Gasoline:United States - Standards for Reformulated and Conventional Gasoline A. The Panel Report: Its Main Findings and Conclusions Relating to Art. III and XX B. The Appeal by the United States C. The Report of the Appellate Body I. Factual Background Faced with a serious environmental problem caused by the toxic pollutants emitted by factories and vehicles, the U.S. Congress amended the Clean Air Act in 1990.9 Most of all, the Clean Air Act of 1990 (CAA) purported to ensure that the level of air pollution caused by gasoline combustion did not exceed 1990 levels and that pollutants be reduced in major population areas.10 To implement the CAA, the U.S. Environmental Protection Agency (EPA) enacted the "Regulation of Fuels and Fuel Additives- Standards for Reformulated and Conventional Gasoline"11 (the so-called "Gasoline Rule"). This regulation was designed to control toxic and other pollution caused by the combustion of gasoline manufactured in or imported into the United States.12 The most distinctive characteristic of this Gasoline Rule was that this Rule employed either individual (established by the entity itself) or statutory (established by the EPA and intended to reflect average 1990 U.S. gasoline quality) baselines, depending on the nature of the entity concerned.13 Domestic refiners, blenders, and importers were allowed to establish an individual baseline representing the quality of their 1990 gasoline before they were forced to use the statutory baseline set by the EPA, while foreign refiners were not.14 This apparent disparity in establishing the baselines induced many complaints by foreign countries like Venezuela and Brazil who exported gasoline to the U.S. because the statutory baseline was allegedly much stricter than individual baselines.15 A. The Panel Report: Its Main Findings and Conclusions Relating to Art. III and XX 1. Article III:4 ("like products" and "less favorably" ) The Panel found that chemically-identical imported and domestic gasoline by definition have exactly the same physical characteristics as well as end-users, and are perfectly substitutable. Therefore, the Panel concluded that chemically-identical imported and domestic gasoline were like products under Article III:4.16 The Panel further concluded that since, under the baseline establishment rules of the Gasoline Rule, imported gasoline was effectively prevented from enjoying the same favorable sales conditions as were afforded domestic gasoline. Because of a producer-specific individual baseline, imported gasoline was treated "less favorably" than domestic gasoline.17 Having reached this conclusion, the Panel rejected the U.S. argument that imported gasoline was treated similarly to gasoline from similarly situated domestic parties. The Panel emphasized that Art.III: 4 deals not with the producer, but the product. 18 2. Article XX(b): "necessary to protect human, animal or plant life or health" The Panel found that the U.S. failed to meet the "necessary" test19 embedded in Art. XX (b) which requires proof that the measure in dispute (baseline establishment rule) is the "least-trade-restrictive" alternative. In this regard, the Panel noted that other alternatives, including a single statutory baseline applying to all entities, could have been adopted.20 3. Article XX(g): "relating to the conservation of an exhaustible natural resources; and made effective in conjunction with restrictions on domestic production or consumption The Panel interpreted the meaning of both "relating to" and "in conjunction with" as "primarily aimed at", following the preceding interpretation from the 1987 Herring and Salmon Panel.21 The Panel then noted that there was no direct connection between less favorable treatment of imported gasoline that was chemically identical to domestic gasoline and the U.S. objective of improving air quality in the United States.22 The Panel therefore concluded that the baseline establishment methods that afforded less favorable treatment to imported gasoline were not primarily aimed at the conservation of natural resources.23 Accordingly, the Panel did not proceed to deal with the issue of chapeau (introductory clause of Article XX).24 4. Applicability of the Agreement on Technical Barriers to Trade (the "TBT" Agreement) The Panel did not examine the applicability of the TBT. It merely noted that in view of its findings under the GATT, it was not necessary to decide on issues raised under the TBT Agreement.25 B. The Appeal by the United States Although the Panel report rejected almost all arguments that the U.S. raised, the U.S. appealed the Panel's findings only in terms of Art. XX (g) and the chapeau of Art. XX. It did not raise the Panel's rulings on Art.III: 4, Art. XX (b), and (d). The U.S. merely argued that the Panel erred in law by ruling that the baseline establishment rules do not constitute a measure "relating to" the conservation of clean air within the meaning of Article XX(g) of GATT, and consequently by failing to further examine the chapeau of Art. XX.26 C. The Report of the Appellate Body 1. The Issue of Justification under Article XX(g) of the GATT Measures The question here was whether "measures", as the term appears in both the chapeau of Art. XX and in Art. XX (g), refers to the Gasoline Rule as a whole or only to the particular provisions of that Rule, namely the baseline establishment rules.27 Without explicitly providing an answer to that question which the Appellate Body itself raised, the Appellate Body merely noted that no disputant had urged an interpretation of "measures" which would encompass the Gasoline Rule in its totality.28 Relating to the conservation of exhaustible natural resources After rejecting the Panel's obscure use of "no direct connection" (between less favorable treatment of imported gasoline and U.S. environmental objectives) as its interpretation of the "primarily aimed at" test, the Appellate Body found that the Panel had erred in basing its legal conclusion on Art. III: 4 ("less favorable treatment") as opposed to the measures at issue ("baseline establishment rules").29 Furthermore, the Appellate Body criticized the Panel Report for applying the "necessary" test to XX (g). According to the Appellate Body, the Panel blatantly disregarded the text of Art. XX (in particular, the Article's deliberate use of "relating to" vs. "necessary"). In the Appellate Body's view, this disregard amounted to a fundamental error in treaty interpretation in light of the Vienna Convention on the Law of Treaties (the Vienna Convention).30 The Appellate Body finally concluded that the measure in issue (baseline establishment rules) was appropriately regarded as "primarily aimed at", and consequently "relating to", the conservation of natural resources for the purpose Art. XX (g). According to the Appellate Body, given that the baseline establishment rules were designed to permit scrutiny and monitoring of the level of compliance by refiners, importers, and blenders with "non-degradation" requirements. 31 If such measures are made effective in conjunction with restriction on domestic production or consumption Although the Panel did not believe that the measure satisfied the proceeding requirement of "relating to" the conservation of clean air and hence did not address this issue, the Appellate Body did focus on the second requirement of Art. XX (g). Focusing on the dictionary meanings of "made effective" and "in conjunction with", the Appellate Body defined these terms as "operative" ("in force", or "having come into effect") and "together with" ("jointly with"), respectively. Armed with these definitions, the Appellate Body interpreted the second clause of Art. XX (g) as a requirement of even-handedness in the imposition of restriction, in the name of conservation, upon the production or consumption of exhaustible natural resources.32 Therefore, the Appellate Body held that since the measure (baseline establishment rules) affected both domestic and imported gasoline, it was made effective in conjunction with restrictions on domestic production or consumption. 2. The Chapeau Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a distinguished restriction on international trade, (...)33 First, the Appellate Body underscored that the chapeau addresses the manner in which a questioned measure is applied, rather than the measure itself or its specific contents34 and, accordingly, that the purpose of the chapeau is generally the "prevention of abuse" of the exceptions in [what was later to become] Article [XX].35 Among "arbitrary discrimination", "unjustifiable discrimination" and "disguised restriction" on international trade delineated in the chapeau, the Appellate Body viewed "disguised restriction" as the broadest term which was inclusive of the other two. More fundamentally, the Appellate Body found that a "disguised restriction" might be properly interpreted as a restriction taken "under the guise of a measure formally within the terms of an exception listed in Article XX."36 Second, the Appellate Body found that the U.S. had "more than one alternative course of action" in promulgating regulations implementing the CAA, including the imposition of statutory baselines without differentiation as between domestic and imported gasoline.37 In this context, the Appellate Body also rejected the U.S. argument on administrative difficulties that individual baselines for foreign refiners would have generated, such as the impracticability of verification and enforcement of foreign refiner baselines. It upheld the Panel's view that the U.S. argument was insufficient to justify the denial to foreign refiners of individual baselines permitted to domestic refiners considering, in particular, the U.S. practice in other contexts, such as anti-dumping laws, in which the U.S. resorts to other information only when the information is not supplied or regarded unverifiable.38 More importantly, the Appellate Body stressed that the U.S. should have explored the possibility of entering into "cooperative arrangements" with both foreign refiners and the foreign governments by which the U.S. would have overcome the alleged administrative problems.39 Finally, the Appellate Body concluded that the foregoing two omissions - failure to explore adequate means, including cooperative arrangements for mitigating administrative problems and disregard of the costs for foreign refiners that would result from the imposition of statutory baselines, constituted "unjustifiable discrimination" and a "disguised restriction on international trade." 9 See Clean Air Act Amendments of 1990, 42 U.S.C. § 7545 (k) (1994). 10 Appellate Body Report, supra note 1, at 4. The CAA established two gasoline programs for this purpose. The first program defines the so-called "(ozone) non-attainment areas" consisting of (i) nine large cosmopolitan areas suffering from the worst summertime ozone pollution and (ii) additional areas included at the request of the state governors concerned. In these non-attainment areas, all gasoline must be reformulated before consumption, while the sale of conventional gasoline is prohibited. The second program allows the sale of conventional gasoline in rest areas. The CAA deferred implementation of the aforementioned programs to the EPA. As a result, the EPA enacted the Gasoline Rule, relying heavily on the use of 1990 baselines as a means of determining compliance with the CAA's requirements. Id., at 4-6. 11 40 CFR 80, 59 Fed. Reg. 7716 (16 February 1994). 12 Appellate Body Report, supra note 1, at 4-6. 13 Id. 14 As a matter of fact, the possible use of individual baselines for foreign refiners was explored by the EPA while drafting the Gasoline Rule, ensuing the preparation of May 1994 proposal. However, this proposal was abandoned when the U.S. Congress passed legislation in September 1994 denying the funding necessary for its implementation. Id. 15 See Panel Report, supra note 1, paras. 3-12, 3-13. 16 In determining whether imported and domestic gasoline were like products, the Panel adopted the same test employed by the 1987 Japanese Alcoholic Beverage case: a "case-by-case" test based on various factors including physical characteristics, end-uses, and tariff classification. See Japan - Taxes on Alcoholic Beverages, the Appellate Body Report adopted on 4 October 1996, WT/DS8/AB/R; WT/DS10/AB/R; WT/DS11/AB/R [hereinafter Alcoholic Beverages]; Panel Report, supra note 1, para. 6.9. 17 Panel Report, supra note 1, para. 6.10. 18 Id. The Panel also rejected the U.S. argument that the treatment accorded to gasoline imported under a statutory baseline was on the whole no less favorable than that accorded to domestic gasoline under individual refiner baselines, noting that such balancing cannot be accepted. Id., para. 6.14. 19 See, e.g., Thailand - Restriction on Importation of and Internal Taxes on Cigarettes, adopted on 7 November 1990, GATT, B.I.S.D. (37th Supp.) at 224 (1991) [hereinafter Thai Cigarette ]; United States - Section 337 of the Tariff Act of 1930, adopted on November 7, 1989, GATT, B.I.S.D. (36th Supp.) at 345 (1990) [hereinafter Section 337]. 20 Panel Report, supra note 1, para. 6.24-6.25. 21 Id. Para. 6.38-6.39. See also Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, adopted on 22 March 1988, GATT , B.I.S.D. (35th Supp.) at 98 (1989) [hereinafter Herring and Salmon]. 22 Panel Report, supra note 1, para. 6.40. 23 Id. 24 Id., para. 6.41. 25 Panel Report, supra note 1, para. 6.43. 26 Appellate Body Report, supra note 1, at 9. 27 Id., at 13-14. 28 Id. The Panel noted that : The Panel here was following the practice of earlier panels in applying Art.XX to provisions found to be inconsistent with Art.III:4: the :measures" to be analyzed under Article XX are the same provisions infringing Article III:4. (...) In the present appeal, no one has suggested in their final submissions that the Appellate Body should examine under Article XX any portion of the Gasoline Rule other than the baseline establishment rules held to be in conflict with Article III:4. No one has urged an interpretation of "measures" which would encompass the Gasoline Rule in its totality. (underlining added) 29 Id., at 15-16. 30 Id., at 16-17. Vienna Convention of the Law of Treaties, concluded on May 23, 1969, entered into force on January 27, 1990, U.N. Doc. A/ CONF. 39/27, 8 I.L.M. 679 (1969) [hereinafter Vienna Convention]. 31 Appellate Body Report, supra note 1, at 19. 32 Id., at 20-21. 33 GATT 1994, supra note 6, art. XX. 34 United States - Imports of Certain Automotive Spring Assemblies, the Panel Report adopted on 26 May 1983, GATT , B.I.S.D. (30th Supp.) at 107 (1984) [hereinafter Certain Automotive Spring Assemblies]. 35 Appellate Body Report, supra note 1, at 22; GENERAL AGREEMENT ON TARIFFS AND TRADE, ANALYTICAL INDEX- GUIDE TO GATT LAW AND PRACTICE 564 (1994) [hereinafter ANALYTICAL INDEX]. 36 Appellate Body Report, supra note 1, at 25. This interpretation, in the Appellate Body's view, is compatible with the purpose and object of avoiding abuse of illegitimate use of the exceptions to substantive rules available in Art. XX. Id. 37 Id. 38 Id., at 26-27. 39 The Appellate Body underscored that : The U.S. must have been aware that for these established techniques and procedures to work, cooperative arrangements with both foreign refiners and the foreign governments concerned would have been necessary and appropriate. (...) [I]t appears to the Appellate Body, that the United States had not pursued the possibility of entering into cooperative arrangements with the governments of Venezuela and Brazil or, if it had, not to the point where it encountered governments that were unwilling to cooperate. (...) But it does not reveal what, if any, efforts had been taken by the United States to enter into appropriate procedures in cooperation with the governments of Venezuela and Brazil so as to mitigate the administrative problems pleaded by the United States. (underlining added). Id., at 27.
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