4.267  The United States points out that the India - Patents (US) panel found that "the legitimate expectations of WTO Members" must be taken into account, and that the "protection of legitimate expectations of Members regarding the conditions of competition is a well established GATT principle" derived in part from GATT 1994 Article XXIII, the basic dispute settlement provisions of the GATT and WTO, and GATT 1947 panel reports relating to GATT 1947 Article III.¹⁹¹ Further, based on Article 31 of the Vienna Convention, which provides for "good faith" interpretation of treaty terms in accordance with their ordinary meaning in their context and in light of their object and purpose, the Panel stated,

"In our view, good faith interpretation requires the protection of legitimate expectations derived from the protection of intellectual property rights provided for in the Agreement".¹⁹²

4.268  The United States further notes that the Appellate Body rejected this approach, noting that the panel had "merge[d], and thereby confuse[d], two different concepts from previous GATT practice,¹⁹³ and had misapplied VCLT Article 31:

"The Panel misunderstands the concept of legitimate expectations in the context of the customary rules of interpretation of public international law.  The legitimate expectations of the parties to a treaty are reflected in the language of the treaty itself.  The duty of a treaty interpreter is to examine the words of the treaty to determine the intentions of the parties.   This should be done in accordance with the principles of treaty interpretation set out in Article 31 of the Vienna Convention.  But these principles neither require nor condone the imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended". ¹⁹⁴

4.269  The United States indicates that the Appellate Body went on to refer to DSU Article 3.2, which provides, "Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements", and DSU Article 19.2, which provides, "In accordance with paragraph 2 of Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements".¹⁹⁵ The Appellate Body stated, "These provisions speak for themselves.  Unquestionably, both panels and the Appellate Body are bound by them".¹⁹⁶

4.270  According to the United States, the European Communities in this case is attempting to engage in even more dramatic fashion in the "imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended",¹⁹⁷ the approach which the Appellate Body rejected in India - Patents (US).  Nowhere is the EC's "not genuinely discretionary" test found in WTO Agreement Article XVI:4, DSU Article 3.2, or any other provision of a covered agreement.   Indeed, the European Communities does not claim that it does.   Its test is based on extrapolation from the concept of "security and predictability" in Article 3.2 – an objective, not an obligation – and from a vague explanation of the "good faith" obligation in the VCLT – not a covered agreement.

4.271  The United States notes that Article 3.2 opens with the statement, "The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system".¹⁹⁸   This enunciation of the purpose of the DSU contains within it the understanding that it is the DSU itself which achieves this purpose.  In other words, the substantive obligations in the text of the WTO Agreement and its annexes, enforced through the DSU, provide security and predictability.  "The legitimate expectations of the parties to a treaty are reflected in the language of the treaty itself".¹⁹⁹ As the Appellate Body underlined in India - Patents (US), interpretations which go beyond the text to make up obligations out of thin air and aspirations can threaten the legitimacy of the dispute settlement system.  Article 3.2 draws a line between dispute settlement and legislation, and directs that panels abstain from the latter.

4.272  The United States further contends that similarly, in United States – Import Prohibition of Certain Shrimp and Shrimp Products, the Appellate Body stated, "A treaty interpreter must begin with, and focus upon, the text of the particular provision to be interpreted.  It is in the words constituting that provision, read in their context, that the object and purpose of the states parties to the treaty must first be sought".²⁰⁰ In US – Shrimp, the Appellate Body rejected a panel's interpretation of the chapeau of Article XX that focused not on the ordinary meaning of the words of the chapeau and its immediate object and purpose, but instead on the general object and purpose of the GATT and WTO Agreement.  Just as the European Communities now seeks to derive new obligations from the general notion of security and predictability, the US – Shrimp panel concluded that the chapeau included a general obligation "not to undermine the WTO multilateral trading system". According to the panel,

"we must determine not only whether the measure on its own undermines the WTO multilateral trading system, but also whether such type of measure, if it were to be adopted by other Members, would threaten the security and predictability of the multilateral trading system".²⁰¹

4.273  The United States emphasises that the Appellate Body rejected this approach.   The Appellate Body explained that, rather than examining the consistency of the measure in question with the chapeau of Article XX, the panel focused repeatedly on "the design of the measure itself".²⁰² The Appellate Body referred to this as:

"a standard or a test that finds no basis either in the text of the chapeau or in that of either of the two specific exceptions claimed by the United States.  The panel, in effect, constructed an a priori test that purports to define a category of measures which, ratione materiae, fall outside the justifying protection of Article XX".²⁰³

4.274  In the view of the United States, the Appellate Body therefore reversed the panel's analysis and the findings based on that analysis.²⁰⁴ It described the panel's analysis as "abhorrent to the principles of interpretation we are bound to apply".²⁰⁵

4.275  The United States argues that the European Communities is proposing a mode of analysis strikingly similar to one already rejected by the Appellate Body in US - Shrimp.  Based on the same generalized notion of "security and predictability", the European Communities is proposing a test not found in DSU Article 23 or WTO Agreement Article XVI:4, a test focusing on "the design of the measure itself":  whether a discretionary domestic law's "design, structure and architecture" is "manifestly intended to encourage violations of WTO law or is otherwise biased against WTO-consistent action". The Panel must reject this test.  The analysis of whether Sections 301-310 are consistent with DSU Article 23 and WTO Agreement Article XVI:4 "must begin with, and focus upon, the text of"²⁰⁶ these provisions.

4.276  In this respect, further, the United States responds to the Panel's request for comments on the following statement in the third-party submission by Hong Kong, China:

"The question is consequently raised as to how international obligations can be implemented in good faith if the possibility of deviation exists in a domestic legislation?   Are there expectations that the international obligations will be observed and not impaired when the possibility of deviation is expressis verbis provided for in a domestic legislation?  Is the predictability, necessary to plan future trade as the Superfund panel acknowledged, not affected when trading partners know ex ante that their partners have enacted legislation which allows them to disregard their international obligations?"

4.277  The United States answers that the question Hong Kong raises in the first sentence quoted above is a non sequitur.   Parties to an international agreement have, by becoming parties, committed to implement their agreement obligations in good faith.   It is this very fact that leads to the conclusion that one cannot assume that authorities will exercise discretion under domestic legislation so as to violate international obligations. 

4.278  In the view of the United States, if authorities exercise their discretion such that they actually deviate from their international obligations, they may then be found to have violated those obligations.   Until that point, however, it may not be assumed that they will exercise their discretion in this manner.  It may not be assumed that parties will act in bad faith.   Certainly the European Communities should accept this: in the Article 21.5 proceedings in the Bananas dispute and again in its recent proposal to amend Article 21, the European Communities has taken the position that there is a presumption of compliance in all WTO proceedings, even in Article 21.5 proceedings to determine whether a Member has brought into compliance a measure already found to be WTO-inconsistent.²⁰⁷

4.279  The United States adds that with respect to the relevance of whether legislation provides expressis verbis for the "possibility of deviation" from international obligations, the United States notes that any legislation which does not explicitly limit the exercise of discretion provides for such a possibility, and the United States doubts that Hong Kong authorities lack such discretion.²⁰⁸ This does not change the fact that WTO Members with discretionary legislation, whatever the form, have made a binding legal commitment to comply with their WTO obligations – in other words, to exercise their discretion in a WTO-consistent manner.  As discussed further in response to the following question, there is no greater assurance that a Member will act in accordance with its WTO obligations if it exercises broad, undefined discretionary authority than if it must exercise discretion not to undertake WTO-inconsistent action explicitly provided for in legislation.

4.280  In the view of the United States, Hong Kong's reference to the Superfund²⁰⁹ panel's discussion of "predictability" ignores the facts and findings of that case, which contradict Hong Kong's position.  There, the legislation in question specifically did, expressis verbis, provide for action which, if delegated discretion were not exercised in a particular manner, would have been inconsistent with US obligations under the GATT 1947.   The 1986 Superfund Act required importers to supply sufficient information regarding the chemical inputs of taxable substances to enable the tax authorities to determine the amount of tax to be imposed; otherwise, a penalty tax would be imposed in the amount of five percent ad valorem or a different rate to be prescribed in regulations by the Secretary of the Treasury by a different methodology.²¹⁰ The five per cent penalty tax, which was to go into effect on January 1, 1989 if regulations to the contrary were not issued, would have been inconsistent with GATT 1947 Article III:2.²¹¹ At the time of the panel proceedings in 1987, the regulations in question had not yet been issued.  Nevertheless, the panel concluded:

"[W]hether [the regulations] will eliminate the need to impose the penalty tax and whether they will establish complete equivalence between domestic and imported products, as required by Article III:2, first sentence, 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 a tax inconsistent with the national treatment principle but, since the Superfund Act also gives them the possibility to avoid the need to impose that tax by issuing regulations, the existence of the penalty rate provisions as such does not constitute a violation of the United States obligations under the General Agreement".²¹²

4.281  According to the United States, it is worth emphasising the US – Superfund panel's reliance on the fact that there were "open questions" regarding the Superfund regulations which would have to be answered before a panel could determine the GATT-inconsistency of the penalty tax provision.  On the one hand, this illustrates the fact that the panel would not assume that the United States would ultimately exercise its discretion in bad faith.  However, it also illustrates the fact that, even where a statute is discretionary, the actual exercise of that discretion remains open to challenge.  In Superfund, the regulations in that case – once issued – would have been subject to challenge if they violated GATT rules.   Likewise, it remains open to WTO Members, including the European Communities, to challenge the US exercise of discretion under Sections 301-310 in particular cases if they believe it to be inconsistent with US WTO obligations.²¹³ Thus, for this Panel to confirm the consistent findings of every GATT and WTO panel to date regarding the mandatory/discretionary distinction would in no way deny the European Communities or other Members the ability to challenge US actions taken under Sections 301-310.²¹⁴

4.282 The United States further contends that the Superfund panel's discussion of "predictability" came in the context of explaining why mandatory legislation may be challenged even if it will not go into effect until a fixed time in the future.²¹⁵ As described above, the Superfund Act was enacted in 1986 but the penalty tax provision would not become effective until 1989.   According to the panel, the fact that legislation is not yet in effect would not excuse any GATT-inconsistent acts which the legislation mandates.²¹⁶ However, the panel went on to conclude that the penalty tax provisions of the legislation were not mandatory because they also included discretion to implement regulations consistent with US GATT obligations.²¹⁷ As the panel indicated, the legislation gave US authorities "the possibility" to avoid GATT-inconsistent action.²¹⁸ Thus, as the United States has emphasized, it is the possibility of compliance, and not the possibility of deviation, which is the proper question for panels examining whether the mere existence of legislation as such is consistent with a Member's obligations.  This has uniformly been the analysis which GATT and WTO panels have applied to date.

4.283  The United States claims that Hong Kong's attempt to subject to WTO findings of inconsistency discretionary legislation which "allows WTO-inconsistent action to be taken" also ignores the fact that domestic legislation may be applicable not only to WTO Members in connection with rights under covered agreements, but also to countries which are not WTO Members, and to WTO Members with respect to matters not subject to a covered agreement.   The WTO Agreement and its annexes by definition are not applicable to such cases.  Thus, even if discretionary legislation were to "leave open the possibility" of determinations which would violate DSU Article 23 if applied to a WTO Member regarding rights under a covered agreement, DSU Article 23 may not be read so as to circumscribe the exercise of a Member's rights with respect to non-WTO Members and non-WTO matters.

4.284  The United States indicates that to put another way, international agreements are made between contracting parties.  The actions of those parties towards one another may or may not violate the obligations they have undertaken vis-�-vis one another.  However, the actions taken towards non-parties are not relevant to this analysis.   It is one thing to conclude that a contracting party may challenge legislation mandating action towards all if that action violates an obligation with respect to contracting parties.  However, if legislation permitting such action could also be challenged, contracting parties would effectively be precluded from exercising sovereign powers with regard to non-parties, except by establishing parallel sets of laws applicable to parties and non-parties, or by explicitly providing for limits in their domestic laws as to how discretion may be exercised towards parties.  There is absolutely no indication in the WTO Agreement or its annexes that Members agreed to this degree of interference with the exercise of national sovereignty.

4.285  In response to a question posed by the Panel, the United States further agues that no distinction can or should be made between different types of discretionary legislation for purposes of determining whether the mere existence of that legislation violates a Member's WTO obligations.   In either case, authorities may exercise their discretion in a manner consistent or inconsistent with their international obligations.   One may not assume that authorities will fail to implement their international obligations in good faith.  

4.286  The United States contends that leaving aside the fact that it may not be assumed that a Member will fail to act in good faith to comply with its obligations, it would be impossible to distinguish "good" and "bad" discretionary legislation.  The Panel's question implies that it may be possible to distinguish based on whether the legislation provides for general, non-specific discretion to achieve certain goals, rather than discretion not to undertake a specified course of action which would violate a country's international obligations.  However, if this were the test, it could lead to the odd result that legislation providing for broad discretion could not be reviewed as such even if authorities repeatedly exercise their discretion in a WTO-inconsistent manner, while legislation providing for discretion not to take WTO-inconsistent action could be found inconsistent even if authorities always exercise that discretion so as to be consistent with their WTO obligations.  

4.287  The United States further points out that on the other hand, if the means of distinguishing discretionary legislation were based on whether there were a pattern of exercising that discretion in a WTO-inconsistent manner, as the European Communities suggests, this would present other problems.  For example, the first requirement of any such test would be that a particular incident could not be included in the pattern unless there were panel or Appellate Body findings of a violation with respect to that incident.  Complaining parties could not merely assert that violations had taken place in the past, and panels could not merely accept these assertions.  However, if no such findings exist, the panel could itself make these findings only if the subject matter of each incident were within the panel's terms of reference, and involved a violation of a covered agreement.²¹⁹ Moreover, incidents occurring prior to entry into force of the covered agreements – before 1995 – could not be considered as part of the "pattern".

4.288  The United States adds that such a "pattern of conduct" test would imply a presumption that a Member will not comply with its WTO obligations.  If experience under the WTO Agreement has established any pattern, it is that the European Communities has persistently failed to comply with its obligations with respect to its banana import regime, and any presumption of non-compliance could be expected to apply in this case.  Yet, as noted above, in the Article 21.5 proceedings in the Bananas dispute and again in its recent proposal to amend DSU Articles 21, 22 and 23, the European Communities has taken the position that there is a presumption of compliance in all WTO proceedings, even in Article 21.5 proceedings.   Article 21.5 proceedings will only take place if there is a disagreement on the existence or consistency of measures taken to implement DSB rulings or recommendations, in other words if, after the DSB has at least once already adopted findings that a Member has violated its WTO obligations, there remain doubts as to whether the Member has fulfilled its commitment pursuant to Article 21.3 to bring its measure into compliance.  Nevertheless, even under these circumstances (and in the Bananas dispute, the DSB rulings had been preceded by adverse rulings by two GATT panels), the European Communities insists that there remains a presumption that a Member is complying with its obligations.  It is difficult to square this position with one suggesting that, after a pattern of violations has been demonstrated, one may assume that a Member will violate its obligation to implement in good faith.

4.289  The United States goes on to state that in addition, in order to find a pattern of conduct, it would be necessary to define a "pattern".  How many actions inconsistent with WTO rules would establish such a pattern?  Moreover, if such a pattern were established and a violation found, how could a Member bring itself into compliance?  For example, if the EC's pattern of violating its international obligations in connection with its banana import regime were sufficient to establish that the Treaty of Amsterdam authority for this regime is WTO-inconsistent, would the European Communities have to amend its Treaty authority to preclude any further WTO violations?

4.290  In the view of the United States, all of this illustrates the complexity of this issue.  It is a proper subject of debate in the DSU Review, since any change from current practice would require an amendment under Article X of the WTO Agreement or interpretation under Article IX of the WTO Agreement.  In that connection, the United States again notes that the European Communities has in those discussions conceded that there currently is a distinction between mandatory and discretionary legislation in GATT/WTO jurisprudence and practice, by offering a proposal to "remove the current distinction between discretionary and mandatory measures",²²⁰ thereby making it possible to establish the WTO-incompatibility of discretionary measures.²²¹

4.291 In rebuttal, the European Communities argues that according to consistent GATT 1947 practice, a law that mandates a measure inconsistent with an obligation under the GATT is deemed to be inconsistent with that obligation even if it has not yet been applied. The GATT 1947 panels were of the view that the objective of predictability could not be achieved if a GATT 1947 contracting party adopted domestic legislation stipulating actions at variance with its obligations.

4.292  The European Communities asserts that even in applying the standard developed by the GATT 1947 panels, the obligations of the United States set out in Article 23 of the DSU and Articles I, II, III, VIII and XI of the GATT 1994 are violated by Sections 301-310 because they mandate the executive authorities of the United States to act inconsistently with these DSU and GATT provisions.

4.293  In the view of the European Communities, the United States recognises that Sections 301-310 must meet the standard developed under GATT 1947 practice. Its principal argument is that Sections 301-310 do not require the USTR to determine that a WTO Member is denying the United States' rights under a WTO agreement or is failing to implement DSB recommendations. In its view, Sections 301-310 therefore do not "preclude" WTO-consistent action and are consequently not mandatory within the meaning of the GATT 1947 practice.

4.294  According to the European Communities, the United States further claims that the USTR is not required to determine that United States' rights under a WTO agreement are being denied and that a failure to implement DSB recommendations occurred and that, consequently, Sections 301-310 do not mandate determinations inconsistent with Article 23 of the DSU. However, these determinations must be based on the investigation initiated by the USTR under Section 302 or the monitoring conducted by the USTR under Section 306(a).