapeau of Article XX. Subsequently, a WTO arbitral award was issued in August 2008, giving Brazil until December 17, 2008 to implement the WTO rulings. On January 5, 2009, the EC agreed to give Brazil more time for compliance.
The Appellate Body decision, together with the subsequent arbitral award, has given rise to a conflict between the rulings of the WTO and Mercosur. This conflict can have further implications for the environmental values at issue.
The Appellate Body’s Decision
Article XX(b) of the GATT permits the implementation by a WTO Member of measures “necessary to protect human, animal or plant life or health”, but the chapeau of Article XX requires that such measures not be “applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”. The key differences between the Appellate Body’s decision and the Panel’s lie in their interpretation of the chapeau language.
The Panel had focused on the trade effect in its interpretation of the term “unjustifiable” discrimination. The Panel found that the Mercosur exemption discriminated between Mercosur countries and other WTO Members, but such discrimination was not “unjustifiable” within the meaning of the chapeau because, at the time, the volume of retreaded tyres imported from Mercosur countries was not significant enough to undermine the objective of the import ban. Applying the same “effect” test, the Panel found that imports of used tyres through Brazilian court injunctions resulted in “unjustifiable” discrimination because the volume of such imports was so large that the objective of the import ban was being significantly undermined.
The Appellate Body rejected this quantitative approach, which would characterize discrimination as “unjustifiable” only if the volume of imports is large enough to significantly undermine achievement of a measure’s objective. In its view, the assessment of whether discrimination is unjustifiable “will usually involve an analysis that relates primarily to the cause or the rationale of the discrimination.” While acknowledging that the effects of the discrimination “may be a relevant factor” for determining whether the discrimination is justifiable, the Appellate Body nonetheless found that the Panel erred in focusing “exclusively” on the relationship between the effects of the discrimination and its justifiable character.
The Appellate Body also disagreed with the Panel’s interpretation of the term “arbitrary” discrimination. The Panel had found that the discrimination resulting from the Mercosur exemption was not arbitrary because Brazil enacted the exemption to comply with the ruling of a Mercosur tribunal, rather than out of its capricious or random decision. Similarly, the Panel had found the imports of used tyres did not result in arbitrary discrimination because they were made through court injunctions. While agreeing that acts implementing a decision of a judicial or quasi-judicial body can hardly be characterized as a decision that is “capricious” or “random,” the Appellate Body held that discrimination resulting from a rational decision or behavior can still be arbitrary or unjustifiable if “it is explained by a rationale that bears no relationship to the objective of a measure provisionally justified under one of the paragraphs of Article XX, or goes against that objective.” 
For these reasons, the Appellate Body concluded that the Mercosur exemption, as well as the used tyre imports through court injunctions, resulted in Brazil’s import ban being applied in a manner that constitutes “arbitrary or unjustifiable discrimination” within the meaning of the chapeau. Accordingly, Brazil is required to bring its measure into conformity with its WTO obligations.
The Arbitral Award
Brazil may have “a reasonable period of time” to implement the WTO rulings. A WTO arbitrator was appointed to determine what constitutes the reasonable period in this case, after the EC and Brazil failed to reach agreement.
In the arbitral proceeding, Brazil requested that it have until September 2009 to achieve full compliance. According to Brazil, because the Mercosur exemption was mandated by a Mercosur ruling, it would have to negotiate an arrangement with its Mercosur partners and the earliest time for such arrangement to take effect would be September 2009. The EC opposed, arguing that a Mercosur-wide arrangement would not lead to removal of the Mercosur exemption and that Brazil should not be given time for pursuing measures that obviously would not bring about compliance.
While recognizing that Brazil may choose to negotiate with other countries as a way to implement a WTO ruling, the arbitrator found that such negotiation is an “external” process outside the law-making and regulatory system of Brazil, and is therefore not indispensable for Brazil’s implementation of the WTO decision. Accordingly, the arbitrator decided not to factor into his determination any time needed for such negotiation. Based on the time necessary for Brazil to change its domestic law concerning the imports of used tyres through court injunctions, the arbitrator set December 17, 2008 as the deadline for Brazil’s compliance.
Both the Panel and the Appellate Body decisions resoundingly affirm that import bans unilaterally imposed to protect health and the environment can be compatible with the WTO Agreement. In a sense, the Appellate Body’s decision can be viewed as even more pro-environment than the Panel’s since it requires Brazil’s import ban to be complete and fully consistent with its environmental purposes.
Under current circumstances, however, Brazil cannot remove the Mercosur exemption without disobeying the ruling of the Mercosur tribunal. Thus, unless it can make an arrangement within Mercosur to overcome the effect of that ruling, the only way Brazil can comply with both its WTO and Mercosur obligations is to withdraw the import ban, which of course would defeat its environmental purposes.
This potential conflict between the rulings of the WTO and the Mercosur tribunal is only accentuated by the arbitral award. By disallowing time for Brazil to secure a negotiated solution within Mercosur, the arbitrator has forced Brazil into a legal bind between the WTO and Mercosur systems. If Brazil fails to remove the Mercosur exemption or otherwise maintains an incomplete import ban after December 17, 2008, it may face further WTO proceedings on sanctions against its noncompliance.
It should be pointed that this conflict between the WTO and Mercosur decisions is not inherent or inevitable. As the Appellate Body noted, Article 50(d) of the Treaty of Montevideo contains a provision similar to Article XX(b) of the GATT, exempting measures taken by a Mercosur member for the protection of human, animal or plant life and health. Brazil could have defended its import ban on these grounds in front of the Mercosur tribunal, but chose not to. This fact apparently complicated Brazil’s position in the WTO litigation.
It should also be pointed out, however, that there was no assurance that the Mercosur tribunal would have found the import ban justifiable under Article 50(d) had Brazil invoked that provision for defense. The Mercosur tribunal is a separate international forum, whose interpretation of the same treaty language in a given case may or may not be consistent with that of the WTO. Hence, the issue raised here is one of the fragmentation of international law.
 Report of the Appellate Body, Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, adopted December 17, 2007
 Award of the Arbitrator, Brazil – Measures Affecting Imports of Retreaded Tyres, Arbitration under Article 21.3(c) of the Understanding on Rules and Procedures Governing the Settlement of Disputes, WT/DS332/16, August 29, 2008.
 Report of the Appellate Body, supra note 1, para. 229.
 Id. para. 230.
 Id. para. 232.
 Understanding on the Rules and Procedures Governing the Settlement of Disputes (DSU), Article 21.3.
 See Award, supra note 2, paras. 78-80.
 The EC is entitled to request authorization from the WTO to retaliate against Brazil after 20 days of the expiry of the deadline for compliance. See DSU, Article 22.2. While the EC has agreed to refrain from making the request for now, it has reserved the right to do so in the future.
 Report of the Appellate Body, supra note 1, para. 234.
 Id. On Brazil’s strategy in the Mercosur litigation, see Fabio Morosini, The MERCOSUR and WTO Retreaded Tires Dispute: Rehabilitating Regulatory Competition in International Trade and Environmental Regulation, http://papers.ssrn.com/col3/papers.cfm?abstract_id=1154710.
 Supra note 8. See also Award, supra note 2, paras. 81-82.
 In a similar dispute involving Argentina’s import ban on retreaded tryes, the Mercosur tribunal rejected the defense invoked by Argentina under Article 50(d). See Award, supra note 2, fn. 141.
 See U.N. International Law Commission, Study Group on the Fragmentation of International Law, Report: Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, U.N. Doc. A/CN.4/L.682 (2006).