New Zealand Yearbook of International Law
Multiple international conventions and declarations have acknowledged the link between development and the respect of basic human and labour rights, of the environment, and of the principles of governance. The failure to honour these basic standards, which are specified in various international conventions, entails particular problems for developing countries. It is therefore appropriate to address these special development needs positively through granting additional GSP [generalised system of preferences] preferences to those developing countries which have taken on board the major international conventions in these areas.
The Appellate Body of the World Trade Organisation (WTO) issued its report European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries (EC – Preferences) on 7 April 2004. In its report, the Appellate Body found that the European Union (EU) had not met all the requirements of applicable WTO rules on non-discrimination when providing preferential tariff treatment to goods originating in developing countries. As a consequence of the Appellate Body’s findings, the EU adopted a new tariff preferences scheme on 27 June 2005. Under the EU’s new scheme, exporters from developing countries that ratify and implement international conventions related to sustainable development are entitled to export a range of goods into the EU tariff-free. Exporters from developing countries that do not meet the EU’s sustainable development conditions are only entitled to benefit from a reduced tariff when exporting those same goods into the EU.
This Note reviews the Appellate Body’s decision in EC – Preferences, and the implementation of the decision by the EU. It begins with an overview of the ‘generalised system of preferences’ (GSP), under which developed countries are encouraged to offer tariff preferences to developing countries. It then reviews the EU’s GSP policy on sustainable development, the features of its GSP scheme challenged by India in EC – Preferences, the Appellate Body’s determination of India’s claim and the reforms adopted by the EU to meet the Appellate Body’s requirements for non-discrimination in GSP schemes. It concludes by commenting on some of the issues raised by the EU’s revised scheme. This Note does not review all of the issues associated with GSP schemes. Instead, its focus is on the particular issues raised by the EU’s policy of promoting sustainable development under its GSP scheme, in view of the Appellate Body’s recent decision and the EU’s adoption of a revised GSP scheme in response.
The United Nations Conference on Trade and Development (UNCTAD) approved the creation of the GSP in 1968, and through the GSP, developed countries agreed to provide voluntary preferential tariff treatment to products imported from developing countries. The wide adoption of preferential tariff schemes by developed countries has been promoted since the early 1960s, within UNCTAD in particular, as one strategy to overcome the problems associated with the application of the most favoured nation (“MFN”) rule in denying developing countries adequate access to the profitable markets of developed countries. Improved market access is intended to increase the returns received by developing countries from their exports, promote industrialisation and stimulate growth and development within their economies. Fifteen countries and the EU have notified GSP schemes to the UNCTAD Secretariat. The overall impact of these schemes is difficult to assess, since there is only limited recent data available. Nonetheless, while developed countries continue to apply high MFN tariff rates and provide high levels of domestic support to products of export interest to developing countries, developing countries will continue to rely on the preferential treatment conferred under the schemes.
Because tariff preferences contravene the MFN rule in article I(1) of the General Agreement on Tariffs and Trade (GATT), the GATT Contracting Parties needed to formally authorise the adoption of GSP schemes by their developed country membership. Authorisation was first granted in 1971, when the Contracting Parties agreed to waive the application of article I for a period of ten years to permit preferential tariff treatment of products originating in developing countries and territories. The waiver was formalised in 1979 when the Contracting Parties adopted the Enabling Clause at the end of the Tokyo round of GATT negotiations, which permanently authorised and encouraged the granting of the tariff preferences described in the 1971 waiver.
As a decision of the Contracting Parties, the Enabling Clause became part of the WTO under the provisions of Paragraph 1(b)(iv) of the GATT 1994, and continues to form the legal basis by which developed country members of the WTO may confer tariff preferences to developing countries. (Developing countries may grant preferences to least developed nations under a separate Decision.) The Enabling Clause is regarded as an example of the special and differential treatment accorded to developing countries within the WTO.
The EU was the first to take advantage of the 1971 waiver and implement a GSP scheme. It has been revised several times, and more than 170 developing countries and territories now benefit from tariff preferences granted under the EU’s scheme. The EU has said that its scheme provides greater preferential market access than the GSP schemes of the United States, Japan and Canada combined. The EU also assessed that in 2002, GSP tariff preferences were conferred on goods valued at EUR 53 billion (or 5.6% of the value of all EU imports in that year), at a cost of EUR 2.2 billion in uncollected customs revenues. The European Trade Commissioner recently described the scheme as its “single most important trade tool for development”.
Over the last decade, the EU has linked its GSP policy to its policies on sustainable development by including in its GSP scheme various conditions related to sustainable development, and by requiring developing countries to comply with these conditions in order to be eligible for additional tariff preferences. For the most part these conditions have related to the promotion of labour and environmental standards. Promoting social issues wherever possible in its trade relations has been a priority of the EU at least since 1992, reflecting its view that economic and social progress should go hand in hand. For example, the EU has insisted upon including respect for democratic principles, human rights and the rule of law as essential ingredients in bilateral and regional agreements that the EU concludes. Its use of sustainable development conditionality in its GSP scheme can be seen as another application of this policy, in that third countries will only get the full benefits of dealing with the EU if they agree to meet the EU’s sustainable development concerns.
Granting additional preferences on a conditional basis was a key feature of the EU’s GSP scheme established in 2001. The 2001 scheme included several categories of preferences. Products designated as ‘non-sensitive’ enjoyed tariff-free entry into the EU, while ‘sensitive’ products benefited from a 3.5% reduction in the MFN tariff rate. In addition to these general tariff preferences, developing countries were entitled to apply for additional preferences on the basis of compliance with conditions relating to environmental standards (for exports of tropical timber products) and labour standards (for all products exported to the EU).
A further special preferences entitlement was also established to benefit developing countries engaged in efforts to combat drug production and trafficking, and was intended to provide those countries with export opportunities for substitute crops. These arrangements differed from the labour and environment conditions, as the preferences were only available to countries selected by the EU – there was no procedure for developing countries to apply to be included as a beneficiary on the basis of compliance with any EU anti-drugs requirements. The 12 countries listed in the EU’s GSP Regulation as beneficiaries of the anti-drugs arrangements enjoyed a complete suspension of tariffs on eligible products. Finally, products other than arms and munitions from least developed countries were entitled to tariff-free entry under the EU’s “Everything But Arms” initiative, although implementation of this initiative for certain products such as sugar was delayed.
The Appellate Body’s decision in EC – Preferences arose from a challenge by India to the operation of the EU’s 2001 GSP scheme, and the EU’s appeal against the decision of the panel established to hear India’s claim at first instance. The key issues in the case were whether tariff preferences under a GSP scheme were required by the terms of the Enabling Clause to be granted on a non-discriminatory basis, and if yes, whether the EU’s special preferences for countries engaged in efforts to combat drug production and trafficking were in fact discriminatory, in breach of the Enabling Clause (as argued by India).
India’s complaint initially covered the preferences for compliance with the EU’s labour and environment conditions. India then confined its case to the anti-drugs arrangements, which it claimed created “undue difficulties for India’s exports” to the EU. It was not simply having to pay MFN or reduced tariff rates that concerned India (depending on whether or not any preferential tariff applied under the general GSP scheme) as much as the disadvantages caused to Indian exporters from the duty free treatment accorded to exports from Pakistan, since Pakistan had been selected to benefit under the anti-drugs regime. The Indian clothing sector was particularly affected. According to India’s Ministry of Commerce and Industry, India considered the special preferences under the EU’s 2001 scheme to be inconsistent with WTO rules, but only launched its challenge when Pakistan became entitled to receive them. At that stage, Pakistani clothing exports to the EU benefited from a further 9.6% reduction on the applicable tariff, and trade flows from India in this sector experienced a sudden and direct downwards impact.
The inclusion of Pakistan and the exclusion of India demonstrates the trade diversionary effect of GSP conditionality and selective schemes, and the impact of differentiation in the allocation of GSP preferences between developing countries on the competitiveness of products from developing country recipients in comparison with non-recipients. The submissions of third party countries and the sides taken by them in the proceedings, which are discussed further below, also reflect these issues.
Despite the significance that countries have attached to GSP schemes, the precise legal status of the Enabling Clause has been the subject of considerable doubt. One view has been that the Enabling Clause operates as a waiver or an exception to the MFN rule in article I(1) of the GATT. Another view is that the Enabling Clause reflects permanent WTO policy on special and different treatment for developing countries, and does not have the temporary or exceptional character of a waiver or exception. The Appellate Body resolved this uncertainty in EC – Preferences when it decided, principally on the basis of the phrase “notwithstanding the provisions of Article I” appearing in the text of the Enabling Clause, that the Enabling Clause does indeed operate as an exception to MFN. The meaning of ‘notwithstanding’ could have been interpreted as creating a right independent to the MFN obligation, that is, a right of developed countries to grant tariff preferences to developed countries, notwithstanding the existence of an MFN rule in the GATT. The use of the word ‘notwithstanding’ was necessary to clarify the relationship between the Enabling Clause and the MFN rule, but that relationship need not necessarily have been one of rule and exception.
As a consequence of the Appellate Body’s finding on this point, the EC had the burden of proving that its GSP scheme complied with the requirements of the Enabling Clause as a defence to the MFN violation. India had the expected burden of pointing to an inconsistency with the MFN rule (which will always be clear in every case involving tariff preferences). India also had the burden of identifying the relevant requirement of the Enabling Clause that it considered had not been complied with. In other words, in its complaint, India had to have raised the issue of MFN violation, as well as non-compliance by the EU with its defence to that violation. In other cases of rule and exception, only the defendant country has the burden of raising an exception as a defence (for example, article XX GATT). There now appears to be a confusing scheme of two types of WTO exceptions, which as Joost Pauwelyn has noted, gives the impression that some (such as the Enabling Clause) are more important than others. This impression is misleading since with both types of exception, the defendant country has the substantive burden of proving that the terms of the exception have been met.
In the Appellate Body’s view, characterising the Enabling Clause as an exception to MFN (with the accompanying burden of proof) would not discourage developed countries from granting tariff preferences in reliance upon it. This may be so, but the Appellate Body may also have given developing countries greater incentive to challenge GSP schemes – especially where the scheme includes contentious features such as the non-trade conditions under the EU’s new GSP scheme discussed below. While historically beneficiary countries have been reluctant to challenge a GSP scheme from which they benefit, recent experience suggests a challenge is now more likely where a developing country considers that the operation of a GSP scheme denies the country a benefit it is lawfully entitled to.
The EU urged the Appellate Body not to treat the Enabling Clause as an exception to MFN, and argued that it embodied the most important application of the principle of special and differential treatment to support its case. The consequent characterisation of the Enabling Clause as an exception is, however, more consistent with the EU’s own recent efforts at encouraging a shift from ongoing support and special treatment for developing countries towards greater reciprocity in its trade relationships based on a progressive integration of developing countries into the world economy.
India claimed that the additional preferences under the EU’s special anti-drugs arrangements discriminated against beneficiaries of the 2001 scheme that were not selected to receive them, and that such discrimination was inconsistent with the requirements of the Enabling Clause. Paraguay, a third party to the case that had not been selected to receive the additional preferences, presented similar arguments to India, and also urged the Appellate Body to find that all tariff preferences pursuant to the Enabling Clause must apply to all developing countries.
All parties accepted that the operative provisions of the Enabling Clause do not expressly require preferences to be granted on a non-discriminatory basis. India submitted that the Enabling Clause did nevertheless impose a non-discrimination obligation on preference-giving countries, and relied upon a footnote to paragraph 2(a) of the Enabling Clause in support of its argument. When read together, paragraph 2(a) and its footnote authorise:
Preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences” “as described in the Decision of … 25 June 1971 relating to the establishment of… generalized, non reciprocal and non discriminatory preferences.
India argued that the footnote could not be ignored, since developing countries had not relinquished their rights to be treated equally amongst themselves. It further argued that its interpretation was consistent with the object, purpose and drafting history of the Enabling Clause.
The EU argued that the footnote merely referred to a description of the GSP under the 1971 waiver but did not, of itself, impose any legal obligation on preference-giving countries. The United States in its third participant’s submission also questioned India’s reliance upon the footnote. Its submission was predictable, given that the United States also has a long standing practice of including conditions in its GSP scheme and had a strong interest in an outcome that would allow it to continue doing so – at best one that rejected any requirement of non-discrimination.
Bolivia, Colombia, Ecuador, Peru and Venezuela (together, the “Andean Community”) were all beneficiaries of the anti-drugs arrangements and also presented a third party submission to the Appellate Body. In its submission, the Andean Community argued that the historical context and preparatory work for the Enabling Clause had an aspirational tone that did not support “non-discriminatory” in the footnote of the Enabling Clause as having any binding effect. It could be said in support of the Andean Community view that if the Contracting Parties had intended preferences to be granted on a non-discriminatory basis, an express provision to this effect would have been included in the main body of the Enabling Clause text. According to Robert Howse (noting the submission of the Andean Community and the negotiating history of the 1971 waiver and the Enabling Clause), the omission was deliberate, and reflects a history of disagreement between the Contracting Parties on the issue of non-discrimination.
In its report, the Appellate Body upheld the panel’s decision on this aspect of the case and confirmed that GSP schemes must be generalised, non-reciprocal and non-discriminatory to qualify for exemption under the Enabling Clause. Noting that paragraph 2(a) of the Enabling Clause requires tariff preferences to be “in accordance” with the GSP as “described” in the 1971 waiver, the Appellate Body referred to the Oxford dictionary’s definition of “accordance”. Since “accordance” was defined as meaning “conformity”, the Appellate Body held that only preferential tariff treatment that is in conformity with the description “generalized, non reciprocal and non discriminatory” would be justified under paragraph 2(a). The Appellate Body also referred to the stronger language of the French and Spanish versions of the text (which use the equivalent of “define” instead of “describe”) to support its finding. Surprisingly the Appellate Body did not discuss the different views regarding the history of the reference to non-discrimination in the footnote, nor subsequent state practice, to determine whether these other versions should be relied on in this way. The Appellate Body has in past opinions referred to the interpretation criteria set out in the Vienna Convention, and adopted a more purposive approach to interpretation of WTO obligations. It would have given members a greater appreciation of the requirement for non-discrimination in GSP schemes (and promoted the predictability of WTO jurisprudence) had the Appellate Body done the same in this case.
In any event the Appellate Body did discuss the meaning of non-discrimination in the context of GSP schemes, and was guided in its discussion by the other provisions of the Enabling Clause, in particular paragraph 3(c). Given the many possible meanings of non-discrimination, the Appellate Body could have applied a strict requirement on preference-giving countries to treat all developing countries the same. This would exclude the possibility of developed countries including any conditions in their GSP schemes, since at a basic level conditions lead to discrimination between those developing countries that comply with them and those that do not.
Instead, the Appellate Body took a broader view of non-discrimination and held that only distinctions between “similarly situated” developing countries would be discriminatory. For this purpose, countries with the same development, financial and trade needs to which the GSP scheme is intended to respond would be similarly situated. According to the Appellate Body, the aims of the Enabling Clause do not require preference-giving countries to grant identical preferences to all developing countries:
We are of the view that the objective of improving developing countries’ “share in the growth in international trade”, and their “trade and export earnings”, can be fulfilled by promoting preferential policies aimed at those interests that developing countries have in common, as well as those interests shared by sub-categories of developing countries based on their particular needs [emphasis in original].
The Appellate Body explained that the required development, financial or trade need must be assessed according to objective standards, such as widely recognised standards included in international instruments. Identification by the preference- giving or receiving country on the basis of their own criteria will be insufficient. In addition, tariff preferences must respond positively to the identified need, such that the need at issue must be capable of being addressed effectively by tariff preferences. Accordingly, non-trade conditions that differentiate between developing countries in determining eligibility for tariff preferences will not necessarily “discriminate”, provided they relate solely to a qualifying need, and all developing countries who share that need receive the relevant preferences.
On the facts of the case, the EU failed to discharge its burden that the special tariff preferences scheme for combating drugs production complied with the Enabling Clause. The Appellate Body held that the special anti-drugs arrangements were discriminatory, since they were only available to developing countries chosen by the EU, and the criteria for including countries similarly affected by the drug problem, or for removing countries no longer affected by the problem or for whom the arrangements have had no positive effect, lacked transparency and objectivity. One commentator described the EU’s anti-drugs arrangements as being “as far away from the meaning of ‘non-discriminatory’ as can possibly be imagined”.
There are various reasons, derived from the text of the Enabling Clause, that would have supported a narrower interpretation of non-discrimination. The Appellate Body arrived at its interpretation by first applying the footnote to paragraph 2(a) to import the obligation of non-discrimination, and then by applying paragraph 3(c), which requires preferences under paragraph 2 to respond to development needs, as relevant context to give meaning to non-discrimination – awkward drafting, if this is what was originally intended. Paragraph 3 does not expressly refer to particular or sub-categories of needs. In contrast, paragraphs 6 to 8 oblige the Contracting Parties to take into account the special economic situation of the least developing countries. Despite these indications from the text to the contrary, the Appellate Body seemed to rely on an absence of any similar express positive obligation on developed countries in paragraph 3 to respond to the needs of developing countries collectively to justify its interpretation. Another footnote, which applies to the whole of paragraph 2, reads:
It would remain open for the CONTRACTING PARTIES to consider on an ad hoc basis under the GATT provisions for joint action any proposals for differential and more favourable treatment not falling within the scope of this paragraph.
This reminds the Contracting Parties of the GATT procedure that may be used by developed countries to request a waiver from the other WTO members in respect of any special scheme for a particular group of developing countries, whether that group is selected on the basis of a development need or some other criteria.
Following the Appellate Body’s findings in EC – Preferences, the EU revised its GSP scheme to remove the subjective selection criteria held to contravene the Enabling Clause. It adopted a new GSP scheme on 27 June 2005 that entered into full operation on 1 January 2006. Although the EU was only required to bring the special preferences under the anti-drug arrangements into conformity with its WTO obligations, these arrangements as well as the special preferences tied to labour and environmental conditions were removed as part of the EU’s scheduled reform of its scheme as a whole.
The new scheme continues to comprise a system of general preferences, available to all countries designated as developing countries. It maintains duty free access for non-sensitive products, a reduced tariff for sensitive products and duty free access for least developing countries under the EU’s “Everything But Arms” programme. The EU has expanded product coverage under the new scheme to provide greater market access, especially in the agriculture and fisheries sectors. As a result, trade flows from developing countries into the EU are expected to increase under the new scheme.
The revised scheme also continues to include special preferences under a new incentive system, intended to promote sustainable development, called “GSP Plus”. GSP Plus came into effect on 1 July 2005. It has been expressly tailored to satisfy the Appellate Body’s requirements that any differentiation between developing countries (which includes the application of non-trade related conditions) be based on objective criteria, and promote development needs. In its policy briefs released with an earlier draft of the new scheme, the EU emphasised its belief that the failure by developing countries to comply with basic international human rights and environmental standards gives rise to particular development needs of those countries, and that the granting of additional preferences can be used to respond positively to them. It stated:
Multiple international conventions and declarations have acknowledged the link between development and the respect of basic human and labour rights, of the environment, and of the principles of governance. The failure to honour these basic standards, which are specified in various international conventions, entails particular problems for developing countries. It is therefore appropriate to address these special development needs positively through granting additional GSP preferences to those developing countries which have taken on board the major international conventions in these areas.
In other words, the EU treats non-agreement to various international standards as a form of development need. The EU has decided to respond to that need under GSP Plus by rewarding developing countries with additional preferences, if they comply with these standards. The EU has identified a set of international conventions related to basic human rights, workers’ rights and protection of the environment that embody these standards. A full list of these conventions is set out in the Annex to this Note. All the conventions listed in part A must be “ratified and effectively implemented” at the time of application, and 7 of the 11 conventions in part B must be ratified and effectively implemented on application (all must be ratified and implemented by 2009). All developing countries that meet these conditions will be able to export goods entitled to preferential treatment into the EU tariff-free. By contrast, under the general preferences system, less than half of the product lines entitled to preferential treatment will be given tariff-free access. The EU has stressed that, in its view, the conditions that apply under GSP Plus relate only to promoting sustainable development. Conditions with overtly political objectives unrelated to promoting development, such as those forming part of the United States’ GSP scheme, have not been included.
The EU’s revised GSP scheme also includes trade-related conditions, such as limits on the total market share and diversification rates of eligible export products, which are intended to ensure the benefits of the scheme are targeted at the most vulnerable countries and their most vulnerable goods. These conditions proved to be politically contentious, and debates on them contributed to the delay in the adoption of the new scheme (large exporters such as India and China will lose benefits as a result of their implementation). These kinds of condition are generally dealt with under the separate topic of graduation. Since they do not raise the same issues as non-trade related conditions, they are not specifically discussed further here.
Despite the EU’s unsuccessful defence on the narrow facts of the case, it appeared to be satisfied with the overall outcome in EC – Preferences. The EU welcomed the report as it was presented to the WTO’s Disputes Settlement Body for adoption, and said that it was particularly satisfied with the Appellate Body’s interpretation of non-discrimination that enables preference-giving countries to differentiate between GSP beneficiaries. In reacting positively to the decision, the then EU Trade Commissioner Pascal Lamy noted that it “makes it clear that we can continue to give trade preferences to developing countries according to their particular situation and needs, provided this is done in an objective, non-discriminatory and transparent manner”. Thus supported by EC – Preferences, GSP Plus continues the EU’s longstanding policy of using trade mechanisms to pursue broader social and development objectives, by extending special tariff preferences to the sub-group of developing countries that meets its sustainable development conditions.
The EU’s focus on sustainable development as a development need under its new GSP scheme can find some justification in the broadening perceptions of development. When the GSP was first promoted in the 1960s, the international community generally considered development to mean economic progress that could be achieved through an increase in production. A wider understanding of development has evolved since that time, and many states now include within the notion of development respect for human rights and protection of the environment, recognising that development cannot be achieved solely through increasing the exports of developing countries. WTO members have recognised this by stating in the preamble to the WTO Agreement that the purposes of the organisation include the expansion of trade in accordance with the objective of sustainable development. Sustainable development is also a global concern, since the ways in which developing countries choose to develop can have an impact on the environment at a global level. The EU could be seen as sharing some responsibility for sustainable development through its GSP scheme, by rewarding countries that accept the costs of developing sustainably with additional tariff preferences and by reducing its tariff income from these countries.
Another popular argument in favour of extending additional tariff preferences to developing countries that comply with conditions such as the GSP Plus conventions is that compliant countries should be treated more favourably than countries that do not develop sustainably. Taking human rights as an example of a requirement of sustainable development, countries that respect human rights should be rewarded with more favourable preferential tariff treatment than countries that commit violations of human rights, and one of the measures that ought to be available to developed countries to respond to such violations is the withdrawal of preferential tariff treatment. Multilateral determination of the violation adds legitimacy to any such response. In this respect, it is noted that under GSP Plus, withdrawal of preferences must be based on a conclusion of the monitoring body of the relevant convention that the beneficiary country has engaged in serious and systematic violation of the principles laid down in the convention.
On the other hand, there are also a number of concerns raised by the EU’s use of the GSP system to promote sustainable development goals, and the Appellate Body’s decision in EC – Preferences that permits such use. Even though trade preferences are voluntarily granted, differentiation between developing countries in their allocation should still be subject to control. India’s argument that developing countries never gave up their MFN rights as between themselves (meaning developing countries should be treated the same) is not backed up by the participation and arguments of developing countries that supported the EU’s case in EC – Preferences (above). However, at least in the WTO context, Gerhart and Keller have argued that the long term stability of the organisation will depend on ensuring that all members continue to believe that the benefits of belonging outweigh the costs. Currently, one of the most important benefits for developing countries accepting the rules and commitments of WTO membership is the special and differential treatment afforded to them while they remain a developing country, of which the Enabling Clause is a key feature. This benefit dissipates for developing countries adversely affected by differential tariff preferences allocations in the ways highlighted by India’s challenge to the EU’s 2001 scheme.
Overall, the Appellate Body’s decision in EC – Preferences recognises the importance of tariff preferences to developing countries. It also seeks to impose substantive limits on the ability of developed countries to differentiate between GSP beneficiaries, by ruling that differentiation will only be justifiable between countries that have dissimilar development needs, and also by imposing the burden of proving that the requirements of the Enabling Clause have been met upon preference-giving countries (above). However, there is also ambiguity in the extent of differentiation permitted by the Appellate Body, and the EU’s GSP Plus illustrates how loosely controlled developed countries are in their ability to differentiate under their GSP schemes. To begin with, in the absence of universally agreed development priorities, it will be the preference-giving country that subjectively decides which development needs it will respond to, and which it will ignore. It is also readily apparent that in many cases it will be uncertain whether international instruments (recommended by the Appellate Body as the basis for differentiation), will provide objective standards, since it is unclear from the Appellate Body’s decision what level of wide recognition will be sufficient for a standard to have the necessary objectivity. Further, it is unclear whether the jurisdiction of the WTO dispute settlement bodies under clause 3.2 of the Understanding on the Rules and Procedures Governing the Settlement of Disputes (DSU) to clarify the scope of WTO rights and obligations extends to adjudicating on issues concerning the status of non-WTO instruments in any challenge to differentiation under a GSP scheme.
The EU justified its selection of conventions for GSP Plus as follows:
The 16 conventions on human and labour rights have been selected as they incorporate universal standards and reflect rules of customary international law and they form the core basis of the concept of sustainable development. The remaining conventions reflect basic global standards aiming at the effective implementation of policies geared to sustainable development [emphasis added].
The exclusion of developing countries that have not ratified the conventions that reflect “universal standards” of customary international law from GSP Plus will not necessarily unfairly disadvantage them. This is because rules of customary international law are binding on all states, so all the EU requires as a condition for the grant of additional preferences is that developing countries comply with laws by which all countries are already bound. But whether a particular convention embodies customary international law will not always be clear, and the EU’s assertion that the first 16 in its list have attained the status of binding rules of customary international law could be seen as reflecting only its analysis of them. In addition, the conventions go further than any customary norms that do exist, in that they establish enforcement and monitoring regimes that bind only those states that ratify them. Even Trebilcock and Howse, who support linking trade policy with core labour standards, admit that the scope and definition of the class of human rights that can be viewed as sufficiently universal is “problematic”.
The conventions which merely reflect, according to the EU, “basic global standards” are even more problematic. They may promote sustainable development in a general sense, but it is open to question whether conventions that other major developed countries, notably the United States, have so far refused to ratify are “widely recognised”. In some cases, there will be little reason for developing countries not to adhere to the standards established by them. However, compliance with all of the standards identified by the EU is unlikely to be a development priority for every vulnerable developing country that wishes to participate in GSP Plus, in which case the benefits of compliance are unlikely to be immediately apparent.
A further problem with differentiation on the basis of compliance with sustainable development conditions is that, as the EU acknowledges, there is currently no consensus for a discussion on the interaction between trade and sustainable development issues within the WTO. Labour and environmental issues have been particularly contentious. Generally speaking, developing countries reject trade actions that support labour standards on the basis that lower production costs resulting from lower labour standards are a legitimate comparative advantage, and also that developed country concerns are both paternalistic and protectionist.
WTO members decided at the 1996 Singapore Ministerial Conference that issues related to labour standards should be resolved within the International Labour Organisation. Likewise the WTO’s Trade and Environment Committee considers that the most effective way to deal with environmental concerns is through environmental agreements. Where there is a lack of international agreement on a labour or environmental standard, provided the standard is sufficiently “widely recognised” (which is an uncertain standard, as discussed above), it appears that the EU is able to resort to its GSP scheme to compel agreement by developing countries that wish to benefit from additional preferences under the scheme. There is nothing in the text or history leading to the adoption of the Enabling Clause to suggest that this is what the Enabling Clause was designed to encourage. The subsequent use of the Enabling Clause for this purpose was not addressed, or even acknowledged, by the Appellate Body in its interpretation of non-discrimination.
Another concern relates to the potential for de facto discrimination. It is recalled that allocations of tariff preferences must not differentiate between similarly situated countries, and that the Appellate Body defined similarly situated countries as those with the same development, financial and trade needs. The question arises whether this meaning of “needs” requires preference-giving countries to take into account the capacity of developing countries to develop, which includes the capacity to absorb the costs associated with implementing new rules such as those under the conventions identified by the EU in GSP Plus. Lorand Bartels has suggested that countries may only be similarly situated if they have the same technical and economic capacity to meet a particular development need, but this point was not adopted as part of the Appellate Body’s findings in the EC – Preferences report.
There is very little in GSP policy documents released by the EU to indicate that the capacity to develop and respond to the EU’s GSP Plus conditions was taken into account when formulating the GSP Plus scheme, apart from the EU’s view that additional tariff preferences would positively respond to the needs of the recipients. It seems possible then that de facto discrimination may occur in favour of those developing countries that have a greater capacity to implement the requirements of the GSP Plus conventions. A GSP scheme could include the provision of assistance to support implementation of the relevant conventions. For example, investment in new technologies may help reduce the costs of complying with higher environmental standards. In fairness to the EU, it does have several capacity building programmes in place, but it does not see them as fulfilling any legal prerequisite to the offering of conditional tariff preferences under GSP Plus.
The conventions identified by the EU for the purposes of determining GSP Plus eligibility reflect its values and views of sustainable development. The EU’s desire to maintain its values in its trading relationships may well be genuine, is not new, and raises the wider issue of how non-economic concerns should be accommodated within the WTO. However, the Enabling Clause is a troubled means for pursuing values in trade relations, since it only allows developed countries to unilaterally address what they consider to be failures by developing countries. The absence of a broader values-based exceptions provision in WTO agreements, and the continued use of the GSP for pursuing non-trade objectives, may also have an impact on the ongoing trade negotiations more generally:
By failing to respond to the demand for a social clause within the WTO, the Organization has simply created an incentive for developed countries to make fewer offers for tariff cuts on an MFN basis in future rounds of negotiations (especially on products of interest to developing countries), so as to preserve the impact that comes with being able to grant – and withdraw – GSP treatment.
Clearer direction from the Appellate Body in EC – Preferences as to what constitutes a development “need” and a “positive response” to different developing needs may have moderated the outcomes described above. Or the Appellate Body could simply have relied on the text of the Enabling Clause to support a narrower interpretation of non-discrimination. Perhaps instead the Appellate Body was more concerned with allowing developed countries to use their schemes to link trade with their values and development policies, to ensure that they continue to offer as many benefits as possible under their GSP schemes – the possibility of the EU limiting its tariff preferences seemed to be a real one when EU officials warned that the original panel’s findings on non-discrimination, if upheld by the Appellate Body, could jeopardise its programme of special preferences. In its interpretation of the Enabling Clause, the Appellate Body had the difficult task of recognising the strong domestic pressure from within the EU to promote social causes and not to deal with undemocratic regimes. At the same time, it was faced with the sometimes competing systemic WTO issues, legal text and issues of immense importance to development. Gerhart and Keller described the Appellate Body’s role both in the case and in the WTO more generally as “an institutional gyroscope, one that provides balance in a system that, if unbalanced, could fall apart”.
Following its long dispute with India, the EU has produced a revised GSP policy that approaches the granting of tariff preferences in a more impartial and transparent way than its predecessor scheme. The EU has identified sustainable development and related concerns as development needs of developing countries, and identified multilateral conventions as the base criteria according to which the EU will grant additional tariff preferences to respond to them. However, it is also apparent that the EU’s assurances that it has followed the Appellate Body’s decision in EC – Preferences closely will be of little comfort to many of its GSP beneficiary countries. The Appellate Body’s decision is supportive of the EU using its GSP scheme to promote its development policy since it allows the EU, in pursuing its policy, to continue to differentiate between developing countries on a conditional-rewards basis and impose the burden of compliance with its conditions on them. Potential developing country beneficiaries will have the choice of compliance and its associated costs, or risking trade diversion and competitive disadvantage. The GSP has been the focus of much renewed attention, and so long as aspects of conditionality remain untested and groups of developing countries are deemed ineligible for special preferences, this is likely to continue.
1. International Covenant on Civil and Political Rights
2. International Covenant on Economic Social and Cultural Rights
3. International Convention on the Elimination of All Forms of Racial Discrimination
4. Convention on the Elimination of All Forms of Discrimination Against Women
5. Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment
6. Convention on the Rights of the Child
7. Convention on the Prevention and Punishment of the Crime of Genocide
8. Minimum Age for Admission to Employment
9. Prohibition and Immediate Action for the Elimination of the Worst Forms of Child Labour
10. Abolition of Forced Labour Convention
11. Forced Compulsory Labour Convention
12. Equal Remuneration of Men and Women Workers for Work of Equal Value Convention
13. Discrimination in Respect of Employment and Occupation Convention
14. Freedom of Association and Protection of the Right to Organise Convention
15. Application of the Principles of the Right to Organise and to Bargain Collectively Convention
16. International Convention on the Suppression and Punishment of the Crime of Apartheid
17. Montreal Protocol on Substances that deplete the Ozone Layer
18. Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal
19. Stockholm Convention on Persistent Organic Pollutants
20. Convention on International Trade in Endangered Species
21. Convention on Biological Diversity
22. Cartagena Protocol on Biosafety
23. Kyoto Protocol to the UN Framework Convention on Climate Change
24. UN Single Convention on Narcotic Drugs
25. UN Convention on Psychotropic Substances
26. UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
27. Mexico UN Convention against Corruption
[∗] Lecturer, Faculty of Law, University of Auckland. On-line sources were checked on 14 September 2005. My thanks to Professor Jane Kelsey and Treasa Dunworth, both of the Faculty of Law, University of Auckland, for their helpful comments on an earlier draft of this Note. Any errors remain my own.
 Commission of the European Communities, Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2004) 461 (final) 10.
 WTO Appellate Body report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted 20 April 2004.
 Preferential tariff treatment and tariff preferences mean the imposition of lower tariff rates upon the import of goods from developing countries entitled to the preferential treatment, as compared to the usual bound rate of tariff imposed on the same goods from all other countries.
 Council Regulation (EC) No 980/2005 of 27 June 2005.
 There are numerous other issues associated with GSP schemes. These include establishing criteria for the graduation of developing countries from schemes, exclusion of products that compete with products from the preference giving country and administrative barriers against effective utilisation of preferences such as complex rules of origin.
 Conference Resolution 21(ii), UNCTAD II (1968).
 MFN requires that any benefit one contracting party grants to another state also be granted unconditionally to like products of all other contracting parties. Other possible market access barriers include, for example, the application of technical requirements.
7 Australia, Belarus, Bulgaria, Canada, the Czech Republic, the EU, Hungary, Japan, New Zealand, Norway, Poland, the Russian Federation, the Slovak Republic, Switzerland, Turkey and the United States. United Nations Conference on Trade and Development, About GSP, online at: <www.unctad.org/Templates/Page.asp?intItemID=2309&lang=1> (last accessed on 15 January 2006).
 In 1999, UNCTAD assessed the 6 largest GSP schemes and reported that in 1997, the total value of imports receiving preferences was approximately US $100 billion, at a cost of US $2 billion in foregone customs revenue (UNCTAD, Quantifying the benefits obtained by Developing Countries from the Generalized System of Preferences (7 October 1999)). More recent data indicates the foregone customs revenue of the EU alone now exceeds EUR 2 billion – see below n17 and accompanying text.
 For a contrary view, see Report by the Consultative Board to the Director General, The Future of the WTO – Addressing Institutional Challenges in the New Millennium (2004), para 99. In the report, the Consultative Board refers to empirical studies which conclude that tariff preferences are of little benefit in promoting development. This is not a widely held view among preference-receiving countries (many of which have economies structured historically around colonial preferences), although it is generally accepted that other strategies are also required to promote and sustain development for the long term.
 Generalized System of Preferences, Decision of 25 June 1971, GATT BISD 18S/24.
2 Formally known as Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, Decision of 28 November 1979, GATT BISD 26S/203.
11 The Enabling Clause was confirmed as falling within paragraph 1(b)(iv) of the GATT in European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries WT/DS246/AB/R, adopted 20 April 2004, para 90.
 Preferential Tariff Treatment for Least Developed Countries, Decision on Waiver adopted 15 June 1999, WTO Document WT/L/304.
 There is some resistance to various forms of special and differential treatment, including the granting of GSP preferences, within the WTO (for example, see Chapter 2 Part E of the Report referred to at n9), suggesting some tension between the expectations of members through UNCTAD and through the WTO respectively with regard to the GSP. Alternatives to the current regime of special and differential treatment are discussed in Bernard Hoekman, ‘Operationalizing the Concept of Policy Space in the WTO: Beyond Special and Differential Treatment’, (2005) 8(2) Journal of Internatonal Economic Law 405.
 European Commission, GSP: The new EU preferential terms of trade for developing countries (press release, 10 February 2005).
18 Commission of the European Communities, ‘Developing Countries, international trade
and sustainable development: the function of the CommunityRs generalised system of preferences (GSP) for the ten-year period from 2006 to 2015’, COM (2004) 461 final, 6-7, online at: <http://europa.eu.int/prelex/detail_dossier_print.cfm?CL=en & DosID=191521> (last accessed on 15 January 2006).
16 Bridges Weekly Trade News Digest, ‘EU Adopts New GSP Scheme’ 9(23) 29 June 2005.
 The EU first attempted to apply labour conditions to tariff preferences in 1978, when it proposed including them in the Lomé Convention. It was unsuccessful due to protest by developing countries. Michael Trebilcock and Robert Howse, ‘Trade Policy and Labour Standards’ (2005) 14 Minnesota Journal of Global Trade 261, 265 (hereafter Trade Policy and Labour Standards)).
 See Commission of the European Communities, Communication from the Commission to the European Parliament, The Council, the European Economic and Social Committee and the Committee of the Regions: The Social Dimension of Globalisation – the EU’s policy contribution on extending the benefits to all, COM (2004) 383 (final).
 Ibid, 10-11.
 The scheme is contained in Council Regulation (EC) No 2501/2001 of 10 December 2001.
 WTO Appellate Body report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted 20 April 2004.
 WTO Panel report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R, adopted 1 December 2003.
7 Request for Consultations by India, WTO Document WT/DS246/1G/L/521, 12 March 2002.
24 Ministry of Commerce and Industry (India), India wins GSP case against EC at the WTO (press release, 2 December 2003).
 The effect may be considered trade diversionary in the sense that Pakistani exporters were able to sell more goods into the EU and Indian exporters less as a result of the difference in preferential treatment accorded to the two countries, even though the Indian goods may have been produced more efficiently.
 Lorand Bartels, The WTO Enabling Clause and Positive Conditionality in the European Community's GSP Program, (2003) 6(2) J. Int’l Econ. L., 507, 516 – 517.
31 See Robert Howse, Indias WTO Challenge to Drug Enforcement Conditions in the EU Generalized System of Preferences, (2003) 4 Chicago Journal of International Law 385, 390.
27 WTO Appellate Body report, EC – Preferences, para 90.
 Other views on this issue have been discussed at length by Howse (above, n 30) and Bartels (above, n 29). Also see Steve Charnovitz and oths, ‘Internet Roundtable: The Appellate Body’s GSP Decision’ (2004) 3(2) World Trade Review, 239 (hereafter, Internet Roundtable).
 WTO Appellate Body report, EC - Preferences, para 113.
 Joost Pauwelyn, Internet Roundtable, above n 32, 257.
 WTO Appellate Body report, EC – Preferences, paras 90, 94, 95 and 98.
 For example, India’s dispute with the EU in EC – Preferences. The relatively large and economically powerful developing countries Thailand and Brazil have also challenged the EU over its GSP scheme (see WTO Document WT/DS/OV/22 (October 2004), 13 and 25). Contributing factors may include the WTO dispute settlement mechanisms introduced in 1995, and increasing competition over trade preferences between developing countries evidenced by disputes such as EC – Preferences and the long-running dispute over the EU’s bananas regime (involving competition between around 70 developing countries from Africa, the Carribean and the Pacific (ACP countries) and non-ACP countries over preferential trade in bananas with the EU).
 WTO Appellate Body report, EC – Preferences, para 93.
The Cotonou Partnership Agreement between the EU and ACP countries is an example of the EU’s efforts to encourage trade liberalisation in developing countries and their integration into the world economy.
 WTO Appellate Body report, EC – Preferences, para 71.
 WTO Appellate Body report, EC – Preferences, paras 45-55.
 WTO Appellate Body report, EC – Preferences, para 146.
 Conditions have been imposed on a much wider basis under the United States scheme. For example, under its Trade Act of 1974, the United States has withheld preferences from countries with communist systems of government or fail to protect intellectual property owned by United States citizens. In light of EC – Preferences, these aspects of the United States scheme are almost certainly beyond the limits of permissible discrimination.
 WTO Appellate Body report, EC – Preferences, para 59.
 Howse, above n 30, 402 (noting the Third Party Submission of the Andean Community and the negotiating history of the 1971 waiver and of the Enabling Clause).
 WTO Appellate Body report, EC – Preferences, paras 145-147.
 Art. 3(2) of the Dispute Settlement Understanding annexed to the WTO Agreement sets out the functions of the dispute settlement system of the WTO. One of these functions is to clarify the provisions of the WTO agreements in accordance with customary rules of interpretation of public international law. These rules include those set out in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (1969). Art. 31(3)(b) states that “any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation” is to be taken into account together with the context in interpreting a treaty provision. Art. 33 provides that each language version of a treaty is equally authoritative, and that the object and purpose of the treaty is to be taken into account in reconciling different versions. See also the comments on this issue by various authors in Internet Roundtable, above n 32.
 WTO Appellate Body report, EC – Preferences, para 153.
 Ibid, para 169.
 Ibid, para 163.
 Ibid, para 164 (applying paragraph 3(c) of the Enabling Clause).
 Ibid, para 184.
 Steve Charnovitz, Internet Roundtable, above n 32, 239.
 WTO Appellate Body report, EC – Preferences, para 159.
 Council Regulation (EC) No 980/2005 of 27 June 2005, Art. 30.
 Commission of the European Communities, GSP: The new EU preferential terms of trade for developing countries (press release, 10 February 2005).
 Council Regulation (EC) No 980/2005 of 27 June 2005, Art. 30.
 Commission of the European Communities, Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2004) 461 (final), 10.
 Ibid, 10.
60 Council Regulation (EC) No 980/200 of 27 June 2005, Art. 9.
55 Above n 42.
 World Trade Organisation, ‘DSB adopts reports on EC's GSP scheme’, online at: <http://www.wto.org/english/news_e/news04_e/dsb_20apr04_e.htm> (last accessed on 15 January 2006).
 European Commission, WTO India - GSP: WTO confirms differentiation among developing countries is possible (press release, 7 April 2004).
 WTO Agreement, preamble para 1 relevantly reads: “…expanding the production of trade in goods and services, while allowing for the optimal use of the word’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with [the parties’] needs and concerns at different levels of development”.
 See Trebilcock and Howse, Trade Policy and Labour Standards, above n 19, 272 (who argue that excluding economic sanctions from the menu of possible options to respond to gross or systematic abuses of human rights is indefensible).
 Council Regulation (EC) No 980/2005 of 27 June 2005, Art. 16.1(a).
 Peter Gerhard and Archana Kella, ‘Power and Preferences: Developing Countries and the Role of the WTO Appellate Body’, 30 North Carolina Journal of International Law and Commercial Regulation. 515, 528.
 Ibid, 528 - 531. Also see n 14 and accompanying text.
 The EU acknowledged views on this issue had been expressed by developing countries, but it did not go any further and clarify which, if any, of those views had been taken into account. See Commission of the European Communities, Communication from the Commission Concerning amendment of the Commission’s proposal for a Council Regulation applying a scheme of generalised tariff preferences for the period 1 July 2005 to 31 December 2008, COM (2005) 43 (final), 3. The EU’s policy-making process raises questions of procedural or administrative unfairness regarding the EU’s dealings with GSP beneficiaries that are similar to issues raised by the complainants in United States – Import Prohibition of Certain Shrimp and Shrimp Products (WT/DS58/AB/R, adopted 12 October 1998). In that case, the Appellate Body criticised the United States for negotiating “seriously” with some, but not with other, WTO members that export shrimp into the United States, when determining what environmental protection measures ought to be applied (para 172). The United States sought unsuccessfully to rely on the general exceptions provision Art. XX GATT to justify environmental standards that affected the ability of shrimp harvesters to export into the United States.
70 A weakness of the DSU text is its lack of clarity on the relationship between WTO law and general public international law. See generally Gabrielle Marceau, ̵WTO Dispute Settlement and Human Rights’, (2002) 13 European Journal of International Law 753.
 North Sea Continental Shelf Cases (Federal Republic of Germany v Denmark; Federal Republic of Germany v Netherlands) Merits (1969) ICJ Rep, 41 ILR 29, 41-45. Persistent objectors to the obligations would not be bound: Anglo-Norwegian Fisheries Case (United Kingdom v Norway), Merits (1951) ICJ Rep.
 Ibid. Art. 38.1(b) of the Statute of the International Court of Justice refers to international custom as “evidence of a general practice accepted as law”. The International Court of Justice recognised the principles underlying the Convention on the Prevention and Punishment of the Crime of Genocide as principles which are recognised by civilised nations as binding on States, even without any conventional obligation: Reservations to the Convention on the Prevention and Punishment of the Crime of Genocide, Advisory Opinion, (1951) ICJ Rep. The civil rights against torture, apartheid and certain rights of due process (e.g. before passing of the death penalty) may also be said to have universal recognition. The status of other principles reflected in the other conventions in the EU’s list as customary international law, or even as widely recognised, is more doubtful.
74 Trebilcock and Howse, Trade Policy and Labour Standards, above n 19, 273 (noting variable ratification of ILO conventions including by major developed countries, uncertainties over the scope of principles related to child labour, discrimination, freedom of association and so on).
67 For example, the United States has not ratified the Kyoto Protocol on Climate Change or the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal.
 European Commission, ‘Trade and Social Conditions’, online at: <http://www.europa.eu.int/comm/trade/issues/global/social/index_en.htm> (last accessed on 15 January 2006)
 For a more comprehensive review of these issues, see Michael Trebilcock and Robert Howse, The Regulation of International Trade (Routledge, 2nd ed, 1999), Chapters 15 and 16 (hereafter, The Regulation of International Trade).
 World Trade Organization, The Environment: A Specific Concern, online: <http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey2_e.htm> (last accessed
1 February 2006).
 Above n 47 and accompanying text.
80 Bartels, above n 29, 524-525.
72 Trebilcock and Howse, The Regulation of International Trade, above n 76, 463.
 Bridges Weekly Trade News Digest, WTO Appellate Body: Differentiation Possible under Preference Schemes (22 April 2004).
 Gerhart and Keller, above n 66, 567.