RESTRICTED
WORLD TRADE WT/DS2/R
29January 1996
ORGANIZATION(96-0326)
United States -
Standards forReformulated
andConventional Gasoline
Report ofthePanelTable ofContents
I. INTRODUCTION ....................................1
II. FACTUAL ASPECTS ....................................2
A. TheClean AirAct..................................3
B. EPA'sGasoline Rule ................................3
1. Establishment ofBaselines ........................3
2. Reformulated Gasoline ..........................4
3. Conventional Gasoline (or"Anti-Dumping Rules") ........4
C. TheMay1994 Proposal ..............................5
III. MAIN ARGUMENTS ....................................5
A. General ....................................5
B. TheGeneral Agreement onTariffs andTrade ................6
1. Article I-General Most-Favoured-Nation Treatment .......6
2. Article III-National Treatment onInternal Taxation
andRegulation ...............................7
a) Article III:4 ............................7
b) Article III:1 ............................14
3. Article XX-General Exceptions ....................15
4. Article XX(b)................................15
a) "Protection ofHuman, Animal andPlant Life
orHealth" .............................15
b) "Necessary" ............................15
5. Article XX(d) ................................21
6. Article XX(g) ................................22
a) "Related totheconservation ofexhaustible natural
resources..." ............................22
b) "...made effective inconjunction withrestrictions
ondomestic production orconsumption" ..........23
7. Preamble toArticle XX..........................23
8. Article XXIII -Nullification andImpairment ............25ii
C. Agreement onTechnical Barriers toTrade ..................25
1. Article 2-Preparation, Adoption andApplication ofTechnical
Regulations byCentral Government Bodies .............25
a) Whether orNottheGasoline RuleisaTechnical
Regulation .............................25
b) Article 2.1.............................27
c) Article 2.2.............................27
2. Article 12-Special andDifferential Treatment ofDeveloping
Country Members .............................28
IV. SUBMISSIONS BYINTERESTED THIRD PARTIES ...............28
A. TheEuropean Communities ...........................28
B. Norway ....................................31
V. INTERIM REVIEW ....................................31
VI. FINDINGS ....................................32
A. Introduction ....................................32
B. Article III ....................................33
1. Article III:4 .................................33
2. Article III:1 .................................37
C. Article I:1 ....................................37
D. Article XX(b) ....................................38
1. Policy goalofprotecting human, animal orplant lifeorhealth 38
2. Necessity oftheinconsistent measure .................39
E. Article XX(d) ....................................42
1. Securing compliance withconsistent lawsorregulations .....43
2. Other conditions ..............................43
F. Article XX(g) ....................................43
1. Policy goalofconserving anexhaustible natural resource ....44iii
2. Measure "related to"theconservation ofanexhaustible natural
resource; andmade effective "inconjunction" withrestrictions
ondomestic production orconsumption ................45
G. Article XXIII:1(b) ..................................46
H. Applicability oftheAgreement onTechnical Barriers toTrade ....46
VII. CONCLUDING REMARKS ................................46
VIII. CONCLUSIONS ....................................47I. INTRODUCTION
1.1 On23January 1995, theUnited States received arequest from Venezuela tohold
consultations under Article XXII:1 oftheGeneral Agreement onTariffs andTrade 1994 ("General
Agreement"), Article 14.1oftheAgreement onTechnical Barriers toTrade ("TBT Agreement")
andArticle 4oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes
("DSU"), ontheruleissued bytheEnvironmental Protection Agency on15December 1993,
entitled "Regulation ofFuels andFuelAdditives -Standards forReformulated andConventional
Gasoline" (WT/DS2/1). Theconsultations between Venezuela andtheUnited States tookplace on
24February 1995. Astheydidnotresult inasatisfactory solution ofthematter, Venezuela, ina
communication dated 25March 1995, requested theDispute Settlement Body ("DSB") toestablish
apanel toexamine thematter under Article XXIII:2 oftheGeneral Agreement andArticle 6of
theDSU (WT/DS2/2). On10April 1995, theDSBestablished apanel inaccordance withthe
request made byVenezuela. On28April 1995, theparties tothedispute agreed thatthePanel
should havestandard terms ofreference (DSU, Art.7)andagreed onthecomposition ofthePanel
asfollows:
Chairman: Mr.Joseph Wong
Members: Mr.Crawford Falconer
Mr.KimLuotonen
1.2 On10April 1995, Brazil requested theUnited States toholdconsultations under
Article XXII:1 oftheGeneral Agreement, Article 14.1oftheTBTAgreement andArticle 4ofthe
DSU ontheruleissued bytheEnvironmental Protection Agency on15December 1993 entitled
"Regulation onFuels andFuelAdditives -Standards forReformulated andConventional
Gasoline" (WT/DS4/1). Consultations between Brazil andtheUnited States were heldon
1May1995 without resulting inasatisfactory solution ofthematter. Inacommunication dated
19May1995, Brazil requested theDSBtoestablish apanel toexamine thematter pursuant to
Article XXIII oftheGeneral Agreement, Article 14oftheAgreement onTechnical Barriers to
Trade andArticle 6oftheDSU. On31May1995, theDSBestablished aPanel inaccordance
withtherequest made byBrazil.
1.3 On31May1995, pursuant toArticle 9oftheDSU inrespect ofmultiple complainants,
theDSBdecided, withtheagreement ofalltheparties, thatforpractical reasons thismatter be
examined bythePanel already established attherequest ofVenezuela on10April 1995. The
dateoftheconstitution ofthePanel, namely 28April 1995, remained unchanged.
1.4 Duetotheadditional taskgiven tothePanel, theDSBagreed upon, atthesame meeting,
thefollowing terms ofreference:
"Toexamine, inthelightoftherelevant provisions ofthecovered agreements citedby
Venezuela indocument WT/DS2/2 andbyBrazil indocument WT/DS4/2, thematters
referred totheDSBbyVenezuela andBrazil inthose documents andtomake such
findings aswillassist theDSBinmaking therecommendations oringiving therulings
provided forinthose agreements".
1.5 TheChairman oftheDSBrecalled Article 9.2oftheDSU which provides that"therights
which theparties tothedispute would haveenjoyed hadseparate panels examined thecomplaints
areinnowayimpaired".
1.6 Australia, Canada, theEuropean Communities andNorway reserved theirrights to
participate inthePanel proceedings asthirdparties. Only theEuropean Communities and
Norway presented arguments tothePanel.WT/DS2/R
Page2
1.7 ThePanel metwiththeparties tothedispute from 10to12July1995 andfrom 13to
15September 1995. Itmetwiththeinterested thirdparties on11July1995.
1.8 On21September 1995, theChairman ofthePanel informed theDSBthatthePanel would
notbeabletoissue itsreport within sixmonths. Thereasons forthatdelay arestated in
document WT/DS2/5.
1..9 ThePanel issued itsinterim report totheparties on11December 1995. Following a
request made bytheUnited States pursuant toArticle 15.2oftheDSU, thePanel heldafurther
meeting withtheparties on3January 1996.
1.10 ThePanel issued itsfinalreport totheparties tothedispute on17January 1996.
II. FACTUAL ASPECTS
A. TheClean AirAct
2.1 TheClean AirAct("CAA"), originally enacted in1963, aimsatpreventing and
controlling airpollution intheUnited States. Ina1990 amendment totheCAA1,Congress
directed theEnvironmental Protection Agency ("EPA") topromulgate newregulations onthe
composition andemissions effects ofgasoline inorder toimprove airquality inthemost polluted
areas ofthecountry byreducing vehicle emissions oftoxic airpollutants andozone-forming
volatile organic compounds. These newregulations apply toUSrefiners, blenders andimporters.
2.2 Section 211(k) oftheCAA divides themarket forsaleofgasoline intheUnited States into
twoparts. Thefirstpart,which covers approximately 30percent ofgasoline marketed inthe
United States, consists oftheninelarge metropolitan areas thatexperienced theworst summertime
ozone pollution during theperiod 1987-1989, plusanyareas thatdonotmeetnational ozone
requirements andareadded attherequest ofthegovernor ofthestate. These areas arereferred to
asozone "nonattainment areas", andinthispartoftheUnited States only"reformulated gasoline"
maybesoldtoconsumers. IntherestoftheUnited States, "conventional gasoline" maybesold
toconsumers.
2.3 Section 211(k)(2)-(3) oftheCAA established certain compositional andperformance
specifications forreformulated gasoline. Theoxygen content must notbelessthan2.0percent by
weight, thebenzene content must notexceed 1.0percent byvolume andthegasoline must befree
ofheavy metals, including leadormanganese. Theperformance specifications oftheCAA
require a15percent reduction intheemissions ofbothvolatile organic compounds ("VOCs") and
toxic airpollutants ("toxics") andnoincrease inemissions ofnitrogen oxides ("NOx"). These
requirements aremeasured bycomparing theperformance ofreformulated gasoline inbaseline
vehicles (representative model year1990 vehicles) against theperformance of"baseline gasoline"
insuchvehicles. Section 211(k)(10) oftheCAA defines thespecifications ofbaseline gasoline
soldinthesummer, which isthehighozone season, andleaves thespecifications ofwinter
baseline gasoline tobedetermined byEPA. Itprovides, however, thatthespecifications for
winter gasoline shallbethose oftheindustry average gasoline soldin1990. Fortheyear2000
andbeyond, theCAA requires thatnewreformulated gasoline requirements bedeveloped that
require a20-25 percent reduction inemissions ofVOCs andtoxics, depending onEPA's
considerations offeasibility andcost.
142U.S.C. §7545(k).WT/DS2/R
Page3
2.4 TheCAA alsosetsrequirements forconventional gasoline, which ensure thateach
refiner 's,blender 'sorimporter 'sconventional gasoline soldintherestofthecountry remains as
clean asitwasin1990. Thisprogramme isknown as"anti-dumping rules" because itisdesigned
toprevent refiners, blenders orimporters from dumping intoconventional gasoline fuel
components thatarerestricted inreformulated gasoline andthatcause environmentally harmful
emissions. Toaccomplish this,section 211(k)(8) oftheCAA provides thatnorefiner, blender or
importer ofgasoline maysellconventional gasoline thatemits VOCs, toxics, NOx orcarbon
monoxide ("pollutants") ingreater amounts thanthegasoline soldintheUnited States bythat
refiner, blender orimporter in1990. Inorder toimplement thisprovision, separate individual
baselines must beestablished forrefiners, blenders orimporters based onthegasoline theysoldin
1990. Thatpermits determination ofwhether theemissions from arefiner 's,blender 'sand
importer 'sconventional gasoline (post-1994 gasoline) aregreater thantheemissions from its1990
gasoline. If,however, EPAdetermines thatnoadequate andreliable dataexistregarding the
composition ofsuch1990 gasoline soldbyarefiner, blender orimporter, thestatutory baseline
gasoline isapplied. Thestatutory annual baseline values arecalculated using aseasonal weighting
ofthestatutory summer baseline, asdefined intheCAA, andthestatutory winter baseline, as
determined byEPA.
B. EPA'sGasoline Rule
1. Establishment ofBaselines
2.5 TheCAA directed EPAtodetermine thequality of1990 gasoline, towhich reformulated
andconventional gasoline would becompared inthefuture: these determinations areknown as
"baselines". EPAsethistoric baselines forindividual entities, andestablished astatutory baseline,
intended toreflect average US1990 gasoline quality, which would beusedinstead ofthehistoric
individual baselines forthose entities whowere determined tobelacking adequate andreliable
dataregarding thequality ofthegasoline theyproduced in1990.
2.6 EPA'sfinalrule2("Gasoline Rule") requires anydomestic refiner, which wasinoperation
foratleast6months in1990, toestablish anindividual refinery baseline, which represents the
quality ofgasoline produced bythatrefiner in1990. Theruleestablishes three methods forthe
purpose ofdetermining adomestic refiner 'sindividual historic baseline. Under Method 1,the
refiner must usethequality dataandvolume records ofits1990 gasoline. However, as
acknowledged byEPAatthetime, itwasnotanticipated thatmany domestic refiners would have
allthedatanecessary toestablish anindividual baseline based entirely onactual 1990 data. If
Method 1typedataarenotavailable, adomestic refiner must useits1990 gasoline blendstock
quality dataand1990 blendstock production records (Method 2).Intheevent thatneither oneof
these twomethods isavailable, adomestic refiner must turntoMethod 3typedatawhich consist
ofitspost-1990 gasoline blendstock and/or gasoline quality datamodeled inlightofrefinery
changes toshow 1990 gasoline composition. Domestic refiners arenotpermitted tochoose the
statutory baseline.
2.7 Animporter which isalsoaforeign refiner must determine itsindividual baseline using
Methods 1,2and3ifitimported atleast75percent, byvolume, ofthegasoline produced atits
foreign refinery in1990 intotheUnited States in1990 (theso-called "75%rule")3.
240CFR 80,59-Fed. Reg. 7716 (16February 1994).
340CFR 80.91(b)(ii).WT/DS2/R
Page4
2.8 Certain entities are,however, automatically assigned tothestatutory baseline. Firstly,
refineries which began operation after1990 orwere inoperation forlessthan6months in1990
arerequired tousethestatutory baseline. Secondly, importers andblenders areassigned the
statutory baseline unless theycanestablish theirindividual baseline following Method 1.Ifactual
1990 dataarenotavailable, which is,asfordomestic refiners, anticipated byEPA, importers and
blenders areassigned tothestatutory baseline. EPAconsiders thatblenders which produce
gasoline bycombining gasoline blendstocks purchased from many sources cannot determine with
accuracy thequality oftheir1990 gasoline using Methods 2and3.Similarly, EPAconsiders that
importers cannot useMethods 2and3,because these methods inherently apply onlytorefineries
andbecause oftheextreme difficulty inestablishing theconsistency oftheirgasoline quality over
time.
2. Reformulated Gasoline
2.9 Regarding theimplementation oftheregulations forreformulated gasoline, EPAproposes
atwo-step approach. From 1January 1995 to1January 1998, EPAenforces aninterim
programme called the"Simple Model". Under thisprogramme, reformulated gasoline soldinthe
United States bydomestic refiners willbesubject torequirements established withreference tothe
individual baseline forcertain gasoline qualities andrequirements specified intheGasoline Rule
forother gasoline qualities. More specifically, theparameters sulphur, olefins andT-90 are
measured against eachUSrefiner 'sindividual 1990 baseline andmust bemaintained atorbelow
these 1990 levels (these arecalled "non-degradation requirements"). Therequirements regarding
fourother gasoline qualities (Reid Vapour Pressure, oxygen, benzene andtoxics performance) are
specified byEPAintheGasoline Rule4.Importers offoreign gasoline alsohavetocomply with
therequirements setoutinthefinalruleregarding ReidVapour Pressure, oxygen, benzene and
toxics performance. However, importers cannot useindividual 1990 baseline forsulphur, olefins
andT-90, buthavetocomply withlevels specified inthestatutory baseline forthese parameters.
Under theSimple Model, requirements forsulphur, olefins andT-90 must bemetonanannual
average basis. EPAadopted theindividual baseline approach forthese parameters intheSimple
Model because atthetimeitwasformulating itsregulation, itconsidered thattheavailable data
regarding sulphur, olefins andT-90 didnotpermit anassessment oftheprecise effects ofthese
components ontheemissions levelofgasoline. Given thisuncertainty, EPAdidnotwantto
require refiners immediately tomake refinery changes which might laterprove tobeunnecessary,
given thegreater flexibility provided bytheComplex Model.
2.10 Asof1January 1998, EPAwillenforce the"Complex Model", which willapply the
same emissions reduction requirements toallproducers ofreformulated gasoline. Theindividual
baselines forsulphur, olefins andT-90 willnolonger apply.
3. Conventional Gasoline (or"Anti-Dumping Rules")
2.11 The1990 Amendment totheCAA requires that,asof1January 1995, eachrefiner 's,
blender 'sorimporter 'sconventional gasoline soldintheUnited States benomore polluting than
thegasoline soldbythatrefiner, blender orimporter in19905.EPArequires domestic refiners to
measure non-degradation requirements forconventional gasoline against theirindividual baselines
while importers offoreign gasoline areassigned tothestatutory baseline. However, inthis
programme, thenon-degradation requirements apply toallconventional gasoline requirements,
andnotonlytosulphur, olefins andT-90. Requirements must bemetonanaverage annual basis.
440CFR 80.41.
542U.S.C. §7545 (CAA 211(k)(8)).WT/DS2/R
Page5
TheGasoline Rulelimits ("caps") thevolume ofconventional gasoline thatissubject toan
individual baseline tothevolume ofgasoline produced in1990 bythatentity; allconventional
gasoline produced inexcess ofthespecific volume capismeasured against thestatutory baseline.
2.12 Domestic refiners andimporters ofconventional gasoline, unlike those ofreformulated
gasoline, willstillbesubject todifferent baselines aftertheentry intoforce oftheComplex Model
in1998.
C. TheMay1994 Proposal
2.13 Inviewofthecomments made byinterested parties during therulemaking process ofthe
finalGasoline Rule, EPAproposed, inMay1994, toamend thereformulated gasoline regulation
inorder todefine criteria andprocedures bywhich foreign refiners could establish individual
refinery baselines inamanner similar tothatrequired fordomestic refiners6.Pursuant tothis
proposal, foreign refiners would beallowed toestablish anindividual baseline using Methods 1,2
or3.Iftheindividual baseline wasapproved byEPA, importers could useitforthepurpose of
certifying theportion ofreformulated gasoline imported from thatparticular refinery intothe
United States. However, theuseofindividual foreign refinery baselines would besubject to
various additional strict requirements, aiming atensuring theaccuracy andrespect oftheforeign
refinery 'sindividual baseline withrespect togasoline shipped totheUnited States andverifying
therefinery oforigin. Furthermore, itwould notapply toconventional gasoline. After apublic
comment period, theUSCongress enacted legislation inSeptember 1994 denying funding toEPA
forimplementation oftheMay1994 Proposal.
III. MAIN ARGUMENTS
A. General
3.1 Venezuela andBrazil requested thePanel tofindthatthefinalrulepromulgated bythe
United States 'Environmental Protection Agency ("EPA") on15December 1993 andentitled
"Fuels andFuelAdditives -Standards forReformulated andConventional Gasoline" ("Gasoline
Rule") was:
(a) contrary toArticles IandIIIofGATT 1994;
(b) notcovered byanyoftheexceptions under Article XXofGATT 1994;
(c) contrary toArticle 2oftheAgreement onTechnical Barriers toTrade.
3.2 Venezuela additionally requested thePanel tofindthattheGasoline Rulenullified and
impaired benefits accruing toVenezuela under theGeneral Agreement within themeaning of
Article XXIII:1(b).
3.3 Accordingly, Venezuela andBrazil asked thePanel torecommend thattheUnited States
takeallnecessary steps tobring theGasoline Ruleintoconformity withitsobligations under the
General Agreement andtheTBTAgreement. Venezuela requested thePanel torecommend that
theUnited States amend theGasoline Ruletoprovide treatment forgasoline imports noless
favourable thanthataccorded toUSproduced gasoline.
3.4 TheUnited States requested thePanel tofindthattheGasoline Rulewas:
640CFR 80(59Fed.Reg. 22800, 3May1994).WT/DS2/R
Page6
(a) consistent withArticles IandIIIoftheGeneral Agreement 1994;
(b) falling within thescope ofArticle XX(b),(d),and(g)ofGATT 1994;
(c) consistent withtheAgreement onTechnical Barriers toTrade.
B. TheGeneral Agreement onTariffs andTrade
1. Article I-General Most-Favoured-Nation Treatment
3.5 Venezuela andBrazil argued thattheruleallowing animporter which wasalsoaforeign
refiner toestablish itsindividual baseline, provided thatitimported intotheUnited States atleast
75percent ofthegasoline produced atthatrefinery in1990 ("75%rule"), granted anadvantage
togasoline exported from certain thirdcountries inviolation ofArticle IoftheGeneral
Agreement.
3.6 Venezuela argued thatthe75%ruleapplied onlytoafixed, finite andeasily determinable
group ofcountries, determined onlybyhistorical facts. Hence, noimporter orforeign refiner
could takeanyaction thatwould alteritsability tobenefit from thisrule. According to
information submitted toVenezuela bytheUnited States, refineries based inCanada onlywere
likely tomeetthecriteria. Aprevious panel report hadfound thattheEuropean Community 's
meatquality regulations requiring certification ofimported beefbytheUSDepartment of
Agriculture were inconsistent withArticle IoftheGeneral Agreement because "[E]xports oflike
products ofother origin thanthatoftheUnited States were ineffect denied access totheEEC
market considering thattheonlycertifying agency authorized tocertify themeat...wasaUnited
States agency mandated tocertify onlymeatfrom theUnited States"7.Asamatter offact,only
certain countries could benefit from thisprovision. Thiswas,accordingly, abreach ofArticle I.
3.7 Brazil submitted thatthetwocriteria contained inthe75%rule,i.e.theowner
relationship between theimporter andtheforeign refiner andthepercentage ofgasoline it
imported intotheUnited States, were notneutral buthadbeenchosen soastosuitaparticular
category ofcountries andtherefore constituted an"advantage" within themeaning ofArticle I.
These criteria hadnolinkwiththecharacteristics ofgasoline asaproduct. Thus, the75%rule
applied adifferent andmore favourable standard toimports from some foreign refineries thanit
applied toimports from refineries inother countries.
3.8 TheUnited States replied thatthe75%ruledidnotprovide an"advantage" tothe
products ofanyparticular country. The75%rulewould haveapplied toanyimporter thatcould
meetitstwoobjective criteria, regardless ofthecountry oforigin ofthegasoline. The
United States specified thatthe75%requirement represented theminimally acceptable value to
ensure thattheimporter 'sindividual baseline determined under Methods 1,2and3would be
accurate. (Infact,most foreign refiners were unlikely toexport more than30%oftheir
gasoline). Secondly, thecriterion requiring thattheimporter andforeign refiner bethesame entity
eliminated theenforcement concerns arising inrelation withtheestablishment ofanindividual
baseline foraforeign refiner. TheUnited States considered thatVenezuela 'sinvocation ofthe
panel report "European Economic Community -Imports ofBeefFrom Canada" wasinapposite
because, inthatdispute, theECregulation atissue expressly listed theUSDepartment of
Agriculture (USDA) astheonlycertifying authority forthemeatinquestion, andUSDA wasonly
authorized tocertify USmeat. Inthatcase, thecertifying process itself guaranteed thatonlyUS
beefwould becertified, thereby expressly favouring USbeefoverthatofallother countries. In
contrast, the75%ruleexpressly requires anyimporter thatmeets itsobjective criteria toestablish
7"European Economic Community -Imports ofBeefFrom Canada", BISD 28S/92 (adopted on10March 1981),
paragraph 4.2(a).WT/DS2/R
Page7
anindividual baseline foritsgasoline. TheUnited States alsonoted thattheregulatory deadline
forindividual baseline applications under the75%rulehadelapsed without anycompany meeting
thecriteria. The75%rulehadnoapplication andcould therefore notbeinconsistent withany
provisions oftheGeneral Agreement.
3.9 Venezuela considered thattheUnited States interpreted toonarrowly thepanel report
"EEC -Imports ofBeefFrom Canada" when saying thatthefavoured country must beexpressly
identified inorder fortheregulation toviolate Article I.Aruleviolated Article Iwhen it
stipulated, likethe75%rule,thattheproducts ofonlysome countries could qualify.
3.10 Venezuela andBrazil considered thatthefactthatthe75%rulehadnoapplication should
notprevent thePanel from ruling onit.Venezuela considered thatthemere existence ofsucha
regulation might haveinhibiting effects oncommercial andinvestment decisions. Thus, the
possibility ofitsfuture application wassufficient toestablish anArticle Iviolation. Brazil added
thataclear ruling onthe75%rulewasnecessary because itwould dissuade countries from
designing future standards that,being neutral atfirstsight, were infactdesigned tofitonlythe
precise situation oftheirownmultinationals, thusthreatening theintegrity ofArticle I.
2. Article III-National Treatment onInternal Taxation andRegulation
a) Article III:4
3.11 Venezuela andBrazil stressed thattheywere notquestioning therightoftheUnited States
toenact stringent environmental standards andregulations inorder toimprove airquality within
theUSterritory provided these standards andregulations treated imported products noless
favourably thandomestic likeproducts.
3.12 Venezuela andBrazil argued thattheGasoline Rule, bydenying foreign refiners the
possibility toestablish anindividual baseline, violated Article III:4because itaccorded less
favourable treatment toimported gasoline, bothreformulated andconventional, thantoUS
gasoline. TheGasoline Rulerequired imported gasoline toconform withthemore stringent
statutory baseline when USgasoline hadtocomply onlywithaUSrefiner 'sindividual baseline.
Practically, thismeant thatimported gasoline withcertain parameter levels above thestatutory
baseline could notbedirectly soldintheUSmarket whereas gasoline withthese same qualities
produced inaUSrefinery could befreely soldontheUSmarket provided thatitconformed with
thatrefiner 'sindividual baseline. Inorder toaccommodate thissituation, foreign refiners hadtwo
options: (i)make expensive investments andchanges totheirrefineries inorder toproduce
gasoline conforming tothemore stringent statutory baseline, or(ii)supply atalower price
gasoline toanimporter thatcould average thatgasoline withother gasolines (ifsuchother
gasolines existinsufficient amount) inorder tomeet, overanannual period, therequirements of
thestatutory baseline. Bothoptions adversely affected theconditions ofcompetition forimported
gasoline andafforded protection todomestic production inamanner contrary toArticle III.
Furthermore, these adverse competitive effects were precisely whatEPAintended toavoid forUS
refiners bygranting them individual baselines. Brazil added thatitwasuptotheUnited States to
demonstrate thatitsdiscriminatory system didnottreatimports lessfavourably.
3.13 Venezuela andBrazil heldthatofficials from theUSgovernment hadacknowledged on
various occasions thattheGasoline Rulediscriminated against imported gasoline andaccorded
more favourable treatment todomestically produced gasoline. Venezuela added thatanother US
government official hadpublicly stated thatsuchdiscrimination wasintentionally endorsed asa
means ofaffording protection toUSgasoline. These statements showed thattheGasoline Rule
discriminated bothineffect andinintent against foreign refiners. Venezuela andBrazil furtherWT/DS2/R
Page8
argued thatEPA's1994 proposed amendments totheGasoline Rule("1994 Proposal")
acknowledged thatthediscriminatory treatment ofimported gasoline wasinconsistent withthe
United States 'obligations under theGeneral Agreement. Venezuela andBrazil argued thatthe
1994 Proposal would havepartly eliminated thediscrimination byproviding fortheestablishment
ofindividual baselines byforeign refiners ofreformulated gasoline; however, thediscriminatory
treatment ofconventional gasoline would havecontinued.
3.14 Venezuela noted that"Petroleos deVenezuela, S.A." ("PDVSA") hadalready made costly
adjustments toitsproduction inorder tomeetthestatutory baseline requirements andhad
accelerated itsprogramme ofinvestments withaviewtocomplying withtheComplex Model
requirements. These adjustments hadreduced thevolume andvalue ofVenezuela 'scurrent and
anticipated gasoline exports totheUnited States below thelevels thatwould haveprevailed if
PDVSA were allowed toestablish itsindividual baseline. These adjustments interfered with
PDVSA 'sinvestment programme, obliging ittofocus onproduction fortheUSgasoline market
andadversely affecting other important investment projects.
3.15 Brazil stated inaddition thatapplication ofthestatutory baseline toforeign refiners and
domestic importers wasdiscriminatory inseveral respects. First, theflexibility given todomestic
refiners inestablishing individual baselines hadtheeffect thatmany ofthem were allowed
emissions levels higher thanthose permitted bythestatutory baseline. Secondly, thestatutory
baseline wasmore stringent thantheaverage oftheindividual baselines forrefineries located in
theEastern andGulfCoast states (where virtually allBrazilian gasoline wassold) because ofthe
inclusion inthenational average ofthestrict 1990 Californian standards. TheGasoline Rulealso
favoured imports bydomestic refiners overimports byimporters whowere notdomestic refiners.
Domestic refiners whose current production was"cleaner" thantheirindividual baseline could
import gasoline withparameter levels above thestatutory baseline, could blend itwiththeirown
cleaner production andsellitontheUSmarket aslongasthemixture conformed withtheir
individual baseline. Importers whowere notdomestic refiners hadtoconform tothestatutory
baseline inallinstances. Thus, theGasoline Ruleaffected thedistribution ofgasoline inthe
United States bychannelling imports todomestic refiners whohadanincentive totakeadvantage
oftheirprivileged position bydemanding lower prices from foreign refiners.
3.16 Brazil stated thatthesame gasoline thatitusedtoexport totheUnited States market as
"finished" gasoline was,since theentry intoforce oftheGasoline Rule, considered onlyas
"blendstock8",which wassoldatalower price. Thus, Brazil hadnotbeenabletoexport
"finished" conventional gasoline totheUSmarket since 1January 1995. Brazilian refiners were
notcurrently producing reformulated gasoline .
3.17 TheUnited States replied thattheGasoline Ruledidnottreatimported gasoline less
favourably thandomestic gasoline overall. Theenvironmental goaloftheGasoline Rulewasto
regulate theoverall quality ofthegasoline soldintheUnited States. Each importer hadtosatisfy
onaverage thestatutory baseline, which approximated average gasoline quality consumed inthe
USin1990, anddomestic refiners hadtosatisfy onaverage their1990 individual baselines, which
overall roughly represented 1990 USgasoline quality. Hence, overall domestically produced
gasoline hadtobeatleastasclean asforeign gasoline since roughly halfofdomestic gasoline
would be"cleaner" androughly halfwould bedirtier thangasoline using thestatutory baseline.
TheUnited States supplied thePanel withdatadocumenting thenumber ofdomestic refiners with
baseline values bothabove andbelow thestatutory baseline forspecific parameters andemissions
levels upon which compliance withthenon-degradation requirements wasbased. Thisanalysis
8Blendstock isunfinished gasoline which hastobeblended inorder tobesoldasfinished gasoline.WT/DS2/R
Page9
showed thatfivedomestic refineries hadindividual baselines thatwere below theannual statutory
baseline forallfuelparameters andemissions levels, andthree domestic refiners hadindividual
baselines thatwere above theannual statutory baseline forallfuelparameters andemissions
levels. Thus, most refiners hadindividual baselines withseveral parameters above the
corresponding statutory values andseveral below. TheUnited States considered thataprevious
panel report hadrecognized that"there maybecases where application offormally identical legal
provisions would inpractice accord lessfavourable treatment toimported products anda
contracting party might thushavetoapply different legalprovisions toimported products to
ensure thatthetreatment accorded them isinfactnolessfavourable"9.Since themajority of
importers didnothavethenecessary datatouseMethods 1,2,or3,theywould beprecluded
from supplying theUSmarket astheywould beunable toestablish anindividual baseline. In
fact,theGasoline Rulegranted more favourable treatment toimports since identical treatment
would haveinpractice excluded imported gasoline from theUSmarket.
3.18 TheUnited States argued thattheGasoline Ruleapplied toimported gasoline andnotto
foreign refiners producing gasoline. Moreover, foreign refiners were notrequired toproduce
gasoline thatmetanybaseline atall,butcould produce gasoline which wascleaner ordirtier than
thestatutory baseline. Thebaseline establishment rulefocused ontheimporter offoreign gasoline
because theUnited States wasnotattempting toregulate theconduct offoreign companies or
those ofother overseas entities; theimporter wasthefirstentity, within USterritory, thathad
control overthequality ofgasoline imported intotheUnited States. Thus, foreign refiners were
subject onlytotheindependent purchasing decisions ofUSimporters whohadtobalance the
products ofoneormore foreign refiners withthatofanother inorder tocomply withthestatutory
baseline. Thefactthatnosingle batch ofgasoline would bedeemed asnon-complying provided
additional flexibility tobothimporters andforeign refiners. Moreover, thecomplainants 'focus on
equal treatment ofindividual foreign refiners wasmisplaced since theGeneral Agreement applied
totheimported product andnottotheproducer.
3.19 TheUnited States argued thatgasoline from importers wastreated similarly togasoline
from similarly situated domestic parties. Forinstance, imported gasoline wastreated identically to
gasoline produced bydomestic refiners withlimited 1990 operations ortogasoline produced by
USblenders whose business entailed alackofconsistency ofsources andquality ofthegasoline
produced. These producers hadincommon withtheimporters theinability toestablish an
accurate individual baseline because theirbusiness characteristics orhistory were suchthatthey
could notdetermine thequality oftheirgasoline asrequired byMethods 2and3.Although
theoretically, the1990 gasoline quality ofanimporter might beestablished byfirstdetermining
therefineries oforigin forallofthegasoline imported bythatimporter in1990, andthen
obtaining accurate andverifiable information onthequality ofthatsubset of1990 gasoline
produced attherefinery andexported totheparticular USimporter, theUnited States expected
thatonlyaverylimited number ofimporters would beabletoestablish anindividual baseline
using suchaprocedure. Inaddition, there were significant problems associated withestablishing
the1990 gasoline quality offoreign refiners: tracking therefinery oforigin oftheimported
gasoline, establishing thequality ofthesmall subset ofgasoline shipped totheUnited States and
lackofadequate enforcement capacity. According totheUnited States, these factors made itvery
difficult toverify theaccuracy orreliability ofclaims regarding aforeign refiner 's1990 gasoline
quality forthatpurpose. Ontheother hand, gasoline produced bydomestic refiners wasmade
from crude oilwhose quality could easily bedocumented, aswere thecharacteristics ofthe
physical plant andoperational procedures. Thus, thequality ofthegasoline produced atsucha
domestic refinery could beaccurately assessed. TheUnited States further argued thatimported
9"United States -Section 337oftheTariff Actof1930", BISD 36S/345 (adopted on7November 1989).WT/DS2/R
Page10
gasoline anddomestically produced gasoline were inthesame position withregard tothe
flexibility forcomplying withtheirrespective baselines. Asvarious qualities ofgasoline were
available inthemarket, some above andsome below thestatutory baseline, animporter had
complete flexibility toselect gasoline from different sources andmixthem inorder toreach the
annual average quality required bythestatutory baseline. Bycontrast, adomestic refiner was
constrained byitsrefinery equipment andcrude oilsupplies.
3.20 TheUnited States considered thatVenezuela wasincorrect initsclaim thattheUS
government official 'sstatement demonstrated thattheGasoline Rulehadaprotectionist purpose.
Thestatement inquestion actually reflected theUSgovernment 'scommitment when itissued the
finalGasoline Ruletocontinue addressing theissue ofhowimports were treated, andtheUS
government 'songoing concern thatenvironmental protection notbecompromised. Thisstatement
alsoshowed thatthegovernment official 'sobjective wasadoption ofthebestenvironmental
provision thatwasfairtoallparties concerned. TheUnited States equally rejected Venezuela and
Brazil 'sargument thatthe1994 Proposal implied recognition thattheGasoline Rulediscriminated
against imports. The1994 Proposal wasacontinuation ofEPA'sprior attempts todevelop
criteria thatwould protect theenvironment, minimize disruption toproducers, andtreatsimilarly
situated parties alike. ThefactthatEPAwaswilling tomake thisattempt wasneither a
determination thattheGasoline Rulewasflawed noradetermination thatthe1994 Proposal was
feasible. Thisproposal received largely negative public comment andwasrejected intheend,
including byVenezuela. PDVSA itself hadobjected thattheproposed conditions related to
gasoline tracking were basically unworkable.
3.21 TheUnited States disagreed withVenezuela 'sclaim about decreased imports. Datafrom
theUSEnergy Information Administration showed thatcurrent import volumes hadnot
significantly decreased from historical levels. Furthermore, import volume anddomestic
production fluctuated greatly depending onmarket conditions, irrespective ofUSregulatory
action. More specifically, Venezuela 'sshare oftheUSimport market rosefrom 11.5 to
18.5percent inthefirstfivemonths of1995 compared tothesame period in1994. Regarding the
claim byVenezuela thattheGasoline Rulehadobliged itsrefineries tomake burdensome
investments, theUnited States noted thatitwasimpossible tojudge towhatextent PDVSA 's
investments were made inreaction toregulations, suchastheGasoline Rule, inforce inany
particular export market. If,however, PDVSA 'sinvestments were related totheGasoline Rule,
theywere more likely duetotheneedtocomply withtheComplex Model starting in1998 thanto
the1995-1998 non-degradation requirements 'programme. With respect tocompliance withthe
Simple Model requirements, theUnited States considered thatPDVSA could upgrade theportion
ofitsgasoline output senttotheUnited States bysimply adding toitadditives suchasoxygenates.
Inaddition, theamount ofcomplying gasoline thatcould beproduced, orthecostofproducing it,
washighly dependent onthefraction ofgasoline made tomeetaparticular specification. While a
domestic refiner hadtoproduce allitsgasoline output within certain limits, foreign refiners
typically produced onlyasmall fraction oftheirgasoline output fortheUSmarket. Thus foreign
refiners alsohadtheflexibility toselect theircleanest blendstocks fortheUSmarket. Such
approaches didnotrequire refinery modifications. There wasnoreason thatBrazil could not
adjust inthesame manner totheSimple Model requirements. TheUnited States alsonoted that
reported internal turmoil inBrazil 'srefining sector, amonth-long strike beginning inNovember
1994, andapparently recurring labour problems thisyearsuggested thatBrazil 'sdecreased exports
totheUnited States could hardly beattributed toUSregulations.
3.22 Venezuela agreed withtheUnited States thatArticle IIIapplied toimported gasoline and
nottotheforeign refiners. TheGasoline Rulediscriminated against imported gasoline by
applying thestatutory baseline tosuchgasoline while applying individual baselines toUSgasoline.WT/DS2/R
Page11
TheUnited States wrongly introduced theconcept of"similarly situated parties" asabasis for
arguing thatimported gasoline andUSproduced gasoline were not"like product". Imported and
domestic gasolines hadthesame tariff classification, served thesame enduseandthesame end
users andwere indistinguishable from thecommercial standpoint; thus, allgasoline wasalike
product. Theconcept "similarly situated parties" wasnewtoGATT andlacked alegalbasis.
Moreover, Venezuela considered thatthese parties were not"similarly situated". Importers, who
obtained finished gasoline fordistribution toother wholesalers orretailers were not"similarly
situated" toblenders, whoproduced gasoline bymixing gasoline components produced byothers.
Itwasmore appropriate tocompare them to"jobbers" whoobtained finished gasoline for
distribution toother wholesalers orretailers andwhousedtheindividual baselines associated with
thegasoline theyacquired. Foreign refiners were "similarly situated parties" withrespect toUS
refiners inthatthereasons given bytheUnited States astowhyUSrefiners canestablish their
ownbaselines apply equally toforeign refiners.
3.23 Venezuela argued thattheUnited States didnotdenytheexistence ofdifferential treatment
forimported gasoline. Thus, ithadtoassume theburden ofproving thatsuchtreatment wasno
lessfavourable totheimported product. According topastpanel reports, thetestwasnotwhether
therules were different butwhether suchdifferences accorded nolessfavourable treatment to
imported products. Venezuela considered thatsuchademonstration hadnotbeenmade.
Venezuela disagreed withtheinterpretation given bytheUnited States tothepanel report
"United States -Section 337oftheTariff Actof1930" andconsidered thatpanels interpreted the
words "treatment nolessfavourable" contained inArticle III:4ascalling foreffective equality of
opportunities forimported products. TheUnited States 'assertion thatitwas"incumbent upon
theimporter tobalance theproducts ofoneormore foreign refiners withthatofanother" was
contrary tothatestablished understanding ofArticle III:4. Nosuchequality could existifthe
veryability ofaproducer/exporter tointroduce hisproduct intotheimporter 'smarket depended
onthesubsequent decisions oftheimporter tobuyadditional product produced andexported by
another person. Theopportunity toimport alikeproduct could notbeconditional upon the
importer 'swillingness torunariskofnotfinding below-statutory baseline gasoline inorder to
average itwithabove-statutory baseline gasoline. Venezuela considered thatthereasoning oftwo
previous panel reports10regarding thelossofcompetitive opportunities forimported products was
applicable tothiscaseandledtotheconclusion thatimported gasoline should havethesame
distribution opportunities available toUSproduced gasoline, including theability tobesold
directly intocommerce withtheapplication ofanindividual baseline.
3.24 Venezuela considered thattheissue atstake wasnotaveraging, atechnique which was
alsoavailable todomestic refiners, butthedifference between therequirements imposed on
imported gasoline andtherequirements imposed onUSgasoline. Inorder toregulate theaverage
quality ofgasoline intheUnited States, theGasoline Ruleregulated every batch ofgasoline
produced inorimported intotheUS.Thefactthattheverysame gasoline withidentical
characteristics would betreated differently under theRuleifproduced byaUSrefiner asopposed
toaforeign refiner wasprecisely the"less favourable treatment" prohibited under Article III:4.
3.25 Venezuela rejected theUnited States 'assertion thataforeign refiner thatproduced
gasoline in1990 withproperties ofsulphur, olefins andT-90 above thestatutory baseline onlyhad
tomix"additives suchasoxygenates" toupgrade itsgasoline; infact,theverycomposition ofthe
foreign gasoline hadtochange. Venezuela denied theUnited States 'claim thatVenezuela had
rejected the1994 Proposal. Venezuela hadsimply explained whysome means bywhich theEPA
10"United States -Measures Affecting Alcoholic andMaltBeverages", BISD 39S/206 (adopted on19June1992), and"Canada -
Import, Distribution andSaleofCertain Alcoholic Beverages", BISD 39S/27 (adopted on18February 1992).WT/DS2/R
Page12
proposed toachieve certain endswere notworkable from apractical standpoint, andpresented
alternatives toachieve thesame endsinamore practical andworkable manner.
3.26 Brazil argued thatthealleged benefit toimports deriving from thefactthat"roughly half"
ofthedomestic gasoline must be"cleaner" thanimported gasoline (which, inBrazil 'sviewhad
notbeendemonstrated) didnotovercome thelessfavourable treatment accorded toimports
deriving from thefactthat"roughly half" ofthedomestic gasoline waspermitted tobe"dirtier"
thanimported gasoline. Thisstatement bytheUnited States implicitly admitted thediscrimination
contained intheGasoline Rulewhich required imported gasoline tobecleaner thanhalfofthe
domestically produced gasoline. Brazil noted thataprevious panel report hadrejected anynotion
ofbalancing more favourable treatment ofsome imported products against lessfavourable
treatment ofother imported products11.Thesame rationale applied toanynotion ofbalancing
more favourable treatment vis-à-vis some domestic products against lessfavourable treatment vis-
à-visother domestic products. Similarly, another panel report12hadconcluded thattheexposure
ofaparticular imported product toariskofdiscrimination constituted, byitself, aform of
discrimination. TheGasoline Ruleexposed allimports tolessfavourable treatment thanthe
treatment accorded towhattheUnited States haddescribed as"roughly half" ofthedomestic
production. Thus, inthisdispute asinprevious disputes, thepanel should reject thenotion of
"balancing". Brazil further argued thattheUnited States hadnotinanyevent demonstrated that
theaverage oftheindividual baselines wasequivalent tothestatutory baseline. Domestic refiners
were allowed tousepost1990 (Method 3)datatoestablish theirindividual baselines whereas the
statutory baseline waspresumably established based onactual 1990 data. Thiscontradicted the
USargument thatimporters were subject toanoverall average standard which wasequivalent to
thatimposed ondomestic refiners because baselines based ondatafrom different timeperiods
could notbeconsidered tobeequivalent.
3.27 Brazil argued thatUnited States 'reference tothe"Section 337" panel report wasirrelevant
since ithadnotdemonstrated inthisparticular casethattheapplication offormally identical legal
provisions would inpractice accord lessfavourable treatment toimported products. TheUnited
States only"believed" thatgranting individual baselines toforeign refiners would disadvantage
them. Similarly, theUnited States hadnotdemonstrated whyUSimporters would notbeableto
establish anindividual baseline following Method 3,based onpost-1990 gasoline blendstock, since
according totheUnited States, importers were blenders andusedblendstocks. Finally, the
comparison made bytheUnited States between aforeign refiner andaUSimporter was
inaccurate, foraforeign refiner hadtobecompared withaUSdomestic refiner.
3.28 Brazil rejected theargument thatimported gasoline wastreated similarly togasoline from
similarly situated parties. Imported gasoline produced byforeign refiners whohadunlimited
operations in1990 wastreated likegasoline produced byblenders anddomestic refiners whohad
limited operations in1990, whereas itshould havebeentreated likegasoline produced by
comparable USdomestic refiners. Brazil further noted thatmost USblenders whowere not
domestic refiners were infactimporters, andhence should not,asargued bytheUnited States, be
considered astwoseparate categories. Thus, discriminating between domestic refiners and
domestic importers inpractice resulted indiscriminating against imports. Moreover, thefactthat
domestic refiners were allowed toimport blendstock, mixitwiththeirownproduction and
measure thecompliance ofthefinalproduct against theirindividual baseline, whereas neither
blenders norimporters were allowed todothiswithrespect totheirownblendstock, showed that
thesystem didnottreatlikeproducts inasimilar way.
11"United States -Section 337oftheTariff Actof1930", BISD 36S/345, (adopted on7November 1989).
12"EEC -Payments andSubsidies PaidtoProcessors andProducers ofOilseeds andRelated Animal-Feed Proteins",
BISD 37S/86 (adopted on25January 1990).WT/DS2/R
Page13
3.29 Brazil agreed withtheUnited States thatArticle IIIapplied togasoline andnottothe
producer ofgasoline. Inthisparticular case, thestandard applied togasoline hadbeendetermined
withreference totheproducer ofgasoline. Brazil wasnotquestioning thispolicy choice assuch,
butthefactthatadifferent andlessfavourable standard applied toimported products. Inthecase
ofBrazil, thisdiscrimination wasillustrated bythefactthatthegasoline exported byBrazil as
"finished" conventional gasoline until1January 1995 wasnowconsidered asamere "blendstock"
because itdidnotmeetthestatutory baseline requirements. Blendstock gasoline commanded a
lower price because thebuyer hadtomixitwith"cleaner" gasoline inorder tocomply withthe
statutory baseline. Inconclusion, Brazil stated thatthefactthattheproduct produced bya
Brazilian refiner could notbesoldintheUnited States asfinished gasoline while theidentical
product produced byaUSrefiner complying withitsindividual baseline could besoldasfinished
gasoline constituted precisely thelessfavourable, discriminatory treatment Article IIIwasintended
toprohibit.
3.30 TheUnited States argued thatthecomplainants improperly focused ondeveloping foreign
refinery baselines, andhadnotdemonstrated howforeign refiners could accurately ascertain the
quality ofthesubset oftheirtotalgasoline production exported totheUnited States, evenifthey
were abletoestablish thequality oftheirtotal1990 output byusing Methods 1,2or3.Even
assuming thatthisproblem could beovercome byVenezuela andBrazil, itremained forother
foreign refiners. Byfocusing onforeign refiners 'baselines rather thanonthemore logical
establishment ofimporters 'baselines, thecomplainants appeared toseekacommercial advantage
fortheirnational oilcompanies overother foreign gasoline suppliers. Thiscould favour those
importers whohadcommercial tiestosuchrefiners overothers, andthereby distort competitive
conditions among importers. TheGeneral Agreement didnotrequire theUnited States toaccord
rights onforeign soiltoforeign refiners, asopposed toWTO Members, especially ifissues
relating toimports could better beaddressed through regulating importers whowere located on
USterritory.
3.31 TheUnited States further argued thatthereferences made byVenezuela toprevious panel
reports were irrelevant because thesituation currently under examination wasdifferent. The
question posed tothisPanel wasnotwhether imports anddomestic products were treated
identically (theUnited States recognized thatitwasnotthecase), butwhether thattreatment was
lessfavourable under Article III.Given thefactthat,forthereasons stated above, anidentical
treatment would haveprecluded most importers from marketing gasoline intheUnited States, the
specific provisions applying toimports didnotviolate Article III.TheUnited States alsorejected
Brazil 'sclaim thatblenders were infactimporters andmaintained thattheydidfallintotwo
different categories, evenifsimilarly situated inother respects. (Oftheregistered entities that
were blenders orimporters, overathirdwere solely blenders andoverathirdwere solely
importers.) TheUnited States considered thatthedifficulties supposedly experienced by
Venezuela andBrazil toexport gasoline totheUSmarket were groundless. Firstly, importers
could easily findlarge amounts ofgasoline withlowlevels ofsulphur andolefin, thus"offsetting"
Venezuela 'shighsulphur andolefin content, because ofthetypical configurations ofrefineries
outside oftheUnited States. Thiswasevidenced bytheclean imports ofreformulated gasoline
thisyearandbythefactthat1995 exports from Venezuela didnotreflect anidentifiable impact of
theGasoline Rule. Secondly, Brazil 'schoice nottoexport finished gasoline, buttoexport
blendstock instead, wasunrelated toUSenvironmental regulations since theGasoline Ruledidnot
contain anyrequirements astowhether importers imported gasoline ontheonehand, or
blendstock ontheother. Theconventional andreformulated gasoline requirements didnotaimat
establishing whether aproduct wasorwasnotgasoline. Rather, tobesoldas"gasoline",
commercial contracts generally required aproduct tomeetcertain standards established bythe
American Society ofTesting andMaterials. Regarding thealleged reduced export volumes from
thecomplainants, theUnited States noted thatimport levels inagiven market were generallyWT/DS2/R
Page14
sensitive tovarious factors (USdemand, exporting country 'ssupply anddemand, refinery cost
structure, gasoline market conditions inother competing exporting countries, forinstance), and
thatworldwide exports ofgasoline totheUnited States hadbeenfollowing adownward trend over
thelastfiveyears. Itwasequally difficult toknow theexact roleplayed bytheGasoline Rule
withregard totheinvestment programme ofVenezuelan refineries since anyrefiner operating at
theworld levelneeded asignificant reformer capacity. Venezuela 'sinvestment insuchareformer
unitlikely reflected overall Venezuelan market strategy. Moreover, whatever production
limitations PDVSA might havewithrespect tooneparticular refiner, blending offeedstock from
several refineries made higher levels ofstatutory-quality gasoline onaper-shipment basis possible.
Inaddition, theUSgovernment hadstudied refinery coststructure shortly afterpassage ofthe
Clean AirActandfound thatrefiners whose production ofreformulated gasoline wasabout 30%
orlessoftheirtotalgasoline production could produce thereformulated gasoline atlittleorno
incremental cost(i.e.investment costs) because oftheirability toselect among blendstocks.
3.32 TheUnited States argued that,withrespect totheparticular baseline tobeemployed by
domestic refiners thatimport, theRule'srequirement thatrefiners usetheirownbaselines applied
onlytoconventional gasoline, anduptothevolume thattherefiner imported in1990. The
purpose oftheprovision wastoprevent adomestic refiner withabaseline more stringent thatthe
statutory baseline from avoiding thatstringent baseline byexporting gasoline produced atthe
domestic refinery andthenreimporting thatsame gasoline under thestatutory baseline, aconcern
raised toEPAinpublic comments.
3.33 Venezuela argued itwasnotfocusing onforeign refiners butonthesituation ofimported
gasoline. Theforeign refiner hadbecome anissue onlybecause thecharacteristics of
USproduced gasoline setbytheGasoline Rulewasdetermined, inlarge part,bythehistorical
quality levels oftheindividual USproducers. Venezuela considered thatitwasmisleading to
engage, astheUnited States did,inadiscussion oftherelative situation ofimporters anddomestic
refiners when comparing therespective treatment ofdomestic andimported products. Thefocus
oftheanalysis hadtoremain ongasoline asaproduct. Theprevious panel cases citedby
Venezuela were relevant because thesituations were similar. Venezuela disagreed withtheUnited
States 'argument thatimporters could easily obtain suitable offsetting gasoline forVenezuela 's
gasoline quality. Thedatapresented bytheUnited States tothePanel regarding theproperties of
gasoline imported in1995 suggested exactly thecontrary: byshowing thatthemaximum values
ofsulphur, olefins andT-90 ofimported gasoline were essentially atthestatutory baseline, these
dataconfirmed thatabove-statutory foreign gasoline wasnotpurchased byUSimporters. Thus,
foreign refiners were effectively obliged tocomply withthestatutory baseline requirements ifthey
wanted tosellgasoline intheUnited States.
b) Article III:1
3.34 Venezuela andBrazil claimed thatdiscriminatory baseline requirements contained inthe
Gasoline Ruleviolated Article III:1forthesame reasons theyviolated Article III:4. Bydistorting
theconditions ofcompetition forforeign gasoline, bothreformulated andconventional, theywere
applied "soastoafford protection todomestic production". Venezuela alsonoted that
Article III:1wasamore general provision thanArticle III:4. Thus, itwould notinsist onthe
panel ruling onArticle III:1ifthePanel found theGasoline Ruletobeinconsistent with
Article III:4.
3.35 TheUnited States replied that,forthereasons expressed under Article III:4, theGasoline
Ruledidnotafford protection todomestic production. Furthermore, since Article III:1hadby
itself onlyanexhortatory character, itwasnotamenable toafinding of"violation" inadispute
settlement proceeding. APanel hadnever found anindependent violation ofArticle III:1.WT/DS2/R
Page15
3.36 Brazil argued thatprevious disputes13,towhich theUnited States hadbeenaparty,
involved aviolation ofArticle III:1.
3. Article XX-General Exceptions
3.37 TheUnited States argued thattheGasoline Rulefellwithin thescope ofArticle XX
whether ornotitwasconsistent withother provisions oftheGeneral Agreement. Notall
measures described byArticle XXwere inconsistent withtheGeneral Agreement. However, if
thePanel accepted thattheGasoline Rulewasconsistent withother provisions oftheGeneral
Agreement, inparticular Article III,itdidnotneedtodecide whether themeasures atissue also
fellunder Article XX. Article XXguaranteed inanyevent thatthese measures were not
inconsistent withtheGeneral Agreement.
3.38 Venezuela andBrazil considered thattheissue atstake under Article XXwasnotwhether
theCAA ortheregulations implementing itwere necessary, butwhether itwasnecessary to
accord foreign gasoline lessfavourable treatment ,which, theyargued, wasthesituation inthis
case. Venezuela argued further thatArticle XXprovided limited andconditional exceptions from
obligations under other provisions oftheGeneral Agreement, andtheburden wasontheparty
invoking thatprovision tojustify theapplication ofanyoftheenumerated exceptions. TheUnited
States lacked thefactual andlegalsupport necessary tocarry thatburden withrespect toanyofits
claims under Article XX.
4. Article XX(b)
a) "Protection ofHuman, Animal andPlant LifeorHealth"
3.39 TheUnited States argued thatitwaswellestablished thatairpollution, andinparticular
ground-level ozone, presented health riskstohumans, animal andplants. Toxic airpollution was
acause ofcancer, birthdefects, damage tothebrain orother parts ofthenervous system,
reproductive disorders andgenetic mutation. Itcould affect notonlypeople withimpaired
respiratory systems, buthealthy adults andchildren aswell. Ozone wasalsoresponsible for
agricultural cropyield lossintheUnited States. Vehicular airtoxic emissions accounted for
approximately 40to50percent oftotalairtoxic emissions. TheGasoline Ruleprovisions sought
tocontrol toxic airpollution from mobile sources byaddressing thefuelthatcreates these
emissions. Thus, itsaimwastoprotect public health andwelfare byreducing emissions oftoxic
pollutants, VOCs andNOx forreformulated gasoline, andtoavoid degradation ofairquality for
emissions ofNOx andtoxic airpollutants forconventional gasoline. Therefore, theGasoline
Rulefellwithin therange ofpolicies specified inArticle XX(b).
b) "Necessary"
3.40 TheUnited States argued thatthenon-degradation requirements forbothreformulated and
conventional gasoline were necessary toprotect human, animal andplant lifeorhealth. Using
individual baselines forconventional gasoline wasthequickest andfairest waytoachieve the
programme 'senvironmental goal, which wastoensure themaintenance ofUS1990 gasoline
quality inthecleaner areas without affecting thespeedy andcost-effective implementation ofthe
reformulated gasoline programme inthemost polluted areas, andwithout causing major
disruptions inthedomestic production ofconventional gasoline. Ifasingle baseline were usedfor
allconventional gasoline, thenallproducers whose gasoline wasdirtier thanthisbaseline for
13"Canada -Administration oftheForeign Investment Review Act", BISD 30S/140 (adopted on7February 1984) andUnited
States -Measures Affecting Alcoholic andMaltBeverages" BISD 39S/206 (adopted on19June1992).WT/DS2/R
Page16
certain gasoline qualities would needtochange thecharacteristics oftheirproduction tomeetthe
standard forthose qualities, andthose producers whose gasoline wascleaner thanthebaseline
could degrade down tothebaseline. Theresult would bethesame overall average forgasoline,
butlarge segments ofgasoline producers would havebeenrequired tomake changes totheir
conventional gasoline production. Where future production exceeded their1990 output, refiners
must meetthestatutory baseline. With respect toreformulated gasoline, individual baselines were
usedforathree yeartransition period andapplied tothree gasoline qualities -sulphur, olefin and
T-90- which were required topreserve theiraverage US1990 levels because EPAlacked data
about theirprecise emission effects. Thisapproach avoided requiring large segments ofproducers
tomake changes intheirgasoline inorder tomeetasingle requirement, whereas itwasnotclear
whether andhowanysuchchange wasneeded toavoid emissions increases. However, all
reformulated gasoline refiners must havebegun toadjust theiroperations inorder tomeetthenew
reformulated gasoline requirements thatwould beineffect in1998 under theComplex Model.
Allregulated gasoline qualities would thenbemeasured against thestatutory baseline. Thus, the
baseline system protected airquality inthemost practical andcost-effective manner, while taking
thebestaccount ofthevarious producers 'characteristics.
3.41 TheUnited States argued thattheindividual baseline approach washowever notpossible
withallproducers, inparticular, refiners thatwere onlyproducing during partof1990, blenders
andimporters. These categories ofproducers were inadifferent situation since theylacked the
datanecessary touseMethods 1,2and3,andrequiring them toestablish anindividual baseline,
likedomestic refiners, would havehadtheeffect ofprecluding them from theUSmarket. Thus,
assigning importers tothestatutory baseline ensured thattheywould notbeforced outofthe
market while treating similarly situated parties alike. Moreover, evenifinsome cases importers
might beabletoestablish individual baselines derived from foreign refiner information, giving
importers achoice astowhich baseline tousewould inevitably haveundermined theairquality
objective oftheregulation since business incentives would haveinduced them tousethecheapest
andleaststringent option, which would alsohavebeenthemost polluting one. Taking into
account these concerns overgaming, EPAhaddetermined thatnoother option wasfeasible
without having adverse effects ontrade. TheUnited States stressed thattheGasoline Ruleapplied
totheimporter andnottotheforeign refiner. Given thatthere hadtraditionally beenavariety of
gasoline andblendstock qualities available onthemarket, importers were likely tohavethe
flexibility toimport gasoline from various sources, some withlevels above andothers below the
statutory baseline, aslongastheannual average fortheimporter metthestatutory baseline.
3.42 TheUnited States argued thatitwasnotfeasible togiveindividual baselines toforeign
refiners forvarious reasons. First, gasoline wasafungible international commodity anda
shipment ofgasoline arriving inaUSportgenerally contained amixture ofgasoline thathadbeen
produced atseveral foreign refineries. Therefore itwould beverydifficult, ifnotimpossible, to
determine therefinery oforigin ofashipment ofgasoline forthepurpose ofestablishing an
individual baseline. Second, thedifficulty ofidentifying therefinery oforigin would alsofavour
potential gaming ofthesystem since theforeign refiner could betempted toclaim therefinery of
origin foreachshipment ofimported gasoline thatwould present themost benefits interms ofthe
baseline restrictions. Thethirdreason related tothedifficulties oftheUnited States toexercise
enforcement jurisdiction over foreign refiners. TheGasoline Rulecould notbeenforced simply
byexamining theproduct attheborder butrequired EPAtoaudit thefacilities ofrefineries in
order toverify, interalia,thatthedataprovided toestablish theindividual baselines were
accurate aswellastoensure future compliance. EPAalsoneeded other enforcement tools suchas
criminal penalties, civilenforcement proceedings orcourt warrants, thatwould notbereadily
available touseoutside USterritory against arefinery located onforeign soil. Holding the
importer accountable fortheconduct oftheforeign refiner withwhom hehasnotcolluded could
havebeenanunfair solution. TheUnited States recalled thatthepanel report "United States -WT/DS2/R
Page17
Section 337oftheTariff Actof1930" hadacknowledged thatameasure might needtoprovide
apparently lessfavourable treatment toimports insituations where it"might beconsiderably more
difficult toidentify thesource ofinfringing products ortoprevent circumvention oforders limited
totheproducts ofnamed persons"14,thanforUSproducts. Thepresent caseoffered similar
differences inenforcement needs andcapabilities withrespect totheidentification ofthesource of
gasoline.
3.43 TheUnited States disagreed withVenezuela 'sassertion thattheMay1994 Proposal
demonstrated thefeasibility ofindividual baselines forforeign refiners. ThisProposal wasa
continuation ofEPA'sefforts todevelop criteria thatwould protect theenvironment, minimize
disruption toproducers andtreatsimilarly situated gasoline alike, taking intoaccount the
comments andconcerns expressed byinterested parties. ThefactthatEPAmade thisattempt was
neither adetermination thattheGasoline Rulewasflawed noradetermination thatthe1994
Proposal wasfeasible. The1994 Proposal contained several strict conditions governing the
establishment ofindividual baselines forforeign refiners, which showed thatconcerns stillexisted.
Moreover, itapplied onlytoreformulated gasoline because theindefinite application ofindividual
baselines forconventional gasoline andtheexpectation thatmany more foreign refiners would
supply theconventional market indicated thattheenvironmental riskassociated withallowing this
option were toogreat tojustify evenitsproposal. Inpublic comments, the1994 Proposal had
beencriticised asfavouring asmall group ofimporters overalltheothers. PDVSA andother
foreign refiners hadobjected thattheproposed conditions, interaliathose related togasoline
tracking, were unworkable. Forthese reasons, theUnited States rejected Venezuela 'sassertion
thatEPAwould havefinalized thisProposal except fortheaction byCongress.
3.44 TheUnited States considered thatVenezuela 'scitation ofthetestimony ofaUS
government official wasinapposite. Thistestimony reflected theUSgovernment 'scommitment
when itissued thefinalGasoline Ruletocontinue addressing theissue ofhowimports were
treated together withtheconcerns thatenvironmental protection notbecompromised andthatthe
provisions befairtoalltheparties affected. Contrary toVenezuela 'sargument, thistestimony did
notshow thatprotectionism underlay theGasoline Rule'streatment ofimports. Thestatement of
aUSgovernment official defending theproposed useofforeign refiner baselines onlyillustrated
thatUSregulators wished toobtain amutually satisfactory solution withVenezuela. Moreover,
theRuleexplicitly stated thatitsmotivation wasenvironmental protection, notprotectionism.
3.45 Venezuela argued thatArticle XX(b) wasnotapplicable because theUnited States hadnot
demonstrated thatthere were nolesstrade-restrictive means toachieve itshealth policy objectives.
TheGasoline Rule'sdiscriminatory baseline requirements were not,therefore, "necessary" within
theterms ofArticle XX(b). Venezuela considered thatthere were lesstrade-restrictive
alternatives totheGasoline Rulediscriminatory baseline requirements thatwould achieve thesame
objective. Onesuchalternative wastoauthorize theuseofindividual baselines byforeign refiners
forbothreformulated andconventional gasoline. Another alternative wastorequire allUS
gasoline producers tomeetthestatutory baseline requirements. Athirdalternative, inVenezuela 's
view, would havebeentoenforce theComplex Model asof1995, rather than1998, soastotreat
bothUSandimported reformulated gasoline equally from thebeginning. Afourth alternative
would havebeentoauthorize theuseofforeign refiner individual baselines and,ifcompensating
emissions reductions were necessary, tospread theburden ofsuchcompensation equally across all
gasoline, USandimported alike.
14BISD 36S/345, §5.32, adopted 7November 1989.WT/DS2/R
Page18
3.46 Venezuela considered that,contrary totheUSargument, theuseofaforeign refiner
baseline wasfeasible. Itwasfeasible foraforeign refiner todevelop anindividual baseline,
relying onthesame types ofrecords anddataasUSdomestic refiners. InthecaseofVenezuela,
PDVSA hadalltherecords necessary toaccurately determine anindividual baseline inconformity
withtherequirements applicable totheUSrefiners, ashadbeenconfirmed bythefirm
Turner, Mason andCo.which served asanindependent, EPA-approved auditor. Theforeign
refiner 'sindividual baseline would besubmitted toEPAforapproval andtocorrect anypossible
mistakes before theproduct could beimported intotheUnited States. EPAcould thenrequire a
foreign refiner, asarequirement forestablishing andmaintaining itsindividual baseline, toappear
before theagency and/or tomake available toitproduction records andanyother reasonable
information aimed atensuring theaccuracy ofthebaseline. Then, enforcement would onlybe
relevant inverifying thecharacteristics ofgasoline asitentered theUnited States. Thiskindof
verification wasroutinely performed onmany types ofimported products and,inthecaseof
gasoline, compliance foreachshipment could bedetermined attheportofentry bytesting the
shipment andcomparing itsfuelproperties withtheindividual baseline oftheforeign refiner.
Furthermore, since theimporter wascurrently liable towards EPAforgasoline thatdidnot
conform tothestatutory baseline, itwassimilarly possible tomake himliable forgasoline thatdid
notconform totheforeign refiner 'sindividual baseline. Under UScustoms law,precedents
existed where animporter wasliable foranimported product thatdidnotmeetcertain standards,
andsubject tocivilandcriminal sanctions. Venezuela cited, interalia,thecaseofimporters
being liable forproducts notmeeting thesafety standards promulgated bytheConsumer Product
Safety Commission. Thisdemonstrated thatUnited States 'concerns about enforcement
mechanisms outside itsterritory andimporter 'sliability fortheconduct ofaforeign company
were without merit. Venezuela rejected theargument thatitwasnotpossible todetermine the
refinery oforigin andnoted thatduring theconsultations leading tothe1994 Proposal, PDVSA
hadsuggested several alternatives todealwiththisproblem. Moreover, theconcerns expressed
bytheUnited States about foreign gasoline being mixed with"dirty" gasoline before being
imported intotheUnited States should apply equally toUSproduced gasoline being degraded after
itleftaUSrefinery. Venezuela alsostrongly denied theassertion thatithadrejected the1994
Proposal since ithadclearly supported EPA'sproposal toallow foreign refiners toestablish their
individual baselines andhadcontinued towork withEPAtothatend,presenting alternatives and
explaining whyparticular provisions oftheProposal were unnecessarily burdensome and
unworkable.
3.47 Lastly, Venezuela argued thatUnited States 'concern about "gaming", which wasbased on
theassumption thatforeign refiners with"cleaner" gasoline would select thestatutory baseline
rather thanestablishing theirownbaseline, thusaffecting theairquality, waspurely speculative
forseveral reasons. EPAhaditself recognised thatitdidnothavedataabout theaverage quality
ofgasoline imported in1990, andthuscould notknow whether asignificant amount ofthat
gasoline imported was"cleaner" thanthestatutory baseline. Available dataindicated thatforeign
refiners were notlikely to"degrade" from their1990 gasoline quality andtheimpact ofanysuch
activity would atmost bedeminimis .Moreover, USstatistics showed that,from January to
March 1995, imported gasoline represented lessthantwopercent oftotalUSgasoline
consumption. Thus, evenaccepting (which Venezuela didnot)theUnited States 'argument that
halfoftheforeign refiners produced gasoline in1990 thatwasbelow thestatutory baseline and
halfoftheforeign refiners produced gasoline thatwasabove thestatutory baseline, possibilities
forgaming would ariseforlessthanonepercent oftotalUSgasoline consumption. Thepractical
impact ofgaming wastoosmall tojustify discrimination against imported gasoline under
Article XX(b). Finally, several aspects oftheGasoline Ruleareincompatible withtheprofessed
USconcern regarding thepossible environmental impact ofpotential "gaming" :forexample, the
factthatthere wasnolimitation onthevolume ofreformulated gasoline aUSrefiner could
produce under itsindividual baseline, orthefactthatinaparticular geographical area, theWT/DS2/R
Page19
emissions from gasoline would vary, depending onwhich refiners were supplying it,andasa
consequence, theemissions levels could exceed thestatutory baseline. Moreover, EPAhad
recently proposed several amendments totheGasoline Rule, suchasprovisions permitting upward
adjustment inbaseline levels because ofaUSrefiner 'sinability toacquire lowsulphur content
crude oilthatwasavailable in1990, which equally undermined itsenvironmental objectives.
Venezuela concluded thattheUnited States hadnotmettheburden oftheproof required by
Article XX.
3.48 Brazil didnotdisagree withthepurpose oftheUnited States which wastoaddress the
problem ofairpollution inorder toprotect human, animal andplant lifeandhealth. However,
Brazil considered thattheGasoline Ruleprogramme didnotsatisfy therequirements of
Article XX(b), because theburden ofachieving thispurpose wasplaced disproportionately on
imported gasoline. Allimported gasoline hadtomeetthe1990 average expressed inthestatutory
baseline whereas halfofthedomestic refineries could sellgasoline which didnotmeetthe
statutory baseline. Theconcerns expressed bytheUnited States about thenegative impact of
imposing asingle statutory baseline ondomestic refiners could notjustify aviolation tothe
national treatment obligation forthefollowing tworeasons. First, EPAdidnotwanttoimpose on
domestic refiners whose gasoline wasdirtier thanthestatutory baseline theburden ofchanging
theirproduction characteristics, butitimposed precisely thisrequirement onforeign refiners.
Secondly, theUnited States hadnotdemonstrated tothePanel whydomestic refiners whose
production wascleaner thanthestatutory baseline would downgrade tothebaseline. Andeven
assuming thatsuchadowngrade would occur, theoverall airquality would notchange aslongas
therefiners with"dirtier" gasoline were required toupgrade tothestatutory baseline. Brazil
considered thataruleestablishing thestatutory baseline asaminimum withtheadditional
requirement thatthose refiners whoproduced gasoline above thestatutory baseline continue todo
sowasanother option which would takecareofthedowngrading concern while atthesame time
improving airquality intheUnited States andeliminating discrimination against imports.
3.49 Brazil further argued thattheUnited States hadnotexplained whyimporters could not
establish anindividual baseline, especially using Method 3since importers presumably maintained
records oftheirimports andthuscould havedataontheir1990 imports. Even assuming thatit
wasnecessary toassign importers tothestatutory baseline, thisdidnotexplain thefailure to
provide forindividual baselines forforeign refiners. Brazil considered thattheUnited States had
notdemonstrated thatforeign refiners didnothavesufficient datatoestablish theirownbaselines.
Inthatcontext, theUnited States referred onlyto"difficulties" but,according toBrazil, mere
"difficulties" didnotcreate necessity within themeaning ofArticle XX(b). Moreover, assuming
thatthese difficulties were insurmountable, theywould nevertheless notallow theUnited States to
discriminate against foreign gasoline since there wasanalternative measure, reasonably available,
which wastherequirement thatallgasoline, domestically produced andimported, meetthesame
statutory baseline, asBrazil hadnoted above.
3.50 Brazil considered thattheUnited States hadpresented nofactual basis tosupport its
concern thataforeign refiner would "game" thesystem ifgiven thechoice between thestatutory
andtheindividual baseline. Besides, thisopportunity for"gaming" could beeliminated bysimply
assigning allrefiners, domestic orforeign, tothesame baseline, statutory orindividual.
Regarding theuseofindividual baselines byforeign refiners, theUnited States hadnever made
anyattempts toinvestigate ordetermine empirically whether thecalculation andenforcement of
suchbaselines were possible. However itmerely insisted thatthese problems were
insurmountable and,therefore, thestatutory baseline hadtobeapplied toimported gasoline.
Finally, thefactthatnumerous parties hadobjected toparticular aspects ofthe1994 Proposal did
notmean thatnon-discriminatory baselines forforeign refiners were notpossible. BrazilWT/DS2/R
Page20
concluded thattheUnited States hadnotdemonstrated whyitwasnotpossible topermit foreign
refiners ofbothconventional andreformulated gasoline tousetheirownbaselines.
3.51 Brazil argued thatthediscrimination under theGeneral Agreement ortheTBTAgreement
wasnotjustifiable evenassuming thattheuseofforeign refiners 'individual baselines was
impossible. Ifitwere impossible toassign individual baselines toforeign refiners, theUnited
States would thenbejustified inusing individual baselines fordomestic refiners onlyifnoother,
non-discriminatory measure were available. AWTO Member wasnotpermitted toreview several
options, select oneinwhich discrimination wasunavoidable, andthenplead thattheselected
option required discrimination. Under Article IIIoftheGeneral Agreement -butalsounder
Article IoftheGeneral Agreement andArticle 2oftheTBTAgreement- aWTO Member was
obliged, when thepolicy option involved discrimination, tochoose another option when onewas
available. Inthisparticular case, there wassuchanavailable alternative, which wastoapply the
statutory baseline toallproducers ofgasoline.
3.52 TheUnited States maintained itsarguments regarding theimpraticability offoreign
refiner 'sbaseline. Itargued thatcompliance withrequirements based onforeign refinery
baselines could notbeestablished onlybysampling gasoline onitsarrival ataUSportofentry,
because itwould benecessary todetermine therefinery oforigin forsuchimported gasoline.
Thistypeofdetermination would bedifficult, ifnotimpossible, duetothefungible mixing of
gasoline thatoccurs before arrival inaUSportofentry. Theenforcement provisions ofother US
statutes citedbyVenezuela tonegate thisconcern were inapposite, because those statutes all
involved matters thatcould beresolved byinspection oftheproduct byCustoms officials atthe
border. TheUnited States alsonoted thatthere wasnoanalogous concern withidentifying the
source ofgasoline produced atdomestic refineries, because domestic gasoline wasregulated atthe
refinery gate, which leftnoquestions ofwhich refinery produced anyparticular batch ofgasoline.
TheUnited States further argued thatthepotential environmental effect of"gaming" could be,
under areasonable scenario, anannual increase inNOx emissions from imported gasoline by5.6
to7percent (about 115,000 short tons). USanalyses offoreign refinery configurations showed
thatbecause oflowfluidcatalyst unitcapacity among foreign refiners, sulphur andolefin levels in
imports were likely tobelowcompared totheUSstatutory baseline, thusleaving ample room for
gaming anddegradation. Moreover, the"gaming" incentives forforeign "cleaner" refiners were
nothypothetical: various changes since 1990 inphysical plants andoperating procedures could
change theeconomic calculus forproducing gasoline ofaspecified quantity, andthequality ofthe
crude usedinrefining could change. Inthese conditions, arefiner might choose todegrade the
sulphur, T-90 orother characteristics ifitproved tobeeconomical. TheUnited States
emphasized thatthere were noregulatory requirements onforeign refiners, whohadample
flexibility, notavailable todomestic refiners, toselect among blendstocks. TheUnited States
concluded that,contrary toVenezuela 'sandBrazil 'sclaim, Article XXdidnotrequire adoption of
thestatutory baseline asanational standard evenifthedifficulties associated withthe
establishment ofindividual baselines forimporters were insurmountable. Application ofthe
statutory baseline todomestic producers ofreformulated andconventional gasoline in1995 would
havebeenphysically andfinancially impossible because ofthemagnitude ofthechanges required
inalmost allUSrefineries; itthuswould havecaused asubstantial delay intheprogramme.
Weighing thefeasibility ofpolicy options ineconomic ortechnical terms inorder tomeetan
environmental objective wasalegitimate consideration, anddidnot,initself, constitute
protectionism, asalleged byVenezuela andBrazil. Article XXdidnotrequire agovernment to
choose themost expensive possible waytoregulate itsenvironment. Inthecaseathand, itwas
notnecessary toassign domestic refiners tothestatutory baseline forthenon-degradation
requirements forthereasons stated above.WT/DS2/R
Page21
3.53 TheUnited States argued thatthelackofavolume limitation fortheuseofindividual
baselines under thereformulated gasoline programme wasnotexpected toaffect thesuccess of
thatprogram. USdatashowed thatrefineries withthehighest olefin andsulphur levels intheir
baselines (i.e.thedirtiest baselines) asagroup hadnotextended theirmarket share afterthestart
upofthereformulated gasoline programme. Thiswasconsistent withEPA'soriginal expectations
thattheshort timeperiod during which individual baselines were usedinthereformulated
programme would notprovide anincentive forrefiners torevise theirinvestment andproduction
decisions based onwhether theirbaselines were above orbelow thestatutory baseline. The
United States alsoargued thatthevarious baseline adjustments allowed under theGasoline Rule
either redressed disadvantages occurring asaresult ofgovernment requirements, ordealtwith
situations where theUSgovernment didnothavedataforafullyear'srepresentative operations.
3.54 Venezuela argued thattheexamples posed bytheUnited States intheattempt toshow an
increase ofaverage NOx emissions from imported gasoline because ofpotential gaming were
flawed, leading toexaggerated results because theyhadrelied ontheComplex Model, which was
notinusefor1995-1997, andontheassumption thathalfoftheimported gasoline in1990 had
properties below andhalfhadproperties above thestatutory baseline. Regarding thislast
assumption, theUnited States hadconceded thatitsimply didnotknow theproperties ofthepool
ofimported gasoline in1990, andhadfailed topresent evidence thatforeign refiners which might
haveexported totheUnited States gasoline cleaner thanthestatutory baseline would havean
incentive todegrade down tothestatutory baseline. Venezuela rejected thisassumption andstated
thatthere wasnoeconomic incentive forarefiner tooperate itsrefinery inalessthanoptimal
manner toincrease thelevelofafuelproperty suchassulphur orolefins forthesolepurpose of
making "dirtier" gasoline.
5. Article XX(d)
3.55 TheUnited States considered theGasoline Rule'sbaseline establishment system was
necessary toenforce thenon-degradation requirements aiming atpreventing deterioration ofair
quality. Thenon-degradation requirements ensuring thatgasoline soldintheUnited States didnot
become more polluting thanin1990 were "laws orregulations which arenotinconsistent withthe
provisions oftheGeneral Agreement". They were measures forwhich, pursuant toArticle XX(g)
andXX(b), "nothing in[theGeneral Agreement] shallbeconstrued toprevent theadoption or
enforcement byanycontracting party". Forthereasons stated under Article XX(b), thebaseline
establishment rules were necessary toensure thatthere wasnodegradation ingasoline orair
quality. Ifimporters were allowed touseseveral baselines, depending onwhich foreign refiners
chose tousethem, "gaming" could occur, andresult inadeterioration ofoverall airquality.
Therefore, theGasoline Rulefellwithin thescope ofArticle XX(d).
3.56 Venezuela considered thattheUnited States hadnotclearly established which were the
"laws orregulations" which were notinconsistent withtheGeneral Agreement andwithwhich
compliance wassecured, andhence hadfailed todemonstrate suchconsistency. Venezuela noted
thataprevious panel hadfound thatameasure wasdeemed to"secure compliance with" onlyifit
waseffective to"enforce obligations" under lawsorregulations consistent withtheGeneral
Agreement, asopposed toensuring thebroader attainment ofanobjective15.When stating that
"thebaseline establishment rules arenecessary toensure thatthere isnodegradation ingasoline
andairquality", theUnited States precisely referred toanobjective, instead ofidentifying any
obligation ofthenon-degradation requirements thatthediscriminatory baseline requirements were
15"EEC -Regulation onImports ofParts andComponents", BISD 37S/132, para. 5.17-5.18 (adopted on16May1990).WT/DS2/R
Page22
necessary toenforce. Moreover, forthereasons expressed under Article XX(b), theGasoline
Rulewasnotnecessary. Thus, theUnited States didnotmeettherequirements ofArticle XX(d).
3.57 Brazil considered that,forthereasons ithadalready developed under Article XX(b), the
United States failed todemonstrate thattheGasoline Rulewas"necessary" tosecure compliance
withtheClean AirAct,within themeaning ofArticle XX(d). AsBrazil hadpreviously indicated,
there were non-discriminatory alternatives available totheUnited States.
6. Article XX(g)
3.58 TheUnited States argued that,asaprogramme intended topreserve clean air,the
Gasoline Rulefellwithin thescope ofArticle XX(g).
a) "Related totheconservation ofexhaustible natural resources..."
3.59 TheUnited States argued thatclean airwasanexhaustible resource within themeaning of
Article XX(g) since itcould beexhausted bytheemissions ofpollutants suchasVOCs, NOx and
toxics. Inthemost polluted areas, itcould become chronically contaminated andremain soover
longperiods oftime. Aircontaining pollutants could move longdistances tocontaminate other
airsheds. Moreover, bystopping airdegradation, theCAA alsoprotected other exhaustible
natural resources suchaslakes, streams, parks, crops andforests, which were affected byair
pollution. Thus, theobjectives underlying thereformulated andconventional gasoline
programmes fellwithin therange ofpolicies topreserve bothclean airand,consequently, other
natural resources.
3.60 Venezuela noted thatitshared withtheUnited States aconcern fortheimpact ofdirtyair
onhealth, butclaimed thattheUnited States 'arguments regarding theapplicability of
Article XX(g) tothiscasewere bothfactually andlegally erroneous. Recalling pastpanel reports,
Venezuela considered thattheexceptions provided forbyArticle XXhadtobeinterpreted
narrowly, inamanner thatpreserved thebasic objectives andprinciples oftheGeneral
Agreement16.Noting thattheoriginal purpose ofArticle XX(g) wastopermit exceptions to
otherwise applicable prohibitions orrestrictions ontheexport oftradeable goods thatcould be
exhausted asaresult oftheirexploitation, Venezuela doubted thatclean airwasanexhaustible
natural resource within themeaning ofarticle XX(g). Venezuela considered thatclean airwasa
"condition" ofairthatwasrenewable rather thanaresource thatwasexhaustible, suchas
petroleum andcoal. There wasnotextual basis forexpanding thescope ofArticle XX(g) tocover
renewable "conditions" ofresources asopposed toexhaustible natural resources.
3.61 Venezuela noted thatunder established GATT jurisprudence, ameasure "related to"the
conservation ofanexhaustible natural resource onlyifitwas"primarily aimed at"conserving that
resource17.TheUnited States hadnotevenattempted toargue thattheGasoline Rule's
discriminatory requirements, which were themeasure atissue inthedispute, were "primarily
aimed at"conservation, buthadmerely attempted tojustify thatthereformulated andconventional
gasoline requirements fellunder Article XX(g). Furthermore, theUnited States hadidentified
onlytheprotection ofhealth astheprimary objective forthereformulated andconventional
gasoline requirements, which wasirrelevant toanArticle XX(g) analysis. Venezuela noted thatit
16"United States .Restrictions onImports ofTuna", DS29/R, 16June1994 (unadopted), "Canada -Administration ofthe
Foreign Investment Review Act", BIDS 30S//140, para. 5.20(adopted on7February 1984), "United States -Section 337oftheTariff
Actof1930", BISD 36S/345 (adopted on7November 1989).
17"Canada -Measures Affecting Exports ofUnprocessed Herring andSalmon", BISD 35S/98, para. 4.6(adopted on
22March 1988).WT/DS2/R
Page23
hadpreviously demonstrated tothePanel thattheGasoline Rulemethodology contained loopholes
which undermined itsownconservation objectives, thusconfirming thatthediscriminatory
baseline system could notbe"primarily aimed at"theconservation ofanexhaustible natural
resource.
3.62 TheUnited States disagreed withtheclaim thatclean airwasnotanexhaustible natural
resource within themeaning ofArticle XX(g). TheUnited States maintained thatairwas
undoubtedly anatural resource which could beexhausted ifitwasrendered unfitforhuman,
animal orplant consumption. Thiswassimilar totherecognition inprevious panel proceedings
thatfishwere an"exhaustible natural resource" since theirpopulations could bedepleted or
rendered extinct18.
b) "...made effective inconjunction withrestrictions ondomestic
production orconsumption"
3.63 TheUnited States considered thattheGasoline Rulerestricted domestic production of
gasoline byrequiring manufacturers tolimittheirproduction ofgasoline sothatoverthecourse of
theyeartheaverage ofparticular components ofthegasoline didnotexceed certain maximum
levels. Italsorestricted domestic consumption byensuring thattheaverage ofthose components
ofgasoline solddidnotexceed certain maximum levels.
3.64 Venezuela rejected thisargument because itconsidered thattheUnited States hadnot
shown thatthediscriminatory baseline requirements were "primarily aimed atrendering effective"
restrictions ondomestic production orconsumption ofclean air,the"natural resource" tobe
conserved bytheGasoline Rule. TheUnited States hadonlyreferred torestriction ondomestic
production andconsumption ofgasoline.
3.65 Brazil argued that,evenassuming thatclean airwasanexhaustible natural resource, the
Gasoline Ruledidnotrestrict domestic production orconsumption ofclean air.Atbest,the
Gasoline Rulesought toincrease production ifnotconsumption ofclean air,nottorestrict it.
Moreover, neither theCAA northeGasoline Rulerestricted inanywaythequantity ofgasoline
thatcould beproduced orconsumed intheUnited States, butmerely regulated itsquality. Since
neither theproduction northeconsumption ofairorgasoline wasrestricted bytheCAA orthe
Gasoline Rule, theGasoline Ruledidnotfallunder Article XX(g).
3.66 TheUnited States argued thattheGasoline ruledidrestrict domestic consumption ofclean
airthrough itsrestriction ofemissions thatpolluted theair.Thiswassimilar torestrictions
applied oncarsinorder toconserve fuel. Inthiscase, theGasoline Rule'sapplication toimports
-including thebaseline rules- wasprimarily aimed atrendering effective restrictions ondomestic
production ofdirtyair,orconversely theconsumption ofclean air,through regulation ofthe
gasoline thatcaused airpollution.
7. Preamble toArticle XX
3.67 TheUnited States argued that,asithaddemonstrated inthediscussion concerning
Article III,theGasoline Ruleapplied equally tosimilarly situated parties. Importers andblenders
were required tomeettheparameters of1990 average USgasoline because theycould not
ascertain therefinery oforigin andthequality ofthegasoline theymarketed in1990. This
avoided thealternatives ofeither "gaming" problems orexcluding most imported gasoline from
18"Canada -Measures Affecting Exports ofUnprocessed Herring andSalmon", BISD 35S/98 (adopted on22March 1988) and
"United States -Prohibition ofImports ofTuna andTuna Products from Canada, BISD 29S/91 (adopted on22February 1982).WT/DS2/R
Page24
themarket. Unlike domestic refiners, importers hadtheflexibility torelyonavariety ofsources
soastomeetanannual average quality ofgasoline. Moreover, foreachoftherequirements,
about halfofUSgasoline produced bydomestic refiners hadtobecleaner incertain respects than
theannual average gasoline quality supplied byimporters. Inaddition, aportion oftheUS
gasoline market wasbeing supplied withgasoline bydomestic refiners which hadtomeetthe
statutory baseline because theirgasoline could notbepresumed tohavebeenpartofthegasoline
poolin1990. Buttotheextent thattheenforcement conditions differed between theUnited States
andother countries, the"same conditions" didnotprevail intheUnited States andinother
supplying countries. Accordingly, anydifferences intreatment were neither arbitrarily nor
unjustifiably discriminatory, butwere based onvalid, legitimate policy reasons.
3.68 TheUnited States further argued thattheGasoline Ruledidnotconstitute adisguised
restriction ontrade since itsobjective wastoensure nodegradation from 1990 levels foremissions
andairpollutants, ahealth objective thathadnothing todowitharestriction ontrade. The
provisions were transparent andimposed thesame overall requirements, stemming from thesame
objective, onimported asondomestic gasoline. Theevolution oftheprovisions atissue
demonstrated thattreatment ofimports hadnothing todowiththefundamental structure ofthe
partoftherulethatwasbeing contested. Forconventional gasoline, theCAA prescribed
individual baselines onaproducer-specific basis forrefiners, blenders andimporter. Atthetime
theCAA Amendments were introduced, imports didnotfigure significantly inthedebate, not
surprisingly inthelightoftheirsmall (2to6percent) share oftheUSgasoline market. Inview
oftheuncertainty oftheemissions effects ofthese parameters irrespective ofthesource of
gasoline, in1991 EPAagreed toregulate, withrespect toreformulated gasoline, onthebasis of
individual baselines forthethree non-degradation requirements.
3.69 Venezuela argued thatthe75%Rulewhich applied toonlyafewrefineries thatwere
historically determined didgrant anadvantage togasoline imported bytheUnited States from
certain thirdcountries, asopposed togasoline imported from Venezuela. Thus, theGasoline Rule
constituted ameans ofarbitrary andunjustifiable discrimination between countries where thesame
conditions prevailed. Referring topastpanel reports19,Venezuela considered thatthereference
"where thesame conditions prevail" didnotrelate tothenational treatment obligations, ashad
beenargued bytheUnited States, butonlytothemost-favoured-nation obligation oftheGeneral
Agreement. Moreover, ashadbeenpreviously argued byVenezuela, thediscriminatory baseline
requirements oftheGasoline Rulewere notjustified byenvironmental concerns, butintended to
distort theconditions ofcompetition infavour ofUSgasoline against imported gasoline. Hence,
theGasoline Rulewasadisguised restriction oninternational trade, within themeaning ofthe
Preamble ofArticle XX.
3.70 Brazil rejected thearguments given bytheUnited States andargued thatbydiscriminating
between theUnited States andallother countries, andbydiscriminating among thirdcountries
based upon thecriteria ofownership andquantity ofexports, theGasoline Ruleconstituted a
means ofarbitrary orunjustifiable discrimination between countries where thesame conditions
prevailed. Since thediscrimination ofimported products wassoblatant, Brazil considered thatthe
restrictions ontrade were notdisguised.
19"United States -Imports ofCertain Automotive Spring Assemblies", BISD 30S/107, para. 55(adopted on26May1983) and
"United States -Prohibition onImports ofTuna andTuna Products from Canada", BISD 29S/91, para. 4.8(adopted on
22February 1982).WT/DS2/R
Page25
8. Article XXIII -Nullification andImpairment
3.71 Venezuela argued that,inaddition toitsviolation claim under XXIII:1(a), itwasmaking
analternative claim ofnullification andimpairment under XXIII:1(b). Thediscriminatory
baseline requirements hadresulted inshipments ofapproximately thirty-three thousand fewer
barrels ofVenezuelan gasoline totheUnited States perdaythanwould bepossible absent the
discrimination. Theprice ofVenezuelan gasoline anditsshare intheUSmarket, aswellasthe
investment programme forVenezuelan refineries, hadalsobeenadversely affected. Venezuela
wasaware thatstatistical evidence ofadverse trade effects wasnotthebasis forafinding of
nullification orimpairment under Article XXIII:1(b). Nevertheless, itwished toemphasize that
bysoaffecting trade volumes, prices received forVenezuelan gasoline, Venezuela 'sshare inthe
USmarket andPDVSA 'sinvestment programme, theGasoline Rulehaddistorted theconditions
ofcompetition fortrade intheUnited States compared totheconditions reasonably expected by
Venezuela under theGeneral Agreement. Venezuela saidthatifthePanel found nullification or
impairment under Article XXIII:1(a), itneeded notmake aruling onnon-violation nullification or
impairment under Article XXIII:1(b).
3.72 Inresponding toother claims byVenezuela andBrazil, theUnited States contested
generally theallegation thatthere wasanyidentifiable impact on1995 Venezuelan exports
attributable totheGasoline Rule. Venezuela 'sexports totheUnited Sates hadsteadily declined
overthelastfiveyears, anditsdecrease inexports in1995 wasentirely consistent withtheearlier
decline.
C. Agreement onTechnical Barriers toTrade
1. Article 2-Preparation, Adoption andApplication ofTechnical
Regulations byCentral Government Bodies
a) Whether orNottheGasoline RuleisaTechnical Regulation
3.73 Venezuela andBrazil submitted thattheGasoline Rulewasa"document" which laiddown
"product characteristics" and"with which compliance wasmandatory" forbothconventional and
reformulated gasoline. Therefore, itwasa"technical regulation" within themeaning ofAnnex I
oftheTBTAgreement.
3.74 TheUnited States replied thatthenon-degradation requirements contained intheGasoline
Ruledidnotspecify particular product characteristics, andtherefore didnotmeettheTBT
Agreement 'sdefinition ofa"technical regulation". Shipments ofgasoline ofwidely varying
characteristics could besoldbyaparticular entity, theonlyrequirement being thatattheendof
theyear, theaverage ofcertain oftheirchemical ingredients fellbelow certain levels. Thus, these
provisions were requirements oncompanies, notonproducts, andcompliance wasmeasured ona
company levelforimporters andblenders, andonarefinery levelfordomestic refiners, butnot
onaproduct basis. These provisions constituted requirements ontotalannual sales, butwere not
technical regulations within themeaning oftheTBTAgreement. Therefore, theTBTAgreement
didnotapply tothisdispute.
3.75 Venezuela maintained thatEPA'sregulation implementing theCAA through thebaseline
setting mechanisms precisely established product characteristics forgasoline consumed inthe
United States andwastherefore a"document which laysdown product characteristics" within the
meaning ofthedefinition contained inAnnex IoftheTBTAgreement. Moreover, the
United States itself admitted thisfactwhen saying thattheRuledealtwith"chemical ingredients".
Venezuela wasalsooftheviewthataveraging didnotmake anydifference forthepurpose oftheWT/DS2/R
Page26
TBTAgreement since anyaveraging techniques required examination oftheproperties ofeach
individual gasoline shipment. Excluding from thecoverage oftheTBTAgreement regulations
relying onaveraging would openagaping loophole. Under thisinterpretation, theobligation of
theAgreement could beavoided byaveraging. Venezuela considered thattheUnited States
wanted toavoid examination under theTBTAgreement inorder toescape therequirements
contained inArticle 2.2.
3.76 Brazil objected totheUnited States 'argument thattheGasoline Rulewasnotatechnical
regulation within themeaning oftheTBTAgreement. Brazil considered thatthelanguage ofthe
CAA andthatoftheGasoline Rule, referred totheestablishment ofproduct standards forgasoline
when determining thefuelproperties forthestatutory baseline andtheindividual baselines. These
product standards applied togasoline were mandatory. Thefact,argued bytheUnited States, that
noparticular shipment ofgasoline needed tomeetanyprecise standards since therequirements
were measured onanannual average basis, andthusthatthe"product" wastheannual quantity of
gasoline produced, blended, orimported, rather thaneachsub-unit, wasirrelevant. Annual
production inthiscasewassimply theunitofproduction towhich thestandard wasapplied.
Brazil noted thatiftheUnited States were correct initsassertion thattheindividual baselines
applied torefiners andnottogasoline, thediscrimination would thenbeevenmore apparent
because foreign refiners hadnobaseline. Inthiscaseamandatory requirement would apply only
toimported gasoline while, under thelogic oftheUnited States, norequirement would apply to
domestic gasoline, asdistinct from domestic refiners. However, theenforcement andsurveillance
system provided forbyEPAintheGasoline Ruleinorder toregularly check thequality of
gasoline anditsproperty attherefinery levelargued infavour ofatechnical regulation setting
forth product characteristics. Moreover, theUnited States 'ownstatements tothePanel
acknowledged thisfactwhen declaring thatthe"requirements" oftheGasoline Rulewere
"necessary toprotect human, animal andplant lifeorhealth". Inconclusion, Brazil considered
thatarulewhich obliged imported gasoline thatdidnotmeetthestatutory baseline tobeblended
withgasoline thatexceeded these requirements inorder tomeetthemandatory statutory
requirements wasa"document" withmandatory product characteristics.
3.77 TheUnited States argued thattheTBTAgreement hadbeendesigned toelaborate onthe
disciplines ofArticle IIIoftheGeneral Agreement foraveryspecific subset ofmeasures
(technical regulations, standards andconformity assessment procedures). Thefactthatameasure
wasinwriting, mandatory andapplied toproducts didnotmake itatechnical regulation. Excise
taxes, forinstance, metallthese criteria butwere not"technical regulations". Similarly, theterm
"technical regulation" wasnotsobroad astocover allgovernment regulatory actions affecting
products. Forexample, government regulations requiring factory smokestacks tohavedevices to
reduce emissions were nottechnical regulations, though theywere inwriting, mandatory and
specified "characteristics". Contrary towhatwasargued bythecomplainants, there were no
minimum ormaximum content oremissions requirements applied withrespect tothenon-
degradation requirements forindividual shipments ofeither reformulated orconventional gasoline
under theSimple Model. Ashipment orevensaleofgasoline wasnotrequired tomeetspecific
product characteristics withrespect tothenon-degradation requirements atissue. TheGasoline
Rulewasnotsetting uniform criteria interms ofgasoline characteristics; standardization was
neither thepurpose northeresult oftheregulation. TheUnited States concluded thatthe
complainants were interpreting theterm"technical regulation" outofcontext andsuchan
interpretation, ifaccepted, would introduce intotheTBTAgreement many measures which were
infactnotintended tobecovered. TheUnited States alsoargued thatBrazil 'sviewthata
"product" inthiscasebedefined asanentire year'sproduction, rather thanashipment orabatch,
would bearadical departure from theconcept of"product" under theWTO andwaswithout basis
intheWTO.WT/DS2/R
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b) Article 2.1
3.78 Venezuela argued thatArticle 2.1oftheTBTAgreement incorporated theobligations of
national treatment andMFN setforth inArticles IIIandIoftheGeneral Agreement. Venezuela
andBrazil argued that,asatechnical regulation within themeaning oftheTBTAgreement, the
Gasoline Rulelaiddown product characteristics forimported Venezuelan andBrazilian gasoline
thatgavelessfavourable treatment thanthatprovided toimports from certain thirdcountries and
toUSgasoline. Thus, itviolated theobligations ofnational treatment andMFN treatment
contained inArticle 2.1oftheTBTAgreement.
c) Article 2.2
3.79 Venezuela andBrazil claimed thattheGasoline Rulecreated unnecessary obstacles to
international trade inviolation ofArticle 2.2oftheTBTAgreement.
3.80 Venezuela considered thattheGasoline Ruleviolated Article 2.2fortworeasons. First,
there wasevidence thatthisRulehadbeen"prepared, adopted orapplied withaviewto...
creating obstacles tointernational trade". TheUnited States didnotintend todiscriminate against
imported gasoline when itinitiated theregulatory process. However, crucial decisions involving
thespecific discriminatory aspects oftheRulewere knowingly made bothduring theregulatory
process andthereafter. Thetestimony under oathmade inApril 1994 byagovernment official to
theUnited States Senate wasevidence thatthediscrimination wasintentionally adopted asameans
ofaffording protection togasoline produced intheUnited States.
3.81 Second, theGasoline Rulehadtheeffect ofcreating anunnecessary obstacle to
international trade because themore stringent requirements imposed onimported gasoline were
notnecessary tofulfil thestated objective oftheRulewhich istoimprove airquality intheUnited
States. Inthisrespect, Venezuela considered thatArticle 2.2oftheTBTAgreement provided
greater guidance withrespect totheconcept of"necessity" thanArticle XXoftheGeneral
Agreement, especially itssecond sentence which expressly callsforacertain balance. Article XX
spoke onlyofmeasures thatare"necessary", which hadbeeninprevious cases strictly interpreted
tomean thatameasure isnotnecessary ifitisnottheleasttrade-restrictive measure reasonably
available20.Asexplained inrelation ofArticle XX(b), theGasoline Ruleclearly pursued atrade-
restrictive approach despite thefactthatalternatives consistent withtheGeneral Agreement were
available, while therisksofnon-fulfilment ofanylegitimate objective hadbeendeliberately
exaggerated. EPAitself hadacknowledged thatlesstrade-restrictive alternatives ofachieving the
airquality objective were possible andthe1994 Proposal, though notentirely consistent withthe
General Agreement, wasonesuchalternative.
3.82 Venezuela further considered thattherisksofnon-fulfilment ofalegitimate objective had
tobeassessed against "scientific andtechnical information" which, inthecaseathand, hadnever
beenprovided despite various requests made byVenezuela, inparticular under Article 2.5ofthe
TBTAgreement. Article 2.2oftheTBTAgreement required thatthetrade-restrictive elements of
atechnical regulation beeliminated unless "scientific andtechnical information" orother reliable
factual datademonstrate thatthose elements were necessary tofulfil alegitimate objective. The
United States hadnever submitted scientific evidence ortechnical datademonstrating thatthe
different baseline requirements were necessary tofulfil theairquality objectives buthadalways
relied on"gaming" asthejustification. EPAhadnever attempted toanalyze howmuch imported
gasoline would besusceptible togaming orwhether, incaseofgaming, theimpact onhealth
20"United States -Section 337oftheTariff Actof1930", BISD 36S/345, adopted on7November 1989 and"Thailand -
Restrictions onImportation ofandInternal Taxes onCigarettes", BISD 37/200, adopted 7November 1990.WT/DS2/R
Page28
objectives would beunacceptable. Inthatregard, Venezuela recalled thatEPAitself had
acknowledged thattheenvironmental impact ofgaming wasspeculative because itlacked "clear
evidence" regarding theactual average quality of1990 imported gasoline anddidnotknow
whether asignificant amount ofimported gasoline was"cleaner" thanthestatutory baseline.
Moreover, solittlegasoline wasimported thatthepotential differential emissions -between
individual andstatutory baselines- would nothaveanysignificant impact ontheaverage emission
quality ofthegasoline consumed intheUnited States.
3.83 Brazil stated that,forthereasons already expressed under arguments relating toArticles I
andIIIoftheGeneral Agreement andArticle 2.1oftheTBTAgreement, theGasoline Rule
created "unnecessary obstacles tointernational trade" inamanner contrary toArticle 2.2ofthe
TBTAgreement.
2. Article 12-Special andDifferential Treatment
ofDeveloping Country Members
3.84 Venezuela observed thatArticle 12oftheTBTAgreement imposed certain obligations on
theUnited States withrespect todeveloping countries. Venezuela didnotseekanyspecial
treatment butmerely wanted itsgasoline tobeheldtothesame baseline requirements asUS
gasoline. Venezuela stated thatitwasnotasking forthePanel toruleunder Article 12but
intended topoint outthatthediscriminatory treatment affecting Venezuelan gasoline was
particularly objectionable inthelightofthatprovision.
IV. SUBMISSIONS BYINTERESTED THIRD PARTIES
A. TheEuropean Communities
4.1 TheEuropean Communities (the"EC") stated that,asanexporter totheUnited States of
gasoline forautomobiles andother fueloils,ithadasubstantial interest inthematter before the
Panel. In1994, thetotalvolume ofEC-12 exports totheUnited States forgasoline represented
6'423'411metric tonnes. Thisvolume hadincreased since theenlargement oftheEC,on
1January 1995. TheECdeclared thatitdidnotcontest therightoftheUnited States toenforce
legislation whose purpose wastoprotect human, animal orplant lifeorhealth. However, such
measures hadtobeinconformity withtheprovisions oftheWTO Agreement andnotbeapplied
sothatimports from thirdcountries were discriminated against, thatthedomestic industry was
afforded protection, orthatdisguised restrictions were imposed oninternational trade.
4.2 TheECstated that,while agreeing withtheUnited States thattheapplication offormally
identical provisions could, incertain cases, accord inpractice lessfavourable treatment to
imported products, itcould notagree withtheconsequences which theUnited States seemed to
draw from thefindings ofthepanel report "United States -Section 337oftheTariff Actof1930"
forthepresent case. Itcould notbeconcluded from thatreport thatwhen itwasnottechnically
feasible toapply toimported products theruleapplied todomestic products, itwasthensufficient
tofindaworkable rulewhich wassufficiently close tothatapplicable todomestic products,
without changing thatlatter rule. TheECconsidered thatthelogic behind Article IIIofthe
General Agreement required Members toachieve effective non-discrimination orabsence of
protection. Such anobjective should beachieved preferably byamending existing rules orre-
formulating newrules which could beapplied identically todomestic andimported goods.
4.3 TheECargued thatrisksofviolations ofArticle III:1and4resulted from thefactthat
Methods 2and3ofestablishing individual baselines were onlyavailable todomestic refiners.WT/DS2/R
Page29
TheECdidnotwanttodiscuss theaccuracy ofthearguments developed bytheUnited States with
respect tothefeasibility ofindividual baselines forforeign refiners, butassumed, forthesakeof
argument, thatMethods 2and3could notbeapplied toimported gasoline inthiscase.
Considering theexplanations given bytheUnited States astowhatthestatutory baseline
represented, andassuming theywere correct, theECfailed toseewhyUSrefiners could notbe
subject tothestatutory baseline, likeimporters andblenders. Such ameasure would havebeenin
totalconformity withArticle III,paragraphs 1and4.Inaddition, itappeared from the
information submitted bythemain parties tothedispute thatbarely halfoftheUSrefiners had
theirindividual baselines approved atthetimeoftheentry intoforce oftheRule. While not
affecting theexistence oftheviolation, thisfactproved thattheapplication ofthestatutory
baseline ergaomnes would probably notaffect significantly thecompetitive position ofUS
refiners.
4.4 TheECunderstood theconcern expressed bytheUnited States thatcertain importers and
blenders, whohadtheflexibility toselect gasoline from various sources, might haveanadvantage
overUSrefiners ifthestatutory baseline were tobeapplied toallgasoline producers. However,
thispotential advantage wasinherent totheaveraging mechanism contained intheGasoline Rule
andwasnotasufficient reason tointroduce asystem which would unavoidably favour certain US
producers. Article IIIrequired thatnolessfavourable treatment begiven toimported products,
notthecontrary21.Ifoneconsidered thataUSrefiner might haveproduced extremely "dirty"
gasoline in1990, theGasoline Ruledidnotgiveanimmediate incentive forUSrefiners toadapt
theirproduction, whereas increased access toUSmarket forthirdcountry gasoline wasdependent
onagradual approximation oftheirquality compared withthestatutory baseline. Therefore, the
Gasoline Ruleentailed attheveryleastaserious riskofdiscrimination, which constituted, by
itself, aform ofdiscrimination22.According topastpanel reports, theUnited States hadtoshow
that,despite thedifferent treatment accorded toimported products, thenolessfavourable
treatment standard ofArticle IIIwasmet.
4.5 Regarding the75%Rule, theECargued thatthefactitwasbased onobjective criteria,
asargued bytheUnited States, wasnotsufficient toavoid discrimination inthepresent case. A
defacto discrimination intheapplication ofthemost-favoured-nation principle waspossible, as
thecriteria usedtogrant thattreatment were based onthesituation in1990. Animporter meeting
therequired criteria afterthatdatecould nothaveinvoked it.Hence, theRulecould onlybenefit
certain countries where UScompanies hadinvested inlocalrefiners before 1990. As
acknowledged bytheUnited States, thiscould haveincluded Canada, where certain UScompanies
owned refineries atthattime. However, thiscould nothavebenefitted production ofrefiners
located incountries where, forinstance, thepetroleum industry wasmostly, ifnotexclusively,
owned bytheState in1990. Therefore, the75%Rulewasdefacto notbased onobjective
criteria, andhence contrary toArticle IoftheGeneral Agreement. TheECfurther argued that
thePanel should make afinding onthisRuledespite thefactthatitcould nolonger beinvoked.
APanel should beguided initsexamination bythecontent ofthe"matter" -the75%Ruleinthe
present case- referred toit23.Adetermination bythePanel ontheconformity ofthatrulewith
Article Iwould helpavoid thiskindofmeasure being found inthefuture inthelegislation ofa
WTO Member.
21"United States -Section 337oftheTariff Actof1930", BISD 36S/345 (adopted on7November 1989).
22"EEC -Payments andSubsidies PaidtoProcessors andProducers ofOilseeds andRelated Animal Feed Proteins", BISD
37S/86 (adopted on25January 1990).
23United States -Imposition ofCountervailing Duties onCertain Hot-Rolled Lead andBismuth Carbon Steel Products from France,
Germany andtheUnited Kingdom", SCM/185, 15November 1994 (notadopted).WT/DS2/R
Page30
4.6 Astowhether theGasoline Rulefellunder theTBTAgreement, theECstated thatit
agreed withtheUnited States thattherequirements onchemical ingredients didnotneedtobe
satisfied byeachshipment andalsothat,themeasures atissue being based onayearly average,
theimporters remained freetoimport different varieties ofgasoline provided thattheannual
average mettherequirements. However, theECdoubted thatastandard should beexcluded from
thescope oftheTBTAgreement onlyforthereason thatitrequired compliance onayearly basis
instead ofonashipment basis. Itwasclear thattheimporter hadonlytobalance various qualities
ofgasoline inorder tomeetthestatutory baseline. From thepoint ofviewoftheexporting
country, theGasoline Rulecreated aclear incentive foradapting itsproduction standards ifit
wanted tomaintain orincrease itsshare oftheUSmarket. Exporting refiners notadapting their
production standards toUSrequirements (oratleastnotgradually narrowing thedifference down
tototalcompliance) would beunlikely toincrease theirsalesintheUSsince importers hadto
blend orbalance the"dirty" imported gasoline with"cleaner" gasoline. The"cleaner" gasoline
being likely tobemore expensive, importers would gradually cease toimport "dirty" gasoline,
thusobliging foreign refiners tomeetthestatutory baseline foreachshipment. Forthisreason,
theECcould notagree withtheUnited States thatthenon-degradation requirements didnot
specify particular "product characteristics". Although nomaximum content wassetpershipment,
theUSmethodology resulted inpushing themarket toapply standards gradually closer tothe
averages referred tointherule.
4.7 TheECconsidered that,incertain circumstances, theUSsystem would impose aclearly
defined standard. Forexample, anexporter setting upitsownimportation network intheUnited
States waslikely tobeobliged toimmediately adapt itsproduction toUSstandards inorder notto
havetoimport gasoline ofdifferent qualities atthesame timeasitsowngasoline (with therelated
increased costs). Therefore, theECbelieved thattheGasoline Ruleimposed atechnical
regulation within themeaning oftheTBTAgreement. TheECfurther considered that,ifone
were toagree withtheUSarguments, suchanaveraging system could represent apotential for
circumvention oftheTBTAgreement, mainly inthefieldofchemical products where itwasused
relatively frequently. Ifthemere useofanaveraging requirement wassufficient toexclude the
TBTAgreement from applying tocertain environmental standards, thentheincreased legal
protection resulting from Article 2.2ofthatAgreement compared, forinstance, withArticle XX
oftheGeneral Agreement, would nolonger beavailable fortheother Members.
4.8 Referring tothefindings ofaprevious panel, theECconsidered that,from aprocedural
point ofview, theUnited States wasentitled torelyonArticle IIIandonArticle XXinthe
alternative24.However, Article XX,asanexception, hadtobeinterpreted strictly, andtheEC
wasoftheviewthattheGasoline Rule, inthewayitwasapplied, didnotmeettherequirements
ofArticle XXbutimposed adisguised restriction ontrade byallowing USrefiners tocontinue
producing "dirty" gasoline meeting theirindividual baselines, while imposing actual constraints on
foreign producers toadapt theirproduction toUSstandards. Such aprotectionist effect would
probably notbecreated ifidentical baselines were applied tobothimported anddomestically
produced gasoline. Moreover, asdemonstrated above, theapplication ofthestatutory baseline to
bothdomestic andimported gasoline would haveachieved thesame aimwithout introducing
discrimination between sources ofsupply. Inanyevent, measures inconsistent withtheGeneral
Agreement were notnecessary toenforce the1990 CAA amendment. Therefore, theEC
considered that,eveniftheGasoline Ruledidnotconstitute a"means ofarbitrary orunjustifiable
discrimination between countries where thesame conditions prevail", itwasobviously ameans to
alleviate therestructuring efforts oftheUSrefining industry while atthesame timerequiring
foreign producers toadapt almost immediately theirproduction. Hence, while officially pursuing
24"United States -Restrictions onImports ofTuna", DS21/R, 3September 1991, para. 5.22(notadopted).WT/DS2/R
Page31
environmental objectives, itintroduced adisguised restriction ontrade. TheECconcluded that
thebaselines system wasnotproportionate anddidnotmeetthenecessity testofArticle XX.
B. Norway
4.9 Norway stated thatitsreasons forreserving itsrights asathirdparty inthiscasewere in
legalandpractical terms verysimilar tothose argued byVenezuela andBrazil intheirrespective
requests fortheestablishment ofapanel. TheGasoline Regulation denied national treatment to
gasoline imported from Norway. Therefore, Norway supported Venezuela andBrazil 'srequest
thatthePanel findtheGasoline Ruletobeinconsistent withArticles IandIIIoftheGeneral
Agreement, andwithArticle 2oftheTBTAgreement.
4.10 Norway saidthattheNorwegian State OilCompany ("Statoil") wasexperiencing avery
difficult situation because ofthewaytheGasoline Ruleoperated. There wasaconsiderable
incentive forStatoil tobeabletoexport totheUSmarket ascompared toother markets. In
1989, Statoil builttheMongstad refinery withtheobjective ofselling totheUnited States some
0.5millions tonsperyearoutofatotalgasoline production of2,5millions tonsperyear. In
1990, Statoil soldatotalofabout 470'000tonsofgasoline totheUnited States, outofwhich
about 350'000tonscame from Mongstad refinery. Since December 1994, Statoil hadnot
exported gasoline from Mongstad totheUnited States.
4.11 Norway argued thatchanging specifications wasinthenature oftherefining business.
However, likeVenezuela 'sandBrazil 'srefineries, Statoil wasaffected bythediscriminatory
nature oftheUSregulation. Assigned tothestatutory baseline foritsexports ofreformulated
gasoline until1998 andforconventional gasoline indefinitely, theMongstad refinery would not
competitively beabletoproduce anyvolumes ofgasoline, based oncurrent refinery
configurations andinvestment plans. Norway considered that,ifthePanel ruled infavour of
Venezuela andBrazil, Statoil would, asan"Importer ofRecord" in1990, beallowed toestablish
itsindividual 1990 baseline forthevolume soldthatyear.
V. INTERIM REVIEW
5.1 On18December 1995, theUnited States requested thePanel toreview inaccordance with
Article 15.2oftheDSU precise aspects oftheinterim report thathadbeenissued totheparties on
11December 1995, andtoholdameeting forthatpurpose. ThePanel metwiththeparties on3
January 1996 inorder toheartheirarguments concerning theinterim report. ThePanel carefully
reviewed thearguments presented bytheUnited States andtheresponses offered byVenezuela
andBrazil.
5.2 Inrespect oftheinterim report ’sdiscussion ofArticle III,theUnited States argued thatin
several respects theinterim report dealtwithissues thatwere notdisputed bytheparties orwere
unnecessary tothePanel’sconclusion thataspects oftheGasoline Ruleviolated Article III:4.
While thePanel didnotagree withallthearguments made bytheUnited States, itdidrevise the
report totakeintoaccount those arguments withwhich itagreed andparagraphs 6.5and6.9-
6.11ofthefindings reflect thePanel’sresponse.
5.3 Inrespect oftheinterim report ’sdiscussion ofArticle XX(b), theUnited States objected
tothePanel’suseofspecific terms which didnotappear inthetextoftheprovision, the
description oftheUSargument, andthePanel’sanalysis ofalternative measures available tothe
United States. ThePanel revised thereport where itaccepted theUSarguments andparagraphs
6.20-6.25and6.27-6.28ofthefindings reflect thePanel’sresponse.WT/DS2/R
Page32
5.4 Inrespect oftheinterim report ’sdiscussion ofArticle XX(d), theUnited States objected
tothePanel’suseofspecific terms which didnotappear inthetextoftheprovision. ThePanel
accepted theUSarguments andparagraph 6.31oftherevised findings reflects thePanel’s
response.
5.5 Inrespect oftheinterim report ’sdiscussion ofArticle XX(g), theUnited States objected
tothePanel’suseofspecific terms which didnotappear inthetextoftheprovision, andthe
analysis ofalternative measures available totheUnited States. Venezuela requested achange to
thedescription ofitsargument under thisprovision. ThePanel revised thereport where it
accepted thearguments oftheUSandVenezuela andparagraphs 6.35-6.36and6.40-6.41of
thefindings reflect thePanel’sresponse.
5.6 Inrespect oftheinterim report ’sdescriptive section, Venezuela andtheUnited States
suggested further changes which thePanel tookintoaccount inre-examining thatpartofthe
report. ThePanel revised thedescriptive section ofthereport where itaccepted theneedfor
these changes.
VI. FINDINGS
A. Introduction
6.1 ThePanel noted thatthedispute arose from thefollowing facts. TheClean AirActaims
tocontrol andreduce airpollution intheUnited States. TheActandcertain ofitsregulations (the
“Gasoline Rule”)setstandards forgasoline quality intended toreduce airpollution, including
ozone, caused bymotor vehicle emissions. From 1January 1995, theGasoline Rulepermits only
gasoline ofaspecified cleanliness (“reformulated gasoline ”)tobesoldinareas ofhighair
pollution. Inother areas, onlygasoline nodirtier thanthatsoldinthebaseyearof1990
(“conventional gasoline ”)canbesold.
6.2 TheGasoline Ruleapplies torefiners, blenders andimporters ofgasoline. Itrequires that
certain chemical characteristics ofthegasoline inwhich theydealrespect, onanannual average
basis, defined levels. IntheGasoline Rulesome ofthese levels arefixed; others areexpressed as
“non-degradation ”requirements. Under thenon-degradation requirements, eachdomestic refiner
must maintain, onanannual average basis, therelevant gasoline characteristics atlevels noworse
thanits“individual baseline ”—thatis,theannual average levels achieved bythatrefiner in1990.
Toestablish anindividual baseline, arefiner must show evidence ofthequality ofgasoline
produced orshipped in1990 (“Method 1").Ifthatevidence isnotcomplete, thenitmust usedata
onthequality ofblendstock produced in1990 (“Method 2").Ifthese twomethods donotresult
insufficient evidence, therefiner must alsousedataonthequality ofpost-1990 gasoline
blendstock orgasoline (“Method 3").
6.3 Importers arealsorequired touseanindividual baseline, butonlyinthecase(unlikely,
according totheparties tothedispute) thattheyareabletoestablish itusing Method 1data.
Unlike domestic refiners, theyarenotallowed toestablish anindividual baseline byusing the
secondary ortertiary dataspecified inMethods 2and3.Ifanimporter cannot produce Method 1
data, thenitmust usea“statutory baseline ”which theUnited States claims isderived from the
average characteristics ofallgasoline consumed intheUnited States in1990. Some other
domestic entities (such asrefiners withonlypartial orno1990 operations, andblenders with
insufficient Method 1data) arealsoassigned thestatutory baseline. Exceptionally, importers that
imported in1990 atleast75percent oftheproduction ofanaffiliated foreign refinery aretreated
asdomestic refiners forthepurpose ofestablishing baselines. Since thisdispute concerns onlytheWT/DS2/R
Page33
Gasoline Rule’snon-degradation requirements, andnotreformulated andconventional gasoline as
such, thePanel willrefergenerally to“gasoline ”inthecourse ofitsfindings.
6.4 Venezuela andBrazil claim thattheGasoline Ruleviolates thenational treatment
provisions ofArticle III:1and4oftheGeneral Agreement andthemost-favoured-nation provision
ofArticle I.Venezuela claims inthealternative thattheGasoline Rulehasnullified andimpaired
benefits under thenon-violation provisions ofArticle XXIII:1(b). Venezuela andBrazil alsoclaim
thattheGasoline Ruleviolates Article 2oftheAgreement onTechnical Barriers toTrade (the
“TBTAgreement ”).TheUnited States rejects these claims andargues thattheGasoline Rulecan
bejustified under theexceptions contained inArticle XX,paragraphs (b),(d)and(g),which
argument isrejected byVenezuela andBrazil. Italsoargues thattheGasoline Ruledoesnot
come within thescope ofArticle 2oftheTBTAgreement.
B. Article III
1. Article III:4
6.5 ThePanel proceeded toexamine theclaim thattheGasoline Ruleviolates Article III:4of
theGeneral Agreement, which states:
Theproducts oftheterritory ofanycontracting party imported intotheterritory of
anyother contracting party shallbeaccorded treatment nolessfavourable than
thataccorded tolikeproducts ofnational origin inrespect ofalllaws, regulations
andrequirements affecting theirinternal sale,offering forsale,purchase,
transportation, distribution oruse.
ThePanel noted thatunder thisprovision thecomplainants arerequired toshow theexistence of:
(a)alaw,regulation orrequirement affecting theinternal sale,offering forsale,purchase,
transportation, distribution oruseofanimported product; and(b)treatment accorded inrespect
ofthelaw,regulation orrequirement thatislessfavourable totheimported product thantothe
likeproduct ofnational origin. ThePanel agreed withtheparties thattheGasoline Rulewasa
law,regulation orrequirement affecting theinternal sale,offering forsale,purchase,
transportation, distribution oruseofanimported product. Itproceeded therefore toconsider
whether theGasoline Ruleaccorded lessfavourable treatment toimported products thantolike
products ofnational origin.
6.6 ThePanel noted thearguments ofVenezuela andBrazil thatimported gasoline was“like”
domestic gasoline, butreceived treatment lessfavourable because imported gasoline wassubjected
tomore demanding quality requirements thangasoline ofUSorigin. TheUnited States replied
thatgasoline from similarly-situated parties wastreated inthesame manner under theGasoline
Rule. Gasoline from importers wastreated nolessfavourably thanthatfrom other domestic non-
refiners suchasblenders, orrefiners whohadonlylimited ornooperations in1990.
6.7 ThePanel observed thatArticle III:4deals withtreatment tobeaccorded tolikeproducts.
However, thetextdoesnotspecify exhaustively those aspects thatdetermine whether theproducts
are“like”.Inresolving thisinterpretative issue thePanel referred, inconformity withArticle 3.2
oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes, tothe
Vienna Convention ontheLawofTreaties ,which states inArticle 31that“atreaty shallbeWT/DS2/R
Page34
interpreted ingood faithinaccordance withtheordinary meaning tobegiven totheterms ofthe
treaty intheircontext andinthelightofitsobject andpurpose ”.25
6.8 ThePanel proceeded toexamine thisissue inthelightoftheordinary meaning oftheterm
“like”.Itnoted thattheword canmean “similar ”,or“identical ”.ThePanel thenexamined the
practice oftheCONTRACTING PARTIES under theGeneral Agreement. Thispractice wasrelevant since
Article 31oftheVienna Convention directs that“subsequent practice intheapplication ofthe
treaty which establishes theagreement oftheparties regarding itsinterpretation ”isalsotobe
considered intheinterpretation ofatreaty. ThePanel noted thatvarious criteria forthe
determination oflikeproducts under Article IIIhadpreviously beenapplied bypanels. These
were summarized inthe1970 Working Party Report onBorder TaxAdjustments, which had
observed:
With regard totheinterpretation oftheterm‘likeorsimilar products ’,which
occurs some sixteen times throughout theGeneral Agreement, itwasrecalled that
considerable discussion hadtaken place ...butthatnofurther improvement of
thetermhadbeenachieved. TheWorking Party concluded thatproblems arising
from theinterpretation oftheterms should beexamined onacase-by-case basis.
Thiswould allow afairassessment ineachcaseofthedifferent elements that
constitute a‘similar ’product. Some criteria were suggested fordetermining, ona
case-by-case basis, whether aproduct is‘similar ’:theproduct 'send-uses ina
given market; consumers 'tastes andhabits, which change from country to
country; theproduct 'sproperties, nature andquality.26
These criteria hadbeenapplied bythepanel inthe1987 Japan Alcohol caseintheexamination
under Article III:2ofinternal taxation measures. Thatpanel hadproceeded onacase-by-case
basis, determining whether various alcoholic beverages were “like”onthebasis of“theirsimilar
properties, end-uses andusually uniform classification intariff nomenclatures. ”27ThePanel
considered thatthose criteria were alsoapplicable totheexamination oflikeproducts under
Article III:4.
6.9 Inlightoftheforegoing, thePanel proceeded toexamine whether imported anddomestic
gasoline were likeproducts under Article III:4. ThePanel observed firstthattheUnited States
didnotargue thatimported gasoline anddomestic gasoline were notlikeperse.Ithadargued
rather thatwithrespect tothetreatment oftheimported anddomestic products, thesituation ofthe
parties dealing inthegasoline must betaken intoconsideration. ThePanel, recalling itsprevious
discussion ofthefactors tobetaken intoaccount inthedetermination oflikeproduct, noted that
chemically-identical imported anddomestic gasoline bydefinition haveexactly thesame physical
characteristics, end-uses, tariff classification, andareperfectly substitutable. ThePanel found
therefore thatchemically-identical imported anddomestic gasoline arelikeproducts under
Article III:4.
6.10 ThePanel nextexamined whether thetreatment accorded under theGasoline Ruleto
imported gasoline waslessfavourable thanthataccorded tolikegasoline ofnational origin. The
Panel observed thatdomestic gasoline benefitted ingeneral from thefactthattheseller whoisa
refiner usedanindividual baseline, while imported gasoline didnot.Thisresulted inless
favourable treatment totheimported product, asillustrated bythecaseofabatch ofimported
25Vienna Convention ontheLawofTreaties, Art.31.
26L/3464, adopted on2December 1970, BISD 18S/97, 102,para. 18.
27"Japan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages", BISD 34S/83, 115,
para. 5.6(adopted on10November 1987).WT/DS2/R
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gasoline which waschemically-identical toabatch ofdomestic gasoline thatmetitsrefiner 's
individual baseline, butnotthestatutory baseline levels. Inthiscase, saleoftheimported batch
ofgasoline onthefirstdayofanannual period would require theimporter overtherestofthe
period tosellonthewhole cleaner gasoline inorder toremain inconformity withtheGasoline
Rule. Ontheother hand, saleofthechemically-identical batch ofdomestic gasoline onthefirst
dayofanannual period would notrequire adomestic refiner tosellonthewhole cleaner gasoline
overtheperiod inorder toremain inconformity withtheGasoline Rule. ThePanel alsonoted
thatthislessfavourable treatment ofimported gasoline induced thegasoline importer, inthecase
ofabatch ofimported gasoline notmeeting thestatutory baseline, toimport thatbatch atalower
price. Thisreflected thefactthattheimporter would havetomake costandprice allowances
because ofitsneedtoimport other gasoline withwhich thebatch could beaveraged soastomeet
thestatutory baseline. Moreover, thePanel recalled anearlier panel report which stated that“the
words ‘treatment nolessfavourable ’inparagraph 4callforeffective equality ofopportunities for
imported products inrespect oflaws, regulations andrequirements affecting theinternal sale,
offering forsale,purchase, transportation, distribution oruseofproducts. ”28ThePanel found
therefore thatsince, under thebaseline establishment methods, imported gasoline waseffectively
prevented from benefitting from asfavourable salesconditions aswere afforded domestic gasoline
byanindividual baseline tiedtotheproducer ofaproduct, imported gasoline wastreated less
favourably thandomestic gasoline.
6.11 ThePanel thenexamined theUSargument thattherequirements ofArticle III:4aremet
because imported gasoline istreated similarly togasoline from similarly situated domestic parties
—domestic refiners withlimited 1990 operations andblenders. According totheUnited States,
thedifference intreatment between imported anddomestic gasoline wasjustified because
importers, likedomestic refiners withlimited 1990 operations andblenders, could notreliably
establish their1990 gasoline quality, lacked consistent sources andquality ofgasoline, orhadthe
flexibility tomeetastatutory baseline since theywere notconstrained byrefinery equipment and
crude supplies. ThePanel observed thatthedistinction intheGasoline Rulebetween refiners on
theonehand, andimporters andblenders ontheother, which affected thetreatment ofimported
gasoline withrespect todomestic gasoline, wasrelated tocertain differences inthecharacteristics
ofrefiners, blenders andimporters, andthenature ofthedataheldbythem. However, Article
III:4oftheGeneral Agreement deals withthetreatment tobeaccorded tolikeproducts; its
wording doesnotallow lessfavourable treatment dependent onthecharacteristics oftheproducer
andthenature ofthedataheldbyit.ThePanel noted thatintheMaltBeverages case, atax
regulation according lessfavourable treatment tobeeronthebasis ofthesizeoftheproducer was
rejected.29Although thisfinding wasmade under Article III:2concerning fiscal measures, the
Panel considered thatthesame principle applied toregulations under Article III:4. Accordingly,
thePanel rejected theUSargument thattherequirements ofArticle III:4aremetbecause imported
gasoline istreated similarly togasoline from similarly situated domestic parties.
6.12 Apart from being contrary totheordinary meaning oftheterms ofArticle III:4, any
interpretation ofArticle III:4inthismanner would mean thatthetreatment ofimported and
domestic goods concerned could nolonger beassured ontheobjective basis oftheirlikeness as
products. Rather, imported goods would beexposed toahighly subjective andvariable treatment
according toextraneous factors. Thiswould thereby create great instability anduncertainty inthe
conditions ofcompetition asbetween domestic andimported goods inamanner fundamentally
inconsistent withtheobject andpurpose ofArticle III.
28"United States -Section 337oftheTariff Actof1930", BISD 36S/386, para5.11(adopted on7November 1989).
29"United States -Measures Affecting Alcoholic andMaltBeverages", BISD 39S/206, para. 5.19(adopted on19June1992).WT/DS2/R
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6.13 ThePanel considered thattheforegoing wassufficient todispose oftheUSargument. It
noted, however, thateveniftheUSapproach were tobefollowed, under anyapproach based on
“similarly situated parties ”thecomparison could justasreadily focus onwhether imported
gasoline from anidentifiable foreign refiner wastreated more orlessfavourably thangasoline
from anidentifiable USrefiner. There were, inthePanel’sview, many keyrespects inwhich
these refineries could bedeemed tobetherelevant similarly situated parties, andthePanel could
findnoinherently objective criteria bymeans ofwhich todistinguish which ofthemany factors
were relevant inmaking adetermination thatanyparticular parties were “similarly situated. ”
Thus, although these refineries were similarly situated, theGasoline Ruletreated theproducts of
these refineries differently byallowing onlygasoline produced bythedomestic entity tobenefit
from theadvantages ofanindividual baseline. Thisconsequential uncertainty andindeterminacy
ofthebasis oftreatment underlined, intheviewofthePanel, therationale ofremaining within
theterms oftheclear language, object andpurpose ofArticle III:4asoutlined above in
paragraph 6.12.
6.14 ThePanel thennoted theargument oftheUnited States thatthetreatment accorded to
gasoline imported under astatutory baseline wasonthewhole nolessfavourable thanthat
accorded todomestic gasoline under individual refiner baselines. TheUnited States claimed that
theGasoline Ruledidnotdiscriminate against imported gasoline, since thestatutory baseline (by
thenature ofitscalculation) andtheaverage ofthesumoftheindividual baselines both
corresponded toaverage gasoline quality in1990, andthatdomestic andimported gasoline was
treated equally overall. ThePanel noted that,inthese circumstances, theargument thaton
average thetreatment provided wasequivalent amounted toarguing thatlessfavourable treatment
inoneinstance could beoffset provided thatthere wascorrespondingly more favourable treatment
inanother. Thisamounted toclaiming thatlessfavourable treatment ofparticular imported
products insome instances would bebalanced bymore favourable treatment ofparticular products
inothers. Aprevious panel hadfound that
the"nolessfavourable" treatment requirement ofArticle III:4hastobe
understood asapplicable toeachindividual caseofimported products. ThePanel
rejected anynotion ofbalancing more favourable treatment ofsome imported
products against lessfavourable treatment ofother imported products. Ifthis
notion were accepted, itwould entitle acontracting party toderogate from theno
lessfavourable treatment obligation inonecase, orindeed inrespect ofone
contracting party, ontheground thatitaccords more favourable treatment insome
other case, ortoanother contracting party. Such aninterpretation would leadto
great uncertainty about theconditions ofcompetition between imported and
domestic products andthusdefeat thepurposes ofArticle III.30
ThePanel concurred withthisreasoning thatunder Article III:4lessfavourable treatment of
particular imported products insome instances could notbebalanced bymore favourable
treatment ofother imported products inother instances. ThePanel therefore rejected theUS
argument.
6.15 ThePanel observed that,considered evenfrom thepoint ofviewofimported gasoline asa
whole, treatment wasgenerally lessfavourable. Importers ofgasoline hadtoadapt toanassigned
average standard notlinked totheparticular gasoline imported, while refiners ofdomestic gasoline
hadonlytomeetastandard linked totheirownproduct in1990. Statistics onbaselines boreout
thisdifference intreatment. According totheUnited States, asofAugust 1995, approximately
30"United States -Section 337oftheTariff Actof1930", BISD 36S/345, para. 5.14(adopted on7November 1989).WT/DS2/R
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100USrefiners, representing 98.5percent ofgasoline produced in1990, hadreceived EPA
approval oftheirindividual baselines. Only three oftherefiners metthestatutory baseline forall
parameters. Thus, while 97percent ofUSrefiners didnotandwere notrequired tomeetthe
statutory baseline, thestatutory baseline wasrequired ofimporters ofgasoline, except intherare
case(according totheparties) thattheycould establish abaseline using Method 1.
6.16 ThePanel found thatimported anddomestic gasoline were likeproducts, andthatsince,
under thebaseline establishment methods, imported gasoline waseffectively prevented from
benefitting from asfavourable salesconditions aswere afforded domestic gasoline byan
individual baseline tiedtotheproducer ofaproduct, imported gasoline wastreated lessfavourably
thandomestic gasoline.
2. Article III:1
6.17 ThePanel thennoted thearguments advanced byVenezuela andBrazil thattheGasoline
Rulewasapplied “soastoafford protection todomestic production ”contrary toArticle III:1.
TheUnited States disagreed andargued inthealternative thatArticle III:1wasonlyhortatory and
could notform thebasis ofaviolation. ThePanel examined firstwhether, aftermaking afinding
ofinconsistency withArticle III:4, itshould make afinding under Article III:1. ThePanel noted
thatthepanel intheMaltBeverages casehadexamined aclaim made under paragraphs 1,2and4
ofArticle III. Thatpanel hadconcluded that“because Article III:1isamore general provision
thaneither Article III:2orIII:4, itwould notbeappropriate forthePanel toconsider [the
complainant ’s]Article III:1allegations totheextent thatthePanel were tofind[therespondent ’s]
measures tobeinconsistent withthemore specific provisions ofArticles III:2andIII:4.”31The
present Panel agreed withthisreasoning, andtherefore didnotfinditnecessary toexamine the
consistency oftheGasoline RulewithArticle III:1.
C. Article I:1
6.18 ThePanel proceeded toexamine theclaim ofVenezuela andBrazil thattheGasoline Rule
violated themost-favoured-nation provision ofArticle I:1bypermitting animporter touse
secondary evidence toestablish anindividual baseline, provided thatin1990 itimported atleast
75percent oftheproduction from anaffiliated foreign refinery. Venezuela andBrazil claimed
thattheruletargeted asmall number ofcountries, andthatthedifferent treatment wasbased on
criteria (ownership andproportion ofproduct purchased) thathadnolinktotheproduct, as
required under Article I:1.TheUnited States claimed therulewasbased onobjective criteria
and,inanycase, itwasnotapplicable because noimporter hadqualified forthebenefit before the
deadline.
6.19 ThePanel observed thatithadnotbeentheusual practice ofapanel established under the
General Agreement toruleonmeasures that,atthetimethepanel’sterms ofreference were fixed,
were notandwould notbecome effective. Inthe1978 Animal FeedProtein case, thePanel ruled
onadiscontinued measure, butonethathadterminated afteragreement onthepanel’sterms of
reference.32Inthe1980 Chile Apples case, thepanel ruled onameasure terminated before
agreement onthepanel’sterms ofreference; however, theterms ofreference inthatcase
specifically included theterminated measure and,itbeing aseasonal measure, there remained the
31"United States -Measures Affecting Alcoholic andMaltBeverages", BISD 39S/206, 270,para. 5.2(adopted on19June1992).
32"EEC -Measures onAnimal Feed Proteins", L/4599, BISD 25S/49 (adopted on14March 1978). SeealsotheReport ofthe
Panel on"United States -Prohibitions ofImports ofTuna andTuna Products from Canada", BISD 29S/91, 106,para. 4.3(adopted on
22February 1982).WT/DS2/R
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prospect ofitsreintroduction.33Inthepresent case, thePanel’sterms ofreference were
established afterthe75percent rulehadceased tohaveanyeffect, andtherulehadnotbeen
specifically mentioned intheterms ofreference. ThePanel further noted thatthere wasno
indication bytheparties thatthe75percent rulewasameasure that,although currently notin
force, waslikely toberenewed. Finally, thePanel considered thatitsfindings ontreatment under
thebaseline establishment methods under Articles III:4andXX(b),(d)and(g)would inanycase
havemade unnecessary theexamination ofthe75percent ruleunder Article I:1.ThePanel did
nottherefore proceed toexamine thisaspect oftheGasoline Ruleunder Article I:1oftheGeneral
Agreement.
D. Article XX(b)
6.20 ThePanel proceeded toexamine whether theaspect ofthebaseline establishment methods
found inconsistent withArticle III:4could, asargued bytheUnited States, bejustified under
paragraph (b)ofArticle XX. Therelevant parts ofArticle XXwere asfollows:
Subject totherequirement thatsuchmeasures arenotapplied inamanner which
would constitute ameans ofarbitrary orunjustifiable discrimination between
countries where thesame conditions prevail, oradisguised restriction on
international trade, nothing inthisAgreement shallbeconstrued toprevent the
adoption orenforcement byanycontracting party ofmeasures:
(b) necessary toprotect human, animal orplant lifeorhealth;
ThePanel noted thatastheparty invoking anexception theUnited States boretheburden ofproof
indemonstrating thattheinconsistent measures came within itsscope. ThePanel observed that
theUnited States therefore hadtoestablish thefollowing elements:
(1) thatthepolicy inrespect ofthemeasures forwhich theprovision wasinvoked fell
within therange ofpolicies designed toprotect human, animal orplant lifeor
health;
(2) thattheinconsistent measures forwhich theexception wasbeing invoked were
necessary tofulfil thepolicy objective; and
(3) thatthemeasures were applied inconformity withtherequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(b), alltheabove elements hadtobesatisfied.
1. Policy goalofprotecting human, animal orplant lifeorhealth
6.21 ThePanel noted theUnited States argument thatairpollution, inparticular ground-level
ozone andtoxic substances, presented health riskstohumans, animals andplants. TheUnited
States argued that,since about one-half ofsuchpollution wascaused byvehicle emissions, andthe
Gasoline Rulereduced these, theGasoline Rulewaswithin therange ofpolicy goals described in
Article XX(b). Venezuela andBrazil didnotdisagree withthisview. ThePanel agreed withthe
parties thatapolicy toreduce airpollution resulting from theconsumption ofgasoline wasa
33"EEC -Restrictions onImports ofApples from Chile", BISD 27S/98, (adopted on10November 1980).WT/DS2/R
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policy within therange ofthose concerning theprotection ofhuman, animal andplant lifeor
health mentioned inArticle XX(b).
2. Necessity oftheinconsistent measures
6.22 ThePanel recalled itsfinding inparagraph 6.16thatimported gasoline wastreated less
favourably thandomestic gasoline, since, under thebaseline establishment methods, imported
gasoline wasprevented from benefitting from asfavourable salesconditions aswere afforded
domestic gasoline byanindividual baseline tiedtotheproducer ofaproduct. ThePanel then
proceeded toexamine whether theaspect oftheGasoline Rulefound inconsistent withtheGeneral
Agreement wasnecessary toachieve thestated policy objectives under Article XX(b). ThePanel
noted thatitwasnotthenecessity ofthepolicy goalthatwastobeexamined, butwhether ornot
itwasnecessary thatimported gasoline beeffectively prevented from benefitting from as
favourable salesconditions aswere afforded byanindividual baseline tiedtotheproducer ofa
product. ItwasthetaskofthePanel toaddress whether these inconsistent measures were
necessary toachieve thepolicy goalunder Article XX(b). Itwastherefore notthetaskofthe
Panel toexamine thenecessity oftheenvironmental objectives oftheGasoline Rule, orofparts of
theRulethatthePanel didnotspecifically findtobeinconsistent withtheGeneral Agreement.
6.23 ThePanel thenturned tothearguments oftheparties relating tothataspect ofthe
Gasoline Rulefound inconsistent withtheGeneral Agreement. TheUnited States argued thatnot
allentities dealing ingasoline could beassigned anindividual baseline and,ofthose whocould be
assigned suchabaseline, notallcould usethesame types ofsecondary ortertiary evidence
(Methods 2and3)toestablish it.Certain entities including importers, blenders andrefiners
which didnothavecontinuous 1990 operations, were simply notinaposition tofurnish this
secondary ortertiary evidence. Venezuela andBrazil argued ontheother handthatforeign
refiners should beaccorded theirownindividual baselines under theGasoline Ruleusing thesame
types ofevidence, aseasily available tothem astodomestic refiners. Alternatively, theyargued
thatimporters should beabletouseindividual 1990 baselines established fortheforeign refiners
withwhom theydealt. They noted thatanEPAregulatory proposal hadevenbeenmade along
those linesinMay1994. TheUnited States countered thatsuchaproposal would notbefeasible
because of:(1)theimpossibility ofdetermining therefinery oforigin foreachimported
shipment; (2)theincentive to“game”thesystem thereby handed toexporters andimporters; and
(3)thedifficulty fortheUnited States toexercise anenforcement jurisdiction withrespect toa
foreign refinery, since theGasoline Rulerequired criminal andcivilsanctions inorder tobe
effective. TheUnited States argued further against theuseofforeign refiner baselines byciting
“equity concerns ”ofimporters thattheirusewould favour those firms thatdealtwithVenezuelan
product, andtheexistence ofparticular competitive conditions intheinternational market,
including theflexibility maintained byforeign refiners.
6.24 ThePanel proceeded toexamine whether theUnited States hadinfactdemonstrated that
theinconsistent measures found toviolate Article III:4were necessary toachieve thestated policy
objectives oftheUnited States. ThePanel noted thattheterm“necessary ”hadbeeninterpreted in
thecontext ofArticle XX(d) bythepanel intheSection 337casewhich hadstated that:
acontracting party cannot justify ameasure inconsistent withanother GATT
provision as"necessary" interms ofArticle XX(d) ifanalternative measure which
itcould reasonably beexpected toemploy andwhich isnotinconsistent withother
GATT provisions isavailable toit.Bythesame token, incases where ameasure
consistent withother GATT provisions isnotreasonably available, acontractingWT/DS2/R
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party isbound touse,among themeasures reasonably available toit,thatwhich
entails theleastdegree ofinconsistency withother GATT provisions.34
Thesame reasoning hadbeenadopted bythe1990 ThaiCigarette panel inexamining ameasure
under Article XX(b). Thatpanel sawnoreason nottoadopt thesame interpretation of
“necessity ”under Article XX(b) asunder Article XX(d), stating that
theimport restrictions imposed byThailand could beconsidered tobe"necessary"
interms ofArticle XX(b) onlyifthere were noalternative measures consistent
withtheGeneral Agreement, orlessinconsistent withit,which Thailand could
reasonably beexpected toemploy toachieve itshealth policy objectives.35
ThePanel alsonoted thatwhile several pastpanels examining issues under Article XXhad
identified alternative measures thatwere reasonably available andfullyconsistent withtheGeneral
Agreement, theyhadalsoinother instances identified alternative measures thatwould be“less
inconsistent ”withtheGeneral Agreement. Forexample, thepanel inthe337casefound that,
while ageneral exclusion order applying toimported products wasnot“necessary ”,alimited in
remorder could bejustified eventhough ittoowasinconsistent withArticle III:4.36Recalling its
remarks inparagraph 6.22above, thePanel considered thatitstaskwasthustodetermine whether
theUnited States haddemonstrated whether itwasnecessary tomaintain precisely those
inconsistent measures whereby imported gasoline waseffectively prevented from benefitting from
asfavourable salesconditions aswere afforded todomestic gasoline byanindividual baseline tied
totheproducer ofaproduct. Ifthere were consistent orlessinconsistent measures reasonably
available totheUnited States, therequirement todemonstrate necessity would nothavebeenmet.
6.25 ThePanel thenexamined whether there were measures consistent orlessinconsistent with
theGeneral Agreement thatwere reasonably available totheUnited States tofurther itspolicy
objectives ofprotecting human, animal andplant lifeorhealth. ThePanel didnotconsider that
themanner inwhich imported gasoline waseffectively prevented from benefitting from as
favourable salesconditions aswere afforded todomestic gasoline byanindividual baseline tiedto
theproducer ofaproduct wasnecessary toachieve thestated goals oftheGasoline Rule. Inthe
viewofthePanel, baseline establishment methods could beapplied toentities dealing inimported
gasoline inawaythatgranted treatment toimported gasoline thatwasconsistent orless
inconsistent withtheGeneral Agreement. Ifasingle statutory baseline applying toallentities —
refiners, blenders andimporters —wasnotthechosen regulatory method, thenimporters could
forexample bepermitted touseagasoline baseline applicable toimports derived, when possible,
from evidence oftheindividual 1990 baselines offoreign refiners withwhom theimporter
currently dealt. Although suchascheme could result informally different regulation forimported
anddomestic products, thePanel noted thatprevious panels hadaccepted thatthiscould be
consistent withArticle III:4.37Therequirement under Article III:4totreatanimported product
nolessfavourably thanthelikedomestic product ismetbygranting formally different treatment
totheimported product, ifthattreatment results inmaintaining conditions ofcompetition forthe
imported product nolessfavourable thanthose ofthelikedomestic product. Further, these
conditions ofcompetition referred tothose conditions thatwere established bygovernment
measures andwould nottherefore include factors suchasthe“flexibility ofindividual producers ”
inthiscase. ThePanel noted finally thataregulatory scheme using foreign refiner baselines, to
34"United States -Section 337oftheTariff Actof1930", BISD 36S/345, para. 5.26(adopted on7November 1989).
35"Thailand -Restrictions onImportation ofandInternal Taxes onCigarettes", BISD 37S/200, para. 75(adopted on
7November 1990).
36"United States -Section 337oftheTariff Actof1930", BISD 36S/345, para. 5.32(adopted on7November 1989).
37"United States -Section 337oftheTariff Actof1930", BISD 36S/345, para. 5.11(adopted on7November 1989).WT/DS2/R
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theextent thatitdidnotdistinguish between imported gasoline onthebasis ofitscountry of
origin, would notnecessarily contravene Article Iorother provisions oftheGeneral Agreement,
andthattheUnited States, notwithstanding suggestions thatcertain importers might haveequitable
concerns, hadnotestablished thecontrary.
6.26 ThePanel noted theclaims oftheUnited States thatallowing importers orforeign refiners
touseindividual baselines insuchawaywasnotfeasible forthereasons listed inparagraph 6.23.
ThePanel wasnotconvinced thattheUnited States hadsatisfied itsburden ofproving thatthose
reasons precluded theeffective useofindividual baselines inamanner which would allow
imported products toobtain treatment thatwasconsistent, orlessinconsistent, withobligations
under Article III:4. First, while thePanel agreed thatitwould benecessary under suchasystem
toascertain theorigin ofgasoline, thePanel could notconclude thattheUnited States hadshown
thatthiscould notbeachieved byother measures reasonably available toitandconsistent orless
inconsistent withtheGeneral Agreement. Indeed, thePanel noted thatadetermination oforigin
would often befeasible. ThePanel examined, forinstance, thecaseofadirect shipment tothe
United States. Itconsidered thatthere wasnoreason tobelieve that,given theusual measures
available ininternational trade fordetermination oforigin andtracking ofgoods (including
documentary evidence andthirdparty verification) there wasanyparticular difficulty sufficient to
warrant thedemands ofthebaseline establishment methods applied bytheUnited States.
6.27 Second, thePanel didnotagree thattheUnited States hadmetitsburden ofshowing that
the“gaming ”concern wasanadequate justification formaintaining theinconsistency withArticle
III:4resulting from thebaseline establishment methods. Itwasuncertain if,ortowhatextent,
gaming would actually occur, especially given thesmall market share ofimported gasoline
(approximately 3percent). Moreover, thePanel noted thattheGasoline Ruledidnotguarantee in
itsregulation ofUSentities thatgasoline characteristics subject tonon-degradation requirements
(i.e.those regulated bybaselines), would remain atthe1990 average levels. Forexample, there
wasnovolume capontheproduction ofreformulated gasoline byindividual refineries, which
meant thatifproducers ofrelatively dirtier gasoline expanded theirrelative share ofproduction of
reformulated gasoline, thenational average levelofpollutants subject tothenon-degradation
requirements would begreater thanin1990. Similarly, within the1990 volume limitations, ifthe
output ofproducers ofrelatively cleaner gasoline fellbelow 1990 levels, while output ofothers
didnot,national average levels ofpollutants would beworse. Moreover, specific provisions of
theGasoline Rulepermitted some refiners toproduce dirtier gasoline thantheyproduced in1990
(e.g., certain producers ofJP-4jetfuel) andpermitted others torequest specific derogation from
theRule. ThePanel stressed thatitwasnotfinding thatsuchevents would occur, onlythatthey
could under theRule. Given thattheGasoline Ruledidnottherefore guarantee thatgasoline
characteristics subject tonon-degradation requirements would remain at1990 levels, thePanel
considered thatitwasnotconsistent fortheUnited States toinsist thatthere could benopossible
deviation from achieving those levels inrespect ofimports, when ithadnotdeemed itnecessary
tobeasexacting onitsowndomestic production. Moreover, slightly stricter overall requirements
applied tobothdomestic andimported gasoline could offset anypossibility ofanadverse
environmental effect from these causes, andallow theUnited States toachieve itsdesired levelof
clean airwithout discriminating against imported gasoline. Such requirements could be
implemented bytheUnited States atanytime. ThePanel concluded thattheUnited States hadnot
metitsburden ofshowing thatconcern overgaming wasanadequate justification formaintaining
theinconsistency withArticle III:4resulting from thebaseline establishment methods.
6.28 Third, thePanel didnotaccept thattheUnited States haddemonstrated thatthere wasno
other measure consistent, orlessinconsistent, withArticle III:4reasonably available toenforce
compliance withforeign refiner baselines, orimporter baselines based thereon. Theimposition of
penalties onimporters wasinthePanel’sviewaneffective enforcement mechanism usedbytheWT/DS2/R
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United States inother settings. IntheviewofthePanel, theUnited States hadreasonably
available toitdatafor,andmeasures of,verification andassessment which were consistent orless
inconsistent withArticle III:4. Forinstance, although foreign datamaybeformally lesssubject to
complete control byUSauthorities, thisdidnotamount toestablishing thatforeign datacould not
inanycircumstances besufficiently reliable toserve USpurposes. This, however, wasthe
practical effect oftheapplication oftheGasoline Rule. InthePanel'sview, theUnited States had
notdemonstrated thatdataavailable from foreign refiners wasinherently lesssusceptible to
established techniques ofchecking, verification, assessment andenforcement thandataforother
trade ingoods subject toUSregulation. Thenature ofthedatainthiscasewassimilar todata
relied upon bytheUnited States inother contexts, including, forexample, under theapplication
ofantidumping laws. Inanantidumping case, onlywhen theinformation wasnotsupplied or
deemed unverifiable didtheUnited States turntoother information. Ifasimilar practice were to
beapplied inthecaseoftheGasoline Rule, thenimporters could, forinstance, bepermitted touse
theindividual baselines offoreign refiners forimported gasoline from those refiners, withthe
statutory baseline being applied onlywhen thesource ofimported gasoline could notbe
determined orabaseline could notbeestablished because ofanabsence ofdata. InthePanel's
view, because allowing forsuchapossibility wasreasonably available totheUnited States and
would entail alesser degree ofinconsistency withtheGeneral Agreement, theUnited States had
failed todemonstrate thenecessity oftheGasoline Rule'sinconsistency withArticle III:4onthis
matter.
6.29 InviewofthePanel’sfinding thattheaspect ofthebaseline establishment methods found
inconsistent withArticle III:4wasnot“necessary ”under Article XX(b), thePanel didnotproceed
toexamine whether itmetalsotheconditions intheintroductory clause toArticle XX.
E. Article XX(d)
6.30 ThePanel proceeded toexamine whether theaspect ofthebaseline establishment methods
found inconsistent withArticle III:4could, asargued bytheUnited States, bejustified under
paragraph (d)ofArticle XX. Therelevant parts ofArticle XXwere asfollows:
Subject totherequirement thatsuchmeasures arenotapplied inamanner which
would constitute ameans ofarbitrary orunjustifiable discrimination between
countries where thesame conditions prevail, oradisguised restriction on
international trade, nothing inthisAgreement shallbeconstrued toprevent the
adoption orenforcement byanycontracting party ofmeasures:
(d) necessary tosecure compliance withlawsorregulations which arenot
inconsistent withtheprovisions ofthisAgreement, including those relating
tocustoms enforcement, theenforcement ofmonopolies operated under
paragraph 4ofArticle IIandArticle XVII, theprotection ofpatents, trade
marks andcopyrights, andtheprevention ofdeceptive practices;
6.31 ThePanel recalled thattheparty invoking anexception under Article XXboretheburden
ofproving thattheinconsistent measures came within itsscope. ThePanel observed thatthe
United States therefore hadtodemonstrate thefollowing elements:
(1) thatthemeasures forwhich theexception were being invoked -thatis,the
particular trade measures inconsistent withtheGeneral Agreement -secure
compliance withlawsorregulations themselves notinconsistent withtheGeneral
Agreement;WT/DS2/R
Page43
(2) thattheinconsistent measures forwhich theexception wasbeing invoked were
necessary tosecure compliance withthose lawsorregulations; and
(3) thatthemeasures were applied inconformity withtherequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(d), alltheabove elements hadtobesatisfied.
1. Securing compliance withconsistent lawsorregulations
6.32 ThePanel proceeded toexamine whether theaspect ofthebaseline establishment methods
found inconsistent withtheGeneral Agreement secured compliance withalaworregulation not
inconsistent withtheGeneral Agreement. TheUnited States argued thatthenon-degradation
requirements were lawsandregulations notinconsistent withtheGeneral Agreement, andthatthe
baseline establishment methods secured compliance withthese. Venezuela argued thattheUnited
States hadnotclearly established which lawsorregulations were notinconsistent withtheGeneral
Agreement, andwithwhich compliance wassecured. Brazil considered thattheUSmeasures at
most enforced apolicy objective, notanactual obligation asrequired under Article XX(d).
6.33 ThePanel observed that,assuming thatasystem ofbaselines byitself were consistent with
Article III:4, theUSscheme might constitute, forthepurposes ofArticle XX(d), alawor
regulation “notinconsistent ”withtheGeneral Agreement. However, thePanel found that
maintenance ofdiscrimination between imported anddomestic gasoline contrary toArticle III:4
under thebaseline establishment methods didnot“secure compliance ”withthebaseline system.
These methods were notanenforcement mechanism. They were simply rules fordetermining the
individual baselines. Assuch, theywere notthetypeofmeasures withwhich Article XX(d) was
concerned.38
2. Other conditions
6.34 ThePanel observed that,inviewofitsfinding thatthelessfavourable treatment of
imported gasoline under thebaseline establishment methods accorded toimporters didnot“secure
compliance ”withtheunderlying baseline establishment rules, itdidnotneedtoconsider also
whether these methods were “necessary ”tosecure compliance andmettheconditions inthe
introductory clause toArticle XX.
F. Article XX(g)
6.35 ThePanel proceeded toexamine whether thepartoftheGasoline Rulefound inconsistent
withArticle III:4could, asargued bytheUnited States, bejustified under paragraph (g)of
Article XX. Therelevant parts ofArticle XXwere asfollows:
Subject totherequirement thatsuchmeasures arenotapplied inamanner which
would constitute ameans ofarbitrary orunjustifiable discrimination between
countries where thesame conditions prevail, oradisguised restriction on
international trade, nothing inthisAgreement shallbeconstrued toprevent the
adoption orenforcement byanycontracting party ofmeasures:
38"European Economic Community -Regulation onImports ofParts andComponents", BISD 37S/132, paras. 5.12-5.18
(adopted on16May1990).WT/DS2/R
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(g) relating totheconservation ofexhaustible natural resources ifsuch
measures aremade effective inconjunction withrestrictions ondomestic
production orconsumption;
ThePanel noted thatastheparty invoking anexception theUnited States boretheburden ofproof
indemonstrating thattheinconsistent measures came within itsscope. ThePanel observed that
theUnited States therefore hadtodemonstrate thefollowing elements:
(1) thatthepolicy inrespect ofthemeasures forwhich theprovision wasinvoked fell
within therange ofpolices related totheconservation ofexhaustible natural
resources;
(2) thatthemeasures forwhich theexception wasbeing invoked -thatisthe
particular trade measures inconsistent withtheGeneral Agreement -were related
totheconservation ofexhaustible natural resources;
(3) thatthemeasures forwhich theexception wasbeing invoked were made effective
inconjunction withrestrictions ondomestic production orconsumption; and
(4) thatthemeasures were applied inconformity withtherequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(g), alltheabove elements hadtobesatisfied.
1. Policy goalofconserving anexhaustible natural resource
6.36 ThePanel noted theUSargument thatclean airwasanexhaustible resource within the
meaning ofArticle XX(g), since itcould beexhausted bypollutants suchasthose emitted through
theconsumption ofgasoline. Lakes, streams, parks, crops andforests were alsonatural resources
thatcould beexhausted byairpollution. Measures tocontrol airpollution were therefore
measures toconserve exhaustible natural resources. Venezuela disagreed, considering thatairwas
notanexhaustible natural resource within themeaning ofArticle XX(g); rather, its“condition ”
changed depending onitscleanliness. Article XX(g) wasoriginally intended tocover exports of
exhaustible goods suchaspetroleum andcoal; toexpand ittocover “conditions ”ofrenewable
resources wasnotjustified.
6.37 ThePanel thenexamined whether clean aircould beconsidered anexhaustible natural
resource. IntheviewofthePanel, clean airwasaresource (ithadvalue) anditwasnatural. It
could bedepleted. Thefactthatthedepleted resource wasdefined withrespect toitsqualities was
not,forthePanel, decisive. Likewise, thefactthataresource wasrenewable could notbean
objection. Apastpanel hadaccepted thatrenewable stocks ofsalmon could constitute an
exhaustible natural resource.39Accordingly, thePanel found thatapolicy toreduce thedepletion
ofclean airwasapolicy toconserve anatural resource within themeaning ofArticle XX(g).
39"Canada -Measures Affecting Exports ofUnprocessed Herring andSalmon", BISD 35S/98, para4.4(adopted on
22March 1988). Seealsothesame conclusion withrespect todolphins intheReport ofthePanel on"United States -Restrictions on
Imports ofTuna", circulated on16June1994, DS29/R, para5.13, notadopted.WT/DS2/R
Page45
2. Measures “related to”theconservation ofanexhaustible natural
resource; andmade effective “inconjunction ”withrestrictions on
domestic production orconsumption
6.38 ThePanel proceeded toexamine whether thebaseline establishment methods found
inconsistent withArticle III:4were “related to”theconservation ofclean air.Venezuela argued
thatpastpanels hadinterpreted “related to”tomean “primarily aimed at”theconservation ofthe
resource. According toVenezuela, loopholes intheestablishment ofthebaseline undermined its
ownconservation objectives, andthemeasure could nottherefore beseenas“primarily aimed ”at
conservation.
6.39 ThePanel noted thatthewords “related to”didnotinisolation provide precise guidance
astotherequired linkbetween themeasures andtheconservation objective. However, thePanel
agreed withtheinterpretation ofthisterminthereport ofthe1987 Herring andSalmon case,
where thepanel stated that
asthepreamble ofArticle XXindicates, thepurpose ofincluding Article XX:(g)
intheGeneral Agreement wasnottowiden thescope formeasures serving trade
policy purposes butmerely toensure thatthecommitments under theGeneral
Agreement donothinder thepursuit ofpolicies aimed attheconservation of
exhaustive natural resources. ThePanel concluded forthese reasons that,while a
trade measure didnothavetobenecessary oressential totheconservation ofan
exhaustible natural resource, ithadtobeprimarily aimed attheconservation ofan
exhaustible natural resource tobeconsidered as"relating to"conservation within
themeaning ofArticle XX:(g).40(emphasis added)
Forthesame reasons, theHerring andSalmon panel decided that
theterms "inconjunction with" inArticle XX:(g) hadtobeinterpreted inaway
thatensures thatthescope ofpossible actions under thatprovision corresponds to
thepurpose forwhich itwasincluded intheGeneral Agreement. Atrade measure
could therefore intheviewofthePanel onlybeconsidered tobemade effective
"inconjunction with" production restrictions ifitwasprimarily aimed atrendering
effective these restrictions.41(emphasis added)
6.40 ThePanel thenproceeded toexamine whether thebaseline establishment methods could be
saidtobe"primarily aimed at"achieving theconservation objectives oftheGasoline Rule. The
Panel recalled thepurpose ofArticle XX:(g), which hadbeenexpressed bythepanel inthe1987
Herring andSalmon caseasfollows:
[T]he purpose ofincluding Article XX:(g) intheGeneral Agreement wasnottowiden the
scope ofmeasures serving trade policy purposes butmerely toensure thatthe
commitments under theGeneral Agreement donothinder thepursuit ofpolicies aimed at
theconservation ofexhaustible natural resources.
ThePanel thenconsidered whether theprecise aspects oftheGasoline Rulethatithadfound to
violate Article III--thelessfavourable baseline establishments methods thatadversely affected the
conditions ofcompetition forimported gasoline --were primarily aimed attheconservation of
40"Canada -Measures Affecting Exports ofUnprocessed Herring andSalmon", BISD 35S/98, para4.6(adopted on
22March 1988).
41Ibidem.WT/DS2/R
Page46
natural resources. ThePanel sawnodirect connection between lessfavourable treatment of
imported gasoline thatwaschemically identical todomestic gasoline, andtheUSobjective of
improving airquality intheUnited States. Indeed, intheviewofthePanel, being consistent with
theobligation toprovide nolessfavourable treatment would notprevent theattainment ofthe
desired levelofconservation ofnatural resources under theGasoline Rule. Accordingly, itcould
notbesaidthatthebaseline establishment methods thatafforded lessfavourable treatment to
imported gasoline were primarily aimed attheconservation ofnatural resources. InthePanel's
view, theabove-noted lackofconnection wasunderscored bythefactthataffording treatment of
imported gasoline consistent withitsArticle III:4obligations would notinanywayhinder the
United States initspursuit ofitsconservation policies under theGasoline Rule. Indeed, the
United States remained freetoregulate inorder toobtain whatever airquality itwished. The
Panel therefore concluded thatthelessfavourable baseline establishments methods atissue inthis
casewere notprimarily aimed attheconservation ofnatural resources.
6.41 With respect towhether thebaseline establishment methods could besaidtobeprimarily
aimed at"rendering effective restrictions ondomestic production orconsumption", thePanel
noted thatithadnotdetermined thatthemeasures atissue were “restrictions ”,andwhether they
were “on”domestic production orconsumption. However, inlightofitsfinding inparagraph
6.40, thePanel didnotproceed todetermine thisissue orwhether themeasure mettheconditions
intheintroductory clause ofArticle XX.
G. Article XXIII:1(b)
6.42 ThePanel thennoted theclaim byVenezuela under Article XXIII:1(b) thatbenefits
accruing toitunder theGeneral Agreement hadbeennullified andimpaired bytheapplication of
theGasoline Rule, whether ornotitconflicted withprovisions oftheGeneral Agreement. In
viewofthefinding bythePanel thattheGasoline Ruleviolated Article III:4oftheGeneral
Agreement, andcould notbejustified under Article XX(b),(d)and(g),thePanel concluded that
itwasnotnecessary toexamine thisadditional claim.
H. Applicability oftheAgreement onTechnical Barriers toTrade
6.43 Inviewofitsfindings under theGeneral Agreement, thePanel concluded thatitwasnot
necessary todecide onissues raised under theTBTAgreement.
VII. CONCLUDING REMARKS
7.1 Inconcluding, thePanel wished tounderline thatitwasnotitstasktoexamine generally
thedesirability ornecessity oftheenvironmental objectives oftheClean AirActortheGasoline
Rule. Itsexamination wasconfined tothose aspects oftheGasoline Rulethathadbeenraised by
thecomplainants under specific provisions oftheGeneral Agreement. Under theGeneral
Agreement, WTO Members were freetosettheirownenvironmental objectives, buttheywere
bound toimplement these objectives through measures consistent withitsprovisions, notably those
ontherelative treatment ofdomestic andimported products.WT/DS2/R
Page47
VIII. CONCLUSIONS
8.1 Inthelightofthefindings above, thePanel concluded thatthebaseline establishment
methods contained inPart80ofTitle40oftheCode ofFederal Regulations arenotconsistent
withArticle III:4oftheGeneral Agreement, andcannot bejustified under paragraphs (b),(d)and
(g)ofArticle XXoftheGeneral Agreement.
8.2 ThePanel recommends thattheDispute Settlement Body request theUnited States tobring
thispartoftheGasoline Ruleintoconformity withitsobligations under theGeneral Agreement.