A preference for development the law and economics of GSP

Downloaded from https:www.cambridge.orgcore. University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https:www.cambridge.orgcoreterms. https:doi.org10.1017CBO9780511674518.011

P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 July 6, 2007 13:18 GENE M GROSSMAN AND ALAN O SYKES 10 A Preference for Development: The Law and Economics of GSP Introduction The WTO case brought by India in 2002 to challenge aspects of the European Communities’ Generalized System of Preferences (GSP) brings fresh scrutiny to a policy area that has received little attention in recent years – trade preferences for developing countries The idea for such preferences emerged from the first United Nations Conference on Trade and Development (UNCTAD) in 1964 The ensuing negotiations led to Resolution 21(ii) at the second session of UNCTAD in 1968, acknowledging “unanimous agreement” in favor of the establishment of preferential arrangements.1 Tariff discrimination violates the most-favored nation (MFN) obligation of GATT Article I, however, and thus the legal authority for preferential tariff schemes had to await a GATT waiver of this obligation, which came in 1971 The waiver was to expire after 10 years, but the authority for preferences was extended by the GATT contracting parties Decision of November 28, 1979 on Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries, popularly known as the “Enabling Clause,”2 and now incorporated into the law of the WTO along with the GATT itself Although trade discrimination favoring developing countries is the essence of any GSP scheme, India’s WTO complaint raised the question of what type of discrimination is permissible – must all developing countries be treated alike, or can preference-granting nations discriminate among them based on various sorts of criteria? The European system challenged by India afforded more generous preferences to the least-developed countries (LDCs), to developing nations that undertook certain measures to protect the environment and labor rights, and to 12 nations involved in efforts to combat drug trafficking India originally challenged the environmental, labor, and drug-related preferences, but later limited its complaint only to the drug preferences A WTO panel ruled in India’s favor in See OECD Secretary General (1983) GATT B.I.S.D (26th Supp.) at 203 (1980) 255 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 256 July 6, 2007 Gene M Grossman and Alan O Sykes late 2003.3 The WTO Appellate Body affirmed the ruling in India’s favor in early 2004,4 although it modified the panel’s findings in a way that seemingly authorizes some differential treatment of developing countries based on their “development, financial and trade needs.” The purpose of this paper is to review the current state of the law in the WTO system and to ask whether economic analysis can offer any wisdom about the proper extent of “discrimination” through GSP measures These issues are challenging ones, both from a legal and an economic standpoint There are good economic reasons to be concerned about discrimination and reciprocity in GSP schemes, and there are respectable legal arguments that they should be strictly limited GSP benefits are “gifts” of a sort, however, and tight limitations on their terms may put an end to them altogether It is exceedingly difficult to say whether discrimination and reciprocity in GSP schemes make the trading community worse off or better off over the long haul Section provides legal and historical background, including a description of the GSP schemes currently in place in the United States and Europe and a thorough review of the recent panel and Appellate Body decisions Section evaluates the Appellate Body decision from a legal perspective and considers its possible implications for aspects of the U.S and European GSP schemes that were not challenged by India Section examines trade preferences from an economic perspective, inquiring into the soundness of the GSP concept as a whole and asking whether some forms of discrimination are somehow better than others Legal Background Resolution 21(ii) at UNCTAD II in 1968 called for the establishment of a “generalized, non-reciprocal, non-discriminatory system of preferences in favour of the developing countries, including special measures in favour of the least advanced among the developing countries.” It further stated that such preferences had three objectives: to increase the export earnings of developing countries, to promote their industrialization, and to accelerate their rates of economic growth From the outset of serious negotiations within UNCTAD, however, it was clear that the “non-discriminatory system of preferences” envisioned by Resolution 21(ii) would in fact embody considerable elements of discrimination Indeed, Resolution 21(ii) on its face contemplates discrimination in favor of LDCs Further, the theory behind GSP was that it would reduce the reliance of developing countries on exports of primary products and promote industrialization Accordingly, it was understood that manufactured goods would be the main beneficiaries of Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R (December 1, 2003) (hereafter “Panel Rep.”) Appellate Body Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R (April 7, 2004) (hereafter “AB Rep.”) Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 A Preference for Development: The Law and Economics of GSP July 6, 2007 13:18 257 preferences and that agricultural products would be treated less favorably.5 This discrimination across sectors inevitably produces a kind of de facto discrimination across beneficiaries – some beneficiaries have far greater capacity to produce the manufactured goods that are designated for preferential treatment than others In addition to these features that were built into the conception of the system, political factors intruded heavily on the willingness of nations to grant preferences across the board Some developing countries were seen as ideologically unacceptable recipients of preferences; many produced manufactured goods in politically sensitive import sectors, such as textiles and footwear; and the possibility of import surges was a matter of significant concern Thus, it quickly became clear that if GSP schemes were to be politically viable in the major developed nations, they would have to contain substantial additional limitations as to product coverage and beneficiaries and be accompanied by safeguards to address politically unacceptable increases in imports No mechanism existed for coordinating the evolution of national schemes on such matters, and thus each developed rather differently Along the way, some preference-granting countries began to condition GSP benefits on the willingness of beneficiary nations to cooperate on various policy margins, either by rewarding cooperation with greater preferences or punishing its absence by withdrawing them The conception of GSP as a “non-reciprocal” program thus came under considerable pressure as well 2.1 GSP Scope and Conditionality in the United States and Europe UNCTAD reports that there are currently 16 national GSP schemes notified to the UNCTAD secretariat – Australia, Belarus, Bulgaria, Canada, the Czech Republic, the European Community, Hungary, Japan, New Zealand, Norway, Poland, the Russian Federation, the Slovak Republic, Switzerland, Turkey, and the United States.6 They differ in significant detail, and interested readers may consult the UNCTAD Web site for the particulars of various systems Our purpose here is simply to show how the more important schemes are riddled with provisions that might be viewed as discrimination or reciprocity, and for that purpose it suffices to consider only the schemes of the United States and the European Communities 2.1.1 GSP in the United States The GSP of the United States was first enacted in the Trade Act of 1974 and took effect in 1976 President George Bush signed legislation that reauthorized the GSP program through 2008 See OECD Secretary General (1983) See UNCTAD Web site, http://www.unctad.org/Templates/Page.asp?intItemID = 2309& lang = (last visited September 1, 2004) Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 July 6, 2007 258 Gene M Grossman and Alan O Sykes The statute has three sections – a general grant of authority to the President to extend preferences,7 a section on the designation of beneficiary countries,8 and a section on the designation of eligible products.9 Regarding the designation of beneficiary countries, the statute begins with a short list of developed countries that are ineligible It next forecloses beneficiary status to eight other categories of nations: (1) “communist” countries (with exceptions), (2) countries that are parties to an “arrangement” that withholds “supplies of vital commodity resources from international trade” (aimed at OPEC); (3) countries that injure U.S commerce by affording preferences to other developed countries; (4) countries that expropriate the property of U.S citizens, including intellectual property, without just compensation; (5) countries that fail to enforce binding arbitral awards in favor of U.S citizens; (6) countries that aid or abet terrorism or fail to take “steps to support the efforts of the United States to combat terrorism”; (7) countries that have not taken steps “to afford internationally recognized worker rights”; and (8) countries that fail to fulfill their “commitments to eliminate the worst forms of child labor.” The last five exclusions can be waived by the President in the “national economic interest.”10 The President has the discretion to confer beneficiary status on any nation not excluded by the above factors, and the statute provides additional factors that the President must consider in exercising this discretion.11 Along with the prospective beneficiary’s interest in the program, its level of development, and its treatment in the GSP schemes of other donor countries, the President must also consider whether the country provides “equitable and reasonable access to [its] markets and basic commodity resources” and “adequate and effective protection of intellectual property rights,” whether it has taken steps to reduce investmentdistorting practices and barriers to trade in services, and whether it takes steps to afford internationally recognized worker rights The statute also provides for “mandatory graduation” of “high income” countries, without defining the term “high income.”12 At the low-income end of the spectrum, it also allows the President to designate least-developed beneficiary nations and to extend to them preferences that are not extended to other developing nations Pursuant to these provisions, quite a number of nations that have become highly successful exporters, such as Hong Kong, Singapore, and Malaysia, have now been “graduated” from the U.S scheme because of their “high-income” status Several nations have had their GSP status suspended temporarily because of problems in their worker rights practices, including Nicaragua, Paraguay, and Chile Some of the benefits to Argentina were suspended in 1997 over an intellectual property dispute, and some of the benefits to Pakistan were suspended at one time, but later restored in return for their cooperation in antiterrorism efforts Beneficiary status has also been denied to a number of nations 11 19 U.S.C §2461 19 U.S.C §2463 19 U.S.C §2462(c) 10 12 19 U.S.C §2462 19 U.S.C §2462(b) 19 U.S.C §2462(e) Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 A Preference for Development: The Law and Economics of GSP July 6, 2007 13:18 259 with whom the United States has had poor political relations (e.g., Cuba, Iran, North Korea, and Syria).13 It is assuredly possible that geopolitical considerations play a broader role sub rosa in many of the decisions regarding beneficiary status, and there is no mechanism to ensure that the various criteria are applied in a careful and even-handed fashion We not dwell at length here on the provisions for the designation of eligible products, as they are unlikely to be at the heart of any dispute over discrimination or reciprocity (although they might be said to cause de facto discrimination as indicated) Because these provisions are relevant to an assessment of the economic effects of the system, however, we note three important details First, many sensitive items are excluded by statute from the GSP system, such as certain textile and apparel products, watches, electronic products, steel products, footwear and leather products, certain agricultural products, and “any other articles which the President determines to be import-sensitive.”14 Second, a product from a particular beneficiary becomes ineligible for coverage if there is no longer a “competitive need” (unless it comes from a least developed beneficiary) When imports of a product from a single beneficiary exceed a certain monetary threshold (currently $115 million), or 50 percent of all U.S imports of the article in a calendar year, it must be removed as an eligible product unless the President executes a “waiver.”15 Third, all items are subject to rules of origin In general, a product will not be deemed to originate in a beneficiary nation unless it meets a 35 percent valueadded test – the value of the input products produced in the beneficiary nation, plus the value of processing in that nation, must equal 35 percent of the value of the finished good.16 2.1.2 GSP in the European Communities The European approach to GSP has evolved considerably over time The system in place through 1994 relied heavily on quantitative limits for the importation of duty-free or reduced-duty industrial and agricultural products The arrangement challenged by India, relies to a much greater extent on “tariff modulation” and “special incentive” arrangements, coupled with provisions for country and sectoral graduation, as well as an “everything but arms” arrangement for LDCs.17 The tariff modulation arrangement classifies goods into “very-sensitive,” “sensitive,” “semi-sensitive,” and “non-sensitive” products Roughly speaking 13 14 16 17 See generally, UNCTAD, Generalized System of Preferences: Handbook on the Scheme of the United States of America (2003); UNCTAD, Generalized System of Preferences: List of Beneficiaries (2001) 15 19 U.S.C §2463(b) 19 U.S.C §2463(c)–(d) 19 U.S.C §2463(a) (2) See generally, Council Regulation, 250/2001, 2001 O.J., applying a scheme of generalized tariff preferences for the period from January 2002 to 31 December 2004; UNCTAD, Generalized System of Preferences: Handbook on the Scheme of the European Community (2002) Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 260 521 86276 July 6, 2007 Gene M Grossman and Alan O Sykes and with a few exceptions, beneficiary countries then receive tariff reductions of 15 percent, 30 percent, 65 percent, and 100 percent, respectively, off the usual MFN rate for goods in each category LDCs, however, receive duty-free treatment on goods in all categories except armaments Countries can be completely graduated from the system based on a “development index,” and individual exports from particular countries can also be graduated based on a combination of considerations relating to the development index and to the beneficiary’s market share or degree of specialization in a particular product “Special incentive arrangements” provide additional margins of preference to nations that apply for them and prove their eligibility The labor arrangement applies to developing countries that have adopted the substance of the standards required by several International Labor Organization Conventions relating to, inter alia, forced labor, collective bargaining rights, non-discrimination principles, and child labor The environmental incentive arrangement applies to goods originating in countries with tropical forests that can establish their adherence to international standards regarding the sustainable management of tropical forests The special arrangements supporting measures to combat drugs are made available to 11 South or Central American countries, plus Pakistan, that are involved in efforts to reduce drug trafficking They too provide additional margins of preference on a range of products, essentially exempting goods from sectorspecific graduation rules that would otherwise apply to them Finally, the scheme contains a number of “temporary withdrawal and safeguard” provisions The most important are aimed at import surges, and they allow preferences to be suspended after an investigation of such developments Other provisions for temporary withdrawal apply to situations in which the beneficiary country has been shown to have tolerated slavery, violated worker rights, exported goods of prison labor, failed to take appropriate means to control drug trafficking, engaged in fraud with respect to rules of origin, engaged in “unfair trade practices,” or infringed the objectives of certain fishery conventions The policies favored by the European system differ somewhat from the policies encouraged by the United States, although there are notable similarities Both systems certainly exhibit a significant degree of discrimination and reciprocity in their design and in their application that goes well beyond simply the more favorable treatment of LDCs that was envisioned by UNCTAD Resolution 23(ii) 2.2 India’s Complaint and Its Legal Basis As noted earlier, India’s original complaint before the WTO challenged the labor, environmental, and drug-related preferences in the European GSP scheme, but India later restricted its challenge to the drug-related preferences Its decision to restrict the scope of its complaint has resulted in an Appellate Body decision that leaves open many questions about the permissible scope of discrimination, as we show in this chapter Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 A Preference for Development: The Law and Economics of GSP July 6, 2007 13:18 261 The legal foundation for India’s challenge begins with GATT Article I, which requires that any “advantage, favour, privilege or immunity” granted by one member nation to the product of another and relating, inter alia, to “customs duties and charges of any kind,” must also be granted “immediately and unconditionally” to like products originating in other member nations This principle is commonly termed the most-favored nation (MFN) obligation of GATT Any GSP scheme, of course, involves tariff discrimination by the preferencegranting nation It thus requires some derogation from the legal prohibition in Article I, which was first allowed under a 10-year waiver approved by the GATT membership in 1971 During the Tokyo Round, however, GATT members negotiated an agreement to make the authority permanent, embodied in the so-called Enabling Clause The relevant text of the Enabling Clause provides as follows: Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries, without according such treatment to other contracting parties The provisions of paragraph apply to the following: (a) Preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences 3(original footnote) (d) Special treatment of the least developed among the developing countries in the context of any general or specific measures in favour of developing countries Any differential and more favourable treatment provided under this clause: (a) shall be designed to facilitate and promote the trade of developing countries and not to raise barriers to or create undue difficulties for the trade of any other contracting parties; (b) shall not constitute an impediment to the reduction or elimination of tariffs and other restrictions to trade on a most-favoured-nation basis; (c) shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of developing countries” (original footnote) As described in the Decision of the contracting parties of 25 June 1971, relating to the establishment of “generalized, non-reciprocal and non discriminatory preferences beneficial to the developing countries.” The Enabling Clause plainly allows nations to depart from the MFN obligation to provide more favorable tariff treatment to goods from developing Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 July 6, 2007 262 Gene M Grossman and Alan O Sykes countries and to provide even more favorable treatment for goods from the LDCs Its text is otherwise silent on the range of goods to be covered by preferences, on the permissibility of other forms of discrimination among beneficiaries, and on the acceptability of attaching conditions (reciprocity) to preferential benefits Footnote 3, however, states that the Generalized System of Preferences contemplated by the Enabling Clause is the system contemplated in the 1971 waiver, which in turn referred to the “generalized, non-reciprocal and non-discriminatory” system of preferences discussed under the auspices of UNCTAD Footnote raises several issues that are not addressed directly by India’s complaint What is meant by the requirement of “generalized” preferences – does this obligation place any limits on the exclusion of particular products from GSP schemes? What does the obligation to provide “non-reciprocal” preferences imply about the imposition of conditions for the granting of preferences? India’s complaint put these issues to the side and focused instead on the requirement of non-discriminatory preferences According to India, when a nation grants a preference on a particular product, it must extend that preference to all developing countries, subject only to the proviso that LDCs can receive greater preferences Because the drug-related preferences in the European scheme afford special benefits to 12 enumerated beneficiaries that are not co-extensive with the set of LDCs, India contended that the preferences failed the requirement of non-discrimination under the Enabling Clause and in turn violated GATT Article I 2.3 The European Response and the Panel Decision Before the panel, Europe’s first response was a formalistic claim that the Enabling Clause did not create an exception to Article I of GATT, but removed GSP schemes altogether from the coverage of Article I The distinction was important, according to Europe, because India’s complaint alleged a violation of Article I but not of the Enabling Clause per se, and the panel should only adjudicate claims brought before it The panel quickly put this issue to the side (over a dissent), however, and read the Enabling Clause as an exception to the MFN obligation of Article I – but for the exception, preferences would violate Article I, and India’s allegation of an Article I violation squarely raised the proper issue Further, following WTO precedent on “exceptions” to primary obligations, the panel held that Europe had the burden of demonstrating that its program falls within the exception afforded by the Enabling Clause.18 Once the panel ruled that GSP preferences fall under Article I, the panel had little difficulty in concluding that India made out a prima facie case of a violation.19 The panel then turned to the question whether Europe could invoke the Enabling Clause and thereby establish its “affirmative defense.” On this front, 18 Panel Rep ¶¶7.31–7.54 19 Panel Rep ¶¶7.55–7.60 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 A Preference for Development: The Law and Economics of GSP July 6, 2007 13:18 263 Europe had three main arguments First, it pointed to paragraph 3(c) of the Enabling Clause, which provides that differential treatment shall “be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of developing countries.” Europe argued that different developing countries have different “development, financial and trade needs” and that this provision authorizes (and indeed requires) preferences to be modified to respond to those differing needs, inevitably producing differences in the preferences across beneficiaries Second, Europe argued that India misinterpreted the requirement in footnote that preferences be “non-discriminatory.” For Europe, “discrimination” involved arbitrary differences in the treatment of similarly situated entities – it argued that as long as differences in treatment could be justified by a legitimate objective and the differences were reasonable in pursuit of that objective, no “discrimination” should be found.20 Third, Europe argued that paragraph 2(a) of the Enabling Clause, which authorizes “preferential tariff treatment accorded by developed contracting parties to products originating in developing countries,” does not require preferencegranting nations to afford preferences to all developing countries Had the drafters meant to require that preferences be extended to all developing countries, Europe suggested, they could have inserted the word “all” into the text India’s response to the first and third arguments was that the term “developing countries” in paragraphs 3(c) and 2(a) should be read as all developing countries (i.e., developing countries as a group) Preferences should respond to the “development, financial and trade needs” of those countries as a group, claimed India, and should not vary in accordance with any individual needs Paragraph 2(a) likewise provides no authority for picking and choosing among developing countries in India’s view This proposition is reinforced by footnote and its reference to non-discriminatory preferences, according to India, which should be read to require formally identical treatment subject only to the exceptions specifically contemplated by the Enabling Clause The panel addressed each of Europe’s arguments separately, but its analysis of all three was strikingly parallel The panel found that the relevant portions of the text of the Enabling Clause were ambiguous Following the Vienna Convention, it then turned to the context of the treaty text, its object and purpose, and other aids to interpretation It noted that the Enabling Clause referred back to the waiver granted in 1971, which in turn made reference to “mutually acceptable” preferences The “mutually acceptable” preferences were apparently those negotiated under the auspices of UNCTAD and embodied in the “Agreed Conclusions” 20 Robert Howse advances another line of argument that Europe did not pursue in the case He suggests that the “obligations” in footnote 3, particularly the obligation to afford “nondiscriminatory” preferences, were never intended to have binding legal effect but were merely aspirational For a thorough vetting of this perspective, see Howse (2003) Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 July 6, 2007 264 Gene M Grossman and Alan O Sykes that eventually emerged from the ongoing negotiations in UNCTAD The panel thus concluded that the Enabling Clause should be interpreted to permit the sort of preferential system contemplated by the UNCTAD negotiators, memorialized in the Agreed Conclusions and incorporated by implicit reference into the 1971 waiver The panel then reviewed the Agreed Conclusions at some length It found that they anticipated some limitations on product coverage – most manufactured goods would be covered, with limited exceptions, with only case-by-case coverage for agriculture But nothing in the negotiating history seemed to contemplate discrimination among developed countries on the basis of their development or other “needs,” except for the special treatment of LDCs The only other potential limitations on coverage addressed by the UNCTAD negotiations concerned measures to withdraw preferences or to set quantitative ceilings when exporters achieve a certain competitive level, along with safeguard measures to address import surges On the basis of these findings, the panel accepted India’s argument that the phrase “developing countries” in paragraph 2(a) refers to all developing countries,21 and implicitly as well its suggestion that the reference to “developing countries” in paragraph 3(c) is to developing countries as a group According to the panel, paragraph 3(c) does not authorize differences in preferences except those contemplated by the UNCTAD negotiators.22 Finally, the panel found no basis in the text or relevant negotiating history for Europe’s contention that the requirement of “non-discriminatory” preferences was satisfied as long as differences in treatment resulted from objective criteria relating to legitimate objectives Rather, footnote “requires that identical tariff preferences under GSP schemes be provided to all developing countries without differentiation,” except only for the differential treatment expressly contemplated in the Agreed Conclusions.23 Europe’s final line of defense was an effort to invoke GATT Article XX(b), which allows measures “necessary to protect human health.” The panel was not persuaded, questioning whether the drug-related preferences were genuinely aimed at the protection of human health in Europe, questioning their “necessity” and whether they amounted to an arbitrary discrimination among beneficiary nations where similar conditions prevail in violation of the chapeau to Article XX.24 Europe did not appeal these findings 2.4 The Appellate Body Decision The Appellate Body affirmed the proposition that the Enabling Clause is an exception to GATT Article I India had the burden of raising the question whether Europe’s system was consistent with the Enabling Clause and did so; Europe then had the burden of proving its consistency 21 23 Panel Rep ¶7.174 Panel Rep ¶7.161 22 24 Panel Rep ¶7.116 Panel Rep ¶7.236 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 291 development.30 This understanding suggests a greater openness to forms of conditionality designed to restructure recipient state policies and institutions as a means to further development and a lesser concern for the “externalities” that motivate G&S’s analysis The above analysis suggests that, in addition to the other reasons that G&S identify, the GSP dispute is a hard case because at some level it asks us to choose between two distinct approaches to international law The choice is hard because both approaches are plausible and attractive Indeed, the choice between these perspectives may be the hardest international legal question of all, harder even than that of the permissible forms of discrimination in GSP programs, because it is the starkest version of the question posed by those programs IV Conclusion Where does this analysis leave us? Let me offer one final thought If on some level the GSP dispute asks us to choose between two competing visions of international law, this suggests a very different defense of the AB report The AB’s actual holding in GSP was largely on procedural grounds The problem was that the drug program lacked objective criteria for becoming a beneficiary or for removing a state from the list of beneficiaries; the AB contrasted this with the EC’s environmental and labor incentive program, which included “detailed provisions setting out the procedure and substantive criteria that apply to a request to become a beneficiary under either of those special incentive arrangements.”31 The AB said much less about the types of conditionality that would pass muster under the Enabling Clause But maybe a focus on process rather than substance is wise in hard cases like this one To delve more deeply into the substance of permissible forms of conditionality might have forced the AB to at least implicitly privilege one competing vision of international law over the other But surely whichever view prevails has to be the product of a larger political process and cannot be imposed by judicial fiat By deciding on procedural grounds, the AB may have avoided speaking to these conflicting visions of international law And by not opining on this issue, the AB may have minimized the extent to which the GSP dispute was a hard case that made bad law 30 31 An influential body of political economy scholarship advances this argument See, e.g., Dani Rodrik, et al, Institutions Rule: The Primary of Institutions Over Geography and Integration in Economic Development, J Econ Growth (2004); Daron Acemoglu, et al., The Colonial Origins of Comparative Development: An Empirical Investigation, 91 Am Econ Rev 1369 (2001); Robert Hall & Chad I Jones, Why Do Some Countries Produce So Much More Output per Worker than Others, 114 Quarterly J Econ 83 (1999) Many of the arguments in this literature regarding the importance of domestic institutions build upon the pioneering work of Douglass North See, e.g., Douglass C North, Institutions, Institutional Change and Economic Performance (1990) AB report, supra note 7, at para 182 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 July 6, 2007 JEFFREY KENNERS The Remodeled European Community GSP+: A Positive Response to the WTO Ruling? Comment on Grossman and Sykes’ “A Preference for Development: The Law and Economics of GSP” Introduction The European Community has embarked on a fundamental reform of its preferential trading arrangements with developing countries both as a necessary response to the requirement to comply with the decision of the WTO Appellate Body (AB)1 and also out of a desire to fashion a GSP that complements its evolving development policy In a remodeled GSP+ scheme, the EC now offers special incentives to applicant countries for the purposes of encouraging “sustainable development” and “good governance” with reference to a list of international conventions The GSP+ is open to all developing countries with “the same development needs.”2 The preamble of the EC Regulation declares that these preferences are designed to promote further economic growth and thereby to respond positively to the need for sustainable development.3 In this way the EC believes that it is able to demonstrate that it is pursuing its development policy priorities in a manner that is consistent with WTO law This commentary begins by tracing the contested provisions of the EC GSP to the emergence in the early 1990s of a broader conception of community development policy that included the promotion of democracy and human rights, including labor rights From this platform I evaluate the extent to which it has been possible for the EC to demonstrate that, following the AB decision, it now has an objective process for granting special trade preferences in its reformed GSP based on an integral concept of sustainable development linked to compliance with global standards As part of this evaluation I consider how far, if at all, the EC-Tariff Preferences, WT/DS246/AB/R, April 2004 European Commission Communication, Developing countries, international trade and sustainable development: the function of the Community’s generalised system of preferences (GSP) for the ten-year period from 2006 to 2015, COM(2004) 461 final, July 2004, point 6.5 The Communication formed the basis for the adoption of Council Regulation 980/2005/EC of 27 June 2005 applying a scheme of generalised tariff preferences, OJ 2005 L169/1 Regulation 980/2005, recital of the preamble 292 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 293 EC’s response addresses the outstanding questions identified by Grossman and Sykes in their legal analysis EC Development Policy and Trade Preferences – A Neat Fit? The European Community was the first to introduce a GSP in 1971, but until 1995 it organised a system that distinguished among different types of products and imposed quantitative limitations, but was otherwise conventional The EC GSP was primarily concerned with providing an incentive to traders to import products from developing countries and to help them compete in international markets.4 By contrast with the US GSP, there was initially no social clause imposing conditionality on recipients of preferences In the period leading up to the cyclical GSP review in 1995 the EC changed its approach to development policy First in 1989, with the negotiation of the Fourth Lom´e Convention,5 and later in bilateral cooperation and trade agreements, the EC introduced and then mainstreamed a “human rights clause.” Article 5(1) of Lom´e IV declared that “respect for human rights is recognised as a basic factor of real development.”6 This clause amounted to no more than exhortation but, following a European Commission proposal in 1991 to integrate human rights more generally into development cooperation,7 the European Council issued a Resolution on Human Rights, Democracy and Development8 that sought not only to reward advances in good governance but also to punish grave and persistent violations of human rights or the interruption of democratic processes.9 Formal reinforcement swiftly followed later that year with the Treaty on European Union, which identified democracy and respect for human rights among the foundational principles of the EU10 and as core elements of the Common Foreign and Security Policy.11 New provisions on development cooperation provided that a 10 See the introduction to the User’s Guide to the European Union’s System of Generalised Tariff Preferences, February 2003 Available at: http://europa.eu.int/comm./trade/issues/ global/gsp EC Co-operation Agreement with African, Caribbean and Pacific (ACP) countries, 15 December 1989 OJ 1991 L229/1 Commission Communication to the Council, Human Rights, Democracy and Development Co-operation Policy, SEC(91) 61/6, 25 March 1991 Resolution of the Council and of the Member States of 28 November 1991, Bull EC 11-91, p 122 For comment see Cremona, ‘Human Rights and Democracy Clauses in the EC’s Trade Agreements’ in Emiliou & O’Keeffe (eds.), The European Union and World Trade Law (Wiley, 1996) 62–77; Brandtner & Rosas, ‘Trade Preferences and Human Rights’ in Alston (ed.), The EU and Human Rights (Oxford, 1999) 699–722; Fierro, ‘Legal Basis and Scope of the Human Rights Clauses in EC Bilateral Agreements: Any Room for Positive Interpretation?’ (2001) European Law Journal 41; and Riedel & Will, ‘Human Rights Clauses in External Agreements of the EC’ in Alston, supra, 723–754 11 Art EU Art 11(1) EU Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 294 521 86276 July 6, 2007 Jeffrey Kenners general objective of policy in this area would be “developing and consolidating democracy and the rule of law, and that of respecting human rights and fundamental freedoms.”12 Significantly, perhaps, in the light of controversy over the legality of social clauses in trade agreements under the GATT, there was no such amendment to the common commercial policy.13 Nevertheless, the European Court of Justice has recognised that provisions on development cooperation can be included in the EC’s activities under the common commercial policy without affecting the nature of the commercial agreement.14 Further justification can be found in the link between development cooperation and human rights as recognised by the Court in Portugal v Council.15 Although the link between trade and human rights is somewhat tenuous, as a legal foundation for EC competence, the mainstreaming of human rights was implemented in the form of trade and cooperation agreements with several countries in Latin America and Asia.16 More than 50 EC agreements negotiated in the 1990s contained human rights and democracy clauses as “essential elements” of the agreement Increasingly it became standard to include non-execution and suspension clauses in cases of non-compliance by one of the parties.17 The EC did not activate these clauses, but their introduction was regarded as potentially problematic in the period leading up to the conclusion of the WTO Agreement.18 Moreover, as we see below, in the area of unilateral EC measures, GSP preferences to Burma/Myanmar have been repeatedly suspended on the basis of human rights violations By 1999 the Council found it necessary to introduce simultaneous horizontal “Human Rights Regulations” to standardise and synchronise the requirements for implementing EC operations in development cooperation and other areas in accordance with the emerging policy consensus.19 12 14 15 16 17 18 19 13 Art 177(2) EC Arts 131–134 EC Case C-45/86 Commission v Council [1987] ECR 1493, para 17 The Court noted that the link was recognised by the UN Conference on Trade and Development (UNCTAD) and Part IV of the GATT See Fierro, n9 above at 49 Case C-268/94 [1996] ECR I-6177 The Court held at para 26 that adjusting co-operation policies to respect for human rights presupposes the creation of a relationship of subordination within the aims of the development provisions of the EC Treaty For example, the Trade and Co-operation Agreements with Brazil (1992), Macao (1992), Mongolia (1993), respectively, COM(92) 209, OJ 1992 L404/26, and OJ 1993 L41/45 See Cremona, n9 above at 65–68 Following a Council Decision in May 1995 based on COM(95) 216 See Brandtner & Rosas, n10 above at 702 See Cremona, n9 above at 75 Council Regulation 975/1999/EC of 29 April 1999 concerning development co-operation operations, OJ 1999 L120/1, and Council Regulation 976/1999/EC of 29 April 1999 concerning Community operations other than development co-operation, OJ 1999 L120/8 The latter Regulation was based on the Community’s general powers in Art 308 EC These measures were subsequently amended by, respectively, European Parliament and Council Regulation 2240/2004/EC of 22 December 2004, OJ 2004 L390/3, and Council Regulation 2242/2004/EC of 22 December 2004, OJ 2004 L390/21 See Gatto, ‘The Integration of Social Rights Concerns Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 295 The Commission’s proposals for the 1995 GSP promoted the notion of “positive conditionality”20 as a justification for the introduction of labour and environment incentives as “components” of sustainable development, drawing on the UN Declaration on the Right to Development of 1986 and the Rio Declaration on Environment and Development of 1992.21 The Commission was acutely aware of the need to comply with the WTO waiver and Enabling Clause.22 The new system was introduced in 1995 and further refined in 1998 and 2001.23 On the one hand, the most eye-catching feature of the reform of the EC GSP in this period was the introduction of an “Everything But Arms” (EBA) amendment extending dutyand quota-free access to all products originating in the least-developed countries (LDCs), except arms and ammunition.24 Based strictly on the UN’s list of LDCs, this initiative is designed to meet the requirements of paragraph 3(c) of the Enabling Clause for differential and more favorable treatment designed to respond positively to the development, financial, and trade needs of developing countries and can be fully reconciled with WTO’s Doha Ministerial Declaration.25 This special arrangement for the LDCs has survived fully intact in the 2005 GSP.26 On the other hand, the seeds for the dispute with India were sown with the introduction of a special arrangement to combat drug production and trafficking intended to help specified beneficiary countries in their fight against illegal drugs27 and the introduction of separate special incentive arrangements for the protection of labor rights and the environment.28 There is a long-established connection between measures to protect the environment and the promotion of sustainable development29 ; moreover, trade and environmental protection objectives are regarded as mutually supportable by the 20 21 22 23 24 25 26 27 28 29 ´ in the External Relations of the European Union’ in de Burca & de Witte (eds.), Social Rights in Europe (Oxford, 2005) 339–365 See L Bartels, ‘The WTO Enabling Clause and Positive Conditionality in the European Community’s GSP Program’ (2003) Journal of International Economic Law 507 at 523–527 See COM(94) 212 See Brandtner & Rosas, n9 above at 718 The Enabling Clause is shorthand for the GATT Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, 28 November 1979 (L/4903) For the provisions in force at the time of the EC-India dispute, see Council Regulation 2501/2001/EC of 10 December 2001, OJ 2001 L346/1 Council Regulation 416/2001/EC of 26 February 2001, OJ 2001 L60/43 Adopted on 14 November 2001, WT/MIN(01)/DEC/1 Para 42 declares that: ‘We commit ourselves to the objective of duty-free, quota-free market access for products originating from LDCs.’ Arts 12–13 of Regulation 980/2005 Art 10 of Regulation 2501/2001 From 2002 this list included Pakistan, adding to geopolitical tension with India See Harrison, ‘Incentives for Development: The EC’s Generalized System of Preferences, India’s WTO Challenge and Reform’ (2005) 42 Common Market Law Review 1663 at 1667 Art of Regulation 2501/2001 Particular emphasis was focused on compliance with international standards concerning sustainable forest management in accordance with the standards of the International Tropical Timber Convention Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 296 521 86276 July 6, 2007 Jeffrey Kenners WTO.30 However, on what basis did the EC justify introducing special incentives for the observance of labor rights?31 The EC’s motivation was, at least in part, a defensive one, driven by concerns about the negative consequences of globalisation, not least a “race to the bottom” in labour standards.32 Equally important, however, was a positive ambition to promote economic and social rights drawn from international labor standards as equivalent to, and indivisible from, civil and political rights.33 The primary purpose of the GSP special incentive arrangements for labor rights was to reward developing countries that complied with Core Labor Standards that, after the adoption of the ILO Declaration of Fundamental Principles and Rights at Work in 1998,34 relate to specific ILO Conventions concerning the following: (1) freedom of association and the effective recognition of the right to collective bargaining (Convention Nos 87 and 98) (2) elimination of all forms of forced or compulsory labor (Convention Nos 29 and 105) (3) effective elimination of child labor (Convention Nos 138 and 182) (4) elimination of discrimination in employment and occupation (Convention Nos 100 and 111) This approach has several advantages First, it recognises the functional autonomy of the ILO for setting and supervising global labor standards as endorsed by the WTO Singapore Declaration of 1996 This autonomy arises as a quid pro quo for the rejection of a social clause in the WTO Agreement, but it permits the EU to legitimately advance the “social dimension” of globalisation through its external policies The EU can build on a relationship of cooperation and constructive dialogue with the ILO that, as Novitz observes, makes a positive and reciprocal contribution to the formulation of labor standards and their international enforcement.35 Second, it provides the EU with an opportunity to exercise its influence and power 30 31 32 33 34 35 Doha Declaration at paras 31–33 See also Shrimp/Turtle (12 October 1998, WT/DS58/AB/R) where the AB took account of the Rio Declaration See Howse, ‘Back to the Court after Shrimp/Turtle? Almost but not quite yet: India’s short lived challenge to labor and environmental exceptions in the European Union’s Generalized System of Preferences’ (2002–2003) 18 American University International Law Review 1333 The source of this policy can be found in a Council Resolution of December 1994 on certain aspects of European social policy: a contribution to economic and social convergence in the Union, OJ 1994 C368/6 Discussed further by Novitz, ‘The European Union and International Labour Standards: The Dynamics of Dialogue between the EU and the ILO’ in Alston (ed.), Labour Rights as Human Rights (Oxford, 2005) 214–241 at 229 See User’s Guide, n4 above, point See Kenner, ‘Economic and Social Rights in the EU Legal Order: The Mirage of Indivisibility’ in Hervey & Kenner (eds.), Economic and Social Rights Under the EU Charter of Fundamental Rights: A Legal Perspective (Hart Publishing, 2003) 1–25 See the home page at www.ilo.org For an excellent discussion see Alston, ‘Core Labour Standards’ and the Transformation of the International Labour Rights Regime’ (2004) 15 European Journal of International Law 457 Novitz, n31 above at 215 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 297 as a “global actor” that seeks to “set globalisation within a moral framework” by anchoring it in solidarity and sustainable development.36 The EU is professing an institutional vocation to help reduce the imbalance between the economic and social dimensions of global governance37 by giving a higher normative authority to labour standards, and in the exercise of its external trade powers, it aims to promote an interaction that is capable of having a transformative effect on the lives of individuals and power relationships within and between existing institutions.38 Third, by basing compliance with labor rights on internationally recognised norms it is easier for the EC to justify the labor-trade linkage39 and reconcile its approach with the trade liberalisation prerogatives of the WTO.40 Indeed, by prioritising the ILO Core Labor Standards (CLS) the EC is able to demonstrate that its actions are objective and proportionate All ILO members are bound by the CLS even if they have not ratified each of the Conventions This targeted approach provides an easier fit, if not a perfect match, for the conditions in the Enabling Clause of being “generalisednon-discriminatory,” and “non-reciprocal,” not least because both the EC and the ILO recognise that the CLS “should not be used for protectionist trade purposes.”41 In the context of the EC GSP the implementation of these principles in the Regulation offered, according to the AB, “detailed provisions setting out the procedure and substantive criteria” applicable to any developing country seeking to benefit Albeit this was obiter dicta, but as Grossman and Sykes note,42 it nevertheless amounted to a clear indication that, on more detailed scrutiny, the special labour incentives might have passed the nondiscrimination test had India persisted with its original challenge To illustrate the operation of the post-1995 GSP, the example of the temporary withdrawal of trade preferences from Burma/Myanmar is instructive The GSP Regulation now included detailed provisions for temporary withdrawal of preferential trade arrangements.43 This process is more complex than the initial grant of preferences, but significantly, it must be founded on the supervisory determinations of the ILO that “shall serve as the point of departure for the investigation as to whether temporary withdrawal is justified.”44 This procedure was not yet formalised when the EC first decided to withdraw generalised trade preferences 36 37 38 39 40 41 42 44 “The Laeken Declaration”, Annex I of the Presidency Conclusions of the Laeken European Council, December 2001, p 19 See European Commission, Promoting Core Labour Standards and Improving Social Governance in the Context of Globalisation, COM(2001) 416 See further, Klare, ‘The Horizons of Transformative Labour and Employment Law’ in Conaghan, Fischel and Klare (eds.), Labour Law in an Era of Globalization (Oxford, 2002) 3–29 See Cremona, n9 above at 76 See further, McCrudden & Davies, ‘A Perspective on Trade and Labor Rights’ (2000) Journal of International Economic Law 43 Article of the ILO Declaration, which is consistent with para of the WTO Singapore Declaration See COM(2001) 416, para 2.1.4 43 Grossman & Sykes, p 16 Arts 26–34 of Regulation 2501/2001 Art 28(3) See Novitz, n31 above at 231 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 298 July 6, 2007 Jeffrey Kenners from Burma in 1997,45 but its decision was directly linked to the report of an ILO Commission of Inquiry investigating forced labour practices in Burma The European and international trade union confederations made a joint complaint to the European Commission demanding action At the ILO level this process was ultimately to lead to a decision of the International Labour Conference to impose a ban on technical cooperation with Burma and, uniquely, the implementation of an action for failure to carry out the recommendations of a Commission of Inquiry.46 On this basis the European Commission has repeatedly found that forced labour is widespread in Burma, in violation of ILO Conventions Nos 29 and 105, now part of the CLS, and has formed the view that GSP preferences can be suspended if the country concerned is found to practice forced labour, regardless of whether or not the products exported have been produced by such labour.47 On this basis the withdrawal of preferences from Burma has been maintained and is incorporated into the 2005 Regulation.48 The withdrawal of trade preferences based on the use of forced labour may be justified under GATT Article XX either on the grounds of protecting (a) “public morals,” (b) “human life or health,” or (e) related to the products of “prison labour,” although the latter would not appear to cover forced labour in general.49 Howse has presented a persuasive case for conditionality relating to a violation of any of the ILO Conventions allied to the CLS being justified under both Article XX and the Enabling Clause,50 but even if this justification was confirmed, it would still be necessary to show under the “chapeau” to Article XX that withdrawing the preference is not “a means of arbitrary or unjustifiable discrimination between countries” or a “disguised restriction on international trade.” As Novitz concludes, the application of transparent criteria and flexibility in the implementation of conditions is important, but although the case is especially strong in relation to forced labour in general and to Burma in particular, there is evidence to show that several EU members are guilty of double standards because they are not complying with other ILO Conventions that form part of the CLS.51 The GSP+ – Meeting Legitimate Development Needs? In July 2004, in the immediate aftermath of the AB ruling, the European Commission published guidelines for a reformed GSP for 2006–2015.52 The Commission’s 45 46 47 48 49 51 Council Regulation 552/97/EC of 24 March 1997, OJ 1997 L85/8 Under Art 33 of the ILO Constitution See further, Hepple, Labour Laws and Global Trade (Hart Publishing, 2005) pp 51–52 See Brandtner & Rosas, n9 above at 716 Brandtner and Rosas note that complaints concerning the use of forced labour were also made against Pakistan in 1997 but this did not lead to an investigation by the Commission, provoking accusations of double standards although the case was not so unequivocal Regulation 980/2005, Art 29 and recital 19 of the preamble 50 See Howse, n30 above at 1373 Ibid., 1367–1375 52 Novitz, n31 above at 234 COM(2004) 461 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 299 guidelines formed the basis for the Council’s GSP Regulation of June 2005, abolishing the unlawful drug arrangement and introducing a new combined special incentive arrangement for “sustainable development’ and ‘good governance,” known as GSP+, taking effect on July 1, 2005.53 According to the Commission the reformed GSP is targeted on the countries that most need to benefit and is designed to encourage regional cooperation It is presented as “stable, predictable, objective and simple.”54 Five separate GSP arrangements are reduced to three consisting of a general arrangement granted to all beneficiary countries and territories and to two special arrangements that, drawing from the language of the AB, take into account “the various development needs of similar-situated developing countries.”55 The first special arrangement is for the LDCs on the UN list, a carryover of the previous EBA scheme that remains the most generous of the EC preferences.56 In the second special arrangement, the GSP+ establishes a single system of additional concessions for the “special development needs” of all developing countries providing they meet certain criteria and apply the main international conventions relating to social rights, environmental protection, and governance, including the fight against drugs.57 The EC may temporarily withdraw entitlements to GSP+ beneficiaries in the case of “serious and systematic” violations of the listed conventions based on the conclusion of the relevant international monitoring bodies.58 The EC’s aim, by introducing these reforms, is to comply with the requirements of the AB in respect of the operation of its GSP schemes and the criteria on which they are based while adapting them to keep pace with an ambitious and rapidly changing development policy agenda The relaunched GSP reflects the European Consensus on Development, which was issued as a joint statement by the EU institutions and the Member states in 2005.59 Under this consensus the primary and overarching objective of EU development cooperation is the eradication of poverty in the context of sustainable development, including support for the UN Millennium Development Goals.60 There is particular emphasis on a multidimensional approach to the eradication of poverty, which is heavily influenced by Sen’s work on “capabilities,”61 such as, inter alia, consumption and food security, health, education, rights, the ability to be heard, human security, dignity, and decent work.62 In this sense, for example, opportunities for and the exercise of social rights enable individuals to convert their capabilities by extending 53 55 57 59 60 61 62 Art 30 of Regulation 980/2005, n2 above 54 COM(2004) 461, Executive Summary 56 Recital of the Regulation Art 12–13 58 COM(2004) 461, Executive Summary Art 16(a) European Commission DG E II, Doc 14820/05, http://www.europa.eu.int/comm./ development/body/development policy statement/index en.htm Ibid., para For Sen ‘a ‘capability’ [is] a kind of freedom: the substantive freedom to achieve alternative functioning combinations’ See Sen, Development as Freedom (Oxford, 1999) p 75 European Consensus, para 11 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 300 521 86276 July 6, 2007 Jeffrey Kenners the range of choice of alternative functionings on the part of individuals.63 The term “sustainable development” is defined as including good governance, human rights, and political, economic, social, and environmental aspects.64 Delivery is to be achieved on the basis of “ownership” of development strategies by partner countries and participation by civil society.65 Hence the GSP has been repackaged as part and parcel of a transformative EC development policy that, with its emphasis on sustainable development and good governance as the basis for the GSP+, is intended to be four-square with the Doha Development Agenda – not least the WTO’s recognition that ‘the aims of upholding and safeguarding an open and non-discriminatory multilateral trading system, and acting for the environment and the promotion of sustainable development can and must be mutually supportive.”66 In this context the UN’s Johannesburg Declaration on Sustainable Development of 200267 provides a springboard for a broad interpretation of sustainable development to include labor rights and environmental protection to be delivered through partnership.68 Turning to the details of the GSP+, it is to be commended on the basis that countries have “ratified and effectively implemented” 23 of the most important international conventions relating to labor rights, the environment, good governance, and the fight against drug production and trafficking by October 31, 2005.69 Significantly all of the 16 core human and labor rights conventions in Annex III(A) have been ratified,70 whereas of the 11 conventions relating to environment and governance principles, including drugs in Annex III(B), are given until the end of 2008 to be implemented.71 Furthermore, the countries applying for GSP+ must 63 64 66 67 68 69 70 71 See Deakin & Browne, ‘Social Rights and Market Order: Adapting the Capability Approach’ in Hervey & Kenner, n33 above, 27–43 at 34 65 European Consensus, para Ibid., paras 14 and 18 Doha Ministerial Declaration, n25 above at para Available at: http://www.un.org/esa/sustdev/index.html See the European Commission’s Explanatory Memorandum to the 2005 draft Regulation, COM(2004), 699, final of 20 October 2004, p Art and Annex III of Regulation 980/2005 Consisting of eight UN Conventions and eight ILO Conventions The UN Conventions are International Covenant on Civil and Political Rights; International Covenant on Economic, Social and Cultural Rights; International Convention on the Elimination of All Forms of Racial Discrimination; Convention on the Elimination of All Forms of Discrimination Against Women; Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment; Convention on the Rights of the Child; Convention on the Prevention and Punishment of the Crime of Genocide; and the International Convention on the Suppression and Punishment of the Crime of Apartheid The listed ILO Conventions are the eight CLS’ Conventions referred to above, n34 Montreal Protocol on Substances that Deplete the Ozone Layer; Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal; Stockholm Convention on Persistent Organic Pollutants; Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES); Convention on Biological Diversity; Cartagena Protocol on Biosafety; Kyoto Protocol to the UN Framework Convention on Climate Change; UN Single Convention on Narcotic Drugs (1961); UN Convention on Psychotropic Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 301 give an undertaking to maintain the ratification of the conventions and their implementing legislation and accept regular monitoring.72 Differentiation is justified on the basis that the GSP+ is only available to “vulnerable” countries.73 For a country to fall within this category it must not be classified by the World Bank as a high-income country during three consecutive years, the five largest sections of its GSP-covered imports to the EC must represent more than 75 percent in value of its GSP-covered imports, and those GSP-covered imports to the EC must represent less than percent in value of total GSP-covered imports to the EC.74 This definition amounts to a significant tightening of the criteria for inclusion from the previous regimen The EC is targeting and effectively reducing the number of potential beneficiaries who may apply while ostensibly maintaining an open system Following receipt of the applications75 and examination of the findings of the relevant international organisations and agencies,76 a Commission Decision was issued on December 21, 2005 Fifteen applicant countries have qualified for GSP+, including 11 from Central and South America where the issue of combating drug production and trafficking is of particular importance.77 These countries have provided “comprehensive information” about the ratification and effective implementation of the conventions and have demonstrated that their economies are “dependent and vulnerable,”78 The EC’s remodeled GSP is impressive both in scale – EC imports under GSP totaled €40 billion compared to the U.S.’s €22 billion in 2004 – and intensity, with EBA targeting the world’s poorest 50 countries, of which 34 are sub-Saharan The GSP+ countries are granted duty-free access to the EU for 7,200 products The EU is now able to contend that it is the largest trading partner for the world’s poorest countries and has the most generous GSP arrangements.79 But does the reformed GSP meet legitimate development needs for WTO purposes? 72 74 75 76 77 78 79 Substances (1971); UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988); and UN Convention against Corruption (Mexico) The Regulation is not specific about the four conventions that can be implemented later but in a press release of 21 December 2005 refers to the Kyoto Protocol, CITES, and the UN Convention against Corruption Therefore, it appears that the drug-related conventions must be included in the initial ratifications See further at: www.europa.eu.int/comm./trade/issues/ global/gsp/pr211205 en.htm 73 Art 9(1((d) Art 9(1)(e) Art 9(3) Based on data available on September 2004 as an average over three consecutive years Under Art 10 the deadline for applications was 31 October 2005 In accordance with Art 11(1) Under Art 28 the Commission is assisted by a body of experts sitting as the Generalised Preferences Committee Decision 2005/924/EC, OJ 2005 L337/50 The beneficiaries are Bolivia, Columbia, Costa Rica, Ecuador, Georgia, Guatemala, Honduras, Sri Lanka, Moldova, Mongolia, Nicaragua, Panama, Peru, El Salvador, and Venezuela Press release, n71 above Ibid Moreover, the general scheme continues to provide benefits for India (17%), China (11%), and Brazil (6%) as the largest GSP exporters to the EU Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 302 July 6, 2007 Jeffrey Kenners In their assessment of EC-Tariff Preferences Grossman and Sykes have identified a number of “fundamental and potentially thorny questions” that remain unanswered First, what counts as a development, financial, or trade need? It is noted that the AB accepted the argument that drug trafficking is related to a “development need,” but the burden rested on the EC to prove that the drug arrangements were available to “all GSP beneficiaries that are similarly affected by the drug problem.”80 Nevertheless, the AB did not rule directly on this point, leaving open the possibility that, in a prospective challenge, the EC would have to prove that drug-related trade preferences were not enacted for its benefit but were for the recipients’ own “development need.”81 Under GSP+ the drug-related incentives are subsumed within the general heading of “environment and governance principles”82 and fall within an overall framework based on promoting “sustainable development,” This linkage is not entirely convincing, but there is evidence, from the Johannesburg Declaration, that “illicit drug problems” are among the conditions that “pose severe threats” to sustainable development.83 This suggests at the very least that, providing the GSP+ is objective and available to all, it can contribute to meeting a legitimate development need of the recipient even if it is also of benefit to the EC Second, if there is a legitimate development need, the authors raise the question of the magnitude of the differential treatment permitted.84 The inclusion of three conventions relating to illicit drugs suggests a certain bias toward this issue, but it can be argued that this is proportionate to the problem and even though several of the beneficiaries of GSP+ have serious drug trafficking problems the scheme does not deny preferences to other applicants As Harrison notes,85 the abolition of the closed list and the application of transparent and objective criteria based on compliance with the principal related international conventions indicate a concerted attempt to meet these requirements Third, Grossman and Sykes ask whether donor countries have unfettered discretion to select the needs they choose to address and to ignore others.86 Is it possible for the selection of needs to be discriminatory and in contravention of the Enabling Clause? In relation to the environmental standards required for GSP+, the scheme is no longer concerned merely with protection of tropical forests but is now based on a wide selection of international conventions relating to the environment The same argument applies to the tightly drawn selection of human rights and labour rights in the Annex In particular, as the selected labour rights correspond exactly to the Conventions in the CLS, the EC is able to demonstrate that it is acting objectively and not simply selecting those standards that replicate its own social model Support can be drawn from the AB’s observation that 80 82 83 85 81 Ibid., p 15 AB Rep para 180 Grossman & Sykes, p 21 See the Conventions list in Annex III(B), n72 above 84 See n67 above, para 19 Grossman & Sykes, p 21 86 Harrison, n27 above at 1679 Grossman & Sykes, p 21 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 303 “broad-based recognition of a particular need, set out in multilateral instruments adopted by international organisations could serve as an [objective] standard” that is required to assess a development, financial, or trade need.87 Fourth, can donor countries continue to impose conditionality notwithstanding the reference to “non-reciprocal” and “non-discriminatory” preferences in footnote of the Enabling Clause?88 The concept of non-reciprocity can be understood only as applying to concessions involving a reduction in barriers to market access.89 Bartels suggests that conditions unrelated to market access, such as drugs and labor and environmental conditions, must be non-reciprocal.90 Any other interpretation would pose an enormous threat to conditionality in GSP schemes.91 The AB’s decision leaves this question open Even if the drug-related incentives fulfill a development need, is not the benefit to the donors reciprocal in the natural meaning of the term?92 By emphasising drug production and trafficking, which is unquestionably of concern to its Member states, the EC has taken a calculated risk that a narrow interpretation of reciprocity would prevail in the event of any future challenge The EC is on stronger ground in defending conditionality under GSP+ as “non-discriminatory” under WTO law According to the AB the duty of preferencegranting countries is “to make available identical tariff preferences to all similarlysituated beneficiaries,”93 Bartels94 suggests that the technical and economic capacity of potential recipients should be the primary criterion of whether countries are in similar situations It can be argued that this is precisely the criterion the EC has now chosen for identifying “vulnerable” countries that can apply for GSP+.95 The AB drew upon the second recital of the preamble to the WTO Agreement, where it explicitly the need for positive efforts designed to ensure that developing countries secure a share in the growth in international trade commensurate with the needs of their economic development”(emphasis added) In their judgment the word “commensurate” in this phrase “appears to leave open the possibility that developing countries may have different needs according to their levels of development and particular circumstances,”96 It is submitted that the EC has selected objective criteria that legitimately take into account the stage of economic development of those eligible to apply Further support for the non-discriminatory nature of the EC’s new model arises from the decision to base conditionality under GSP+ entirely on 87 88 90 92 93 95 96 AB Rep para 163 (emphasis in the original) For further comment see Harrison, n27 above at 1679 89 Ibid., p 22 Bartels, n20 above at 526 91 Ibid Grossman & Sykes, p 22 According to the Concise Oxford English Dictionary reciprocity is defined as the practice of exchanging things for mutual benefit, Pearsall ed (Oxford, 2001) 94 AB Rep para 154 Bartels, n20 above at 524 See recital of the preamble of the Regulation, which specifically refers to the GSP+ applying only to similar-situated countries AB Rep para 161 Emphasis added Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 P1: JzG 0521862769c10 CUFX130/Bermann 304 521 86276 July 6, 2007 Jeffrey Kenners internationally recognised binding standards that must be ratified and effectively implemented by the applicants It follows that all potential applicants are bound by the same standards and that the basis for selection of beneficiaries is therefore neutral Even if the countries concerned have not ratified all of the relevant ILO Conventions it is fair to assume that as ILO members they are committed to the CLS.97 Equally, if one accepts that labour conditionality is a legitimate development need, as discussed earlier, it follows that any scheme that allows countries to benefit from such conditions without observing the related Conventions would be discriminatory against those countries that are in compliance From the discussion thus far one might conclude that the GSP+ is founded on a global consensus on the integral link between trade and sustainable development that includes such considerations as the effective realisation of internationally established standards on human and labour rights, environmental protection, and combating drug trafficking The special incentives are targeted at broadly similar countries where such development needs exist, and preferences are granted as a positive response to applications for assistance in accordance with standards that can be verified as objective by reference to international conventions and their oversight by the relevant international organisations This creates what the AB describes as “a sufficient nexus” between the preferential treatment and the likelihood of alleviating a relevant need, which must be effectively addressed through tariff preferences.98 Subject to one or two caveats about the continuing emphasis on drug-related preferences the reformed GSP conforms with the ruling in EC – Tariff Preferences So much for the spin, but is there a fly in the ointment? As Cremona notes, the roles played by the EU as a global actor not reflect neatly the differences between different EU policies and competences.99 The EU has exclusive competence over external trade,100 but its Member states retain full competence in areas of core labour law, notably the right to strike and freedom of association.101 These are the areas regulated by ILO Convention Nos 87 and 98 and are at the heart of the CLS, and yet it is precisely in these areas, where there is no EC control, that several EU Member states have been found to be in violation, in some cases persistently,102 by the same ILO supervisory bodies whose findings are monitored for the purpose of determining compliance by “vulnerable” developing countries with the same Conventions under the rules for GSP+ This is one aspect of the 97 99 100 101 102 98 Bartels, n20 above at 525 AB Rep para 164 Cremona, ‘The Union as a Global Actor: Roles, Models and Identity’ (2004) 41 Common Market Law Review 553 at 572 Art 133 EC These areas are explicitly excluded from the social policy competences in Art 137 EC For example, as Novitz, n31 above notes at 219, the United Kingdom has been in repeated breach of both Conventions See Case No 1852 (UK), 309th Report of the ILO Governing Body Committee on Freedom of Association, 1998, para 308 Novitz also notes, at 220, that the ILO has found violations of Convention No 87 by Austria, Spain and Greece, and concerns have been raised about laws in Belgium, Denmark, and Germany Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 13:18 P1: JzG 0521862769c10 CUFX130/Bermann 521 86276 Comment on “A Preference for Development” July 6, 2007 13:18 305 discrimination issue where the EU is silent, as was the AB, and yet it is particularly insidious for developing countries who resent the fact that, as Novitz concludes, the EU uses its economic leverage to evade responsibility for implementation of international labor standards, but requires third states to so if they wish to receive trade and aid benefits.103 The EU stands accused of double standards or even neo-colonialism The obvious retort is that it is the duty of the Member states to comply with ILO Conventions and not the EU, but this ignores the fact that the EU’s rhetoric creates an assumption of compliance as exemplified by the proclamation of its own Charter of Fundamental Rights.104 For initiatives such as the GSP+ to succeed the EU needs to demonstrate a capacity to act consistently and, ultimately, to develop a more integrated identity in international relations.105 103 105 104 Novitz, n31 above at 241 OJ 2000 C364/1 For further discussion see Cremona, n100 above, and Wessels, ‘The Inside Looking Out: Consistency and Delimitation in EU External Relations’ (2000) 37 Common Market Law Review 1135 Downloaded from https://www.cambridge.org/core University College London (UCL), on 26 Dec 2017 at 12:26:33, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms https://doi.org/10.1017/CBO9780511674518.011 ... 2007 A Preference for Development: The Law and Economics of GSP 13:18 265 Europe did not appeal the panel’s interpretation of paragraph 3(c) of the Enabling Clause, as the panel had not made any... to the UNCTAD secretariat – Australia, Belarus, Bulgaria, Canada, the Czech Republic, the European Community, Hungary, Japan, New Zealand, Norway, Poland, the Russian Federation, the Slovak Republic,... protection The countries that are eligible initially are Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Georgia, Guatemala, Honduras, Sri Lanka, Mongolia, Nicaragua, Panama, Peru, and Venezuela