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WTO rules provide basis for DCFTA arbitration ruling on Ukrainian lumber export restrictions

The EU said it prevailed in its first bilateral FTA panel case against Ukraine in a dispute relating to Ukraine’s export ban on certain wood products, but the ruling also leaves Ukraine room to keep some restrictions. The ruling and the case prove that rules-based resolution of trade disputes remains very much in fashion.

The facts of the dispute

In January 2019, the EU initiated its first-ever bilateral dispute settlement procedure under a bilateral free trade agreement. The dispute covered two measures banning the export of certain wood products from Ukraine into the EU under the EU-Ukraine Deep and Comprehensive Free Trade Agreement (EU-Ukraine DCFTA).

The first measure under consideration was a 2005 export ban concerning 10 specific rare and valuable wood types and a 2015 export ban on unprocessed timber.

Ukraine claimed that it had adopted these measures in order to reduce illegal logging of precious wood types, thereby contributing to the protection of natural resources and more broadly to the protection of the environment.

Kyiv was invoking its right to regulate and the exceptions under Article XX GATT, which allow states to adopt GATT-incompatible measures for the protection of natural resources.

The EU was not convinced that these export bans were genuinely adopted for the protection of the environment but rather as protecting the domestic wood industry. In any event, the EU argued less restrictive measures such as imposing export quotas would have been more suitable and thus justifiable.

While the EU often presents itself as the great defender of the environment in trade agreements – in this case it was actually concerned with ensuring free trade.

Incorporation of WTO law and its dispute settlement system

It should be noted that the EU-Ukraine DCFTA, as many other similar agreements signed by the EU, essentially incorporate by reference WTO law and to a large extent also the WTO dispute settlement system – albeit with some variations.

The dispute settlement system contained in the DCFTA provides for the creation of a three-member arbitration panel, with seat in this case in Lugano, Switzerland. The arbitration essentially functions similar to a WTO panel. However, there is no appeals mechanism, no equivalent to the EU’s Appellate Body.

In substance, the arbitration panel essentially applied the relevant GATT provisions and the jurisprudence of the WTO Appellate Body. This was helped by the fact that one of the arbitrators in this case was Georgio Sacerdoti a highly experienced former WTO Appellate Body member and chairman.

A Solomonic decision  

One can say that the the arbitration panel issued a Solomonic decision.

On the one hand, the arbitration panel accepted Ukraine’s arguments that the 2005 export ban concerning specific 10 wood types, while incompatible with the agreement, was nevertheless justified under Article XX(b) GATT as a measure necessary to protect plant life.

Although the arbitration panel was not very convinced that the 2005 export ban actually has contributed to the protection of those woods types, it nevertheless granted Ukraine significant room to use its right to regulate as it sees fit.

On the other hand, the arbitration tribunal concluded that the 2015 export ban was clearly aimed at boosting the domestic wood industry and, more importantly, was not accompanied with a similar ban for the domestic wood industry.

Thus, the arbitration tribunal concluded that the 2015 export ban was not adopted for the protection of the exhaustible resources, and thus could not be justified under Article XX(g) GATT.

In the end, while the EU prevailed as far as the 2015 export ban on wood products is concerned, the arbitration tribunal was clearly mindful to preserve the policy space for states to adopt measures that might – even only remotely – help protect the environment without requiring a very high burden of proof.

Implications for EU dispute settlement going forward

This case illustrates that there is no need to reinvent from scratch the tool for resolving trade disputes between States. WTO law and its panel arbitration system appears to be still the preferred tool for the EU.

In fact it is noteworthy that this case was concluded within less than two years, which illustrates that relatively simple and straightforward trade disputes do not need to simmer in the background for years, thereby straining the political and economic relationships between the parties.

Indeed, the EU has proposed arbitration as a tool to work around the current paralysis of the WTO Appellate Body, which has been accepted by a handful of WTO members under a mechanism known as the MPIA.

In sum, this arbitration procedure illustrates that the EU is eager to continue using arbitration panels as a tool to resolve trade disputes with its trading partners despite the dispute settlement paralysis at the WTO.

 

Nikos Lavranos is Guest Professor at Free University Brussels. He regularly contributes to Borderlex.

 

 

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