WTO Appellate Body Rules on Dominican Republic Cigarette Imports

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.
[1]Dominican Republic-Measures Affecting the Importation and Internal Sale of Cigarettes. WT/DS302/AB/R.
[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.