Incoterms_® and Commercial Contracts

Executive Summary

Regulations are a part of every producer’s business. Government regulate to protect our food and beverage supply, to prevent the spread of diseases, to protect the environment, consumers and workers; to assure quality, and to achieve many other legitimate policy objectives. Regulations nevertheless can increase the cost of doing business and are sometimes imposed for protectionist purposes.

This chapter examines two WTO Agreements that deal with product regulation. The first, the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement), deals with risks to the life and health of humans, animals and plants from diseases, pests, disease-causing organisms, as well as additives, contaminants and toxins. The SPS Agreement helps to assure that food, beverages and feedstuffs are safe. It is a sciencebased agreement – SPS measures must either conform to international standards (harmonisation) or have a scientific basis. It requires that SPS measures be nondiscriminatory, necessary, transparent and take regional conditions into consideration. They must not result in a disguised restriction on international trade.

The second agreement, the Agreement on Technical Barriers to Trade, deals with broader trade-related objectives, including protection of human, animal and plant life and health (through, e.g. product-safety measures), prevention of deceptive practices, and protection of the environment. Many of the rules applicable to SPS measures are also applicable to TBT measures. TBT measures must be non-discriminatory, necessary and transparent. They must also be based on international standards where such standards would be appropriate and effective to achieve a legitimate objective. Like SPS measures, they must not result in a disguised restriction on international trade.

* Arthur E. Appleton and Patrick F.J. Macrory are partners in the law firm of Appleton Luff, based in Geneva and Washington, DC respectively. Dr Appleton is also an Adjunct Professor at the Johns Hopkins University School of Advanced International Studies (SAIS-Europe). Mr Macrory is also Director of the International Trade Law Center at the International Law Institute in Washington, DC.

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1.0 Introduction

Government regulations play an important part in everyday life. They fill policy gaps that businesses, without prodding, may find too costly, or simply undesirable to address. For example, governments regulate to protect our food and beverage supply from additives, contaminants and toxins, to prevent the spread of diseases to humans, animals and plants, to protect the health and safety of citizens in general, and consumers and workers in particular, from environmental risks, and to ensure product quality. Human health and safety is by far the most important of these objectives, with regulations to protect the environment and to protect consumers from deceptive practices also playing an important role.

Most would agree that these objectives are legitimate, and would probably not be fulfilled without government intervention. However, such regulations raise costs for business, and this is normally reflected in product prices. For business the question is often: Can we find an economical means of meeting the terms of a trade-related regulation whilst remaining competitive? Do we have the technology? Will we be fined by government or brought to court by a consumer if we do not comply with important regulations?

THE PREVALENCE OF REGULATIONS

• Between 1995 and 2015 Members notified almost 45,000 regulations to the WTO;¹
• The International Standards Organisation has issued more than 21,000 international standards;²
• The International Electrotechnical Commission has about 9,200 international standards in its library, and is advised by 20,000 experts³; and
• The OECD estimates that 80% of world trade is affected by standards or technical regulations.⁴

Trade-related regulations also have a protectionist side. In some countries businesses are able to influence government policy for protectionist purposes. For example, if a manufacturer is an efficient producer of electric cars, it might lobby its government to enact domestic legislation requiring that all cars sold in the country, whether produced there or imported, be zero or low emissions vehicles. Or a government might base a regulation covering fireproof doors on a design by a domestic manufacturer, giving it a competitive edge over foreign producers.

Regulations, when applied uniformly, can create a level playing field for domestic and foreign businesses and fulfil legitimate goals. However, they can inhibit trade even when not designed to do so. For example, a motorcycle manufacturer might decide that it was not worthwhile continuing to export to a country that introduced tough new noise emissions regulations that would be costly to comply with, even though the new regulations were not discriminatory and did not have a protectionist purpose. This chapter will help businesses discern which types of regulation are legal under the WTO Agreement and which may be subject to challenge as discriminatory and unjustifiably trade-restrictive.

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First, though, a little background. Non-tariff Barriers (NTBs) were not a major concern in the early days of the GATT, since high tariffs played a more important role inhibiting trade. However, as tariffs came down as a result of successive rounds of GATT negotiations, attention shifted to NTBs as an obstacle to trade. Also, as standards of living and consumer expectations increased, governments enacted many more regulations to meet the growing demand for food safety, environmental improvement, consumer protection, etc. After the Kennedy Round of trade negotiations (1964-1967), the GATT Secretariat compiled an inventory of NTBs that identified more than 800 separate measures.⁵One of the agreements negotiated in the Tokyo Round (1973-79), the Agreement on Technical Barriers to Trade (known as the “Standards Code”), was designed to minimise the trade-distorting effect of regulations, including those affecting agricultural trade. However, this Code was only binding on the 32 GATT Contracting Parties (mostly developed countries) that signed it.

This chapter examines two of the WTO Agreements that deal with regulations and which grew out of GATT Article XX (discussed in Chapter Two). The first is the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement), which deals with risks to the life and health of humans, animals (sanitary) and plants (phytosanitary) from diseases, pests, disease-causing organisms, as well as additives, contaminants and toxins. In particular the SPS Agreement helps to assure that food, beverages and feedstuffs are safe. It was negotiated in conjunction with the WTO Agreement on Agriculture to address the concern that Members would resort to SPS measures to protect domestic producers once the tariff reductions and the elimination of import quotas on agricultural products required by the Agreement entered into effect. The SPS Agreement is very “science-based”. On the one hand, if supported by a scientific justification, it provides Members with the policy space to protect human, animal and plant life and health from SPS risks; on the other hand it seeks to prevent SPS measures from being used as non-tariff (protectionist) measures.

The second agreement, the WTO Agreement on Technical Barriers to Trade (TBT Agreement), covers regulations that deal with risks, other than SPS risks, to human, animal and plant life and health, such as product safety, as well as regulations with other “legitimate objectives”, such as preventing environmental harm and deceptive practices. The TBT Agreement grew out of the plurilateral Tokyo Round Standards Code mentioned above and, like the SPS Agreement, binds all WTO Members. It also strikes a balance between allowing Members the policy space to regulate in order to fulfil legitimate policy objectives, and preventing Members from using regulations for protectionist purposes.

It is important to understand that both the SPS and the TBT Agreements are poorly drafted, and that recent decisions by the Appellate Body have not been particularly helpful in clarifying some of the significant ambiguities in the texts.

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INTRODUCTORY POINTS REGARDING THE SPS AND TBT AGREEMENTS

• The SPS and TBT Agreements have three principal objectives: (i) to minimise the adverse trade effects of regulations and standards, while allowing Members room to address legitimate policy concerns; (ii) to encourage (but not require) harmonisation, particularly through the use of international standards; and (iii) to ensure transparency;
• Both agreements cover trade-related regulations and standards applicable to trade in goods, but not services;
• Neither Agreement applies to goods procured by a Member government;
• The SPS and the TBT Agreements each provide an incentive for Members to rely on international standards when designing their own standards, but allow Members to impose higher standards where desired and justified;
• The SPS Agreement permits a Member to determine the level of protection it requires provided that it has a scientific basis; there is no “lowest common denominator” approach, as alleged by some WTO opponents;
• Both agreements apply retroactively to regulations that Members promulgated before their entry into the WTO; and
• Both Agreements bind all WTO Members and are subject to the rules of the WTO dispute settlement system.

As only WTO Members can bring WTO disputes, business interests must lobby Member governments to challenge foreign regulations that may violate either Agreement and restrict market access for the goods they export.

Business interests sometimes also lobby Members to enact SPS and TBT measures that protect their interests – in some cases from the introduction of unsafe or dangerous products that compete with safer domestically produced goods. In other cases, they may simply lobby for the introduction of regulations aimed at restricting competition from less expensive imports.

This chapter will explain the operation of the SPS and the TBT Agreements and provide the business community with suggestions on how to operate under each agreement. The SPS Agreement is examined first, then the TBT Agreement. Regulatory issues, which usually arise under Article III and Article XX of the GATT, are discussed in

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2.0 Scope and Application of the SPS Agreement

2.1 SPS Measures Defined

The SPS Agreement is aimed largely at the safety of food, beverages, and animal feedstuffs, although its potential reach is far broader.

SCOPE OF THE SPS AGREEMENT [ANNEX A (1)]

The SPS Agreement allows a WTO Member to enact laws and regulations to protect:

• Human or animal life or health from risks arising from additives, contaminants, toxins or disease-causing organisms in foods, beverages or feedstuffs, for example food colouring linked to cancer, pesticide residue, and salmonella bacteria or aflatoxin fungi on or in food;
• Human life and health from risks arising from diseases carried by animals, plants or products thereof, or from the entry, establishment or spread of pests;⁶for example avian flu, zika or malaria; and
• Animal and plant life and health from pests, diseases, disease-carrying organisms or disease-causing organisms, such as foot-and-mouth disease.⁷

Typical SPS requirements include quarantine requirements, limitations on food and beverage additives, laws limiting pesticide, fungicide and herbicide residues, laws requiring food to be processed in specific ways (for example chemical treatment to ensure that chickens are not contaminated with salmonella), and packaging requirements related to food safety (such as regulations limiting the type of plastic that can be used for water bottles). The SPS Agreement also covers labelling requirements related to food safety.

LABELLING AND PACKAGING REQUIREMENTS

Labelling and packaging requirements can fall under either Agreement. A labelling requirement that relates to food safety, such as “This product contains peanuts” (protecting those that are allergic to peanuts) would almost certainly fall under the SPS Agreement. But a requirement to provide the nutritional information of peanut butter would fall under the TBT Agreement. This distinction could be important as all SPS measures must be science-based, but TBT measures are generally subject to less stringent requirements.

While the scope of the SPS Agreement is territorial (Members enact trade measures to protect human, animal and plant life and health within their territory), the SPS Agreement permits Members to inspect facilities abroad that are producing food and beverage products for export to their territory.⁸

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As noted above, the SPS Agreement is a science-based agreement. All SPS measures that do not conform to international standards (which are of course based on science) must have at least some scientific basis – a reasonable minority opinion suffices. A Member may not legally ban importation of an item on SPS grounds just because they “think” there may be a risk to human, animal or plant life or health. If a business suspects that there is no scientific reason behind an SPS measure of another Member, it should encourage its government to raise the measure with the other Member, first bilaterally, then in the WTO’s SPS Committee, then in formal consultations. This may resolve the issue or begin to pave the way for a WTO dispute settlement proceeding.

2.2 SPS Agreement: Principal Obligations

Although Article 2 of the SPS Agreement is entitled “Basic Rights and Obligations”, rights and obligations appear throughout the Agreement. WTO Members have the right to apply SPS measures to protect human, animal and plant life or health within their territory, so long as they meet the conditions set forth in the SPS Agreement. The most important requirements that Members must meet are examined below (some of these requirements are also found in the TBT Agreement).

SPS MEASURES MUST SATISFY THE FOLLOWING CONDITIONS

• They “must” be based on and conform to international standards, guidelines or recommendations when they exist. This is known as harmonisation. However, with scientific justification and a risk assessment, a Member may set a higher level of protection (Articles 3 and 5.6);
• They must be necessary to achieve the Member’s objective, which means that they must generally be the least trade restrictive measure reasonably available) (Articles 2.2, 5.6 and note 3);
• They must not discriminate arbitrarily or unjustifiably between WTO Members where similar conditions prevail, and they must not constitute a disguised trade restriction (Articles 2.3 and 5.5);
• They must ensure that measures are adapted to regional conditions (Article 6); and
• They must abide by transparency requirements (Annex B).

Under Article 2.4 of the SPS Agreement, measures that satisfy the SPS Agreement are presumed to satisfy the GATT, in particular Article XX(b),⁹with the result that a trade measure that survives an SPS challenge is very unlikely to violate the GATT.

2.3 Harmonisation with International Standards

As explained in the introduction to this chapter, the SPS Agreement encourages Members to harmonise their SPS measures with international standards. It does so by providing in Article 3.2 that an SPS measure that conforms to an international standard, guideline or recommendation is presumed to be consistent with the relevant provisions of the SPS Agreement (and the GATT Agreement), and as a result is extremely unlikely to be successfully challenged. This is known as a “safe harbour” provision. According to the Appellate Body, in order to “conform to” an international standard, a Member’s regulation should “embody the international standard[Page93:]completely and, for practical purposes, convert… it into a municipal standard.”¹⁰Unlike the TBT Agreement, it is not sufficient that a Member’s regulation merely be “based on” an international standard. The national regulation must “conform to” the international standard (a stricter requirement) if the Member is to benefit from the presumption of consistency with the SPS Agreement.

The SPS Agreement identifies three international standardisation organisations by name:

• The Codex Alimentarius Commission,
• The International Office of Epizootics, and the
• The international and regional organisations operating within the framework of the International Plant Protection Convention.

These are the most prominent international organisations making standards for food and beverage safety, animal health, and plant health respectively. While the list is not closed, and standards issued by other organisations could be used, SPS disputes in the WTO have not looked at such standards.

Governments send their representatives, often scientists, to the meetings of these standardisation organisations. Food and agricultural interests should monitor the activities of international standard-setting organisations carefully. Businesses in the developed world often work with their governments to ensure that the standard-setting agenda, and international standards reflect, to the extent possible, their interests by proposing products for standardisation that they produce, and by encouraging the use of their national standards as a basis for international standards.

Having said this, for reasons explained below, many developed country standards exceed international standards, often because their citizens desire a higher level of protection and their producers are capable of meeting higher standards. Such standards may also serve a protectionist purpose (whether intentional or not).

2.4 Measures Not Conforming to International Standards

The Members intend that the “safe harbour” provision described above will encourage countries to adopt SPS measures that conform to international standards. Suppose, however, that a Member wishes to enact a measure in an area that is not covered by an international standard, or decides to establish a higher level of protection than that provided by the relevant international standard. It is permitted to do so – indeed, Members are entitled to choose virtually any level of protection (known as the “Appropriate Level of Protection”, or “ALOP”) they require – but the measure must be based on “sound science” and a formal “risk assessment”. It must also be “necessary”, not violate the “non-discrimination” obligation, and not be a “disguised restriction on international trade” between Members where the same or similar conditions prevail. Each of these requirements is discussed below.

2.4.1 Scientific Principles/Scientific Evidence

SPS measures that do not conform to international standards – either because they exceed the international standard or there is no international standard – must be based on scientific principles and may not be maintained without sufficient scientific evidence. Article 5.2 requires that a “risk assessment” (discussed below) “take into account available scientific evidence”. The scientific justification – which will normally be contained in the risk assessment – need not be based on the work of a Member’s[Page94:]own scientists, nor does it need to be based on a majority-held view, so long as it comes from a respected and qualified source.¹¹Respected minority scientific opinion is sufficient to justify an SPS measure that exceeds international standards.

JAPAN – APPLES¹²

In Japan – Apples the Appellate Body upheld the Panel’s ruling that a Japanese measure banning the importation of US apples was imposed without sufficient scientific evidence, in violation of Article 2.2 of the SPS Agreement. Citing its Japan – Agricultural Products II decision,¹³the Appellate Body upheld the Panel’s determination that a measure is “maintained ‘without sufficient scientific evidence’ within the meaning of Article 2.2 of the SPS Agreement if there is no ‘rational or objective relationship’ between the measure and the relevant scientific evidence.”¹⁴

2.4.2 Risk Assessment

An SPS regulation that does not conform to an international standard, either because there is no standard or it exceeds the standard, must be based on a “risk assessment”. The Panel in EC – Hormones defined a “risk assessment” as “a scientific process aimed at establishing the scientific basis for the sanitary measure a Member intends to take”15 A risk assessment allows a Member to determine the degree of risk it is willing to accept on behalf of its residents, thus enabling it to establish its ALOP, and to develop means for managing the risk. In short, the risk assessment should assess the level of risk without the proposed measure, indicate the ALOP chosen, and show that that the proposed measure will achieve that level. Under the SPS Agreement, a risk assessment must be based on available “scientific evidence; relevant processes and production methods; relevant inspection, sampling and testing methods; prevalence of specific diseases or pests; existence of pest- or disease-free areas; relevant ecological and environmental conditions; and quarantine or other treatment.”¹⁶Science plays a role in each of these factors. A Member need not conduct its own risk assessment, and in fact some developing countries may find it difficult to do so. A Member may rely on another Member’s risk assessment.

EC – HORMONES

In the EC – Hormones case, the Appellate Body found that an EC measure prohibiting the import and sale of beef from cattle treated with growth hormones violated the SPS Agreement as the EC had failed to conduct a risk assessment.¹⁷“The requirement that an SPS measure be ‘based on’ a risk assessment is a substantive requirement that there be a rational relationship between the measure and the risk assessment.”¹⁸The Appellate Body also noted that “Article 5.1 does not insist that a Member that adopts a sanitary measure shall have carried out its own risk assessment. It only requires that the SPS measures be ‘based on an assessment, as appropriate for the circumstances...’”.¹⁹

2.4.3 Necessity

Article 2.2 of the Agreement requires Members to ensure that each SPS measure “is applied only to the extent necessary to protect human, animal or plant life or health…”. Article 5.6 requires that when Members establish or maintains an SPS measure they must ensure that the measure is “not more trade-restrictive than required to achieve their appropriate level of [SPS] protection…”. Should another Member challenge the regulating Member’s measure as unnecessary (or not required) to achieve the ALOP, the challenging Member must prove that there is a “another measure, reasonably[Page95:]available taking into account technical and economic feasibility, that achieves the appropriate level of sanitary or phytosanitary protection and is significantly less restrictive to trade.”²⁰

AUSTRALIA – SALMON²¹

In Australia – Salmon, the Appellate Body found that Australian import restrictions on Canadian and US fresh, chilled and frozen salmon were unjustified. One of the purposes of the restrictions was to prevent the discharge of untreated waste. In an effort to implement the decision, Australia decided to allow the importation of consumer ready salmon cutlets weighing less than 450 grams, small enough to assure that further processing in Australia was unnecessary, thereby preventing untreated waste from being discharged. When this measure was challenged, the Panel found that Australia had acted inconsistently with Article 5.6 as there was a less trade-restrictive measure available. Australia could have simply mandated that its salmon processing facilities not discharge untreated waste.

Although at first glance, this least trade-restrictive test may seem to be stringent, in fact Members have some leeway in the design of SPS measures. This is evident from inclusion of the adjective “significantly” (“significantly less restrictive to trade”). This is also consistent with the general relaxation of the “necessity” test in GATT and TBT cases.²²

More recent SPS cases have tended to focus less on “necessity” and more on the justification for the measure. Measures have been struck down on the following grounds:

• Appropriate scientific justification was absent;
• A risk assessment was inadequate or not conducted; or
• The measure resulted in arbitrary or unjustifiable discrimination.

2.4.4 No Arbitrary or Unjustifiable Discrimination;

No Disguised Trade Restrictions

Unlike most of the WTO Agreements, the SPS Agreement does not contain a strict MFN or national treatment obligation, nor is it “triggered by a finding of ‘like products’”.²³The reason is obvious. A ban on imports of beef from all WTO Members because of a problem solely with beef from the United Kingdom would make no sense, yet would be required by strict application of the MFN principle. Instead, Article 2.3 modifies the non-discrimination principle to apply only to Members “where identical or similar conditions prevail”, as well as prohibiting the use of SPS measures as a “disguised restriction on international trade”. The formulation is very similar to that found in Article XX of the GATT. (See Section 8.1 of Chapter Two.) While several panel and Appellate Body decisions have mentioned Article 2.3 of the SPS Agreement, none has defined clearly what constitutes arbitrary or unjustifiable discrimination. Instead, the focus of panels and the Appellate Body appears to be on comparable risk. If a disease strikes all cloven-hoofed animals from the United Kingdom, but not from other Members, an importing Member can ban importation of UK cloven-hoofed animals without violating the non-discrimination requirement.²⁴

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2.5 Other Important Provisions

2.5.1 Regional Conditions

Disease-causing organisms (viruses and bacteria), disease-carrying organisms (such as certain insects) and other pests do not respect national frontiers. They are however subject to geographic and geological constraints. As a result, a WTO Member, particularly a Member with different climatic zones, is likely to have areas where certain animal and plant diseases and pests are prevalent, and other regions where such problems do not exist. The SPS Agreement requires Members to ensure that SPS measures are adapted to such regional characteristics, and establishes a mechanism for demonstrating that certain areas are pest- or disease-free.²⁵Members are required to give other Members access to verify claims that an area is pest- or disease-free.

INDIA – AGRICULTURAL PRODUCTS26

India imposed SPS measures prohibiting the importation of certain livestock and animal products allegedly to prevent the entry of avian flu. The United States challenged the Indian measure, in part because the measure prohibited imports from any country that had notified the International Office of Epizootics (OIE) of an avian flu outbreak.

The Appellate Body upheld the Panel’s finding that India’s avian flu trade measures violated Article 6 of the SPS Agreement since they prohibited all imports from any Member that has notified the OIE of an avian flu outbreak. The total prohibition was contrary to Article 6.1 and 6.2 as it eliminated any possibility that India would recognise a disease-free area.

Agricultural producers in countries whose exports are banned because of indigenous pests or diseases (such as foot-and-mouth disease), but who themselves are in areas where the pests or diseases are absent should encourage their governments to seek recognition from trading partners that the region is disease free. For example, in 2015 the United States lost a WTO dispute brought by Argentina as a result of the US failure to recognise that Argentina’s southern region of Patagonia was free of foot-and-mouth disease and likely to remain so.²⁷

2.5.2 Precaution

Article 5.7 of the SPS Agreement allows Members to implement SPS measures when scientific evidence is insufficient to conduct a risk assessment. This does not mean that there is no science supporting a measure – on the contrary there must be some scientific evidence of a problem.

MAD COW DISEASE

The Mad Cow Disease (BSE)²⁸epidemic provides a good example of the application of Article 5.7. When cattle started developing the symptoms of an unknown disease, WTO Members closed their borders to cattle from countries where the outbreak arose. This was a precautionary measure. Scientists knew that something was wrong, but were not sure what. Only later was the cause of the disease ascertained and permanent SPS measures notified to the WTO and put into place by various Members.

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There are four conditions before a precautionary SPS measure can be put into place by a WTO Member:

• Scientific evidence must be insufficient to be able to conduct a risk assessment;
• The Member’s measures must be based on available “pertinent” information, including that from the relevant international organisations as well as from sanitary or phytosanitary measures applied by other Members;
• The Member applying the measure must seek to obtain additional information necessary for a more objective assessment of risk; and
• The Member applying the measure must review the measure within a reasonable period of time.²⁹

JAPAN – AGRICULTURAL PRODUCTS:

DUTY TO OBTAIN ADDITIONAL INFORMATION³⁰

In Japan – Agricultural Products the Panel found that Japan’s “precautionary” varietal testing requirement, which had been in effect for the products and pests at issue for 20 years, was inconsistent with the Agreement. Since the entry into force of the SPS Agreement on 1 January 1995, Japan had been under an explicit obligation to collect additional information to enable it to more objectively review the appropriateness of the varietal testing requirement, but had failed to do so. The Appellate Body upheld this finding in a report adopted in 1999, making it clear that Japan had had a reasonable period of time both to obtain and review additional information.

If there is sufficient scientific evidence to conduct a risk assessment, a Member will not be able to successfully invoke the doctrine of precaution as set forth in the SPS Agreement. To date, no Member has successfully argued that its measure satisfied the precautionary approach authorised in the SPS Agreement. However, when a legitimate case of precaution arises, for example when Members closed their beef markets as a result of Mad Cow Disease, it is unlikely that a Member would risk the political capital that challenging such a ban would entail.

Business interests are advised against encouraging a Member to challenge a trade measure based on precaution when obvious health risks are at stake. Businesses risk damage to their reputation by doing so.

2.5.3 Equivalence

Article 4 of the SPS Agreement appears to require Members to accept sanitary or phytosanitary measures of other Members as equivalent if they achieve the importing Member’s appropriate level of SPS protection. However, this provision, while stronger than its TBT counterpart, is not as strong as it may seem. The exporting Member must “objectively demonstrate” to the importing Member that its SPS measure achieves the importing Member’s ALOP.³¹The importing Member has a degree of discretion to determine whether its ALOP is met.³²

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THE CASE OF SWISS CHEESE IN AUSTRALIA³³

Switzerland was able to demonstrate to the Australian authorities the equivalence of its applied risk management measures to achieve a level of safety for three hard cheeses that was comparable to the current Australian domestic standard. No Codex Alimentarius standard existed and Switzerland made its demonstration through a risk assessment. “The risk assessment concluded that when made according to the manufacturing process in the Swiss application, the hard cheeses attained at least the same level of pathogen destruction as for pasteurisation, while the semihard cheeses did not.”

Article 4 also requires Members, upon request, to enter into consultations with other Members to achieve agreements recognizing that SPS measures are equivalent. Again, entering into negotiations is not the same as negotiating an agreement.

Accepting SPS measures as equivalent requires a considerable degree of confidence in a trading partner’s SPS system. A developed country may be more inclined to accept that a product from other developed countries achieves its appropriate level of SPS protection than a product from a developing country.

2.5.4 Conformity Assessment

Conformity assessment procedures are governed by Annex C of the Agreement. Annex C requires that control, inspection and approval processes be undertaken without undue delay. A WTO panel held that an EU moratorium on the testing of genetically modified food products violated this requirement.³⁴As noted above, Annex C authorises foreign inspections. It also requires that inspection procedures be reasonable and necessary, and that the inspection requirements for imported products not be more onerous than the inspection requirements applicable to like domestic products (national treatment). The national treatment obligation extends to the Annex’s provisions governing confidentiality, imposition of fees, and siting of inspection facilities.

2.5.5 Sub-National Governments and Non-Governmental Bodies

Article 13 of the Agreement requires Members to take reasonable measures to ensure that subnational governments and non-governmental bodies comply with the Agreement, and forbids them to require or encourage regional, local governments or non-governmental bodies to take action that is inconsistent with the Agreement.

2.5.6 Private Standards

Sanitary and phytosanitary buying requirements established by supermarket chains and other large importers can also act as important non-tariff barriers for developing country agricultural products. Although a frequent subject of discussion in SPS Committee meetings, such standards are outside the SPS Agreement as they are set by private parties and not WTO Members.

2.6 Transparency

2.6.1 General Provisions

Annex B of the SPS Agreement contains important provisions regarding “transparency”, which make it easier for Members to become aware of foreign SPS measures. Somewhat surprisingly, these requirements are not as business-friendly as[Page99:]the analogous TBT transparency requirements, since the SPS Agreement does not mandate that SPS enquiry points provide information to businesses and interested parties, other than Members.

SPS transparency requirements take several forms and can be broken down into measures applicable to pre-adoption and post-adoption regulatory phases.

SPS TRANSPARENCY REQUIREMENTS

• Pre-adoption:
  • Transparency requirements during the pre-adoption phase apply when a proposed SPS measure is not substantially the same as the content of an international standard;
  • Except in urgent circumstances, Members must allow a reasonable time between publication and entry into effect so that producers are able to adapt their products and production methods;
  • When an international standard does not exist, or an SPS measure diverges substantially from the international standard, and if the regulation will have a significant effect on trade, Members must publish a notice at an early stage that will allow other Members to become acquainted with the proposal;
  • Members must also notify other Members through the WTO Secretariat of the products to be covered by the proposed regulation and the objective and rationale behind it; provide copies of the proposed regulation on request; allow a reasonable time for Members to comment in writing on the proposed standard; and take these comments into consideration;
  • Members must make notifications to the WTO Secretariat in English, French or Spanish; and
  • Members must designate a central government authority to be responsible for implementation of SPS notification procedures.
• Post-adoption: Members must promptly publish all adopted SPS measures. Except in cases of urgency, Members should allow a reasonable period between publication and entry into force, to give suppliers in other countries time to adjust to the new requirements.

2.6.2 Enquiry Points

In addition to the transparency requirements listed above, Annex B requires that Members establish SPS enquiry points. These are offices that provide answers to all reasonable questions from other Members, and provide relevant documents, concerning proposed or adopted SPS measures, including: control and inspection procedures, production and quarantine treatment, pesticide tolerance and food additive approval procedures, risk assessment procedures, factors taken into account when the member determines the ALOP, as well as bilateral and regional arrangements that fall within the scope of the SPS Agreement.

SPS enquiry points are under no obligation to respond to business enquiries. In the event that an SPS enquiry point fails to respond to an enquiry from a business, the affected business should seek to have a friendly government contact the enquiry point on its behalf.

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2.6.3 Urgent Problems

The SPS Agreement permits Members to derogate from the pre-adoption notification requirements when urgent matters arise. For example, if an outbreak of avian flu were to arise, a Member would be permitted to enact immediate quarantine and other SPS measures as long as it notified Members through the WTO Secretariat of the regulation and products covered, the rationale behind the regulation, and the nature of the urgent problem. The Member must also provide copies of the regulation upon request to other Members, allow Members to comment in writing, discuss the comments with other Members, and take the comments into consideration.

2.6.4 Transparency Resources

Section 6 of Chapter One provides details of available Internet resources, including EU and US SPS resources, that will help business stay abreast of SPS developments.

The WTO Secretariat operates a comprehensive internet site with information about the SPS Agreement, including a training course and a short guide.³⁵ This site provides important information for the business community. Not only does this site provide an access point for detailed information on the SPS Agreement, there is also an “SPS Information Management System” website http://spsims.wto.org/web/pages/settings/country/Selection.aspx that allows the business community (and anyone else) to obtain copies of SPS notifications, addresses specific trade concerns, and provides a list of enquiry points, committee reports, and many other documents useful to the agribusiness community.³⁶

3.0 Scope and Application of the TBT Agreement

If a trade-related regulation does not fall under the SPS Agreement, it is likely to fall under the Agreement on Technical Barriers to Trade (TBT Agreement). The TBT Agreement has much in common with the SPS Agreement, but it also differs in important ways. While the primary purpose of the SPS Agreement is food and beverage safety, the goals of the TBT Agreement deal with broader trade-related objectives, including protection of human, animal and plant life and health (through product safety measures), prevention of deceptive practices, and protection of the environment.³⁷These so-called “legitimate objectives” are part of an open-ended list that covers several other types of typical regulations, such as quality standards, and regulations for consumer convenience (for example, standardised electrical and telephone outlets). As can be seen from the table in the text box, by far the largest number of regulations notified to the WTO under the TBT Agreement were designed for the protection of human health or safety, followed by prevention of deceptive practices

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One of the most important differences between the two Agreements relates to the role of science. As we have seen, every SPS measure must be science-based, unless it is simply an adoption of an international standard (which of course is itself based on science). In the case of TBT measures, science, while it can be important, is not essential in every case. For example, a measure outlawing the sale of pornographic material based on public morality grounds would not require scientific backing; on the other hand, an environmental regulation probably would.

Determining whether a measure is covered by the SPS or the TBT Agreement is the first step in an analysis of a goods-related regulation. A specific provision under a trade measure cannot fall under both Agreements. A business subject to a regulation that it believes is discriminatory should first determine whether the measure falls under the terms of Annex A(1) of the SPS Agreement (See Section 2.1 of this Chapter). If not, the measure is likely to be a TBT measure.³⁸ Food and beverage-related safety measures that deal with additives, contaminants, toxins, pests and diseases) almost always fall under the SPS Agreement, while other goodsrelated trade regulations are likely to fall under the TBT Agreement.

Why is this important for business? The science-based nature of the SPS Agreement may make it more difficult to justify a particular measure. For example, defending a ban on meat produced from cloned animals might be more difficult under the SPS Agreement where scientific evidence that the product is unsafe would be required; defending a similar ban under the TBT Agreement might be easier if based on public morality or prevention of deceptive practices.

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3.1 TBT Measures

The TBT Agreement covers technical regulations, standards and conformity assessment procedures (testing). All three are important for businesses that manufacture and trade goods. The TBT rules applicable to all three are similar.

3.1.1 Technical Regulations and Standards

As defined in Annex 1.1 of the TBT Agreement, technical regulations are mandatory, written rules applying to identifiable products that set out product characteristics or their related processes and production methods. They include rules dealing with terminology, symbols, packaging, marking and labelling requirements. The definition of a standard is broadly similar, with one important difference – the Agreement defines standards as “not mandatory”. The terminology is somewhat confusing, as in common parlance mandatory regulations are often referred to as “standards”.

Until recently the distinction seemed clear-cut. However, a recent decision by the Appellate Body, described in the text box below, blurred the distinction, and many measures that were regarded as standards because they were voluntary may now be classified as technical regulations. While an interesting issue for lawyers to debate, the change of categorisation makes little difference in practice, as the TBT rules applicable to standards are generally the same as those applicable to technical regulations.

THE US – TUNA II CASE

Mandatory labelling schemes, such as a requirement that food products be labelled with their nutritional content, are clearly technical regulations within the meaning of the TBT Agreement. But what about a labelling system that allows, but does not require statements to be made about the product if it meets certain criteria? US – Tuna II determined that a US programme establishing criteria which if met allowed a manufacturer to affix a “dolphinsafe” label on canned tuna was a technical regulation within the meaning of the TBT Agreement, even though the label was not required.³⁹The decision was based on the following factors:

• The US programme established a single and legally required means of addressing a matter (the definition of “dolphin-safe”) and disallowed use of other labels that do not satisfy the definition;
• The US programme prescribed in a broad and exhaustive manner the conditions that apply for making the dolphin-safe assertion; and
• The US programme covered the entire field in relation to the product (which tuna is harvested in a manner that at dolphin-safe).

Business interests may find it useful to lobby governments to enact labelling schemes that differentiate their products based on manufacturing characteristics that local consumers will appreciate – for example, “This product was not produced with child labour”. In doing so, business should be mindful that TBT rules will apply, in particular the requirement that TBT measures be non-discriminatory.

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3.1.2 Conformity Assessment

Conformity assessment procedures determine whether a product satisfies the requirements of a technical regulation or a standard.⁴⁰The rules in the TBT Agreement (discussed below) applicable to technical regulations and standards are generally applicable to conformity assessment procedures. As with the SPS Agreement, the TBT Agreement permits conformity assessment to take place abroad in foreign facilities – in other words it authorises foreign inspections.⁴¹

Conformity assessment procedures can themselves pose important obstacles to international trade – particularly in instances when for logistical or cultural reasons domestic manufacturers find it easier than foreign producers to satisfy conformity assessment requirements. For example, at the behest of its domestic toy industry, one Latin American country dramatically increased inspection requirements for doll safety. More onerous inspection requirements discouraged potential foreign entrants and served to protect domestic manufacturers in a market already facing strong competition from Chinese imports.

Business should not underestimate the importance of technical regulations and conformity assessment procedures as barriers to international trade. Businesses seeking protection sometimes lobby receptive governments to fashion well-crafted technical regulations and conformity assessment procedures designed to protect local business interests.

3.2 TBT Agreement: Principal Obligations

The TBT Agreement requires that technical regulations, standards and conformity assessment procedures:

• Do not discriminate (most-favoured-nation and national treatment);⁴²
• Do not create unnecessary obstacles to international trade (“necessity”);⁴³
• Are based on international standards when they exist and when they are effective and appropriate (“harmonisation”);⁴⁴ and
• Are transparent.⁴⁵

GATT AND THE TBT AGREEMENT

The first two of these requirements – non-discrimination and necessity – are similar to the obligations under the GATT.

The harmonisation obligation is not found in the GATT, but is unlikely to be invoked by a Member unless discrimination against a Member’s exports is present.

The transparency obligations go beyond those present in the GATT, but transparency issues are also unlikely to result in formal WTO disputes absent a transparency requirement that discriminates against a Member’s exports.

Most challenges under the TBT Agreement also invoke the GATT. This strategy proved successful in the EC – Seal Products dispute,⁴⁶ where the AB found a violation of Article XI of the GATT after ruling that the TBT Agreement did not apply.⁴⁷[Page104:]

The principal TBT obligations are discussed below from the perspective of technical regulations, but similar rules apply to standards and conformity assessment procedures.

3.2.1 Non-discrimination

Like the GATT, the TBT Agreement contains both national treatment and mostfavoured- nation obligations. Unlike the GATT, the TBT Agreement does not set forth exceptions. This drafting oversight poses a problem for the business community. The Appellate Body had to find a way to reconcile the need to fulfil a Member’s legitimate regulatory objectives with the need to assure that a Member does not apply technical regulations for protectionist purposes. The Appellate Body solved the problem by “creating” the concepts of a “legitimate regulatory distinction” and “even-handedness” as part of the four-part test set out below.⁴⁸Although the formal analysis may be somewhat different, it is likely that the result in a TBT dispute alleging a violation of the non-discrimination obligation would be the same as the result in a GATT dispute predicated on a non-discrimination violation (MFN or national treatment) were a party to invoke Article XX to justify the discrimination.

DISCRIMINATION UNDER THE TBT AGREEMENT: WHAT BUSINESS SHOULD CONSIDER

1. Are the products “like”? If not, a Member may subject the products to different regulatory treatment. The traditional “like product” test applies.⁴⁹
2. If the products are like products, does the imported product(s) receive less favourable treatment (i.e. does the measure alter the conditions of competition), either when compared to domestic like products (national treatment), or as between imported like products (MFN treatment)?
3. If a given product is subject to less favourable treatment, is the less favourable treatment based on a “legitimate regulatory distinction” (LRD)? For example, assuming for the sake of argument that all automobiles are like products, a regulation stating that all automobiles operated within a particular Member must be zero emission vehicles discriminates in favour of electric and hydrogen cars and against gasoline-powered cars, but would probably be based on a legitimate regulatory distinction – protection of the environment.
4. Is the LRD applied even-handedly? Look at how the regulation is designed and applied. If the above measure only authorises zero emission electric automobiles to the exclusion of zero emission hydrogen vehicles and the regulating state is an efficient producer of such electric vehicles, this would suggest that the regulation is not even-handed as there would not appear to be a legitimate regulatory distinction between the treatment of electric and hydrogen vehicles.⁵⁰The measure as applied would appear designed to discriminate de facto in favour of domestically produced electric automobiles.

All recent TBT decisions have found that there was no legitimate regulatory distinction behind the discrimination, and that there was therefore a violation of Article 2.1 – the TBT Agreement’s non-discrimination obligation.

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RECENT TBT CASES ON DISCRIMINATION⁵¹

US – Clove Cigarettes: The Appellate Body struck down as discriminatory a US ban on the sale of cigarettes containing flavoured tobacco, except menthol cigarettes. The Appellate Body found that clove, menthol and other flavoured cigarettes were like products and that the US measure resulted in less favourable treatment for Indonesian clove cigarettes than for US-produced menthol cigarettes.

US – Tuna II: Dolphins swim with tuna in certain parts of the Pacific Ocean. The United States regulates the use of a “dolphin-safe” label that manufacturers can apply to tuna products to indicate that the tuna is caught in a manner that avoids dolphin deaths. The Appellate Body found that the US labelling regulations discriminated against Mexico. The US labelling scheme applied to tuna caught with purse-seine nets in the eastern tropical Pacific Ocean where the US and Mexico both fish. Tuna coming from the western tropical Pacific Ocean where Mexico does not fish were subjected to laxer requirements (despite the fact that tuna also swim with dolphins in that region).

US – COOL: The COOL case dealt with a US “country of origin labelling” (COOL) scheme that the United States applied to certain cuts of meat produced in Canada, Mexico and the United States. The scheme was purportedly designed to provide consumers with information as to where livestock were born, raised and slaughtered. The Appellate Body found that the COOL programme discriminated against Canadian and Mexican livestock by imposing increased costs on their livestock, both in in the slaughtering process, and through the collection of information that was never provided to consumers. This case is discussed in Chapter 13, Case Study A.

Businesses seeking government support to challenge a technical regulation, standard or conformity assessment procedure should focus their effort on identifying discrimination that is not justifiable based on an even-handedly applied legitimate regulatory distinction. This route has proven the most successful in WTO dispute settlement.

3.2.2 Necessity

Pursuant to the TBT Agreement, technical regulations, standards and conformity assessment procedures must not create “unnecessary” obstacles to international trade (as explained above, measures based on international standards are presumed to meet this requirement). This language is clarified in Article 2.2: “For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create.”⁵²

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THE “NECESSITY TEST”

As with recent WTO Appellate Body decisions interpreting the term “necessary” in Article XX(a), XX(b) and XX(d) of the GATT,⁵³the Appellate Body decisions in the three recent TBT cases summarised above also applied a relaxed interpretation of the “necessity test”. Instead of looking for the “least trade-restrictive measure reasonably available”, the Appellate Body looked instead at the degree of contribution a TBT measure makes toward furtherance of a legitimate objective. None of these three TBT decisions found that the US measure was not necessary. All three decisions were instead based on a violation of the non-discrimination provision discussed above.

3.2.2.1 The Role of a Science-Based Risk Assessment in TBT Cases

As we have seen, all SPS measures that do not conform to international standards must be based on a science-based risk assessment. The role of science and risk assessment is not as clear-cut in the case of the TBT Agreement. Clearly there is no need for scientific backing for a measure based on public morality (EC – Seal Products) or prevention of consumer deception. However, the necessity test requires account to be taken “of the risks non-fulfilment would create”, and “relevant elements of consideration” include “available scientific and technical information”. The Appellate Body has not spoken on the role of science in TBT cases, but it might be more difficult to defend a science-based measure, such as an environmental regulation, if it did not have scientific backing in the form of a risk assessment.

3.2.3 Harmonisation with International Standards

The TBT Agreement requires Members to base their technical regulations, standards and conformity assessments on international standards where they exist or are imminent, unless they are ineffective or inappropriate.

3.2.3.1 International Standards

The TBT Agreement mentions two standardisation organisations by name: the International Standardization Organization and the International Electrotechnical Commission, which together account for a large majority of international standards. Although the list of international standardising bodies is open-ended, as affirmed in the US – Tuna II case, to qualify a body must:

• Have recognised activities in standardisation;
• Be open to relevant bodies of at least all WTO Members; and
• Be open at every stage of standards development.⁵⁴

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In many industrial sectors businesses play a role in the international standard-setting process. For example, when the International Telecommunications Union, a UN specialised agency that develops technical standards to assure the interconnectivity of networks and technologies, holds meetings in Geneva, industry representatives are present on the side-lines lobbying government officials to have standards that are favourable to their business adopted as international standards.

Nevertheless, in some fast moving areas, for example the development of Wi-Fi standards, companies agree private standards amongst themselves and bring products to market well before international standards are adopted. These standards would not of course be covered by the TBT Agreement.

3.2.3.2 Presumption of Necessity

If a Member bases its measures on an international standard, there is a presumption that the regulation is “necessary” (see Section 3.2.2).

3.2.3.3 Ineffective or Inappropriate International Standards

Members are free to enact regulations that are not based on international standards when international standards do not exist or when they are ineffective or inappropriate.

“INEFFECTIVE OR INAPPROPRIATE”

In EC – Sardines,55 the EC attempted (unsuccessfully) to justify a measure that only permitted one species of sardine (that happened to be caught in the Mediterranean) to be labelled “sardines” arguing that the Codex Alimentarius standard was ineffective or inappropriate as it permitted other species to be so labelled.⁵⁶Peru was able to demonstrate that the Codex standard at issue was an effective and appropriate means of satisfying the EC’s objectives of market transparency, consumer protection and fair competition.

3.2.4 Transparency

3.2.4.1 General Provisions

The transparency provisions of the TBT Agreement are similar to those in the SPS Agreement, although as will be seen below, they are more business friendly. TBT transparency requirements take several forms. Most apply when a relevant international standard does not exist or a proposed technical regulation is “not in accordance with the technical content of relevant international standards” and “may have a significant effect on trade”. They can be broken down into measures applicable pre-adoption and post-adoption.

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TBT TRANSPARENCY REQUIREMENTS57

• Pre-adoption:
  • Publish a notice that they propose to publish a particular regulation
  • Notify WTO Members through the WTO Secretariat at an “early appropriate stage” of the products to be covered, and the objectives and rationale of the proposed regulation;⁵⁸
  • Upon request provide Members with copies of the proposed regulation;
  • Identify where the regulation deviates from international standards;
  • Allow a reasonable time for other Members to comment in writing on the proposed regulation and take these comments into consideration; and
  • Identify a central government authority to be responsible for TBT notifications.
• Post-adoption: Publish promptly all adopted technical regulations, with (except in cases of urgency) a reasonable interval before entry into force to give producers time to adapt.

3.2.4.2 Enquiry Points

In addition to the transparency provisions outlined above, as with the SPS Agreement, the TBT Agreement mandates that Members establish “enquiry points” to respond to questions from other Members. Unlike the SPS Agreement, TBT enquiry points must be able to respond to questions from interested parties, such as the business community, as well as Member enquiries. TBT enquiry points are required to provide relevant documents regarding proposed or adopted technical regulations, standards and conformity assessment procedures.

3.2.4.3 Urgent Problems

The TBT Agreement permits Members to derogate from pre-adoption notification requirements when urgent matters related to safety, health, environmental protection or national security arise or threaten to arise. For example, if Members discover that a certain brand of imported mobile phone contained batteries that were prone to explode, the Member would be permitted to ban importation of that brand of phone, provided that upon adoption of the technical regulation prohibiting import, it notifies Members through the WTO Secretariat of the regulation and products covered, the rationale behind the regulation, and the nature of the urgent problem.⁵⁹

3.2.4.4 Transparency Resources

Section 6 of Chapter One provides details of available Internet resources, including EU and US TBT resources, that will help keep the business community up-to-date with respect to TBT developments.⁶⁰

The WTO website provides important TBT-related information that can be of assistance to the business community, including a searchable TBT Information Management System with all TBT notifications,⁶¹ as well as a training course and a detailed guide explaining the TBT Agreement.⁶² Derestricted official documents are also available.⁶³

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3.3 Responsibility of Members for Subnational Government and Non-Governmental Bodies

The TBT Agreement requires Members to take “reasonable measures” to ensure compliance with the Agreement by local government and non-governmental bodies⁶⁴that have been given regulatory authority (for example, inspection companies such as SGS), and makes Members responsible for breaches of the TBT Agreement committed by such bodies. This provision is important for the business community, particularly when exporting to federal states like the United States, Germany and Brazil. For example, a WTO Member could bring a dispute settlement proceeding against the United States if an automobile emissions regulation established by the state of California violated the TBT Agreement.

3.4 Non-Binding Provisions

The TBT Agreement contains several non-binding provisions that may indicate the future direction of regulations and regulatory agreements. They are discussed below.

3.4.1 Equivalence

A WTO Member is required to give “positive consideration” to accepting the technical regulations of other Members as equivalent, even if different from its own, if the Member is satisfied that the foreign regulation adequately fulfils the objectives of its own regulation. As this “requirement” gives members discretion to determine when a foreign regulation is equivalent, its enforceability may be difficult. Nevertheless, equivalency agreements do exist. For example, since 2014, the United States and Japan have recognised the equivalence of their organic food regulations, and as a result “all certified organic plant and plant based processed products that are produced in the United States and Japan, or which have final processing, packaging, or labelling in the United States or Japan, may access either market.”⁶⁵

3.4.2 Mutual Recognition of Conformity Assessments

Members are required to ensure, “whenever possible”, that they accept the results of testing procedures (conformity assessment procedures), even if such procedures differ from their own, if they are “satisfied” that the testing procedures assure a result equivalent to their own testing procedures. This provision vests substantial discretion in individual Members. This provision encourages consultations between Members, as well as consideration of the relevant international recommendations of international standardising bodies. For example, the United States and the European Union have mutual recognition agreements in place to recognise the test results of specified conformity assessment bodies operating in the areas of telecommunications equipment and electromagnetic compatibility.

3.4.3 Design of Technical Regulations

“When appropriate”, Members are to specify technical regulations based on performance characteristics as opposed to design characteristics. For example, the regulation of a fire door should be specified based on its ability to withstand a certain temperature for a specified length of time, as opposed to its physical characteristics, which could be defined more easily in a way that favours domestic products over imports. WTO Members intended that regulations based on performance characteristics would unleash the creativity of the business community by allowing space for new means of solving problems – for example the development of new materials to design a fire door. In fact, the trend in developed countries is to base regulations increasingly on performance characteristics, unless the matter is so vital (for example automobile safety) that regulations based on design characteristics are necessary (such as mandatory airbag and seatbelt requirements). [Page110:]

Unfortunately, by qualifying the preference for performance requirements with the phrase “when appropriate”, the TBT Agreement allows plenty of room for a protectionist approach. A Member could, for example, base its regulation for a fire door on a design used by its own manufacturers, which would give them an advantage over foreign competitors, and could probably come up with reasons why a performance-based approach would not be appropriate.

3.5 Does the TBT Agreement Cover Non-Product-Related Measures?

An important but so far unresolved issue is whether a government can ban the import of a product based on production methods that are not detectable in the product itself; for example when a manufacturer does not comply with international labour or environmental standards. The TBT defines a technical regulation as a measure that sets out product characteristics or their “related” processes or production methods. A narrow reading of the language would suggest that failure to comply with international labour or environmental standards is not “related” to product characteristics. However, the Appellate Body has not yet ruled on this issue. It is however known from US – Shrimp (Article 21.5)⁶⁶that Article XX of the GATT permits a Member to legally ban the import of a product not manufactured in accordance with that Member’s environmental standards provided that the Member does not apply the ban in a manner that results in arbitrary or unjustifiable discrimination or a disguised restriction on international trade.⁶⁷As the Appellate Body appears to be striving for consistency between the TBT and GATT Agreements, it would be somewhat surprising if a trade measure based on product characteristics that are not detectable in the final product could pass muster under the GATT but not the TBT Agreement.

Business interests should be prepared to deal with import restrictions based on product characteristics that are not detectable in the product itself – such as a manufacturer’s failure to meet core labour standards or environmental norms.

A related question is whether a government can require products to be labelled with characteristics associated with a product’s production but not detectable in the final product (for example, carbon emissions produced when a product is manufactured; whether the manufacturer complies with labour, environmental or human rights agreements, etc.). As described above, a 2012 WTO Appellate Body decision held that a US programme that established criteria which if met allowed a manufacturer to affix a “dolphin-safe” label on canned tuna was a technical regulation within the meaning of the TBT Agreement,⁶⁸although obviously the means by which the tuna were caught had no effect on the characteristics of the tuna itself.

As a result of the Appellate Body decision in US – Tuna II, Members can require the labelling of product characteristics not detectable in the final product – such as whether production of a product is in compliance with environmental, labour or human rights norms. Of course, the labelling programme must meet the requirements of the TBT Agreement, in particular Article 2.1 (non-discrimination), as well as the GATT.

3.6 Private Standards

Another important non-tariff barrier for developing country agricultural products, are buying requirements established by supermarket chains and other large importers, such as sustainability standards set forth by GlobalG.A.P.,69 or supermarket buying requirements relating to size, colour, flavour, and production standards. US – Tuna II, [Page111:]discussed above, makes clear that such standards are outside the WTO Agreement as they are set by private parties whose standard-setting activities are not open to all WTO Members at all stages of their activity.

4.0 Mega-Regional Free Trade Agreements

Increasingly regional trade agreements incorporate provisions governing SPS and TBT measures – in particular provisions related to equivalence and mutual recognition. This is also true for the mega-regional agreements now under negotiation or awaiting ratification. “Mega-regional” free trade agreements have the potential to greatly affect international trade as they are intended to eliminate tariffs and reduce non-tariff barriers, as well as reduce or eliminate barriers to services trade, among countries that are already deeply integrated into global value chains. It was estimated that (i) if ever ratified the Trans-Pacific Partnership (TPP) would have affected more than a quarter of world goods and services trade, and (ii) the Trans-Atlantic Trade and Investment Partnership (TTIP) could affect more than 40% of such trade.⁷⁰Likewise, the Regional Comprehensive Economic Partnership agreement (RCEP), which would bring together the members of the Association of Southeast Asian Nations (ASEAN)⁷¹and the six countries with which ASEAN has free trade agreements,⁷²would profoundly affect regional trade in East and Southeast Asia. Free Trade Agreements are discussed in Chapter Two.

Businesses from countries that are in the process of negotiating or ratifying one or more mega-regional agreements should factor in the economic implications of such agreements on their business activities. In some cases, mega-regional agreements will make it easier to enter business relationship with companies active in countries that have ratified the same agreement. However, as a result of complex rules of origin, they may also serve to provide a layer of protection from competitors outside a particular mega-regional agreement.

Mega-regional agreements are expected to contain provisions dealing with non-tariff barriers, in particular TBT and SPS regulations. At the time of writing (April 2017) the future of TPP was very much in doubt. The United States had withdrawn from the Agreement and it was unclear whether the other eleven signatories would proceed without the United States. Nevertheless, TPP provides a good example of how megaregional agreements are likely to treat SPS and TBT measures, as it reflects the most up-to-date thinking and may be a good model for future RTAs. The SPS and TBT obligations in the TPP, sometimes referred to as “SPS+” and “TBT+”, go beyond those set forth in the WTO SPS and TBT Agreements.

4.1 The Trans-Pacific Partnership’s SPS Provisions

The TPP contains a specific SPS chapter. It provides that SPS measures that exceed international standards must be based on documented and objective scientific evidence rationally related to the particular SPS measure. TPP also requires that measures taken to manage SPS risks (“risk management”) be the least trade restrictive measure reasonably available to reach the desired level of SPS protection.⁷³This may serve to limit excessive SPS responses to minimal SPS risks.

To the extent feasible, TPP focuses in large part on equivalence – both productspecific equivalence, and also equivalence on a system-wide basis (for example use of accredited laboratories). The goal is to prevent parties from relying on small differences that would prevent a party’s recognition that a SPS measure or an SPS system is equivalent. TPP also tries to accelerate the import inspection process and[Page112:]requires prompt justification of rejections – which can be critical when agricultural products are traded.

TPP also curbs potential abuse of the precautionary approach provided for in Article 5.7 of the SPS Agreement by requiring that precautionary measures be reviewed within six months, instead of the reasonable period of time specified in Article 5.7.

TPP also seeks to limit a party’s ability to restrict trade in animal and animal products by setting forth strict disciplines that are applicable to the veterinary certificates used for trade in such products.

With respect to pest-free and disease-free zones, TPP requires greater respect for regional and local conditions than that set forth in the WTO SPS Agreement. It favours trade from “compartments” (zones) with high levels of bio-security. An importing party must provide a rationale when it refuses to recognise a “compartment” as disease or pest-free.

Similar transparency requirements are required for risk assessments. In order to prevent abuse by an importing country, the importing country must upon request state whether it has conducted a risk assessment and provide supporting data. The exporting country has a right to review and comment on the data and seek an explanation of the data’s relevance. The TPP also provides for science-based audit procedures whereby an importing country can audit the practices of the exporting country. The audit can include an assessment of a country’s SPS system, as well as the practices of the competent authorities. TPP specifically authorises on-site inspections.

Finally, TPP establishes a Cooperative Technical Consultation (CTC) mechanism that parties must utilise before resorting to the TPP’s formal dispute settlement system.

4.2 The Trans-Pacific Partnership’s TBT Provisions

TPP also contains a separate chapter that deals with TBT provisions. TPP largely builds on existing WTO TBT disciplines, in particular in the area of conformity assessment (testing). For example, parties are required to accord national treatment to recognised conformity assessment bodies outside their territory and to recognise their testing results. The goal is to avoid duplicative testing (both within and outside the importing state). The TPP also prohibits members from requiring that a conformity assessment body be located within the territory of the importing party – in other words it anticipates that testing will be undertaken in the exporting country and the results recognised by the importing country.

As with the SPS chapter of TPP, the TBT chapter mandates transparency. It requires public consultations before new TBT measures are adopted. This allows both businesses and consumers (“stakeholders”) time to comment on draft measures. In most cases, TPP also requires a six-month waiting period between publication and entry into force of new TBT measures so that the business community has time to adapt its products.

TPP parties are also required to make regulatory decisions public. This includes disclosure of the criteria employed by a conformity assessment body when it refuses to recognise the decision of a foreign body.

TPP limits the fees assessed for conformity assessment to the cost of the service provided. It also provides for increased protection of proprietary information in the processed food sector. In general, all information disclosure requirements are limited to what is necessary to achieve a legitimate objective.

Finally the TBT chapter of the TPP Agreement includes a series of sectoral annexes that business should consult, assuming ratification, if operating in a covered sector.

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TPP TBT ANNEXES⁷⁴

The TPP Agreement contains the following important TBT Annexes that could affect specific business sectors:

• Wine and Distilled Spirits
• Information and Communications Technology Products
• Pharmaceuticals
• Cosmetics
• Medical Device
• Proprietary Formulas for Pre-packaged Foods and Food Additives
• Organic Products

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