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13 September 2016

WTO Case Summary

 

Sayenko Kharenko International Trade Practice Group offers a wealth of experience   across the full spectrum of cross-border trade regulation and policy so we launch the new project – preparation of WTO dispute reviews. 

 

RUSSIA – TARIFF TREATMENT

REPORT OF THE PANEL

The dispute "Russia – Tariff Treatment" deals with the import duties imposed by Russia on certain agricultural and manufacturing products in excess of its bound rates. In particular, Russia has exceeded the ceiling of the import duties approved in its Schedule of Concessions (the "Schedule").|1| The dispute was initiated by the European Union (the "EU"), which products were and/or potentially could be subjected to the imposition of the alleged import duties. The Panel found that the imposition of certain import duties by Russia is inconsistent with its WTO obligations and amounts to the breach of Article II:1(b) of the General Agreement on Tariffs and Trade (the "GATT").|2|

SUMMARY

The EU challenged twelve measures undertaken by Russia, i.e. imposition of import duty rates in excess of its bound rates with respect to eleven tariff lines and, consequently, systematic violation of its Schedule. These measures can be divided into three main groups:

  • imposition of ad valorem rate|3| in excess of the relevant bound rate set forth in the Schedule – with regard to paper and paperboard (the first to sixth measures);
  • imposition of a combined rate|4| that may be in excess of the relevant bound ad valorem rate set forth in the Schedule – with regard to palm oil and its fractions, refrigerators and freezers (the seventh to eleventh measures);
  • "Systematic Duty Variation" – systematic imposition of duties being levied in excess of bound rates (the twelfth measure).

The Panel addressed the issue of violation of Article II:1(b) GATT with regard to each group of measures separately and found such a violation in respect of the first two. Even though Russia recognized that some of its import duties exceeded the bound rates set forth in its Schedule, it noted that its import duties concerning certain alleged products had been already brought into compliance with its bound rates during the examination of the case by the Panel, and the rest would be amended in the nearest future.

SIGNIFICANCE OF THE REPORT

WTO’s activities are aimed at elimination of obstacles to international trade. Compliance of the WTO Members with the bound rates and gradual reduction thereof is a part-and-parcel of such a policy.

This is the first case ever decided in the WTO against the Russian Federation since its accession to the WTO in 2012, and the first case in which Russia was found in breach of the WTO rules. In particular, Russia imposed the import duties in excess of its bound rates on the products imported from the territory of other WTO Members.

At the same time, the dispute concerned both (1) the import duties, imposed on the products at the time of the dispute, and (2) the import duties, which had to come into force in the future. Hereby, the EU challenged the consistency of those import duties, which were not applicable at the time of the dispute, relying on the necessity to prevent systemic violations in the future. Also it is important to note that Russia indeed brought certain import duties in compliance with its obligations in the course of the Panel proceedings. However, that has not prevented the Panel from finding that Russia acted in violation of the WTO rules.

FIRST GROUP OF MEASURES — AD VALOREM RATES IN EXCESS OF BOUND RATES

Russia imposed the import duties of 10 per cent and 15 per cent on five tariff lines (i.e. paper and paperboard). However, pursuant to the Russia’s Schedule its respective bound rates should not move beyond 5 per cent. Thus, Russia exceeded its bound rates set forth in the Schedule.

Furthermore, the increase of the import duty levied on another tariff line was expected in the future. At the time of the Panel establishment, the sixth tariff line was subject to the duty rate of 5 per cent. However, this rate was fixed under Russian legislation as a temporary measure, which had to be further increased up to 15 per cent. The Panel noted that even if the restrictive measure is not in force at the time of the proceedings, it already "exists" pursuant to the law, and the question of its WTO-consistency may be subjected to the examination of the Panel.

In particular, the Panel noted that Article II:1 GATT protects the conditions of competition, and not trade volumes. Thus, there is no requirement to provide evidence of any transactions and the actual application of import duties in order to prove the violation of the first sentence of Article II:1(b) GATT. Instead, the nature of the measure, its structure and design should be analyzed, as well as possibility of the measure to come into force automatically in the future.|5|

At the same time, the Panel found by analogy to the requirements of Article III:2 GATT (concerning internal taxes applicable to imported products) that Article II:1(b) GATT prevents WTO Members from the slightest deviation from their commitments (standard de minimis does not apply).

Referring to the Panel report in US – Superfund case, the Panel noted that the WTO dispute settlement system is designed to ensure security and predictability of the international trade system, and, therefore, the measures imposed by the WTO Members, which are expected to come into force in the future, may constitute a violation of the GATT provisions. Finally, although a 15per cent rate relating to the sixth tariff line had been canceled and had never come into force, it was found in violation with Article II:1(b) GATT.

Having found the violation of Article II:1(b) GATT with regard to the first to fifth tariff lines, the Panel referred to the principle of legal economy and did not consider the claim of the EU concerning the violation of Article II:1(a) GATT prohibiting less favorable treatment than that provided for in a Member's Schedule.

However, the Panel considered such claim in relation to the duty rate that was to be applied in the future (the sixth tariff line).In particular, the Panel pointed out that the import duty of 15 per cent was predictable and, therefore, the construction of such a measure did not lead to the further distortion of competition on the market and to granting less favorable treatment. Accordingly, the Panel has not found any violation of Article II:1(a) GATT in this respect.

SECOND GROUP OF MEASURES — COMBINED RATES IN EXCESS OF BOUND RATES

Russia was committed to impose ad valorem duty rate on palm oil and its fractions, refrigerators and freezers not higher than 3%. However, Russia imposed a combined duty rate on the abovementioned products: i.e. the percentage of the customs value of the products (ad valorem rate), which could not be less than a specific amount per unit (specific rate).

Imposition of the combined rate instead of ad valorem rate cannot be considered as a violation of Article II:1(b) GATT per se. However, in such a case an applicable combined rate (either its ad valorem or specific component, depending on the situation) and the ad valorem rate, set forth in the Schedule, should be compared. In other words, even if, as in the case at hand, the ad valorem rate (as part of a combined rate) amounts to 3 per cent, the requirement to such a rate not to be less than 0.09 EUR/kg means that under certain circumstances, the combined rate might exceed the bound rate set forth in the Schedule. Moreover, Russia did not undertake any measures to prevent the application of such combined rate in excess of its bound limits.

It is worth noting that certain duty rates (with regard to the 7th, 8th, 10th and 11th tariff lines) have been brought into compliance with Russia’s bound rates during the course of these proceedings. However, as noted by the Panel, the elimination of the violation after the establishment of the Panel does not exclude the violation of Article II:1(b) GATT heretofore.

THIRD GROUP OF MEASURES — "SYSTEMATIC DUTY VARIATION"

The particularity of the twelfth measure in the form of "Systematic Duty Variation" is in that the EU did not argue the inconsistency of the duty rates concerning specific tariff lines, but the general practice of their application, which affected a significant number of tariff lines and the system as a whole. Analysis of such a measure requires a higher standard of review and involves proving the existence of a "measure" as such as well as systematic and specific application thereof to the significant number of lines, which resulted in the general practice (following the example of US – Zeroing, which dealt with the issue of the existence of the contested "measure" within the meaning of the provisions of the GATT).

The Panel found that the EU failed to provide sufficient evidence to establish the violation in the context of Article II:1(b) GATT. In particular, it has not proved that the duty variation was either connected to any specific plan, or was systematic, or amounted to the general practice, but it rather limited its arguments to specific examples concerning certain tariff lines without having demonstrated their effect on the tariff system as a whole. Without such evidence, the Panel was unable to establish the existence of the contested "measure" and, consequently, the violation of the provisions of the GATT.

CONCLUSIONS

Therefore, the Panel found that eleven out of twelve measures imposed by Russia were in violation of Article II:1(b) GATT. As a result, as for now Russia is obliged to review its import duty rates, which do not meet its WTO obligations. Either Party can appeal the Report of the Panel to the WTO Appellate Body within 60 days after it is made public.

For more information, please contact Anzhela Makhinova, counsel at Sayenko Kharenko.  


|1|The Schedule sets forth the maximum import duty rates that may be levied on the products imported from the territory of any other WTO Member.

|2|The Panel analyzed the issue of consistency of the alleged measures with first sentence of Article II:1(b) GATT. Article II:1(b)  GATT deals with customs duties applicable to imports and provides that a WTO Member cannot apply customs duties higher than those set forth in its Schedule.

|3|The duty is charged as a percentage of customs value of the products and the other items it is imposed on.

|4|The duty consists of both an ad valorem rate of duty and a specific rate of duty (defined in terms of a specific amount per unit).

|5|Such preliminary finding was made by the Appellate Body in Argentina – Textiles and Apparel.

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