(ii) Relevance of Protocol of Provisional Application

4.196  In response, the European Communities argues that the distinction between mandatory and discretionary legislation in GATT 1947 practice was a reflection of the fact that the contracting parties to GATT 1947, under the existing legislation clause in the Protocol of Provisional Application (PPA) and the protocols of accession, were bound by their obligations under the GATT 1947 only to the extent that their domestic legislation permitted the executive authorities to perform those obligations.

4.197  The European Communities points out that according to paragraph 1(b) of the PPA,

"The Governments of … undertake … to apply provisionally on and after January 1, 1948 … Part II of that Agreement to the fullest extent not inconsistent with existing legislation" (emphasis added)

4.198  In the view of the European Communities, this clause allowed the government of the United States and other governments to accept the GATT 1947 without submitting it for ratification by their legislature. Under the GATT 1947 there was thus an assumption and the clear expectation that pre-existing legislation stipulating measures contrary to the provisions of the GATT 1947 could continue.

4.199  The European Communities contends that the notion of mandatory legislation under the GATT 1947 was adopted in this particular context of a conflict between an existing legislation and a new GATT-Part II obligation: the existing legislation clause required each contracting party to resolve such a conflict in favour of the former and to the detriment of the latter.

4.200  In the EC's view, already in its deliberations in 1947, i.e. before the provisional application of the GATT 1947, the Tariff Agreement Committee stated the following:

"the intent is that it should be what the executive authority can do - in other words, the administration would be required to give effect to the general provisions to the extent that it could do so without either (1) changing the existing legislation or (2) violating existing legislation. If a particular administrative regulation is necessary to carry out the law… that regulation would, of course, have to stand; but to the extent that the administration had the authority within the framework of existing laws to carry out these provisions, it would be required to do so".¹⁴¹ (emphasis added)

4.201  The European Communities points out that after the GATT 1947 was provisionally applied by means of the PPA, a 1949 GATT Working party, examining, in the course of its work, measures that could be permitted to be exempted under the "existing legislation" clause of the PPA, confirmed this view:

"The working party agreed that a measure is so permitted, provided that the legislation on which it is based is by its terms or expressed intent of a mandatory character - that is, it imposes on the executive authority requirements which cannot be modified by executive action"¹⁴² (emphasis added).

4.202  The European Communities notes that the contracting parties therefore had no right to expect that the legal uncertainty arising from the existence of such legislation would be eliminated. All they could expect was that the executive authorities would use the discretion available to them under the legislation in a GATT-consistent manner.

4.203  The European Communities argues that this explains the need of a restrictive interpretation of mandatory legislation with the aim to allow a rapid entry into force of the GATT 1947. The intention was in fact to limit the scope of the "existing legislation" clause of the PPA thus allowing an effective application of GATT 1947. A more open reading of the PPA clause would have de facto reduced considerably the achievement of the objectives of the GATT.

4.204  The European Communities further maintains that the GATT panels had no option but to apply the same standard to all domestic legislation, whether it was adopted before or after the entry into force of the GATT. The working parties and Panels under GATT 1947¹⁴³ therefore faced a dilemma: adopting a narrow definition of "mandatory" legislation furthered the objectives of the GATT with respect to existing legislation¹⁴⁴ but had exactly the opposite effect when applied to new legislation. The findings of the 1987 United States - Taxes on Petroleum and Certain Imported Substances show that this Panel was aware of this dilemma¹⁴⁵:

"… These regulations have not yet been adopted. Thus, whether they will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, … remain open questions. From the perspective of the overall objectives of the General Agreement it is regrettable that the Superfund Act explicitly directs the United States tax authorities to impose tax inconsistent with the national treatment with respect to that case … The Panel noted with satisfaction the statement of the United States that, given the tax authorities' regulatory authority under the Act, 'in all probability the 5 per cent penalty rate would never be applied'" (emphasis added)".

4.205  In the EC's view, along the same lines, the 1990 EEC - Parts and Components panel report stated that

"…the mere existence of the anti-circumvention provision in the EEC's anti-dumping Regulation is not inconsistent with the EEC's obligations under the General Agreement. Although it would, from the perspective of the overall objectives of the General Agreement, be desirable if the EEC were to withdraw the anti-circumvention provision, the EEC would meet its obligations under the General Agreement if it were to cease to apply the provision in respect to contracting parties".¹⁴⁶

4.206  The European Communities adds that more explicitly referring to the PPA, the 1989 Norway - Restrictions of Imports of Apples and Pears panel report reaffirmed the 1947 understanding that a legislation should be considered to

"be mandatory in character by its terms or expressed intent".

4.207  The European Communities further argues that the 1990 panel report's findings on Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes were expressly based on the two earlier precedents, i.e. the 1989 Norway - Apples and Pears panel report and the 1949 Working party on 'Notifications of existing measures and procedural questions’. The European Communities draws the attention of the Panel to the fact that, consistently with the Norway - Apples and Pears panel report and the 1949 - Working party report, the Thai - Cigarettes panel report dealt with the issue of mandatory versus discretionary legislation exclusively in the context of the interpretation of a clause in Thailand's Protocol of accession identical to paragraph 1(b) of the PPA.

4.208  The European Communities maintains that the 1992 United States - Measures Affecting Alcoholic and Malt Beverages, the panel again had to assess as a matter of priority the scope of application of the PPA with respect to state legislation in the United States. In that context, it came to the conclusion that

"the record does not support the conclusion that the inconsistent state liquor legislation at issue in this proceeding is 'mandatory existing legislation' in terms of the PPA".

4.209  The European Communities recalls the 1992 United States - Denial of Most-Favoured-Nation Treatment as to Non-Rubber Footwear from Brazil panel report. The context was again provided by the PPA:

"2.6 This legislation, in effect at the time the United States acceded to the GATT in 1947, was inconsistent with Article VI:6(a), which proscribes the levy of countervailing duties without a determination of injury.  However, Section 303 was covered by the "existing legislation" clause of paragraph 1(b) of the Protocol of Provisional Application of the General Agreement (the "PPA").   Paragraph 1(b) of the PPA states that GATT contracting parties shall apply Part II of the General Agreement (which includes Article VI) "to the fullest extent not inconsistent with existing legislation".  Section 303 remains in effect today and applies to dutiable imports from all countries that are not signatories to the Subsidies Agreement.

2.7 It was under Section 303 that the countervailing duty order on non-rubber footwear from Brazil was imposed in 1974, without the benefit of an injury test.

2.8 In 1974, the United States enacted Section 331 of the Trade Act of 1974,¹⁴⁷ amending its countervailing duty law to apply also to imports of duty-free products.  The United States acknowledged that this provision was not in existence in 1947 and, therefore, was not sheltered by the PPA.  Accordingly, the United States law provided that, with respect to imports of duty-free products from a GATT contracting party, the United States would provide an injury test before the imposition of countervailing duties". (emphasis added)

4.210   The European Communities contends that the only legislation that was therefore under the scrutiny of the Panel was Section 331 of the Trade Act of 1974. This provision, which is part of the Trade Act of 1974 that includes also Sections 301-310 that are the subject-matter of the present dispute settlement procedure, was drafted, in relevant part, as follows:

"(a)(2) In the case of any imported article or merchandise which is free of duty, duties may be imposed under this section only if there is an affirmative determination by the Commission under subsection (b)(1) ...

(b) Injury Determination With Respect to Duty-Free Merchandise;   Suspension of Liquidation.—(1) Whenever the Secretary makes a final determination under subsection (a) that a bounty or grant is being paid or bestowed with respect to any article or merchandise which is free of duty and a determination by the Commission is required under subsection (a)(2), he shall—

(A) so advise the Commission, and the Commission shall determine within three months thereafter, and after such investigation as it deems necessary, whether an industry in the United States is being or is likely to be injured, or is prevented from being established, by reason of the importation of such article or merchandise into the United States;   and the Commission shall notify the Secretary of its determination; ...

(c) Application of Affirmative Determination.--An affirmative determination by the Secretary under subsection (a) with respect to any imported article or merchandise shall apply with respect to articles entered ... on or after the date of the publication in the Federal Register of such determination.  In the case of any imported article or merchandise which is free of duty, so long as a finding of injury is required by the international obligations of the United States, the preceding sentence shall apply only if the Commission makes an affirmative determination of injury under subsection (b)(1)".

4.211 The European Communities underlines the very similar wording used by Section 331 and Sections 301-310 of the same Trade Act. With respect to the above mentioned provisions in Section 331, the 1992 "Non-Rubber Footwear" Panel found that

"6.13 Having found that Section 331 of the 1974 Act and Section 104(b) of the 1979 Act are applicable to like products, the Panel examined whether this legislation as such is consistent with Article I:1.   The Panel noted that the CONTRACTING PARTIES had decided in previous cases that legislation mandatorily requiring the executive authority to impose a measure inconsistent with the General Agreement was inconsistent with that Agreement as such, whether or not an occasion for the actual application of the legislation had arisen. The Panel recalled that the backdating provisions of the two Acts are mandatory legislation, that is they impose on the executive authority requirements which cannot be modified by executive action, and it therefore found that these provisions as such,   not merely their application in concrete cases, have to be consistent with Article I:1". (footnote omitted)

4.212 The European Communities notes that, under the United States’ countervailing duty law, the administration has discretion whether or not to apply a countervailing duty on subsidised products. The requirement that the Administration not apply the injury criterion if it decides to apply a countervailing duty was nevertheless regarded to be "mandatory".

4.213 In the view of the European Communities, in the case of the 1994 United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco panel report,¹⁴⁸ its findings were based, on the one hand, on the "Superfund" and the Thai - Cigarettes panel reports (thus confirming the past GATT 1947 practice). On the other hand, the panel explicitly indicated that the discriminatory measures in Section 1106(c) of the 1993 US Budget Act had not been followed by the promulgation of the implementing rules required by the Act.

4.214 The European Communities contends that further "useful guidance"¹⁴⁹ for this Panel could also be found in the unadopted panel report on EEC - Member States' Import Regimes for Bananas¹⁵⁰, paragraphs 342 to 349.

4.215  The United States responds by recalling that the European Communities argues that GATT 1947 panels implicitly relied on a "restrictive interpretation of mandatory legislation" because such an interpretation was necessary in light of the Protocol of Provisional Application. According to the European Communities, because the Protocol exempted from GATT 1947 coverage existing legislation, "effective application of GATT 1947" required that this exemption have a limited scope. The European Communities states, "[t]he contracting parties therefore had no right to expect that the legal uncertainty arising from the existence of such [mandatory] legislation would be eliminated".  According to the European Communities, GATT panels in fact either implicitly or explicitly relied on the existence of the Protocol in those cases finding discretionary legislation non-actionable.

4.216 The United States then contends that the EC's logic is flawed and hard to follow, and it is not clear what "legal uncertainty" arose from "the existence of" pre-existing mandatory legislation.  The European Communities apparently is attempting to claim that "uncertainties" existed and had to be tolerated under the GATT 1947 in order to support its argument that they may no longer be tolerated under the WTO Agreement. The United States will address the EC's arguments regarding "uncertainty" in more detail shortly.   For now it is sufficient to note that the distinction between the consistency of discretionary and mandatory legislation arose for reasons having nothing to do with the Protocol of Provisional Application or any "uncertainties" the Protocol created. 

4.217 The United States notes that the European Communities claimed that the panel reports which developed this doctrine either cited the Protocol or cases citing the Protocol, but it fails to establish this in its analysis of these panel reports.  To the contrary, these cases never once reference the Protocol or cases citing the Protocol when dealing with the issue of whether the mere existence of discretionary legislation is actionable.  The analysis of these cases confirms this.  It also confirms that there has been no change in the application of this doctrine in WTO jurisprudence, nor any reference in that jurisprudence to the fact that the Protocol was eliminated.  The EC's assertions concerning the relationship between the development of this doctrine and the Protocol are completely without foundation.

4.218 The United States notes that the European Communities purports to demonstrate how the doctrine of the non-actionability of discretionary legislation arose in connection with the Protocol of Provisional Application.   The European Communities stated that the panels which developed this doctrine either cited the Protocol or cases citing the protocol.  The following analysis of these cases reveals that this is not true, and that the EC’s discussion of these cases is highly distorted, inaccurate and misleading.

4.219 The United States argues that the first panel to find that the mere existence of discretionary legislation is not actionable was the 1987 US -  Superfund panel.¹⁵¹ In its analysis of this case, the European Communities makes the bald assertion that this panel "was aware of" the dilemma allegedly created by the Protocol. It offers absolutely no support for this assertion.  The EC offers no evidence that the Superfund case so much as references the Protocol, because there is no such reference.  The Superfund panel referred neither to prior panel reports, nor to the Protocol, in making its finding regarding discretionary legislation.¹⁵²

4.220 The United States argues that after referencing US - Superfund, the European Communities next introduces, with the phrase "[a]long the same lines", a quotation from the 1990 panel report on EEC - Parts and Components applying the mandatory/discretionary distinction, as if the leap it made with respect to the Superfund panel may be transferred to yet another case.  However, the EEC – Parts and Components case makes no reference to the Protocol, or to cases citing the Protocol.   Instead, it refers to the Superfund panel report which, as we have seen, makes no reference to the Protocol or to cases citing the Protocol.¹⁵³

4.221  In the view of the United States, the European Communities next juxtaposes a reference to the 1989 panel on Norway -- Restrictions on Imports of Apples and Pears, a case which does, indeed, refer to the Protocol and the question of whether certain mandatory legislation was, by virtue of the Protocol, exempt from GATT coverage.  This case did not, however, involve the question of whether the mere existence of discretionary legislation is actionable.¹⁵⁴

4.222 According to the United States, the European Communities identifies a case which discusses both the Protocol and the question of whether the mere existence of discretionary legislation is actionable: Thai -   Cigarettes.  However, the European Communities incorrectly states that the Thai - Cigarettes panel report "dealt with the issue of mandatory versus discretionary legislation exclusively in the context of the interpretation of a clause in Thailand’s Protocol of accession identical to paragraph 1(b) of the PPA".

4.223 The United States contends that in fact, the issue of mandatory versus discretionary legislation arises three times in Thai – Cigarettes.  The first is in the context of addressing whether Thailand’s Protocol exempted a provision of the Tobacco Act (Section 27) from the application of Article XI:1 of the GATT 1947.¹⁵⁵ The Panel’s discussion of this point references Norway Apples, but makes no reference to US -  Superfund or to EEC  - Parts and Components.¹⁵⁶ The next reference to a discretionary/mandatory distinction comes in the context of determining whether the mere existence of excise tax provisions allowing for the possibility of a violation of GATT 1947 Article III:2 could be said to violate that provision.¹⁵⁷ The panel found it did not, relying on the US – Superfund and EEC – Parts and Components panel reports.¹⁵⁸ Despite the fact that the Panel had one paragraph earlier applied the discretionary/mandatory distinction in the context of the PPA, the panel did not refer to this finding or to the Protocol.¹⁵⁹    Likewise, when the panel for a third time addressed a mandatory/discretionary distinction, this time to determine whether the existence of a provision "enabling the executive authorities to levy [a] discriminatory [business and municipal tax]" violated Article III, the panel concluded that it did not.¹⁶⁰ In making this finding, the panel referenced its finding with respect to excise taxes (which referenced the US – Superfund and EEC – Parts and Components reports), but made no reference to its earlier findings with respect to the Protocol.¹⁶¹ The panel thus drew no connection between the non-actionability of discretionary legislation and the exemption of pre-existing mandatory legislation under the Protocol, despite the opportunity presented by the fact that the dispute dealt with both issues.

4.224  The United States notes that the EC citation to US - Malt Beverages is equally without support.  The European Communities notes that this panel report addressed the question of whether legislation was exempt from the GATT 1947 because it was covered by the Protocol (the panel found it was not), but neglects to point out that the Protocol is not so much as mentioned in the separate discussion in that report of whether the non-enforcement of mandatory legislation rendered legislation non-actionable.¹⁶² That discussion again references Thai - Cigarettes, EEC Parts and Components and US -  Superfund, but not the Protocol or cases citing the Protocol.¹⁶³  The Protocol issue cited by the European Communities is clearly unrelated to the issues presented here.

4.225  The United States notes that the European Communities next discusses the 1992 panel report on United States -  Non-Rubber Footwear.   The European Communities asserts that "the context was again provided by the PPA", an assertion which is at best misleading.   While issues relating to the PPA were responsible for the fact that the United States was applying multiple countervailing duty regimes to countries in different circumstances, the exemption of various of these regimes under the PPA was not at issue.¹⁶⁴ Rather, the issue related to the comparative treatment different countries received under each of these regimes, which the panel found to violate GATT 1947 Article I:1.¹⁶⁵ The panel found that the specific provisions of these regimes granting more or less favorable treatment were mandatory because they could not be modified through executive discretion, and were therefore actionable as such.¹⁶⁶ In a footnote to this finding omitted by the European Communities, the panel cited US - Superfund and EEC – Parts and Components.¹⁶⁷ There is no reference to the Protocol or to cases citing the Protocol.

4.226  The United States points out that the European Communities also draws false comparisons between Sections 301-310 and the laws at issue in Non-Rubber Footwear.  First, the EC focuses on only one of the laws under examination in that case, an amendment to a 1930s law included in the Trade Act of 1974.  That amendment, like the other laws at issue dating to the 1930s and 1979, related to countervailing duties and had nothing to do with Sections 301-310.  Second, the EC quotes with emphasis references in the 1974 amendment to "determinations" and the word "shall", and states, "the EC cannot help but underline the very similar wording used by Section 331 and Sections 301-310 of the same Trade Act".

4.227  The United States argues that the European Communities ignores the fact that the "determinations" on which it focuses had absolutely nothing to do with the finding in the case.  The issue in Non-Rubber Footwear was the timing and procedures under each of the laws for lifting existing countervailing duty orders.  Existing countervailing duty orders on products of countries newly granted GSP benefits were automatically given an injury review.   If that review was negative, the order was revoked, "backdated" to the date these countries were granted GSP benefits.   On the other hand, countervailing duty orders on dutiable products from countries acceding to the Subsidies Code were given an injury review only upon application within three years of accession, and the revocations were "backdated" only to the date of the application.   The differential treatment was the basis for the panel's Article I:1 finding; that finding had nothing to do with the language highlighted in the EC description.

4.228  In the US's view, the European Communities further attempts to draw false parallels between the 1974 countervailing duty law amendment and Sections 301-310 by stating that, under the countervailing duty law,

"the administration has discretion whether or not to apply a countervailing duty on subsidized products.   The requirement that the Administration not apply the injury criterion if it decides to apply a countervailing duty was nevertheless regarded to be mandatory".

4.229  According to the United States, the only problem with the EC's analysis is that it bears no relationship to that of the panel.  "The requirement that the Administration not apply the injury criterion" was (1) not at issue in the case, if for no other reason than (2) no such requirement is in the law.  Again, the issue in the case was the timing and procedures for injury reviews and for revocation of existing countervailing duty orders.  Because the case dealt with existing orders, the Administration had already in each of these cases determined that a countervailable subsidy existed, years before the issue of revocation, and the application of different revocation regimes, ever arose.  Thus, even were it accurate to describe such determinations as discretionary (the procedures and methodologies for making the determination are detailed in statutory and regulatory provisions, and allow for limited discretion), these determinations were never at issue in the case, and were completely irrelevant to the "backdating provisions" which the panel considered mandatory and therefore actionable as such.

4.230  The United States points out that the European Communities fails to include any discussion of how this practice allegedly changed under the WTO because the Protocol was no longer in effect.  The non-actionability of discretionary legislation (or the actionability of mandatory legislation) was again at issue in Canada – Civil Aircraft, Turkey - Textiles and Argentina – Textiles and Apparel (US), but the European Communities addresses only the last of these.   In its discussion of that case the European Communities provides no demonstration that the panel applied a new definition of "mandatory", or that the panel referred to the Protocol of Provisional Application.  Instead, the panel found that Argentina’s specific duties were mandatory measures, relying on the consistent line of GATT and WTO cases establishing the mandatory/discretionary distinction.¹⁶⁸ The panel stated, "GATT/WTO case law is clear in that a mandatory measure can be brought before a Panel, even if such an adopted measure is not yet in effect".¹⁶⁹ In a footnote omitted from the EC’s discussion, the panel cited US - Superfund.  The panel also noted that the U.S. Tobacco report confirmed this interpretation.¹⁷⁰

4.231  According to the United States, had the EC bothered to address the Canada – Aircraft and Turkey - Textile cases, it would have found that neither of these cases did anything other than apply the GATT distinction on discretionary/mandatory legislation.  For example, in Canada – Aircraft, the panel stated:

"We recall the distinction that GATT/WTO panels have consistently drawn between discretionary legislation and mandatory legislation.  For example, in United States Tobacco, the panel 'recalled that panels had consistently ruled that legislation which mandated action inconsistent with the General Agreement could be challenged as such, whereas legislation which merely gave the discretion to the executive authority ... to act inconsistently with the General Agreement could not be challenged as such; only the actual application of such legislation inconsistent with the General Agreement could be subject to challenge'".¹⁷¹ (citation omitted)

4.232  The United States considers that neither Canada - Aircraft nor Turkey - Textiles redefined the meaning of "mandatory" or refer to the Protocol of Provisional Application to do so.¹⁷² The EC’s claim that the definition of mandatory has changed because of the elimination of the Protocol of Provisional Application is thus pure fantasy.  Neither the GATT cases establishing the actionability of mandatory legislation nor the WTO cases which have continued to apply this rule relied on the existence, expiration, or anything else regarding, the Protocol of Provisional Application.¹⁷³