Mercado Común del Sur/Southern Common Market MERCOSUR, is a major trade bloc of the southern Western Hemisphere. Full members are Argentina, Brazil, Paraguay, and Uruguay. Associate members are Bolivia, Chile, Colombia, Ecuador and Peru. Venezuela was added as a full member in 2005, but the congresses of Brazil and Paraguay have not ratified the action. The organization’s purpose is to link economies, promoting free trade toward the goal of regional economic integration. Its constitutive treaty is the Treaty Establishing a Common Market[1]; MERCOSUR’s major organs are:
On June 8, 2007, the Permanent Tribunal of Review (TPR) of MERCOSUR issued a decision[2] in a case of first impression involving compensatory measures under Articles 31 and 32 of the Protocol of Olivos (PO)[3]. The TPR acted on a petition from Argentina complaining of compensatory measures taken by Uruguay in response to Argentina’s failure to implement a previous TPR decision in a controversy over importation of remolded tires from Uruguay into Argentina[4]. In response to the failure to implement Order No. 1/2005, Uruguay applied a compensatory measure consisting of a 16% tariff on the importation of tires generally from Argentina into Uruguay, effective April 18, 2007. Argentina complained to the TPR that the sanction was excessive. The TPR assumed jurisdiction under Articles 31 and 32 of the PO. Pursuant to these articles, if a state party fails to implement a TPR order, an affected state party may apply temporary compensatory measures such as the suspension of concessions or other “equivalent” obligations directed toward obtaining compliance with the order (Article 31). If the noncompliant party believes the compensatory measures are excessive, it may bring the matter before the TPR. If the compensatory measure involves sectors other than those originally affected, as in this case, the TPR must determine the reasons for the action and whether the compensatory measures are proportional to the consequences of the failure to implement the order (Article 32). Noting that the PO does not contain a definition of “excessive” and that no cases interpreting the term have been decided, Argentina based its arguments on dispute resolution provisions of the WTO. Specifically, it analogized the interpretation of the term “equivalent,” in Article 31 of the PO to interpretations of the same term in Article 22(4) of the WTO’s Dispute Resolution Understanding (“DSU”)[5]. Based on this analysis, Argentina argued that Uruguay’s compensatory measure exceeded the equivalency limitation; was not proportional to the consequences of the Argentine failure to implement the arbitral decision (in that it improperly considered damages provoked by the original implementation by Argentina of its restrictive measures); was punitive in character; and was therefore inconsistent with the rules of MERCOSUR. In the Argentine view, enforcement by the TPR would amount to a derogation of sovereignty to which members of MERCOSUR had not agreed and which was not permissible. Argentina further suggested criteria to evaluate the level of damage to itself caused by the Uruguayan action and questioned whether Uruguay had met its burden of proof concerning its 16% tariff under the provisions of Article 32. Uruguay responded that accession to the PO rendered the TPR’s arbitral orders mandatory, and that Argentina’s failure to comply with the order had a negative effect on the norms of MERCOSUR itself, as well as the process of integration of the community. It dismissed Argentina’s reliance on a definition of “equivalent” in WTO practice as ill-founded, as the term was used differently in the DSU than in the PO. The 16% tariff was not intended to force compliance with the arbitral order, but rather to offset some of the damage caused to the Uruguayan economy by Argentina’s failure to comply with the order. Uruguay pointed out that the asymmetry in commerce between the two states would have rendered ineffective any compensatory measure against Argentina confined to the sector (remolded tires) affected by the TPR’s original order[6], justifying application of the compensatory measure to tires generally. It noted with supporting data that the percentage of Uruguayan exports to Argentina amounted to a much higher ratio of its total exports than the ratio between Argentina’s exports into Uruguay and Argentina’s total exports. In resolving these claims, the TPR concluded that MERCOSUR is a regional bloc in the process of integration (with interests not just commercial and economic, but also social, cultural, juridical and political), and does not just promote of liberalization of commerce like the WTO. With this foundation, the TPR stated that the failure to implement the previous order of the TPR damaged not only the directly affected party but other members of MERCOSUR, its institutions, and the whole juridical order of the community. Therefore, it concluded that it might consider not just commercial damages but also economic damages to the whole community. The TPR also concluded that a determination of proportionality must take into account the level of damages that led to the compensatory measures, including Argentina’s noncompliance with the order. It noted that the European Union may apply sanctions having the effect of forcing a noncompliant state into compliance with its orders. It first considered, therefore, the level of commerce directly affected by the original restriction by Argentina of the flow of commerce, as well as the application of the compensatory measure to sectors other than the sector affected by the original action. It then analyzed the level of the compensatory tariff in light of the respective trade volumes of Uruguay and Argentina, and concluded the damage to Uruguay from the original Argentine violation to be much more serious, given the size of its economy, than the impact on Argentina of the Uruguayan action. Finally, the TPR determined that it needed no explicit grant of authority from Argentina to force compliance with a previous order. Based on its reasoning the TPR found the compensatory tariff of Uruguay to be proportional and appropriate. * * The case demonstrates the difficulties inherent in determining appropriate compensation to a complaining state for losses incurred after a violation of economic order by another state. The TPR also grappled with whether unilateral retaliatory action to force compliance by the violating state is permissible in the MERCOSUR regime. Its conclusions relied heavily on the rhetoric of integration and the imposition of discipline to support integration. No argument directly tied the 16% tariff level to the level of damages incurred by Uruguay. The TPR’s attempt to analyze the Uruguayan action as “equivalent” to the damage caused by Argentine failure to implement the previous order necessarily seemed arbitrary and intended to vindicate the interests of the institution of MERCOSUR as a whole, rather than provide proportional compensation to Uruguay. The rejection of the Argentine arguments for narrow interpretation of the scope of the PO reflects internal dissension within the group about what the process of integration is to encompass. However, the decision demonstrates the resolve of the recently-formed TPR to be taken seriously and to interpret the PO, its charter, broadly enough that its decisions are enforceable. Robin M. Blackwood U.S. Navy JAG Corps Commander (Ret.) Footnotes: 1 Treaty of Asuncion, March 26, 1991, 30 I.L.M. 1041 (1991) supplemented by the Protocol of Ouro Preto Regarding the Institutional Structure of MERCOSUR, Dec. 17, 1994, 34 I.L.M. 1244 (1995); Protocol of Brasilia for the Solution of Controversies in MERCOSUR, Dec. 17, 1991, 361 I.L.M. 691 (1997); and the Olivos Protocol for the Settlement of Disputes, Feb. 18, 2002, 42 I.L.M. 2 (2002). (These agreements are available at http://www.sice.oas.org/Mercosur/instmt_e.asp. Olivos Protocol is available only in Spanish; the others in English or Spanish.) 2 Laudo No 1/2007, laudo del Tribunal Permanente de Revisión constituido para entender en la solicitud de pronunciamiento sobre exceso en la aplicación de medidas compensatorias – controversia entre Uruguay y Argentina sobre prohibición de importación de neumáticos remoldeados procedentes del Uruguay, (Award Number 1/2007, Award of the Permanent Revision Tribunal who convened to understand the subjugated verdict of compensatory measures given in excess – regarding the controversy between Uruguay and Argentina over the prohibition of the importation of remolded tires originating from Uruguay (June 8, 2007)). 3 Olivos Protocol for the Settlement of Disputes, (Argentina, Brazil, Paraguay, and Uruguay), Feb. 18, 2002, 42 I.L.M. 2. The Protocol entered into force on January 2004. The text in Spanish is available at: http://www.sice.oas.org/Trade/MRCSR/olivos/polivos_s.asp (August 6, 2007).
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Laudo No 1/2005, laudo del Tribunal Permanente de Revisión constituido para entender en el recurso de revisión presentado por la República Oriental del Uruguay contra el laudo arbitral del Tribunal Arbitral ad hoc de fecha 25 de octubre de 2005 en la controversia “Prohibición de importación de neumáticos remoldeados procedentes del Uruguay”.
(Award Number 1/2005, Award of the Permanent Revision Tribunal who convened to understand the appeal presented by the Republic of Uruguay versus the arbitration award handed down from the Arbitration Tribunal ad hoc on October 25, 2005 regarding the controversy over the prohibition of the importation of remolded tires originating from Uruguay December 20, 2005 available at http://www.mercosur.int/msweb/portal%20intermediario/ 5 Understanding on Rules and Procedures Governing the Settlement of Disputes, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, Legal Instruments—Results of the Uruguay Round, 33 I.L.M. 1225, 1226 (1994). Art. 22(4) provides, “The level of the suspension of concessions or other obligations authorized by the DSB shall be equivalent to the level of the nullification or impairment.” 6 Article 32 of the PO permits expansion of compensatory measures into sectors other than that affected by the original offensive action where suspension in the originally-affected sector only is deemed unworkable or ineffective. |
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