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(iii) Marrakech Agreement4.233 The European Communities also argues that Article XVI:4 of the Marrakech Agreement provides for a more far-reaching and novel obligation upon WTO Members when compared to Articles 26 and 27 of the Vienna Convention on the Law of Treaties or to the legal situation existing under the GATT 1947,
4.234 The European Communities points out that in particular, the provision requires a positive action by the WTO Member ensuring the conformity of its domestic law, which includes not only legislation but also regulations and administrative procedures. 4.235 The European Communities further indicates that through Article 3.2 of the DSU, the Uruguay Round participants when they agreed to adopt the DSU explicitly pursued the objective of providing security and predictability to the multilateral trading system. This objective has been subsequently confirmed by the Appellate Body in EC Computer Equipment case174 as
4.236 The European Communities finally contends that the existing legislation clauses in the PPA and the protocols of accession have been explicitly excluded from the definition of the General Agreement on Tariffs and Trade 1994. 4.237 In the view of the European Communities, four sets of important consequences derive from the above-mentioned new legal environment:
4.238 The European Communities further argues that in this new legal environment it is then no longer justified to apply as such the standards developed under the GATT 1947 to domestic legislation. According to Articles XVI:4 of the WTO and 3.2 of the DSU together with the principle of "good faith" implementation under Article 26 of the Vienna Convention on the Law of Treaties Members' domestic law cannot be considered to be WTO-consistent merely because it does not formally preclude WTO-consistent actions. WTO Members must now go further and ensure that their domestic law is not designed to frustrate the implementation of their WTO obligations. 4.239 The European Communities argues that the Panel practice after the entry into force of the WTO is either inconclusive (and therefore does not stand in the way of the above-described interpretation) or supports the EC's views. 4.240 The European Communities points out that the 1998 Report of the Panel Japan Measures Affecting Agricultural Products dealt in particular with the interpretation of paragraph 1 of Annex A to the SPS Agreement. That provision reads as follows:
4.241 In the view of the European Communities, this provision has a function similar to that of Article XVI:4 of the Marrakech Agreement. It defines the domestic law related to phytosanitary measures, not merely actions taken under such law, as a phytosanitary measure. This means that each Member must ensure that that its domestic law related to phytosanitary measures is in conformity with its obligations under the SPS Agreement. Japan essentially argued that its domestic law is in conformity with the SPS Agreement because it does not mandate actions inconsistent with the SPS Agreement. The Panel rejected this argument on the following grounds:
4.242 The European Communities considers that the above reasoning can be transposed to Article XVI:4 of the WTO Agreement because the rationale of that provision is similar to that of paragraph 1 of Annex A to the SPS Agreement: what is relevant are the trade effects of the law at issue and the incentives or disincentives it creates, not merely whether it is mandatory. 4.243 The European Communities further notes that in its 1997 report on Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items,180 a panel found what follows:
4.244 In the view of the European Communities, the panel's decision fully supports the EC's approach as well. 4.245 The United States contends that the European Communities claims that panel practice after entry into force of the WTO "is either inconclusive (and therefore does not stand in the way of the [the EC's "new legal environment" theory]) or supports the EC's views". In support of this statement, the European Communities cites Japan Measures Affecting Agricultural Products181 and Argentina Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items. However, the Argentina Textiles and Apparel (US) panel does no more than reaffirm that mandatory legislation is actionable, without redefining the term "mandatory" as the European Communities seeks to do here. 4.246 The United States points out that as for Japan Agricultural Products, the European Communities refers to a panel discussion involving the publication requirement in paragraph 1 of Annex B of the Agreement on Sanitary and Phytosanitary Measures. This discussion did not involve the question of whether discretionary measures are actionable, nor did the issue arise at any point in Japan Agricultural Products. Japan did not, as the European Communities would have it, "essentially argue[] that its domestic law is in conformity with the SPS Agreement because it does not mandate actions inconsistent with the SPS Agreement".182 Rather, Japan argued that its varietal testing requirement did not come within the specific terms of the definition of "sanitary and phytosanitary regulations" provided in Annex B of the SPS Agreement.183 The panel rejected Japan's argument, finding that the definition in the Annex was not limited as proposed by Japan. 4.247 The United States notes that according to the European Communities, the Japan Agricultural Products panel's reasoning "can be transposed to" WTO Agreement Article XVI:4 "because the rationale of that provision is similar to that of paragraph 1 of Annex A to the SPS Agreement". This conclusion is absurd. The rationale of paragraph 1 of Annex B publication of SPS measures cannot be equated with that of WTO Agreement Article XVI:4 to ensure that domestic laws permit compliance with international obligations. Moreover, a panel's examination of an explicit definition of "measures" cannot be equated to the question of whether the mere existence of non-mandatory legislation can result in a finding of WTO inconsistency. 4.248 The United States further argues that the European Communities also claims that the Japan Agricultural Products panel's reliance on a line of GATT cases which pre-date the WTO184 somehow supports the EC's claim that the advent of the WTO changed the definition of "mandatory". Beyond the issue of timing, the European Communities is confusing two separate lines of GATT cases which stand for very different propositions: (1) the Superfund line of cases, which stand for the mere existence of legislation which grants governmental authorities the discretion to comply or not comply with their GATT/WTO obligations is not grounds for a finding of inconsistency; and (2) the Italian Machinery/FIRA line of cases, which stand for the proposition that a measure which nominally does not mandate compliance by private actors may nevertheless be considered a government "requirement" or "restriction" subject to the requirements of GATT 1947 Article III or XI if it creates sufficient incentives or disincentives for those private actors to comply.185 4.249 The United States claims that the EC's confusion recalls that of the panel in India - Patents (US), which "merge[d], and thereby confuse[d], two different concepts from previous GATT practice".186 In similar fashion, the European Communities posits a theory of "not genuinely discretionary" measures it has pieced together from assumptions, inferences and misreadings of unrelated panel findings, the Protocol of Provisional Application and miscellaneous DSU and WTO objectives. Like the theories at issue in India - Patents (US) and US - Shrimp, the EC's theory has no textual basis and must be rejected. The analysis of whether Sections 301-310 are consistent with DSU Article 23 and WTO Agreement Article XVI:4 must be based on the text of those provisions. 4.250 In response to the Panel's question as to what standards should be used in order to determine whether a Member has ensured the conformity of its laws, regulations and administrative procedures with its WTO obligations, the European Communities contends that as demonstrated above, it is no longer correct to rely on the distinction between mandatory and discretionary legislation along the legal path followed by the GATT 1947 practice. However, this does not mean that all domestic law that does not preclude WTO-inconsistent measures and thus provides for the possibility of actions deviating from WTO law (a "potential deviation") is WTO-inconsistent. It is now necessary to distinguish between
4.251 In the view of the European Communities, the first type of domestic law is genuinely discretionary. It is simply a consequence of the legislator's decision to delegate decision-making power to the administration. WTO Members are free to decide how to distribute decision-making authority on trade policy matters between the legislature and executive authorities. Article XVI:4 positively requires WTO Members to ensure that their domestic law is in conformity with their obligations under the covered agreements and therefore does not frustrate the objectives of the WTO. However, nothing in Article XVI:4 requires Members to transfer all decision making to the legislator. For these reasons, it would be inappropriate to interpret Article XVI:4 of the WTO Agreement so extensively as to require WTO Members to include explicit language in their domestic law precluding WTO-inconsistent actions. 4.252 The European Communities goes on to state that the second type of legislation is not genuinely discretionary. It is not intended to transfer decision-making authority within specified parameters from one branch of the government to another but to frustrate the implementation of specific WTO obligations. It creates, for no legitimate reason, legal uncertainty and unpredictability for the trade with other Members. A Member that maintains such law has not ensured the conformity of its law with its WTO obligations even if the law does not preclude the theoretical possibility of WTO-consistent actions. 4.253 The European Communities recalls its argument that in order to determine whether legislation that does not preclude WTO-consistent actions is genuinely discretionary, Panels should concentrate their examination as a matter of priority on the text of the domestic law or regulation. 4.254 In the view of the European Communities, this analysis on the text should focus firstly on verifying whether that domestic legislation leaves a large degree of liberty of action to the administration to develop a policy within certain predetermined parameters187 or whether it induces the executive to act systematically in conflict with the Member's WTO obligations and that it is at the very least sufficiently constraining and well-defined. In the latter situation, the measure should not be considered genuinely discretionary. 4.255 In the view of the European Communities, in addition, Panels should consider the design, structure and architecture of the domestic legislation under examination. Any domestic legislation or regulation whose structure, design or architecture is biased against compatibility with the Member's WTO obligations, or that is designed to create uncertainty and unpredictability in the trade relations among WTO Members, or that is structured so as to render difficult, unlikely or practically impossible for the executive to pursue a WTO compatible implementation could not be considered genuinely discretionary. 4.256 The European Communities points out in this respect that, as the very recent Panel Report on Chile - Taxes on Alcoholic Beverages188 rightly indicates at paragraph 7.119
4.257 The European Communities further explains that finally, an additional guiding principle to be used in order to determine whether a domestic law or regulation corresponds to a genuinely discretionary measure is the definition by Dailler and Pellet of the public international law principle of "good faith" implementation: "[L]'ex�cution de bonne foi, exige positivement fid�lit� et loyaut� aux engagements pris" and should therefore exclude "toute tentative de 'fraude � la loi', toute ruse".189 4.258 In response to the Panel's question as to whether the standards applicable under WTO law in general and Article XVI:4 of the WTO Agreement in particular are met by legislation that mandates discriminatory tax but at the same time allows for "some limited exceptions in special circumstances subject to discretionary powers", the European Communities argues that this specific issue raised by the Panel can be resolved by applying the criteria suggested by the European Communities above. 4.259 The European Communities points out that according to the Oxford English Reference Dictionary, a rule is "a principle to which an action conforms or is required to conform". An exception is "an instance that does not follow the rule". In practice, the existence of exceptions is considered to be the confirmation of the existence of the rule. 4.260 The European Communities argues that in the example submitted by the Panel to the parties, the fact that the administration is granted, in some limited circumstances, with the power to act by exception to the rule should therefore be interpreted in the following way:
4.261 In the EC's view, therefore, a Member's legislation providing for a (number of) rule(s) that are inconsistent with one or more of the obligations under a WTO Agreement should be deemed to violate as such that Member's WTO obligations irrespective of whether the legislation was actually implemented and also independently from the existence of some "limited exceptions in special circumstances subject to discretionary powers". 4.262 The European Communities then contends that the design, structure and architecture of such legislation (i.e. its objectively expressed "intent") would be dominated by the (WTO-inconsistent) rule. It would be a legislation purposefully biased against WTO compatibility and thus could not be mended by the existence of some "limited exceptions" to the (WTO-inconsistent) rule. Moreover, the mere existence of such a legislation imposing (WTO-inconsistent) rules would inevitably create a pattern of uncertainty, insecurity and unpredictability in the trade relations among the Members and could by no means constitute a "good faith" implementation of the Member's WTO obligations under Article 26 of the Vienna Convention on the Law of Treaties or (even less so) under the more demanding standard set out in Article XVI:4 of the Marrakech Agreement. 4.263 The European Communities further argues that this is, if at all possible, even more relevant in instances where only a remote possibility to obtain an "act of grace" in a specific case, a kind of waiver, to be granted by the highest political authorities of the WTO Member concerned190 and where such an "act of grace" is subject to a number of objective criteria that may, in practice, require the targeted WTO Member to give in to WTO-inconsistent pressure. 4.264 The United States points out that the European Communities suggested that WTO Agreement Article XVI:4, read together with DSU Article 3.2 and the elimination of the Protocol of Provisional Application, have created a "new legal environment". According to the European Communities, "In this new legal environment it is then no longer justified to apply as such the standards developed under the GATT 1947 to domestic legislation". Rather, "WTO Members must now go further and ensure that their domestic law is not designed to frustrate the implementation of their WTO obligations". Panels must therefore apply new standards in distinguishing among discretionary legislation to determine which are "not genuinely discretionary". According to the European Communities, a law is not genuinely discretionary if it "does not preclude the executive authorities from acting consistently with WTO law but that is - by design, structure and architecture - manifestly intended to encourage violations of WTO law or is otherwise biased against WTO-consistent action". Such a law "creates, for no legitimate reason, legal uncertainty and unpredictability for the trade with other Members". 4.265 According to the United States, the European Communities claims to derive this test from "Article 3.2 of the DSU and the principle of 'good faith' implementation of international obligations under Article 26 of the Vienna Convention on the Law of Treaties", which "no longer allows" legal situations "which could seriously impair the security and predictability of the international trading system". Leaving aside the fact that the language of Article 3.2 dates to the 1989 Montreal Rules, and thus predates the EC's "new legal environment", the European Communities is seeking to create from a WTO provision relating to the objectives of the Dispute Settlement Understanding, and its own notions of "good faith" and "uncertainty", an entirely new obligation not found in any provision of the WTO Agreement or its annexes. 4.266 The United States puts forth that the Appellate Body has confronted such a situation before. The European Communities even alludes to one such situation in its oral statement, when it refers to the US endorsement in India - Patents (US) of panel findings that the "protection of legitimate expectations of WTO Members regarding conditions of competition is as central to trade relating to intellectual property as it is to trade in goods that do not relate to intellectual property". What the European Communities fails to mention is that the Appellate Body squarely reversed the panel on this point.
TO CONTINUE WITH UNITED STATES SECTIONS 301-310 OF THE TRADE ACT OF 1974 174 Appellate Body Report on EC Computer Equipment, op. cit. 175 Appellate Body Report on India - Patents (US), op. cit., para. 81 176 The European Communities notes that it is interesting to note that in a different factual context, the Human Rights Committee - established by Article 28 of the International Covenant on Civil and Political Rights - followed a logic that, mutatis mutandis, is comparable to the logic suggested by the European Communities in this case. In the "Mauritian Women" case, it held with respect to the possibility of a direct violation of a right by a law that "it must in any event be applicable in such a way that the alleged victim's risk of being affected is more than a theoretical possibility" (emphasis added). (35/1978, paragraph 9.2) 177 [original footnote] In accordance with Article 3.2 of the DSU and established WTO jurisprudence, we shall interpret these terms in paragraph 1 of Annex A in accordance with the interpretative rules of the 1969 Vienna Convention on the Law of Treaties ("Vienna Convention"), in particular Article 31 thereof which provides in relevant part as follows: "1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose". 178 [original footnote] For example, the Illustrative List of Trade-Related Investment Measures ("TRIMs") contained in the Annex to the Agreement on TRIMs indicates that TRIMs inconsistent with Articles III:4 and XI:1 of the GATT include those which are "mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage" (emphasis added). 179 [original footnote] Recently, for example, the Panel on Japan Measures Affecting Consumer Photographic Film and Paper (adopted on 22 April 1998, WT/DS44/R), addressing a claim of non-violation nullification and impairment under Article XXIII:1(b) of the GATT, stated the following (at paragraph 10.49):
180 Panel Report on Argentina Textiles and Apparel (US), op. cit. 181 Panel Report on Japan Measures Affecting Agricultural Products ("Japan Agricultural Products"), adopted 19 March 1999, WT/DS76/R. 182 Ibid. page 10. 183 Footnote 5 to Annex B provided that the annex covered "phytosanitary measures such as laws, decrees or ordinances". See Agreement on the Application of Sanitary and Phytosanitary Measures, Annex B, footnote 5. 184 These cases include Panel Report on Japan Semiconductors, op. cit., para. 109 and Panel Report on EEC Parts and Components, op. cit., para. 5.21. 185 See Panel Report on Italian Discrimination Against Imported Agricultural Machinery ("Italian Machinery"), adopted 23 October 1958, BISD 7S/60; Panel Report on Canada Administration of the Foreign Investment Review Act ("Canada - FIRA"), adopted 7 February 1984, BISD 30S/140, para. 5.4; EEC Parts and Components, para. 5.21; Panel Report on Japan Semiconductors, op. cit., para. 109. 186 Appellate Body Report on India - Patents (US), op. cit., para. 36. According to the United States, the India - Patents (US) panel confused the concept of protecting expectations of parties as to the competitive relationship between their products and those of other parties with the concept of protecting reasonable expectations of parties relating to market access concessions, all in the service of developing a theory of "protection of legitimate expectations" not found in the text of the TRIPs Agreement. Ibid. 187 The European Communities notes that the United States quoted the still unadopted Panel Report on Canada Aircraft, op. cit., as an evidence of the continuing application of the GATT 1947 practice concerning the definition of mandatory and discretionary legislation after the Uruguay Round. The European Communities disagrees. The European Communities is of the view that this recent Panel report supports fully the EC's suggested approach. When considering the legal nature of Canada's Export Development Act (EDA), Section 10, the Panel reached the correct conclusion that "a mandate to support and develop Canada's export trade does not amount to a mandate to grant subsidies, since support and development could be provided in a broad variety of ways" (para. 9.127, in fine). The reading of the relevant provision of Canada's EDA confirms it as a clear example of a genuine discretionary legislation within the criteria suggested here by the European Communities:
188 Panel Report on Chile - Taxes on Alcoholic Beverages, circulated 15 June 1999, WT/DS87/R - WT/DS110/R. 189 Droit International public, (1994), paragraph 143. 190 The European Communities notes that in a different factual context, the European Court of Human Rights followed a logic that, mutatis mutandis, is comparable to the logic suggested by the European Communities in this case. In the "Soering" case (1/1989/161/217), the ECHR stated the following:
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