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Perspectives: WTO rules must allow room to address process and production methods

One of the fundamentals of the original GATT treaty of 1947 is equal treatment of imported products that are ‘like’ domestic products, regardless of how they are processed and produced. Recent developments in both EU and US law suggest the consensus around this principle has ended. It is time to find a new policy equilibrium around this issue.

This does not seem an obvious moment to be discussing the finer points of World Trade Organization law. Many would see the only currently pertinent question to be around its survival, particularly in the face of unilateral activity by the major powers, the EU, US, and China.

But the peak of aspiration towards the foundations of our global trade system should not just be about stumbling on. Evolution is needed. Failing to take account of new policy challenges would only hasten its decline as rules are increasingly perceived as outdated.

Rules framed as long ago in 1947 have of course been supplemented in many respects, not least with the transition from the General Agreement on Tariffs and Trade to the WTO in 1995. The enormous growth of trade since then, a climate crisis, and greater expectations from consumers and governments also drive the need for reconsideration.

Some of GATT’s original fundamental norms, such as non-discrimination between like products, are now openly in question.

New legislation in the EU and US such as on deforestation and animal welfare are seen as potentially clear breaches by other members in differentiating products through their processing and production methods.

Matters of WTO law have always excited great interest among specialists, to which policy-makers have generally deferred. But this approach doesn’t work for areas of major disagreement between WTO members.

Considering production methods as equally important to the final form of products is becoming an issue on which political leaders need to find some common ground in Geneva.

Like products and general exceptions in policy terms

A core building bloc in the recovery from a long period of economic depression and world war, the GATT focused on preventing overt discrimination towards goods from other countries.

Emphasising in Article III Paragraph 4 that like products should be treated the same with regard to laws, regulations, and regulations, whether imported or domestically produced, was made a core principle on the global trade rule-book. Under this thinking a shoe is a shoe, whether made at home or imported, regardless of the underlying rules shaping production such as for example its carbon footprint.

But there is qualifying text, which makes it clear that the purpose of the like products text is on preventing disguised discrimination. Thus Paragraph 1 of the same article expressly says that laws should not be used “to afford protection to domestic production”.

Similarly, there are various general exceptions to the above principles under Article XX, such as protecting public morals or conserving natural resources. But these policy rationales cannot be used as a means of arbitrary discrimination or disguised restriction on trade.

The notion of ‘like products’ could never however exhaustively defined by WTO jurisprudence, despite there having been numerous disputes and accompanying legal commentary.

Many in the trade policy community have long seen a ‘like goods’ test as almost entirely excluding differential treatment of imported goods at the border depending on how they were produced. General exceptions inscribed in the GATT such as use of forced labour or exhausting natural resources would be considered separately.

US and EU legislate to address process and production methods

Such a clean definition has come under pressure. It is now clearly being rejected by public authorities in the EU and US.

Last May, the US Supreme Court approved California’s proposed animal welfare regulation restricting the sale of meat products derived from animals raised in certain conditions – which also affects trade relations between US states.

Meanwhile in the EU the deforestation regulation obliges companies to ensure products sold in the EU have not led to deforestation and forest degradation. The Carbon Border Adjustment Mechanism will mean imported products treated differently depending on their country of origin’s climate mitigation laws.

None of these laws has yet gone to WTO dispute. But all them could, once fully implemented. In doing so, they will draw on previous cases which have allowed or rejected different treatment for the same goods produced in different ways.

In thinking about how hypothetical disputes may be handled, there is a danger of missing a far more important point. Trade rules require a degree of political consensus to be acceptable.

Where there is no consensus, WTO rulings are merely likely to sharpen divisions of opinion, leading to at best some temporary accommodation. Such was the case with the EU and US dispute over growth hormones in beef, where an uneasy truce continues many years after the case should have been settled.

Finding a new ‘line of equilibrium’

Considering an earlier case, that of US import restrictions on shrimps the appellate body expounded on the delicate task of “locating and marking out a line of equilibrium between the right of a member to invoke an exception under Article XX and the rights of the other members under varying substantive provisions”.

Ultimately, once amended to be made to be clearly non-discriminatory, such restrictions were found to be acceptable under WTO rules.

Animal welfare proponents would probably expect the same result if California’s restriction was challenged in Geneva. But both this ruling and the EU’s carbon pricing and deforestation rules could be found to discriminate against different countries in the way they operate in practice.

This has at least been implied by a recent article in the Journal of International Economic Law by Giulia Claudia Leonelli. She differentiates between measures requiring third countries to follow the exact same regulatory approach and those who may be following an equivalent but different one to meeting the same objective. The first of these may well be seen to be problematic in any dispute, the second perhaps the basis for broader international acceptance.

India has already indicated that it intends to discuss the implementation of CBAM with the EU, though stating that it does not intend to raise a dispute at the WTO but work out a bilateral settlement. Similarly, Indonesia and Malaysia want to talk about deforestation.

Such discussions, and broader political debate, should be about seeking a broader new line of equilibrium with regard to like products, ideally without needing to use a general exception to GATT rules.

There is clearly some demand to include production methods in the definition of product likeness, which doesn’t necessarily require any new text.

But it is rather the question of non-discrimination that should be crucial in thinking about absorbing such demands.

In the current political climate in the EU and US, the distinction between climate and protectionist policy goals isn’t always obvious and should be the major focus to retain a functional WTO.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

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